UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report _____________________
For the transition period from ___________ to ____________
Commission File Number: 0-27524
-------
DYNAMOTIVE ENERGY SYSTEMS CORPORATION
(Exact name of Registrant as specified in its charter)
Province of British Columbia (Canada)
(Jurisdiction of incorporation or organization)
Suite 230 -1700 West 75th Avenue
Vancouver, British Columbia
V6P 6G2 Canada
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b)
of the Act:. None
Securities registered or to be registered pursuant to Section 12(g)
of the Act:
Common Shares Without Par Value
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:. None
1
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
Title of Each Class Outstanding at December 31, 2005
Common Shares Without Par Value 123,211,875
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
If this report is an annual or transition report, indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Act of 1934. Yes [ ] No [X]
Note - Checking the box above will not relieve any registrant required to
file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer [ ]Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17 [X] Item 18 [ ]
If this is an annual report, indicate by check mark whether if the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes [ ] No [X]
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes [ ] No [X]
This report contains statements of a forward-looking nature relating to
future events or our future performance. These statements are only
predictions and actual events or results may differ materially. In
evaluating such statements, you should carefully consider the various
factors identified in this report which could cause actual results to differ
materially from those expressed in or implied by, any forward-looking
statements, including those set forth in "Risk Factors" See "Cautionary Note
Regarding Forward-Looking Statements".
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TABLE OF CONTENTS
Page
Part 1 4
Item 1. Identity Of Directors, Senior Management and Advisers 4
Item 2. Offer Statistics and Expected Timetable 4
Item 3. Key Information 4
Item 4. Information On The Company 8
Item 5. Operating and Financial Review and Prospects 16
Item 6. Directors, Senior Management and Employees 25
Item 7. Major Shareholders and Related Party Transactions 41
Item 8. Financial Information 42
Item 9. The Offer and Listing 42
Item 10. Additional Information 43
Item 11. Quantitative and Qualitative Disclosures About Market Risk 54
Item 12. Description Of Securities Other Than Equity Securities 55
Part II 56
Item 13. Defaults, Dividend Arrearages and Delinquencies 56
Item 14. Material Modifications To The Right Of Security Holders and
Use Of Proceeds 56
Item 15. Controls And Procedures 56
Item 16. [Reserved] 57
Part III 58
Item 17. Financial Statements 58
Item 18. Financial Statements 100
Item 19. Exhibits 100
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Part I
Item 1. Identity Of Directors, Senior Management and Advisers
Not applicable, this is an Annual Report only.
Item 2. Offer Statistics and Expected Timetable
Not applicable, this is an Annual Report only.
Item 3. Key Information
A. Selected financial data
The following table represents selected consolidated financial information
of DynaMotive Energy Systems Corporation. The table should be read together
with "Item 5. Operating and Financial Review and Prospects." Except as
otherwise indicated, the following selected financial data have been
prepared in accordance with Canadian generally accepted accounting
principles.
Fiscal Year
2005 2004 2003 2002 2001
- ---------------------------------------------------------------------------------------
(US Dollars)
Results of operations:
Revenue - - - 68,569 274,360
Loss from operations (11,822,274) (9,917,889) (4,995,624) (3,733,499) (5,798,827)
Loss from continuing
operations (11,997,344) (9,916,215) (4,921,650) (4,366,454) (6,437,461)
Net loss per Cdn GAAP (11,997,344) (9,916,215) (4,984,681) (5,261,607) (6,838,264)
Net loss per US GAAP (13,124,724) (8,405,184) (4,984,681) (5,264,469) (6,602,892)
Net loss per share Cdn GAAP (0.11) (0.12) (0.09) (0.12) (0.19)
Net loss per share US GAAP (0.12) (0.10) (0.09) (0.12) (0.18)
Net loss from continuing
operation per share (0.11) (0.12) (0.09) (0.10) (0.18)
Financial position at year-end:
Total assets, Cdn GAAP 16,962,573 13,198,698 3,759,605 1,285,813 6,454,399
US GAAP 16,962,573 13,198,698 3,759,605 1,285,813 6,457,263
Total liabilities, Cdn GAAP 8,670,165 8,911,500 2,035,168 1,957,625 5,179,271
US GAAP 8,692,977 8,911,500 2,035,168 1,957,625 5,179,271
Shareholder's equity,
Cdn GAAP 8,292,408 4,287,198 1,724,437 (671,812 1,275,128
Shareholder's equity,
US GAAP 8,269,596 4,287,198 1,724,437 (671,812) 1,277,992
Common shares issued 123,211,875 93,129,798 69,915,654 49,941,000 40,942,115
- ---------------------------------------------------------------------------------------
During 2005, significant impacts to results of operations and financial
condition and comparability of results of operations and financial condition
in 2005 versus 2004 occurred principally due to the construction and
commissioning of the Company's 100tpd commercial scale plant in West Lorne,
Ontario. The Company is solely focused on BioOil related activities.
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B. Capitalization and indebtedness
Not applicable, this is an Annual Report only.
C. Reasons for the offer and use of proceeds
Not applicable, this is an Annual Report only.
D. Risk factors
RISK FACTORS
You should carefully consider the risks, uncertainties and other factors
described below because they could materially and adversely affect our
business, financial condition, operating results, prospects and or the
market price of our common shares. This Risk Factors section is written in
accordance with U.S. Securities and Exchange Commission's "plain English"
guidelines. In this section, the words "we," "us," "our" and "ours" refer
only to the Company and its subsidiaries and not any other person.
RISKS RELATED TO OUR OPERATIONS
WE HAVE INCURRED NET LOSSES SINCE COMMENCING BUSINESS AND EXPECT LOSSES TO
CONTINUE FOR THE FORESEEABLE FUTURE
We have had limited revenues to date and have not shown a profit since
inception. The Company had a net loss of $11,997,344 for the year ended
December 31, 2005 as well as a net loss of $9,916,215 for the year ended
December 31, 2004. As at December 31, 2005, the Company has a working
capital deficit of $5,357,001. As this is a new business, we may experience
typical problems, difficulties, complications and delays. We expect to show
a substantial net loss for the year ended 2006. We do not expect revenues to
increase in any significant way until we have successfully established
commercial BioOil operations. Accordingly, we may not be able to operate
profitably on a consistent basis, if at all.
The ability of the Company to continue as a going concern is in substantial
doubt and is dependent on achieving profitable operations, commercializing
its BioOil production technology and obtaining the necessary financing in
order to develop this technology. The outcome of these matters cannot be
predicted at this time. The Company's future operations are dependent on the
market's acceptance of its products in order to ultimately generate future
profitable operations, and the Company's ability to secure sufficient
financing to fund future operations. There can be no assurance that the
Company's products will be able to secure market acceptance. Management
plans to raise additional equity financing to enable the company to complete
its development plans. These financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Subsequent to the year end, during the period from January 1 to March 24,
2006, the Company issued 11,253,937 common shares for total proceeds of
$7,680,459, inclusive of $1,615,000 received as at December 31, 2005,
relating to a private placement commencing during the forth quarter of 2005.
In addition during the period from January 1 to March 24, 2006, the Company
received $1.64 million on the exercise of 269,172 options and 4,022,806
warrants. Management is of the opinion that this and expected future
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financing along with expected sales will provide sufficient working capital
to meet the Company's liabilities and commitments as they become due.
OUR TECHNOLOGY MAY NOT PROVE COMMERCIALLY VIABLE
Our technology is currently being tested at a commercial scale. Ongoing
efforts at commercialization may expose operational flaws and unanticipated
costs that may inhibit or preclude ultimate market acceptance. Our
technology has not demonstrated it can generate positive cash flow or a
return on investment.
WE HAVE LIMITED FINANCIAL AND MANAGEMENT RESOURCES TO PURSUE OUR GROWTH
STRATEGY
Our growth strategy may place a significant strain on our management,
operational and financial resources. We have negative cash flow from
operations and continue to seek additional capital. We will likely have to
obtain additional capital either through debt or equity financing to
continue our research and development strategies. There can be no
assurance, however, that we will be able to obtain such financing on terms
acceptable to the Company. If adequate funds are not available when needed,
we may be required to delay, scale-back or eliminate the manufacturing,
marketing or sales of one or more of our products or research and
development programs.
If we raise additional funds through the issuance of equity or convertible
securities, these new securities may contain certain rights, preferences or
privileges that are senior to those of our Common Shares. Additionally, the
percentage of ownership of the Company held by existing shareholders will be
reduced.
WE MUST DEVELOP AND EXPAND OUR SALES AND MARKETING CAPABILITIES
Our sales and marketing experience is very limited. We will be required to
further develop our marketing and sales force in order to effectively
demonstrate the advantages of our technology over more traditional
technology, as well as other competitors' technology. We may not be able to
establish adequate sales and distribution capabilities, and there is no
guarantee that our sales and marketing experience will be successful.
WE MAY NOT BE ABLE TO SUCCESSFULLY PROTECT OUR PROPRIETARY RIGHTS
Patents and other intellectual property are a critical aspect of the present
operation and future success of our business. Policing unauthorized use of
our proprietary technologies and other intellectual rights could entail
significant expense and could be difficult or impossible, particularly given
that the laws of some countries afford little or no effective protection of
our intellectual property. Given the nature of our business, third parties
may bring claims of copyright, patent or trademark infringement against us.
Further, third parties may claim that we have misappropriated their creative
ideas or otherwise infringed on their proprietary rights in connection with
our technologies. Any claims of infringement, with or without merit, could
be time consuming to defend, result in costly litigation, divert management
attention, require us to enter into costly royalty or licensing agreements
or prevent us from using important technologies or methods.
OUR BUSINESS ENVIRONMENT IS VERY COMPETITIVE
The markets for alternative energy technologies is highly competitive, and
other providers of such technologies, especially producers of ethanol from
biomass, may have various advantages in competition with ours. Many of our
competitors have established long-standing relationships with power
generation companies, utilities, manufacturers and others that we view as
potential customers. Many competitors also have substantially greater
access to capital and technical resources than we do and may therefore have
a significant competitive advantage.
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Our primary technologies face market acceptance barriers that do not affect
already established technologies. To date, our primary technologies have
gained only limited market acceptance and have generated minimal revenues.
WE MAY BE SUBJECT TO HAZARDOUS WASTE LIABILITIES
BioOil and some of its derivative products may be deemed to be hazardous
wastes for which a liability may be imposed upon us should any contamination
from improper storage or handling occur. Liability costs associated with
environmental cleanups of contaminated sites historically have been very
high as have been the level of fines imposed by regularity authorities upon
parties deemed to be responsible for environmental contamination. We have
obtained limited insurance protection but this may not be sufficient
insurance protection from such liabilities if they should ever arise. If
contamination should take place for which we are deemed to be liable,
potentially liable or a responsible party, the resulting costs could have a
material effect on our business.
OUR BUSINESS WILL SUFFER IF WE LOSE KEY SKILLED PERSONNEL
We are dependent on certain members of our management and engineering staff,
and if we lose their services our business could be severely impacted. In
particular, we rely on the services of our Chief Executive Officer and Vice
President Engineering. In addition, our ability to manage growth
effectively will require that we continue to implement and improve our
management systems and recruit and train new employees. We may not be able
to successfully attract and hire skilled and experienced personnel.
OUR STRATEGIC ALLIANCES MAY NOT ACHIEVE THEIR GOALS
We expect to partially rely on strategic alliances for development
contracts, assistance in research and development and marketing expertise.
Even if we are successful in forming these alliances, they may not achieve
their goals.
THE ABILITY TO TRADE THE COMPANY'S STOCK MAY BE LIMITED
Shares of the Company's Common Shares currently trade only upon the Over-
the-Counter Bulletin Board market. This may not provide the same liquidity
for the trading of securities as the NASDAQ or other exchange. Because our
shares are not listed on NASDAQ or any other exchange, the Company's stock
presently comes within the definition of a "penny stock" as defined in the
Securities Exchange Act of 1934 and the rules under that Act.
Generally, the penny stock rules require a broker-dealer, before a
transaction in a penny stock to deliver a standardized risk disclosure
document prepared by the SEC that provides information about penny stocks
and the nature and level of risks in the penny stock market. The broker-
dealer must also provide the customer with current bid and offer quotations
for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. In
addition, the penny stock rules generally require that the broker-dealer
must make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement
to the transaction. These disclosure requirements may have the effect of
reducing the level of trading activity in the secondary market for a stock
that is subject to the penny stock rules. Therefore, investors may find it
more difficult to sell their shares.
OUR STOCK'S TRADING PRICE WILL BE SUBJECT TO MARKET VOLATILITY
In recent years, the stock market in general, and the prices of stock of
technology companies including our own, have experienced extreme price
fluctuations, sometimes without regard to the fundamentals of the particular
company. These broad market and industry fluctuations may adversely affect
the market price of our Common Shares.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, within the meaning of
Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933 that reflect our current expectations about our
future results, performance, prospects and opportunities. Where possible,
the forward-looking statements are identified by words such as "believes,"
"anticipates," "plans," "expects," "seeks," "estimates," "intends," "may,"
"will," and other similar expressions; however, these words are not the
exclusive means of identifying such statements. In addition, any statements
that refer to expectations, projections or other characterization of future
events or circumstances are forward-looking statements. The forward-looking
statements are subject to significant risks, uncertainties and other factors
including those identified in the "Risk Factors" section of this Form 20-F,
which may cause actual results to differ materially from those expressed in
or implied by, these statements. The Company undertakes no obligation to
publicly update or revise any forward-looking statements to reflect events
or circumstances occurring subsequent to the filing of this report or for
any other reason.
Item 4. Information On The Company
A. History and development of the Company
DynaMotive Energy Systems Corporation (the "Company" and or "DynaMotive") is
a leader in a niche area of biomass-to-liquid fuel conversion which is
dominated by ethanol producers. The Company's principal business is the
development and commercialization of its a technology called "Fast
Pyrolysis. Fast Pyrolysis is a process that rapidly heats biomass in the
absence of oxygen to produce a liquid fuel ("BioOil"). . BioOil is a clean,
renewable fuel which can replace, providing the equipment is suitably
modified, natural gas, diesel and other fossil fuels to produce power,
mechanical energy and heat in certain industrial boilers, fuel gas turbines
and fuel reciprocating engines. The Company aims to generate significant
amounts of energy, in the form of BioOil fuels, based upon utilization of
relatively abundant and inexpensive biomass waste streams from agricultural
and forest operations and other post-industrial biomass residues. In many
cases, the feedstock sources are costly to dispose of and therefore are
available at zero cost or are potentially revenue generating when converted
into BioOil. The process of biomass to energy conversion is sustainable,
renewable and greenhouse gas neutral, and is consistent with other renewable
energy sources such as wind, hydro and solar. The significant advantage of
biomass energy over other renewable forms of energy, is that biomass is
capable of delivering energy on a 24/7 basis, whereas wind, hydro and solar
energy sources are all subject to natural fluctuations often entailing
significant downtime.
DynaMotive is attempting to establish its patented technology as the
industry standard for the production of liquid biomass based fuels (other
than ethanol), in competition with other pyrolysis technologies, and other
biomass to energy applications. The Company's fast pyrolysis process
efficiently converts raw biomass or biomass wastes into three fuel types:
Liquid (BioOil), Solid (char) and Gas (non-condensable gases). The non-
condensable gases are used to fuel the pyrolysis process. The entire system
is a closed loop with virtually no emissions or waste by-products.
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.
The Company was incorporated on April 11, 1991 in the Province of British
Columbia, Canada, under the name of DynaMotive Canada Corporation. On
October 31, 1995, the shareholders approved a change of name to DynaMotive
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Technologies Corporation and on June 26, 2001, the shareholders again
approved a change of name to the Company's current name.
As of December 31, 2005, the Company had three wholly-owned subsidiaries
plus 99.9% ownership of a limited partnership: DynaMotive Corporation
(incorporated in the State of Rhode Island in 1990), DynaMotive Europe
Limited (formerly known as DynaMotive Technologies (UK) Ltd., incorporated
in the United Kingdom in 1996), DynaMotive Canada, Inc. (incorporated in
Canada in November 2000), and the West Lorne BioOil Co-Generation Limited
Partnership (the "Limited Partnership") which was formed in Ontario, Canada
in September 2003. DynaMotive Canada Inc. acts as the General Partner of the
Limited Partnership, which operates the biooil co-generation plant.
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.
The principal executive office of the Company is Suite 230 - 1700 West 75th
Avenue, Vancouver, British Columbia, Canada V6P 6G2 (Telephone: 604-267-6000).
B. Business Overview
Unless otherwise indicated, all financial information contained in this
Annual Report on Form 20-F is in U.S. dollars and based on Canadian
generally accepted accounting principles ("GAAP").
The Company is currently commercializing its Fast Pyrolysis biomass-to-
energy technology that converts low or zero cost forest and agricultural
biomass residues into liquid BioOil that is then used as a "green" renewable
fuel alternative for power generation, industrial use or as the raw material
for a range of derivative products. In 2005 the Company completed
construction of its first 100 tpd commercial scale plant, located adjacent
to the Erie Flooring and Wood Products manufacturing plant in West Lorne,
Ontario, Canada. The Company continues to ramp up the plant and bring the
facility toward full operation in 2006.
I. CORE TECHNOLOGIES
Initial applications for BioOil are targeted for generating heat, power and
mechanical energy in industrial boilers, gas turbines and stationary
reciprocating engines. The char can also be used as a fuel or as a feedstock
for the production of charcoal briquettes, in its raw form as a coal or coke
alternative; or in other potential value added applications including
activated carbon for use in the water and wine industries and carbon black
for domestic and industrial uses. The non-condensable gases are re-cycled in
the Fast Pyrolysis process and provide the majority of the energy required
for the process.
DynaMotive has six phases to its commercialization program as shown below:
Phase 1: Bench scale, "proof of concept" was completed by Resource
Transforms International, Ltd. (RTI) in 1996. DynaMotive licensed the Fast
Pyrolysis technology in 1997 and purchased the exclusive worldwide rights to
the technology from RTI in 2000.
Phase 2: In 1997, DynaMotive built a 0.5 tonnes per day (tpd) prototype
plant in Vancouver, BC, which was upgraded in 1998 to a capacity of 2 tpd.
This plant has operated for over 3,000 hours. In 1999, Stone & Webster
Engineering, a major US based power engineering company, completed technical
due diligence and concluded that the process was "reliable and scaleable."
Phase 3: In 2001, DynaMotive entered into a strategic alliance with Tecna
S.A. of Argentina to develop commercial energy systems based on DynaMotive's
pyrolysis technology in Latin America and other markets on a non-exclusive
basis. Tecna would also collaborate with DynaMotive to provide technical
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design and optimization input on DynaMotive's BioOil production technology.
Tecna has provided valuable technical support, engineering and consulting
services to validate the basic engineering and operation of the BioOil
technology and to evaluate and quantify the potential for improvements to
the efficiency of the BioOil technology. This work has been on going since
and resulted in confirmation of the basic BioOil designs and process
efficiencies, development of process designs and equipment specification and
design details that are being incorporated into the current BioOil plant
designs.
Phase 4: DynaMotive completed commissioning of a new 10 tpd pilot plant in
March 2001 which was de-commissioned in December 2002. The plant was built
to industrial specifications complete with a state-of-the-art distributed
control system (DCS). The plant had a production capacity of 6,000 litres of
BioOil per day and achieved or exceeded this capacity output for more or
less continuous periods of up to 10 days at a time. The plant has exceeded
design parameters operating on a continuous basis at 50% above its nominal
design capacity.
Phase 5: Following the 10 tpd pilot, DynaMotive began construction of a 100
tpd commercial scale plant, with commissioning completed by Q4 2005. This
plant processes wood residues and is designed for continuous 24-hour
production at commercial scale although this capacity has only be achieved
for short periods of time since commissioning. This project is also intended
to demonstrate continuous operation of end use applications (boilers/kilns
and gas turbines). The principal goal of the commercial demonstration
project is to demonstrate the economics of the process, and to secure future
engineering, procurement and construction (EPC) commitments from the
Company's current partners and potential future service and equipment
providers. Ultimately, the Company expects these EPC commitments to
facilitate lending commitments to execute on BioOil project developments as
part of the Company's final commercialization phase.
The 100 tpd plant had a capital cost of approximately $16.1 million (Cdn$21
million), or 60% over budget, due to challenges involved in moving from
pilot scale to commercial size. With government grants of approximate $4.3
million (Cdn$5 million) and a portion of the related costs being expensed,
the Company carries the cost of the plant at $12.8 million (Cdn$15.0
million), which approximates its replacement cost and the Company believes
this is a realizable value. The plant is designed to generate revenue
streams of BioOil, char and electric power. As of December 31, 2005 the West
Lorne Plant has been operated as part of commissioning since February, 2005
and produced minimal income. In 2006, the plant has been operational during
the period from January 1 to April 24, when a planned maintenance shutdown
commenced. The shutdown was completed in mid-June and the plant has re-
started commercial operation. In the period January 1 to April 24, 2006, the
plant was either producing or available (e.g. reactor warm) for 74 days.
During this period, the West Lorne plant produced BioOil and Char for a
number of purposes including BioOil shipments to the US of $23,549;
successful commercial scale fuel demonstrations in a number of industries
within Canada; running of the turbine; providing BioOil for business
development and research initiatives in North America and Europe (including
emulsification development); and providing a commercial scale platform for
the Company in its evaluation of design and process improvements for its
200TPD unit now in fabrication. The operation of the turbine during this
same period included running for a total of 79 hours at various operating
levels, during which it produced 60,400 KWh of electricity.
In addition, the West Lorne facility has provided DynaMotive with a showcase
of its commercial BioOil technology to many interested companies and
government institutions and has been fundamental in the Company's successes
in sale of plant and master licenses previously disclosed and those
currently in negotiation.
10
Phases 6/7: With completion of the 100 tpd plant, DynaMotive and partners
are working to develop multiple commercial plants at the 200 tpd scale and
larger and to bring the costs of the plants down significantly. The Company
is presently seeking to secure rights to multiple 'high disposal cost'
biomass waste streams around the world, in order to launch its final
commercial efforts. The Company believes that by securing rights to these
biomass waste streams and related BioOil, power and/or energy purchase
commitments will be able to catalyze the development of commercial BioOil
projects that incorporate the design, engineering and licensing of its Fast
Pyrolysis technology.
By virtue of being derived from biomass residues, all BioOil fuels are
considered to be carbon dioxide and greenhouse gas neutral. When combusted,
they produce no sulfur dioxide and significantly reduced nitrogen oxide
emissions compared with hydrocarbon fuels, therefore having significant
environmental advantages over these fuels with respect to atmospheric
pollution.
1) BIOOIL PRODUCTION PROCESS
BioOil is produced using a patented fast pyrolysis process trade named Fast
Pyrolysis that converts forest and agricultural biomass residues such as
sawdust, sugar cane bagasse, rice husks and wheat straw amongst others into
commercial fuels (BioOil, char and non-condensable gases). The process was
developed by RTI.
In 1996, the Company obtained the exclusive worldwide rights from RTI for
air emissions control products from this technology. In 1998, this exclusive
arrangement with RTI was expanded to include the Fast Pyrolysis process and
virtually any new products derived from BioOil including fuels and slow
release fertilizers. 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. The research agreement has
terminated and the patents are owned royalty-free.
In the fast pyrolysis 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 residues. The Company
believes that the overall simplicity of the Fast pyrolysis 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 yields, 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
tpd Fast pyrolysis 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 tpd on a continuous basis. In 1999, further changes were
made to the feed system, Fast Pyrolysis reactor, cyclone, and
instrumentation and control systems to provide increased stable operation.
Once these changes were made, the Fast Pyrolysis was re-commissioned and
produced BioOil of sufficiently high quality to meet fuel specification
requirements as defined by our engine testing partners.
The Company's 10 tpd BioOil plant was commissioned in March, 2001.
Commissioning included a sustained 10 day, 24 hr/7 day a week operation
which demonstrated that this design with minor adjustments could yield 14.5
tpd rather than the estimated 10 tons. The Company believes that 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
11
system. The Company adopted this design policy in order to facilitate easy
scale-up to commercial plant capacities.
2) BIOOIL COMMERCIAL DEMONSTRATIONS, APPLICATIONS AND MARKETS
During 2004, the Company began construction of its first 100 tpd plant in
Ontario, Canada at the Erie Flooring and Wood Products ("Erie Flooring")
facilities. The integrated plant utilizes wood residue from Erie Flooring's
operations and is comprised of wood conditioning equipment, pyrolysis plant
and power island. Pyrolysis and generation equipment are to be provided by
DynaMotive and Magellan Aerospace, Orenda division (Orenda) respectively.
Erie Flooring provides wood residue for the project and will receive
electricity and process heat for its operations. The project began to export
green power to Ontario's grid system in 2005. The project is expected to
reach operating cash flow positive in 2006 based on sales of BioOil for
energy and derivative products and sales of electricity and char. Operating
costs are expected to be approximately $1 million per year on a normalized
basis and the plant is forecast to produce a positive IRR and to prove the
commercial viability of the technology.
The Company has entered into lease, wood supply, steam and electricity
supply and other agreements with Erie Flooring, [ see "Consortium Master
Agreement" referred to in Exhibit 4.6] which allow for operation of the
plant. The Company has received its generation license from the Ontario
Energy Board and has an interconnection agreement with Hydro One for the
export of electric power to the Ontario electricity grid.
The Company believes that the near term commercial application for BioOil is
as a clean burning fuel that can be used to replace natural gas, diesel and
other fossil fuels in boilers, gas turbines and slow and medium speed
reciprocating engines for heat and power generation, to replace natural gas
in the forest industry and for lumber dry kiln and lime kiln applications.
Initial markets may include Canada, the US, Brazil and European countries,
in addition to sugar producing regions in other parts of Latin America, Asia
and Island based economies.
Orenda is in the second phase of a program to develop a commercial gas
turbine package fueled by DynaMotive's BioOil. The 2.5 MW (megawatt) GT2500
turbine was successfully commissioned on BioOil in 2005 and has been
installed at the Erie Flooring site. Orenda has also identified further
commercial scale projects for its turbines and BioOil, in addition to Erie
Flooring as referred to above.
DynaMotive also targets the industrial fuels market. Working with the
Canadian federal department of Natural Resources CANMET Energy Technology
Centre in Ottawa, Ontario, it developed a burner nozzle design for stable
BioOil fuel combustion. This has created 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
boilers, kiln fuels and specialty heating applications markets. Testing of
BioOil in lumber kilns was successfully completed in 2002. In 2003,
DynaMotive completed pilot scale limekiln testing of BioOil fuel in
conjunction with the University of British Columbia (UBC). Customers for
BioOil fuels could potentially include local, regional and international
power generators and electrical utilities (fuel substitution in large scale
power plants and fuel for district heating), fuel distributors, forest
companies (natural gas substitute in lime kilns, lumber kilns and boilers),
oil and gas producers (steam production for extraction) and manufacturing
companies (process heat) including sawmills, pulp mills and greenhouses.
Beyond the programs above, testing continued with various industrial burner
and boiler combustion experts and manufacturers and with industrial
customers in 2005. These tests are a necessary prerequisite to long term
fuel sales agreements.
The Company also continues to work with Cosan Bon Jesus ("Cosan" is Brazil's
largest sugar and ethanol producer) with which the Company signed a
comprehensive Memoranda of Understanding in March 1998. During 2005 the
Company continued work with Cosan including site specific engineering
studies. Cosan and DynaMotive have tested bagasse and optimized technical
12
design for bagasse-based BioOil pyrolysis plants. The Company is
concentrating on optimizing the design for a bagasse-fed BioOil pyrolysis
plant and further validating applications, fuel quality and chemical
composition of BioOil made from bagasse.
The Company has completed a series of production runs converting 100%
softwood bark derived from spruce, pine and fir into fuel quality BioOil.
Lower value bark residues are a major problem for the forest industry; as
bark has little or no value and is costly to dispose of. Canada, for
example, produces approximately 18 million tons of sawmill residues per year
of which 5 to 6 million tons are considered wastes and are subsequently
incinerated or landfilled.
3) 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 by future licensees or partnerships
with DynaMotive. Over time, we anticipate that BioOil will be refined in
much the same way that petroleum is today in order to derive the highest
value energy and chemical products.
