UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
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[ ] 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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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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 105 -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
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, 2003
Common Shares Without Par Value 69,915,654
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 [ ]
1
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 [X] Item 18 [ ]
(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 [ ] Not applicable [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".
2
TABLE OF CONTENTS
Page
PART I 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 17
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 25
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 32
ITEM 8. FINANCIAL INFORMATION 34
ITEM 9. THE OFFER AND LISTING 35
ITEM 10. ADDITIONAL INFORMATION 36
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 39
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 41
PART II 41
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 41
ITEMS14. MATERIAL MODIFICATIONS TO THE RIGHT OF SECURITY HOLDERS AND
USE OF PROCEEDS 41
ITEM 15. CONTROLS AND PROCEDURES 41
ITEM 16. [RESERVED] 41
PART III 42
ITEM 17. FINANCIAL STATEMENTS 42
ITEM 18. FINANCIAL STATEMENTS 43
ITEM 19. EXHIBITS 90
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Part I
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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
2003 2002 2001 2000 1999
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(US Dollars)
Results of operations:
Revenue ---- 68,569 274,360 907,744 1,259,668
Loss from operations (4,995,624) (3,733,499) (5,798,827) (4,863,482) (2,444,931)
Loss from continuing
operations (4,921,650) (4,366,454) (6,437,461) (4,756,873) (2,444,931)
Net loss per Cdn GAAP (4,984,681) (5,261,607) (6,838,264) (4,756,873) (2,444,931)
Net loss per US GAAP (4,984,681) (5,264,469) (6,602,892) (6,103,362) (2,638,157)
Net loss per share Cdn GAAP (0.09) (0.12) (0.19) (0.15) (0.11)
Net loss per share US GAAP (0.09) (0.12) (0.18) (0.12) (0.29)
Net loss from continuing
operation per share (0.09) (0.10) (0.18) (0.15) (0.11)
Financial position at year-end:
Total assets, Cdn GAAP 3,759,605 1,285,813 6,454,399 4,469,120 2,312,435
US GAAP 3,759,605 1,285,813 6,457,263 4,390,740 2,232,666
Total liabilities,
Cdn GAAP 2,035,168 1,957,625 5,179,271 898,374 892,850
US GAAP 2,035,168 1,957,625 5,179,271 898,374 892,850
Shareholder's equity,
Cdn GAAP 1,724,437 (671,812) 1,275,128 3,570,746 1,419,585
Shareholder's equity,
US GAAP 1,724,437 (671,812) 1,277,992 3,492,366 1,339,816
Deficit, Cdn GAAP (36,136,236) (31,151,555) (25,773,048) (18,934,784) (14,177,911)
US GAAP (38,603,514) (33,618,833) (28,354,364) (21,381,691) (15,648,110)
Common shares issued 69,915,654 49,941,000 40,942,115 35,851,060 24,617,402
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During 2003, significant impacts to results of operations and financial
condition and comparability of results of operations and financial condition in
2003 versus 2002 occurred principally due to completing the divestiture of the
operating assets of the Company's DynaPower subsidiary in April 2002, the
December 2002 liquidation of the Company's 75% owned subsidiary Border BioFuels
Ltd. ("BBL") and the commencement of construction of the Company's 100tpd
commercial demonstration plant during 2003. The liquidation of BBL is described
in Item 8(b), and included in the Company's consolidated financial statements as
Discontinued Operations. The Company is now solely focused on BioOil related
activities.
4
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 FUTURE
LOSSES
We have had limited revenues to date and have not shown a profit since
inception. The Company had a net loss of $4,984,681 for the year ended December
31, 2003 as well as a net loss of $5,261,607 for the year ended December 31,
2002. 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 2004. 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.
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.
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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 TECHNOLOGY HAS NOT YET BEEN COMMERCIALIZED
To date, our technology has been tested only at a pre-commercial scale. Full
commercialization may expose operational flaws and unanticipated costs that may
inhibit market acceptance.
OUR MARKET IS VERY COMPETITIVE
The markets for our products and technologies are traditionally highly
competitive, and other providers of products and technologies have various
advantages and disadvantages 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. Most
competitors also have substantially greater access to capital and technical
resources than we do and may therefore have a significant competitive advantage.
Our primary technologies face market acceptance barriers that do not affect
already established technologies. To date, our primary technologies and products
have gained only limited market acceptance and have generated no 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
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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 Chief
Technology Officer. 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.
RISKS RELATED TO OUR COMMON SHARES
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 MAY 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.
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.
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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 biomass-to-liquid fuel conversion, a process known as "Fast
Pyrolysis". Its principal business is the development and commercialisation of
its renewable energy process called BioThermTM, which is a fast pyrolysis
process that produces liquid BioOil fuel from biomass or biomass waste
feedstocks. BioOil is a clean, renewable fuel which can replace natural gas,
diesel and other fossil fuels to produce power, mechanical energy and heat in
industrial boilers, fuel gas turbines and fuel reciprocating engines. The
Company aims to unleash significant amounts of energy production, in the form of
BioOil fuels, based upon utilization of abundant 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. Information for the total revenues by
category of activity and geographic market for each of the last three years is
detailed in Note 16 to the Consolidated Financial Statements.
DynaMotive is attempting to establish its patented technology as the industry
standard for the production of liquid biomass based fuels, 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 no emissions or waste
byproducts.
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 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, 2003, the Company had six wholly-owned subsidiaries:
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), and DynaMotive Canada, Inc.
(incorporated in Canada in November 2000), the West Lorne BioOil Co- Generation
Limited Partnership formed under the laws of Ontario, DynaMotive ElectroChem
Corporation (incorporated in the Province of British Columbia in 1993),
DynaMillTM Systems Limited (incorporated in the Province of British Columbia in
1996) and DynaMotive Puerto Rico, Inc. (incorporated in Puerto Rico in 1997).
The latter three are currently inactive and the Company's wholly-owned
subsidiary, DynaMotive Europe Ltd., purchased 75% of the shares of Border
Biofuels Ltd. (BBL), a United Kingdom company, in April, 2001. In 2002, BBL
became insolvent and the Company now treats it as a discontinued operation.
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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 105 - 1700 West 75th
Avenue, Vancouver, British Columbia, Canada V6P 6G2 (Telephone: 604-267- 6000).
B. Business Overview
Financial information concerning the Company's industry segments is summarized
in Note 16 to the Consolidated Financial Statements. 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").
DynaMotive's primary focus is to commercialize its patented BioOil production
technology and establish this technology as the worldwide industry standard for
production of BioOil as a clean, renewable fuel utilizing biomass feedstocks. To
support this goal, the Company plans over the next year to develop full
commercial scale BioOil production facilities in conjunction with its alliance
partners and then expand upon its existing marketing efforts to generate new
licensee's throughout Canada, Europe, the USA, Asia and Latin America.
The Company is currently commercializing its BioTherm biomass-to-energy
technology that converts low or zero cost forest and agricultural biomass wastes
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 April 2002, the Company completed the sale of the operating assets of
DynaPower, its metal cleaning subsidiary to former employees to focus
exclusively in the bioenergy field and in the development of BioOil and
derivative products. The Company retains ownership in all of DynaPower's
intellectual property and expects to receive on-going royalties from its
patents. DynaPower produces industrial metal cleaning systems that eliminate the
need for toxic chemicals traditionally used by the wire manufacturing industry
to clean their products. DynaPower systems have been sold in North and South
America, Europe and Asia
I. CORE TECHNOLOGIES
The Company develops and markets the BioThermTM process which efficiently
converts forest and agricultural biomass waste into BioOil, char and non-
condensable gases. There is zero waste from the process. 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 BioThermTM process and provide the
majority of the energy required for the process. DynaMotive aims to position its
technology as the worldwide industry standard for the production of BioOil
clean, renewable fuel.
The Company has demonstrated a high level of success from its BioThermTM and
BioOil commercialisation program in recent years. DynaMotive has six phases to
its commercialisation program as shown below:
Phase 1: Bench scale, "proof of concept" was completed by Resource Transforms
International, Ltd. (RTI) in 1996. DynaMotive licensed the BioThermTM 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."
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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 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 BioTherm technology and to
evaluate and quantify the potential for improvements to the efficiency of the
BioTherm technology. This work has been on going since and resulted in
confirmation of the basic BioTherm designs and process efficiencies, development
of process designs and equipment specification and design details that are being
incorporated into the current BioTherm plant designs.
Phase 4: DynaMotive completed commissioning of a new 10 tpd pilot plant in March
2001. The plant has been built to industrial specifications complete with a
state-of-the-art distributed control system (DCS). The plant has a production
capacity of 6,000 litres of BioOil per day. In January 2003, DynaMotive
completed its pilot plant program having confirmed the technology's scalability
and reliability as well as the capacity to replicate the technology enhancements
achieved. The plant has exceeded design parameters operating on a continuous
basis at 50% above its nominal design capacity. The Company also announced full
focus of its resources to the construction of a 100 tpd commercial plant in
Canada.
Phase 5: Following successful operation of the 10 tpd pilot, DynaMotive has
begun construction of a 100 tpd commercial demonstration plant, with
commissioning expected in Q3 2004. This plant will use the same design, and will
process wood residues to demonstrate continuous 24-hour production at commercial
scale. 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 BioThermTM/BioOil project developments as part
of the Company's final commercialization phase.
Phases 6/7: On completion of the field demonstration stage, DynaMotive and
partners plan to develop multiple commercial plants at the 100-400 tpd scale.
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
BioThermTM technology.
BioOil can also be used as the basis for a range of derivative products
including, but not limited to, blended fuels for transportation, slow release
fertilizers and specialty chemicals. The Company continues to pursue its
strategy to secure industrial partners to develop commercial products from
BioOil derivatives, based upon prototypes developed by DynaMotive allowing the
Company to leverage its resources.
By virtue of being derived from biomass waste, 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
diesel fuel, therefore having significant environmental advantages over fossil
fuels with respect to atmospheric pollution.
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1) BIOOIL PRODUCTION PROCESS
BioOil is produced using a patented fast pyrolysis process trade named
BioThermTM that converts forest and agricultural biomass wastes 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 BioThermTM 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.
In the BioThermTM reactor, biomass waste materials are rapidly heated in the
absence of oxygen. The rapidly vaporized volatiles are then quickly condensed,
forming a liquid fuel referred to as BioOil, solid char and non- condensable
gases. Depending upon the feedstock used (many different sources of feedstock
have been bench tested thus far), the process typically produces 60-75 tons of
BioOil, 15-25 tons of char and approximately 15 tons of non- condensable gases
from 100 tons of biomass waste. The Company believes that the overall simplicity
of the BioThermTM 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
BioThermTM 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,
BioThermTM reactor, cyclone, and instrumentation and control systems to provide
increased stable operation. Once these changes were made, the BioThermTM 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 system. The Company adopted this design
policy in order to facilitate easy scale-up to commercial plant capacities.
In January 2003, the Company announced that it successfully completed its pilot
plant program confirming the technology's scalability and reliability as well as
the capacity to replicate the technology enhancements achieved. As a result, the
Company closed its test facilities and consolidated its operations at its
corporate headquarters in Vancouver. In 2003, the Company focused its resources
on construction of a 100 tpd commercial plant in West Lorne, Ontario and entered
into agreements for the development and construction of the 100tpd pyrolysis
reactor for the plant and completed engineering review of the design with UMA
Engineering Ltd.
2) BIOOIL COMMERCIAL DEMONSTRATIONS, APPLICATIONS AND MARKETS
During 2003, the Company began development of its first 100 tpd plant in
Ontario, Canada that will be hosted at Erie Flooring and Wood Products
facilities. The integrated plant is to utilize wood residue from Erie flooring's
operations and will be comprised of wood conditioning equipment, pyrolysis plant
11
and power island. Pyrolysis and generation equipment are to be provided by
DynaMotive and Magellan Aerospace, Orenda division (Orenda) espectively. Erie
Flooring is to provide wood residue for the project and will receive electricity
and process heat for its operations. The project is expected to export green
power to Ontario's grid system beginning in Q3, 2004. The project is expected to
be operating cash flow positive in 2005 and to prove the commercial viability of
the technology.
In June 2003, the Company announced that it 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 C$5,000,000 (US$ 3.8 million) 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"). If the
Company sells the project or otherwise dispose during the Contract Period of
assets financed by the SDTC funding, SDTC may have a claim on a portion of the
proceeds proportionate to their percentage contribution to the asset.
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 pre-commissioned on BioOil in March 2004 and is being readied for
shipment to the Erie Flooring site. Orenda has also identified further
commercial demonstration 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 in 2003.
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. Cosan and DynaMotive
have tested bagasse and optimized technical 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
12
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. Canada's wood waste alone could potentially be converted to 15
million barrels of BioOil per year and represents a significant source of raw
materials for DynaMotive.
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 upporting
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. Char is a
granular solid with properties similar to coal. At 23 - 25 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.
In 2003, 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 expected to continue in 2004.
13
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 also 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 C$5,000,000 (US$ 3.8 million) 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"). If the
Company sells the project or otherwise dispose during the Contract Period of
assets financed by the SDTC funding, SDTC may have a claim on a portion of the
proceeds.
In 2002 and 2003, the Company entered into amendments to its Research and
Development Contribution agreement with the Government of Canada through
Technology Partnerships Canada (TPC). The agreement confirms a maximum
reimbursement cap of C$8.235 million (US$6.3 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 BioThermTM 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, 2003, has drawn US$2.8 million
to fund pre-commercial BioThermTM 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$12.4 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.
In 2002, the Company announced that the US Department of Energy awarded
US$250,000 to a consortium including the Company to determine the technical and
commercial viability of integrated pyrolysis / combined cycle biomass power
systems (IPCC).
DynaMotive's US subsidiary, its R&D partner RTI, Alliant Energy Corporation and
partner experts in power plant design, electric utility operation and biomass
energy conducted the program. The IPCC concept combines a biomass pyrolysis
plant with a conventional combined cycle power plant. In this system, solid
biomass is converted into a liquid biooil that is a mixture of oxygenated
hydrocarbons and water. This liquid serves as fuel for a gas turbine topping
cycle. Waste heat from the gas turbine provides thermal energy to a steam
turbine bottoming cycle.
The proposed cycle could be commercially offered in the near term with minimal
research and development needs. In contrast, implementation of the value-added
products design will require the development of new technologies and will entail
some technological risk.
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
14
foreign sources. Historically, lead-time for delivery of materials has not been
a problem.
While the Company has intentionally 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 materials
necessary to its business.
