-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SBtVk487yP5sHuN/3qqygBz6aKvRR2lNinHxUQnXUp54W5Hqn8cXL+Iajg4eSoQW YQxaeuh8cOl8vYyngMwBJg== 0000941625-06-000031.txt : 20060502 0000941625-06-000031.hdr.sgml : 20060502 20060501205534 ACCESSION NUMBER: 0000941625-06-000031 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20060501 FILED AS OF DATE: 20060502 DATE AS OF CHANGE: 20060501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNAMOTIVE ENERGY SYSTEMS CORP CENTRAL INDEX KEY: 0000941625 STANDARD INDUSTRIAL CLASSIFICATION: COGENERATION SERVICES & SMALL POWER PRODUCERS [4991] IRS NUMBER: 000000000 STATE OF INCORPORATION: A1 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27524 FILM NUMBER: 06797020 BUSINESS ADDRESS: STREET 1: 1700 WEST 75TH AVENUE STREET 2: SUITE 230 CITY: VANCOUVER, BC STATE: A1 ZIP: V6P 6G2 BUSINESS PHONE: 6042676000 MAIL ADDRESS: STREET 1: 1700 WEST 75TH AVENUE STREET 2: SUITE 230 CITY: VANCOUVER STATE: A1 ZIP: V6P 6G2 FORMER COMPANY: FORMER CONFORMED NAME: DYNAMOTIVE TECHNOLOGIES CORP DATE OF NAME CHANGE: 19960227 FORMER COMPANY: FORMER CONFORMED NAME: DYNAMOTIVE CANADA CORP DATE OF NAME CHANGE: 19950315 6-K 1 financialstatements2005.txt FINANCIAL STATEMENTS 2005 FORM 6-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 or 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR May 01, 2006 DYNAMOTIVE ENERGY SYSTEMS CORPORATION (Exact name of Registrant as specified in its charter) ----------------- Suite 230-1700 West 75th Avenue Vancouver, BC Canada V6P 6G2 (604) 267-6000 (Address of principal executive offices) ----------------- [Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F:] FORM 20-F X FORM 40-F --- --- [Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to rule 12g3-2(b) under the Securities Exchange Act of 1934.] YES NO X --- --- [If "Yes " is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):] Not applicable DYNAMOTIVE [LOGO] Green Fuels to the World FORM 52-109F1 CERTIFICATION OF ANNUAL FILINGS I, R. Andrew Kingston, President and Chief Executive Officer of DynaMotive Energy Systems Corporation, certify that: 1. I have reviewed the annual filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers? Annual and Interim Filings) of DynaMotive Energy Systems Corporation (the ?issuer?) for the annual period ending December 31, 2005; 2. Based on my knowledge, the annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the annual filings; 3. Based on my knowledge, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date and for the periods presented in the annual filings; 4. The issuer?s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting for the issuer, and we have: a. designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the annual filings are being prepared; b. designed such internal control over financial reporting, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer?s GAAP; and c. evaluated the effectiveness of the issuer?s disclosure controls and procedures as of the end of the period covered by the annual filings and have caused the issuer to disclose in the annual MD&A our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by the annual filings based on such evaluation; and 5. I have caused the issuer to disclose in the annual MD&A any change in the issuer?s internal control over financial reporting that occurred during the issuer?s most recent annual period that has materially affected, or is reasonably likely to materially affect, the issuer?s internal control over financial reporting. Date: April 28, 2006 /s/ R.Andrew Kingston - --------------------- R. Andrew Kingston President & CEO DynaMotive Energy Systems Corporation Angus Corporate Center, 230-1700 West 75th Avenue, Vancouver BC, Canada V6P 6G2 Tel: (604) 267-6000 www.dynamotive.com Fax: (604) 267-6005 DYNAMOTIVE [LOGO] Green Fuels to the World FORM 52-109F1 CERTIFICATION OF ANNUAL FILINGS I, Brian Richardson, Chief Financial Officer of DynaMotive Energy Systems Corporation, certify that: 1. I have reviewed the annual filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers? Annual and Interim Filings) of DynaMotive Energy Systems Corporation (the ?issuer?) for the annual period ending December 31, 2005; 2. Based on my knowledge, the annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the annual filings; 3. Based on my knowledge, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date and for the periods presented in the annual filings; 4. The issuer?s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting for the issuer, and we have: a. designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the annual filings are being prepared; b. designed such internal control over financial reporting, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer?s GAAP; and c. evaluated the effectiveness of the issuer?s disclosure controls and procedures as of the end of the period covered by the annual filings and have caused the issuer to disclose in the annual MD&A our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by the annual filings based on such evaluation; and 5. I have caused the issuer to disclose in the annual MD&A any change in the issuer?s internal control over financial reporting that occurred during the issuer?s most recent annual period that has materially affected, or is reasonably likely to materially affect, the issuer?s internal control over financial reporting. Date: April 28, 2006 /s/ Brian Richardson - --------------------- Brian Richardson Chief Financial Offier DynaMotive Energy Systems Corporation Angus Corporate Center, 230-1700 West 75th Avenue, Vancouver BC, Canada V6P 6G2 Tel: (604) 267-6000 www.dynamotive.com Fax: (604) 267-6005 Consolidated Financial Statements (in U.S. dollars) DynaMotive Energy Systems Corporation December 31, 2005 and 2004 BDO [LOGO] - --- BDO Dunwoody LLP 600 Cathedral Place Chartered Accountants 925 West Georgia Street Vancouver, BC, Canada V6C 3L2 Telephone: (604) 688-5421 Telefax: (604) 688-5132 E-mail: vancouver@bdo.ca www.bdo.ca AUDITORS' REPORT To the Shareholders of DynaMotive Energy Systems Corporation We have audited the consolidated balance sheets of DynaMotive Energy Systems Corporation as at December 31, 2005 and 2004 and the consolidated statements of loss, deficit and cash flows for the years then ended. These financial statements are the responsibility of the company?s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2005 and 2004 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. The comparative figures for 2003 were reported upon by other auditors. Their report covered the year ended December 31, 2003, contained no reservations and was dated April 16, 2004. /s/ BDO Dunwoody LLP Chartered Accountants Vancouver, Canada March 24, 2006 DynaMotive Energy Systems Corporation Incorporated under the laws of British Columbia, Canada CONSOLIDATED BALANCE SHEETS As at December 31 (in U.S. dollars)
2005 2004 $ $ - ------------------------------------------------------------------------------- ASSETS Current Cash 1,428,468 136,971 Restricted Cash [note 9] 172,813 -- Receivables 40,326 230,280 Government grants receivable [note 16] 627,582 236,548 Prepaid expenses and deposits 235,127 177,967 - ----------------------------------------------------------------------------------- Total current assets 2,504,316 781,766 Property, plant and equipment [note 5] 14,199,148 12,154,153 Patents [note 6] 259,109 262,779 - ----------------------------------------------------------------------------------- 16,962,573 13,198,698 =================================================================================== LIABILITIES AND SHAREHOLDERS? EQUITY Current Short-term loans [note 7] -- 42,331 Accounts payable and accrued liabilities [note 8] 7,314,856 7,635,494 Convertible debenture [note 9] 546,461 -- Project advance [note 18] -- 166,003 - ----------------------------------------------------------------------------------- Total current liabilities 7,861,317 7,843,828 Convertible debenture [note 9] -- 307,463 Long-term debt [note 10] 808,848 760,209 - ----------------------------------------------------------------------------------- Total liabilities 8,670,165 8,911,500 - ----------------------------------------------------------------------------------- Commitments and contingencies [notes 1, 12, and 16] Shareholders? Equity Share capital [note 11(b)] 51,849,476 39,866,465 Shares to be issued [note 11(c)] 2,677,832 2,340,894 Contributed surplus [note 11(h)] 13,047,158 9,584,266 Cumulative translation adjustment (434,661) (654,374) Deficit (58,847,397) (46,850,053) - ----------------------------------------------------------------------------------- Total shareholders? equity 8,292,408 4,287,198 - ----------------------------------------------------------------------------------- 16,962,573 13,198,698 ===================================================================================
See accompanying notes On behalf of the Board: ?Richard Lin? ?Andrew Kingston? Director Director DynaMotive Energy Systems Corporation Incorporated under the laws of British Columbia CONSOLIDATED STATEMENTS OF LOSS For the Year Ended December 31 (in U.S. dollars)