The Company is following a staged approach to product development, focusing
initially on the earliest and most appropriate application of BioOil as a
clean, renewable fuel to generate power and heat in industrial boilers and
kilns, gas turbines and stationary reciprocating engines. The Company is
also supporting efforts to develop a next generation of higher-value fuels,
including BioOil/ethanol blends, BioOil/diesel emulsions and catalytic
reforming of BioOil to produce synthetic fuels and bio-methanol. BioOil also
has potential as a raw material to produce agro-products such as slow
release fertilizers and other high-value products.
Over the longer term, the Company believes that exploitation of specialty
chemicals contained in BioOil has the potential to create significant value.
RTI and other research institutions are developing techniques to extract
chemicals such as hydroxyacetaldehyde, levoglucosan, levoglucosenone,
acetol, acetic acid and formic acid. These chemicals have a wide variety of
possible applications including food flavorings, adhesives, resins,
pharmaceuticals, bio-based pesticides and paper brighteners.
CHAR PRODUCTION
Char is a significant co-product of the Company's pyrolysis process
comprising 15% to 20% yield from the input biomass at a value of
approximately one half that of biooil on a weight basis when used for fuel
purposes. Char is a granular solid with properties similar to coal. At 23 -
30 Giga Joules 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
(carbon dioxide) neutral and does not contain any sulfur.
A commercial scale BioOil plant processing 400 tpd of wood residue is
expected to produce approximately 26,000 tons per year of char with a total
energy value of 600,000 - 650,000 Giga Joules, dependent on the composition
and species of the feedstock.
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 also has potential for use as a
feedstock for manufacturing of charcoal briquettes. DynaMotive char has been
successfully tested at industrial scale and the prototype briquettes showed
excellent results, meeting or exceeding all charcoal industry quality
standards.
13
In 2003 and 2004 the Company, with the University of Saskatchewan, completed
initial analysis concluding that char is an appropriate material for
activated carbon. Research and testing in this area is continuing through
2006.
4) BIOOIL STRATEGIC PARTNERS, INVESTMENT AND GOVERNMENT FUNDING
The Company's BioOil technologies are consistent with the environmental and
economic objectives of many governments around the world.
The Company has received strong support from Canadian government departments
and funded entities. In 2003, the Company was approved to receive a funding
contribution for the Erie Flooring Project from Sustainable Development
Technology Canada (SDTC). On March 5, 2004 the Company signed the
Contribution Agreement with SDTC, confirming their $ 4.3 million
(C$5,000,000) capital grant to the Project, subject to completion of the
agreed work plan and documentation of eligible costs and other reporting
requirements over a three year period following completion of the Project
(the "Contract Period"). In 2004, the Company received the three payments
totaling $3.2 million (C$3.7 million) from SDTC. In November 2005, the
Company received a payment of $0.7 million (C$0.8 million) from SDTC. The
Company expects to receive the remaining $0.4 million (C$0.5 million) during
2006. If the Company sells the project or otherwise disposes during the
Contract Period of assets financed by the SDTC funding, SDTC will have a
claim on a portion of the proceeds.
In 2003 and 2004, the Company entered into amendments to its Research and
Development Contribution agreement with the Government of Canada through
Technology Partnerships Canada (TPC). In November 2004, the Company received
an extension to its TPC funding agreement to March 31, 2006. The agreement
confirms a maximum reimbursement cap of $7.1 million (C$8.235 million). The
investment will help the Company further its commercial-scale demonstration
programs, as well as continue its research, development and testing of
DynaMotive's fast pyrolysis technology.
TPC is a key element in the federal government's innovation strategy,
leveraging private sector investments in research, development and
innovation in critical, leading-edge technologies. DynaMotive originally
entered into the Contribution agreement with TPC in 1997 and as at December
31, 2005, had claimed US$6 million to fund pre-commercial Fast Pyrolysis
research and development. The amended agreement modifies and expands key
terms and conditions placed on the Company. The Company is required to
repay these funds from a percentage of future sales up to a maximum of
US$13.7 million. The Company will focus all funding from the amended
Contribution agreement towards construction of a full commercial-scale
forestry demonstration BioOil facility in Canada. The funds received from
SDTC have been accounted for as a credit to the carrying cost of the West
Lorne Plant.
II. RAW MATERIALS AND SUPPLIERS
For the most part, the Company's products are custom designed and
manufactured and are not produced for inventory. BioOil units will only be
produced for specific projects with procurement commencing when project
funding has been fully committed.
The Company outsources the final assembly of its products prior to sale and
does not manufacture the major components of its systems. The manufactured
components and materials used in the Company's products are obtained from
both domestic and foreign sources. Historically, lead-time for delivery of
materials has not been a problem.
While the Company has chosen to use only a limited number of manufacturers
to produce the components for its technologies, in the opinion of
management, the Company has a readily available supply of components and raw
materials for all of its anticipated products from various sources and does
not anticipate any difficulties in obtaining the components and raw
14
materials necessary to its business. These components comprise primarily
pyrolysis reactor chambers, burner assemblies, and conveyers.
The Company believes that this licensing and focused, outsourced
manufacturing strategy allows it to deliver superior products without the
high capital expenditures that the Company would otherwise require in order
to manufacture the components in house. As a result of limiting the number
of suppliers for the key components for the Company's products, the Company
believes it is better able to control costs while still maintaining high
quality specifications for the components' manufacture. Moreover, the
Company believes that it is better able to limit the number of third parties
who have access to the Company's proprietary technologies.
III. EFFECT OF GOVERNMENTAL AND ENVIRONMENTAL PROTECTION REGULATIONS
Operators of the Company's pyrolysis plants will be subject to federal,
provincial, state or foreign environmental laws. If full commercial use of
BioOil in power generation, heat and other applications commences, the
Company will become subject to various federal, local and foreign laws and
regulations pertaining to the discharge of material into the environment,
the use of biological waste products as feedstock, and otherwise relating to
the protection of the environment. The Company believes that it will be able
to comply with such laws at a cost which will not be prohibitive.
C. Organizational Structure
(Please refer to PDF file)
15
As of December 31, 2005, the Company had three wholly-owned subsidiaries
plus 99.9% ownership of a limited partnership: DynaMotive Corporation
(incorporated in the State of Rhode Island in 1990), DynaMotive Europe
Limited (formerly known as DynaMotive Technologies (UK) Ltd., incorporated
in the United Kingdom in 1996) inactive in 2005, DynaMotive Canada, Inc.
(incorporated in Canada in November 2000), and the West Lorne BioOil Co-
Generation Limited Partnership (the "Limited Partnership") which was formed
in Ontario, Canada in September 2003. DynaMotive Canada Inc. acts as the
General Partner of the Limited Partnership, which has developed and operates
the West Lorne Plant.
D. Property, Plants and Equipment.
The Company's office facilities are leased. The Company's corporate
headquarters, leased for a five-year period which commenced in May 2004, are
located in a business park complex in Vancouver, BC, Canada with
approximately 8,000 square feet of office space. The Company's principal
capital asset is the West Lorne Plant discussed above.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
OVERVIEW
This section should be read in conjunction with the Company's financial
statements included under Item 17 of this Form 20-F.
In 2005, DynaMotive invested primarily in the establishment of its West
Lorne Plant and as well continued its research and development activities
related to its BioOil technology along with business development activities
to develop initial commercial projects and market acceptance of BioOil.
Ongoing operations were focused in Canada.
A. RESULTS OF OPERATIONS
During the year ended December 31, 2005, the Company recorded a net
operating loss of $11,997,344 compared to a net operating loss of $9,916,215
for the year 2004. The increase in operating loss in 2005 as compared to
2004 was primarily attributable increased activity related to completion of
the Company's 100 tpd plant resulting in (i) an increase in interest expense
(ii) an increase in marketing expense, (iii) an increase in professional
fees and (iv) an increase in rent. The net operating loss in 2005 reflected
professional fees totaling $1,533,546, of which, $1,046,841 was non-cash
amounts paid in shares. The non-cash professional fees in 2004 were
$235,845. During the year ended December 31, 2004, the Company recorded a
net operating loss of $9,916,215, compared to a net operating loss of
$4,984,681 for the year 2003. The increase in operating loss in 2004 as
compared to 2003 was primarily attributable to (i) an increase in general
and administrative salaries and benefits (ii) an increase in marketing
expense, (iii) an increase in professional fees and (iv) an increase in
research and development. The net operating loss in 2004 reflected
professional fees totaling $1,010,802, of which, $235,845 was non-cash
amounts paid in shares. The non-cash professional fees in 2003 were
$655,416.
The basic and diluted loss per common share decreased to eleven cents
($0.11) for the year 2005 from twelve cents ($0.12) for the year 2004. The
loss per common share for the year 2003 was nine cents ($0.09). The decrease
16
in basic and diluted loss per share for 2005 was due to both the increase in
the loss for each year and the increase in the weighted average number of
Common Shares outstanding from 80,979,299 shares in 2004 to 108,009,185 in
2005.
Overall capital expenditures, net of government grants and disposal, used
for developing and patenting the Company's technologies decreased to
$1,915,857 in 2005 from $9,106,450 in 2004. Capital expenditures for the
Fast Pyrolysis technology decreased to $1,864,961 in 2005 from $8,982,857 in
2004. The decrease in the Fast Pyrolysis capital expenditures in 2005 was
due mainly to the completion of constructing the 100 tpd industrial plant in
Ontario in 2005. Overall capital expenditures, net of government grants and
disposal, used for developing and patenting the Company's technologies
increased to $9,106,450 in 2004 from $1,502,100 in 2003. Capital
expenditures for the Fast Pyrolysis technology increased to $8,982,857 in
2004 from $1,497,398 in 2003. The increase in the Fast Pyrolysis capital
expenditures in 2004 was due mainly to construction of the 100 tpd
industrial plant in Ontario, Canada and initial payments on the 200 tpd
plant to be constructed at a Canadian site.
The Company's total assets increased to $16,962,573 at the end of 2005 from
$13,198,698 at the end of 2004, due mainly to the building of the 100 tpd
commercial scale plant. Property, plant and equipment increased to
$14,199,148 in 2005 from $12,154,153 in 2004 due to the building of the 100
tpd commercial scale plant. The total liabilities decreased to $8,670,165 at
the end of 2005 from $8,911,500 at the end of 2004, due mainly to the
increase of payments issued to the vendors related to the 100 tpd industrial
plant. Current liabilities increased slightly to $7,861,317 at the end of
2005 from $7,843,828 at the end of 2004 due to an increase in accounts
payable and accrued liabilities of the 100 tpd commercial scale plant and
convertible debenture that are due within 12 months of December 31, 2005
For the years 2005, 2004 and 2003, the Company had expended on an annual
basis $3,218,058, $3,455,511 and $969,419 respectively, on research and
development. Of these amounts, $782,423, $765,106 and $456,438 respectively,
were reimbursed by government funding. The remainder of the respective
annual expenditures were paid by the Company. The level of research and
development expenditure has decreased in 2004 and 2005 in support of
development of the commercial scale plant and other product development
activities. Future research and development expenditures are expected to be
at a similar level.
The Company has been able to draw significantly from government grant and
loan facilities, including the Government of Canada's Technology
Partnerships Canada program both for expenditures made in 2004 and technical
and project related expenditures in 2005. The Company's agreement with
Technology Partnerships Canada pertains to maximum funding of US$7.1 million
(C$8.235 million), of which $5.3 million (C$ 6.2 million) has been received
as of year end 2005.
General and administrative salaries and benefits decreased to $5,152,851 in
2005 from $5,267,756 in 2004. The decrease in 2005 was mainly due to a
decrease in non-cash compensation and management's conscious effort in
controlling the Company's development activities with its 100 TPD commercial
scale plant. General and administrative salaries and benefits increased to
$5,267,756 in 2004 from $2,693,430 in 2003. The increase in 2004 was mainly
due to increased activity in the general and administrative area, an
increase in non-cash compensation and increase in the Company's development
activities with its 100 TPD commercial scale plant. Due to the change in
accounting policy for stock option compensation effective January 1, 2004,
pursuant to which, the Company is required to use fair value method of
calculating stock option compensation for all options granted subsequent to
17
January 1, 2002, modifications on the term of the employee stock options,
stock based compensation expense recognized has increased during the 2004.
Professional fees increased to $1,533,546 (comprised of legal & accounting
and audit fees of $243,988 and consulting fees of $1,289,558) in 2005 from
$1,010,802 (of legal & accounting and audit fees of $240,955 and consulting
fees of $769,847) in 2004. The increase was due mainly to the increase of
hiring external consultants during the year. Professional fees increased to
$1,010,802 in 2004 from $954,223 (comprised of legal & accounting and audit
fees of $297,349 and consulting fees of $656,874) in 2003. The increase was
due mainly to the increase of hiring external consultants during the year.
Amortization and depreciation increased to $148,556 in 2005 from $130,912 in
2004 due to the replacement of certain computer equipment and an increase of
computer equipment for a number of new staff. Amortization and depreciation
increased to $130,912 in 2004 from $125,580 in 2003 due to the replacement
of certain computer equipment.
Interest and other income decreased to $5,614 in 2005 from $8,766 in 2004
due mainly to decrease of miscellaneous revenue in 2005. Interest and other
income decreased to $8,766 in 2004 from $73,974 in 2003 due mainly to
decrease of miscellaneous revenue in 2004.
Interest expense increased in 2005 to $1,445,918 from $151,758 in 2004 due
mainly to the accretion of the debt discount and expense incurred on the
conversion of long-term and short-term convertible loan. Interest expense
decreased in 2004 to $151,758 from $320,643 in 2003 due mainly to the
repayment of interest bearing debt.
Marketing expense increased to $496,297 in 2005 from $283,322 in 2004 due to
an increase in business development and corporate financing activities and
during the year. Marketing expense increased to $283,322 in 2004 from
$155,914 in 2003 due to an increase in business development activities and
participation in an environmental conference during the year.
Office supplies, telephone and insurance increased to $467,854 in 2005 from
$328,286 in 2004 due to the increased activities in the general and
administrative area. Office supplies, telephone and insurance increased to
$328,286 in 2004 from $300,751 in 2003 due to the increased activities in
the general and administrative area.
Rent for leased premises increased to $175,294 in 2005 from $107,804 in 2004
due to the increase of office space and addition of accommodation for staff
working at the West Lorne site. Rent for leased premises decreased to
$107,804 in 2004 from $109,653 in 2003 due to the change in office and
storage space.
Currency exchange gain in 2005 amounted to $33,677 compared to a gain of
$53,156 in 2004 due to the depreciation of the US Dollar. Currency exchange
gain in 2004 amounted to $53,156 compared to a gain of $177,551 in 2003 due
to the depreciation of the US Dollar.
Loss on the write-down of long-term assets was $200,457 in 2005 as the
Company wrote-off its 10 TPD pilot plant as management determined its value
was permanently impaired.
B. LIQUIDITY AND CAPITAL RESOURCES
Principal sources of liquidity during the year ended December 31, 2005 were
(i) $6,398,254 in net proceeds ($6,433,295 gross) after deducting related
18
issue costs and expenses from private placement offerings of the Company's
Common Shares and the exercise of Common Share options for cash, (ii)
$1,957,000 in deposits for Common Shares to be issued in 2006 pursuant to
private placement offerings commenced in 2005, (iii) $1,825,000 increase in
short-term convertible loan, (iv) $42,331 decreased in repayment of short-
term loan and (v) $368,712 increase in government grant receivable.
For the previous year ended December 31, 2004 the Principal sources of
liquidity during the year ended December 31, 2004 were (i) $4,857,699 in net
proceeds ($5,242,734 gross) after deducting related issue costs and expenses
from private placement offerings of the Company's Common Shares and the
exercise of Common Share options for cash, (ii) $1,636,408 in deposits for
Common Shares to be issued in 2005 pursuant to private placement offerings
commenced in 2004, (iii) $830,013 increase in convertible loan, (iv)
$816,727 increase in long-term debts and (v) $509,879 decrease in government
grant receivable.
Overall cash inflows increased during 2005 due to significantly increased
financing activities and the completion of constructing of the West Lorne
Project in 2005. During the year ended December 31, 2005, the Company used
cash in operating activities and in investing activities of $6,734,729 and
$1,775,189 respectively, and generated cash from financing activities of
$9,769,211.
During the previous year ended December 31, 2004, the Company used cash in
operating activities and in investing activities of $2,883,735 and
$5,824,645 respectively, and generated cash from financing activities of
$8,693,057. During year ended December 31, 2003, the Company used cash in
operating activities and in investing activities of $2,169,755 and $530,209
respectively, and generated cash from financing activities of $3,221,353.
The net amount of cash used in operating activities during 2005 increased by
134% of cash used in operating activities during 2004 due to the completion
and commissioning of the Company's 100 tpd plant and the resulting increase
in business development activities. Cash used in operating activities
consisted primarily of a net loss for 2005 of $11,997,344 that was offset by
(i) amortization of non-cash items in the sum of $148,556, (ii) non-cash
equity compensation expenses, $3,697,057, and (iii) non-cash accretion
expense in the amount of $1,068,192.
The net amount of cash used in operating activities during 2004 increased by
33% of cash used in operating activities during 2003. Cash used in operating
activities consisted primarily of a net loss for 2004 of $9,916,215 that was
offset by (i) amortization of non-cash items in the sum of $130,912, (ii)
non-cash equity compensation expenses, $4,730,604, and (iii) net change in
non-cash working capital balances related to operations of $2,087,156.
Financing activities during 2005 generated a net increase in cash of
$9,769,211, primarily from the Company's private placements of Common
Shares. Financing activities during 2004 generated a net increase in cash of
$8,693,057, primarily from the Company's private placements of Common
Shares.
Investing activities in 2005 resulted in the use of cash, net of grants and
disposal, in the amount of $1,775,189 that consisted of $1,580,195 that was
incurred in the acquisition of capital assets, $22,181 was expended on
patents and $172,813 was increased in restricted cash (funds held by the
Company's lawyer as collateral for short-term convertible debentures).
Investing activities in 2004 resulted in the use of cash, net of grants and
disposal, in the amount of $5,824,645 that consisted of $5,804,656 that was
incurred in the acquisition of capital assets, $19,989 was expended on
patents. Investing activities in 2003 resulted in use of cash, net of grants
19
and disposal, in the amount of $530,209 that consisted of $491,057 that was
incurred in the acquisition of capital assets, $6,479 was expended on
patents and $32,673 was expended on other long-term assets.
During the first quarter of 2005, the Company raised subscription funds of
$2.5 million relating to the private placement commenced commencing in the
second quarter of 2004 at subscription prices ranging from $0.30 to $0.523
per share. 6 million shares and 2.2 million Common Share Purchase Warrants
were issued as a result of this funding.
During the second quarter, the Board approved a tranched funding of up to
$20 million to meet its objectives for additional working capital, general
corporate purposes and to assist the Company in the completion of its first
commercial plant. The Company raised subscription funds of $0.68 million
relating to the same private placement of the previous quarter at
subscription prices ranging from $0.337 to $0.427 per share. 1.2 million
shares and 0.3 million Common Share Purchase Warrants were issued as a
result of this funding.
During the second quarter of 2005 the Company issued $1.825 million of
convertible debentures including $175,000 of debentures issued to officers
and directors (or companies controlled by officers and directors) of the
Company. The debentures are due between June and September 2006, have an
interest rate of 10% payable in shares and are convertible into Company
common shares at rates between $0.40 and $0.425 per share. These debentures
are collateralized by certain government receivables and are guaranteed by
the Company. In September and December 2005, $1.15 million of the debentures
were converted into 2.7 million common shares and 0.68 million Series U
warrants. As at December 31, 2005, $675,000 of these debentures remain
outstanding.
During the third quarter of 2005, the Company raised subscription funds of
$2.5 million relating to the same private placement of the previous quarter
at subscription prices ranging from $0.40 to $0.48 per share. 5.1 million
shares and 1.3 million Common Share Purchase Warrants were issued as a
result of this funding.
During the fourth quarter, the Company raised further $2.8 million relating
to the same the private placement of the previous quarter at share prices
ranging from $0.455 to $0.71 per share. 3.8 million shares and 0.9 million
Common Share Purchase Warrants were issued as a result of this funding.
In total, the Company raised during 2005 $7.1 million in cash and settled
$1.8 million in consulting fees payable by the Company (these shares were
valued based on the quoted market price on the date of the settlement
agreement) for a total of 20 million Common Shares and 6 million Common
Share Purchase Warrants.
With the current cash on hand and anticipated cash flow from sales revenue,
the Company anticipates that it will have sufficient cash resources and
available financing to satisfy its cash requirements for the next 12 months.
The Company may require additional funding for the commercial expansion of
its Fast Pyrolysis technologies through the year 2006 and beyond. Given
market conditions and other factors, there can be no guarantee that the
Company will be successful in securing additional finance. 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.
The outcome of these matters cannot be predicted at this time. The Company's
future operations are dependent on the market's acceptance of its products
in order to ultimately generate future profitable operations, and the
Company's ability to secure sufficient financing to fund future operations.
There can be no assurance that the Company's products will be able to secure
market acceptance. Management plans to raise additional equity financing to
enable the company to complete its development plans. Subsequent to the
20
year end, during the period from January 1 to March 24, 2006, the
Company issued 11,253,937 common shares for total proceeds of
$7,680,459, inclusive of $1,615,000 received as at December 31, 2005,
relating to a private placement commencing during the forth quarter of
2005. In addition during the period from January 1 to March 24, 2006,
the Company received $1.64 million on the exercise of 269,172 options
and 4,022,806 warrants.
The Company's 2006 financing plan is structured to enable construction
of the Company's first 200 tonne per day ("tpd") BioOil manufacturing
facility. The core of the strategy surrounds market and project based
equity financing that minimizes equity dilution while raising
sufficient capital for operations and projects. In addition, the
Company will seek asset backed debt financing if such facilities are
available on reasonable commercial terms.
In addition to contemplated equity and debt offerings, the Company
expects to be able to draw approximately $1.5 million in 2006 being the
balance of government grant and loan facilities, including the
Government of Canada's Technology Partnerships program and from the
approved SDTC funding towards the West Lorne Project.
In connection with the Company's 200 tpd project, the Company is
committed to outstanding construction commitments of approximately $2.6
million and expects the project to be completed in late 2006.
The Company's funding plan for 2006 is structured so that equity
placements explained above will maintain Company and project
operations. Additionally, the Company contemplates a private placement
and project finance strategy which, with government contributions,
other project funding and sales, are expected to fund the 200tpd
project(s) which are expected to be developed during 2006. Any delay in
securing project funding for a project will delay the construction and
commissioning of that project.
The West Lorne Project has committed to a seven year $3 million (C$3.6
million) turbine financing agreement which will be secured by the
turbine and other power island assets. The Project has also entered
into a three year loan agreement for $0.8 million (C$1.0 million) of
which $816,727 (C$1,000,000) has been advanced as at December 31, 2005.
This loan is secured by a first charge on all of the project's assets
aside from the power island assets. For detail, please see note 10 of
the Audited Consolidated Financial Statements 2005.
In 2004 the Company entered into an agreement to pay for equipment and
services in exchange for an $830,013 (C$1 million) convertible
debenture. The debenture is convertible into common shares of the
Company at the market price at time of conversion, subject to a minimum
conversion price of US$0.40 per share and a maximum conversion price of
US$0.60 per share. The debenture bears no interest and the principal is
due December 10, 2009. The entire loan was converted in 2005 into
1,535,001 DynaMotive common shares and 767,000 two-year Series S
warrants exercisable at $0.57 per share. For detail, please see note
9(a) of the Audited Consolidated Financial Statements 2005.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared based on the
accounting policies described in Note 2 to our consolidated financial
statements in "Item 17. Financial Statements" in this Annual Report on
Form 20-F. The preparation of financial statements in conformity with
Canadian generally accepted accounting principles requires management
21
to make estimates and assumptions that affect the amounts reported in
the financial statements and notes. Actual results could differ from
these estimates.
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. Amounts received for future expenditures are
recorded as a current liability. Government assistance towards the
acquisition for property, plant and equipment is deducted from the cost
of the related property, plant and equipment.
Repayment of contribution is contingent solely upon the Company's
ability to generate revenue from the sale of specified products or
technology. Accordingly, liability of repayment will only be accrued
when sales of the products or technology have been generated.
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. As at December 31, 2005
and 2004, no investment tax credits have been recorded.
Research And Development Costs
Research costs are expensed in the period incurred. Development costs
are expensed in the period incurred unless the Company believes the
development project meets Canadian 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.
Projects Under Development
The Company expenses all preliminary stage costs incurred with respect
to a potential capital project, including costs related to the
consideration of alternatives, feasibility studies, and activities
occurring prior to the decision to proceed with the project until the
capital project meets the Company's capitalization policy and is
considered a project under development. The Company begins to
capitalize costs for projects under development when it has determined
that it is more likely than not that the financing for the capital
project is available and it is more likely than not that the Company
will be able to meet the requisite local and other governmental
regulations to develop the capital project.
For those capital projects that meet the Company's capitalization
policy, the Company capitalizes incremental costs that are directly
identifiable with the specific capital project until the capital
project is substantially complete and ready for its intended use.
Financing costs, including interest, are capitalized when they arise
from indebtedness incurred, directly or indirectly, to finance the
construction of the capital project. Capitalization of financing costs
will cease when a capital project is considered to be substantially
complete and ready for its intended use.
Annually, or whenever events and circumstances indicate that the
carrying value of the assets might be impaired and the carrying value
may not be recoverable, the Company
22
performs evaluations to assess the recoverability of its projects under
development. When the carrying value of projects under development is
determined to exceed its recoverable amount, an impairment loss is
recorded to reduce the carrying value of the projects under development
to its fair value.
Stock Based Compensation Plan
The Company has two stock based compensation plans - a stock
appreciation rights ("SA Rights") plan, which is no longer being used,
and a stock option plan for directors and employees, which are
described in note 11. There are a total of 22,639,120 shares reserved
for options under the plan of which 13,580,533 have been granted (see
details under Executive Compensation). Under the terms of the stock
option plan the Company may grant fixed options or options whose
vesting is contingent on future performance. Under Canadian GAAP,
compensation is recognized under the fair value based method when fixed
or performance based stock options are granted to employees and
directors. Compensation is recognized using the fair value based method
for SA Rights, under Canadian GAAP, when the performance criteria have
been met and amortized over the service period.
In addition, the Company has entered into compensation arrangements,
which entitle certain non-employees to receive specific amounts for
their services. These amounts can only be settled by applying them to
the exercising of outstanding options to purchase common shares each
month 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, and warrants to employees or
as consideration for services rendered by non-employees. As a result of
the change in accounting policy (note 3), such equity awards are
recorded at their fair value, as compensation expense or capitalized to
long-term assets under construction 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
netted against the proceeds raised. All unvested or modified options
for non-employees are re-measured on each balance sheet date until such
options vest, are exercised or forfeited.
Effective January 1, 2004, the Company adopted the Canadian GAAP fair-
value-based method for all stock-based awards granted on or after
January 1, 2004 and retroactively applied this method without
restatement. For US GAAP purposes, the Company continues to follow SFAS
No. 123.("SFAS 123") "Accounting for Stock Based Compensation" in
accounting for options granted to non-employees and Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations, in accounting for
stock options granted to officers, directors, and employees.
Compensation expense is calculated based on the difference, on the
measurement date, between the fair market value of the Company's stock
and the exercise price and is recorded over the vesting period of the
options. During 2005, 152,000 [2004 - 315,813; 2003 - 1,595,456] fixed
employee stock options granted with exercise prices less than the
market price of the underlying stock on the date of the grant. For U.S.
GAAP purposes, the stock appreciation rights ("SA Rights") and
performance-based stock options are accounted for as a variable
compensation plan under APB 25. The Company uses the best estimates of
number of SA Rights to be exercised (or forfeited) to record the
compensation relating to variable plans.
Prior to January 1, 2002, the Company did not record stock-based
compensation for Canadian GAAP purposes and
as such there was a difference between Canadian and U.S. GAAP. For the
23
years ended December 31, 2003 and 2002,, the Company adopted the
guidance under CICA Handbook Section 3870 [note 3] which required that
all stock-based awards made to non-employees and direct awards of
stock, stock appreciation rights and awards that call for settlement in
cash or other assets that are outstanding or granted for fiscal years
beginning on or after January 1, 2002 are to be measured and recognized
using a fair value based method. For stock based awards granted to
employees, the Company had previously elected to use the intrinsic
method as permitted under Canadian GAAP, which is consistent with U.S.
GAAP.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENCES, ETC.