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
The Company may be subject to material federal, provincial, state or foreign
environmental laws. If full commercial use of BioOil in power generation, heat
and other applications commences, the Company believes that it may 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 fully comply in all
material aspects with all such laws and regulations to the extent that they be
deemed applicable to the Company's product with only limited resources expected
to be required by the Company in so complying.
The Company believes that the environmental regulations currently imposed upon
the targeted consumers of the Company's primary technologies are likely to be
maintained if not expanded upon for the foreseeable future. The Company believes
that the imposition of such regulations upon these targeted customers will
provide significant assistance to the Company's ability to sell its products.
Any stringent environmental protection laws enacted in an area in which a
targeted customer is located could further enhance the Company's ability to
attract customers to use these products.
15
C. Organizational Structure
(Please refer to the attached organization chart)
As of December 31, 2003, the Company had six wholly-owned subsidiaries plus 100%
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), DynaMotive
ElectroChem Corporation (incorporated in the Province of British Columbia in
1993), DynaMillTM Systems Limited (incorporated in the Province of British
Columbia in 1996), DynaMotive Puerto Rico, Inc. (incorporated in Puerto Rico in
1997) and the West Lorne BioOil Co-Generation Limited Partnership (the "Limited
Partnership") which was formed in Ontario, Canada in September 2003. The latter
three corporations are currently inactive. DynaMotive Canada Inc. acts as the
General Partner of the Limited Partnership, which will develop and operate the
Erie Flooring Project. In April 2001, DynaMotive Europe Ltd., purchased 75% of
the shares of Border Biofuels Ltd. (BBL), a United Kingdom company. In December
2002, BBL was placed into liquidation and the Company now accounts for it as a
discontinued operation (see note 4 of the Company's audited financial
statements).
D. Property, Plants and Equipment.
The Company's office facilities are leased. The Company's corporate headquarters
are located in a business park complex in Vancouver, BC, Canada with
approximately 4,400 square feet of office space. In February 2004, the Company
entered into a five-year lease for approximately 8,000 square feet at he same
address.
Since December 2002, the Company's 10 tpd pilot plant has been in storage and is
intended for use to demonstrate the feasibility of new biomass waste streams.
In addition to furniture and computer equipment, the majority of the Company's
capital assets consist of capital assets under construction for the Erie
Flooring Project, initial amounts paid for the second 100 tpd plant and test
equipment (10 tpd pilot plant).
16
Item 5. Operating and Financial Review and Prospects
THE FOREGOING DISCUSSION IN "OPERATING AND FINANCIAL REVIEW AND PROSPECTS"
CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING, AMONG OTHER THINGS, FUTURE
ENERGY PRICES, THE AMOUNT OF SAVINGS DUE TO THE COMPANY'S COST CUTTING PROGRAM
AND THE LEVEL OF FUTURE CAPITAL EXPENDITURES. THESE STATEMENTS REFLECT
MANAGEMENT'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL
PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON MANY ASSUMPTIONS AND
FACTORS INCLUDING COMPETITIVE PRICING FOR PRODUCTS, COMMODITY PRICES, ECONOMIC
CONDITIONS IN COUNTRIES WHERE THE COMPANY DOES BUSINESS, THE EFFECTS OF CURRENCY
FLUCTUATIONS AND THE EFFECTS OF GOVERNMENT REGULATIONS. ANY CHANGES IN SUCH
ASSUMPTIONS OR FACTORS COULD PRODUCE SIGNIFICANTLY DIFFERENT RESULTS.
OVERVIEW
This section should be read in conjunction with the Company's financial
statements included under Item 17 of this Form 20-F.
In 2003, DynaMotive continued its research and development activities related to
its BioTherm 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
For the years 2003, 2002 and 2001, the Company had expended on an annual basis
$969,419, $453,710 and $677,482 respectively, on research and development. Of
these amounts, $456,438, $288,445 and $60,667 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
increased in the current year in support of development of the commercial
demonstration plant and other product development activities. Future research
and development expenditures are expected to be at a similar or increased 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 2002 and technical and project related
expenditures in 2003. The Company's agreement with Technology Partnerships
Canada pertains to maximum funding of C$8.235 million (US$6.3 million), of which
C$3.88 million (US$ 2.9 million) has been received as of year end 2003.
General and administrative salaries and benefits increased to $2,693,430 in 2003
from $1,483,443 in 2002. The increase in 2003 was mainly due to the higher
market price of the company's stock resulting in higher recorded stock based
compensation expenses. General and administrative salaries and benefits
increased to $1,483,443 in 2002 from $1,461,553 in 2001. The increase in 2002
was mainly due to employing more internal consultants.
Professional fees increased to $954,223 (comprised of legal & accounting and
audit fees of $297,349 and consulting fees of $656,874) in 2003 from $861,199
(comprised of legal & accounting and audit fees of $322,876 and consulting fees
of $538,323) in 2002. The increase was due mainly to the higher market price of
the company's stock resulting in higher recorded stock based compensation
17
expenses. Professional fees decreased to $861,199 (comprised of legal &
accounting and audit fees of $322,876 and consulting fees of $538,323) in 2002
from $1,970,843 (comprised of legal & accounting and audit fees of $378,379 and
consulting fees of $1,592,464) in 2001. The decrease was due mainly to a
reduction in consultants replaced with permanent staff and the non-renewal of
certain consulting agreements.
Amortization and depreciation decreased to $125,580 in 2003 from $313,474 in
2002 due to the write-down of assets in 2002. Amortization and depreciation
decreased to $313,474 in 2002 from $404,495 in 2001 due to the write-down of
assets in the Biolime unit.
Interest and other income increased to $73,974 in 2003 from $982 in 2002 due
mainly to increase of miscellaneous revenue in 2003. Interest and other income
decreased to $982 in 2002 from $18,405 in 2001 due to reduced cash resources and
related investments.
Interest expense increased in 2003 to $320,643 from $123,013 in 2002 due mainly
to the increase in total liabilities and interest accretion on convertible loan.
Interest expense increased in 2002 to $123,013 from $26,080 in 2001 due mainly
to the interest accretion from the convertible loan.
Marketing expense decreased to $155,914 in 2003 from $183,294 in 2002 due to a
reduction in the use of external assistance. Marketing expense decreased to
$183,294 in 2002 from $670,415 in 2001 due to a reduction of personnel,
including consulting assistance, to carry out market research and development of
markets for products from the BioOil process.
Office supplies, telephone and insurance increased to $300,751 in 2003 from
$230,808 in 2002 due to the increase of insurance costs. Office supplies,
telephone and insurance decreased to $230,808 in 2002 from $371,663 in 2001 due
to the reduction of staff.
Rent for leased premises decreased to $109,653 in 2003 from $515,446 in 2002 due
to the elimination of the pilot plant space and U.K. lease. Rent for leased
premises increased to $515,446 in 2002 from $351,738 in 2001 due to the full
year's rent for the office in London, U.K.
Currency exchange gain in 2003 amounted to $177,551 compared to a gain of
$80,461 in 2002 due to the depreciation of the US Dollar. Currency exchange ain
in 2002 amounted to $80,461 compared to a gain of $6,313 in 2001 due to the
currency exchange on the European operations.
Loss on the write-down of long-term assets was decreased to $nil in 2003 from
$872,114 in 2002. No write-down occurred in 2003. Loss on the write-down of
long-term assets was increased to $872,114 in 2002 from $585,078 in 2001. In
2002, DynaMill assets in the amount of $46,944 and Wire Die Cleaning assets in
the amount of $31,303 were written off because the Company is focused on the
application of BioOil for energy. The Company wrote-off its 2 TPD pilot plant of
$159,096 as it completed its testing. Amounts related to the10 TPD pilot plant
assets totaling $237,913 were partially written-down, as the Company intends to
keep the 10 TPD plant for testing and market development purposes. The 50 TPD UK
pilot plant development assets of $212,749 were written-off due to the Company
focusing on the 100 demo plant in Canada. Other assets of $65,377 were written
off. Patents for DynaPower of $118,732 were written-down.
Overall capital expenditures, net of government grants and disposal, used for
developing and patenting the Company's technologies increased to $1,502,100 in
2003 from $183,473 in 2002. Capital expenditures for the BioThermTM technology
increased to $1,497,398 in 2003 from $182,637 in 2002. The increase in the
BioThermTM capital expenditures in 2003 was due to commencement of the 100 tpd
industrial demonstration plant in Ontario, Canada and initial payments on the
second 100 tpd plant to be constructed at a Canadian forestry site.
18
Overall capital expenditures, net of government grants and disposal, used for
developing and patenting the Company's technologies decreased to $183,473 in
2002 from $607,649 in 2001. Capital expenditures for the BioThermTM technology
decreased to $182,637 in 2002 from $543,980 in 2001. The decrease in the
BioThermTM capital expenditures was due to the commissioning of the 10 tpd
demonstration plant in 2001, followed by only limited capital expenditures being
required during 2002. Capital expenditures for its BioOil Power Generation unit
were $182,637 in 2002 related to the design and development of a 100 tpd BioOil
Demo Plant.
The Company's total assets increased to $3,759,605 at the end of 2003 from
$1,285,813 at the end of 2002, due mainly to the building of 100 tpd industrial
demo plants. Capital assets increased to $2,293,422 in 2003 from $750,409 in
2002 due to the building of 100 tpd industrial demo plants. Current Liabilities
increased to $2,035,168 at the end of 2003 from $1,957,625 at the end of 2002
due almost entirely to a increase in accounts payable and accrued liabilities of
the 100 tpd industrial demo plants. There were no long-term liabilities at the
end of 2003 and 2002.
During the year ended December 31, 2003, the Company recorded a net operating
loss of $4,984,681, compared to a net operating loss of $5,261,607 for the year
2002. The decrease in operating loss in 2003 as compared to 2002 was primarily
attributable to (i) a decrease in amortization and depreciation, (ii) a decrease
in rent, (iii) a decrease in loss on write-down long-term assets, and (iv) a
decrease in loss from discontinued operations. The net operating loss in 2003
reflected professional fees totaling $954,223, the majority of which, $592,385
was non-cash amounts paid in shares. The non-cash rofessional fees in 2002 were
$546,286. During the year ended December 31, 2002, the Company recorded a net
operating loss of $5,261,607, compared to a net operating loss of $6,838,264 for
the year 2001. The decrease in operating loss in 2002 as compared to 2001 was
primarily attributable to (i) a decrease in marketing expense, (ii) a decrease
in professional fees, (iii) a decrease in research & development expense, and
(iv) a decrease in Capital Tax expense.
The basic and diluted loss per common share decreased to nine cents ($0.09) for
the year 2003 from twelve cents ($0.12) for the year 2002. The loss per common
share for the year 2001 was nineteen cents ($0.19). The decrease in basic and
diluted loss per share for 2003 and 2002 was due to both the decrease in the
loss for each year and the increase in the weighted average number of Common
Shares outstanding from 36,458,969 shares in 2001 to in 45,104,978 in 2002 and
56,617,490 in 2003.
B. LIQUIDITY AND CAPITAL RESOURCES
Principal sources of liquidity during the year ended December 31, 2003 were (i)
$2,321,852 in net proceeds ($2,413,473 gross) after deducting related ssue costs
and expenses from private placement offerings of the Company's Common Shares and
the exercise of Common Share options for cash, (ii) $1,476,012 in deposits for
Common Shares to be issued in 2004 pursuant to private placement offerings
commenced in 2003, and (iii) $154,488 in project deposit received.
For the previous year ended December 31, 2002 were (i) $1,545,400 in net
proceeds ($1,546,669 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) $352,376 in deposits for Common Shares to
be issued in 2003 pursuant to private placement offerings commenced in 2003 and
(iii) convertible loans from the existing shareholders in the amount of
$263,416, and (iv) $196,596 from a short-term bank indebtedness. For the
previous year ended December 31, 2001, the principal sources of liquidity were
19
(i) $1,995,094 in net proceeds ($2,012,273 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) $479,026 in
deposits for Common Shares to be issued in 2002 pursuant to private placement
offerings commenced in 2002 and (iii) $39,999 from a short-term bank
indebtedness.
Overall cash flows increased during 2003 as the Company raised more in equity
offerings than during 2002. During the year ended December 31, 2003, the Company
used cash in operating activities and in investing activities of $2,742,215 and
$530,209 respectively, and generated cash from financing activities of
$3,793,813.
During the previous year ended December 31, 2002, the Company used cash in
operating activities and in investing activities of $2,347,796 and $64,902
respectively, and generated cash from financing activities of $2,357,788. During
the year ended December 31, 2001, the Company used cash in operating activities
and in investing activities of $2,854,237 and $672,105 respectively, and
generated cash from financing activities of $2,514,119.
The net amount of cash used in operating activities during 2003 increased by 17%
of cash used in operating activities during 2002. Cash generated in operating
activities consisted primarily of a net loss for 2003 of $4,984,681 that was
offset by (i) amortization of non-cash items in the sum of $125,580, (ii)
non-cash equity compensation expenses, $2,427,857, (iii) accretion of interest
on convertible debt of $239,245 and (iv) net change in non-cash working capital
balances related to operations of $372,665.
The net amount of cash used in operating activities during 2002 decreased 17%
from 2001. Cash used in operating activities consisted primarily of a net loss
for 2002 of $5,261,607 that was significantly offset by (i) amortization of
non-cash items in the sum of $313,474, (ii) non-cash equity compensation
expenses, $1,326,010, (iii) write down of capital assets of $872,114, and (iv)
net change in non-cash working capital balances related to operations of
$451,059.
Financing activities during 2003 generated a net increase in cash of $3,793,813,
primarily from the Company's private placements of Common Shares. Financing
activities during 2002 generated a net increase in cash of $2,357,788, primarily
from the Company's private placements of Common Shares. Financing activities in
2001 generated a net cash increase of $2,514,119, primarily from the Company's
private placements of Common Shares.
Investing activities in 2003 resulted in use of cash, net of grants 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 other long-term assets. Investing activities in 2002 resulted in
use of cash, net of grants and disposal, in the amount of $64,902 that consisted
of $70,071 was incurred in the acquisition of capital assets, $7,946 was
expended on patents and offset by proceeds of $13,115 on the sale of equipment.
Investing activities in 2001 resulted in use of cash, net of grants and
disposal, in the amount of $672,105 that consisted of $576,460 was incurred in
the acquisition of capital assets, $70,243 was incurred in the acquisition of
BBL, $31,189 was expended on patents and offset by proceeds of $5,787 on the
sale of equipment.
During the first quarter of 2003, the Company commenced a private placement
financing of up to $2 million and raised a total of $2.1 million, including
$1.76 million in cash and cancellation of $390,006 in consulting fees payable by
the Company at share prices ranging from $.15 to $.40 for a total of 11.5
million Common Shares issued, including 5.75 million three-year warrants to
purchase the Company's Common Share at prices ranging from $.25 to $.67 per
share.