2005 2004 2003 $ $ $ - ----------------------------------------------------------------------------------- EXPENSES Amortization and depreciation 148,556 130,912 125,580 Interest expense [note 11(i)] 1,445,918 151,758 320,643 Marketing [note 11(i)] 496,297 283,322 155,914 Office supplies, telephone and insurance 467,854 328,286 300,751 Professional fees [note 11(i)] 1,533,546 1,010,802 954,223 Rent 175,294 107,804 109,653 Research and development [notes 11(i) and 16] 2,435,635 2,690,405 512,981 General and administrative salaries and benefits [note 11(i)] 5,152,851 5,267,756 2,693,430 Foreign Exchange gain (33,677) (53,156) (177,551) - ----------------------------------------------------------------------------------- 11,822,274 (9,917,889) 4,995,624 - ----------------------------------------------------------------------------------- Loss from operations (11,822,274) (9,917,889) (4,995,624) OTHER REVENUE AND EXPENSES Interest and other income 5,614 8,766 73,974 Loss on asset disposals 19,773 (7,092) -- Loss on write-down of long-term assets [notes 5 and 6] (200,457) -- -- - ----------------------------------------------------------------------------------- (175,070) 1,674 73,974 - ----------------------------------------------------------------------------------- Loss from continuing operations (11,997,344) (9,916,215) (4,921,650) Loss from discontinued operations [note 4(a)] -- -- (63,031) - ----------------------------------------------------------------------------------- Loss for the year (11,997,344) (9,916,215) (4,984,681) =================================================================================== Weighted average number of common shares outstanding [note 11[j]] 108,009,185 80,979,299 56,617,490 =================================================================================== Basic and diluted loss per common share Continuing operations [note 11[j]] (0.11) (0.12) (0.09) Discontinued operations [note 11[j]] -- -- -- - ----------------------------------------------------------------------------------- Loss per share (0.11) (0.12) (0.09) ===================================================================================
See accompanying notes DynaMotive Energy Systems Corporation Incorporated under the laws of British Columbia CONSOLIDATED STATEMENTS OF DEFICIT As at December 31 (in U.S. dollars)
2005 2004 2003 $ $ $ - ----------------------------------------------------------------------------------- Deficit, beginning of year (46,850,053) (36,136,236) (31,151,555) Effect of change in accounting policy [note 3] -- (797,602) -- - ----------------------------------------------------------------------------------- Deficit, beginning of year restated (46,850,053) (36,933,838) (31,151,555) Loss for the year (11,997,344) (9,916,215) (4,984,681) - ----------------------------------------------------------------------------------- Deficit, end of year (58,847,397) (46,850,053) (36,136,236) ===================================================================================
See accompanying notes DynaMotive Energy Systems Corporation Incorporated under the laws of British Columbia CONSOLIDATED STATEMENTS OF CASH FLOWS As at December 31 (in U.S. dollars)
2005 2004 2003 $ $ $ - ----------------------------------------------------------------------------------- OPERATING ACTIVITIES Loss for the year (11,997,344) (9,916,215) (4,984,681) Add items not involving cash: Amortization and depreciation 148,556 130,912 125,580 Accretion expense[note 9 and 10] 1,068,192 97,200 239,245 Interest expense-non cash 67,970 -- -- Gain on disposition of asset (19,773) -- -- Loss on write-down of property, plant and equipment 200,457 -- -- Stock based compensation [note 11(i)] 3,697,057 4,730,604 2,427,857 Foreign exchange gain and other items (33,677) (13,392) (177,551) Net change in non-cash working capital balances related to operations [note 15] 133,833 2,087,156 199,795 - ----------------------------------------------------------------------------------- Cash used in operating activities (6,734,729) (2,883,735) (2,169,755) - ----------------------------------------------------------------------------------- FINANCING ACTIVITIES Decrease in bank indebtedness -- -- (158,539) Proceeds from convertible debenture 1,825,000 830,013 -- Proceeds from long-term debt -- 816,727 -- Proceeds from short term loan -- 42,331 265,000 Repayment of short term loan (42,331) -- (265,000) Increase in project advance -- -- 154,488 (Increase) decrease in government grant receivables (368,712) 509,879 (572,460) Share capital issued 6,398,254 4,857,699 2,321,852 Shares to be issued 1,957,000 1,636,408 1,476,012 - ----------------------------------------------------------------------------------- Cash provided by financing activities 9,769,211 8,693,057 3,221,353 - ----------------------------------------------------------------------------------- INVESTING ACTIVITIES Increase in other long-term assets -- -- (32,673) Increase in patent costs (22,181) (19,989) (6,479) Purchase of property, plant and equipment (net of government grants) (1,580,195) (5,804,656) (491,057) Increase in restricted cash (172,813) -- -- - ----------------------------------------------------------------------------------- Cash used in investing activities (1,775,189) (5,824,645) (530,209) - ----------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents from operations 1,259,293 (15,323) 521,389 Effects of foreign exchange rate changes on cash 32,204 (131,220) (262,968) - ----------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents during year 1,291,497 (146,543) 258,421 Cash and cash equivalents, beginning of year 136,971 283,514 25,093 - ----------------------------------------------------------------------------------- Cash and cash equivalents, end of year 1,428,468 136,971 283,514 ===================================================================================
Supplemental cash flow information [notes 11(i) and 15] See accompanying notes DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 1. NATURE OF BUSINESS AND FUTURE OPERATIONS DynaMotive Energy Systems Corporation (?the Company? or ?Dynamotive?) was incorporated on April 11, 1991 under the laws of the Province of British Columbia. Dynamotive is focused on the development of innovative energy solutions based on its patented fast pyrolysis system. The Company?s focus is to commercialize its patented BioOil production technology and establish this technology for production of BioOil clean fuels. These financial statements have been prepared in accordance with Canadian generally accepted accounting principles on a going concern basis, which presumes the Company will be able to realize its assets and discharge its liabilities in the normal course of operations for the foreseeable future. As at December 31, 2005, the Company has a working capital deficiency of $5,357,001 (2004 - $7,062,062), and has incurred a loss of $11,997,344 (2004 - $9,916,215) for the year ended December 31, 2005. The ability of the Company to continue as a going concern is in substantial doubt and is dependent on achieving profitable operations, commercializing its BioOil production technology and obtaining the necessary financing in order to develop this technology. The outcome of these matters cannot be predicted at this time. The Company?s future operations are dependent on the market?s acceptance of its products in order to ultimately generate future profitable operations, and the Company?s ability to secure sufficient financing to fund future operations. There can be no assurance that the Company?s products will be able to secure market acceptance. Management plans to raise additional equity financing to enable the company to complete its development plans. These financial statements do not include any adjustments that might result from the outcome of these uncertainties. Subsequent to the year end, during the period from January 1 to March 24, 2006, the Company issued 11,253,937 common shares for total proceeds of $7,680,459, inclusive of $1,615,000 received as at December 31, 2005, relating to a private placement commencing during the forth quarter of 2005. In addition during the period from January 1 to March 24, 2006, the Company received $1.64 million on the exercise of 269,172 options and 4,022,806 warrants. Management is of the opinion that this and expected future financing along with expected sales will provide sufficient working capital to meet the Company?s liabilities and commitments as they become due. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. The following is a summary of significant accounting policies used in the preparation of these consolidated financial statements: DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) Principles of consolidation These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries DynaMotive Corporation, incorporated under the laws of Rhode Island, U.S.A.; DynaMotive Europe Limited, incorporated under the laws of the United Kingdom; and DynaMotive Canada Inc., federally incorporated under the laws of Canada. In addition, the Company owns 99.9% of the West Lorne BioOil Co-Generation LP formed under the laws of Ontario and has accounted for its proportionate share of the partnership. The consolidated financial statements include the results of operations of Border Biofuels Limited (?BBL?) as discontinued operations [note 4]. Use of estimates The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Foreign currency translation The accounts of the Company and its consolidated subsidiaries are measured using the Canadian dollar as the functional currency. Monetary items denominated in foreign currencies are translated into Canadian dollars using exchange rates in effect at the balance sheet date and non-monetary items are translated using historical exchange rates. Exchange gains or losses arising on the transaction or settlement of foreign currency denominated monetary items are included in the determination of net income. The Company uses the U.S. dollar as the reporting currency for its consolidated financial statements. Assets and liabilities are translated into U.S. dollars using current exchange rates in effect at the balance sheet date and revenue and expense accounts are translated using the average exchange rate during the period. Gains and losses resulting from this process are recorded in shareholders? equity as an adjustment to the cumulative translation adjustment account. Revenue recognition [a] Revenue from the sale of products is recognized upon shipment of the product and when the risk and reward of ownership has been transferred to the customer, provided that the amount is fixed or determinable and collection is reasonably assured. [b] Revenue from services contracts is recognized when the services are provided and when the amount is reasonably determinable and collectible. [c] Royalty revenue is recognized when the Company has earned the right to collect payment pursuant to the terms of the relevant agreement and when the amount is reasonably determinable and collectible. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont?d.) Government assistance and investment tax credits Government assistance towards current expenses is included in the determination of income for the period as a reduction of the expenses to which it relates. Amounts received for future expenditures are recorded as a current liability. Government assistance towards the acquisition and construction of property, plant and equipment is deducted from the cost of the related property, plant and equipment. Government assistance is recorded when the Company has incurred the qualifying expenditure and there is reasonable assurance the receipts will be recovered. Repayment of contribution is contingent solely upon the Company?s ability to generate revenue from the sale of specified products or technology. Accordingly, liability of repayment will only be accrued when sales of the products or technology have been generated. Investment tax credits are accounted for under the cost reduction method whereby they are netted against the expense or capital asset to which they relate. Investment tax credits are recorded when the Company has incurred the qualifying expenditures and there is reasonable assurance the tax credits will be realized. As at December 31, 2005 and 2004, no investment tax credits have been recorded. Research and development costs Research costs are expensed in the period incurred. Development costs are expensed in the period incurred unless the Company believes the development project meets Canadian generally accepted accounting criteria for deferral and amortization. In evaluating these criteria the Company considers technological feasibility to be established only when a product demonstrates it operates under conditions which are acceptable to target customers. If management determines that the development of products to which such costs have been capitalized is not reasonably certain, or that costs exceed recoverable value, such costs are charged to operations. Patents Patents are recorded at cost, including related legal costs, and are amortized on a straight-line basis over the lesser of the estimated useful life of the related technology and the life of the patent 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. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont?d.) Property, plant and equipment Property, plant and equipment are recorded at cost, net of government assistance, and amortized using the following methods and annual rates: Furniture and fixtures 20% declining balance Computer equipment 30% declining balance Computer software 100% declining balance Equipment 20% declining balance Leasehold improvements Straight line over the term of the lease (which approximates its estimated life) Motor vehicles 50% the first year and 25% thereafter declining balance Annually, or whenever events and circumstances indicate that the carrying value of the assets might be impaired and the carrying value may not be recoverable, the Company performs evaluations to assess the recoverability of its property, plant and equipment. When the carrying value of property, plant and equipment is determined to exceed its recoverable amount, an impairment loss is recorded to reduce the carrying value of the capital asset to its fair value. Projects under development The Company expenses all preliminary stage costs incurred with respect to a potential capital project, including costs related to the consideration of alternatives, feasibility studies, and activities occurring prior to the decision to proceed with the project until the capital project meets the Company?s capitalization policy and is considered a project under development. The Company begins to capitalize costs for projects under development when it has determined that it is more likely than not that the financing for the capital project is available and it is more likely than not that the Company will be able to meet the requisite local and other governmental regulations to develop the capital project. For those capital projects that meet the Company?s capitalization policy, the Company capitalizes incremental costs that are directly identifiable with the specific capital project until the capital project is substantially complete and ready for its intended use. Financing costs, including interest, are capitalized when they arise from indebtedness incurred, directly or indirectly, to finance the construction of the capital project. Capitalization of financing costs will cease when a capital project is considered to be substantially complete and ready for its intended use. Annually, or whenever events and circumstances indicate that the carrying value of the assets might be impaired and the carrying value may not be recoverable, the Company performs evaluations to assess the recoverability of its projects under development. When the carrying value of projects under development is determined to exceed its recoverable amount, an impairment loss is recorded to reduce the carrying value of the projects under development to its fair value. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont?d.) Income taxes The Company accounts for income taxes using the liability method of tax allocation. Future income taxes are recognized for the future income tax consequences attributable to differences between the carrying values of assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using substantively enacted income tax rates expected to apply to taxable income in the periods in which temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in rates is included in earnings in the period that includes the substantial enactment date. Future income tax assets are recorded in the consolidated financial statements if realization is considered more likely than not. A valuation allowance is recorded to reduce future income tax assets recognized by the amount of any future income tax benefits that, based on available evidence, are not expected to be realized. Stock based compensation The Company has two stock based compensation plans - a stock appreciation rights (?SA Rights?) plan and a stock option plan for directors and employees, which are described in note 11. Under the terms of the stock option plan the Company may grant fixed options or options whose vesting is contingent on future performance. Compensation is recognized under the fair value based method when fixed or performance based stock options are granted to employees and directors. Compensation is recognized using the fair value based method for SA Rights when the performance criteria have been met and amortized over the service period. In addition, the Company has entered into compensation arrangements, which entitle certain non-employees to receive specific amounts for their services. These amounts can only be settled by applying them to the exercising of outstanding options to purchase common shares. The Company recognizes compensation expense based on the fair value of the common stock issuable under the arrangement, when related services are performed. The common shares issuable under these arrangements are generally issued in the quarter following the period in which they are earned. The Company may also issue stock options, and warrants to employees or as consideration for services rendered by non-employees. As a result of the change in accounting policy (note 3), such equity awards are recorded at their fair value, as compensation expense or capitalized to long-term assets under construction when the Company receives the related services and the equity awards vest. No compensation is recognized in connection with options and warrants awarded in connection with private placements, since the share issue costs are netted against the proceeds raised. All unvested or modified options for non-employees are re-measured on each balance sheet date until such options vest, are exercised or forfeited. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont?d.) Loss per common share Basic loss per common share is based on the weighted average number of shares outstanding for the period excluding contingently issuable shares and excluding escrowed shares. For the years ended December 31, 2005 and 2004, potentially dilutive common shares (relating to options, warrants, and convertible agreements outstanding at year end) totaling 50,433,962 (2004 ? 39,342,607, 2003 ? 24,624,318) were not included in the computation of loss per share because their effect was anti-dilutive. Financial instruments The fair values of the financial instruments approximate their carrying value due to their short term or demand nature, except for the convertible debenture and long-term debt. The fair values of the convertible debenture and long-term debt were calculated using discounted cash flow analysis and approximate their carrying value as the effective interest rates implicit in these financial instruments are similar to current market rates. Leases Leases are classified as either capital or operating leases. Leases which transfer substantially all the benefits and risks of ownership of the property to the Company are accounted for as capital leases. Capital lease obligations reflect the present value of future minimum lease payments, discounted at the appropriate interest rate. All other leases are accounted for as operating leases wherein rental payments are expensed as incurred. Cash and cash equivalents Cash and cash equivalents consist of cash on hand and balances invested in short-term money market deposits with maturity less than 30 days from the date of purchase. For year ended December 31, 2005, the average effective interest rate earned on cash equivalent balance was 3.51% (2004 ? nil%). As at December 31, 2005, the Company had $328,468 (2004 - $136,971) in cash, which includes $78,999 in Canadian currency (converted to US dollars) based on year end rate and $1,100,000 (2004 - $nil) in short-term money market deposit. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 3. CHANGE IN ACCOUNTING PRINCIPLES [a] Stock based compensation Effective January 1, 2004, the Company adopted, on a retroactive basis without restatement, the recommendations of revised CICA Handbook Section 3870 (?CICA 3870?), ?Stock-based compensation and other stock-based payments?, which now requires companies to adopt the fair value based method for all stock-based awards granted on or after January 1, 2002. Previously, companies were only required to disclose the pro-forma effect of stock options issued to employees and directors in the notes to the financial statements. The effect of this change in accounting policy was to increase the deficit at January 1, 2004 by $797,602 with a corresponding increase to contributed surplus. Prior to 2004, effective January 1, 2002, the Company followed the recommendations of the CICA 3870, which required that all stock-based awards made to non-employees and direct awards of stock, stock appreciation rights and awards that call for settlement in cash or other assets that were outstanding or granted for fiscal years beginning on or after January 1, 2002 were to be measured and recognized using a fair value based method. Awards that an entity had the ability to settle in stock were recorded as equity, whereas awards that the entity was required to or had a practice of settling in cash were recorded as liabilities. The fair value method was encouraged for all other employee stock based compensation but other methods of accounting such as the intrinsic method were permitted. If the fair value method was not adopted, then pro-forma disclosure for net loss and loss per share was required to show the effects as if the fair value method has been used. The Company elected to use the intrinsic method to account for awards granted to employees and directors in 2003. [b] Asset Retirement Obligations Effective January 1, 2004, the Company adopted CICA Handbook Section 3110, ?Asset Retirement Obligations? which requires the Company to retroactively record the fair value of an asset retirement obligation as a liability in the period in which it incurred a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets and when a reasonable estimate of the fair value can be made. The obligation will be measured initially at fair value using present value methodology, and the resulting costs capitalized into the carrying amount of the related asset. In subsequent periods, the liability will be adjusted for any changes in the amount or timing of the underlying future cash flows. Capitalized asset retirement costs will be depreciated on the same basis as the related asset and the discount accretion of the liability is included in determining the results of operations. As at December 31, 2005 and 2004, the Company estimated the fair value of the asset retirement obligations was $0 and consequently, no liability was accrued. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 4. BORDER BIOFUELS LTD. [a] Liquidation of BBL In April 2001, the Company acquired 75% of the outstanding common shares of Border Biofuels Limited (?BBL?), a United Kingdom Green Power project development company. In December 2002, BBL was placed into liquidation and the Company does not expect to recover any proceeds from the sale of BBL?s assets. As BBL remains in liquidation at December 31, 2005, the Company no longer controls the operating, financing and investing decisions of BBL. As such, the financial position and results of operations have been deconsolidated from the date that BBL was petitioned into bankruptcy. Accordingly, the results of operations of BBL (net loss from discontinued operations for the year ended December 31, 2003 of $63,031) have been accounted for as discontinued operations. [b] Guarantee provided by Dynamotive In 2001, BBL entered into a credit facility with Bank of Scotland for a maximum of $344,160(GBP200,000). The credit facility is denominated in British Pounds Sterling and is guaranteed by the Company. During 2002, BBL became insolvent. If the Bank is unable to realize on its collateral with BBL, it has the right to seek settlement from the Company for payment. Although there is currently no indication that the Bank will pursue the Company, the Company has recognized the full amount of the guarantee as a current liability in 2002 and included the impact as part of the 2002 loss from discontinued operations. BBL remains in liquidation at December 31, 2005, there has been no change in status regarding the settlement of the credit facility. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 5. PROPERTY, PLANT AND EQUIPMENT
2005 2004 ------------------------------------------------ Accumulated Accumulated Cost Amortization Cost Amortization $ $ $ $ - ------------------------------------------------------------------------------------ Furniture and fixtures 148,243 123,669 166,649 127,064 Computer equipment and software 461,123 366,765 395,616 306,745 Equipment 24,499 15,858 647,960 408,916 Projects under development: West Lorne 12,832,393 -- 10,958,107 -- Construction advances - 200 tpd plant 1,196,885 -- 766,035 -- Leasehold improvements 158,200 115,903 153,106 100,476 Motor vehicles -- -- 57,446 47,565 - ------------------------------------------------------------------------------------ 14,821,343 622,195 13,144,919 990,766 - ------------------------------------------------------------------------------------ Net book value 14,199,148 12,154,153 - ------------------------------------------------------------------------------------
The Company has constructed a 100 tonne per day BioOil co-generation project at the site of Erie Flooring in West Lorne, Ontario. At December 31, 2005, the Company had recorded pre-construction advances of $1,196,885 [2004 - $766,035] representing initial payments on a proposed 200 tonne per day (?tpd?) plant. All of the pre-construction advances were paid in cash or shares. During 2005, government grants of $873,583 [2004 - $2,829,117] have been applied to reduce the cost of property, plant and equipment under construction. In 2005, the Company recorded write-downs of certain property, plant and equipment totaling $190,146, pertaining to the BioOil Power Generation segment. The Company determined that the net recoverable amount of certain test equipment was below its carrying value. In 2005, the Company re-assigned a leased vehicle along with its remaining lease liability to a former employee for $nil proceeds. The disposal resulted in a gain of $19,773. 6. PATENTS
2005 2004 ------------------------------------------------ Accumulated Accumulated Cost Amortization Cost Amortization $ $ $ $ - ------------------------------------------------------------------------------------ Patents 390,220 131,111 365,715 102,936 - ------------------------------------------------------------------------------------ Net book value 259,109 262,779 ====================================================================================
DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 6. PATENTS (cont?d) Patents are recorded at cost and amortized on a straight line basis over the estimated useful life, which approximates the legal life, of the related technology of 16 years. The annual amortization expense of these patents for the next five years is estimated to be $25,000 per annum. In 2005, the Company recorded write-downs of certain patents the Company is no longer pursuing totaling $10,311. The Company has determined that the net recoverable amount of these patents was below that carrying values. 7. SHORT-TERM LOANS [a] On December 24, 2004 the Company entered into a loan agreement with an officer of the Company for $42,331. The loan bore interest at 2% per month, had a 1-month term and was repaid in January 2005. [b] On June 3, 2003 the Company entered into a loan agreement with a U.S. based Trust for $200,000 and an officer of the Company for $50,000. The loans bore interest at 2% per month and had a 12-month term. The loan agreement also called for the Company to issue 2.5 million warrants exercisable at $0.20 each for a period of five years as part of the loan financings. The proceeds of the loan were allocated to the loan and warrants based on their relative fair values. Accordingly, $104,167 was initially allocated to the loan and $145,833 was allocated to the warrants. The carrying value of the debt was accreted up to its face value over the term to maturity. Accretion of $12,153 was recognized in the year ended December 31, 2003. The Company provided the lenders with a general security agreement and other undertakings in regard to the loan. In December 2003, the Company repaid the loan and the lender released the Company from the general security agreement. 8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2005 2004 $ $ - ------------------------------------------------------------------------------ Trade accounts payable 5,499,062 3,157,724 Accrued compensation 41,692 34,808 Accrued liabilities 1,429,942 4,057,642 Bank of Scotland guarantee [note 4(b)] 344,160 385,320 - ------------------------------------------------------------------------------ 7,314,856 7,635,494 ==============================================================================