The Company considers patents to be an important aspect of the
Company's business. The Company protects its intellectual property such
as trademarks, patents, product designs, manufacturing processes and
new product research and concepts. These rights are protected through
patents and trademark registrations, the maintenance of trade secrets
and, when necessary and appropriate. The Company also maintains
stringent procedures to maintain the secrecy of its confidential
business information. These procedures include the establishment of
"need to know" criteria for the dissemination of certain information
and the use of written confidentiality agreements in cases where the
sharing of proprietary information with third parties is necessary.
As of May 24, 2006, the Company's key patent is protected in 11
countries, patent applications pending in 5 countries and is scheduled
to expire between years 2016 and 2024. A US Patent was granted in
February 2006 with respect to an enhancement of the key patent and
based on this, a US PCT application was filed in February 2005.
Research costs are expensed in the year incurred. Development costs are
expensed in the year incurred unless the Company believes the
development project meets Canadian 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
Please refer to the Item 5 (a) Results of operations for additional
information on research and development.
D. TREND INFORMATION.
The Company's Fast Pyrolysis technology produces BioOil, a fuel that
will compete with conventional energy sources. Therefore, price trends
in the broad energy industry and developments in the alternative energy
sector will affect the commercial viability and attractiveness of
BioOil. The economic attractiveness of BioOil production is
significantly affected by the availability of suitable biomass
feedstock, the price of which may be effected on a regional basis by
competing uses for the feedstock from other industries. The price of
emissions credits, which can result from combustion of BioOil which
displaces hydrocarbon fuels, may be affected by many outside factors
including legislated requirements and international agreements.
E. OFF-BALANCE SHEET ARRANGEMENTS
Nil
24
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table provides as of December 31, 2005 the known long
term obligations and commitments of the Company:
|========================================================================|
| | | | | | |
|Contractual Obligations| Total | Less | 1 - 3 | 3 - 5 | More |
| | | than 1 | years | years | than 5 |
| | | year | | | years |
|------------------------------------------------------------------------|
|Operating lease | | | | | |
|obligations - Office | Nil | Nil | Nil | Nil | Nil |
|equipment | | | | | |
|------------------------------------------------------------------------|
|Premise lease | | | | | |
|obligations - Head | 498,260 | 142,879 | 306,684 | 48,697 | Nil |
|office | | | | | |
|------------------------------------------------------------------------|
|Convertible debts - | | | | | |
|short-term | 675,000 | 675,000| Nil | Nil | Nil |
|-------------------- --|---------|---------|---------|---------|--------|
|Long-term debt | 830,013 | Nil | 830,013 | Nil | Nil |
|-----------------------|---------|---------|---------|---------|--------|
|Construction |2,569,055|2,569,055| Nil | Nil | Nil |
|commitments | | | | | |
|-----------------------|---------|---------|---------|---------|--------|
|Total |4,572,328|3,386,934|1,136,697| 48,697 | Nil |
|========================================================================|
We have an operating lease for office facilities of our head office.
G. SAFE HARBOR
Forward Looking Statement
Statements in this report concerning the company's business outlook or
future economic performance; anticipated profitability, revenues,
expenses, or other financial items; and statements concerning
assumptions made or expectations as to any future events, conditions,
performance or other matters, are "forward-looking statements" as that
term is defined under the Federal Securities Laws. Forward-looking
statements are subject to risks, uncertainties and other factors which
could cause actual results to differ materially from those stored in
such statements. Such risks, uncertainties and factors include, but
are not limited to, future capital needs, changes and delays in product
development plans and schedules, customer acceptance of new products,
changes in pricing or other actions by competitors, patents owned by
the Company and its competitors, and general economic conditions, as
well as other risks detailed in the Company's filings with the
Securities and Exchange Commission.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
As at May 24, 2006, the Company's directors and executive officers are:
Name Age Position
Richard Chen-Hsing Lin (2)(3) 62 Chairman, President,
Operations-China and Director
R. Andrew Kingston (3) 46 President, Chief Executive
Officer and Director
Curtin Winsor, Jr., Ph.D.(1)(2) 66 Director
25
Desmond Radlein, Ph.D. (1)(2)(3) 57 Director
Shing-Cheng Hong (1) 72 Director
Chih-Lin Chu 38 Director
Brian Richardson 43 Chief Financial Officer
Paul Hughes 36 Chief Operating Officer
Jan Barynin, Ph.D. 69 Vice President, Engineering
Laura Santos 56 Corporate Secretary
Jeffrey Lin 36 Vice President, Business
Development- China and Japan
- -------
(1) Member of the Audit and Corporate Governance Committee of the
Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
(3) Member of the Executive Committee of the Board of Directors.
All Directors are elected annually at the Company's Annual Meeting of
Shareholders. The executive officers of the Company are appointed
annually at the first meeting of the Company's Board of Directors held
after each annual meeting of shareholders. Each director and executive
officer of the Company holds office until his or her successor is duly
elected and qualified or until his or her death or resignation or until
he or she shall be removed in the manner provided by the Company's by-
laws. There is no arrangement or understanding between any director or
executive officer and any other person pursuant to which any director
or executive officer is selected.
Richard Chen Hsing Lin. Mr. Lin has been a Director of the Company
since 1992 and Chairman of the Company since May of 1995. He was
President of the Taiwan Entrepreneurs and Investors Association in
Canada. Mr. Lin is also co-founder, Vice President and Secretary of
Neoventi Technology Corporation since 1991 and Neoventi Investment
Corporation since 1992, and has been a Director of Concert Industries
Ltd. since December 1992. Mr. Lin was President of the Taiwan
Entrepreneurs Association in B.C., Vice President of R.C.A. Taiwan and
a Director of Consolidated Peritronics Medical Inc. from February 1992
to April 1994.
Robert Andrew Kingston. Mr. Kingston was appointed President and CEO in
April 1999. Mr. Kingston has held senior positions in multi-national
oil companies, property and investment corporations and financial
institutions in Europe, the USA and South America. From 1996 to 1999,
Mr. Kingston was advisor to public and private companies in the U.S.
Canada and the U.K. From 1995 to 1996, Mr. Kingston was senior advisor
to the Chairman of Rotch Property Group Ltd., a UK property investment
and development company with assets in excess of US $1.8 billion. From
1992 to 1995, Mr. Kingston was a financial advisor on corporate
restructuring for Interpetrol S.A., a South American oil trading
26
company that at the time was partly owned by the Argentine National Oil
Company (NYSE: YPF). He held a number of positions with the Gatoil
Group of Companies from 1986 to 1990, a fully integrated, privately
owned oil conglomerate, including Managing Director of Gatoil Services
(UK) Limited and Financial Vice President of Gatoil Enterprises Inc.
(USA). He also worked for Price Waterhouse & Co. and Ducilo S.A., a
subsidiary to E.I. DuPont de Nemours & Co.
Curtin Winsor, Jr., Ph.D. Dr. Winsor has been a Director of the Company
since June 1996. He received his MA and Ph.D. in Latin American Area
Studies and History of Diplomacy from the School of International
Service of American University in 1979. He served at the Department of
State's Office of Congressional Relations until 1971. Dr. Winsor became
Special Assistant to Senator Bob Dole, Chairman of the Republican
National Committee, from June 1971 to May 1973. Moving to the private
sector, he served as Manager for International Affairs at the
Washington office of Chase Manhattan Bank from 1973 to 1979. He helped
to found the Alliance for Free Enterprise in 1979 and served as its
Deputy Director until 1983. Dr. Winsor served as US Ambassador to Costa
Rica from 1983 to 1985. He continued to serve as Consultant on Central
America to the Under Secretary of Defense from 1985 to 1987. Dr. Winsor
is a Governor of the Donner Canadian Foundation of Toronto, and a
Trustee of the Pan-American Development Foundation (of the Organization
of American States) in Washington, DC. He has been the owner of the
American Chemical Services Company of Marmet, WV, which provides
chemical blending, storage and distribution services for larger
chemical companies servicing the coal industry for more than the past
five years.
Desmond Radlein, Ph.D. Dr. Radlein became a Director of the Company in
December 1997. Dr. Radlein has been the President of RTI - Resource
Transforms International, Ltd., an R&D company specializing in
pyrolysis technology and applications, since 1994. Dr. Radlein received
a B.Sc. in Chemistry (1986) from the Alcan Scholar University of the
West Indies in Jamaica and M.Sc. in Theoretical Chemistry (1970) from
the University of Calgary in Alberta. He received his Ph.D. from the
University of Cambridge, England (1975) in Physical Chemistry. He was a
member of the Board of the Waterloo Region Community Legal Services
from 1994 to 1995. Dr. Radlein was also an Associate Research Professor
at the Chemical Engineering Department of the University of Waterloo
from 1987 to 1994. He is an inventor or co-inventor of 10 patents on
pyrolysis and petroleum processing and has also authored over 20
publications in various scientific journals. Some of his research
activities include: pyrolytic production of fermentable sugars,
fundamental studies on biomass pyrolysis mechanisms, catalytic
hydropyrolysis for hydrocarbon production and catalyst development for
gasification.
Shing-Cheng Hong. Mr. Hong became a Director of the Company in December
1997. With 40 years of industrial and financial background, Mr. Hong
led a 42-member management team of Hotung Venture Capital Corp. where
he served as President until his retirement in 2001. Hotung is the
leading venture capital group in Taiwan. Mr. Hong still serves as
Chairman of Honho Consulting Corp. which manages the Hong Tung VC, a
subsidiary of Hotung, with funds of US$55 million. He is also President
of Taiwan based Giga Venture Partners & Co. Mr. Hong is also Advisor to
Taiwan based Acer SoftCapital Incorporated.
Chih-Lin Chu. Mr. Chu became a Director of the Company in June 2001.
He is currently President of Hong Kong based China Development and
Investment Holdings Ltd. From 2000 to 2004, Mr. Chu was General Manager
for Business Development at China Strategic Holdings Limited (CSH). CSH
is a public company listed on the Hong Kong Exchange with investments
in energy, tire manufacturing, breweries, auto parts as well as
information technology and e-commerce related projects. From 1999 to
2000, Mr.Chu was Vice Chairman and President, China Operation for
Tricom Holdings Limited, also a public company in Hong Kong with a
focus on telecommunication products. Since 1994, Mr.Chu has been
involved in business development and government relationship in China
27
for various companies including Cathay Pacific Airline O.B.C. G.S.A.,
Shanghai E&T Wako Express Co. Ltd and Shanghai Tricom Limited. Mr. Chu
received his MBA from the China Europe International Business School in
China.
Brian Richardson, C.A., MBA Mr. Richardson was appointed Chief
Financial Officer of the Company in August 2003. From 1993 - 2002, Mr.
Richardson was a financial consultant in a variety of industries,
including working for four years as a project manager for Westcoast
Energy on gas and electric infrastructure projects in Latin America. In
the early 1990's, he was CFO of a publicly traded venture capital firm,
helping to bring it onto the TSE via a reverse take-over. Mr.
Richardson also worked in investment banking, and as CFO of a biotech
start-up. He has significant experience in project planning, management
and control and in working with early stage technology companies. Mr.
Richardson received his designation as a Chartered Accountant in 1987,
and in 1990, graduated with a MBA degree from IMD in Switzerland.
Paul Hughes, C.A., MBA Mr. Hughes was appointed Chief Operating Officer
of the Company in September 2005. From 2002 - 2005, Mr. Hughes was Head
of Power Projects and Alternative Fuels as well as founding partner and
member of the Executive team of MCC Energy PLC. He helped to take the
energy start-up from conception to flotation. From 1991 - 2000, he
worked at Pantellos Group, TXU Corp. and Grant Thornton Chartered
Accountants in high-level management positions that involved strategic
planning and corporate finance. Mr. Hughes has extensive strategic,
financial and commercial experience gained through Europe and North
America. He graduated with an Executive MBA degree as well as with a
BSc (Hons) Managerial & Administrative Studies degree. Mr. Hughes also
received his designation as a Chartered Accountant in the UK.
Jan Barynin, PhD., P.Eng. Dr. Barynin was appointed Vice President,
Engineering in June 2004. Dr. Barynin spent almost 30 years of his
professional career in steam, power, and boiler engineering; from 1970
to 1980 with Combustion Engineering (CE-Canada), from 1980 to 1986 with
Babcock and Wilcox and from 1986 to 1999 with H.A. Simons. He oversaw
the development of the Company's 10 tpd BioOil demonstration plant and
lately, has been responsible for the completion and commissioning of
the 100 tpd BioOil plant in West Lorne, Ontario. His latest endeavours
have been dedicated to renewable energy and use of agricultural and
forestry residues. Dr. Barynin graduated as a Chemical Engineer in 1961
from the Royal Technology University of Denmark and in 1970 received
his doctorate in Chemical Engineering and Chemical Technology from the
Imperial College, UK.
Laura Santos, BFA. Mrs. Santos has been Secretary of the Company since
March 1998, Assistant Secretary and Executive Assistant from 1994 to
1998. Prior to joining the Company, she was Accounting Supervisor with
Everex Systems from 1990 to 1993; Senior Accounting Assistant with
Walbar, Canada from 1989 to 1990 and with CitiBank, N.A. and Chemical
Bank in New York from 1983 to 1988. She was also Assistant to the
Executive Secretary of the Philippine American Chamber of Commerce in
New York from 1982 to 1983. Mrs. Santos graduated with a Bachelor of
Fine Arts degree from the University of the East, Philippines.
Jeffrey Lin, B.Sc. MBA, CMA. Mr. Lin joined DynaMotive in 1994 and has
been appointed VP Business Development to lead the Company's expansion
efforts in Japan and China. Before joining the business development
team, Mr. Lin previously held positions as the Director of Finance and
Project Manager with the Company. Mr. Lin has the technical knowledge,
business and financial experience as well as the cultural background
and the language skills to open new business opportunities in Asia.
28
B. Compensation of Directors and Senior Management
The following table contains a summary of compensation paid or payable to
directors and senior management during the year ended December 31, 2005*:
|=======================================================================|
| | | | | |
| | | |Long-term |Long-term |
| |Salary |Bonus |Incentive |Incentive |
|Name |($) |($) |Plan |Plan |
| | | |($) |($) |
|-----------------------------------------------------------------------|
|Richard Chen-Hsing | 189,960 | 194,900 | - | - |
|Lin | | | | |
|-----------------------------------------------------------------------|
|Robert Andrew | 295,494 | 303,177 | - | - |
|Kingston | | | | |
|-----------------------------------------------------------------------|
|Curtin Window, Jr., | 9,491** | - | - | - |
|Ph.D | | | | |
|-----------------------------------------------------------------------|
|Shing-Cheng Hong | 13,370** | - | - | - |
|-----------------------------------------------------------------------|
|Desmond Radlein | 13,617** | - | - | - |
|-----------------------------------------------------------------------|
|Chih-Lin Chu | 8,253** | | | |
|-----------------------------------------------------------------------|
|Brian Richardson | 142,878 | 136,172 | - | - |
|-----------------------------------------------------------------------|
|Paul Hughes | 67,398 | 37,138 | - | - |
|-----------------------------------------------------------------------|
|Jan Barynin | 115,540 | 18,569 | - | - |
|-----------------------------------------------------------------------|
|Laura Santos | 99,034 | 74,276 | - | - |
|-----------------------------------------------------------------------|
|Jeffrey Lin | 99,034 | 74,276 | - | - |
|=======================================================================|
*Except as otherwise noted, all compensation are disclosed in U.S. dollars
based upon 2005's average exchange rate of $0.8253 per dollar.
** 50% to be paid in cash ($22,365) and 50% in shares (total of 37,118
restricted common shares)
The following table lists stock options outstanding at December 31, 2005 to
purchase common shares of the Company for directors and senior management:
|========================================================================|
| | | | |
|Name |Number of |Exercise |Expiry Date |
| |Shares |Price | |
|------------------------------------------------------------------------|
|Richard Chen Hsing Lin | 750,000 |$0.50 |02-Feb-10 to 29-Apr-12|
|------------------------------------------------------------------------|
|Richard Chen Hsing Lin | 300,000 |$0.23 |30-Aug-13 |
|------------------------------------------------------------------------|
|Richard Chen Hsing Lin | 605,660 |$0.20 |30-Aug 13 to 31-Mar-14|
|------------------------------------------------------------------------|
|Richard Chen Hsing Lin |1,500,000 |$0.45 |31-Jul-09 to 31-Jul-10 |
|------------------------------------------------------------------------|
|Robert Andrew Kingston | 775,000 |$0.50 |02-Feb-10 to 23-Feb-12|
|------------------------------------------------------------------------|
|Robert Andrew Kingston | 907,649 |$0.20 |30-Aug-13 to 14-Mar-14|
|------------------------------------------------------------------------|
|Robert Andrew Kingston | 300,000 |$0.23 |30-Aug-13 |
|------------------------------------------------------------------------|
|Robert Andrew Kingston |2,400,000 |$0.22 |30-Aug-13 to 22-Dec-13|
|------------------------------------------------------------------------|
|Robert Andrew Kingston |1,500,000 |$0.45 |31-Jul-09 to 31-Jul-10|
|------------------------------------------------------------------------|
|Curtin Winsor, Jr., Ph.D| 24,000 |$0.90 |10-Dec-06 |
|------------------------------------------------------------------------|
|Curtin Winsor, Jr., Ph.D| 24,000 |$0.33 |22-Dec-08 |
|------------------------------------------------------------------------|
|Curtin Winsor, Jr., Ph.D| 30,000 |$0.45 |05-Aug-08 to 22-Dec-09|
|------------------------------------------------------------------------|
|Desmond Radlein, Ph.D | 20,000 |$0.90 |10-Dec-06 |
|------------------------------------------------------------------------|
|Desmond Radlein, Ph.D | 24,000 |$0.33 |22-Dec-08 |
|------------------------------------------------------------------------|
|Desmond Radlein, Ph.D | 46,000 |$0.45 |05-Aug-08 to 22-Dec-09|
29
|------------------------------------------------------------------------|
|Shing-Cheng Hong | 16,000 |$0.90 |10-Dec-06 |
|------------------------------------------------------------------------|
|Shing-Cheng Hong | 16,000 |$0.33 |22-Dec-08 |
|------------------------------------------------------------------------|
|Shing-Cheng Hong | 46,000 |$0.45 |05-Aug-08 to 22-Dec-09|
|------------------------------------------------------------------------|
|Chih-Lin Chu | 16,000 |$0.90 |09-Dec-06 |
|------------------------------------------------------------------------|
|Chih-Lin Chu | 16,000 |$0.33 |22-Dec-08 |
|------------------------------------------------------------------------|
|Chih-Lin Chu | 30,000 |$0.45 |05-Aug-08 to 22-Dec-09|
|------------------------------------------------------------------------|
|Brian Richardson | 125,000 |$0.23 |06-May-06 |
|------------------------------------------------------------------------|
|Brian Richardson | 100,000 |$0.45 |30-Aug-06 |
|------------------------------------------------------------------------|
|Brian Richardson | 78,067 |$0.20 |14-Mar-06 |
|------------------------------------------------------------------------|
|Brian Richardson | 400,000 |$0.48 |01-Nov-08 to 21-Jan-09|
|------------------------------------------------------------------------|
|Brian Richardson | 150,000 |$0.58 |01-Nov-08 |
|------------------------------------------------------------------------|
|Paul Hughes | 200,000 |$0.49 |31-May-08 |
|------------------------------------------------------------------------|
|Jan Barynin | 400,000 |$0.48 |31-Dec-09 to 21-Jan-09|
|------------------------------------------------------------------------|
|Laura Santos | 10,000 |$1.00 |2-Feb-10 |
|------------------------------------------------------------------------|
|Laura Santos | 80,000 |$1.50 |14-Jun-10 to 31-Jan-11|
|------------------------------------------------------------------------|
|Laura Santos | 15,000 |$0.50 |28-Apr-12 |
|------------------------------------------------------------------------|
|Laura Santos | 100,000 |$0.23 |30-Aug-13 |
|------------------------------------------------------------------------|
|Laura Santos | 122,308 |$0.20 |30-Aug-13 to 14-Mar-14|
|------------------------------------------------------------------------|
|Laura Santos | 200,000 |$0.48 |31-Dec-09 |
|------------------------------------------------------------------------|
|Jeffrey Lin | 110,000 |$1.00 |02-Feb-10 |
|------------------------------------------------------------------------|
|Jeffrey Lin | 15,000 |$0.50 |28-Apr-12 |
|------------------------------------------------------------------------|
|Jeffrey Lin | 100,000 |$0.23 |30-Aug-13 |
|------------------------------------------------------------------------|
|Jeffrey Lin | 200,000 |$0.49 |21-Jan-09 |
|========================================================================|
C. Board Practices and Share Ownership
Members of the Board of Directors have served in their respective
capacities since their election. Each director elected will hold
office until the conclusion of the next Annual General Meeting of the
Company at which a director is elected, unless the director's office is
earlier vacated in accordance with the Articles of the Company or the
provisions of the Business Corporations Act (British Columbia).
The Company maintains standing Executive, Compensation and Audit
Committees, but does not have a nominating committee. The Executive
Committee is comprised of Dr. Desmond Radlein, Messrs. R. Andrew
Kingston and Richard Chen-Hsing Lin. The purpose of the Committee is to
act on behalf of the Board to provide direction to management and to
authorize and approve expenditures in excess of the authority delegated
by the Board to management, with such approvals to be ratified by the
Board at the next regular scheduled Meeting.
30
The Company's Audit and Corporate Governance Committee, whose members
include Mr. Shing-Cheng Hong, Drs. Curtin Winsor, Jr. and Desmond
Radlein reviews the financial reporting process of the Company on
behalf of the Board by reviewing the independence of the Company's
independent auditors, the adequacy of internal controls, the quality of
financial reporting, and accounting estimates involving the use of
significant management judgment.
The Compensation Committee of the Board of Directors makes
recommendations to the Board of Directors on compensation issues,
including (i) salary levels for officers; (ii) executive compensation
plans; (iii) the review of employee benefit programs; (iv) the review
of proposed compensation plans applicable to the Company's officers and
employees; and (v) the administration of the Company's stock option
plans as authorized by the Board. The Committee is comprised of Drs.
Desmond Radlein and Curtin Winsor, Jr. and Mr. Richard Chen-Hsing Lin.
The Board approved in May 2004 a new compensation plan as proposed by
the Compensation Committee for non-management Board members and
Committee chairs, as follows: a) annual retainer of $8,253, and $4,126
for Board members and Committee chairs respectively, payable in 50%
cash and 50% in common stock priced at $0.60 per share for year 2004-
2005; b) 15,000 and 8,000 stock options for Board members, and
Committee chairs, respectively; the term of the stock options is for
four (4) years and priced at $0.45 per share for years 2004-2006; c)
Board and Committee meeting fees - $247 per meeting under two (2) hours
and $990 per meeting over two (2) hours, payable in 50% cash and 50% in
common stock priced on the last trading day of the respective quarter
at the lower of the price on such day or the average of the previous
five trading days. The Compensation Committee of the Board regularly
reviews the appropriateness of Director's compensation. The directors
are also reimbursed for out-of-pocket expenses such as reasonable
traveling, hotel and other expenses incurred in and about the business
of the Company.
Executive officers of the Company who also act as directors of the
Company do not receive any additional compensation for services
rendered in their capacity as directors, other than as paid by the
Company to such executive officers in their capacity as executive
officers.
The following table sets out the names of directors and senior
management, the period of time during which each has been a director or
senior manager of the Company, and the number of common shares of the
Company beneficially owned by each of them, directly or indirectly, or
over which control or direction is exercised and percentage of
ownership as at May 24, 2006:
|=======================================================================|
| | | |
| |Periods during which|Shares Owned and % |
| |Has Served as a |of Ownership |
|Name |Director or Senior | |
| |Manager | |
|-----------------------------------------------------------------------|
|Richard Chen-Hsing Lin(2)(3) |Since 1992 |2,038,087 Common |
|Chairman, President, | |shares(2) |
|Operations-China and Director | |1.35% |
|-----------------------------------------------------------------------|
|Robert Andrew Kingston (3) |Since 1999 |969,409 Common |
|President, Chief Executive | |shares(3) |
|Officer and Director | |0.06% |
|-----------------------------------------------------------------------|
|Curtin Winsor, Jr., Ph.D.(1) |Since 1996 |1,536,354 Common |
|(2) | |shares(4) |
|Director | |1.02% |
31
|-----------------------------------------------------------------------|
|Shing-Cheng Hong(1) |Since 1997 |123,506 Common |
| | |shares (5) |
|Director | |0.08% |
|-----------------------------------------------------------------------|
|Chih-Lin Chu |Since 2001 |6,845 Common |
|Director | |Shares (6) |
| | |0.005% |
|-----------------------------------------------------------------------|
|Desmond Radlein, Ph.D.(1) |1997 - 2002 and 2003|50,619 Common |
|(2)(3) |to present |shares (7) |
|Director | |0.034% |
|-----------------------------------------------------------------------|
|Brian Richardson |Since 2003 |151,000 Common |
|Chief Financial Officer | |shares |
| | |0.10% |
|-----------------------------------------------------------------------|
|Paul Hughes |Since 2005 |221,145 Common |
|Chief Operating Officer | |Shares |
| | |0.15% |
|-----------------------------------------------------------------------|
|Jan Barynin, Ph.D., P.Eng |Since 2004 |nil |
|Vice President, Engineering | | |
|-----------------------------------------------------------------------|
|Laura Santos |Since 1998 |24,172 Common |
|Corporate Secretary | |shares |
| | |0.016% |
|-----------------------------------------------------------------------|
|Jeffrey Lin |January 2005 |100,000 Common |
|Vice President, Business | |shares |
|Development - China and Japan | |0.066% |
|=======================================================================|
Notes:
(1) The information as to Shares beneficially owned or controlled is
not within the knowledge of the management of the Company and has
been furnished by the respective nominees.
(2) Includes 2,038,087 Common Shares, of which 1,338,045 Common
Shares are held by Cantai Property Limited (Cantai), a company
controlled by Mr. Lin and includes 172,912 Common Shares held by
Neoventi Technology Corporation over which Mr. Lin has voting and
disposition powers. Mr. Lin also holds options to purchase up to
an aggregate of 3,155,660 Common Shares (1,000,000 Common Shares
at an exercise price of $0.45, expiring on July 31, 2009; 750,000
Common Shares at an exercise price of $0.50, expiring on April
28, 2012, 300,000 Common Shares at an exercise price of $0.23,
expiring on August 30, 2013; 605,660 Common Shares at an exercise
price of $0.20, expiring on March 31, 2014 and 500,000 Common
Shares at an exercise price of $0.45, expiring July 31, 2010).
(3) Includes 969,409 Common Shares; 830,853 of these Shares are held
in the name of Cape Fear Ltd., a UK company of which Mr.
Kingston, has served as a director in the past. Mr. Kingston
also holds options to purchase up to an aggregate of 5,882,649
Common Shares (1,000,000 Common Shares at an exercise price of
$0.45, expiring on July 31, 2009; 775,000 Common Shares at an
exercise price of $0.50, expiring on February 23, 2012; 300,000
Common Shares at an exercise price of $0.23, expiring on December
22, 2013; 2,400,000 Common Shares at an exercise price of $0.22,
expiring on December 22, 2013; 907,649 Common Shares at an
exercise price of $0.20, expiring on March 14, 2014, and 500,000
Common Shares at an exercise price of $0.45, expiring on July 31,
2010).
(4) Includes 1,536,354 Common Shares of which 1,273,262 Common Shares
are held by Legacy Trust. Dr. Winsor also holds options to
purchase up to an aggregate of 78,000 Common Shares (24,000
Common Shares at an exercise price of $0.90, expiring on December
10, 2006; 24,000 Common Shares at an exercise price of $0.33,
expiring on December 22, 2008; 15,000 Common Shares at an
exercise price of $0.45, expiring on August 5, 2008 , and 15,000
Common Shares at an exercise price of $0.45, expiring on December
22, 2009).
32
(5) Mr. Hong also holds options to purchase up to 16,000 Common
Shares at an exercise price of $0.90, expiring on December 9,
2006.
(6) Mr. Chu also holds options to purchase up to an aggregate of
62,000 Common Shares (16,000 Common Shares at an exercise price
of $0.90, expiring on December 9, 2006; 16,000 Common Shares at
an exercise price of $0.33, expiring on December 22, 2008; 15,000
Common Shares at an exercise price of $0.45, expiring on August
5, 2008, and 15,000 Common Shares at an exercise price of $0.45,
expiring on December 22, 2009).