During the third quarter of 2003, the Company commenced a private placement
financing of up to $2 million and raised a total of $2 million during the first
tranche, including $1.66 million in cash and cancellation of $354,537 in
consulting fees payable by the Company at share prices ranging from $.19 to $.40
for a total of 5,858,769 Common Shares issued, including 2,981,688 three-year
warrants to purchase the Company's Common Share at prices ranging from $.32 to
20
$.67 per share. Subscribed into the placement for a total of $101,537 were
finder's fees (included in the $354,537 consulting fees amount) relating to the
funding commenced during the first quarter for a total of 534,376 Common Shares
and 169,492 Common share purchase warrants issued.
Subsequent to year-end, the Board approved to increase the funding from $2
million to $4 million to further assist the Company in the completion of its
first commercial plant. As a result, the Company received subscription funds of
$1.6 million relating to the second tranche of the private placement commenced
during the third quarter including $1.3 million in cash and cancellation of
$288,637 in consulting fees payable by the Company at subscription prices
ranging from $.40 to $.485 per share. 3.7 million shares and 1.8 million Common
Share Purchase Warrants remain to be issued as a result of this funding.
In total, the Company raised during the year an aggregate of $4,169,941,
including $3,425,398 in cash which includes $744,543 in consulting fees payable
by the Company for a total of 17,359,166 Common Shares and 8,731,886 Common
Share Purchase Warrants.
With the current cash on hand and anticipated sales revenue, the Company
anticipates that it will require additional funding for its continued operations
and the commercialization of its BioThermTM technologies through the year 2004.
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 Company's 2004 financing plan is structured to enable construction of the
Company's first commercial scale BioOil Demonstration 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 to contemplated equity offerings, the Company expects to be able to
draw significantly from government grant and loan facilities, including the
Government of Canada's Technology Partnerships program and from the approved
SDTC funding towards the Erie Flooring Project. The Company expects to draw in
2004 a significant portion of the remaining in the TPC project funding.
In connection with the Company's West Lorne project, the Company is committed to
outstanding construction commitments of approximately $3.3 million and the
project expects to complete in summer of 2004.
The Company's funding plan for 2004 is structured so that equity placements
explained above will maintain the operations for the next twelve months.
Additionally, the Company contemplates a private placement and project finance
strategy which, with government contributions and other project funding, are
expected to fund the commercial demonstration projects which are expected to be
constructed and commissioned during Q3, 2004. Any delay in securing project
funding for a project will delay the construction and commissioning of that
project.
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 to make estimates and assumptions that affect the
21
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 of capital assets is deducted from
the cost of the related capital assets.
Investment tax credits are accounted for under the cost reduction method whereby
they are netted against the expense or capital asset to which they relate.
Investment tax credits are recorded when the Company has incurred the qualifying
expenditures and there is reasonable assurance the tax credits will be realized.
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 more frequently as circumstances require, the Company performs
periodic 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
22
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 9 of the consolidated financial statements. 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 intrinsic method when fixed or performance based stock options are
granted to employees and directors. Compensation is recognized using the
intrinsic method for SA Rights when the performance criteria has been met and
the SA Rights are vested.
The Company has a compensation arrangement with several officers of the Company
whereby the officers receive a fixed number of common shares per month. The
Company records compensation expense monthly based on the month- end quoted
market price of the Company's stock.
In addition, the Company has entered into compensation arrangements, which
entitle non-employees to specific amounts, which can only be settled by applying
the amounts to exercise outstanding options to purchase common shares monthly
over a period of up to twelve months. The Company recognizes compensation
expense based on the fair value of the common stock issuable under the
arrangement, when related services are performed. The common shares issuable
under these arrangements are generally issued in the quarter following the
period in which they are earned.
The Company may also issue stock options, and warrants as consideration for
services rendered by non-employees. Such equity awards are recorded at their
fair value, as compensation expense or capitalized to capital 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.
If shares or stock options are repurchased, the excess of the consideration paid
over the carrying value of the shares or stock options cancelled is charged to
contributed surplus or deficit.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENCES, ETC.
The Company considers patents to be an important aspect of the Company's
business. The Company aggressively protects its intellectual property such as
rademarks, patents, product designs, manufacturing processes and new product
research and concepts. These rights are protected through the development and
acquisition of utility and design patents and trademark registrations, the
maintenance of trade secrets and, when necessary and appropriate, litigation
against those who, in the Company's opinion, are competing unfairly with the
Company. 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 December 31, 2003, the Company has active inventions protected by patents
issued and patents pending via in-house development or license. The Company's
key U.S. patents are scheduled to expire in year 2016.
The key BioTherm patents expire in years 2016 and 2017 in all jurisdictions
except India where they expire in 2010.
Research costs are expensed in the year incurred. Development costs are expensed
in the year incurred unless the Company believes the development project meets
23
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 BioTherm 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 effect the
commercial viability and attractiveness of BioOil. Early technical development
and market acceptance of BioOil is significantly effected by the availability of
ongoing governmental financial support for the alternative energy industry in
general and for the Company's BioTherm process in particular.
E. OFF-BALANCE SHEET ARRANGEMENTS
Nil
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table provides as of December 31, 2003 the known long term
obligations and commitments of the Company:
- -----------------------------------------------------------------------------------------
Contractual Obligations Total Less than 1 - 3 3 - 5 More than
1 year years years years
- -----------------------------------------------------------------------------------------
Operating lease obligations -
Office equipment 6,246 6,246 Nil Nil Nil
- -----------------------------------------------------------------------------------------
Premise lease obligations -
Head office 647,177 81,125 241,280 275,833 48,939
- -----------------------------------------------------------------------------------------
Total 653,423 87,371 241,280 275,833 48,939
- -----------------------------------------------------------------------------------------
We have operating lease for office facilities of our head office and office
equipment.
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
24
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
As at March 31, 2004, the Company's directors and executive officers are:
Name Age Position
Richard Chen-Hsing Lin (2)(3) 60 Chairman, Vice President, Asian
Affairs and Director
R. Andrew Kingston (3) 44 President, Chief Executive Officer
And Director
Curtin Winsor, Jr., Ph.D. (1)(2) 65 Director
Desmond Radlein, Ph.D. (1)(2)(3) 56 Director
Shing-Cheng Hong (1) 71 Director
Chih-Lin Chu 37 Director
Brian Richardson 41 Chief Financial Officer
Luc Duchesne, Ph.D. 43 Chief Forester
Warren Johnson 44 Chief Technology Officer
Laura Santos 54 Corporate Secretary
(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 elected 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
25
director or executive officer is selected. There are no family relationships
between any director or executive officers.
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
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
26
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
General Manager for Business Development at China Strategic Holdings Limited
(CSH) since March 2000. CSH is a public company listed on the Hong Kong
Exchange with investments in energy, tire manufacturing, breweries, paper,
pharmaceuticals and other light and heavy industries including power plants,
diesel engine manufacturing, cement, chemical plants, electrical machinery
and 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 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, CA. 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.
Luc Duchesne Ph.D. Dr. Duchesne was appointed Chief Forester of the Company in
August 2003. He is a 13-year veteran research scientist on bioproducts and
non-timber forest products with Natural Resources Canada at the Great Lakes
Forestry Center in Sault Ste Marie, Ontario. He is one of Canada's leading
authorities in Non-timber Forest Products and has been instrumental in
mainstreaming this industry. Dr. Duchesne is widely published in a broad range
of disciplines; he is the author or co-author of 85 book chapters and scientific
articles, and has presented over 150 lectures in symposia, international and
national meetings. He is an associate editor at of The Forestry Chronicle and of
Soil, Water and Air Pollution and has taught in 7 Universities at the
undergraduate and graduate levels. Dr. Duchesne graduated in 1983 with a BSc in
Forest Ecology, Laval University; MSc in Forest Pathology, University of Toronto
in 1985 and Ph.D. in Botany, University of Guelph in 1988.
Warren Johnson, P.Eng. Mr. Warren Johnson was appointed Chief Technology
Officer in September 2001. Mr. Johnson leads the BioOil design engineering
and construction group. Before joining the Company, he worked for 18 years in
the domestic and international chemical, pulp and paper and environmental
industries in process design, design and construction management, new
technology development and commercialization, start-up, operations and
safety. His recent responsibility included technology development and
commercialization as VP, Engineering at Conor Pacific Environmental Technologies
27
Inc. He is a Professional Engineer and holds a B.Sc. from the University of
Alberta.
Laura Santos. Mrs. Santos has been Secretary of the Company since March 1998,
Assistant Secretary and Executive Assistant since 1994. Prior to joining the
Company, she was Accounting Supervisor with Everex Systems from 1990 to 1993;
Senior Accounting Clerk 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.
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, 2003*:
Long-term Long-term
Incentive Incentive
Name Salary Bonus Plan Plan
($) ($) ($) ($)
- -----------------------------------------------------------------------
Richard Chen-Hsing Lin 160,600** 6,692 - -
Robert Andrew Kingston 233,413 9,702 - -
Curtin Winsor, Jr., PhD 1,652** - - -
Shing-Cheng Hong 457** - - -
Desmond Radlein 577** - - -
Chih-Lin Chu - - - -
Brian Richardson 77,268 4,461 - -
Luc Duchesne 44,612 4,461 - -
Warren Johnson 107,066 4,461 - -
Laura Santos 60,670 2,528 - -
- -----------------------------------------------------------------------
*Except as otherwise noted, all compensation are disclosed in U.S. dollars based
upon 2003's average exchange rate of $0.7138 per dollar.
**Salary includes both cash and share compensation. Please refer to Item 7-B for
details of Mr. Lin's compensation.
The following table lists stock options outstanding at December 31, 2003 to
purchase common shares of the Company for directors and senior management:
Number of Exercise Expiry Date
Name Shares Price
- --------------------------------------------------------------------------------
Richard Chen Hsing Lin 56,000 $1.00 18-Jan-04 to 22-Dec-04
Richard Chen Hsing Lin 750,000 $0.50 2-Feb-05 to 28-Apr-06
Richard Chen Hsing Lin 300,000 $0.23 30-Aug-06
Richard Chen Hsing Lin 176,929 $0.20 30-Aug-05
Robert Andrew Kingston 775,000 $0.50 2-Feb-05 to 23-Feb-07
Robert Andrew Kingston 633,750 $0.20 30-Aug-05
28
Number of Exercise Expiry Date
Name Shares Price
- --------------------------------------------------------------------------------
Robert Andrew Kingston 300,000 $0.23 30-Aug-06
Robert Andrew Kingston 2,400,000 $0.22 30-Aug-06 to 22-Dec-06
Curtin Winsor, Jr., Ph.D 10,000 $1.00 3-Jun-04
Curtin Winsor, Jr., Ph.D 24,000 $0.90 9-Dec-06
Curtin Winsor, Jr., Ph.D 24,000 $0.33 22-Dec-08
Desmond Radlein, Ph.D 10,000 $1.00 12-Dec-04
Desmond Radlein, Ph.D 20,000 $0.90 9-Dec-06
Desmond Radlein, Ph.D 24,000 $0.33 22-Dec-08
Shing-Cheng Hong 10,000 $1.00 12-Dec-04
Shing-Cheng Hong 16,000 $0.90 9-Dec-06
Shing-Cheng Hong 16,000 $0.33 22-Dec-08
Chih-Lin Chu 16,000 $0.90 9-Dec-06
Chih-Lin Chu 16,000 $0.33 22-Dec-08
Luc Duchesne 100,000 $0.50 30-Aug-06
Brian Richardson 240,000 $0.23 06-May-06
Brian Richardson 100,000 $0.45 30-Aug-06
Warren Johnson 110,000 $1.00 31-Oct-04
Warren Johnson 150,000 $0.50 31-Mar-06 to 29-Apr-06
Warren Johnson 58,976 $0.20 30-Aug-05
Warren Johnson 200,000 $0.23 31-Mar-06
Laura Santos 80,000 $1.50 14-Jun-05 to 31-Jan-06
Laura Santos 10,000 $1.00 2-Feb-05
Laura Santos 15,000 $0.50 28-Apr-06
Laura Santos 100,000 $0.23 30-Aug-07
Laura Santos 33,4200 $0.20 30-Aug-05
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 Company 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.
29
The Company's Audit and Corporate Governance Committee, whose members include
Drs. Curtin Winsor, Jr. and Desmond Radlein and Mr. Shing-Cheng Hong, 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.
At the October 30, 2001 Board Meeting, the Board approved a new compensation
plan proposed by the Compensation Committee for non-management Board and
Committee members, retroactive to July 1, 2001, as follows: a) annual retainer
of 16,000, 8,000 and 4,000 stock options for Board members, Committee chairs and
Technical Advisory Committee members, respectively; the term of the stock
options is for five (5) years and priced on the day of respective Annual General
Meeting ("AGM") of Shareholders for the year, based on the lower of the price of
that day or the average of the five trading days prior to the AGM date; b) Board
and Committee meeting fees - C$300 per meeting under two (2) hours and C$1,200
per meeting over two (2) hours; Committee chairs are compensated 150% of the
above rates. The fees are payable in shares with the provision that the
recipient may elect to receive up to 30% in cash, and shares are priced based on
the last trading day of the respective quarter at the lower of the price on such
day or the previous five (5) day trading average. 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 March 31, 2004:
30
Periods during which Shares Owned and %
Has Served as a of Ownership
Director or Senior
Name Manager
- --------------------------------------------------------------------------------
Richard Chen-Hsing Lin(2)(3) Since 1992 1,906,168 Common
Chairman, Vice-President, Asian shares (4) 2.44%
Affairs and Director
- --------------------------------------------------------------------------------
Robert Andrew Kingston (3) Since 1999 830,853 Common
President, Chief Executive shares(5) 1.06%
Officer and Director
- --------------------------------------------------------------------------------
Curtin Winsor, Jr., Ph.D.(1) (2) Since 1996 248,557 Common
Director Shares 0.31%
- --------------------------------------------------------------------------------
Desmond Radlein, Ph.D.(1) (2)(3) Since 1997 44,563 Common
Director Shares 0.057%
- --------------------------------------------------------------------------------
Shing-Cheng Hong(1) Since 1997 40,836 Common
Director Shares 0.052%
- --------------------------------------------------------------------------------
Chih-Lin Chu Since 2001 nil
Director
- --------------------------------------------------------------------------------
Brian Richardson Since 2003 nil
Chief Financial Officer
- --------------------------------------------------------------------------------
Luc Duchesne, Ph.D Since 2003 nil
Chief Forester
- --------------------------------------------------------------------------------
Warren Johnson Since 2001 5,000 Common
Chief Technology Officer shares 0.006%
- --------------------------------------------------------------------------------
Laura Santos Since 1998 24,172 Common
Corporate Secretary Shares 0.031%
- --------------------------------------------------------------------------------
Notes:
(1) Member of the Audit and Corporate Governance Committee of the Board.