Included in Trade accounts payable is an amount due to a vender which has committed to provide a $3.1 million (C$3.64 million) 7-year lease financing on the equipment purchased. As at December 31, 2005, the Company has not entered into any formal financing agreement with respect to this equipment. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 9. CONVERTIBLE DEBENTURES (a) In December 2004 the Company entered into an agreement with an Ontario corporation (the ?Vendor?) to pay for equipment and services in exchange for an $830,013 (C$1,000,000) convertible debenture (the ?Agreement?). The debenture was convertible into common shares of the Company at the market price at the time of conversion, subject to a minimum conversion price of $0.40 per share and a maximum conversion price of $0.60 per share. In addition, for each share issued upon conversion, the debenture holder would receive 1/2 share purchase warrant. Each whole warrant is exercisable for two years from the date of issue at 5% above the market price at the time of conversion. The debenture bore no interest and the principal was due on December 10, 2009. In September 2005, the Vendor converted the entire debenture into common shares of the Company at a price of $0.54 per share and received 1,535,001 shares and 767,500 two-year Series S warrants exercisable at $0.57 per share. The Agreement also calls for the Company to enter into a marketing agreement with the Vendor. In connection with the marketing agreement, in early 2005 the Company issued to the Vendor 500,000 Series U warrants to purchase common shares of the Company, exercisable at $0.49 per share during the period from January 4, 2005 to December 31, 2006. The Vendor has exercised these warrants subsequent to December 31, 2005. The proceeds of the debenture have been allocated to the debenture and warrants at December 31, 2004 based on their relative fair values. Accordingly, $307,463 was allocated to the debenture, $440,592 was allocated to the conversion feature and $81,958 was allocated to the warrants. The carrying value of the debt was being accreted up to its face value over the term to maturity. No amount of the discount was accreted in 2004 since the debt agreement only became effective in December 2004. The accretion of the debt discount began in January 2005 and the entire balance of $522,550 ($440,592 related to the conversion feature and $81,958 related to the warrants) was expensed upon conversion in September 2005. (b) During the year ended December 31, 2005 the Company issued $1,825,000 of convertible debentures including $175,000 of debentures issued to officers and directors (or companies controlled by officers and directors) of the Company. These debentures are due between June and September 2006, have an interest rate of 10% payable in shares and are convertible into Company common shares at rates between $0.40 and $0.425 per share. These debentures are collateralized by certain government receivables and are guaranteed by the Company. In September and December 2005, $1,150,000 of the debentures were converted into 2,727,941 common shares and 681,985 Series U warrants. In addition, 101,071 shares and 25,267 Series U warrants were issued in 2005 as an interest payment on the debenture. As at December 31, 2005, $675,000 of these debentures remain outstanding. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 9. CONVERTIBLE DEBENTURES (cont?d) The original proceeds of the debenture have been allocated to the debenture and the conversion feature at December 31, 2005 based on their relative fair values. Accordingly, $1,173,409 was originally allocated to the debenture and $651,591 was allocated to the conversion feature. The carrying value of the debt is being accreted up to its face value over the term to maturity. The accretion of the debt discount began in June 2005 and $96,695 was accreted during the period to December 31, 2005. The amount of $426,357 was expensed in the year due to the conversion of the debentures. The Company has restricted funds of $172,813 held by the lawyer as collateral for short-term convertible debentures. Shortly after the year end, debenture holders converted the same amount to company shares and these funds became non-restricted. 10. LONG-TERM DEBT In 2004, the West Lorne BioOil Co-Generation LP (the ?LP?) entered into a loan agreement with a Bahamas Corporation for an $830,013 loan (C$1,000,000, based on exchange rate at December 31, 2004). The loan bears interest at 1.25% per month with interest due monthly and the principal due August 11, 2007. The LP may repay the loan at any time without penalty. The loan agreement also calls for the Company to issue 312,500 warrants to purchase common shares of the Company, exercisable at $0.50 per share for a period of three years, as part of the loan financing. The loan is collateralized by the assets of the LP and is guaranteed by the Company. The proceeds of the loan have been allocated to the debt and warrants based on their relative fair values. Accordingly, $760,209 (C$915,900) was allocated to the loan and $69,804 (C$84,100) was allocated to the warrants. The carrying value of the debt will be accreted up to its face value over the term to maturity. No amount of the discount was accreted in 2004 since the debt agreement only became effective shortly before year end. The accretion of the debt discount began in January 2005 and during the year ended December 31, 2005 $22,591 (C$27,616) was accreted. The balance as at December 31, 2005 included $26,048 of foreign exchange effect. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 11. SHARE CAPITAL [a] Authorized share capital The Company?s authorized capital consists of an unlimited number of common shares [2004 ? unlimited common shares] with no par value and 100,000,000 Class A preferred shares with no par value [2004 ? 100,000,000 with a par value of $5.00] with each having attached special rights and restrictions. No preferred shares were issued and outstanding at December 31, 2005 and 2004. [b] Issued and outstanding common shares
Issued # $ - ---------------------------------------------------------------------------------- Balance, December 31, 2002 49,941,000 27,553,040 Issued for cash Pursuant to private placement 12,863,895 1,544,715 Pursuant to exercise of stock options 580,100 183,050 Issued on conversion of convertible loan 1,389,746 182,254 Issued for settlement of fees payable 2,206,966 699,037 Issued for services (i) 2,973,947 745,894 Shares redeemed and cancelled (ii) (40,000) -- - ---------------------------------------------------------------------------------- Balance, December 31, 2003 69,915,654 30,907,990 Issued for cash Pursuant to private placement (iii) 16,906,913 5,825,691 Pursuant to exercise of stock options 569,284 180,314 Pursuant to exercise of warrants 188,333 50,583 Issued for settlement of fees payable 2,999,113 1,427,565 Issued for services (i) 2,425,641 1,322,145 Issued for SA Rights 124,860 75,489 Shares redeemed and cancelled -- 76,688 - ---------------------------------------------------------------------------------- Balance, December 31, 2004 93,129,798 39,866,465 Issued for cash Pursuant to private placement, net of finder?s fee (iii) 17,303,998 6,071,226 Pursuant to exercise of stock options 1,239,139 373,277 Pursuant to exercise of warrants 1,873,084 592,088 Issued for settlement of fees payable (iii) 3,347,869 1,836,047 Issued for services (i) 1,656,643 929,199 Issued on conversion of convertible debentures 4,364,013 2,038,951 Issued on conversion of project advance 342,287 166,003 Shares to be redeemed and cancelled (ii) (44,956) (23,780) - ----------------------------------------------------------------------------------- Balance, December 31, 2005 123,211,875 51,849,476 ==================================================================================
DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 11. SHARE CAPITAL (cont?d.) [i] The Company has entered into various agreements for services with its employees, directors and non-employees to be settled with various stock awards. a. The Company has entered into compensation arrangements with non-employees for specified amounts, which can only be settled by applying the amounts to exercise outstanding options to purchase common shares monthly over a period of up to twelve months. Included in issued for services are nil [2004 ? nil; 2003 - 1,536,141] shares, fair valued at $nil [2004 - $nil; 2003 - $321,082]. b. The Company issued 624,301 [2004 ? 2,393,459; 2003 - 980,753] restricted shares to non-employees for services, fair valued at $303,010 [2004 - $1,303,005; 2003 - $363,764]. The shares have a 12-month restriction from the issue date. The Company also issued 941,840 [2004 ? nil; 2003 ? nil] shares to non-employees for services, fair valued at $591,799 [2004- $nil; 2003 - $nil]. c. The Company has issued 90,502 [2004 - nil; 2003 - 455,794] shares to employees, directors and officers for services rendered, recorded at fair value of $34,390 [2004 - $nil; 2003 - $60,922]. d. The Company issued nil [2004 ? 32,182; 2003 - 8,590] restricted shares to employees and directors for services, fair valued at $nil [2004 - $19,140; 2003 - $2,686]. The shares have a 12 month restriction from the issue date. During 2003, 7,331 common shares previously issued to a director of the Company were cancelled and returned to Treasury with a fair value of $2,560. [ii] At December 31, 2005, the Company had 44,956 [2004 - nil] common shares to be redeemed. The redeemable shares had a fair value of $23,780 which were issued as a partial payment of outstanding invoices will be returned to the Company as a result of the final settlement with a vendor. At December 31, 2004, the remaining balance of the previously accrued redemption was cancelled as a result of the Company using the shares as a deposit on the next development project. These shares, which were included as outstanding at December 31, 2003, were issued for services in relation to the termination of agreements with non-employees and to be redeemed upon satisfying conditions of the termination agreements which were fully settled in 2003. [iii] During the year ended December 31, 2005, the Company completed a private placement for gross proceeds of $7,138,730. Share issuance costs related to these private placements totaled $1,033,113, of which, $35,041 was paid in cash and $998,072 was paid in shares [note 11(i)]. Pursuant to the private placement agreements in 2005, 7,006,257 Series S warrants were issued in 2005 [note 11(f)]. The Company also issued 3,347,869 fully vested shares for settlement of fees payable in 2005. These shares were valued based on the quoted market price on the date of the settlement agreement. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 11. SHARE CAPITAL (cont?d.) [c] Shares to be issued At December 31, 2005, the Company has 4,673,439 [2004 ? 5,629,859] common shares to be issued which are comprised of: [i] 1,247,344 [2004 ? 1,403,080] common shares which are to be issued to a director and non-employees for services rendered under compensation arrangements in 2005 with a value of $755,224 [2004 - $704,486]. Shares to be issued under compensation arrangements are valued based on the quoted market price on the date of the agreement. [ii] 2,826,095 common shares relating to a private placement commenced during the year ended December 31, 2005 [2004 ? 4,226,779] and 600,000 [2004 - nil] common shares are related to exercise of warrants for gross proceeds of $342,000. The private placement is for up to $20 million at an offering price between $0.33 and $0.81. At December 31, 2005, the Company had received $1,957,000 [2004 - $1,636,408] in cash for these shares to be issued [note 19(a)]. [iii] Subscription receivable of $34,392 [2004 - $NIL] related to 90,502 common shares issued to an officer in 2005. [d] Escrow agreement In December 1995, the Company placed in escrow 1,232,000 shares, issued for nominal consideration, to be released from such escrow agreement as the Company achieves certain milestones. The escrow restrictions provide that these shares may not be traded in, dealt with in any manner whatsoever, or released, nor may the Company, its transfer agent, or Escrow Holders, make any transfer or record any trading in these shares without approval of the Company. The escrow agreement further provides that the shares may then be released from escrow at the rate of one share for every $0.17 of ?cash flow? as defined in the agreement, generated by the Company. The purpose of this escrow agreement, in part, is to encourage the holders thereof to act in the best interests of the Company, and in the event that the Company should become successful, in part due to the efforts of the holders of these shares, they will be entitled to maintain their ownership of these shares, and to obtain regular pro-rata releases. During 1999, the Board approved an amendment to the escrow agreement?s release provisions that applied to 676,000 of the shares held in escrow above. The amended release provisions which are: 1/3 of the common shares in escrow will be released upon the Company achieving a capitalized stock value of $30 million for a consistent twenty day trading period (achieved); 1/3 of the common shares in escrow will be released upon the Company achieving a capitalized stock value of $50 million for a consistent twenty day trading period (achieved); 1/3 of the common shares in escrow will be released upon the Company achieving a capitalized stock value of $100 million for a consistent twenty day trading period (achieved subsequent to year end (see note 19)). DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 11. SHARE CAPITAL (cont?d.) During the year ended December 31, 2000, 450,666 of then common shares were released from escrow as the milestones were reached. Subsequent to December 31, 2005 the Company?s market capitalization exceeded $100 million and as a result 225,334 shares were released from escrow (see note 19(b)), management expects the remaining escrowed shares will be cancelled. Contingently issuable shares held in escrow are only included in the calculation of loss per share when eligible for release from escrow. As such, the weighted average number of common shares outstanding and the basic and diluted loss per common share exclude escrowed shares for all periods presented (note 11(j)). [e] Stock options At December 31, 2005, the following stock options to Directors, employees and others were outstanding:
Options Outstanding Options Exercisable ----------------------- -------------------------- Weighted- Number Average Weighted- Number Weighted- Range of Outstanding at Remaining Average Exercisable at Average Exercise December 31, Contractual Exercise December 31, Exercise Price 2005 Life Price 2005 Price - ----------------------------------------------------------------------------------- $0.20 - $0.23 5,300,084 7.16 years $0.21 5,300,084 $0.21 $0.33 - $0.50 7,817,833 3.68 years $0.47 7,645,333 $0.47 $0.58 - $0.90 595,333 1.80 years $0.73 595,333 $0.73 $1.00 120,000 4.09 years $1.00 120,000 $1.00 $1.50 80,000 4.77 years $1.50 80,000 $1.50 - ----------------------------------------------------------------------------------- 13,913,250 13,740,750 ===================================================================================
From time to time, the Company has provided incentives in the form of stock options to the Company?s directors, officers, employees and others. The Company has reserved 18,488,525 [2004 - 13,969,470] (15%) of its common shares for issuance upon the exercise of stock options of which at December 31, 2005, 4,575,275 [2004 - 2,029,747] are available to be granted. The exercise price and the vesting terms of the options are determined by the Compensation Committee. The exercise price will generally be at least equal to the market price of the common shares at the date of the grant. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 11. SHARE CAPITAL (cont?d.) Stock option transactions for the respective periods and the number of stock options outstanding are summarized as follows:
No. of Common Weighted Average Shares Issuable Exercise Price - ---------------------------------------------------------------------------------- # $ Balance, December 31, 2002 5,827,837 0.63 Options granted 7,603,409 0.24 Options forfeited or expired (1,299,017) 0.32 Options exercised (2,116,241) 0.52 - ---------------------------------------------------------------------------------- Balance, December 31, 2003 10,015,988 0.41 Options granted 3,393,769 0.36 Options forfeited or expired (900,750) 0.70 Options exercised (569,284) 0.32 - ---------------------------------------------------------------------------------- Balance, December 31, 2004 11,939,723 0.38 Options granted 4,068,916 0.48 Options forfeited or expired (856,250) 0.72 Options exercised (1,239,139) 0.30 - ---------------------------------------------------------------------------------- Balance, December 31, 2005 13,913,250 0.39 ==================================================================================
During 2005, the Company reduced the expiry date of 400,000 options issued to officers from the original expiry date of three years to two years. During 2004,the Company extended the expiry date of 6,606,617 options issued to officers from the original expiry date for a period of five years. During 2003, the Company repriced 500,000 options issued to a director (or company controlled by a director) from the original exercise price of $0.50 to anew exercise price of $0.30. Included in the options granted in 2005, were nil [2004 - 350,000] options to non employees for services rendered recorded at a fair value of $nil [2004 - $73,750]. Subsequent to December 31, 2005, 269,172 options with a weighted average exercise price of $0.27 were exercised (see note 19 (a)). DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 11. SHARE CAPITAL (cont?d.) The weighted-average fair value of options granted in 2005 where the stock price is equal to the exercise price of the options, greater than the exercise price of the options and less than the exercise of the options was $0.58, $0.54, and $0.46 respectively [2004 - $nil, $0.40 and $0.41; 2003 ? $0.20, $0.38, and $0.21]. Compensation expense recognized for options granted in 2005 or prior periods was $2,103,328 (2004 - $3,707,356). The fair value of stock options, SA Rights and warrants granted in 2005 is estimated at the measurement date using the Black Scholes option pricing model with the following weighted average assumptions: Risk free interest rate of 3.7% (2004 ? 4.3%); dividend yields of 0% (2004 ? 0%); volatility factors of the expected market price of the Company?s common stock of 79.9% (2004 ? 92.7%); and weighted average expected life of the option of 6.5 years (2004 ? 7.9 years). Pro forma information regarding net loss and loss per share was previously required by CICA 3870, for all periods presented where the fair value method was not chosen, as if the Company has accounted for stock options, SA Rights and warrants granted to employees under the fair value method [see note 3(a)]. The fair value for these options, SA Rights and warrants was estimated at the measurement date using the Black Scholes option pricing model with the following assumptions for 2003: Risk free interest rate of 4.5%; dividend yields of 0%; volatility factors of the expected market price of the Company?s common stock of 116%, and weighted average expected live of the options of 2.7 years. Supplemental disclosure of pro forma loss and loss per share is as follows:
2003 $ - -------------------------------------------------------------------- Loss for the period as stated (4,984,681) Less stock-based compensation 676,354 - -------------------------------------------------------------------- Pro forma loss (5,661,035) ==================================================================== - -------------------------------------------------------------------- Basic and diluted loss per share as stated (0.09) Proforma basic and diluted loss per share (0.10) ====================================================================
DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 11. SHARE CAPITAL (cont?d.) [f] Common share purchase warrants At December 31, 2005 the common share purchase warrants outstanding were as follows:
No. of Common Exercise Shares Issuable Price Expiration Date - ----------------------------------------------------------------------------------- Series P Warrants 3,735,482 $0.40 May 6, 2006 Series Q Warrants 10,357,295 $0.20 to $0.75 Jan 12, 2006 to Aug 31, 2008 Series R Warrants 2,500,000 $0.20 Aug 31, 2008 Series S Warrants 15,998,808 $0.44 to $0.78 Aug 16, 2006 to May 31, 2011 Series T Warrants 312,500 $0.49 Nov 3, 2007 Series U Warrants 1,207,252 $0.49 to $0.53 Jan 4, 2007 to Dec 22, 2008 --------- Total 34,111,337 ====================================================================================
Summary of warrants exercised and issued during the year end:
Number of Common Shares Issuable ----------------------------------- via Warrants exercised/ via Warrants cancelled Issued at December during the during the at Dec 31, Exercise 31, 2004 year year 2005 Price - ----------------------------------------------------------------------------------- Series F Warrants 933,333 (933,333) -- -- $0.70 Series M Warrants 102,544 (102,544) -- -- $1.50 Series O Warrants 300,000 (300,000) -- -- $0.35 Series P Warrants 4,477,147 (741,665) -- 3,735,482 $0.40 Series Q Warrants 11,492,088 (1,134,793) -- 10,357,295 $0.20 to $0.75 Series R Warrants 2,500,000 -- -- 2,500,000 $0.20 Series S Warrants 4,910,239 -- 11,088,569 15,998,808 $0.44 to $0.78 Series T Warrants 312,500 -- -- 312,500 $0.49 Series U Warrants -- -- 1,207,252 1,207,252 $0.49 to 0.53 - ------------------------------------------------------------------------------------- 25,027,851 (3,212,335) 12,295,821 34,111,337 =====================================================================================
Of 34,111,337 outstanding warrants, 32,711,337 warrants are vested. 29,389,349 of the Series P, Q, S, and U warrants are callable by the Company for $0.001 to $0.01 per warrant on 30 days notice as soon as the Company?s shares have closed at or above $1.00 for 20 consecutive trading days. 509,488 of the Series Q warrants are callable by the Company for $0.001 to $0.01 per warrant on 30 days notice as soon as the Company?s shares have closed at or above $1.50 for 20 consecutive trading days (see 19 (c)) DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 11. SHARE CAPITAL (cont?d.) [f] Common share purchase warrants (1)The Series P warrants were issued as part of a private placement and for services of non-employees. These warrants vested upon successful completion of the private placement and as services were performed respectively. During the year ended December 31, 2004, pursuant to various private placements agreement, the Company issued 2,700,000 Series P warrants with an exercise price of $0.40 per share, expiring on April 1, 2006. (2)The Series Q warrants were issued as part of a private placement for cash and services. These warrants vested upon successful completion of the private placement and as services were performed. In 2002, 818,418 Series Q warrants were issued as part of a loan agreement to certain directors of the Company. 4,479,559 Series Q warrants were issued during the year at a weighted average exercise price of $0.59 per share, expiring on various dates from January 12, 2006 to May 20, 2007. Also in 2005, 1,134,793 [2004 - 188,333] warrants were exercised at a weighted average price of $0.31 [2004 - 0.27] per share. (3)The 2,500,000 Series R warrants were issued as part of the loan financings [note 7(b)] at an exercise price of $0.20 per share. (4)The Series S warrants were issued during the year as part of a private placement forcash and services. Of the 11,088,569 warrants issued, 7,006,257 [2004 ? 4,910,239] were issued in relation to private placements. These warrants vested upon successful completion of the private placement and as services were performed. 11,088,569 [2004 4,910,239] Series S warrants were issued during the year. 1,900,000 warrants are vested annually from 2005 to 2008. (5)The Series T warrants were issued as a part of a loan agreement in 2004 and the warrants vested immediately upon issue. (6)The 1,207,252 Series U warrants were issued during the year as a part of conversion of convertible debentures in 2005. These warrants vested immediately upon issue with a weighted average exercise price of $0.51. Compensation expenses recognized for warrants granted during 2005 was $707,166 [2004 - $601,250; 2003 - $1,265,474]. [g] Stock appreciation rights In 1998, the Company established a stock appreciation rights plan whereby the participants will be entitled to require the Company to redeem the stock appreciation rights (?SA Rights?) for an amount equal to the excess of the market value of the underlying common shares over the initial value of the SA Right at the date of grant. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 11. SHARE CAPITAL (cont?d.) The SA Rights vest as the Company achieves stock value targets as defined in the agreement: the remaining 1/3 of the SA Rights issued may be redeemed upon the Company achieving a capitalized stock value of $100 million. The Company also has the right to redeem the SA Rights at its option under certain circumstances. The Company has the sole exclusive election to redeem the SA Rights in cash, shares or in a combination of cash and shares. The number of SA Rights that can be granted under the plan until December 31, 2008 cannot exceed 2,500,000. At December 31, 2005, 300,000 [December 2004 - 300,000] SA Rights were outstanding and 200,000 [December 2004 - 200,000] were vested. SA Rights transactions and the number of SA Rights outstanding is summarized as follows:
No. of SA Rights Issued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Balance, December 31, 2003 1,468,335 SA Rights redeemed (766,668) SA Rights forfeited (401,667) - -------------------------------------------------------------------------------- Balance, December 31, 2004 300,000 SA Rights redeemed -- SA Rights forfeited -- - -------------------------------------------------------------------------------- Balance, December 31, 2005 300,000 ================================================================================
At December 31, 2005, the following SA Rights, all of which were issued to employees, were outstanding:
SA Rights SA Rights Initial Expiration Outstanding Vested Value Date - ------------------------------------------------------------------------------- 300,000 200,000 $0.40 December 31, 2008 ===============================================================================
The Company has an arrangement with a former director of the Company for 300,000 outstanding SA Rights of which 200,000 SA Rights have been vested with an initial value of $0.40 extending the expiration date to December 31, 2008. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 11. SHARE CAPITAL (cont?d.) [h] Contributed surplus Contributed surplus includes the fair value of stock options and warrants issued to non-employees for services rendered, the fair value of warrants issued under short-term loan agreements in 2003 [note 7], the fair value of warrants related to convertible debentures [note 9], the fair value of warrants related to long-term debt in 2004 [note 10], and the fair value of options and warrants granted to employees. [i] Stock based compensation and payment The Company has recorded stock based compensation and payment as follows:
2005 2004 2003 $ $ $ - ----------------------------------------------------------------------------- Balance sheet items Property, plant and equipment 327,533 350,812 1,004,564 Share issue costs 996,876 280,785 947,202 Accounts payable 492,136 17,893 51,000 - ----------------------------------------------------------------------------- 1,816,545 649,490 2,002,766 - ----------------------------------------------------------------------------- Income statement items Professional fees 1,046,841 235,845 655,416 General and administrative salaries and benefits 2,103,328 3,707,356 1,712,658 Marketing -- -- 51,628 Research & development 546,888 787,403 -- Interest expense and other 67,970 97,200 8,155 - ----------------------------------------------------------------------------- 3,765,027 4,827,804 2,427,857 - ----------------------------------------------------------------------------- Total stock based payment 5,581,572 5,477,294 4,430,623 =============================================================================
DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 11. SHARE CAPITAL (cont?d.) [j] Basic and diluted loss per common share
2005 2004 2003 - ------------------------------------------------------------------------------ Numerator Loss from continuing operations $(11,997,344) $(9,916,215) $(4,921,650) Loss from discontinued operations -- -- (63,031) - ------------------------------------------------------------------------------ Net loss $(11,997,344) $(9,916,215) $(4,984,681) - ------------------------------------------------------------------------------ Denominator Weighted average number of common shares outstanding 108,790,519 81,760,633 57,398,824 Escrowed shares (781,334) (781,334) (781,334) - ------------------------------------------------------------------------------ 108,009,185 80,979,299 56,617,490 - ------------------------------------------------------------------------------ Basic and diluted loss per common share Continuing operations $(0.11) $(0.12) $(0.09) Discontinued operations -- -- (0.00) - ------------------------------------------------------------------------------ Loss per share $(0.11) $(0.12) $(0.09) ==============================================================================
12. COMMITMENTS AND CONTINGENCIES Commitments The Company has the following future minimum annual lease commitments for premises and equipment:
$ - -------------------------------------------------------------------------- 2006 143,000 2007 156,000 2008 151,000 2009 49,000 - -------------------------------------------------------------------------- 499,000 - --------------------------------------------------------------------------