(7) Dr. Desmond Radlein also holds options to purchase up to an
aggregate of 90,000 Common Shares (20,000 Common Shares at an
exercise price of $0.90, expiring on December 9, 2006; 24,000
Common Shares at an exercise price of $0.33, expiring on December
22, 2008; 23,000 Common Shares at an exercise price of $0.45,
expiring on August 5, 2008, and 23,000 Common Shares at an
exercise price of $0.45, expiring on December 22, 2009).
The number of shares beneficially owned by the directors and senior
management, directly or indirectly, are based on information furnished
by Computershare Trust Company of Canada, the registrar and transfer
agent of the Company, and by the nominees themselves. The Directors
and Officers beneficially own or effectively control as a group a total
of 5,221,137 shares which represent 3.45% of the total issued and
outstanding shares of the Company.
The Directors and Senior Management hold a total of 11,786,617 options.
4,799,617 options are exercisable between $0.20 and $0.33 each;
6,711,000 are exercisable between $0.45 and $0.58 each; and 276,000
options are exercisable between $0.90 and $1.50 each. All unexercised
options were in the money based on the average trading price of $1.54
per Common share as listed on the OTC BB as at May 24, 2006.
Percentage of class is calculated based on the outstanding common
shares as at May 24, 2006 of 150,927,262.
The Company has a Stock Option Plan (the "Plan"), enabling the Company
to provide its directors, officers and employees with an opportunity to
share in increases in the value of the Company's shares. The Plan is
intended to attract and retain the services of directors, officers,
employees and consultants to the Company for the benefit of the Company
and its shareholders and to provide additional incentive for such
directors, officers and employees to continue to work in the best
interests of the Company and its shareholders through continuing
ownership of its Common Stock. At May 24, 2006, 9,058,587 options were
issuable under the Plan and 13,580,533 options were outstanding at
exercise prices ranging from $0.20 to $1.50 per common share.
AUDIT COMMITTEE AND RELATIONSHIP WITH AUDITOR
Multilateral Instrument 52-110 of the Canadian Securities
Administrators ("MI52-110") requires the Company, as a venture issuer,
to disclose annually in its Information Circular certain information
concerning the constitution of its audit committee and its relationship
with its independent auditor, as set forth in the following:
The Audit and Corporate Governance Committee's Charter
The audit committee has a charter. A copy of the audit committee
charter is attached as Schedule "A" hereto.
Composition of the Audit and Corporate Governance Committee
The members of the audit and corporate governance committee are Shing-
Cheng Hong, Dr. Curtin Winsor, Jr. and Dr. Desmond Radlein, all are
independent members of the audit committee except for Dr. Radlein. All
members are considered to be financially literate.
A member of the audit and corporate governance committee is independent if
the member has no direct or indirect material relationship with the
Company. A material relationship means a relationship which could, in the
33
view of the Company's board of directors, reasonably interfere with the
exercise of a member's independent judgment.
A member of the audit and corporate governance committee is considered
financially literate if he or she has the ability to read and
understand a set of financial statements that present a breadth and
level of complexity of accounting issues that are generally comparable
to the breadth and complexity of the issues that can reasonably be
expected to be raised by the Company.
Relevant Education and Experience
See heading "Election of Directors".
Audit and Corporate Governance Committee Oversight
The audit committee has not made any recommendations to the board of
directors to nominate or compensate any external auditor.
Reliance on Certain Exemptions
The Company's auditors, BDO Dunwoody LLP, Chartered Accountants, have
not provided any material non-audit services.
Pre-Approval Policies and Procedures
The audit and corporate governance committee has adopted specific
policies and procedures for the engagement of non-audit services as set
out in the attached audit committee charter.
External Auditor Service Fees
The audit and corporate governance committee has reviewed the nature
and amount of the non-audited services provided by BDO Dunwoody LLP,
Chartered Accountants, to the Company to ensure auditor independence.
Fees incurred with BDO Dunwoody LLP, Chartered Accountants, for audit
and non-audit services in the last two fiscal years for audit fees are
outlined in the following table.
|===============================================================================|
| | | |
|Nature of Services |Fees Paid to Auditor |Fees Paid to Auditor |
| |in Year Ended |in Year Ended |
| |December 31, 2005 |December 31, 2004 |
|===============================================================================|
|Audit Fees (1) |$111,414 |$106,497 |
|-----------------------|-----------------------------|-------------------------|
|Audit-Related Fees (2) |$9,807 |$Nil |
|-----------------------|-----------------------------|-------------------------|
|Tax Fees (3) |$Nil |$551 |
|-----------------------|-----------------------------|-------------------------|
|All Other Fees (4) |$Nil |$Nil |
|-----------------------|-----------------------------|-------------------------|
|Total |$121,221 |$107,048 |
|===============================================================================|
Notes:
(1) "Audit Fees" include fees necessary to perform the annual audit
and quarterly reviews of the Company's consolidated financial
statements. Audit Fees include fees for review of tax provisions
and for accounting consultations on matters reflected in the
financial statements. Audit Fees also include audit or other
attest services required by legislation or regulation, such as
comfort letters, consents, reviews of securities filings and
statutory audits.
(2) "Audit-Related Fees" include services that are traditionally
performed by the auditor. These audit-related services include
employee benefit audits, due diligence assistance, accounting
consultations on proposed transactions, internal control reviews
and audit or attest services not required by legislation or
regulation.
(3) "Tax Fees" include fees for all tax services other than those
included in "Audit Fees" and "Audit-Related Fees". This category
includes fees for tax compliance, tax planning and tax advice.
34
Tax planning and tax advice includes assistance with tax audits
and appeals, tax advice related to mergers and acquisitions, and
requests for rulings or technical advice from tax authorities.
(4) "All Other Fees" include all other non-audit services.
CORPORATE GOVERNANCE
General
Effective June 30, 2005, National Instrument 58-101 Disclosure of
Corporate Governance Practices ("NI 58-101") and National Policy 58-201
Corporate Governance Guidelines ("NP 58-201") were adopted in each of
the provinces and territories of Canada. NI 58-101 requires issuers to
disclose the corporate governance practices that they have adopted. NP
58-201 provides guidance on corporate governance practices. The Board
believes that good corporate governance improves corporate performance
and benefits all shareholders. This section sets out the Company's
approach to corporate governance and addresses the Company's compliance
with NI 58-101.
1. Board of Directors
Directors are considered to be independent if they have no direct or
indirect material relationship with the Company. A "material
relationship" is a relationship which could, in the view of the
Company's Board of Directors, be reasonably expected to interfere with
the exercise of a director's independent judgment.
The board facilitates its independent supervision over management by
promoting frequent interaction, feedback and exchange of ideas. As
well, management provides the non-independent directors with periodic
reports outlining the financial position and status of development
projects.
The independent members of the Board of Directors of the Company are
Dr. Curtin Winsor, Jr., Shing-Cheng Hong and Chih-Lin Chu.
The non-independent directors are Richard Lin (Chairman of the Board),
R. Andrew Kingston (President and Chief Executive Officer) and Dr.
Desmond Radlein.
2. Directorships
None of the Directors hold any other directorships with any other
reporting issuers.
3. Orientation and Continuing Education
The Board and the Company's senior management conduct orientation
programs for new directors. The orientation programs include
presentations by management to familiarize new directors with the
Company's projects, strategic plans, its significant financial,
accounting and risk management issues, its compliance programs, its
code of business conduct and ethics, its principal officers, its
internal and independent auditors and its outside legal advisors. In
addition, the orientation program includes a review of the Company's
expectations of its directors in terms of time and effort, a review of
the directors' fiduciary duties and visits to Company headquarters and,
to the extent practical, certain of the Company's significant
facilities.
To enable each director to better perform his or her duties and to
recognize and deal appropriately with issues that arise, the Company
provides the directors with suggestions to undertake continuing
director education, the cost of which is borne by the Company.
4. Ethical Business Conduct
The Board of Directors, on the recommendation of the Corporate Governance
Committee, has adopted and maintains a Code of Ethics which applies to the
employees, officers and directors of the Company. The Code of Ethics meets
the definition and coverage of a
35
"code of ethics" under Item 16.B of SEC Form 20-F, as amended, and other
applicable laws and regulations.
5. Nomination of Directors
The Board considers its size each year when it considers the number of
directors to recommend to the shareholders for election at the annual
meeting of shareholders, taking into account the number required to
carry out the Board's duties effectively and to maintain a diversity of
views and experience.
These functions are currently performed by the Audit and Corporate
Governance Committee.
6. Compensation
The Compensation Committee of the Board of Directors makes
recommendations to the Board of Directors on compensation issues,
including (i) salary levels for officers; (ii) executive compensation
plans; (iii) the review of employee benefit programs; (iv) the review
of proposed compensation plans applicable to the Company's officers;
and (v) the administration of the Company's stock option plans as
authorized by the Board. The Committee is comprised of Dr. Desmond
Radlein and Dr. Curtin Winsor, Jr. and Richard Chen-Hsing Lin.
7. Other Board Committees
The Company maintains standing Executive, Compensation and Audit and
Corporate Governance Committees.
The Executive Committee is comprised of Dr. Desmond Radlein, R. Andrew
Kingston and Richard Chen-Hsing Lin. The purpose of the Executive
Committee is to act on behalf of the Board to provide direction to
management and to authorize and approve expenditures in excess of the
authority delegated by the Board to management, with such approvals to
be ratified by the Board at the next regular scheduled Meeting.
The Compensation Committee is comprised of Dr. Desmond Radlein, Dr.
Curtin Winsor, Jr. and Richard Chen-Hsing Lin. See heading
"Compensation of Directors" for functions of the Compensation
Committee.
The Company's Audit and Corporate Governance Committee, whose members
include Shing-Cheng Hong, Dr. Curtin Winsor, Jr. and Dr. Desmond
Radlein, review the financial reporting process of the Company on
behalf of the Board by reviewing the independence of the Company's
independent auditors, the adequacy of internal controls, the quality of
financial reporting, and accounting estimates involving the use of
significant management judgment.
The Board generally requires that all material transactions receive
prior Board approval. In this regard, virtually all financing
transactions are considered material to the Company.
8. Assessments
The Board monitors the adequacy of information given to directors,
communication between the Board and management and the strategic
direction and processes of the Board and committees.
36
COMPENSATION OF EXECUTIVE OFFICERS
Executive Compensation
In this section "Named Executive Officer" means the Chief Executive
Officer, the Chief Financial Officer and each of the three most highly
compensated executive officers, other than the Chief Executive Officer
and Chief Financial Officer, who were serving as executive officers at
the end of the most recently completed fiscal year and whose total
salary and bonus exceeds $150,000 as well as any additional individuals
for whom disclosure would have been provided except that the individual
was not serving as an officer of the Company at the end of the most
recently completed financial year end. The compensation paid to the
Named Executive Officers during the Company's three most recently
completed financial years is as set out below:
Summary Compensation Table
|=============================================================================|
| SUMMARY COMPENSATION TABLE |
|=============================================================================|
| | | Annual Compensation | Long Term Compensation |
| ----------------------------------------------------------------------------|
| | | | | | Awards |
| | | | | |--------------------------|
| | | | | | | |
| | | | |Other | |Restricted |
| | | | |Annual |Securities |Shares or |
|Name and | | | |Compen- |Under |Restricted |
|Principal | |Salary |Bonus |sation |Options |Share Units |
|Position |Year |($) |($) |($) |Granted (#) |($) |
|-----------------------------------------------------------------------------|
|Richard Lin |2005 |189,960 |194,900 | -0- | 500,000 | -0- |
|Chairman of the |------|--------|--------|--------|------------|-------------|
|Board and |2004 |172,864 | 53,012 | -0- |1,000,000 | -0- |
|President, |------|--------|--------|--------|------------|-------------|
|Operations - |2003 |160,600 | 6,692 | -0- | 300,000 | -0- |
|China | | | | | | |
|-----------------------------------------------------------------------------|
|Robert Andrew |2005 |295,494 |303,177 | -0- | 500,000 | -0- |
|Kingston, |------------------------------------------------------------|
|President and |2004 |268,900 | 82,207 | -0- |1,000,000 | -0- |
|Chief Executive |------------------------------------------------------------|
|Officer |2003 |233,413 | 9,702 | -0- |2,700,000 | -0- |
|-----------------------------------------------------------------------------|
|Brian |2005 |142,878 |136,172 | -0- | 350,000 | -0- |
|Richardson |------------------------------------------------------------|
|Chief Financial |2004 |121,005 | 46,097 | -0- | 200,000 | -0- |
|Officer |------------------------------------------------------------|
| |2003 | 77,268 | 4,461 | -0- | 340,000 | -0- |
|-----------------------------------------------------------------------------|
|Jan Barynin |2005 |115,540 | 18,569 | -0- | 200,000 | -0- |
|Vice President, |------------------------------------------------------------|
|Engineering |2004 | 67,842 | 20,632 | -0- | 200,000 | -0- |
| |------------------------------------------------------------|
| |2003 | -0- | -0- | -0- | -0- | -0- |
|=============================================================================|
Notes:
(1) *Except as otherwise noted, all compensation is disclosed in U.S.
dollars based upon 2005's average exchange rate of $0.8252 per
dollar (2004: $0.7683, 2003: $0.7138, per dollar).
(2) Jan Barynin was appointed as Vice-President, Engineering, in June
2004.
Long-Term Incentive Plan Awards
A long term incentive plan ("LTIP") is "a plan providing compensation
intended to motivate performance over a period greater than one
financial year" and does not include option or stock appreciation
rights ("SARs") plans or plans for compensation through shares or units
that are subject to restrictions on resale.
The Company did not award any LTIPs to any Named Executive Officer
during the most recently completed financial year.
37
Stock Appreciation Rights
A stock appreciation right ("SAR") is a right to receive a payment of
cash or an issue or transfer of shares based wholly or in part on
changes in the trading price of the Company's Common Shares. No SARs
were granted to, or exercised by, any Named Executive Officer or any
director during the most recently completed financial year.
Options
The share options granted to the Named Executive Officers during the
financial year ended December 31, 2005 were as follows:
Option Grants During the Most Recently Completed Financial Year
|=========================================================================================|
| | | | | | |
| | | | | | |
| | | | | Market Value of | |
| | | % of total | | Securities | |
| NAMED | Securities | Options | | Underlying | |
| EXECUTIVE | Under | Granted to | Exercise or | Options on the | |
| OFFICERS | Options | Employees in | Base Price | Date of Grant | Expiration|
| Name | Granted (#) | Financial Year| ($/Security)| ($/Security) | Date |
|--------------|-------------|---------------|-------------|------------------|-----------|
| Richard Chen | 500,000 | 13.1% | 0.45 | 0.41 | July 31, |
| Hsing Lin | | | | | 2010 |
| | | | | | |
|--------------|-------------|---------------|-------------|------------------|-----------|
| Robert Andrew| 500,000 | 13.1% | 0.45 | 0.41 | July 31, |
| Kingston | | | | | 2010 |
|--------------|-------------|---------------|-------------|------------------|-----------|
| Brian | 200,000 | 5.3% | 0.48 | 0.47 | November |
| Richardson | | | | | 1, 2008 |
| | 150,000 | 4.0% | 0.58 | 0.55 | November |
| | | | | | 1, 2008 |
|--------------|-------------|---------------|-------------|------------------|-----------|
| Jan Barynin | 200,000 | 5.3% | 0.48 | 0.47 | December |
| | | | | | 22, 2009 |
|==============|=============|===============|=============|==================|===========|
The share options exercised by the Named Executive Officers during the
financial year ended December 31, 2005 and the values of such options
at the end of such year were as follows:
Aggregate Option Exercises During the Most Recently Completed Financial
Year and Financial Year-End Option Values
|==================================================================================|
| | | | | |
| | | | | Value of |
| | | | Unexercised | Unexercised |
| NAMED | | | Options at FY-End| in-the-Money |
| EXECUTIVE | Securities | Aggregate | (#) | Options at FY-End|
| OFFICERS | Acquired on | Value | Exercisable/ | (#) Exercisable/ |
| Name | Exercise (#)| Realized ($) | Unexercisable | Unexercisable |
|---------------|-------------|--------------|------------------|------------------|
| Richard Chen | Nil | Nil | 3,155,660 | $1,599,962 |
| Hsing Lin | | | Exercisable | Exercisable |
| | | | Nil Unexercisable| Nil Unexercisable|
|---------------|-------------|--------------|------------------|------------------|
| Robert Andrew | Nil | Nil | 5,882,649 | $3,453,354 |
| Kingston | | | Exercisable | Exercisable |
| | | | Nil Unexercisable| Nil Unexercisable|
|---------------|-------------|--------------|------------------|------------------|
| Brian | 165,000 | 36,450 | 853,067 | $399,397 |
| Richardson | | | Exercisable | Exercisable |
| | | | Nil Unexercisable| Nil Unexercisable|
|---------------|-------------|--------------|------------------|------------------|
| Jan Barynin | Nil | Nil | 400,000 | $168,000 |
| | | | Exercisable | Exercisable |
| | | | Nil Unexercisable| Nil Unexercisable|
|===============|=============|==============|==================|==================|
Note:
(1) Based on $0.90 per Common Share which is the closing price of the
Company's shares as listed on the OTC BB as at December 31, 2005.
Value of unexercised options is based on the difference between
market value and exercise price at year end.
(2) No share options were repriced on behalf of the Named Executive
Officers during the financial year ended December 31, 2005.
38
Compensation of Directors
The Board approved in May 2004 a new compensation plan as proposed by
the Compensation Committee for non-management Board members and
Committee chairs, as follows: a) annual retainer of $8,253, and $4,126
for Board members and Committee chairs respectively, payable in 50%
cash and 50% in common stock priced at $0.60 per share for the years
2004-2005; b) 15,000 and 8,000 stock options for Board members, and
Committee chairs, respectively; the term of the stock options is for
four (4) years and priced at $0.45 per share for years 2004-2006; c)
Board and Committee meeting fees - $247 per meeting under two (2) hours
and $990 per meeting over two (2) hours, payable in 50% cash and 50% in
common stock priced on the last trading day of the respective quarter
at the lower of the price on such day or the average of the previous
five trading days. Shares when issued with respect to these fees are
restricted for a twelve-month period and subject to Rule 144 of the
Securities Act of 1933. The Compensation Committee of the Board
regularly reviews the appropriateness of Director's compensation. The
directors are also reimbursed for out-of-pocket expenses such as
reasonable traveling, hotel and other expenses incurred in and about
the business of the Company.
Executive officers of the Company who also act as directors of the
Company do not receive any additional compensation for services
rendered in their capacity as directors, other than as paid by the
Company to such executive officers in their capacity as executive
officers.
The following directors received options in their capacity as a
director during the financial year ended December 31, 2005:
Option Grants During the Most Recently Completed Financial Year
|==================================================================================|
| | | | | |
| | | | Market Value of | |
| | | | Securities | |
| | Securities | | Underlying | |
| | under | Exercise or | Options on the | |
| Name of | Options | Base Price | Date of Grant | |
| Director | Granted (#) | ($/Security) | ($/Security) | Expiration Date |
|---------------|-------------|--------------|------------------|------------------|
| Curtin Winsor,| 15,000 | 0.45 | 0.54 | December 22, 2009|
| Jr. Ph.D. | | | | |
|---------------|-------------|--------------|------------------|------------------|
| Shing-Cheng | 23,000 | 0.45 | 0.54 | December 22, 2009|
| Hong | | | | |
|---------------|-------------|--------------|------------------|------------------|
| Chih-Lin Chu | 15,000 | 0.45 | 0.54 | December 22, 2009|
|---------------|-------------|--------------|------------------|------------------|
| Desmond | 23,000 | 0.45 | 0.54 | December 22, 2009|
| Radlein, | | | | |
| Ph. D. | | | | |
|===============|=============|==============|==================|==================|
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The Company has a Stock Option Plan (the "Plan"), enabling the Company
to provide its directors, officers and employees with an opportunity to
share in increases in the value of the Company's shares. The Plan is
intended to attract and retain the services of directors, officers,
employees and consultants to the Company for the benefit of the Company
and its shareholders and to provide additional incentive for such
directors, officers and employees to continue to work in the best
interests of the Company and its shareholders through continuing
ownership of its Common Stock. At May 24, 2006, 22,639,120 options were
issuable under the Plan and 13,580,533 options were outstanding at
exercise prices ranging from $0.20 to $1.50 per Common Share.
39
In December 1998, the Board approved the adoption of a stock
appreciation rights plan (the "SAR Plan") under which the Company can
grant SAR's to employees and directors of the Company entitling the
holder to receive compensation from the Company based upon the
difference in any appreciation in the market value of the Company's
Shares of common stock from the bench mark date and current market
price of when the SAR is granted by the Company. The SARs vest as the
Company achieves stock values as defined in the SAR Plan. The Company
has the sole exclusive election to pay the redemption price either in
cash, in Shares, or in any combination of the cash and Shares
equivalent to the aggregate value of the redemption price. There has
been no grant of SARs for the last five years. As at December 31, 2005,
300,000 SARs were outstanding, and held by a former director of the
Company, of which 200,000 have vested, having met the first and second
vesting provisions of the SAR Plan.
The following table sets out equity compensation plan information as at
the end of the financial year ended December 31, 2005.
Equity Compensation Plan Information
|========================================================================================|
| | Number of securities | Weighted-average | Number of securities |
| | to be issued upon | exercise price of| remaining available |
| | exercise of outstanding| outstanding | for future issuance |
| | options, warrants and | options, warrants| under equity |
| | rights | and rights | compensation plans |
| | | | (excluding securities|
| | | | reflected in |
| | | | column (a)) |
|--------------------|------------------------|------------------|-----------------------|
| | | | |
|Plan Category | (a) | (b) | (c) |
|--------------------|------------------------|------------------|-----------------------|
|Equity compensation | 13,913,250 options | $0.39 | 4,575,275 options |
|plans approved | | | |
|compensation plans | | | |
|(the Plan) | | | |
|--------------------|------------------------|------------------|-----------------------|
|Equity compensation | 300,000 SARs | $0.40 | Nil |
|plans not approved | | | |
|by securityholders | | | |
|(the SAR Plan) | | | |
|--------------------|------------------------|------------------|-----------------------|
|Total | 14,213,250 | $0.39 | 4,575,275 |
|====================|========================|==================|=======================|
Equity Compensation Plan Information
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS
No directors, proposed nominees for election as directors, executive
officers or their respective associates or affiliates, or other
management of the Company were indebted to the Company as at the end of
the most recently completed financial year or as at the date hereof.
D. Employees
The following table lists the number of employees at the end of the
period for each of the past three financial years broken down by
geographic location.
|==================================================================|
| | | | |
| |2005 |2004 |2003 |
|------------------------------------------------------------------|
|Canada |25 |24 |16 |
|------------------------------------------------------------------|
|US |0 |0 |1 |
|------------------------------------------------------------------|
|UK |0 |0 |1 |
|------------------------------------------------------------------|
| |25 |24 |18 |
|==================================================================|
40
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
To the Company's knowledge, it is not directly or indirectly owned or
controlled by another corporation or by any foreign government, nor is it
aware of any person who owns more than 5% of the Company's common stock (the
nly outstanding class of the Company's voting securities) except as noted
below:
Shareholder Name and Address Number of Percentage of
Shares Held Issued Shares
Cede & Co.(1) 63,627,590 42.16%
Box 20
Bowling Green Station
New York, New York, 10274
The Canadian Depository for Securities 45,883,262 30.40%
("CDS")(1)
85 Richmond Street West
Toronto, Ontario M5H 2C9
(1) Cede & Co. and CDS are brokerage clearing houses and hold shares on behalf
of brokerage firms. Management of the Company is unaware of the beneficial
ownership of the shares although certain of these figures may include shares
of management held in their brokerage accounts.
The above information was supplied by Computershare Trust Company of Canada,
the Company's registrar and transfer agent.
Canadian law does not permit disclosure of the beneficial shareholders of a
company's voting securities.
Major shareholders do not have different voting rights.
The Company knows of no arrangements which may, at a subsequent date, result
in a change of control.
Computershare Trust Company of Canada (Computershare) is the Company's
registrar and transfer agent for the Company's shares. Computershare's
records as of May 24, 2006 indicate 150,927,262 shares of common stock issued
and outstanding as follows:
|=======================================================================|
| | | | |
|Residence of |Number of Holders|Number of Shares |Percent |
|Shareholders | |(1) | |
|-----------------------------------------------------------------------|
|Canada | 81 | 55,637,728 |36.864% |
|-----------------------------------------------------------------------|
|U.S.A. |208 | 66,577,360 |44.112% |
|-----------------------------------------------------------------------|
|Other |130 | 28,712,174 |19.024% |
|-----------------------------------------------------------------------|
|Total |419 | 150,927,262 |100.00% |
|=======================================================================|
(1) Includes the total number of shares held by registered and beneficial
shareholders.
B. Related Party Transactions
Consulting fees and share issue costs of $97,395 for the year ended December
31, 2005 have been paid to a shareholder of the Company. Included in the
amount above, is $1,113 paid by stock based compensation.
41
As at December 31, 2005, $82,529 was advanced to a Director of the Company in
connection with the formation of a joint venture for the development of the
Company's BioOil technology and related products. Amount was included in
research and development expenses for the year ended December 31, 2005.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
See Item 17 for the Company's Consolidated Financial Statements for the year
ended December 31, 2005.
B. Significant Changes
Operations
The Company focused its efforts during 2005 on the development of its core
Fast Pyrolysis technology and the completion of its first commercial scale
(100 tpd) BioOil production facility located in West Lorne, Ontario, Canada.
In Canada, the Company's R&D efforts are focused on optimization of its West
Lorne 100 tpd plant and on the planning and design of its proposed 200 tpd
plant. In Canada, opportunities in British Columbia, Saskatchewan, Nova
Scotia continue to be pursued and additional projects were investigated
including promising opportunities in Ontario and elsewhere.
Financing Activities
The Company's financing efforts were successful and continued to support the
Canadian focused operations of the Company. The Company is continuing to
raise equity capital in support of its project development and its ongoing
operations.
Item 9. The Offer and Listing
DynaMotive Energy Systems Corporation's Common Shares is traded on the Over
the Counter Bulletin Board (OTCBB) under the symbol DYMTF.OB. As at December
31, 2005, the closing market sales price on the OTC BB for the Company's
Common Share was $0.90 per share. The following table shows the High and
Low sales prices for the securities traded on the NASD OTC Bulletin Board
for the five most recent full financial years; two most recent full financial
years and any subsequent period for each full financial quarter; and the most
recent six months:
42
Year Ended High Low
---------- ---- ----
2001 1.69 0.49
2002 0.67 0.18
2003 0.79 0.14
2004 0.80 0.41
2005 0.95 0.43
Quarter Ended High Low
------------- ---- ----
March 31, 2004 0.80 0.51
June 30, 2004 0.67 0.46
September 30, 2004 0.62 0.41
December 31, 2004 0.52 0.46
March 31, 2005 0.66 0.47
June 30, 2005 0.59 0.43
September 30, 2005 0.63 0.48
December 31, 2005 1.00 0.53
March 31, 2006 1.76 0.76
Month Ended High Low
----------- ---- ----
December 2005 1.00 0.68
January 2006 0.95 0.76
February 2006 1.10 0.91
March 2006 1.76 1.03
April 2006 1.66 1.50
May 2006 1.59 1.43
The Company has never declared or paid cash dividends on its Common Shares.
The Company currently intends to retain its earnings, if any, to provide
funds for the operation and expansion of its business and, therefore, does
not anticipate declaring or paying cash dividends in the foreseeable future.
Item 10. Additional Information
A. Share capital
In June 2004, the Company changed its authorized capital to an unlimited
number of common shares with no par value and an unlimited Class A preferred
shares with a par value of $5.00 each, having attached special rights and
restrictions. The Notice of Alteration became effective as filed with the
British Columbia's Registrar's office on October 28, 2004.
B. Business Corporations Act Memorandum, Amendments and Articles of
Incorporation
Notice of Alteration of the Company's Articles of Incorporation to cancel the
existing special rights and restrictions attached to the Class "A" Preferred
43
shares and to adopt a new special rights and restrictions attached to the
Class "A" Preferred shares as approved at the Company's Special Meeting of
Shareholders on November 21, 2005. The Company's Articles was altered to
change all of the unissued Class "A" Preferred shares each with a par value
of $5.00 into Class "A" Preferred with no par value; to delete the existing
Article 26 which sets out the special rights and restrictions attached to the
Class"A" Preferred shares; and to add to the Articles of the Company, Article
26, attached as Exhibit 1.5, which will govern the Class "A" Preferred shares
and authorizes directors in the future to issue them in series and attach
specific rights and restrictions to each such series within the requirements
of Article 26.