(2) Member of the Compensation Committee of the Board.
(3) Member of the Executive Committee of the Board.
(4) Includes 1,906,168 Common Shares, of which 1,733,256 Common Shares are
held by Cantai Property Limited, a company controlled by Mr. Lin of which
60,000 Common Shares are held in escrow subject to the Company's attainment
of certain performance criteria; also includes 172,912 Common Shares held by
Neoventi Technology Corporation over which Shares Mr. Lin has voting and
disposition powers.
(5) Includes 830,853 Common Shares held by Cape Fear Limited a UK company
whereby Mr. Kingston serves as a director.
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 3,100,149 shares which represent 3.97%
of the total issued and outstanding shares of the Company.
31
The Directors and Senior Management hold a total of 7,477,820 options. 5,265,820
options are exercisable between $0.20 and $0.33 each; 1,890,000 are exercisable
between $0.45 and $0.50 each; and 322,000 options are exercisable between $0.90
and $1.50 each. 7,155,820 unexercised options were in the money based on the
average trading price of $0.63 per Common share as listed on the OTC BB as at
March 31, 2004.
Percentage of class is calculated based on the outstanding common shares as at
March 31, 2004 of 77,917,558.
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 March 31, 2004, 943,690 options
were issuable under the Plan and 10,743,944 options were outstanding at exercise
prices ranging from $0.20 to $1.50 per common share.
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.
2003 2002 2001
- ---------------------------------------------------------------------------
Canada 16 17 25
US 1 2 2
UK 1 2 6
18 21 33
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 only 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) 24,092,824 30.9%.
Box 20
Bowling Green Station
New York, New York, 10274
The Canadian Depository for Securities 24,784,554 31.8%
Limited ("CDS")(1)
85 Richmond Street West
Toronto, Ontario M5H 2C9
32
(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 March
31, 2004 indicate 77,917,558 shares of common stock issued and outstanding as
follows:
Residence of Number of Holders Number of Shares(1) Percent
Shareholder
- ------------------------------------------------------------------------
Canada 93 31,130,976 39.95%
U.S.A. 211 24,351,775 31.25%
Other 117 22,434,807 28.80%
Total 421 77,917,558 100.00%
(1) Includes the total number of shares held by registered and beneficial
shareholders.
B. Related Party Transactions
Pursuant to a Consulting Agreement, commencing April 11, 2003 with Cape Fear
Limited ("CFL") until December 31, 2007, the Company pays a monthly fee of
$18,750 plus rate of inflation as published by Statistics Canada, to CFL for the
services of Mr. Kingston as President and Chief Executive Officer, plus
reimbursement of out-of-pocket expenses. For the year ended December 31, 2003,
the Company paid CFL a total of $233,413 in cash. As per consulting agreement,
Mr. Kingston can also earn a bonus of up to 50% of his base compensation if
certain milestones are achieved. In the event that CFL's contract is terminated
by the Company, the terms of the contract shall remain in force.
Pursuant to a Consulting Agreement, commencing July 1, 2003 until December 31,
2007 with Cantai Property Ltd. ("Cantai"), a company controlled by Mr. Lin, the
Company pays a monthly consulting fee of $13,384 to Cantai for the services of
Mr. Lin, plus reimbursement of out-of-pocket expenses. For the year ended
December 31, 2003, the Company paid Cantai a total of $160,600, $45,505 of this
amount was subscribed into the Company's private placement at $0.15 per share
including a half a warrant, expiring three years from issue to purchase the
Company's common share at $0.25 per share. Mr. Lin can also earn a bonus of up
to 50% of his base compensation if certain milestones are achieved. In the event
that Cantai's contract is terminated by the Company, the terms of the contract
shall remain in force.
Consulting fees and share issue costs of $1,002,085 for the year ended December
31, 2003 have been paid to a shareholder of the Company. Included in the amount
above, is $1,002,085 paid by stock based compensation.
As at December 31, 2003, $32,673 was advanced to Desmond Radlein, a Director of
the Company in connection with the formation of a joint venture for the
33
development of the Company's BioOil technology and related products. The joint
venture had not been formalized at December 31, 2003.
On June 3, 2003 the Company entered into a loan agreement with an officer of the
Company for $50,000. The loan bear interest at 2% per month and have a 12-month
term. The loan agreement also calls for the Company to issue 0.5 million
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.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
See Item 17 and 18 for the Company's Consolidated Financial Statements for the
year ended December 31, 2003.
B. Significant Changes
Operations
The Company focused its efforts during 2003 on development of its core BioTherm
technology and the development of its first commercial scale (100 tpd) BioOil
production facility to be located in Ontario, Canada. The Company completed the
sale of its DynaPower assets In April 2002 and in December the Company's UK
operations were scaled back following the liquidation of its 75% owned
subsidiary BBL. Accordingly, the results of operations of BBL for the current
and prior periods have been accounted for as discontinued operations
In Canada, the Company's R&D efforts with its 10 tpd pilot plant were completed
and all continuing efforts are now focused on development of the 100 tpd first
commercial plant. Opportunities in British Columbia continue to be pursued and
additional projects were investigated including promising opportunities in
Ontario and elsewhere.
Subsequent to year-end, the Company signed a Contribution Agreement with
Sustainable Development Technology Canada ("SDTC") that provides C$5 million
(US$3.75 million) of financial support for its Erie Flooring BioOil Co-
generation project based in Ontario, Canada. The project is being developed in
partnership with Orenda division of Magellan Aerospace, Ontario Power
Generation, UMA Engineering and Erie Flooring and Wood Products.
Financing Activities
The Company's financing efforts were successful to a limited degree 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.
34
Item 9. The Offer and Listing
DynaMotive Energy Systems Corporation's Common Shares is traded on the Over the
Counter Bulletin Board (OTC:BB) under the symbol DYMTF.OB. As at December 31,
2003, the closing market sales price on the OTC BB for the Company's Common
Share was $0.59 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
years ended; quarter ended the past three years and three months ended
subsequent to year ended 2003 as follows:
Year Ended High Low
- ---------- ---- ---
1999 1.88 0.25
2000 4.11 0.28
2001 1.69 0.49
2002 0.67 0.18
3003 0.79 0.14
Quarter Ended High Low
- ------------- ---- ---
June 30, 2002 0.50 0.27
September 30, 2002 0.41 0.26
December 31. 2002 0.67 0.18
March 31, 2003 0.22 0.14
June 30, 2003 0.70 0.15
September 30, 2003 0.79 0.36
December 31, 2003 0.64 0.31
March 31, 2004 0.80 0.51
Month Ended High Low
- ----------- ---- ---
November 2003 0.60 0.33
December 2003 0.64 0.57
January 2004 0.61 0.51
February 2004 0.58 0.54
March 2004 0.80 0.55
April 2004 0.67 0.57
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.
On June 10, 2003, the Company received a cease trade order from the British
Columbia Securities Commission for failure to file the Company's year-end
financial statements on time. On August 21, 2003, the cease trade order was
revoked by the Executive Director of the British Columbia Securities Commission
as a result of the Company's filing of the required 2003 financial report.
35
Item 10. Additional Information
A. Share capital
Not required.
B. Company Act Memorandum, Amendments and Articles of Incorporation
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.
Certain United States Federal Income Tax Consequences to United States
Holders
The Canada-U.S. Income Tax Convention (1980), as amended, provides that the
normal 25% withholding tax rate is reduced to 15% on dividends paid on shares of
a corporation resident in Canada to residents of the United States, and also
provides for a further reduction of this rate to 5% where the beneficial owner
of the dividends is a corporation which is a resident of the United States and
which owns at least 10% of the voting shares of the corporation paying the
dividend.
Passive Foreign Investment Company
36
For any taxable year of the Company, if 75% or more of the Company's gross
income is "passive income" (as defined in the Code) or if at least 50% of the
Company's assets, by average fair market value (or by adjusted income tax bases
if the Company elects), are assets that produce or are held for the production
of passive income, the Company will be a Passive Foreign Investment Company
("PFIC"). The Company may be a PFIC and, if so, may continue to be a PFIC for
the foreseeable future.
A U.S. Shareholder of a PFIC is subject to special U.S. federal income tax rules
in Sections 1291 to 1297 of the Code. As described below, these provisions set
forth two alternative tax regimes at the election of each such U.S. Shareholder,
depending upon whether the U.S. Shareholder elects to treat the Company as a
"qualified electing fund" (a "QEF Election").
1. The QEF Election Alternative
Each U.S. Shareholder is strongly urged to consider making a QEF Election
because of the potential benefits of such election that are discussed below and
because the Company anticipates that it will not have any earnings and profits
(as computed for United States federal income tax purposes) for the current
taxable year and little, if any, earnings and profits for any future taxable
year in which the Company is a PFIC. (There can be no assurance, however, that
this will be the case.) Accordingly, the timely making of the QEF election, as
discussed below, generally should, subject to the discussion below under "Other
PFIC Rules", avoid any significant adverse United States federal income tax
consequences resulting from any classification of the Company as a PFIC,
although this may depend on a particular U.S. Shareholder's particular
circumstances.
A U.S. Shareholder who elects in a timely manner to treat the Company as a QEF
(an "Electing U.S. Shareholder") will be subject, under Section 1293 of the
Code, to current federal income tax for any taxable year in which the Company is
a PFIC (or is treated as a PFIC with respect to the U.S. Shareholder) on such
Electing U.S. Shareholder's pro-rata share of the Company'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 to the Electing U.S.
Shareholder and (ii) "ordinary earnings" (the excess of earnings and profits
over net capital gain), which will be taxed as ordinary income to the Electing
U.S. Shareholder, in each case, for the shareholder's taxable year in which (or
with which) the Company's taxable year ends, regardless of whether such amounts
actually are distributed. An Electing U.S. Shareholder, however, would not take
into account any income with respect to any taxable year of the Company for
which it has no earnings and profits. Adjustments are provided generally to
prevent double taxation at the time of later distributions on or dispositions of
common shares.
The QEF election also allows the Electing U.S. Shareholder to (i) generally
treat any gain realized on the disposition of common shares (or deemed to be
realized on the pledge of such shareholder's common shares) as capital gain;
(ii) treat such shareholder's share of the Company's net capital gain, if any,
as long-term capital gain instead of ordinary income; (iii) probably (although
in the absence of regulations this matter is not free from doubt) retain in the
case of an individual Electing U.S. Shareholder, the "step-up" in the tax basis
of common shares to the fair market value of such shares on the date of such
Electing U.S. Shareholder's death (which would otherwise not be retained); and
(iv) generally avoid interest charges resulting from PFIC status altogether.
37
In the event the Company is deemed a PFIC, the Company intends to comply with
the reporting requirements prescribed by Treasury regulations. In particular,
the Company will maintain information so that the ordinary earnings and net
capital gain of the Company may be determined. However, future regulations may
contain reporting and record-keeping requirements that are so onerous that it
would not be practicable for the Company to comply. If, after review of the
requirements, the Company decides not to comply with the PFIC record-keeping
requirements, the Company will so notify its shareholders.
A QEF election must be made by attaching the following documents to the timely
filed U.S. federal income tax return for the first taxable year of the U.S.
Shareholder in which or with which a taxable year of the Company during which
the Company was a PFIC and the U.S. Shareholder held (or was considered to have
held) common shares ends: (i) a "Shareholder Section 1295 Election Statement"
executed by the U.S. Shareholder, (ii) a "PFIC Annual Information Statement"
received by the U.S. Shareholder from the Company, and (iii) a Form 8621. In
addition, the Electing U.S. Shareholder must file a copy of the Shareholder
Section 1295 Election Statement with the Internal Revenue Service Center, P.O.
Box 21086, Philadelphia, PA 19114. In the case of common shares owned through a
U.S. entity, the election is made at the entity level.
2. The Non-QEF Election Alternative
If a U.S. Shareholder does not timely make a QEF election for the first taxable
year of the Company during which he holds (or is considered to hold) the common
shares in question and the Company is a PFIC (a "Non-electing U.S.
Shareholder"), then special rules under Section 1291 of the Code will apply to
(i) gains realized on the disposition (or deemed to be realized by reason of a
pledge) of common shares, and (ii) certain "excess distributions" (as defined in
the Code) by the Company. The Company has never made any distributions with
respect to the common shares and it does not anticipate making any such
distributions in the foreseeable future.
A non-electing U.S. Shareholder generally would be required to pro-rate all
gains realized on the disposition of common shares and all excess distributions
over such shareholder's entire holding period for the common shares. All gains
or excess distributions allocated to prior years of the U.S. Shareholder
(provided that such periods are not prior to the first day of the first taxable
year of the Company during such U.S. Shareholder's holding period and beginning
after December 31, 1986 for which it was a PFIC) would be taxed at the highest
tax rates for each such prior year applicable to ordinary income. (Special
foreign tax credit rules apply with respect to withholding taxes imposed on
amounts that are treated as excess distributions.) The Non-electing U.S.
Shareholder 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. Shareholder that is not a
corporation must treat this interest charge as "personal interest" which is
non-deductible. The balance 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.
If the Company is a PFIC for any taxable year during which a Non-electing U.S.
Shareholder holds (or is considered to hold) common shares, then the Company
38
will continue to be treated as a PFIC with respect to such common shares, even
if it is no longer definitely a PFIC. A Non-electing U.S. Shareholder 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. Shareholders) as if
such common shares had been sold on the last day of the last taxable year for
which it was a PFIC. Certain other elections are also available to Non-electing
U.S. Shareholders.
Other PFIC Rules:
Certain special, generally adverse, rules will apply with respect to the common
shares while the Company is a PFIC, regardless of whether the common shares are
held (or considered to be held) by an Electing or Non-electing U.S. Shareholder.
For example, under Section 1297(b)(6) of the Code, a U.S. Shareholder 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 stock. In addition, under Section 1291 (f) of the Code, the Treasury has
authority to issue regulations that would treat as taxable certain transfers
that are generally not so treated, such as gifts, exchanges pursuant to
corporate reorganizations, and transfers at death, although it is not clear that
such authority extends to transfers by Electing U.S. Shareholders.
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 105 - 1700 West 75th
Avenue, Vancouver, BC, V6P 6G2.
I. Subsidiary Information
No applicable
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 Canada, the U.S. and the United Kingdom, and
therefore the Company is subject to risks typical of an international business
39
including, but not limited to, differing economic conditions, changes in
political climate, differing tax structures, other regulations and restrictions
and foreign exchange rate volatility. Accordingly, the Company's future results
could be materially adversely affected by changes in these or other factors.
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, commercial paper and money market instruments. Our
portfolio is diversified and consists primarily of investment grade securities
to minimize credit risk. These investments are typically denominated in U.S.
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, 2003, the fair value of
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.
40
Item 12. Description Of Securities Other Than Equity Securities
Not applicable.
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 a consequence of the Sarbanes-Oxley Act of 2002, the Company's principal
executive and financial officers are required to review the Company's internal
controls and corporate disclosure controls and procedures based on their
evaluation as of the date within 90 days prior to the filing of the Annual
Report. As of the date of filing of this Annual Report the executive and
financial officers are currently reviewing the Company's controls and procedures
and formalising additional policies in regard to them. It is not currently
possible to provide a conclusion in regards to the reliability of the Company's
internal controls however the Company notes that its modest asset base and
relatively limited number of individually significant transactions suggests that
sophisticated financial and disclosure controls and procedures will not be
warranted for the Company. The Company's financial procedures require that two
persons who are either officers or directors sign all cheques and other banking
documents. There have not been any significant changes in the Company's internal
controls or other factors that could significantly affect these controls over
the last several years. The Company's disclosure of financial and other
operational results is only made after they have been reviewed by the Chief
Executive and Chief Financial officers and by the board.
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
41
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.
ITEM 16C Principal accountant fees and services
A summary of accountant fees and services are provided in a table below:
Total Fees
-------------------------
2003 2002
---- ----
Audit Fees (1) 122,698 86,613
Audit-Related Fees (2) - -
Tax Fees (3) 7,923 701
All Other Fees (4) - 5,413
- ------------------------------------------------------
Total 130,621 92,727
- ------------------------------------------------------
(1) Audit fees are 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 2003 and 2002 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 2003 and 2002 include fees related to services for tax
compliance and tax planning.
(4) All other fees include miscellaneous financial advises other than above
categories.
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.
42
Item 18. Financial Statements
Not applicable.
Index to Financial Statements
Auditors' Report
Consolidated Balance Sheets as at
December 31, 2003 and December 31, 2002
Consolidated Statements of Loss for the years ended
December 31, 2003, December 31, 2002 and December 31, 2001 Consolidated
Statements of Deficit for the years ended
December 31, 2003, December 31, 2002 and December 31, 2001 Consolidated
Statements of Cash Flows for the years ended
December 31, 2003, December 31, 2002 and December 31, 2001 Notes to
Consolidated Financial Statements
43
Consolidated Financial Statements (in U.S. dollars)
DynaMotive Energy Systems Corporation
December 31, 2003 and 2002
44
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, 2003 and 2002 and the consolidated statements of
loss, deficit and cash flows for each of the years in the three year period
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 audits in accordance with Canadian and U.S. 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, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 2003
and 2002 and the results of its operations and its cash flows for each of the
years in the three year period ended December 31, 2003 in accordance with
Canadian generally accepted accounting principles.
By: Ernst & Yang LLP
--------------------
Vancouver, Canada, Ernst & Yang 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 audits in accordance with both Canadian generally
accepted auditing standards and United States generally accepted auditing
standards, 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 auditors' report when these are adequately
disclosed in the financial statements.
By: Ernst & Yang LLP
Vancouver, Canada, ---------------------
April 16, 2004. Chartered Accountants
45
DynaMotive Energy Systems Corporation
Incorporated under the laws of British Columbia, Canada
CONSOLIDATED BALANCE SHEETS
( See Nature of Business and Going Concern Uncertainty - Note 1)
As at December 31 (in U.S. dollars)
2003 2002
$ $
-------------------------------------------------------------------------------------------------
ASSETS [note 7]
Current
Cash 283,514 25,093
Accounts receivable 97,501 59,102
Government grants receivable [note 15] 732,776 160,316
Prepaid expenses and deposits 74,280 78,846
-------------------------------------------------------------------------------------------------
Total current assets 1,188,071 323,357
Other long-term assets 32,673 --
Capital assets [note 5] 2,293,422 750,409
Patents [note 6] 245,439 212,047
-------------------------------------------------------------------------------------------------
3,759,605 1,285,813
=================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current
Short-term loans [note 7] -- 158,539
Accounts payable and accrued liabilities [notes 4(b) and 8] 1,880,680 1,698,052
Project advance [note 17] 154,488 --
Convertible loans [note 12(c)] -- 101,034
-------------------------------------------------------------------------------------------------
Total liabilities 2,035,168 1,957,625
-------------------------------------------------------------------------------------------------
Commitments and contingencies [notes 1, 11, 12 and 15]
Shareholders' Equity (Deficiency)
Share capital [note 9(b)] 30,907,990 27,553,040
Shares to be issued [note 9(c)] 2,827,111 771,449
Contributed surplus [note 9(h)] 4,815,679 2,698,998
Cumulative translation adjustment (690,107) (543,744)
Deficit (36,136,236) (31,151,555)
-------------------------------------------------------------------------------------------------
Total shareholders' Equity (Deficiency) 1,724,437 (671,812)
-------------------------------------------------------------------------------------------------
3,759,605 1,285,813
=================================================================================================
See accompanying notes
On behalf of the Board:
"Richard Lin" "Andrew Kingston"
Director Director
46
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)
2003 2002 2001
$ $ $
-------------------------------------------------------------------------------------------------
REVENUE
Sales -- 68,569 274,360
-------------------------------------------------------------------------------------------------
EXPENSES [note 12]
Cost of sales -- 6,587 205,898
Amortization and depreciation 125,580 313,474 404,495
Interest expense [note 14] 320,643 123,013 26,080
Marketing [note 9(i)] 155,914 183,294 670,415
Office supplies, telephone and insurance 300,751 230,808 371,663
Professional fees [note 9(i)] 954,223 861,199 1,970,843
Rent [note 9(i)] 109,653 515,446 351,738
Research and development [note 15] 512,981 165,265 616,815
General and administrative salaries and
benefits [note 9(i)] 2,693,430 1,483,443 1,461,553
Foreign Exchange gain (177,551) (80,461) (6,313)
-------------------------------------------------------------------------------------------------
4,995,624 3,802,068 6,073,187
-------------------------------------------------------------------------------------------------
Loss from operations (4,995,624) (3,733,499) (5,798,827)
OTHER REVENUE AND EXPENSES
Interest and other income 73,974 982 18,405
Gain (loss) on asset disposals -- (31,615) (3,170)
Loss on write-down of long-term assets -- (872,114) (585,078)
[notes 5 and 6]
Gain on recovery of government grants -- 269,792 --
[note 15]
Capital tax expenses -- -- (68,791)
-------------------------------------------------------------------------------------------------
(4,921,650) (632,955) (638,634)
-------------------------------------------------------------------------------------------------
Loss from continuing operations (4,921,650) (4,366,454) (6,437,461)
Loss from discontinued operations [note 4] (63,031) (895,153) (400,803)
-------------------------------------------------------------------------------------------------
Loss for the year (4,984,681) (5,261,607) (6,838,264)
=================================================================================================
Weighted average number of common
shares outstanding [note 9[j]] 56,617,490 45,104,978 36,468,969
=================================================================================================
Basic and diluted loss per common share
Continuing operations [note 9[j]] (0.09) (0.10) (0.18)
Discontinued operations [note 9[j]] -- (0.02) (0.01)
-------------------------------------------------------------------------------------------------
Loss per share (0.09) (0.12) (0.19)
=================================================================================================
See accompanying notes
47
DynaMotive Energy Systems Corporation
Incorporated under the laws of British Columbia
CONSOLIDATED STATEMENTS OF DEFICIT
As at December 31 (in U.S. dollars)
2003 2002 2001
$ $ $
-------------------------------------------------------------------------------------------------
Deficit, beginning of year (31,151,555) (25,773,048) (18,934,784)
Effect of change in accounting policy -- (116,900) --
[note 3]
-------------------------------------------------------------------------------------------------
Deficit, beginning of year restated (31,151,555) (25,889,948) (18,934,784)
Loss for the year (4,984,681) (5,261,607) (6,838,264)
-------------------------------------------------------------------------------------------------
Deficit, end of year (36,136,236) (31,151,555) (25,773,048)
=================================================================================================
See accompanying notes
48
DynaMotive Energy Systems Corporation
Incorporated under the laws of British Columbia
CONSOLIDATED STATEMENTS OF CASH FLOWS
As at December 31 (in U.S. dollars)
2003 2002 2001
$ $ $
-------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Loss for the year (4,984,681) (5,261,607) (6,838,264)
Add items not involving cash:
Amortization and depreciation 125,580 313,474 404,495
Interest-non cash 239,245 -- --
Loss on write-down of long-term assets -- 753,382 323,850
Loss on write-down of patents -- 118,732 261,228
Stock based compensation [note 9(i)] 2,427,857 1,326,010 2,107,595
Loss on discontinued operations -- -- (279,971)
Other (177,551) (48,846) (3,145)
Net change in non-cash working capital
balances related to operations [note 14] (372,665) 451,059 1,169,975
-------------------------------------------------------------------------------------------------
Cash used in operating activities (2,742,215) (2,347,796) (2,854,237)
-------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in bank indebtedness
- short-term (158,539) 196,596 39,999
Increase in short term loan 265,000 -- --
Repayment of short term loan (265,000) -- --
Increase in project advance 154,488 -- --
Proceeds from convertible loan -- 263,416 --
Share capital issued 2,321,852 1,545,400 1,995,094
Shares to be issued 1,476,012 352,376 479,026
-------------------------------------------------------------------------------------------------
Cash provided by financing activities 3,793,813 2,357,788 2,514,119
-------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase in other long-term assets (32,673) -- --
Increase in patent costs (6,479) (7,946) (31,189)
Purchase of capital assets (net of
government grants) (491,057) (70,071) (576,460)
Acquisition costs -- -- (70,243)
Proceeds on sale of equipment -- 13,115 5,787
-------------------------------------------------------------------------------------------------
Cash used in investing activities (530,209) (64,902) (672,105)
-------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents from operations 521,389 (54,910) (1,012,223)
Effects of foreign exchange rate changes (262,968) 18,462 (21,951)
on cash
-------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents during year 258,421 (36,448) (1,034,174)
Cash and cash equivalents, beginning of year 25,093 61,541 1,095,715
-------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year 283,514 25,093 61,541
-------------------------------------------------------------------------------------------------
See accompanying notes
49
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
1. NATURE OF BUSINESS AND GOING CONCERN UNCERTAINTY
[a] Nature of business
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.
In April 2001, the Company acquired Border Biofuels Limited ("BBL"), in the U.K.
In December 2002, BBL was petitioned into bankruptcy by creditors and became
insolvent [note 4]. In April 2002, the Company sold certain assets in its metal
cleaning subsidiary, DynaPower, Inc. to focus all of its resources on its BioOil
production technology [note 10].
[b] Going concern uncertainty
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, 2003, the Company has a working capital deficiency of $847,097, and
has incurred a loss of $4,984,681 for the year ended December 31, 2003.
The ability of the Company to continue as a going concern is in substantial
doubt and 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 is in the process of raising additional capital financing
in order to continue its operations, fund its research and development
activities, and ensure orderly realization of its assets and discharge of its
liabilities.
50
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
1. NATURE OF BUSINESS AND GOING CONCERN UNCERTAINTY (cont'd.)
The Company is not expected to be profitable during the ensuing twelve months
and therefore must rely on securing additional funds from government sources and
by the issuance of shares of the Company for cash consideration. Subsequent to
the period-end, the Company has received additional commitments from the
Canadian governmental agencies and has received additional equity financing
[note 19].
The consolidated financial statements do not reflect adjustments in carrying
values and classifications of assets and liabilities that would be necessary
should the Company not be able to continue its operations.
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:
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; DynaMotive Canada Inc., federally incorporated under
the laws of Canada; DynaPower Inc., incorporated under the laws of British
Columbia [note 10]; DynaMotive Puerto Rico, Inc., incorporated under the laws of
Puerto Rico; DynaMill Systems Ltd. and DynaMotive Electrochem Corporation,
incorporated under the laws of British Columbia, and the West Lorne BioOil
Co-Generation Limited Partnership formed under the laws of Ontario.
The consolidated financial statements include the results of operations of BBL
as discontinued operations [note 4]. DynaMotive Electrochem Corporation,
DynaMill Systems Ltd. and DynaMotive Puerto Rico, Inc. are companies with no
significant net assets or operations.
51
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
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 translation
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
to the customer.
[b] Revenue from contracts relating to implementation of the Company's metal
cleaning systems in a commercial application is recognized on a completed
contract basis, except for those which are greater than three months in
duration, for which revenue is recognized on a percentage of completion
basis where the basis of measure of performance is based on engineering
estimates of completion. Losses on contracts are fully provided for when
they become known.
[c] Revenue from services contracts is recognized when the services are
provided.
52
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
[d] 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.
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 of capital assets is deducted from
the cost of the related capital assets.
Investment tax credits are accounted for under the cost reduction method whereby
they are netted against the expense or capital asset to which they relate.
Investment tax credits are recorded when the Company has incurred the qualifying
expenditures and there is reasonable assurance the tax credits will be realized.
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 commencing with commercial
production. If management determines that development of products to which
patent costs relate is not reasonably certain, or that costs exceed recoverable
value, such costs are charged to operations. Due to the long-term nature of
estimates inherent in determining future cash flows, it is possible that the
future cash flows or the estimated useful life of such assets could be reduced
in the future.
53
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Capital assets
Capital assets are recorded at cost, net of government assistance, and amortized
using the following methods and annual rates:
Furniture and fixtures 20% declining balance
Computer equipment 30% declining balance
Computer software 100% declining balance
Test equipment 20% declining balance
Leasehold improvements Straight line over the term of the lease
Motor vehicles 50% the first year and 25% thereafter
declining balance
Annually, or more frequently as circumstances require, the Company performs
periodic evaluations to assess the recoverability of its capital assets. When
the carrying value of capital assets 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. In 2002 and 2001, the Company determined that
write-downs of the carrying values of certain assets were required [note 5].
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.
54
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Annually, or more frequently as circumstances require, the Company performs
periodic 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.
Cash
The Company considers all highly liquid financial instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are recorded at cost, which approximates fair value. At December 31,
2003 and 2002, the Company did not have cash equivalents.
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 enactment date. Future income tax assets are recorded
in the consolidated financial statements if realization is considered more
likely than not.