Notice of Alteration of the Company's Articles of Incorporation to increase
the Company's authorized capital to an unlimited number of common shares with
no par value and an unlimited Class A preferred shares with a par value of
$5.00 each, having attached special rights and restrictions which became
effective British Columbia's Registrar's office on October 28, 2004. Please
see Exhibit 1.4 for details of the Notice of Alteration.
Previously filed as exhibits to the Company's Quarterly Report on Form 10-QSB
dated August 15, 2000 and Form 10-Q dated August 14, 2001. (Commission
File No. 0-27524).
C. Material contracts
There have been no material contracts entered into, other than contracts
entered into in the ordinary course of business, to which the Company or any
member of the group is a party, for the two years immediately preceding
publication of this document.
D. Exchange controls
Nil
There are no Canadian laws, decrees or regulations applicable to the Company
that restrict the export or import of capital or that affect the remittance
of dividends or other payments, if any, to non-resident holders of the
Company's Common Shares, other than British Columbia corporate laws which
restrict the company from paying dividends where the Company is or as a
result of paying the dividend will become insolvent.
E. Taxation
ALL PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF PURCHASING THE COMMON SHARES.
Material Canadian Federal Income Tax Consequences for United States Residents
The following summarizes the material Canadian federal income tax
consequences generally applicable to the holding and disposition of Common
Shares by a holder who, (a) for the purposes of the Income Tax Act (Canada)
(the "Tax Act"), is not resident in Canada, deals at arm's length with
DynaMotive, holds the Common Shares as capital property and does not use or
hold the Common Shares in the course of carrying on, or otherwise in
connection with, a business in Canada, and (b) for the purposes of the
Canada-United States Income Tax Convention, 1980 (the "Treaty"), is a
resident solely of the United States, has never been a resident of Canada,
has not held or used (and does not hold or
44
use) Common Shares in connection with a permanent establishment or fixed base
in Canada, and is entitled to the benefits of the Treaty. A holder meeting all
of the foregoing requirements is referred to in this summary as a "U.S.
Holder", and this summary only addresses such U.S. Holders. This summary does
not apply to traders or dealers in securities, limited liability companies,
tax-exempt entities, insurers, financial institutions (including those to
which the mark-to-market provisions of the Tax Act apply), or any other U.S.
Holder to which special considerations apply.
This summary is based on the current provisions of the Tax Act including all
regulations thereunder, the Treaty, all proposed amendments to the Tax Act
and the regulations publicly announced by the Minister of Finance to the date
hereof, and the current administrative practice of the Canada Revenue Agency.
It has been assumed that all currently proposed amendments will be enacted as
proposed and that there will be no other relevant change in any governing
law, judicial interpretation or administrative practice, although no
assurances can be given in these respects. The summary does not take into
account Canadian provincial, U.S. federal (which follows further below under
the heading "Material United States Tax Consequences"), state or other
foreign income tax law or practice. The tax consequences to any particular
U.S. Holder will vary according to the status of that holder as an
individual, trust, corporation, partnership or other entity, the
jurisdictions in which that U.S. Holder is subject to taxation, and generally
according to that holder's particular circumstances. Accordingly, this
summary is not, and is not to be construed as, Canadian tax advice to any
particular U.S. Holder. All holders or prospective holders should consult
with their own tax and legal advisors regarding their particular
circumstances. The discussion below is qualified accordingly.
Dividends
Dividends paid or credited, or deemed to be paid or credited to a U.S. Holder
by DynaMotive will be subject to Canadian withholding tax. Under the Treaty,
the rate of withholding tax on dividends paid to a U.S. Holder is generally
limited to 15% of the gross amount of the dividend (or 5% if the U.S. Holder
is a corporation and beneficially owns at least 10% of DynaMotive's voting
shares). DynaMotive will be required to withhold the applicable withholding
tax from any such dividend and remit it to the Canadian government.
Disposition
A U.S. Holder is subject to tax under the Tax Act in respect of a capital
gain realized on the disposition or deemed disposition of a Common Share
unless the U.S. Holder is entitled to relief under the Treaty. For this
purpose, the U.S. Holder's capital gain (or loss) from a disposition or
deemed disposition of a Common Share is the amount by which the proceeds
of disposition exceed (or are exceeded by) the aggregate of the U.S.
Holder's adjusted cost base of the Common Share for purposes of the Tax
Act and any reasonable expenses of disposition. Absent Treaty relief,
one-half of any capital gain so realized is included in computing the U.S.
Holder's income for purposes of the Tax Act.
A qualifying U.S. Holder may generally qualify for relief under the Treaty in
respect of such tax on such capital gain if and provided that the value of
shares of DynaMotive is not derived principally from real property situated
in Canada at the relevant time. Management believes that the value of
DynaMotive's common shares is not currently derived principally from real
property situated in Canada.
A U.S. Holder wishing to claim any such applicable Treaty relief should
consult with the U.S. Holder's own tax advisors regarding the procedure
for claiming the relief in a relevant Canadian tax return reporting the
disposition or deemed disposition. In addition, notwithstanding any
potentially applicable
45
Treaty relief, a disposition or deemed disposition of Common Shares is
subject to certain tax clearance certificate and withholding procedures
that should also be discussed with the U.S. Holder's own tax advisors
in advance of a disposition.
United States Tax Consequences
United States Federal Income Tax Consequences
The following is a discussion of all material United States federal income
tax consequences, under current law, generally applicable to a U.S. Holder
(as hereinafter defined) of common shares of DynaMotive. This discussion does
not address all potentially relevant federal income tax matters and it does
not address consequences peculiar to persons subject to special provisions of
federal income tax law, such as those described below as excluded from the
definition of a U.S. Holder. In addition, this discussion does not cover any
state, local or foreign tax consequences. (see "Taxation - Canadian Federal
Income Tax Consequences" above). Accordingly, we urge holders and prospective
holders of common shares of DynaMotive to consult their own tax advisors
about the specific federal, state, local, and foreign tax consequences to them
of purchasing, owning and disposing of common shares of DynaMotive, based upon
their individual circumstances.
The following discussion is based upon the sections of the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Regulations, published
Internal Revenue Service ("IRS") rulings, published administrative positions
of the IRS and court decisions that are currently applicable, any or all of
which could be materially and adversely changed, possibly on a retroactive
basis, at any time and which are subject to differing interpretations. This
discussion does not consider the potential effects, both adverse and
beneficial, of any proposed legislation which, if enacted, could be applied,
possibly on a retroactive basis, at any time.
U.S. Holders
As used herein, a "U.S. Holder" means a holder of common shares of DynaMotive
who is a citizen or individual resident of the United States, a corporation
or partnership created or organized in or under the laws of the United States
or of any political subdivision thereof, an estate whose income is taxable in
the United States irrespective of source or a trust subject to the primary
supervision of a court within the United States and control of a United
States fiduciary as described Section 7701(a)(30) of the Code. This summary
does not address the tax consequences to, and U.S. Holder does not include,
persons subject to specific provisions of federal income tax law, such as
tax-exempt organizations, qualified retirement plans, individual retirement
accounts and other tax-deferred accounts, financial institutions, insurance
companies, real estate investment trusts, regulated investment companies,
broker-dealers, non-resident alien individuals, persons or entities that have
a "functional currency" other than the U.S. dollar, shareholders subject to
the alternative minimum tax, shareholders who hold common shares as part of a
straddle, hedging or conversion transaction, and shareholders who acquired
their common shares through the exercise of employee stock options or
otherwise as compensation for services. This summary is limited to U.S.
Holders who own common shares as capital assets and the summary does not
address the consequences to a person or entity holding an interest in a
shareholder or the consequences to a person of the ownership, exercise or
disposition of any options, warrants or other rights to acquire common
shares. In addition, this summary does not address special rules applicable
to United States persons (as defined in Section 7701(a)(30) of the Code)
holding common shares through a foreign partnership or to foreign persons
holding common shares through a domestic partnership.
46
Distribution on Common Shares of DynaMotive
In general, U.S. Holders receiving dividend distributions (including
constructive dividends) with respect to common shares of DynaMotive are
required to include in gross income for United States federal income tax
purposes the gross amount of such distributions, equal to the U.S. dollar
value of such distributions on the date of receipt (based on the exchange
rate on such date), to the extent that DynaMotive has current or accumulated
earnings and profits, without reduction for any Canadian income tax withheld
from such distributions. Such Canadian tax withheld may be credited, subject
to certain limitations, against the U.S. Holder's federal income tax
liability or, alternatively, may be deducted in computing the U.S. Holder's
federal taxable income by those who itemize deductions. (See more detailed
discussion at "Foreign Tax Credit" below). To the extent that distributions
exceed current or accumulated earnings and profits of DynaMotive, they will
be treated first as a return of capital up to the U.S. Holder's adjusted
basis in the common shares and thereafter as gain from the sale or exchange
of property. Preferential tax rates for long-term capital gains are
applicable to a U.S. Holder which is an individual, estate or trust. There
are currently no preferential tax rates for long-term capital gains for a
U.S. Holder which is a corporation.
In the case of foreign currency received as a dividend that is not converted
by the recipient into U.S. dollars on the date of receipt, a U.S. Holder will
have a tax basis in the foreign currency equal to its U.S. dollar value on
the date of receipt. Generally any gain or loss recognized upon a subsequent
sale or other disposition of the foreign currency, including the exchange for
U.S. dollars, will be ordinary income or loss. However, an individual whose
realized gain does not exceed $200 will not recognize that gain, provided
that there are no expenses associated with the transaction that meet the
requirements for deductibility as a trade or business expense (other than
travel expenses in connection with a business trip) or as an expense for the
production of income.
Dividends paid on the common shares of DynaMotive generally will not be
eligible for the dividends received deduction provided to corporations
receiving dividends from certain United States corporations. A U.S. Holder
which is a corporation and which owns shares representing at least 10% of the
voting power and value of DynaMotive may, under certain circumstances, be
entitled to a 70% (or 80% if the U.S. Holder owns shares representing at
least 20% of the voting power and value of DynaMotive) deduction of the
United States source portion of dividends received from DynaMotive (unless
DynaMotive qualifies as a "foreign personal holding company" or a "passive
foreign investment company," as defined below). DynaMotive does not
anticipate that it will earn any United States income, however, and therefore
does not anticipate hat any U.S. Holder will be eligible for the dividends
received deduction.
Under current Treasury Regulations, dividends paid on DynaMotive's common
shares, if any, generally will not be subject to information reporting and
generally will not be subject to U.S. backup withholding tax. However,
dividends and the proceeds from a sale of DynaMotive's common shares paid in
the U.S. through a U.S. or U.S. related paying agent (including a broker)
will be subject to U.S. information reporting requirements and may also be
subject to the 31% U.S. backup withholding tax, unless the paying agent is
furnished with a duly completed and signed Form W-9. Any amounts withheld
under the U.S. backup withholding tax rules will be allowed as a refund or
a credit against the U.S. Holder's U.S. federal income tax liability,
provided the required information is furnished to the IRS.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian income
tax with respect to the ownership of common shares of DynaMotive may be
47
entitled, at the option of the U.S. Holder, to either receive a deduction
or a tax credit for such foreign tax paid or withheld. Generally, it will be
more advantageous to claim a credit because a credit reduces United States
federal income taxes on a dollar-for-dollar basis, while a deduction merely
reduces the taxpayer's income subject to tax. This election is made on a
year-by-year basis and generally applies to all foreign taxes paid by (or
withheld from) the U.S. Holder during that year. There are significant and
complex limitations which apply to the credit, among which is the general
limitation that the credit cannot exceed the proportionate share of the U.S.
Holder's United States income tax liability that the U.S. Holder's foreign
source income bears to his or its worldwide taxable income. In the
determination of the application of this limitation, the various items of
income and deduction must be classified into foreign and domestic sources.
Complex rules govern this classification process. In addition, this
limitation is calculated separately with respect to specific classes of
income such as "passive income, " "high withholding tax interest," "financial
services income," "shipping income," and certain other classifications of
income. Dividends distributed by DynaMotive will generally constitute
"passive income" or, in the case of certain U.S. Holders, "financial
services income" for these purposes. The availability of the foreign tax
credit and the application of the limitations on the credit are fact
specific, and U.S. Holders of common shares of DynaMotive should consult
their own tax advisors regarding their individual circumstances.
Disposition of Common Shares of DynaMotive
In general, U.S. Holders will recognize gain or loss upon the sale of common
shares of DynaMotive equal to the difference, if any, between (i) the amount
of cash plus the fair market value of any property received, and (ii) the
shareholder's tax basis in the common shares of DynaMotive. Preferential tax
rates apply to long-term capital gains of U.S. Holders which are individuals,
estates or trusts. In general, gain or loss on the sale of common shares of
DynaMotive will be long-term capital gain or loss if the common shares are a
capital asset in the hands of the U.S. Holder and are held for more than one
year. Deductions for net capital losses are subject to significant
limitations. For U.S. Holders which are not corporations, any unused portion
of such net capital loss may be carried over to be used in later tax years
until such net capital loss is thereby exhausted.
For U.S. Holders that are corporations (other than corporations subject to
Subchapter S of the Code), an unused net capital loss may be carried back
three years and carried forward five years from the loss year to be offset
against capital gains until such net capital loss is thereby exhausted.
Other Considerations
Set forth below are certain material exceptions to the above-described
general rules describing the United States federal income tax consequences
resulting from the holding and disposition of common shares:
Foreign Personal Holding Company
If at any time during a taxable year more than 50% of the total combined
voting power or the total value of DynaMotive's outstanding shares is owned,
directly or indirectly (pursuant to applicable rules of constructive
ownership), by five or fewer individuals who are citizens or residents of
the United States and 60% or more of DynaMotive's gross income for such year
is derived from certain passive sources (e.g., from certain interest and
dividends), DynaMotive may be treated as a "foreign personal holding
company." In that event, U.S. Holders that hold common shares would be
required to include in gross income for such year their allocable portions
of such passive income to the extent DynaMotive does not actually distribute
such income. DynaMotive does not believe that it currently qualifies as a
foreign personal holding company. However, there can
48
be no assurance that DynaMotive will not be considered a foreign personal
holding company for the current or any future taxable year.
Foreign Investment Company
If 50% or more of the combined voting power or total value of DynaMotive's
outstanding shares is held, directly or indirectly, by citizens or residents
of the United States, United States domestic partnerships or corporations, or
estates or trusts other than foreign estates or trusts (as defined by the Code
Section 7701(a)(31)), and DynaMotive is found to be engaged primarily in the
business of investing, reinvesting, or trading in securities, commodities, or
any interest therein, it is possible that DynaMotive may be treated as a
"foreign investment company" as defined in Section 1246 of the Code, causing
all or part of any gain realized by a U.S. Holder selling or exchanging common
shares to be treated as ordinary income rather than capital gain. DynaMotive
does not believe that it currently qualifies as a foreign investment company.
However, there can be no assurance that DynaMotive will not be considered a
foreign investment company for the current or any future taxable year.
Passive Foreign Investment Company
United States income tax law contains rules governing "passive foreign
investment companies" ("PFIC") which can have significant tax effects on U.S.
Holders of foreign corporations. These rules do not apply to non-U.S. Holders.
Section 1297 of the Code defines a PFIC as a corporation that is not formed in
the United States if, for any taxable year, either (i) 75% or more of its
gross income is "passive income," which includes interest, dividends and
certain rents and royalties or (ii) the average percentage, by fair market
value (or, if the corporation is not publicly traded and either is a
controlled foreign corporation or makes an election, by adjusted tax basis),
of its assets that produce or are held for the production of "passive
income" is 50% or more. DynaMotive appears to have been a PFIC for the fiscal
year ended December 31, 2003, and at least certain prior fiscal years.
In addition, DynaMotive expects to qualify as a PFIC for the fiscal year
ending December 31, 2004 and may also qualify as a PFIC in future fiscal
years. Each U.S. Holder of DynaMotive is urged to consult a tax advisor with
respect to how the PFIC rules affect such U.S. Holder's tax situation.
Each U.S. Holder who holds stock in a foreign corporation during any year in
which such corporation qualifies as a PFIC is subject to United States
federal income taxation under one of three alternative tax regimes at the
election of such U.S. Holder. The following is a discussion of such
alternative tax regimes applied to such U.S. Holders of DynaMotive. In
addition, special rules apply if a foreign corporation qualifies as both a
PFIC and a "controlled foreign corporation" (as defined below) and a U.S.
Holder owns, actually or constructively, 10% or more of the total combined
voting power of all classes of stock entitled to vote of such foreign
corporation (See more detailed discussion at "Controlled Foreign Corporation"
below).
A U.S. Holder who elects to treat DynaMotive as a qualified electing fund
("QEF") will be subject, under Section 1293 of the Code, to current federal
income tax for any taxable year to which the election applies in which
DynaMotive qualifies as a PFIC on his pro rata share of DynaMotive's (i) "net
capital gain" (the excess of net long-term capital gain over net short-term
capital loss), which will be taxed as long-term capital gain, and (ii)
"ordinary earnings" (the excess of earnings and profits over net capital
gain), which will be taxed as ordinary income, in each case, for the
shareholder's taxable year in which (or with which) DynaMotive's taxable year
ends, regardless of whether such amounts are actually distributed. A U.S.
Holder's tax basis in the common shares will be increased by any such amount
that is included in income but not distributed.
49
The procedure a U.S. Holder must comply with in making an effective QEF
election, and the consequences of such election, will depend on whether the
year of the election is the first year in the U.S. Holder's holding period in
which DynaMotive is a PFIC. If the U.S. Holder makes a QEF election in such
first year, i.e., a "timely" QEF election, then the U.S. Holder may make the
QEF election by simply filing the appropriate documents at the time the U.S.
Holder files his tax return for such first year. If, however, DynaMotive
qualified as a PFIC in a prior year during the U.S. Holder's holding period,
then, in order to avoid the Section 1291 rules discussed below, in addition to
filing documents, the U.S. Holder must elect to recognize under the rules of
Section 1291 of the Code (discussed herein), (i) any gain that he would
otherwise recognize if the U.S. Holder sold his stock on the qualification
date or (ii) if DynaMotive is a controlled foreign corporation, the U.S.
Holder's pro rata share of DynaMotive's post-1986 earnings and profits as
of the qualification date. The qualification date is the first day of
DynaMotive's first tax year in which DynaMotive qualified as a QEF with
respect to such U.S. Holder. For purposes of this discussion, a U.S. Holder
who makes (i) a timely QEF election, or (ii) an untimely QEF election and
either of the above-described gain-recognition elections under Section 1291
is referred to herein as an "Electing U.S. Holder." A U.S. Holder who holds
common shares at any time
during a year of DynaMotive in which DynaMotive is a PFIC and who is not an
Electing U.S. Holder (including a U.S. Holder who makes an untimely QEF
election and makes neither of the above-described gain-recognition elections)
is referred to herein as a "Non-Electing U.S. Holder." An Electing U.S. Holder
(i) generally treats any gain realized on the disposition of his DynaMotive
common shares as capital gain; and (ii) may either avoid interest charges
resulting from PFIC status altogether, or make an annual election,
subject to certain limitations, to defer payment of current taxes on his
share of DynaMotive's annual realized net capital gain and ordinary
earnings subject, however, to an interest charge. If the U.S. Holder is
not a corporation, any interest charge imposed under the PFIC regime
would be treated as "personal interest" that is not deductible.
In order for a U.S. Holder to make (or maintain) a valid QEF election,
DynaMotive must provide certain information regarding its net capital gains
and ordinary earnings and permit its books and records to be examined to
verify such information. DynaMotive intends to make the necessary information
available to U.S. Holders to permit them to make (and maintain) QEF elections
with respect to DynaMotive. DynaMotive urges each U.S. Holder to consult a
tax advisor regarding the availability of, and procedure for making, the QEF
election.
A QEF election, once made with respect to DynaMotive, applies to the tax year
for which it was made and to all subsequent tax years, unless the election is
invalidated or terminated, or the IRS consents to revocation of the election.
If a QEF election is made by a U.S. Holder and DynaMotive ceases to qualify
as a PFIC in a subsequent tax year, the QEF election will remain in effect,
although not applicable, during those tax years in which DynaMotive does not
qualify as a PFIC. Therefore, if DynaMotive again qualifies as a PFIC in a
subsequent tax year, the QEF election will be effective and the U.S. Holder
will be subject to the rules described above for Electing U.S. Holders in such
tax year and any subsequent tax years in which DynaMotive qualifies as a PFIC.
In addition, the QEF election remains in effect, although not applicable, with
respect to an Electing U.S. Holder even after such U.S. Holder disposes of all
of his or its direct and indirect interest in the shares of DynaMotive.
Therefore, if such U.S. Holder reacquires an interest in DynaMotive, that U.S.
Holder will be subject to the rules described above for Electing U.S. Holders
for each tax year in which DynaMotive qualifies as a PFIC.
In the case of a Non-Electing U.S. Holder, special taxation rules under
Section 1291 of the Code will apply to (i) gains realized on the disposition
(or deemed to be realized by reasons of a pledge) of his DynaMotive common
shares and (ii) certain "excess distributions," as defined in Section
1291(b), by DynaMotive.
50
A Non-Electing U.S. Holder generally would be required to pro rate all gains
realized on the disposition of his DynaMotive common shares and all excess
distributions on his DynaMotive common shares over the entire holding period
for the common shares. All gains or excess distributions allocated to prior
years of the U.S. Holder (excluding any portion of the holder's period prior
to the first day of the first year of DynaMotive (i) which began after
December 31, 1986, and (ii) for which DynaMotive was a PFIC) would be taxed
at the highest tax rate for each such prior year applicable to ordinary
income. The Non-Electing U.S. Holder also would be liable for interest on
the foregoing tax liability for each such prior year calculated as if such
liability had been due with respect to each such prior year. A Non-Electing
U.S. Holder that is not a corporation must treat this interest charge
as "personal interest" which, as discussed above, is wholly non-deductible.
The balance, if any, of the gain or the excess distribution will be treated
as ordinary income in the year of the disposition or distribution, and no
interest charge will be incurred with respect to such balance. In certain
circumstances, the sum of the tax and the PFIC interest charge may exceed
the amount of the excess distribution received, or the amount of proceeds
of disposition realized, by the U.S. Holder.
If DynaMotive is a PFIC for any taxable year during which a Non-Electing U.S.
Holder holds DynaMotive common shares, then DynaMotive will continue to be
treated as a PFIC with respect to such DynaMotive common shares, even if it is
no longer definitionally a PFIC. A Non-Electing U.S. Holder may terminate this
deemed PFIC status by electing to recognize gain (which will be taxed under
the rules discussed above for Non-Electing U.S. Holders) as if such DynaMotive
common shares had been sold on the last day of the last taxable year for which
it was a PFIC.
Effective for tax years of U.S. Holders beginning after December 31, 1997,
U.S. Holders who hold (actually or constructively) marketable stock of a
foreign corporation that qualifies as a PFIC may elect to mark such stock to
the market annually (a "mark-to-market election"). If such an election is
made, such U.S. Holder will generally not be subject to the special taxation
rules of Section 1291 discussed above. However, if the mark-to-market
election is made by a Non-Electing U.S. Holder after the beginning of the
holding period for the PFIC stock, then the Section 1291 rules will apply
to certain dispositions of, distributions on and other amounts taxable with
respect to DynaMotive common shares. A U.S. Holder who makes the
mark-to-market election will include in income for each taxable year for
which the election is in effect an amount equal to the excess, if any, of
the fair market value of the common shares of DynaMotive as of the close
of such tax year over such U.S. Holder's adjusted basis in such common
shares. In addition, the U.S. Holder is allowed a deduction for the lesser
of (i) the excess, if any, of such U.S. Holder's adjusted tax basis in the
common shares over the fair market value of such shares as of the close of
the tax year, or (ii) the excess, if any, of (A) the mark-to-market gains
for the common shares in DynaMotive included by such U.S. Holder for prior
tax years, including any amount which would have been treated as a
mark-to-market gain for any prior tax year but for the Section 1291 rules
discussed above with respect to Non-Electing U.S. Holders, over (B) the mark-
to-market losses for shares that were allowed as deductions for prior tax
years. A U.S. Holder's adjusted tax basis in the common shares of DynaMotive
will be adjusted to reflect the amount included in or deducted from income as
a result of a mark-to-market election. A mark-to-market election applies to
the taxable year in which the election is made and to each subsequent taxable
year, unless DynaMotive common shares cease to be marketable, as specifically
defined, or the IRS consents to revocation of the election. Because the IRS
has not established procedures for making a mark-to-market election, U.S.
Holders should consult their tax advisor regarding the manner of making such
an election. No view is expressed regarding whether common shares of
DynaMotive are marketable for these purposes or whether the election will be
available.
51
Under Section 1291(f) of the Code, the IRS has issued Proposed
Treasury Regulations that, subject to certain exceptions, would treat as
taxable certain transfers of PFIC stock by Non-Electing U.S. Holders that
are generally not otherwise taxed, such as gifts, exchanges pursuant to
corporate reorganizations, and transfers at death. Generally, in such cases
the basis of DynaMotive common shares in the hands of the transferee and the
basis of any property received in the exchange for those common shares
would be increased by the amount of gain recognized. Under the Proposed
Treasury Regulations, an Electing U.S. Holder would not be taxed on certain
transfers of PFIC stock, such as gifts, exchanges pursuant to corporate
reorganizations, and transfers at death. The transferee's basis in this
case will depend on the manner of the transfer. In the case of a transfer by
an Electing U.S. Holder upon death, for example, the transferee's basis is
generally equal to the fair market value of the Electing U.S. Holder's common
shares as of the date of death under Section 1014 of the Code. The specific
tax effect to the U.S. Holder and the transferee may vary based on the manner
in which the common shares are transferred. Each U.S. Holder of DynaMotive
is urged to consult a tax advisor with respect to how the PFIC rules affect
his or its tax situation.
Whether or not a U.S. Holder makes a timely QEF election with respect to
common shares of DynaMotive, certain adverse rules may apply in the event
that both DynaMotive and any foreign corporation in which DynaMotive directly
or indirectly holds shares is a PFIC (a "lower-tier PFIC"). Pursuant to
certain Proposed Treasury Regulations, a U.S. Holder would be treated as
owning his or its proportionate amount of any lower-tier PFIC shares, and
generally would be subject to the PFIC rules with respect to such
indirectly-held PFIC shares unless such U.S. Holder makes a timely QEF
election with respect thereto. DynaMotive intends to make the necessary
information available to U.S. Holders to permit them to make (and maintain)
QEF elections with respect to each subsidiary of DynaMotive that is a PFIC.
Under the Proposed Treasury Regulations, a U.S. Holder who does not make a
timely QEF election with respect to a lower-tier PFIC generally would be
subject to tax (and the PFIC interest charge) on (i) any excess distribution
deemed to have been received with respect to his or its lower-tier PFIC shares
and (ii) any gain deemed to arise from a so-called "indirect disposition" of
such shares. For this purpose, an indirect disposition of lower-tier PFIC
shares would generally include (i) a disposition by DynaMotive (or an
intermediate entity) of lower-tier PFIC shares, and (ii) any other transaction
resulting in a diminution of the U.S. Holder's proportionate ownership of the
lower-tier PFIC, including an issuance of additional common shares by
DynaMotive (or an intermediate entity). Accordingly, each prospective U.S.
Holder should be aware that he or it could be subject to tax even if such U.S.
Holder receives no distributions from DynaMotive and does not dispose of its
common shares. DynaMotive strongly urges each prospective U.S. Holder to
consult a tax advisor with respect to the adverse rules applicable, under the
Proposed Treasury Regulations, to U.S. Holders of lower-tier PFIC shares.
Certain special, generally adverse, rules will apply with respect to
DynaMotive common shares while DynaMotive is a PFIC unless the U.S. Holder
makes a timely QEF election. For example under Section 1298(b)(6) of the
Code, a U.S. Holder who uses PFIC stock as security for a loan (including
a margin loan) will, except as may be provided in regulations, be treated
as having made a taxable disposition of such shares.