Stock based compensation plan
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 9. 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 intrinsic method when fixed or
performance based stock options are granted to employees and directors.
Compensation is recognized using the intrinsic method for SA Rights when the
performance criteria has been met and the SA Rights are vested.
The Company has a compensation arrangement with several officers of the Company
whereby the officers receive a fixed number of common shares per month. The
Company records compensation expense monthly based on the month-end quoted
market price of the Company's stock.
55
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
In addition, the Company has entered into compensation arrangements, which
entitle non-employees to specific amounts, which can only be settled by applying
the amounts to exercise outstanding options to purchase common shares monthly
over a period of up to twelve months. The Company recognizes compensation
expense based on the fair value of the common stock issuable under the
arrangement, when related services are performed. The common shares issuable
under these arrangements are generally issued in the quarter following the
period in which they are earned.
The Company may also issue stock options, and warrants as consideration for
services rendered by non-employees. Such equity awards are recorded at their
fair value, as compensation expense or capitalized to capital 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.
If shares or stock options are repurchased, the excess of the consideration paid
over the carrying value of the shares or stock options cancelled is charged to
contributed surplus or deficit.
Loss per common share
Loss per common share is based on the weighted average number of shares
outstanding for the period excluding contingently issuable shares. The effect of
potential issues of shares under share option, share purchase warrants and
conversion agreements are antidilutive. Therefore, diluted loss per common share
is equivalent to basic loss per common share.
Financial instruments
The fair values of the financial instruments approximate their carrying value
except as otherwise disclosed in the financial statements.
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.
56
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
3. CHANGE IN ACCOUNTING PRINCIPLES
[a] Stock based compensation
Effective January 1, 2002, the Company adopted the recommendations of the new
CICA Handbook Section 3870, "Stock-Based Compensation and Other Stock-Based
Payments". This section establishes standards for the recognition, measurement
and disclosure of stock-based compensation and other stock-based payments made
in exchange for goods and services. The standard requires 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 to
be measured and recognized using a fair value based method. Awards that an
entity has the ability to settle in stock are recorded as equity, whereas awards
that the entity is required to or has a practice of settling in cash are
recorded as liabilities.
As a result of adopting this new standard, opening deficit as at January 1, 2002
is increased by $116,900 and contributed surplus is increased by $116,900 to
reflect certain SA Rights that were outstanding as at January 1, 2002. As
required by the standard, prior period comparative figures have not been
restated. The fair value method is encouraged for all other employee stock based
compensation but other methods of accounting such as intrinsic method are
permitted. If the fair value method is not adopted, then proforma disclosure for
net loss and loss per share is required to show the effects as if the fair value
method has been used. The Company has elected to use the intrinsic method to
account for awards granted to employees and directors.
[b] Impairment of long-lived assets
Effective January 1, 2002, the Company has prospectively adopted the new
recommendations of the CICA Handbook Section 3063 "Impairment of Long-lived
Assets" with respect to the recognition, measurement and disclosure of the
impairment of long-lived assets. This standard required the recognition of an
impairment loss for a long-lived asset to be held and used when changes in
circumstances cause its carrying value to exceed the total undiscounted cash
flows expected from its use. An impairment loss, if any, is determined as the
excess of the carrying value of the assets over its fair value.
57
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
4. BORDER BIOFUELS LTD.
[a] Liquidation of BBL
On April 6, 2001, the Company acquired 75% of the outstanding common shares of
Border Biofuels Limited ("BBL"), a United Kingdom Green Power project
development company for a nominal cash consideration of $2 ((pound)1) plus
acquisition cost of $70,241 ((pound)49,537).
On December 13, 2002, BBL was placed into liquidation when a petition was made
by creditors under the Insolvency Act of 1986 of the United Kingdom.
Substantially all of its assets will be liquidated by a bank appointed receiver.
The Company does not expect to recover any proceeds from the sale of BBL's
assets.
As BBL is in liquidation at December 31, 2003, the Company no longer controls
the operating, financing and investing decisions of the 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 for the current and prior periods have been accounted for as
discontinued operations.
Condensed financial information for BBL as at December 13, 2002 is as follows:
$
- --------------------------------------------------------------------------------
Current assets 44,906
Non-current assets 4,235,771
Current liabilities (1,790,768)
Non-current liabilities (3,100,340)
- --------------------------------------------------------------------------------
Net assets (610,431)
================================================================================
The result of the discontinued operations are as follows:
2003 2002 2001
$ $ $
-------------------------------------------------------------------------------------------------
Sales -- -- 357,046
-------------------------------------------------------------------------------------------------
Net loss from discontinued operations (63,031) (1,508,189) (400,803)
Gain on disposal -- 613,036 --
-------------------------------------------------------------------------------------------------
(63,031) (895,153) (400,803)
=================================================================================================
58
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
4. BORDER BIOFUELS LTD. (cont'd.)
[b] Guarantee provided by Dynamotive
In 2001, BBL entered into a credit facility with Bank of Scotland for a maximum
of $355,700 ((pound)200,000). The credit facility is denominated in British
Pounds Sterling. Interest is charged at the bank's base rate
(as at December 31, 2001 - 4%) plus 3%. The credit facility is guaranteed by the
Company. During 2002, BBL became insolvent. If the Bank is unable to realize on
its security 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.
[c] Acquisition of BBL
The acquisition of BBL was accounted for using the purchase method. The
consolidated financial statements reflect the results of operation of BBL from
the date of acquisition through December 13, 2002 at which time the accounts
were deconsolidated as discussed above. The consideration paid had been
allocated to the net identifiable assets acquired based on their estimated fair
value as follows:
$
- --------------------------------------------------------------------------------
Net assets acquired
Cash 1,994
Non-cash working capital (1,237,786)
Capital assets 100,663
Power purchase agreements 3,538,463
Bank indebtedness (1,627,303)
Shareholders loans (486,674)
Long term debt (75,046)
Minority interest (144,068)
- --------------------------------------------------------------------------------
Total 70,243
- --------------------------------------------------------------------------------
Consideration provided
Cash 2
Costs of acquisition 70,241
- --------------------------------------------------------------------------------
Total 70,243
================================================================================
59
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
4. BORDER BIOFUELS LTD. (cont'd.)
The costs of acquisition related to legal and professional fees incurred by the
Company in the acquisition. The power purchase agreements are contractual
agreements with government agencies in the UK for the Company to supply
electricity from renewable energy sources. The power purchase agreements have an
average remaining term of 15 years. The contracts provide a guaranteed premium
price based on the bid price per kWh of electricity generated. The premium price
is index linked to a consumer price index through to 2017. The agreements are
not site specific and are transferable.
5. CAPITAL ASSETS
2003 2002
-----------------------------------------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
$ $ $ $
-------------------------------------------------------------------------------------------------
Furniture and fixtures 172,248 119,926 140,748 87,801
Computer equipment and software 299,811 258,917 242,941 198,872
Test equipment 603,015 324,938 495,061 209,692
Projects under development:
Construction in Progress - West 1,235,510 -- 335,491 --
Lorne
Pre-construction advances 664,057 -- -- --
Leasehold improvements 88,065 88,065 72,299 69,262
Motor vehicles 53,462 30,900 43,891 14,395
-------------------------------------------------------------------------------------------------
3,116,168 822,746 1,330,431 580,022
-------------------------------------------------------------------------------------------------
Net book value 2,293,422 750,409
=================================================================================================
The Company is constructing a 100 tonne per day BioOil co-generation project at
the site of Erie Flooring in West Lorne, Ontario (See note 17). At December 31,
2003 the Company had recorded pre-construction advances of $664,057 representing
initial payments on a second proposed 100 tonne per day plant. All of the
pre-construction advances were unpaid and included in accounts payable or shares
to be issued as appropriate at December 31, 2003.
During 2003, government grants of $416,708 [2002 - $122,474] have been applied
to reduce the cost of capital assets under construction. For 2003 and 2002,
capital assets under construction comprise the costs to construct a 100 tonne
per day BioOil plant.
60
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
5. CAPITAL ASSETS (cont'd.)
In 2002, the Company recorded write-downs of capital assets totaling $753,382,
pertaining to the BioOil Power Generation segment. The Company determined that
the net realizable value of certain test equipment was below their carrying
values.
In 2001, the Company recorded write-downs of capital assets totaling $323,850,
including $148,813 for capital assets pertaining to the BioLime segment and
$175,037 for capital assets pertaining to the DynaPower segment. The Company
determined that the development of commercially viable BioLime products was
uncertain and therefore, the carrying value of these assets was written down to
$nil. The DynaPower capital assets were held for disposal and the Company had
written the carrying value down to their net realizable value of $1 [note 10].
61
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
6. PATENTS
2003 2002
--------------------------------------------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
$ $ $ $
-------------------------------------------------------------------------------------------------
Patents 320,250 74,811 257,599 45,552
-------------------------------------------------------------------------------------------------
Net book value 245,439 212,047
=================================================================================================
In 2002, the Company recorded a write-down on patents pertaining to the
DynaPower metal cleaning technology of $118,732. The Company determined that the
future cash flows from these licenses granted upon the management buyout [note
10] of DynaPower were insufficient to support the carrying value of these
patents. Therefore, these patents were written down to management's best
estimates of the future discounted cash flows from the licenses on these
patents.
In 2001, the Company recorded write-down of patents totaling $261,228, including
$181,531 pertaining for BioLime patents, $72,514 for Actuator patents and $7,183
for other patents. The Company determined that the development of commercially
viable uses for the products to which the costs for the BioLime, Actuator and
other patents relate was uncertain and therefore, the costs related to these
patents were charged to operations.
7. SHORT-TERM LOANS
[a] 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
bear interest at 2% per month and have a 12-month term. The loan agreement
also calls 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 have been allocated to the loans and warrants based on
their relative fair values. Accordingly, $104,167 was allocated to the
loans and $145,833 was allocated to the warrants. The carrying value of the
debt will be accreted up to its fair value over the term to maturity.
Accretion of $12,153 has been 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 loans.
In December 2003, the Company repaid the loan and the lender released the
Company from the general security agreement.
62
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
7. SHORT-TERM LOANS (cont'd.)
[b] During the year ended December 31, 2003 the Company was advanced $15,000 by
a director which was non-interest bearing and was repaid in August 2003.
[c] At December 31, 2002 the Company had a loan with the Bank of Nova Scotia
for $158,539 (C$250,000). In April 2003, the Company repaid the loan and
the Bank terminated the credit facilities and released the Company from the
general security agreement and all other obligations. The fair market value
of the loan at December 31, 2002 approximates its carrying value because it
had a current market interest rate.
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2003 2002
$ $
-------------------------------------------------------------------------------------------------
Trade accounts payable 911,949 1,022,311
Accrued compensation -- 105,726
Accrued liabilities 613,023 249,132
Bank of Scotland guarantee [note 4(b)] 355,708 320,883
-------------------------------------------------------------------------------------------------
1,880,680 1,698,052
=================================================================================================
9. SHARE CAPITAL
[a] Authorized share capital
The Company's authorized capital consists of 100,000,000 common shares [2002 -
100,000,000] with no par value and 100,000,000 preferred shares [2002 -
100,000,000] with a par value of $5.00 each, having attached special rights and
restrictions. No preferred shares were issued and outstanding at December 31,
2003 and 2002.
63
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
9. SHARE CAPITAL (cont'd.)
[b] Issued and outstanding common shares
Issued
# $
-------------------------------------------------------------------------------------------------
Balance, December 31, 2000 35,851,060 21,040,882
Issued for cash
Pursuant to private placement 2,614,404 1,853,516
Pursuant to exercise of stock options 333,946 141,578
Issued to settle fees payable 323,408 259,635
Issued for services (i) 1,819,297 1,322,303
-------------------------------------------------------------------------------------------------
Balance, December 31, 2001 40,942,115 24,617,914
-------------------------------------------------------------------------------------------------
Issued for cash
Pursuant to private placement 4,503,872 1,545,400
Issued on conversion of convertible loan 856,551 200,000
Issued for settlement of fees payable and severances 479,025 145,598
Issued for services (i) 3,159,437 1,136,507
Shares to be redeemed and cancelled (ii) -- (92,379)
-------------------------------------------------------------------------------------------------
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 [note 12(e)] 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
=================================================================================================
64
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
9. 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 1,536,141 [2002 - 1,379,447] shares, fair valued at
$321,082 [2002 - $552,387].
b. In addition, the Company issued 980,753 [2002 - 675,486]
restricted shares to non-employees for services, fair valued at
$363,764 [2002 - $217,269]. The shares have a 12 months restriction
from the issued date.
c. The Company has issued 455,794 [2002 - 1,054,916] shares to
employees, directors and officers for services rendered, recorded at
fair value of $60,922 [2002 - $349,901].
d. In addition, the Company issued 8,590 [2002 - 49,588]
restricted shares to employees and directors for services, fair valued
at $2,686 [2002 - $16,950]. The shares have a 12 month restriction from
the issue date. During the year, 7,331 [2002 - nil] common shares
previously issued to a director of the Company were cancelled and
returned to Treasury with a fair value of $2,560 [2002 - $nil].
[ii] At December 31, 2003, the Company has 306,748 [December 31, 2002 - 346,748]
common shares to be redeemed. These shares, which were outstanding at
year-end, were issued for services in relation to termination of agreements
with non-employees and will be redeemed upon satisfying conditions of the
termination agreements. Full settlement in cash of $88,000 [December 31,
2002 - $nil] has already been paid to the holder of these common shares as
compensation for the redemption.
[c] Shares to be issued
At December 31, 2003, the Company has 7,107,160 [2002 - 3,225,508] common shares
to be issued which comprise:
[i] 2,783,677 [2002 - 1,695,484] common shares which are to be issued to a
director and non-employees for services rendered under compensation
arrangements with a value of $1,351,099 [2002 - $419,073].
65
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
9. SHARE CAPITAL (cont'd.)
[ii] 4,185,150 common shares relating to a private placement commenced during
the year ended December 31, 2003 [2002 - 1,530,024] and 138,333 common
shares are related to exercise of warrants. The private placement is for up
to $2.0 million at an offering price between $0.30 and $0.385. At December
31, 2003, the Company had received $1,476,012 [2002 - $352,376] in cash for
these shares to be issued [note 19(a)].
[d] Escrow agreement
At December 31, 2003, 556,000 common shares were held in escrow to be released
at a rate of one share for each $0.17 of "cash flow" as defined in the
agreement, generated by the Company.
At December 31, 2003, 225,334 common shares were held in escrow from an original
total of 676,000 common shares put into escrow. These common shares are to be
released from escrow as to 1/3 upon the Company achieving a capitalized stock
value (as defined) of $30 million (which occurred in 2000); 1/3 upon the Company
achieving a capitalized stock value of $50 million (which occurred in 2000) and
1/3 upon the Company achieving a capitalized stock value of $100 million.
During the period ended December 31, 2003, nil [2002 and 2001 - nil] common
shares were released from escrow and at December 31, 2003, 781,334 [2002 -
781,334] common shares are held in escrow.
[e] Stock options
At December 31, 2003, the following stock options to Directors, employees and
others were outstanding:
Options Outstanding Options Exercisable
----------------------------- -----------------------------
Weighted-
Number Average Weighted- Number Weighted-Average
Range of Outstanding at Remaining Average Outstanding at Exercise
Exercise December 31, Contractual Exercise December 31, Price
Prices 2003 Life Price 2003
- -----------------------------------------------------------------------------------------------------
$0.20 - $0.23 5,277,088 2.50 years $0.21 5,240,063 $0.21
$0.30 - $0.90 3,946,900 1.95 years $0.51 3,946,900 $0.51
$1.00 442,000 0.73 years $1.00 442,000 $1.00
$1.50 350,000 1.16 years $1.50 326,000 $1.50
- -----------------------------------------------------------------------------------------------------
10,015,988 9,954,963
=====================================================================================================
66
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
9. SHARE CAPITAL (cont'd.)
From time to time, the Company has provided incentives in the form of share
purchase options to the Company's directors, officers, employees and others. The
Company has reserved 10,487,348 [2002 - 7,491,150] (15%) common shares for
issuance upon the exercise of stock options of which at December 31, 2003,
471,360 [2002 - 1,663,313] are available to be granted. The exercise price and
the vesting terms of the options are determined by the Compensation Committee.
The exercise price will generally be at least equal to the market price of the
common shares at the date of the grant and the term may not exceed five years
from the date of the grant.
Stock 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, 2000 5,229,642 1.14
Options granted 1,246,859 0.72
Options forfeited or expired (97,000) 3.61
Options exercised (1,377,538) 0.64
-------------------------------------------------------------------------------------------------
Balance, December 31, 2001 5,001,963 1.15
Options granted 4,638,298 0.44
Options forfeited or expired (1,598,725) 0.96
Options exercised (2,213,699) 0.38
-------------------------------------------------------------------------------------------------
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
=================================================================================================
During 2003, the Company repriced 500,000 options issued to a director (or
company controlled by Director) from the original exercise price of $0.50 to a
new exercise price of $0.30. During 2002, the Company repriced 1,800,000 options
issued to directors from the original exercise price of $1.50 to a new exercise
price of $0.50.
Included in the options granted in 2003, were 817,300 [2002 - 1,953,170] options
to non-employees for services rendered recorded at a fair value of $145,711
[2002 - $613,787].
The weighted-average fair value of options granted in 2003 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 $0.20, $0.38, and
$0.21 respectively [2002 - $0.37, $0.41, and $0.32; 2001 - $nil, $0.35, and
$0.96].
67
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
9. SHARE CAPITAL (cont'd.)
The Black Scholes options valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Pro forma information regarding net income and earnings per share is required by
CICA Handbook Section 3870, "Stock-Based Compensation and Other Stock-Based
Payments", which also requires that the information be determined as if the
Company has accounted for stock options, SA Rights and warrants granted to
employees under the fair value method. The fair value for these options, SA
Rights and warrants is estimated at the measurement date using a Black Scholes
pricing model with the following assumptions for 2003, 2002, and 2001
respectively: Risk free interest rate of 4.5%, 4.5%, and 3.9%; dividend yields
of 0%; volatility factors of the expected market price of the Company's common
stock of 1.16, 1.13, and 1.19, and a weighted average expected life of the
option of 2.7 years [2002 - 4.3 years; 2001 - 4.9 years].
Supplemental disclosure of pro forma loss and loss per share:
2003 2002 2001
$ $ $
-------------------------------------------------------------------------------------------------
Loss for the period as stated (4,984,681) (5,261,607) (6,838,264)
Less stock-based compensation 676,354 121,248 564,257
-------------------------------------------------------------------------------------------------
Pro forma loss (5,661,035) (5,382,855) (7,402,521)
=================================================================================================
-------------------------------------------------------------------------------------------------
Basic and diluted loss per share as stated (0.09) (0.12) (0.18)
Proforma basic and diluted loss per share (0.10) (0.12) (0.20)
=================================================================================================
68
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
9. SHARE CAPITAL (cont'd.)
[f] Common share purchase warrants
During 2003, the Company repriced 200,000 warrants from the original exercise
price of $0.40 to a new exercise price of $0.15 and the compensation expense of
$16,000 has been recorded.
During the fourth quarter of 2001, the Company made an offer to all existing
warrant holders to reduce the exercise price of all outstanding warrants from a
weighted average exercise price of $1.59, to a weighted average exercise price
of $0.70 in exchange for a reduction in the number of warrants outstanding. No
other terms in the original warrants would change. Warrant holders were given 30
days to accept the offer. As at December 31, 2001, 4,009,167 warrants with a
weighted average exercise price of $1.55 were cancelled and exchanged for
1,907,526 new warrants with a weighted average exercise price of $0.70. During
2002, an additional 1,323,372 warrants with a weighted-average exercise price of
$1.72 were cancelled and exchanged for 618,577 new warrants with a
weighted-average exercise price of $0.70. No compensation expense resulted from
the warrant repricing.
At December 31, 2003 the common share purchase warrants outstanding were as
follows:
No. of Common Exercise
Shares Issuable Price Expiration Date
---------------------------------------------------------------------------------------------------
Series F Warrants 933,333 $0.70 March 5, 2005
Series M Warrants 152,897 $0.70 to $1.50 September 18, 2004 - May 09, 2005
Series N-b Warrants 275,756 $0.70 September 5, 2004 - October 1, 2004
Series O Warrants 300,000 $0.35 June 10, 2005
Series P Warrants 1,777,147 $0.40 July 29, 2005 - May 6, 2006
Series Q Warrants 7,200,862 $0.20 to $0.67 August 31, 2005 - August 31, 2008
Series R Warrants 2,500,000 $0.20 August 31, 2008
---------------------------------------------------------------------------------------------------
As at December 31, 2003, all warrants are vested.
(1) 933,333 of the Series F warrants were issued as part of a private
placement. These warrants vested upon successful completion of the private
placement. 35,000 of the Series F warrants have expired and have been
cancelled.
(2) 84,000 Series G warrants expired and were cancelled during the year.
(3) The Series J warrants expired and were cancelled during the year.
(4) The Series K warrants expired and were cancelled during the year.
(5) 64,491,Series L warrants expired and were cancelled during the year.
69
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
9. SHARE CAPITAL (cont'd.)
(6) The Series M 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. 242,375 Series M warrants
expired and were cancelled during the year.
(7) The Series N-b warrants were issued as part of a private placement. These
warrants vested upon successful completion of the private placement.
(8) The Series O warrants were issued as a part of a loan agreement [note
12(e)] during the year ended 2002 and the warrants vested immediately upon
issue.
(9) 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.
1,235,482 Series P warrants were issued during the year.
(10) The Series Q warrants were issued in the current year 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. 818,418
Series Q warrants were issued as part of a loan agreement to certain
directors of the Company [note 12(e)].
(11) The Series R warrants were issued in the current year as part of a loan
agreement. 2,500,000 Series R warrants were issued as part of the loan
financings [note 7(a)].
Compensation expenses recognized for warrants granted during 2003 was $1,265,474
[2002 - $45,994; 2001 - $558,632].
[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.
The SA Rights vest as the Company achieves stock value targets as defined in the
agreement: 1/3 of the SA Rights issued may be redeemed upon the Company
achieving a capitalized stock value (as defined) of $30 million; 1/3 of the SA
Rights issued may be redeemed upon the Company achieving a capitalized stock
value of $50 million; 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.
70
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
9. SHARE CAPITAL (cont'd.)
At December 31, 2003 1,468,335 [December 2002 - 1,471,668] SA Rights were
outstanding and 1,106,668 [December 2002 - 1,111,667] were vested. Compensation
expense of $158,808 was recognized during the year for vested SA Rights.
SA Rights transactions and the number of SA Rights outstanding is summarized as
follows:
No. of
SA Rights Issued
-------------------------------------------------------------------------------------------------
Balance, December 31, 2001 1,486,667
SA Rights forfeited (14,999)
-------------------------------------------------------------------------------------------------
Balance, December 31, 2002 1,471,668
SA Rights forfeited (3,333)
=================================================================================================
Balance, December 31, 2003 1,468,335
=================================================================================================
At December 31, 2003, 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 $0.400 December 31, 2008
822,501 635,834 $0.400 January 28, 2004
200,000 133,333 $0.625 May 1, 2004
145,834 137,501 $1.000 May 1, 2004
-----------------------------------------------------------------------------------------------
1,468,335 1,106,668
===============================================================================================
Subsequent to December 31, 2003 the Company received redemption notices for
693,335 SA Rights for $108,433 of which $38,666 is to be paid by cash and
$69,767 is to be paid by shares.
The Company has an arrangement with a former director of the Company for 300,000
outstanding SA Rights of which 200,000 SA Rights has been vested with an initial
value of $0.40 extending the expiration date to December 31, 2008.
[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 [note 7], the fair value of warrants related to
convertible debts, and the intrinsic value of equity awards granted to
employees.
71
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
9. SHARE CAPITAL (cont'd.)
[i] Stock based compensation
The Company has recorded stock based compensation as follows:
2003 2002 2001
$ $ $
-------------------------------------------------------------------------------------------------
Balance sheet items
Capital assets 1,004,564 105,455 108,137
Share issue costs 947,202 -- --
Patents and intellectual property -- -- 15,500
Other 51,000 11,989 --
-------------------------------------------------------------------------------------------------
2,002,766 117,444 123,637
Income statement items
Professional fees 655,416 546,286 1,591,381
General and administrative salaries and
benefits 1,712,658 689,397 383,094
Marketing 51,628 42,385 121,790
Rent expense -- 40,848 11,330
Interest expense and other 8,155 7,094 --
-------------------------------------------------------------------------------------------------
2,427,857 1,326,010 2,107,595
Total stock based compensation 4,430,623 1,443,454 2,231,232
=================================================================================================
72
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
9. SHARE CAPITAL (cont'd.)
[j] Basic and diluted loss per common share
2003 2002 2001
- --------------------------------------------------------------------------------------------------
Numerator
Loss from continuing operations (4,921,650) (4,366,454) (6,437,461)
Loss from discontinued operations (63,031) (895,153) (400,803)
- --------------------------------------------------------------------------------------------------
Net loss (4,984,681) (5,261,607) (6,838,264)
- --------------------------------------------------------------------------------------------------
Denominator
Weighted average number of common shares
outstanding 57,398,824 45,886,312 37,250,303
Escrowed shares (781,334) (781,334) (781,334)
- --------------------------------------------------------------------------------------------------
56,617,490 45,104,978 36,468,969
- --------------------------------------------------------------------------------------------------
Basic and diluted loss per common share
Continuing operations (0.09) (0.10) (0.18)
Discontinued operations -- (0.02) (0.01)
- --------------------------------------------------------------------------------------------------
Loss per share (0.09) (0.12) (0.19)
==================================================================================================
10. DYNAPOWER MANAGEMENT BUYOUT
In April 2002, the Company sold all tangible assets of its metal cleaning
subsidiary, DynaPower, Inc. to the management of DynaPower for nominal
consideration of $1 plus future royalties. The Company retains ownership of the
intellectual property related to the DynaPower metal cleaning technology and has
licensed the intellectual property to DynaPower for a period of seven years from
the closing of the sales agreement. The royalties over the seven year period are
based on an increasing percentage of the cumulative revenues generated by
DynaPower on sales of DynaPower systems. The intellectual property will transfer
from the Company to DynaPower on the expiration of the royalty period at March
31, 2009 only if a cumulative sales threshold is reached.
In 2002, the Company recorded write-downs of patents related to DynaPower for
$118,732 and in 2001, recorded write-downs of the DynaPower capital assets of
$175,037 [notes 5 and 6].
73
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
11. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has the following future minimum lease commitments for premises and
equipment:
$
- --------------------------------------------------------------------------------
2004 87,000
2005 116,000
2006 125,000
2007 136,000
2008 139,000
- --------------------------------------------------------------------------------
603,000
================================================================================
In connection with the Company's West Lorne project (see Note 5) the Company is
committed to outstanding construction commitments of approximately $3.3 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.
12. 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 9, the Company had the
following transactions with related parties:
[a] Consulting fees and salaries of $1,591,097 for the year ended December 31,
2003 [years 2002 - $639,910; 2001 - $768,336] have been paid to Directors
(or companies controlled by Directors) of the Company. Included in the
amount above, is $1,233,418 [2002 - $447,789; 2001 - $371,669] paid by
stock based compensation [note 9(b)(i)].
74
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
12. RELATED PARTY TRANSACTIONS (cont'd.)
[b] Consulting fees and share issue costs of $1,002,085 for the year ended
December 31, 2003 [years 2002 - $nil; 2001 - $nil] have been paid to a
shareholder of the Company. Included in the amount above, is $1,002,085
[2002 - $nil; 2001 - $nil] paid by stock based compensation.
[c] As at December 31, 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 at December 31, 2003.
[d] The Company has entered into:
[i] a royalty agreement, pursuant to an agreement to purchase certain
patents for an unlimited term with a company controlled by a previous
Director of the Company, based on 4% of the gross receipts from unit
sales. No sales have occurred to date.
[ii] a 24 month consulting and research agreement, which expired February
9, 2002, with a company controlled by a director of the Company.
Included in research and development expenses are fees of $nil [2002 -
$nil; 2001 - 90,387] to this related party.
[e] In 2002, the Company entered into loan agreements with certain Directors
totaling $182,254. The loans comprised $118,839, which was used to settle
amounts owing to certain Directors and $63,415 which was received in cash.
The loans and accrued interest were converted in May 2003 into the
Company's common shares at 75% of the 10-day average of the Company's
market share price prior to conversion. A total of 818,418 warrants were
also granted to the lenders in connection with the loans. The warrants have
an exercise price ranging from $0.20 to $0.44, expire from May 06, 2006 to
December 23, 2006, and are outstanding at December 31, 2003. For the
portion of the loans received in cash, interest was charged at a rate of 1%
per month and was included in the converted amount. The remaining debt was
non-interest bearing.
The carrying value of the loans was accreted up to its fair value over the
term to maturity. For the year ended December 31, 2003, $115,633 of
accretion interest has been charged to the statement of loss.