Controlled Foreign Corporation
If more than 50% of the total combined voting power of all classes of shares
entitled to vote or the total value of the shares of DynaMotive is owned,
actually or constructively, by citizens or residents of the United States,
United States domestic partnerships or corporation, or estates or trusts other
than foreign estates or trusts (as defined by the Code Section 7701(a)(31)),
each of which own, actually or constructively, 10% or more of the total
52
combined voting power of all classes of shares entitled to vote of DynaMotive
("United States Shareholder"), DynaMotive could be treated as a controlled
foreign corporation ("CFC") under Subpart F of the Code. This classification
would effect many complex results, one of which is the inclusion of certain
income of a CFC which is subject to current U.S. tax. The United States
generally taxes United States Shareholders of a CFC currently on their pro
rata shares of the Subpart F income of the CFC. Such United States
Shareholders are generally treated as having received a current distribution
out of the CFC's Subpart F income and are also subject to current U.S. tax on
their pro rata shares of increases in the CFC's earnings invested in U.S.
property. The foreign tax credit described above may reduce the U.S. tax on
these amounts. In addition, under Section 1248 of the Code, gain from the sale
or exchange of shares by a U.S. Holder of common shares of DynaMotive which is
or was a United States Shareholder at any time during the five-year period
ending on the date of the sale or exchange is treated as ordinary income to
the extent of earnings and profits of DynaMotive attributable to the shares
sold or exchanged. If a foreign corporation is both a PFIC and a CFC, the
foreign corporation generally will not be treated as a PFIC with respect to
United States Shareholders of the CFC. This rule generally will be effective
for taxable years of United States Shareholders beginning after 1997 and for
taxable years of foreign corporations ending with or within such taxable years
of United States Shareholders. Special rules apply to United States
Shareholders who are subject to the special taxation rules under Section 1291
discussed above with respect to a PFIC. Because of the complexity of
Subpart F, a more detailed review of these rules is outside of the scope of
this discussion. DynaMotive does not believe that it currently qualifies as a
CFC. However, there can be no assurance that DynaMotive will not be considered
a CFC for the current or any future taxable year.
F. Dividends and paying agents
Not applicable.
G. Statements by experts
Not applicable.
H. Documents on display
Documents and exhibits referred to in this document may be inspected at the
offices of the Securities and Exchange Commission or obtained from the Company
by telephoning (604) 267-6013 or in writing at Suite 230 - 1700 West 75th
Avenue, Vancouver, BC, V6P 6G2.
I. Subsidiary Information
The Company operates the Erie Plant through a principal subsidiary which is a
Canadian registered limited partnership ("LP"). The Company holds all the
equity and controls all aspects of the LP. A copy of the LP agreement is part
of the Consortium master Agreement filed as Exhibit 4.6.
The Company's other subsidiaries were not active in 2005 and are not material
to Company at this time although if the agreements with Consensus Business
Group are completed based upon the Heads of Agreement (see Exhibits) the
Company will have additional material subsidiaries later in 2005 and in years
following.
53
Item 11. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to financial market risks, including changes in
interest rates and foreign currencies.
FOREIGN CURRENCY RISK
The Company has operations in primarily in Canada with some limited activities
In the U.S. and the United Kingdom, and therefore the Company is subject to
some risks typical of an international business including, but not limited
to, differing economic conditions, changes in political climate, differing
tax structures, other regulations and restrictions and foreign exchange rate
volatility.
The Company can be adversely affected when the Canadian currency appreciates.
Management has the ability, to some extent, to time the exchange and enter
into forward exchange contracts in an attempt to mitigate such risk. The
Company's financial statements are reported in U.S. currency. 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's sales, corresponding receivables and the majority of its
expenses are in Canadian and U.S. dollars. The Company holds cash in
U.S., Canadian and U.K. funds, and exchanges from U.S. currency to Canadian
and U.K. currency as necessary. Through operations in Canada and the U.S.,
the Company incurs research and development and administrative expenses in
Canadian dollars and U.S. dollars and potentially other foreign currencies.
The Company is exposed, in the normal course of business, to foreign currency
risks on any non-Canadian dollar expenditures. The Company has evaluated its
exposure to these risks and has determined that the only significant foreign
currency exposure at this time is to the U.S. dollar, through receipt of
proceeds of U.S. dollar denominated share offerings. At this time, the
Company does not believe the exposure to other currency fluctuations is
material.
INTEREST RATE RISK
The Company invests its cash in a variety of short-term financial
instruments, including bank deposits. These deposits are typically
denominated in U.S. and Canadian dollars. Cash balances in other foreign
currencies are operating balances and are only invested in demand or
short-term deposits of the local operating bank.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their
fair market value adversely impacted because of a rise in interest rates,
while floating rate securities may produce less income than expected if
interest rates fall. Due in part to these factors, the Company's future
investment income may fall short of expectations because of changes in
interest rates or we may suffer losses in principal if forced to sell
securities which have seen a decline in market value because of changes
in interest rates.
The Company's investments are made in accordance with an investment policy
approved by our Board of Directors. Under this policy, all short-term
investments must be made in investment grade securities with original
maturities of less than one year at the time of acquisition.
The Company does not attempt to reduce or eliminate its investment exposure to
interest rate risk through the use of derivative financial instruments due to
the short-term nature of the Company's investments. Based on a sensitivity
analysis performed on the balances as of December 31, 2005, the fair value of
54
short term investments would not be significantly impacted by either a 100
basis point increase or decrease in interest rates. The Company has no bank
loans outstanding.
Item 12. Description Of Securities Other Than Equity Securities
Not applicable.
55
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not applicable.
Item 14. Material Modifications To The Right Of Security Holders and Use Of
Proceeds
Not applicable.
Item 15. Controls And Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the
"Exchange Act"), we carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures as of December
31, 2005 being the date of our most recently completed fiscal year. This
evaluation was carried out under the supervision and with the participation of
our chief executive officer, and our chief financial officer. Based upon that
evaluation, our chief executive officer and our chief financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting management to material information relating to us required to be
included in our periodic SEC filings.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange
Act is accumulated and communicated to management, including our chief
executive officer and chief financial officer to allow timely decisions
regarding required disclosure.
During our most recently completed fiscal year ended December 31, 2005, there
were no changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to affect, our internal control
over financial reporting.
The term "internal control over financial reporting" is defined as a process
designed by, or under the supervision of, the registrant's principal executive
and principal financial officers, or persons performing similar functions, and
effected by the registrant's board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
registrant;
Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
registrant are being made only in accordance with authorizations of
management and directors of the registrant; and
56
Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the registrant's assets that
could have a material effect on the financial statements.
Item 16. [Reserved]
ITEM 16A. Audit committee financial expert
Our board of directors has determined that Mr. Shing-Cheng Hong is the
committee financial expert on our audit committee. For details on his
professional career see "Item 6. Directors, Senior Management and Employees".
ITEM 16B Code of Ethics
The Company has adopted a code of ethics which requires all employees to
acknowledge a responsibility for honest, fair and respectful dealings between
the Company and its employees, customers and suppliers. The Code requires
observance of high standards of respect for the laws applicable to the
Company's business activities and precludes offering or accepting any benefit
from a customer or supplier which could be construed as an improper inducement
to do business. The Company's insiders acknowledge their responsibility for
careful compliance with corporate disclosure and securities trading laws. The
Code is available for review on the Company's website and forms part of the
Exhibits (see Corporate Governance Manual).
ITEM 16C Principal accountant fees and services
A summary of accountant fees and services are provided in a table below:
Total Fees
--------------------------
2005 2004
---- ----
Audit Fees (1) 111,414 106,497
Audit-Related Fees 9,807 -
(2)
Tax Fees (3) - 551
All Other Fees (4) - -
- -------------------------------------------------
Total (5) 121,221 107,048
- -------------------------------------------------
(1) Audit fee in 2005 is an estimated number. Audit fee in 2004 is the
aggregate fees billed by our external auditors for the audit of our annual
consolidated financial statements and services that are normally provided by
external auditors in connection with statutory and regulatory filings.
(2) Audit-related fees in 2005 and 2004 include fees related to services that
are reasonably related to the performance of the audit or review of our
financial statements but not included under "Audit Fees".
(3) Tax fees in 2005 and 2004 include fees related to services for tax
compliance and tax planning.
(4) All other fees include miscellaneous financial advises other than above
categories.
57
Part III
Item 17. Financial Statements
Financial Statements required under this item are filed herewith and
attached to this Form 20-F and form part of this Annual Report.
Index to Financial Statements
Auditors' Report
Comments by Auditors for U.S. Readers on Canada-United States Reporting
Difference
Consolidated Balance Sheets as at
December 31, 2005 and December 31, 2004
Consolidated Statements of Loss for the years ended
December 31, 2005, December 31, 2004 and December 31, 2003
Consolidated Statements of Deficit for the years ended
December 31, 2005, December 31, 2004 and December 31, 2003
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, December 31, 2004 and December 31, 2003
Notes to Consolidated Financial Statements
58
Consolidated Financial Statements (in U.S. dollars)
DynaMotive Energy Systems Corporation
December 31, 2005 and 2004
59
BDO [LOGO]
- ---
BDO Dunwoody LLP 600 Cathedral Place
Chartered Accountants 925 West Georgia Street
Vancouver, BC, Canada V6C 3L2
Telephone: (604) 688-5421
Telefax: (604) 688-5132
E-mail: vancouver@bdo.ca
www.bdo.ca
AUDITORS' REPORT
To the Shareholders of
DynaMotive Energy Systems Corporation
We have audited the consolidated balance sheets of DynaMotive Energy Systems
Corporation as at December 31, 2005 and 2004 and the consolidated statements
of loss, deficit and cash flows for the years then ended. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2005 and 2004 and the results of its operations and its cash flows for the
years then ended in accordance with Canadian generally accepted accounting
principles.
The comparative figures for 2003 were reported upon by other auditors. Their
report covered the year ended December 31, 2003, contained no reservations
and was dated April 16, 2004.
On March 24, 2006, we reported separately to the shareholders of DynaMotive
Energy Systems Corporation on financial statements for the same period prepared
in accordance with the Canadian generally accepted accounting principles,
excluding Note 19, Reconciliation of General Accepted Accounting Principles,
included in the accompanying financial statements
/s/ BDO Dunwoody LLP
Chartered Accountants
Vancouver, Canada
March 24, 2006
60
BDO [LOGO]
- ---
BDO Dunwoody LLP 600 Cathedral Place
Chartered Accountants 925 West Georgia Street
Vancouver, BC, Canada V6C 3L2
Telephone: (604) 688-5421
Telefax: (604) 688-5132
E-mail: vancouver@bdo.ca
www.bdo.ca
Comments by Auditors for U.S. Readers
on Canada-United States Reporting Difference
The reporting standards of the Public Company Accounting Oversight Board
(United States) for auditors require the addition of an explanatory paragraph
(following the opinion paragraph) when the financial statements are affected
by conditions and events that cast substantial doubt on the Company's ability
to continue as a going concern, such as those described in Note 1 to the
financial statements. Although we conducted our audit in accordance with
both Canadian generally accepted auditing standards and the standards of the
Public Company Accounting Oversight Board (United States), our report to the
shareholders dated March 24, 2006 is expressed in accordance with Canadian
reporting standards which do not permit a reference to such conditions and
events in the auditors' report when these are adequately disclosed in
the financial statements.
/s/ BDO Dunwoody LLP
Chartered Accountants
Vancouver, Canada
March 24, 2006
61
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Shareholders of
DynaMotive Energy Systems Corporation
We have audited the consolidated statements of loss, deficit and cash flows of
DynaMotive Energy Systems Corporation for the year ended December 31, 2003.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audit in accordance with Canadian generally accepted
auditing standards and the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the results of its operations and its cash flows for year
ended December 31, 2003 in accordance with Canadian generally accepted
accounting principles.
Vancouver, Canada, /s/Ernst & Young LLP
April 16, 2004. Chartered Accountants
Comments by Auditors for U.S. Readers on
Canada-United States Reporting Difference
United States reporting standards for auditors require the addition of an
explanatory paragraph when the financial statements are affected by conditions
and events that cast substantial doubt on the company's ability to continue as
a going concern, such as those described in Note 1 to the financial
statements. Although we conducted our audit in accordance with both Canadian
generally accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States), our report to the shareholders
dated April 16, 2004 is expressed in accordance with Canadian reporting
standards which do not permit a reference to such conditions and events in the
report of independent registered public accounting firm when these are
adequately disclosed in the financial statements.
Vancouver, Canada, /s/Ernst & Young LLP
April 16, 2004. Chartered Accountants
62
DynaMotive Energy Systems Corporation
Incorporated under the laws of British Columbia, Canada
CONSOLIDATED BALANCE SHEETS
As at December 31 (in U.S. dollars)
2005 2004
$ $
- -------------------------------------------------------------------------------
ASSETS
Current
Cash 1,428,468 136,971
Restricted Cash [note 9] 172,813 --
Receivables 40,326 230,280
Government grants receivable [note 16] 627,582 236,548
Prepaid expenses and deposits 235,127 177,967
- -----------------------------------------------------------------------------------
Total current assets 2,504,316 781,766
Property, plant and equipment [note 5] 14,199,148 12,154,153
Patents [note 6] 259,109 262,779
- -----------------------------------------------------------------------------------
16,962,573 13,198,698
===================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Short-term loans [note 7] -- 42,331
Accounts payable and accrued liabilities [note 8] 7,314,856 7,635,494
Convertible debenture [note 9] 546,461 --
Project advance [note 18] -- 166,003
- -----------------------------------------------------------------------------------
Total current liabilities 7,861,317 7,843,828
Convertible debenture [note 9] -- 307,463
Long-term debt [note 10] 808,848 760,209
- -----------------------------------------------------------------------------------
Total liabilities 8,670,165 8,911,500
- -----------------------------------------------------------------------------------
Commitments and contingencies [notes 1, 12, and 16]
Shareholders' Equity
Share capital [note 11(b)] 51,849,476 39,866,465
Shares to be issued [note 11(c)] 2,677,832 2,340,894
Contributed surplus [note 11(h)] 13,047,158 9,584,266
Cumulative translation adjustment (434,661) (654,374)
Deficit (58,847,397) (46,850,053)
- -----------------------------------------------------------------------------------
Total shareholders' equity 8,292,408 4,287,198
- -----------------------------------------------------------------------------------
16,962,573 13,198,698
===================================================================================
See accompanying notes
On behalf of the Board:
"Richard Lin" "Andrew Kingston"
Director Director
63
DynaMotive Energy Systems Corporation
Incorporated under the laws of British Columbia
CONSOLIDATED STATEMENTS OF LOSS
For the Year Ended December 31 (in U.S. dollars)
2005 2004 2003
$ $ $
- -----------------------------------------------------------------------------------
EXPENSES
Amortization and depreciation 148,556 130,912 125,580
Interest expense [note 11(i)] 1,445,918 151,758 320,643
Marketing [note 11(i)] 496,297 283,322 155,914
Office supplies, telephone and insurance 467,854 328,286 300,751
Professional fees [note 11(i)] 1,533,546 1,010,802 954,223
Rent 175,294 107,804 109,653
Research and development [notes 11(i) and 16] 2,435,635 2,690,405 512,981
General and administrative salaries
and benefits [note 11(i)] 5,152,851 5,267,756 2,693,430
Foreign Exchange gain (33,677) (53,156) (177,551)
- -----------------------------------------------------------------------------------
11,822,274 (9,917,889) 4,995,624
- -----------------------------------------------------------------------------------
Loss from operations (11,822,274) (9,917,889) (4,995,624)
OTHER REVENUE AND EXPENSES
Interest and other income 5,614 8,766 73,974
Loss on asset disposals 19,773 (7,092) --
Loss on write-down of long-term assets
[notes 5 and 6] (200,457) -- --
- -----------------------------------------------------------------------------------
(175,070) 1,674 73,974
- -----------------------------------------------------------------------------------
Loss from continuing operations (11,997,344) (9,916,215) (4,921,650)
Loss from discontinued operations [note 4(a)] -- -- (63,031)
- -----------------------------------------------------------------------------------
Loss for the year (11,997,344) (9,916,215) (4,984,681)
===================================================================================
Weighted average number of common shares
outstanding [note 11[j]] 108,009,185 80,979,299 56,617,490
===================================================================================
Basic and diluted loss per common share
Continuing operations [note 11[j]] (0.11) (0.12) (0.09)
Discontinued operations [note 11[j]] -- -- --
- -----------------------------------------------------------------------------------
Loss per share (0.11) (0.12) (0.09)
===================================================================================
See accompanying notes
64
DynaMotive Energy Systems Corporation
Incorporated under the laws of British Columbia
CONSOLIDATED STATEMENTS OF DEFICIT
As at December 31 (in U.S. dollars)
2005 2004 2003
$ $ $
- -----------------------------------------------------------------------------------
Deficit, beginning of year (46,850,053) (36,136,236) (31,151,555)
Effect of change in accounting
policy [note 3] -- (797,602) --
- -----------------------------------------------------------------------------------
Deficit, beginning of year restated (46,850,053) (36,933,838) (31,151,555)
Loss for the year (11,997,344) (9,916,215) (4,984,681)
- -----------------------------------------------------------------------------------
Deficit, end of year (58,847,397) (46,850,053) (36,136,236)
===================================================================================
See accompanying notes
65
DynaMotive Energy Systems Corporation
Incorporated under the laws of British Columbia
CONSOLIDATED STATEMENTS OF CASH FLOWS
As at December 31 (in U.S. dollars)
2005 2004 2003
$ $ $
- -----------------------------------------------------------------------------------
OPERATING ACTIVITIES
Loss for the year (11,997,344) (9,916,215) (4,984,681)
Add items not involving cash:
Amortization and depreciation 148,556 130,912 125,580
Accretion expense[note 9 and 10] 1,068,192 97,200 239,245
Interest expense-non cash 67,970 -- --
Gain on disposition of asset (19,773) -- --
Loss on write-down of property,
plant and equipment 200,457 -- --
Stock based compensation [note 11(i)] 3,697,057 4,730,604 2,427,857
Foreign exchange gain and other items (33,677) (13,392) (177,551)
Net change in non-cash working capital
balances related to operations [note 15] 133,833 2,087,156 199,795
- -----------------------------------------------------------------------------------
Cash used in operating activities (6,734,729) (2,883,735) (2,169,755)
- -----------------------------------------------------------------------------------
FINANCING ACTIVITIES
Decrease in bank indebtedness -- -- (158,539)
Proceeds from convertible debenture 1,825,000 830,013 --
Proceeds from long-term debt -- 816,727 --
Proceeds from short term loan -- 42,331 265,000
Repayment of short term loan (42,331) -- (265,000)
Increase in project advance -- -- 154,488
(Increase) decrease in government
grant receivables (368,712) 509,879 (572,460)
Share capital issued 6,398,254 4,857,699 2,321,852
Shares to be issued 1,957,000 1,636,408 1,476,012
- -----------------------------------------------------------------------------------
Cash provided by financing activities 9,769,211 8,693,057 3,221,353
- -----------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase in other long-term assets -- -- (32,673)
Increase in patent costs (22,181) (19,989) (6,479)
Purchase of property, plant and equipment
(net of government grants) (1,580,195) (5,804,656) (491,057)
Increase in restricted cash (172,813) -- --
- -----------------------------------------------------------------------------------
Cash used in investing activities (1,775,189) (5,824,645) (530,209)
- -----------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents from operations 1,259,293 (15,323) 521,389
Effects of foreign exchange rate
changes on cash 32,204 (131,220) (262,968)
- -----------------------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents during year 1,291,497 (146,543) 258,421
Cash and cash equivalents, beginning of year 136,971 283,514 25,093
- -----------------------------------------------------------------------------------
Cash and cash equivalents, end of year 1,428,468 136,971 283,514
===================================================================================
Supplemental cash flow information [notes 11(i) and 15]
See accompanying notes
66
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
1. NATURE OF BUSINESS AND FUTURE OPERATIONS
DynaMotive Energy Systems Corporation ("the Company" or "Dynamotive") was
incorporated on April 11, 1991 under the laws of the Province of British
Columbia. Dynamotive is focused on the development of innovative energy
solutions based on its patented fast pyrolysis system. The Company's focus is
to commercialize its patented BioOil production technology and establish this
technology for production of BioOil clean fuels.
These financial statements have been prepared in accordance with Canadian
generally accepted accounting principles on a 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. As
at December 31, 2005, the Company has a working capital deficiency of
$5,357,001 (2004 - $7,062,062), and has incurred a loss of $11,997,344
(2004 - $9,916,215) for the year ended December 31, 2005.
The ability of the Company to continue as a going concern is in substantial
doubt and is dependent on achieving profitable operations, commercializing
its BioOil production technology and obtaining the necessary financing in
order to develop this technology. The outcome of these matters cannot be
predicted at this time. The Company's future operations are dependent on the
market's acceptance of its products in order to ultimately generate future
profitable operations, and the Company's ability to secure sufficient
financing to fund future operations. There can be no assurance that the
Company's products will be able to secure market acceptance. Management
plans to raise additional equity financing to enable the company to complete
its development plans. These financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Subsequent to the year end, during the period from January 1 to March 24,
2006, the Company issued 11,253,937 common shares for total proceeds of
$7,680,459, inclusive of $1,615,000 received as at December 31, 2005,
relating to a private placement commencing during the forth quarter of
2005. In addition during the period from January 1 to March 24, 2006, the
Company received $1.64 million on the exercise of 269,172 options and
4,022,806 warrants. Management is of the opinion that this and expected
future financing along with expected sales will provide sufficient working
capital to meet the Company's liabilities and commitments as they become due.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared by management in
accordance with Canadian generally accepted accounting principles.
The following is a summary of significant accounting policies used in the
preparation of these consolidated financial statements:
67
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
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, incorporated
under the laws of the United Kingdom; and DynaMotive Canada Inc., federally
incorporated under the laws of Canada. In addition, the Company owns 99.9%
of the West Lorne BioOil Co-Generation LP formed under the laws of Ontario
and has accounted for its proportionate share of the partnership.
The consolidated financial statements include the results of operations of
Border Biofuels Limited ("BBL") as discontinued operations [note 4].
Use of estimates
The preparation of financial statements in conformity with Canadian
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 transaction or settlement of foreign currency denominated monetary
items are included in the determination of net income.
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 period. Gains and losses resulting from this process are
recorded in shareholders' equity as an adjustment to the cumulative
translation adjustment account.
Revenue recognition
[a] Revenue from the sale of products is recognized upon shipment of the
product and when the risk and reward of ownership has been transferred to the
customer, provided that the amount is fixed or determinable and collection is
reasonably assured.
[b] Revenue from services contracts is recognized when the services are
provided and when the amount is reasonably determinable and collectible.
[c] Royalty revenue is recognized when the Company has earned the right to
collect payment pursuant to the terms of the relevant agreement and when the
amount is reasonably determinable and collectible.
68
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
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. Amounts received for future expenditures are recorded as a
current liability. Government assistance towards the acquisition and
construction of property, plant and equipment is deducted from the cost of
the related property, plant and equipment. Government assistance is recorded
when the Company has incurred the qualifying expenditure and there is
reasonable assurance the receipts will be recovered.
Repayment of contribution is contingent solely upon the Company's ability to
generate revenue from the sale of specified products or technology.
Accordingly, liability of repayment will only be accrued when sales of the
products or technology have been generated.
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. As at December 31, 2005 and 2004, no investment tax
credits have been recorded.
Research and development costs
Research costs are expensed in the period incurred. Development costs are
expensed in the period incurred unless the Company believes the development
project meets Canadian 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.
Patents
Patents are recorded at cost, including related legal costs, and are
amortized on a straight-line basis over the lesser of the estimated useful
life of the related technology and the life of the patent. 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 future cash flows or
the estimated useful life of such assets could be reduced in the future.
69
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Property, plant and equipment
Property, plant and equipment 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
Equipment 20% declining balance
Leasehold improvements Straight line over the term of the lease
(which approximates its estimated life)
Motor vehicles 50% the first year and 25% thereafter
declining balance
Annually, or whenever events and circumstances indicate that the carrying
value of the assets might be impaired and the carrying value may not be
recoverable, the Company performs evaluations to assess the recoverability of
its property, plant and equipment. When the carrying value of property, plant
and equipment is determined to exceed its recoverable amount, an impairment
loss is recorded to reduce the carrying value of the capital asset to its
fair value.
Projects under development
The Company expenses all preliminary stage costs incurred with respect to a
potential capital project, including costs related to the consideration of
alternatives, feasibility studies, and activities occurring prior to the
decision to proceed with the project until the capital project meets the
Company's capitalization policy and is considered a project under
development. The Company begins to capitalize costs for projects under
development when it has determined that it is more likely than not that the
financing for the capital project is available and it is more likely than not
that the Company will be able to meet the requisite local and other
governmental regulations to develop the capital project.
For those capital projects that meet the Company's capitalization policy, the
Company capitalizes incremental costs that are directly identifiable with the
specific capital project until the capital project is substantially complete
and ready for its intended use. Financing costs, including interest, are
capitalized when they arise from indebtedness incurred, directly or
indirectly, to finance the construction of the capital project.
Capitalization of financing costs will cease when a capital project is
considered to be substantially complete and ready for its intended use.
Annually, or whenever events and circumstances indicate that the carrying
value of the assets might be impaired and the carrying value may not be
recoverable, the Company performs evaluations to assess the recoverability of
its projects under development. When the carrying value of projects under
development is determined to exceed its recoverable amount, an impairment
loss is recorded to reduce the carrying value of the projects under
development to its fair value.
70
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Income taxes
The Company accounts for income taxes using the liability method of tax
allocation. Future income taxes are recognized for the future income tax
consequences attributable to differences between the carrying values of
assets and liabilities and their respective income tax bases. Future income
tax assets and liabilities are measured using substantively enacted income
tax rates expected to apply to taxable income in the periods in which
temporary differences are expected to be recovered or settled. The effect on
future income tax assets and liabilities of a change in rates is included in
earnings in the period that includes the substantial enactment date. Future
income tax assets are recorded in the consolidated financial statements if
realization is considered more likely than not. A valuation allowance is
recorded to reduce future income tax assets recognized by the amount of any
future income tax benefits that, based on available evidence, are not expected
to be realized.
Stock based compensation
The Company has two stock based compensation plans - a stock appreciation
rights ("SA Rights") plan and a stock option plan for directors and
employees, which are described in note 11. Under the terms of the stock
option plan the Company may grant fixed options or options whose vesting is
contingent on future performance. Compensation is recognized under the fair
value based method when fixed or performance based stock options are granted
to employees and directors. Compensation is recognized using the fair value
based method for SA Rights when the performance criteria have been met and
amortized over the service period.
In addition, the Company has entered into compensation arrangements, which
entitle certain non-employees to receive specific amounts for their services.
These amounts can only be settled by applying them to the exercising of
outstanding options to purchase common shares. 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, and warrants to employees or as
consideration for services rendered by non-employees. As a result of the
change in accounting policy (note 3), such equity awards are recorded at
their fair value, as compensation expense or capitalized to long-term assets
under construction 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 netted against the proceeds raised. All unvested or modified
options for non-employees are re-measured on each balance sheet date until
such options vest, are exercised or forfeited.
71
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Loss per common share
Basic loss per common share is based on the weighted average number of shares
outstanding for the period excluding contingently issuable shares and
excluding escrowed shares. For the years ended December 31, 2005 and 2004,
potentially dilutive common shares (relating to options, warrants, and
convertible agreements outstanding at year end) totaling 50,433,962 (2004 -
39,342,607, 2003 - 24,624,318) were not included in the computation of loss
per share because their effect was anti-dilutive.
Financial instruments
The fair values of the financial instruments approximate their carrying value
due to their short term or demand nature, except for the convertible debenture
and long-term debt. The fair values of the convertible debenture and
long-term debt were calculated using discounted cash flow analysis and
approximate their carrying value as the effective interest rates implicit in
these financial instruments are similar to current market rates.
Leases
Leases are classified as either capital or operating leases. Leases which
transfer substantially all the benefits and risks of ownership of the
property to the Company are accounted for as capital leases. Capital lease
obligations reflect the present value of future minimum lease payments,
discounted at the appropriate interest rate. All other leases are accounted
for as operating leases wherein rental payments are expensed as incurred.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and balances invested in
short-term money market deposits with maturity less than 30 days from the
date of purchase.
For year ended December 31, 2005, the average effective interest rate earned
on cash equivalent balance was 3.51% (2004 - nil%). As at December 31, 2005,
the Company had $328,468 (2004 - $136,971) in cash, which includes $78,999
in Canadian currency (converted to US dollars) based on year end rate and
$1,100,000 (2004 - $nil) in short-term money market deposit.