75
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
12. RELATED PARTY TRANSACTIONS (cont'd.)
[f] During 2002, the Company entered into a loan agreement with related parties
for $200,000 cash, which was converted in 2002 into the Company's common
shares at 75% of the 10 day average of the Company's market share price
prior to conversion. A total of 300,000 warrants were granted to the
lenders in connection with the loans. The warrants have an exercise price
of $0.35 per common share and expire on April 30, 2005. Interest was
charged at a rate of 1% per month and was payable up to conversion. The
warrants are outstanding at December 31, 2003.
The proceeds of the above noted convertible debts were allocated to the
debts, the embedded conversion feature and the warrants based on the
relative fair values. Accordingly, $94,118 was recorded as liabilities and
$105,882 recorded as contributed surplus representing the embedded
conversion feature and warrants. The carrying values of the debts were
accreted up to their fair value over their maturity terms. For the year
ended December 31, 2002, $105,882 of accretion interest was charged to the
statement of loss.
[g] On June 3, 2003 the Company entered into a loan agreement with an officer
of the Company for $50,000. The loan bears interest at 2% per month and
have 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.
[h] Pursuant to consulting agreements with certain officers of the Company,
which expire on December 31, 2007, the Company is obligated to paid the
full term of contract in the event of the officers' early termination. As
at December 31, 2003 the compensation obligation payable over the next four
years amounts to $1,542,432.
76
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
13. LOSSES AND UNUSED DEDUCTIONS CARRIED FORWARD FOR INCOME TAX PURPOSES
As at December 31, 2003, the Company has loss carryforwards of approximately
$22,707,000 to apply against future taxable income in Canada ($20,866,000) and
the United Kingdom ($1,826,000) and $742,000 and $319,000 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 Loss
Tax Credits Investment Tax Carryforwards
$ Credits $
$
-------------------------------------------------------------------------------------------------
2004 -- -- 2,070,000
2005 -- -- 2,605,000
2006 12,000 -- 2,460,000
2007 104,000 -- 4,274,000
2008 22,000 -- 4,852,000
2009 44,000 7,000 2,176,000
2010 151,000 85,000 2,429,000
2011 177,000 98,000 --
2012 78,000 43,000 --
2013 154,000 86,000 --
-------------------------------------------------------------------------------------------------
742,000 319,000 20,866,000
=================================================================================================
In addition, the Company has scientific research and experimental development
expenditures of approximately $5,301,000 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, 2003 and December 31, 2002 are as follows:
77
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
13. LOSSES AND UNUSED DEDUCTIONS CARRIED FORWARD FOR INCOME TAX PURPOSES
(cont'd.)
2003 2002
$ $
- ---------------------------------------------------------------------------------------------------------
Loss carryforwards 8,164,000 6,628,000
Research and development deductions and credits 2,588,000 1,712,000
Capital assets 208,000 681,000
Financing costs 380,000 64,000
- ---------------------------------------------------------------------------------------------------------
Total future tax assets 11,340,000 9,085,000
Valuation allowance (11,340,000) (9,085,000)
- ---------------------------------------------------------------------------------------------------------
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 the 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, 2003 and 2002.
14. SUPPLEMENTARY CASH FLOW INFORMATION
2003 2002 2001
Net change in non-cash working capital $ $ $
-------------------------------------------------------------------------------------------------
Accounts receivable (38,399) 8,737 215,908
Government grants receivable (572,460) (160,316) 639,665
Inventory -- 10,043 9,548
Prepaid expenses and deposits 10,566 136,434 (36,764)
Deferred revenue -- (51,981) (47,189)
Accounts payable and accrued liabilities 227,628 508,142 388,807
-------------------------------------------------------------------------------------------------
(372,665) 451,059 1,169,975
=================================================================================================
Interest paid
Short-term interest paid 63,522 48,661 26,080
=================================================================================================
78
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
14. SUPPLEMENTARY INFORMATION (cont'd.)
For the period ended December 31, 2003 the Company recorded no revenue. For the
year ended December 31, 2002, 69% and 10% of sales were from two customers. For
the year ended December 31, 2001, 31%, 17% and 16% of sales were from three
customers. As at December 31, 2003 there were no accounts receivable balances
relating to these customers [2002 - $nil].
15. GOVERNMENT ASSISTANCE
Government assistance received during the year ended December 31, 2003 in the
amount of $915,237 [2002 - $467,832; 2001 - $674,304] has been recorded as a
reduction of expenditures.
Government assistance applied to: 2003 2002 2001
$ $ $
-------------------------------------------------------------------------------------------------
Capital assets and other 422,176 127,144 613,637
Research and development 456,438 288,445 60,667
Other expenses 36,623 52,243 --
-------------------------------------------------------------------------------------------------
Total 915,237 467,832 674,304
=================================================================================================
[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 $6.3 million (Cdn$ 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 June 30, 2004 while retaining the original cumulative maximum
assistance level of $6.3 million. The agreement, as amended, specifies that
in the event commercial viability is achieved, then the assistance is
repayable, commencing January 1, 2003 based on royalties from sales of
specified products resulting from the project to a maximum of $12.4 million
(Cdn$ 16 million) or until the expiration of contract on December 31, 2012.
In early 2002, subsequent to the original amendment, the Company recovered
$269,792 relating to eligible expenditures made in 2001. As at December 31,
2003, $695,437 [2002 - $139,745] is included in government grants
receivable.
79
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
15. GOVERNMENT ASSISTANCE (cont'd.)
[b] Other contribution agreements
The Company had contribution agreements with other Canadian governmental
agencies for a maximum contribution of $376,428 over the 2001 - 2003
period. In the year ended December 31, 2003, the Company received $73,709
[2002 - $98,266; 2001 - $204,244] under these agreements. Of these amounts,
$37,339 is included in government grants receivable as at December 31, 2003
[2002 - $20,571; 2001 - $nil].
In the year ended December 31, 2003, $73,709 [2002 - $98,266; 2001 -
$164,266] has been used to reduce expenditures made in the current year
with the remaining amount at December 31, 2003, $nil [2002 - $nil; 2001 -
$39,978] included in current liabilities to be used to reduce expenditures
made in subsequent periods. A portion of these funds, to a maximum of
$94,238, are repayable under certain defined terms of non-performance.
80
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
16. Segmented information
In 2003 the Company has one reportable segment, BioOil Power Generation. The
BioOil Power Generation segment relates to the biomass-to-energy technology,
BioTherm(TM). Substantially all of the Company's operations and assets are in
Canada and are solely focused on the development and commercialization of its
BioTherm technology. BioOil Power Generation is biomass-to-energy technology
that converts low value forest waste and agricultural by-products into BioOil
for use in power generation or other industrial energy purposes.
In prior years, the Company also had two other reportable segments: DynaPower
and Actuator. In 2002, the Company sold the operating assets of DynaPower to the
management of DynaPower and entered into a licensing arrangement for the
DynaPower intellectual property retained by the Company [note 10]. The licensing
agreement under the Actuator segment expired in 2002 and has not been renewed.
Corporate includes other corporate related amounts that are not a separately
reportable segment.
2003 2002 2001
$ $ $
-------------------------------------------------------------------------------------------------
Revenue
Actuator -- 47,419 --
DynaPower -- 18,480 274,360
BioOil Power Generation -- 2,580 --
Corporate -- 90 --
-------------------------------------------------------------------------------------------------
-- 68,569 274,360
-------------------------------------------------------------------------------------------------
Loss for the period from continuing
operations
Actuator -- 47,419 (111,574)
DynaPower -- (105,074) (578,527)
BioOil Power Generation (4,921,650) (856,475) (2,276,293)
Corporate -- (3,452,324) (3,471,067)
-------------------------------------------------------------------------------------------------
(4,921,650) (4,366,454) (6,437,461)
-------------------------------------------------------------------------------------------------
Capital expenditures, including patents
(net of government grants and disposal)
DynaPower -- -- 18,412
BioOil Power Generation 1,497,398 182,637 543,980
Corporate 4,702 836 44,257
-------------------------------------------------------------------------------------------------
1,502,100 183,473 607,649
-------------------------------------------------------------------------------------------------
Amortization and depreciation
Actuator -- -- 33,912
DynaPower -- -- 100,323
BioOil Power Generation 90,373 197,005 215,546
Corporate 35,207 116,469 54,714
-------------------------------------------------------------------------------------------------
125,580 313,474 404,495
-------------------------------------------------------------------------------------------------
Total assets
BioOil Power Generation 3,211,780 865,647
Corporate 547,825 420,166
--------------------------------------------------------------------------------
3,759,605 1,285,813
--------------------------------------------------------------------------------
81
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
16. Segmented information (cont'd.)
2003 2002 2001
$ $ $
-------------------------------------------------------------------------------------------------
Geographic information
Revenue
United States -- 47,419 109,795
Canada -- 21,060 109,935
Other -- 90 54,630
-------------------------------------------------------------------------------------------------
-- 68,569 274,360
-------------------------------------------------------------------------------------------------
Capital assets
United States 685 792
Canada 2,270,176 720,122
United Kingdom 22,561 29,495
--------------------------------------------------------------------------------
2,293,422 750,409
================================================================================
17. PROJECT ADVANCE
In June 2003 the Company received $154,488 (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 is now proceeding at the site of Erie
Flooring in West Lorne Ontario, but the Company has agreed with OPG that they
may extend the time until December 31, 2004 to decide whether to convert the
Project Advance into either a Project ownership interest or into Company equity
based on then current market value.
82
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
18. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
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 U.S. GAAP, patent costs are amortized over the life of the patent
commencing with the date the patent is granted. Under Canadian GAAP,
patent costs are amortized over the life of the patent commencing with
commercial production.
[iii] 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. Effective January 1, 2002, the Company has
adopted the guidance under CICA Handbook Section 3870 [note 3] which is
consistent with U.S. GAAP.
For U.S. GAAP purposes, the Company has elected to follow 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 2003, there were
1,595,456 [2002 - nil; 2001 - 15,940] 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. Compensation relating to
variable plans is recorded in the reconciliation when it becomes probable
that the award will be earned.
[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.
83
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
18. 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.
2003 2002 2001
$ $ $
-------------------------------------------------------------------------------------------------
Loss for the year, Canadian GAAP 4,984,681 5,261,607 6,838,264
Adjustment for patent cost amortization -- -- 951
Adjustment for stock based compensation -- -- (166,595)
Adjust for patent write-down -- 2,862 (69,728)
-------------------------------------------------------------------------------------------------
Loss for the year, U.S. GAAP 4,984,681 5,264,469 6,602,892
-------------------------------------------------------------------------------------------------
Unrealized losses on foreign currency 146,363 24,321 148,360
translation
-------------------------------------------------------------------------------------------------
Comprehensive loss for the year, U.S. GAAP 5,131,044 5,288,790 6,751,252
=================================================================================================
Weighted average number of common shares
outstanding 56,617,490 45,094,978 36,458,969
=================================================================================================
Basic and diluted loss per common share,
U.S. GAAP (0.09) (0.12) (0.18)
=================================================================================================
Consolidated balance sheet items which vary significantly under accounting
principles generally accepted in the United States would be as follows:
2003 2002
$ $
-----------------------------------------------------------------------------------
Share capital 33,094,758 29,739,808
Shares to be issued 2,827,111 771,449
Contributed surplus 5,096,189 2,979,508
Other accumulated comprehensive income (690,107) (543,744)
Deficit (38,603,514) (33,618,833)
-----------------------------------------------------------------------------------
Shareholders' equity 1,724,437 (671,812)
-----------------------------------------------------------------------------------
84
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003 (expressed in U.S. dollars)
19. SUBSEQUENT EVENTS
[a] As described in note 9(c), during the first 4 months in 2004, the Company
issued 7,189,609 common shares for total proceeds of $2,755,162, inclusive
of $1,476,012 received as at December 31, 2003 relating to a private
placement commencing during third quarter of 2003.
[b] On February 17, 2004 the Company subscribed for an additional 9,980 A Units
and Magellan Aerospace subscribed for 10 A Units of the West Lorne Biooil
Co-generation Limited Partnership to bring the relative ownership
percentage to 99.9% as to DynaMotive and 0.1% as to Magellan.
[c] On March 5, 2004 the Company signed a Contribution Agreement with
Sustainable Development Technology Canada ("SDTC") whereby SDTC will
contribute C$5,000,000 (US$3.8 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.
20. COMPARATIVE FIGURES
Certain comparative figures have been reclassified in order to conform with the
presentation adopted in the current year.
85
CERTIFICATIONS
I, R. Andrew Kingston, President and Chief Executive Officer of DynaMotive
Energy Systems Corporation, certify that;
(1) I have reviewed this Annual Report on Form 20-F of DynaMotive Energy Systems
Corporation;
(2) Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the statement
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant
as of, and for, the periods presented in this report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
(5) The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of the internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
86
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 17, 2004
/S/ R. Andrew Kingston
- ------------------------------
By: R. Andrew Kingston
Title:President and Chief Executive Officer
87
CERTIFICATIONS
I, Brian Richardson, Chief Financial Officer of DynaMotive Energy Systems
Corporation, certify that;
(1)I have reviewed this Annual Report on Form 20-F of DynaMotive Energy Systems
Corporation.
(2) Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the statement
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant
as of, and for, the periods presented in this report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
(5) The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of the internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
88
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 17, 2004
/s/ Brian Richardson
- ------------------------------
By: Brian Richardson
Title: Chief Financial Officer
89
Item 19. Exhibits
Exhibit Exhibit Description
3.1(a) Company Act 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.)
3.1(b) Amendment to the Company act 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.)
3.2 Articles of DynaMotive Technologies Corporation,
as amended to date (filed as Exhibit 3.2 to the Company's
Quarterly Report on Form 10-QSB filed on August 15, 2000 and
incorporated herein by reference.)
4.1 Sustainable Development Technology Canada Contribution
Agreement dated as of March 5, 2004.
4.2 Modification No. M1 to the Sustainable Development
Technology Canada Contribution Agreement dated as of April 6,
2004.
4.3 Loan Agreement between Memorial Gift Trust, James Acheson
and the Company dated June 3, 2003
4.4 Technology Partnerships Canada Agreement dated July 29, 1997
including amendments dated February 2, 1998 to August 29,
2003
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.)
12.1 Certification of chief executive officer
12.2 Certification of chief financial officer
90
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: May 17, 2004
By: /s/ R. Andrew Kingston
- -------------------------------------
R. Andrew Kingston
President and Chief Executive Officer
By: /s/ Brian Richardson
- -------------------------------------
Brian Richardson
Chief Financial Officer
91