72
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
3. CHANGE IN ACCOUNTING PRINCIPLES
[a] Stock based compensation
Effective January 1, 2004, the Company adopted, on a retroactive basis
without restatement, the recommendations of revised CICA Handbook Section
3870 ("CICA 3870"), "Stock-based compensation and other stock-based
payments", which now requires companies to adopt the fair value based method
for all stock-based awards granted on or after January 1, 2002. Previously,
companies were only required to disclose the pro-forma effect of stock
options issued to employees and directors in the notes to the financial
statements. The effect of this change in accounting policy was to increase
the deficit at January 1, 2004 by $797,602 with a corresponding increase to
contributed surplus.
Prior to 2004, effective January 1, 2002, the Company followed the
recommendations of the CICA 3870, which required that all stock-based awards
made to non-employees and direct awards of stock, stock appreciation rights
and awards that call for settlement in cash or other assets that were
outstanding or granted for fiscal years beginning on or after January 1, 2002
were to be measured and recognized using a fair value based method. Awards
that an entity had the ability to settle in stock were recorded as equity,
whereas awards that the entity was required to or had a practice of settling
in cash were recorded as liabilities. The fair value method was encouraged
for all other employee stock based compensation but other methods of
accounting such as the intrinsic method were permitted. If the fair value
method was not adopted, then pro-forma disclosure for net loss and loss per
share was required to show the effects as if the fair value method has been
used. The Company elected to use the intrinsic method to account for awards
granted to employees and directors in 2003.
[b] Asset Retirement Obligations
Effective January 1, 2004, the Company adopted CICA Handbook Section 3110,
"Asset Retirement Obligations" which requires the Company to retroactively
record the fair value of an asset retirement obligation as a liability in the
period in which it incurred a legal obligation associated with the retirement
of tangible long-lived assets that result from the acquisition, construction,
development, and/or normal use of the assets and when a reasonable estimate
of the fair value can be made. The obligation will be measured initially at
fair value using present value methodology, and the resulting costs
capitalized into the carrying amount of the related asset. In subsequent
periods, the liability will be adjusted for any changes in the amount or
timing of the underlying future cash flows. Capitalized asset retirement
costs will be depreciated on the same basis as the related asset and the
discount accretion of the liability is included in determining the results of
operations. As at December 31, 2005 and 2004, the Company estimated the fair
value of the asset retirement obligations was $0 and consequently, no
liability was accrued.
73
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
4. BORDER BIOFUELS LTD.
[a] Liquidation of BBL
In April 2001, the Company acquired 75% of the outstanding common shares of
Border Biofuels Limited ("BBL"), a United Kingdom Green Power project
development company. In December 2002, BBL was placed into liquidation and
the Company does not expect to recover any proceeds from the sale of BBL's
assets. As BBL remains in liquidation at December 31, 2005, the Company no
longer controls the operating, financing and investing decisions of BBL. As
such, the financial position and results of operations have been
deconsolidated from the date that BBL was petitioned into bankruptcy.
Accordingly, the results of operations of BBL (net loss from discontinued
operations for the year ended December 31, 2003 of $63,031) have been
accounted for as discontinued operations.
[b] Guarantee provided by Dynamotive
In 2001, BBL entered into a credit facility with Bank of Scotland for a
maximum of $344,160(GBP200,000). The credit facility is denominated in British
Pounds Sterling and is guaranteed by the Company. During 2002, BBL became
insolvent. If the Bank is unable to realize on its collateral with BBL, it
has the right to seek settlement from the Company for payment. Although there
is currently no indication that the Bank will pursue the Company, the Company
has recognized the full amount of the guarantee as a current liability in
2002 and included the impact as part of the 2002 loss from discontinued
operations. BBL remains in liquidation at December 31, 2005, there has
been no change in status regarding the settlement of the credit facility.
74
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
5. PROPERTY, PLANT AND EQUIPMENT
2005 2004
------------------------------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
$ $ $ $
- ------------------------------------------------------------------------------------
Furniture and fixtures 148,243 123,669 166,649 127,064
Computer equipment and software 461,123 366,765 395,616 306,745
Equipment 24,499 15,858 647,960 408,916
Projects under development:
West Lorne 12,832,393 -- 10,958,107 --
Construction advances
- 200 tpd plant 1,196,885 -- 766,035 --
Leasehold improvements 158,200 115,903 153,106 100,476
Motor vehicles -- -- 57,446 47,565
- ------------------------------------------------------------------------------------
14,821,343 622,195 13,144,919 990,766
- ------------------------------------------------------------------------------------
Net book value 14,199,148 12,154,153
- ------------------------------------------------------------------------------------
The Company has constructed a 100 tonne per day BioOil co-generation project
at the site of Erie Flooring in West Lorne, Ontario. At December 31, 2005,
the Company had recorded pre-construction advances of $1,196,885
[2004 - $766,035] representing initial payments on a proposed 200 tonne per
day ("tpd") plant. All of the pre-construction advances were paid in cash or
shares.
During 2005, government grants of $873,583 [2004 - $2,829,117] have been
applied to reduce the cost of property, plant and equipment under
construction.
In 2005, the Company recorded write-downs of certain property, plant and
equipment totaling $190,146, pertaining to the BioOil Power Generation
segment. The Company determined that the net recoverable amount of certain
test equipment was below its carrying value.
In 2005, the Company re-assigned a leased vehicle along with its remaining
lease liability to a former employee for $nil proceeds. The disposal
resulted in a gain of $19,773.
6. PATENTS
2005 2004
------------------------------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
$ $ $ $
- ------------------------------------------------------------------------------------
Patents 390,220 131,111 365,715 102,936
- ------------------------------------------------------------------------------------
Net book value 259,109 262,779
====================================================================================
75
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
6. PATENTS (cont'd)
Patents are recorded at cost and amortized on a straight line basis over the
estimated useful life, which approximates the legal life, of the related
technology of 16 years. The annual amortization expense of these patents for
the next five years is estimated to be $25,000 per annum.
In 2005, the Company recorded write-downs of certain patents the Company is
no longer pursuing totaling $10,311. The Company has determined that the
net recoverable amount of these patents was below that carrying values.
7. SHORT-TERM LOANS
[a] On December 24, 2004 the Company entered into a loan agreement with an
officer of the Company for $42,331. The loan bore interest at 2% per
month, had a 1-month term and was repaid in January 2005.
[b] On June 3, 2003 the Company entered into a loan agreement with a U.S.
based Trust for $200,000 and an officer of the Company for $50,000. The
loans bore interest at 2% per month and had a 12-month term. The loan
agreement also called for the Company to issue 2.5 million warrants
exercisable at $0.20 each for a period of five years as part of the
loan financings.
The proceeds of the loan were allocated to the loan and warrants
based on their relative fair values. Accordingly, $104,167 was
initially allocated to the loan and $145,833 was allocated to the
warrants. The carrying value of the debt was accreted up to its face
value over the term to maturity. Accretion of $12,153 was recognized in
the year ended December 31, 2003. The Company provided the lenders with
a general security agreement and other undertakings in regard to the
loan. In December 2003, the Company repaid the loan and the lender
released the Company from the general security agreement.
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2005 2004
$ $
- ------------------------------------------------------------------------------
Trade accounts payable 5,499,062 3,157,724
Accrued compensation 41,692 34,808
Accrued liabilities 1,429,942 4,057,642
Bank of Scotland guarantee [note 4(b)] 344,160 385,320
- ------------------------------------------------------------------------------
7,314,856 7,635,494
==============================================================================
Included in Trade accounts payable is an amount due to a vender which has
committed to provide a $3.1 million (C$3.64 million) 7-year lease financing
on the equipment purchased. As at December 31, 2005, the Company has not
entered into any formal financing agreement with respect to this equipment.
76
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
9. CONVERTIBLE DEBENTURES
(a) In December 2004 the Company entered into an agreement with an Ontario
corporation (the "Vendor") to pay for equipment and services in
exchange for an $830,013 (C$1,000,000) convertible debenture (the
"Agreement"). The debenture was convertible into common shares of the
Company at the market price at the time of conversion, subject to a
minimum conversion price of $0.40 per share and a maximum conversion
price of $0.60 per share. In addition, for each share issued upon
conversion, the debenture holder would receive 1/2 share purchase
warrant. Each whole warrant is exercisable for two years from the date
of issue at 5% above the market price at the time of conversion. The
debenture bore no interest and the principal was due on December 10,
2009. In September 2005, the Vendor converted the entire debenture into
common shares of the Company at a price of $0.54 per share and received
1,535,001 shares and 767,500 two-year Series S warrants exercisable at
$0.57 per share.
The Agreement also calls for the Company to enter into a marketing
agreement with the Vendor. In connection with the marketing agreement,
in early 2005 the Company issued to the Vendor 500,000 Series U warrants
to purchase common shares of the Company, exercisable at $0.49 per share
during the period from January 4, 2005 to December 31, 2006. The
Vendor has exercised these warrants subsequent to December 31, 2005.
The proceeds of the debenture have been allocated to the debenture and
warrants at December 31, 2004 based on their relative fair values.
Accordingly, $307,463 was allocated to the debenture, $440,592 was
allocated to the conversion feature and $81,958 was allocated to the
warrants. The carrying value of the debt was being accreted up to its
face value over the term to maturity. No amount of the discount was
accreted in 2004 since the debt agreement only became effective in
December 2004. The accretion of the debt discount began in January
2005 and the entire balance of $522,550 ($440,592 related to the
conversion feature and $81,958 related to the warrants) was expensed
upon conversion in September 2005.
(b) During the year ended December 31, 2005 the Company issued $1,825,000
of convertible debentures including $175,000 of debentures issued to
officers and directors (or companies controlled by officers and
directors) of the Company. These debentures are due between June and
September 2006 and have an interest rate of 10% per annum. At the
holders' option, the principle and accrued interest are convertible
into the Company's common shares and share purchase warrants at rates
between $0.40 and $0.425 per share. For each share issued upon
conversion, the debenture holder would receive 1/2 or 1/4 share purchase
warrants. Each whole warrant is exercisable for three years from the
date of issue at 5% above the market price at the time of conversion.
These debentures are collateralized by certain government receivables
and are guaranteed by the Company. In September and December 2005,
$1,150,000 of the debentures were converted into 2,727,941 common shares
and 681,985 Series U warrants. In addition, 101,071 shares and 25,267
Series U warrants were issued in 2005 as an interest payment on the
debenture. As at December 31, 2005, $675,000 of these debentures
remain outstanding.
77
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
9. CONVERTIBLE DEBENTURES (cont'd)
The original proceeds of the debenture have been allocated to the debenture
and the conversion feature at December 31, 2005 based on their relative fair
values. Accordingly, $1,173,409 was originally allocated to the debenture and
$651,591 was allocated to the conversion feature. The carrying value of the
debt is being accreted up to its face value over the term to maturity. The
accretion of the debt discount began in June 2005 and $96,695 was accreted
during the period to December 31, 2005. The amount of $426,357 was expensed
in the year due to the conversion of the debentures.
The Company has restricted funds of $172,813 held by the lawyer as collateral
for short-term convertible debentures. Shortly after the year end, debenture
holders converted the same amount to company shares and these funds became
non-restricted.
10. LONG-TERM DEBT
In 2004, the West Lorne BioOil Co-Generation LP (the "LP") entered into a
loan agreement with a Bahamas Corporation for an $830,013 loan (C$1,000,000,
based on exchange rate at December 31, 2004). The loan bears interest at
1.25% per month with interest due monthly and the principal due August 11,
2007. The LP may repay the loan at any time without penalty. The loan
agreement also calls for the Company to issue 312,500 warrants to purchase
common shares of the Company, exercisable at $0.50 per share for a period of
three years, as part of the loan financing. The loan is collateralized by
the assets of the LP and is guaranteed by the Company.
The proceeds of the loan have been allocated to the debt and warrants based
on their relative fair values. Accordingly, $760,209 (C$915,900) was
allocated to the loan and $69,804 (C$84,100) was allocated to the warrants.
The carrying value of the debt will be accreted up to its face value over the
term to maturity. No amount of the discount was accreted in 2004 since the
debt agreement only became effective shortly before year end. The accretion
of the debt discount began in January 2005 and during the year ended December
31, 2005 $22,591 (C$27,616) was accreted. The balance as at December 31,
2005 included $26,048 of foreign exchange effect.
78
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
11. SHARE CAPITAL
[a] Authorized share capital
The Company's authorized capital consists of an unlimited number of common
shares [2004 - unlimited common shares] with no par value and unlimited Class
A preferred shares with no par value [2004 - 100,000,000 with a par
value of $5.00] with each having attached special rights and restrictions. No
preferred shares were issued and outstanding at December 31, 2005 and 2004.
[b] Issued and outstanding common shares
Issued
# $
- ----------------------------------------------------------------------------------
Balance, December 31, 2002 49,941,000 27,553,040
Issued for cash
Pursuant to private placement 12,863,895 1,544,715
Pursuant to exercise of stock options 580,100 183,050
Issued on conversion of convertible loan 1,389,746 182,254
Issued for settlement of fees payable 2,206,966 699,037
Issued for services (i) 2,973,947 745,894
Shares redeemed and cancelled (ii) (40,000) --
- ----------------------------------------------------------------------------------
Balance, December 31, 2003 69,915,654 30,907,990
Issued for cash
Pursuant to private placement (iii) 16,906,913 5,825,691
Pursuant to exercise of stock options 569,284 180,314
Pursuant to exercise of warrants 188,333 50,583
Issued for settlement of fees payable 2,999,113 1,427,565
Issued for services (i) 2,425,641 1,322,145
Issued for SA Rights 124,860 75,489
Shares redeemed and cancelled -- 76,688
- ----------------------------------------------------------------------------------
Balance, December 31, 2004 93,129,798 39,866,465
Issued for cash
Pursuant to private placement,
net of finder's fee (iii) 17,303,998 6,071,226
Pursuant to exercise of stock options 1,239,139 373,277
Pursuant to exercise of warrants 1,873,084 592,088
Issued for settlement of fees payable (iii) 3,347,869 1,836,047
Issued for services (i) 1,656,643 929,199
Issued on conversion of convertible debentures 4,364,013 2,038,951
Issued on conversion of project advance 342,287 166,003
Shares to be redeemed and cancelled (ii) (44,956) (23,780)
- -----------------------------------------------------------------------------------
Balance, December 31, 2005 123,211,875 51,849,476
==================================================================================
79
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
11. SHARE CAPITAL (cont'd.)
[i] The Company has entered into various agreements for services with its
employees, directors and non-employees to be settled with various stock
awards.
a. The Company has entered into compensation arrangements with non-employees
for specified 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. Included in issued for services are nil
[2004 - nil; 2003 - 1,536,141] shares, fair valued at $nil
[2004 - $nil; 2003 - $321,082].
b. The Company issued 624,301 [2004 - 2,393,459; 2003 - 980,753] restricted
shares to non-employees for services, fair valued at $303,010 [2004 -
$1,303,005; 2003 - $363,764]. The shares have a 12-month restriction
from the issue date. The Company also issued 941,840 [2004 - nil; 2003 -
nil] shares to non-employees for services, fair valued at $591,799 [2004-
$nil; 2003 - $nil].
c. The Company has issued 90,502 [2004 - nil; 2003 - 455,794] shares to
employees, directors and officers for services rendered, recorded at
fair value of $34,390 [2004 - $nil; 2003 - $60,922].
d. The Company issued nil [2004 - 32,182; 2003 - 8,590] restricted shares
to employees and directors for services, fair valued at $nil [2004 -
$19,140; 2003 - $2,686]. The shares have a 12 month restriction from the
issue date. During 2003, 7,331 common shares previously issued to a
director of the Company were cancelled and returned to Treasury with a
fair value of $2,560.
[ii] At December 31, 2005, the Company had 44,956 [2004 - nil] common shares
to be redeemed. The redeemable shares had a fair value of $23,780
which were issued as a partial payment of outstanding invoices will be
returned to the Company as a result of the final settlement with a
vendor. At December 31, 2004, the remaining balance of the previously
accrued redemption was cancelled as a result of the Company using the
shares as a deposit on the next development project. These shares,
which were included as outstanding at December 31, 2003, were issued
for services in relation to the termination of agreements with
non-employees and to be redeemed upon satisfying conditions of the
termination agreements which were fully settled in 2003.
[iii] During the year ended December 31, 2005, the Company completed a
private placement for gross proceeds of $7,138,730. Share issuance
costs related to these private placements totaled $1,033,113, of
which, $35,041 was paid in cash and $998,072 was paid in shares
[note 11(i)]. Pursuant to the private placement agreements in 2005,
7,006,257 Series S warrants were issued in 2005 [note 11(f)].
The Company also issued 3,347,869 fully vested shares for settlement of
fees payable in 2005. These shares were valued based on the quoted
market price on the date of the settlement agreement.
80
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
11. SHARE CAPITAL (cont'd.)
[c] Shares to be issued
At December 31, 2005, the Company has 4,673,439 [2004 - 5,629,859] common
shares to be issued which are comprised of:
[i] 1,247,344 [2004 - 1,403,080] common shares which are to be issued to a
director and non-employees for services rendered under compensation
arrangements in 2005 with a value of $755,224 [2004 - $704,486].
Shares to be issued under compensation arrangements are valued based
on the quoted market price on the date of the agreement.
[ii] 2,826,095 common shares relating to a private placement commenced
during the year ended December 31, 2005 [2004 - 4,226,779] and 600,000
[2004 - nil] common shares are related to exercise of warrants for
gross proceeds of $342,000. The private placement is for up to $20
million at an offering price between $0.33 and $0.81. At December 31,
2005, the Company had received $1,957,000 [2004 - $1,636,408] in cash
for these shares to be issued [note 20(a)].
[iii] Subscription receivable of $34,392 [2004 - $NIL] related to 90,502
common shares issued to an officer in 2005.
[d] Escrow agreement
In December 1995, the Company placed in escrow 1,232,000 shares, issued for
nominal consideration, to be released from such escrow agreement as the
Company achieves certain milestones. The escrow restrictions provide that
these shares may not be traded in, dealt with in any manner whatsoever, or
released, nor may the Company, its transfer agent, or Escrow Holders, make
any transfer or record any trading in these shares without approval of the
Company. The escrow agreement further provides that the shares may then be
released from escrow at the rate of one share for every $0.17 of "cash flow"
as defined in the agreement, generated by the Company. The purpose of this
escrow agreement, in part, is to encourage the holders thereof to act in the
best interests of the Company, and in the event that the Company should
become successful, in part due to the efforts of the holders of these shares,
they will be entitled to maintain their ownership of these shares, and to
obtain regular pro-rata releases.
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
above. The amended release provisions which 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 (achieved); 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 (achieved); 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 (achieved subsequent to year end (see
note 20)).
81
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
11. SHARE CAPITAL (cont'd.)
During the year ended December 31, 2000, 450,666 of then common shares were
released from escrow as the milestones were reached.
Subsequent to December 31, 2005 the Company's market capitalization exceeded
$100 million and as a result 225,334 shares were released from escrow (see
note 20(b)), management expects the remaining escrowed shares will be
cancelled.
Contingently issuable shares held in escrow are only included in the
calculation of loss per share when eligible for release from escrow. As
such, the weighted average number of common shares outstanding and the basic
and diluted loss per common share exclude escrowed shares for all periods
presented (note 11(j)).
[e] Stock options
At December 31, 2005, the following stock options to Directors, employees and
others were outstanding:
Options Outstanding Options Exercisable
----------------------- --------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 2005 Life Price 2005 Price
- -----------------------------------------------------------------------------------
$0.20 - $0.23 5,300,084 7.16 years $0.21 5,300,084 $0.21
$0.33 - $0.50 7,817,833 3.68 years $0.47 7,645,333 $0.47
$0.58 - $0.90 595,333 1.80 years $0.73 595,333 $0.73
$1.00 120,000 4.09 years $1.00 120,000 $1.00
$1.50 80,000 4.77 years $1.50 80,000 $1.50
- -----------------------------------------------------------------------------------
13,913,250 13,740,750
===================================================================================
From time to time, the Company has provided incentives in the form of stock
options to the Company's directors, officers, employees and others. The
Company has reserved 18,488,525 [2004 - 13,969,470] (15%) of its common
shares for issuance upon the exercise of stock options of which at December
31, 2005, 4,575,275 [2004 - 2,029,747] 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.
82
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
11. 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, 2002 5,827,837 0.63
Options granted 7,603,409 0.24
Options forfeited or expired (1,299,017) 0.32
Options exercised (2,116,241) 0.52
- ----------------------------------------------------------------------------------
Balance, December 31, 2003 10,015,988 0.41
Options granted 3,393,769 0.36
Options forfeited or expired (900,750) 0.70
Options exercised (569,284) 0.32
- ----------------------------------------------------------------------------------
Balance, December 31, 2004 11,939,723 0.38
Options granted 4,068,916 0.48
Options forfeited or expired (856,250) 0.72
Options exercised (1,239,139) 0.30
- ----------------------------------------------------------------------------------
Balance, December 31, 2005 13,913,250 0.39
==================================================================================
During 2005, the Company reduced the expiry date of 400,000 options issued to
officers from the original expiry date of three years to two years.
During 2004,the Company extended the expiry date of 6,606,617 options issued
to officers from the original expiry date for a period of five years.
During 2003, the Company repriced 500,000 options issued to a director (or
company controlled by a director) from the original exercise price of $0.50
to anew exercise price of $0.30.
Included in the options granted in 2005, were nil [2004 - 350,000] options to
non employees for services rendered recorded at a fair value of $nil [2004 -
$73,750].
Subsequent to December 31, 2005, 269,172 options with a weighted average
exercise price of $0.27 were exercised (see note 20(a)).
83
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
11. SHARE CAPITAL (cont'd.)
The weighted-average fair value of options granted in 2005 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
$0.58, $0.54, and $0.46 respectively [2004 - $nil, $0.40 and $0.41; 2003 -
$0.20, $0.38, and $0.21].
Compensation expense recognized for options granted in 2005 or prior periods
was $2,103,328 (2004 - $3,707,356). The fair value of stock options, SA
Rights and warrants granted in 2005 is estimated at the measurement date
using the Black Scholes option pricing model with the following weighted
average assumptions: Risk free interest rate of 3.7% (2004 - 4.3%); dividend
yields of 0% (2004 - 0%); volatility factors of the expected market price of
the Company's common stock of 79.9% (2004 - 92.7%); and weighted average
expected life of the option of 6.5 years (2004 - 7.9 years).
Pro forma information regarding net loss and loss per share was previously
required by CICA 3870, for all periods presented where the fair value method
was not chosen, as if the Company has accounted for stock options, SA Rights
and warrants granted to employees under the fair value method [see note
3(a)]. The fair value for these options, SA Rights and warrants was estimated
at the measurement date using the Black Scholes option pricing model with the
following assumptions for 2003: Risk free interest rate of 4.5%; dividend
yields of 0%; volatility factors of the expected market price of the
Company's common stock of 116%, and weighted average expected live of the
options of 2.7 years.
Supplemental disclosure of pro forma loss and loss per share is as follows:
2003
$
- --------------------------------------------------------------------
Loss for the period as stated (4,984,681)
Less stock-based compensation 676,354
- --------------------------------------------------------------------
Pro forma loss (5,661,035)
====================================================================
- --------------------------------------------------------------------
Basic and diluted loss per share as stated (0.09)
Proforma basic and diluted loss per share (0.10)
====================================================================
84
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
11. SHARE CAPITAL (cont'd.)
[f] Common share purchase warrants
At December 31, 2005 the common share purchase warrants outstanding were as
follows:
No. of Common Exercise
Shares Issuable Price Expiration Date
- -----------------------------------------------------------------------------------
Series P Warrants 3,735,482 $0.40 May 6, 2006
Series Q Warrants 10,357,295 $0.20 to $0.75 Jan 12, 2006 to Aug 31, 2008
Series R Warrants 2,500,000 $0.20 Aug 31, 2008
Series S Warrants 15,998,808 $0.44 to $0.78 Aug 16, 2006 to May 31, 2011
Series T Warrants 312,500 $0.49 Nov 3, 2007
Series U Warrants 1,207,252 $0.49 to $0.53 Jan 4, 2007 to Dec 22, 2008
---------
Total 34,111,337
====================================================================================
Summary of warrants exercised and issued during the year end:
Number of Common Shares Issuable
-----------------------------------
via Warrants
exercised/ via Warrants
cancelled Issued
at December during the during the at Dec 31, Exercise
31, 2004 year year 2005 Price
- -----------------------------------------------------------------------------------
Series F Warrants 933,333 (933,333) -- -- $0.70
Series M Warrants 102,544 (102,544) -- -- $1.50
Series O Warrants 300,000 (300,000) -- -- $0.35
Series P Warrants 4,477,147 (741,665) -- 3,735,482 $0.40
Series Q Warrants 11,492,088 (1,134,793) -- 10,357,295 $0.20 to $0.75
Series R Warrants 2,500,000 -- -- 2,500,000 $0.20
Series S Warrants 4,910,239 -- 11,088,569 15,998,808 $0.44 to $0.78
Series T Warrants 312,500 -- -- 312,500 $0.49
Series U Warrants -- -- 1,207,252 1,207,252 $0.49 to $0.53
- -------------------------------------------------------------------------------------
25,027,851 (3,212,335) 12,295,821 34,111,337
=====================================================================================
Of 34,111,337 outstanding warrants, 32,711,337 warrants are vested.
29,389,349 of the Series P, Q, S, and U warrants are callable by the Company
for $0.001 to $0.01 per warrant on 30 days notice as soon as the Company's
shares have closed at or above $1.00 for 20 consecutive trading days. 509,488
of the Series Q warrants are callable by the Company for $0.001 to $0.01 per
warrant on 30 days notice as soon as the Company's shares have closed at or
above $1.50 for 20 consecutive trading days (see 20(c))
85
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
11. SHARE CAPITAL (cont'd.)
[f] Common share purchase warrants
(1)The Series P warrants were issued as part of a private placement and for
services of non-employees. These warrants vested upon successful completion
of the private placement and as services were performed respectively. During
the year ended December 31, 2004, pursuant to various private placements
agreement, the Company issued 2,700,000 Series P warrants with an exercise
price of $0.40 per share, expiring on April 1, 2006.
(2)The Series Q warrants were issued as part of a private placement for cash
and services. These warrants vested upon successful completion of the private
placement and as services were performed. In 2002, 818,418 Series Q warrants
were issued as part of a loan agreement to certain directors of the Company.
4,479,559 Series Q warrants were issued during the year at a weighted average
exercise price of $0.59 per share, expiring on various dates from January 12,
2006 to May 20, 2007. Also in 2005, 1,134,793 [2004 - 188,333] warrants were
exercised at a weighted average price of $0.31 [2004 - 0.27] per share.
(3)The 2,500,000 Series R warrants were issued as part of the loan financings
[note 7(b)] at an exercise price of $0.20 per share.
(4)The Series S warrants were issued during the year as part of a private
placement forcash and services. Of the 11,088,569 warrants issued, 7,006,257
[2004 - 4,910,239] were issued in relation to private placements. These
warrants vested upon successful completion of the private placement and as
services were performed. 11,088,569 [2004 4,910,239] Series S warrants were
issued during the year. 1,900,000 warrants are vested annually from 2005 to
2008.
(5)The Series T warrants were issued as a part of a loan agreement in 2004
and the warrants vested immediately upon issue.
(6)The 1,207,252 Series U warrants were issued during the year as a part of
conversion of convertible debentures in 2005. These warrants vested
immediately upon issue with a weighted average exercise price of $0.51.
Compensation expenses recognized for warrants granted during 2005
was $707,166 [2004 - $601,250; 2003 - $1,265,474].
[g] Stock appreciation rights
In 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 ("SA Rights") for an amount equal to the excess of the
market value of the underlying common shares over the initial value of the SA
Right at the date of grant.
86
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
11. SHARE CAPITAL (cont'd.)
The SA Rights vest as the Company achieves stock value targets as defined in
the agreement: the remaining 1/3 of the SA Rights issued may be redeemed upon
the Company achieving a capitalized stock value of $100 million.
The Company also has the right to redeem the SA Rights at its option under
certain circumstances. The Company has the sole exclusive election to redeem
the SA Rights in cash, shares or in a combination of cash and shares. The
number of SA Rights that can be granted under the plan until December 31,
2008 cannot exceed 2,500,000.
At December 31, 2005, 300,000 [December 2004 - 300,000] SA Rights were
outstanding and 200,000 [December 2004 - 200,000] were vested.
SA Rights transactions and the number of SA Rights outstanding is summarized
as follows:
No. of
SA Rights Issued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Balance, December 31, 2003 1,468,335
SA Rights redeemed (766,668)
SA Rights forfeited (401,667)
- --------------------------------------------------------------------------------
Balance, December 31, 2004 300,000
SA Rights redeemed --
SA Rights forfeited --
- --------------------------------------------------------------------------------
Balance, December 31, 2005 300,000
================================================================================
At December 31, 2005, the following SA Rights, all of which were issued to
employees, were outstanding:
SA Rights SA Rights Initial Expiration
Outstanding Vested Value Date
- -------------------------------------------------------------------------------
300,000 200,000 $0.40 December 31, 2008
===============================================================================
The Company has an arrangement with a former director of the Company for
300,000 outstanding SA Rights of which 200,000 SA Rights have been vested
with an initial value of $0.40 extending the expiration date to December 31,
2008.
87
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
11. SHARE CAPITAL (cont'd.)
[h] Contributed surplus
Contributed surplus includes the fair value of stock options and warrants
issued to non-employees for services rendered, the fair value of warrants
issued under short-term loan agreements in 2003 [note 7], the fair value of
warrants related to convertible debentures [note 9], the fair value of
warrants related to long-term debt in 2004 [note 10], and the fair value of
options and warrants granted to employees.
[i] Stock based compensation and payment
The Company has recorded stock based compensation and payment as follows:
2005 2004 2003
$ $ $
- -----------------------------------------------------------------------------
Balance sheet items
Property, plant and equipment 327,533 350,812 1,004,564
Share issue costs 996,876 280,785 947,202
Accounts payable 492,136 17,893 51,000
- -----------------------------------------------------------------------------
1,816,545 649,490 2,002,766
- -----------------------------------------------------------------------------
Income statement items
Professional fees 1,046,841 235,845 655,416
General and administrative
salaries and benefits 2,103,328 3,707,356 1,712,658
Marketing -- -- 51,628
Research & development 546,888 787,403 --
Interest expense and other 67,970 97,200 8,155
- -----------------------------------------------------------------------------
3,765,027 4,827,804 2,427,857
- -----------------------------------------------------------------------------
Total stock based payment 5,581,572 5,477,294 4,430,623
=============================================================================
88
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
11. SHARE CAPITAL (cont'd.)
[j] Basic and diluted loss per common share
2005 2004 2003
- ------------------------------------------------------------------------------
Numerator
Loss from continuing operations $(11,997,344) $(9,916,215) $(4,921,650)
Loss from discontinued operations -- -- (63,031)
- ------------------------------------------------------------------------------
Net loss $(11,997,344) $(9,916,215) $(4,984,681)
- ------------------------------------------------------------------------------
Denominator
Weighted average number of
common shares outstanding 108,790,519 81,760,633 57,398,824
Escrowed shares (781,334) (781,334) (781,334)
- ------------------------------------------------------------------------------
108,009,185 80,979,299 56,617,490
- ------------------------------------------------------------------------------
Basic and diluted loss per common share
Continuing operations $(0.11) $(0.12) $(0.09)
Discontinued operations -- -- (0.00)
- ------------------------------------------------------------------------------
Loss per share $(0.11) $(0.12) $(0.09)
==============================================================================
12. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has the following future minimum annual lease commitments for
premises and equipment:
$
- --------------------------------------------------------------------------
2006 143,000
2007 156,000
2008 151,000
2009 49,000
- --------------------------------------------------------------------------
499,000
- --------------------------------------------------------------------------
Pursuant to employment agreements with certain officers of the Company, which
expire between July 31, 2007 and July 31, 2011, the Company is obligated to
pay the full term of contract in the event of the officers' early
termination. As at December 31, 2005 the compensation obligation payable over
the next four years amounts to $5,308,806 (2004 - $3,183,445).
Pursuant to employment agreements with certain officers of the Company, the
Company is obligated to allot and issue 335,000 fully-paid shares and a cash
bonus of $25,700 once the Company's first commercial plant is successfully
commissioned.
89
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
12. COMMITMENTS AND CONTINGENCIES (cont'd)
In connection with the Company's West Lorne project and construction advances
related to the 200TPD plant (see Note 5), the Company has committed to
outstanding constructions commitments of approximately $2.6 million
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.
13. RELATED PARTY TRANSACTIONS
The transactions with related parties are in the normal course of operations
and are recorded at amounts established and agreed between the related
parties. In addition to the transactions described in notes 7 and 11, the
Company had the following transactions with related parties:
[a] Consulting fees and salaries of $1,940,421 for the year ended December
31, 2005 [years 2004 - $3,053,332; 2003 - $1,591,097] have been paid to
Directors (or companies controlled by Directors) of the Company. Included in
the amount above, is 974,392 [2004 - $2,288,556; 2003 - $1,233,418] paid by
stock based compensation [note 11(b)(i)].
[b] Consulting fees and share issue costs of $87,395 for the year ended
December 31, 2005 [years 2004 - $574,326; 2003 - $1,002,085] have been paid
to a shareholder of the Company. Included in the amount above, is $1,113
[2004 $513,958; 2003 - $1,002,085] paid by stock based compensation [note
11(b)(i)].
[c] As at December 31, 2005, $82,529 [2004 - $136,370; 2003 - $32,673] was
advanced to a Director of the Company in connection with the formation of a
joint venture for the development of the Company's BioOil technology and
related products. The joint venture had not been formalized and the advance
was written-off on December 31, 2005.
[d] On June 3, 2003 the Company entered into a loan agreement with an
officer of the Company for $50,000. The loan bore interest at 2% per month
and had a 12-month term. The loan agreement also calls for the Company to
issue 500,000 warrants exercisable at $0.20 each for a period of five years
as part of the loan financings. In December 2003, the Company repaid the loan
and the lenders released the Company from the general security agreement.
90
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
14. LOSSES AND UNUSED DEDUCTIONS CARRIED FORWARD FOR INCOME TAX PURPOSES
As at December 31, 2005, the Company has loss carryforwards of approximately
$40,146,000 to apply against future taxable income in Canada ($37,017,000)
and the United Kingdom ($3,129,000) and $703,000 and $287,000 of federal and
provincial investment tax credits respectively available for future use in
Canada. The United Kingdom loss carryforwards can be carried forward
indefinitely. The Canadian losses and investment tax credits expire as
follows:
Federal Investment Provincial Investment Loss
Tax Credits Tax Credits Carryforwards
$ $ $
- -----------------------------------------------------------------------------------
2006 13,000 -- 2,731,000
2007 115,000 -- 4,746,000
2008 25,000 -- 5,388,000
2009 49,000 8,000 3,975,000
2010 167,000 94,000 4,616,000
2011 197,000 109,000 --
2012 54,000 30,000 --
2013 58,000 32,000 --
2014 25,000 14,000 6,662,000
2015 -- -- 8,899,000
- -----------------------------------------------------------------------------------
703,000 287,000 37,017,000
===================================================================================
91
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
14. LOSSES AND UNUSED DEDUCTIONS CARRIED FORWARD FOR INCOME TAX PURPOSES
(cont'd.)
In addition, the Company has scientific research and experimental development
expenditures of approximately $3,009,000 that can be carried forward
indefinitely to apply against future taxable income in Canada.
Future income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The Company
has recognized a valuation allowance for those future tax assets for which it
is more likely than not that realization will not occur. Significant
components of the Company's future tax assets as of December 31, 2005 and
December 31, 2004 are as follows:
2005 2004
$ $
- -----------------------------------------------------------------------------
Loss carryforwards 13,594,000 10,965,000
Research and development deductions and credits 2,018,000 3,102,000
Property, plant and equipment 1,069,000 1,056,000
Financing costs 655,000 514,000
- -----------------------------------------------------------------------------
Total future tax assets 17,336,000 15,637,000
Valuation allowance (17,336,000) (15,637,000)
- -----------------------------------------------------------------------------
Net future tax assets -- --
- -----------------------------------------------------------------------------
The potential income tax benefits relating to these future tax assets have
not been recognized in the consolidated financial statements as their
realization did not meet requirements of "more likely than not" under the
liability method of tax allocation. Accordingly, no future tax assets have
been recognized as at December 31, 2005 and 2004 and no income tax provision
or benefit has been provided for any of the periods presented. Had a tax
benefit been provided, the Company's expected effective tax rate for the
reversal of the tax benefit would be 34.12%, 35.62% and 35.62% in 2005, 2004
and 2003, respectively.
The Company's future tax assets include approximately $426,000 [2004 -
$261,000] related to deductions for share issuance costs, in excess of
amounts deducted for financial reporting purposes. If and when the valuation
allowance related to these amounts is reversed, the Company will recognize
this benefit as an adjustment to share capital as opposed to income tax
expense in the Consolidated Statement of Loss.
92
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
15. SUPPLEMENTAL CASH FLOW INFORMATION
2005 2004 2003
Net change in non-cash working capital $ $ $
- ------------------------------------------------------------------------------
Receivable 153,693 (90,890) (38,399)
Prepaid expenses and deposits (49,305) (96,852) 10,566
Accounts payable and
accrued liabilities 29,445 2,274,898 227,628
- ------------------------------------------------------------------------------
133,833 2,087,156 199,795
==============================================================================
Interest paid
Short-term interest paid 131,971 26,000 63,522
==============================================================================
For stock based non-cash investing and financing activities, see note 11 (i).
For the year ended December 31, 2004, excluded from investing activities were
$3,039,451 of additions to property, plant and equipment which were accrued
in accounts payable and accrued liabilities and will be financed through
capital leases. As at December 31, 2005, the Company has not entered into any
formal financing agreement with respect to this equipment.
16. GOVERNMENT ASSISTANCE
Government assistance received during the year ended December 31, 2005 in the
amount of $1,664,640 [2004 - $3,611,412; 2003 -.$915,237] has been recorded
as a reduction of expenditures.
Government assistance applied to: 2005 2004 2003
$ $ $
- ------------------------------------------------------------------------------
Property, plant and equipment and other 853,673 2,829,117 422,176
Research and development 782,423 765,106 456,438
Other expenses 28,544 17,189 36,623
- ------------------------------------------------------------------------------
Total 1,664,640 3,611,412 915,237
==============================================================================
93
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
16. GOVERNMENT ASSISTANCE (cont'd.)
[a]Technology Partnerships Canada
During 1997, the Company entered into a contribution agreement with Industry
Canada-Technology Partnerships Canada (TPC) whereby the Company is entitled
to receive a maximum of approximately $7 million (Cdn$ 8.2 million) or 37% of
eligible expenditures, as defined in the agreement. The Company has received
extensions to the original contribution agreement with TPC to March 31, 2006
while retaining the original cumulative maximum assistance level of $7
million. The agreement, as amended, specifies that in the event commercial
viability is achieved, then the assistance is repayable, commencing January
1, 2005 based on royalties from sales of specified products resulting from
the project to a maximum of $13.7 million (Cdn$16 million) or until the
expiration of contract on December 31, 2014. As at December 31, 2005, the
Company has received $5.9 million (Cdn$6.9 million) under these agreements.
In 2005, the Company received approximately $1,007,318, of which $13,029 was
deducted from patents and the remainder was used to reduce expenditures made
during the current year. As at December 31, 2005, $627,582 [2004 - $236,548]
is included in government grants receivable. As the Company has not achieved
commercial viability and no revenue has been generated from the project, no
repayment has been made and no amount accrued for TPC assistance as at year
end.
[b]Sustainable Development Technology Canada
On March 5, 2004 the Company signed a Contribution Agreement with Sustainable
Development Technology Canada ("SDTC") whereby SDTC will contribute $4.3
million (Cdn$5 million) to the capital cost of the Company's Erie Flooring
100 tonne per day BioOil co-generation project development. This amount will
be a grant and will be accounted for as a reduction in the capital cost of
the project. During 2005, the Company received payment of $657,322 (Cdn$
796,478) [2004 - $3,056,468 (Cdn$3,703,522)] from SDTC.
17. SEGMENTED INFORMATION
In 2005 the Company has one reportable segment, BioOil Power Generation. The
BioOil Power Generation segment relates to the biomass-to-energy technology.
Substantially all of the Company's operations and assets are in Canada and
are solely focused on the development and commercialization of its
technology. BioOil Power Generation is biomass-to-energy technology that
converts low value forest residues and agricultural by-products into BioOil
for use in power generation or other industrial energy purposes.
For the years ended December 31, 2005 and 2004 the Company recorded no
revenue.
94
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
18. PROJECT ADVANCE
In June 2003 the Company received $166,003, translated at the rate on the
balance sheet date, (C$200,000) from Ontario Power Generation Inc. ("OPG") as
an initial investment in a proposed Ontario based 100 TPD BioOil co-
generation project (the "Project"). The funds were used for pre-development
work related to the Project and are to be converted into a Project ownership
interest or Company equity upon the decision of whether or not to proceed
with the Project. The Project has now proceeded at the site of Erie Flooring
in West Lorne Ontario, and the Company has agreed with OPG to convert the
Project Advance into Company's equity on March 31, 2005 based on then current
market value. In this regard, 342,287 shares were issued during 2005.
19. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (DRAFT - TO BE
CONFIRMED)
The Company prepares the consolidated financial statements in accordance with
Canadian generally accepted accounting principles ("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, the excess, if any, between the fair value of the
shares in escrow and the carrying value, will be recorded as compensation
expense upon release from escrow. Under Canadian GAAP, shares released from
escrow do not give rise to compensation expense.
[ii] Under Canadian GAAP, prior to the accounting change in 2004 the Company
accounted for all stock-based compensation issued on or after January 1, 2002
to non-employees using the fair value based method and recognized no
compensation expense for stock-based awards to employees. The effect of
retroactively applying, without restatement, the fair value based method of
stock-based compensation to options granted to employees rather than the
previously noted intrinsic method was to increase the deficit as at January 1,
2004 by $797,602 with the corresponding increase to contributed surplus.
Effective January 1, 2004, the Company adopted the Canadian GAAP
fair-value-based method for all stock-based awards granted on or after
January 1, 2004 and retroactively applied this method without restatement.
For US GAAP purposes, the Company continues to follow SFAS No. 123.("SFAS
123") "Accounting for Stock Based Compensation" in accounting for options
granted to non-employees and Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB 25) and related
interpretations, in accounting for stock options granted to officers,
directors, and employees. Compensation expense is calculated based on the
difference, on the measurement date, between the fair market value of the
Company's stock and the exercise price and is recorded over the vesting
period of the options. For options that had their expiry dates extended,
the modification date became the new measurement date and additional
compensation was recorded when the intrinsic value of the modified options
exceeds the intrinsic value at the original measurement date. The Company
applies variable accounting to repriced options granted to directors.
95
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
19. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONT'D)
During 2005, 152,000 [2004 - 315,813; 2003 - 1,595,456] fixed employee
stock options were granted with exercise prices less than the market price of
the underlying stock on the date of the grant. For U.S. GAAP purposes, the
stock appreciation rights ("SA Rights") and performance-based stock options
are accounted for as a variable compensation plan under APB 25 and related
interpretation. The Company uses its best estimates of number of SA Rights
to be exercised (or forfeited) to record the compensation relating to
variable plans.
Prior to January 1, 2002, the Company did not record stock-based
compensation for Canadian GAAP purposes and as such there was a difference
between Canadian and U.S. GAAP. For the year ended December 31, 2003, the
Company adopted the guidance under the original CICA Handbook Section 3870
[note 3] which required that stock-based awards made to non-employees and
direct awards of stock, stock appreciation rights and awards that call for
settlement in cash or other assets that are outstanding or granted for fiscal
years beginning on or after January 1, 2002 are to be measured and recognized
using a fair value based method. For stock based awards granted to employees
for fiscal years beginning on or after January 1, 2002, the Company had
previously elected (prior to January 1, 2004) to use the intrinsic method as
permitted under Canadian GAAP, which is consistent with U.S. GAAP.
[iii] Under US GAAP, the conversion feature of the convertible debts issued
by the Company meets the criteria to be classified as equity. As a result,
the Company follows Emerging Issue Task Force ("EITF") No. 00-27 and records
the proceeds of the convertible debts based on the relative fair value of the
convertible debt, the contingent warrants issuable upon conversion and any
detachable warrants. In accordance with Issue 15 of EITF 00-27, at the time of
conversion, the contingent warrants that were issued upon conversion of the
convertible debenture should be recognized. As a result of the difference in
the calculation of relative fair value for the allocation of proceeds under
Canadian and US GAAP, the carrying value of the convertible debt liability
under US GAAP should be increased by $56,077 with a corresponding decrease in
shareholders' equity. Additional interest expense as a result of recognition
of contingent warrants less the effect of the reduction of accretion of
interest was adjusted to the Consolidated Statements of Loss under US GAAP.
In addition, in accordance with Issue 10 of EITF 00-27, the commitment date
of the convertible instruments related to the paid-in-kind (PIK) accrued
interest should be the date the interest was accrued. As a result, an
additional beneficial conversion feature ("BCF") was calculated on these
convertible instruments issued for PIK accrued interest on the convertible
debentures that were outstanding as at December 31, 2005, amounting to
$14,490 for the year ended December 31, 2005. No accretion on this additional
BCF was included in the net loss for US GAAP purposes as it is immaterial
given the short time period that the convertible debentures were outstanding.
Additional BCF on the convertible instruments related to the PIK accrued
interest for the convertible debentures that were converted during the fiscal
year 2005 was calculated as $27,943. The full amount was charged to interest
expense upon the conversion of the debentures.
96
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
19. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONT'D)
[iv] For U.S. GAAP purposes, 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.
[v] New Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued ("SFAS") No. 123 (revised 2004), "Share-Based Payment." SFAS No.
123(R) requires the Company to measure all employee stock-based compensation
awards using a fair value method and record such expense in its consolidated
financial statements. In addition, SFAS No. 123(R) requires additional
accounting related to the income tax effects and additional disclosure
regarding the cash flow effects resulting from share-based payment
arrangements. For public entities that do not file as a small business
issuer, SFAS No. 123(R) is effective for annual reporting periods of the
registrant's first fiscal year beginning on or after December 15, 2005.
In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an Amendment of FASB Statements No. 133 and 140".
Among other things, SFAS No. 155 permits the election of fair value
remeasurement for certain hybrid financial instruments that would otherwise
require bifurcation under Statement 133, Accounting for Derivative
Instruments and Hedging Activities. These hybrid financial instruments would
include both assets and liabilities. SFAS No. 155 is effective for fiscal
years beginning after September 15, 2006.
The Company has not yet determined the effect of future implementation of
these new standards on its consolidated financial statements.
97
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
19. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONT'D)
If US GAAP were followed, the significant variations on the consolidated
statements of loss and comprehensive loss would be as summarized in the
table below.
2005 2004 2003
$ $ $
- -----------------------------------------------------------------------------------
Loss for the year, Canadian GAAP (11,997,344) (9,916,215) (4,984,681)
Adjustment for stock based compensation (934,131) 1,511,031 --
Adjust to accretion of interest
Expense (iii) (193,249) -- --
- -----------------------------------------------------------------------------------
Loss for the year, U.S. GAAP (13,124,724) (8,405,184) (4,984,681)
- -----------------------------------------------------------------------------------
Unrealized (gain)/losses on foreign currency
Translation 219,713 35,733 (146,363)
- -----------------------------------------------------------------------------------
Comprehensive loss for the year,
U.S. GAAP (12,905,011) (8,369,451) (5,131,044)
- -----------------------------------------------------------------------------------
Weighted average number of common shares
Outstanding 108,009,185 80,979,299 56,617,490
- -----------------------------------------------------------------------------------
Basic and diluted loss per common share,
U.S. GAAP (0.12) (0.10) (0.09)
===================================================================================
2005 2004
$ $
- -----------------------------------------------------------------------------------
Total liabilities, Canadian GAAP 8,670,165 8,911,500
Adjustment for allocation of proceeds of 41,587 --
Convertible debt (iii)
Adjustment for accretion of interest expense (18,775) --
- -----------------------------------------------------------------------------------
Total liabilities, US GAAP 8,692,977 8,911,500
==================================================================================
2005 2004
$ $
- -----------------------------------------------------------------------------------
Total shareholders' equity, Canadian GAAP 8,292,408 4,287,198
Adjustment for allocation of proceeds of (41,587) --
Convertible debt (iii)
Adjustment for accretion of interest expense 18,775 --
- -----------------------------------------------------------------------------------
Total shareholders' equity, US GAAP 8,269,596 4,287,198
==================================================================================
The consolidated assets and cash flows under accounting principles generally
accepted in Canada are the same as the consolidated assets under the
accounting principles generally accepted in the United States.
98
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2005 (express in U.S. dollars)
20. SUBSEQUENT EVENTS
[a] As described in note 11(c), during the period from January 1 to 24,
2006, the Company issued 11,253,937 common shares for total proceeds of
$7,542,878, inclusive of $1,615,000 received as at December 31, 2005 relating
to a private placement commencing during the fourth quarter of 2005. Also
during the period from January 1 to March 24, 2006, the Company received
$1.64 million on the exercise of 269,172 options and 4,022,806 warrants.
[b] On February 6, 2006 the Company's market capitalization exceeded $100
million for the 20th consecutive trading day and as a result 225,334
shares were released from escrow and were issued to the holders.
[c] On March 24, 2006 the Company's shares closed at or above $1.00 for the
20th consecutive trading day and consequently all of the remaining 29.4
million Series P, Q, S, and U warrants with an aggregate exercise value
of $15.2 million (including cash exercise of $1.57 million received
during the period from January 1, 2006 to March 24, 2006) have become
callable by the Company for between $0.001 and $0.01 per warrant upon
30 days written notice. If such notice is given, the warrant holders may
exercise the warrants during the notice period. The Company has not yet
issued notice to warrant holders as at March 24, 2006.
21. COMPARATIVE FIGURES
Certain comparative figures have been reclassified in order to conform with
the presentation adopted in the current year.
99
Item 18. Financial Statements
Not applicable.
Item 19. Exhibits
|===============================================================================|
| | |
|Exhibit |Exhibit Description |
| | |
| | |
|===============================================================================|
|1.1 |Memorandum of DynaMotive Technologies Corporation, as amended|
| |to August 15, 2000 (filed as Exhibit 3.1 to the Company's |
| |Quarterly Report on Form 10-QSB filed on August 15, 2000 and |
| |incorporated herein by reference) |
|-----------------|-------------------------------------------------------------|
|1.2 |Amendment to the Memorandum of DynaMotive Energy Systems |
| |Corporation, dated July 3, 2001 (filed as Exhibit 3.1(b) to |
| |the Company's Quarterly Report on Form 10-Q filed on August |
| |14, 2001 and incorporated herein by reference) |
|-----------------|-------------------------------------------------------------|
|1.3 |Articles of DynaMotive Technologies Corporation, as amended |
| |to date (filed as Exhibit 3.2 to the Company's Quarterly |
| |Report on Form 10-QSB filed on August 15, 2000 and |
| |incorporated herein by reference) |
|-----------------|-------------------------------------------------------------|
|1.4 |Notice of Alteration to the authorized share structure of the|
| |Company as filed with the British Columbia Corporate and |
| |Personal Property Registries on October 28, 2004 (filed on |
| |Form 20-F on May 30, 2005) |
|-----------------|-------------------------------------------------------------|
|1.5 |Notice of Alteration to the Articles of the Company as filed |
| |with the British Columbia Corporate and Personal Property |
| |Registries on November 24, 2005 |
|-----------------|-------------------------------------------------------------|
|1.6 |Copy of the Limited partnership Agreement establishing the |
| |West Lorne BioOil Co-Generation LP referred to the Consortium|
| |Master Agreement filed under 4.6 below |
|-----------------|-------------------------------------------------------------|
|4.1 |Sustainable Development Technology Canada Contribution |
| |Agreement dated as of March 5, 2004 (filed on Form 20-F on |
| |June 1, 2004) |
|-----------------|-------------------------------------------------------------|
|4.2 |Modification No. M1 to the Sustainable Development |
| |Technology Canada Contribution Agreement dated as of April |
| |6, 2004 (filed on Form 20-F on June 1, 2004). |
|-----------------|-------------------------------------------------------------|
|4.3 |Loan Agreement between Memorial Gift Trust, James Acheson |
| |and the Company dated June 3, 2003 (filed on Form 20-F on |
| |June 1, 2004). |
|-----------------|-------------------------------------------------------------|
|4.4 |Technology Partnerships Canada Agreement dated July 29, 1997 |
| |including amendments dated February 2, 1998 to August 29, |
| |2003 (filed on Form 20-F on June 1,2004). |
|-----------------|-------------------------------------------------------------|
|4.5 |Amendment to the Technology Partnerships Canada Agreement |
| |dated November 23, 2004. (filed on Form 20-F on May 30, 2005)|
|===============================================================================|
100
|===============================================================================|
| | |
|Exhibit |Exhibit Description |
| | |
| | |
|===============================================================================|
|4.6 |Consortium Master Agreement dated February 11, 2004 (filed on|
| |Form 20-F on May 30, 2005) |
|-----------------|-------------------------------------------------------------|
|4.7 |Alliance Agreement with UMA Engineering Ltd. dated January |
| |29, 2004. (filed on Form 20-F on May 30, 2005) |
|-----------------|-------------------------------------------------------------|
|4.8 |Loan Agreement between Environmental Engineering & |
| |Consultants Limited and the Company dated November 3, 2004. |
| |(filed on Form 20-F on May 30, 2005) |
|-----------------|-------------------------------------------------------------|
|4.9 |Settlement Agreement between Magellan Aerospace Limited, |
| |West Lorne BioOil Co-Generation LP and the Company dated |
| |December 10, 2004. (filed on Form 20-F on May 30, 2005) |
|-----------------|-------------------------------------------------------------|
|4.10 |Convertible Note Agreement between Paul Hughes, COO and the |
| |Company dated May 31, 2005. |
|-----------------|-------------------------------------------------------------|
|4.11 |Executive Services Agreement with Andrew Kingston dated |
| |August 1, 2004 and Amended Executive Services Agreement with |
| |Andrew Kingston dated September 29, 2004 |
|-----------------|-------------------------------------------------------------|
|4.12 |Executive Services Agreement with Richard Lin dated August 1,|
| |2004 and Amended Executive Services Agreement with Richard |
| |Lin dated September 29, 2004 |
|-----------------|-------------------------------------------------------------|
|4.13 |Executive Services Agreement with Brian Richardson dated |
| |October 1, 2005 |
|-----------------|-------------------------------------------------------------|
|4.14 |Executive Services Agreement with Jan Barynin dated May 17, |
| |2004 |
|-----------------|-------------------------------------------------------------|
|10.21 |Escrow Agreement, dated January 10, 1995, by and among the |
| |Company, Montreal Trust Company of Canada and the holders of |
| |the 3,140,900 escrowed shares (filed as Exhibit 10.21 to the |
| |Company's Registration Statement on Form SB-2, Registration |
| |No. 33-98622, and incorporated herein by reference.) |
|-----------------|-------------------------------------------------------------|
|10.28 |February 9, 2000 Agreement to Purchase Patents and Rights |
| |between DynaMotive Technologies Corporation and RTI Resource |
| |Transforms International, Ltd., (filed as Exhibit 10.28 to |
| |the Company's Form 10-QSB filed on May 15, 2000, and |
| |incorporated herein by reference.) |
|-----------------|-------------------------------------------------------------|
|10.29 |Heads of Agreement with Consensus Business Group and Joint |
| |Venture Proposal for Consensus Business Group dated February |
| |20, 2006 |
|-----------------|-------------------------------------------------------------|
|12.1 |Certification of chief executive officer |
|-----------------|-------------------------------------------------------------|
|12.2 |Certification of chief financial officer |
|-----------------|-------------------------------------------------------------|
|13.1 |Certification of chief executive officer and chief financial |
| |officer - Section 906 of the Sarbanes-Oxley Act of 2002 |
|-----------------|-------------------------------------------------------------|
101
SIGNATURES
----------
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
DynaMotive Energy Systems Corporation
Date: June 28, 2006
By: /s/ R. Andrew Kingston
-----------------------------------------
R. Andrew Kingston
President and Chief Executive Officer
By: /s/ Brian Richardson
-----------------------------------------
Brian Richardson
Chief Financial Officer
102