Pursuant to employment agreements with certain officers of the Company, which expire between July 31, 2007 and July 31, 2011, the Company is obligated to pay the full term of contract in the event of the officers? early termination. As at December 31, 2005 the compensation obligation payable over the next four years amounts to $5,308,806 (2004 - $3,183,445). Pursuant to employment agreements with certain officers of the Company, the Company is obligated to allot and issue 335,000 fully-paid shares and a cash bonus of $25,700 once the Company?s first commercial plant is successfully commissioned. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 12. COMMITMENTS AND CONTINGENCIES (cont?d) In connection with the Company?s West Lorne project and construction advances related to the 200TPD plant (see Note 5), the Company has committed to outstanding constructions commitments of approximately $2.6 million Contingencies In the ordinary course of business activities, the Company may be contingently liable for litigation and claims with customers, suppliers and former employees. Management believes that adequate provisions have been recorded in the accounts where required. Although it is not possible to estimate the extent of potential costs and losses, if any, management believes that the ultimate resolution of such contingencies will not have a material adverse effect on the consolidated financial position of the Company. 13. RELATED PARTY TRANSACTIONS The transactions with related parties are in the normal course of operations and are recorded at amounts established and agreed between the related parties. In addition to the transactions described in notes 7 and 11, the Company had the following transactions with related parties: [a] Consulting fees and salaries of $1,940,421 for the year ended December 31, 2005 [years 2004 - $3,053,332; 2003 - $1,591,097] have been paid to Directors (or companies controlled by Directors) of the Company. Included in the amount above, is 974,392 [2004 - $2,288,556; 2003 - $1,233,418] paid by stock based compensation [note 11(b)(i)]. [b] Consulting fees and share issue costs of $87,395 for the year ended December 31, 2005 [years 2004 - $574,326; 2003 - $1,002,085] have been paid to a shareholder of the Company. Included in the amount above, is $1,113 [2004 $513,958; 2003 - $1,002,085] paid by stock based compensation [note 11(b)(i)]. [c] As at December 31, 2005, $82,529 [2004 - $136,370; 2003 - $32,673] was advanced to a Director of the Company in connection with the formation of a joint venture for the development of the Company?s BioOil technology and related products. The joint venture had not been formalized and the advance was written-off on December 31, 2005. [d] On June 3, 2003 the Company entered into a loan agreement with an officer of the Company for $50,000. The loan bore interest at 2% per month and had a 12-month term. The loan agreement also calls for the Company to issue 500,000 warrants exercisable at $0.20 each for a period of five years as part of the loan financings. In December 2003, the Company repaid the loan and the lenders released the Company from the general security agreement. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 14. LOSSES AND UNUSED DEDUCTIONS CARRIED FORWARD FOR INCOME TAX PURPOSES As at December 31, 2005, the Company has loss carryforwards of approximately $40,146,000 to apply against future taxable income in Canada ($37,017,000) and the United Kingdom ($3,129,000) and $703,000 and $287,000 of federal and provincial investment tax credits respectively available for future use in Canada. The United Kingdom loss carryforwards can be carried forward indefinitely. The Canadian losses and investment tax credits expire as follows:
Federal Investment Provincial Investment Loss Tax Credits Tax Credits Carryforwards $ $ $ - ----------------------------------------------------------------------------------- 2006 13,000 -- 2,731,000 2007 115,000 -- 4,746,000 2008 25,000 -- 5,388,000 2009 49,000 8,000 3,975,000 2010 167,000 94,000 4,616,000 2011 197,000 109,000 -- 2012 54,000 30,000 -- 2013 58,000 32,000 -- 2014 25,000 14,000 6,662,000 2015 -- -- 8,899,000 - ----------------------------------------------------------------------------------- 703,000 287,000 37,017,000 ===================================================================================
DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 14. LOSSES AND UNUSED DEDUCTIONS CARRIED FORWARD FOR INCOME TAX PURPOSES (cont?d.) In addition, the Company has scientific research and experimental development expenditures of approximately $3,009,000 that can be carried forward indefinitely to apply against future taxable income in Canada. Future income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has recognized a valuation allowance for those future tax assets for which it is more likely than not that realization will not occur. Significant components of the Company?s future tax assets as of December 31, 2005 and December 31, 2004 are as follows:
2005 2004 $ $ - ----------------------------------------------------------------------------- Loss carryforwards 13,594,000 10,965,000 Research and development deductions and credits 2,018,000 3,102,000 Property, plant and equipment 1,069,000 1,056,000 Financing costs 655,000 514,000 - ----------------------------------------------------------------------------- Total future tax assets 17,336,000 15,637,000 Valuation allowance (17,336,000) (15,637,000) - ----------------------------------------------------------------------------- Net future tax assets -- -- - -----------------------------------------------------------------------------
The potential income tax benefits relating to these future tax assets have not been recognized in the consolidated financial statements as their realization did not meet requirements of ?more likely than not? under the liability method of tax allocation. Accordingly, no future tax assets have been recognized as at December 31, 2005 and 2004 and no income tax provision or benefit has been provided for any of the periods presented. Had a tax benefit been provided, the Company?s expected effective tax rate for the reversal of the tax benefit would be 34.12%, 35.62% and 35.62% in 2005, 2004 and 2003, respectively. The Company?s future tax assets include approximately $426,000 [2004 ? $261,000] related to deductions for share issuance costs, in excess of amounts deducted for financial reporting purposes. If and when the valuation allowance related to these amounts is reversed, the Company will recognize this benefit as an adjustment to share capital as opposed to income tax expense in the Consolidated Statement of Loss. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 15. SUPPLEMENTAL CASH FLOW INFORMATION
2005 2004 2003 Net change in non-cash working capital $ $ $ - ------------------------------------------------------------------------------ Receivable 153,693 (90,890) (38,399) Prepaid expenses and deposits (49,305) (96,852) 10,566 Accounts payable and accrued liabilities 29,445 2,274,898 227,628 - ------------------------------------------------------------------------------ 133,833 2,087,156 199,795 ============================================================================== Interest paid Short-term interest paid 131,971 26,000 63,522 ==============================================================================
For stock based non-cash investing and financing activities, see note 11 (i). For the year ended December 31, 2004, excluded from investing activities were $3,039,451 of additions to property, plant and equipment which were accrued in accounts payable and accrued liabilities and will be financed through capital leases. As at December 31, 2005, the Company has not entered into any formal financing agreement with respect to this equipment. 16. GOVERNMENT ASSISTANCE Government assistance received during the year ended December 31, 2005 in the amount of $1,664,640 [2004 - $3,611,412; 2003 ?.$915,237] has been recorded as a reduction of expenditures.
Government assistance applied to: 2005 2004 2003 $ $ $ - ------------------------------------------------------------------------------ Property, plant and equipment and other 853,673 2,829,117 422,176 Research and development 782,423 765,106 456,438 Other expenses 28,544 17,189 36,623 - ------------------------------------------------------------------------------ Total 1,664,640 3,611,412 915,237 ==============================================================================
DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 16. GOVERNMENT ASSISTANCE (cont?d.) [a]Technology Partnerships Canada During 1997, the Company entered into a contribution agreement with Industry Canada-Technology Partnerships Canada (TPC) whereby the Company is entitled to receive a maximum of approximately $7 million (Cdn$ 8.2 million) or 37% of eligible expenditures, as defined in the agreement. The Company has received extensions to the original contribution agreement with TPC to March 31, 2006 while retaining the original cumulative maximum assistance level of $7 million. The agreement, as amended, specifies that in the event commercial viability is achieved, then the assistance is repayable, commencing January 1, 2005 based on royalties from sales of specified products resulting from the project to a maximum of $13.7 million (Cdn$16 million) or until the expiration of contract on December 31, 2014. As at December 31, 2005, the Company has received $5.9 million (Cdn$6.9 million) under these agreements. In 2005, the Company received approximately $1,007,318, of which $13,029 was deducted from patents and the remainder was used to reduce expenditures made during the current year. As at December 31, 2005, $627,582 [2004 - $236,548] is included in government grants receivable. As the Company has not achieved commercial viability and no revenue has been generated from the project, no repayment has been made and no amount accrued for TPC assistance as at year end. [b]Sustainable Development Technology Canada On March 5, 2004 the Company signed a Contribution Agreement with Sustainable Development Technology Canada (?SDTC?) whereby SDTC will contribute $4.3 million (Cdn$5 million) to the capital cost of the Company?s Erie Flooring 100 tonne per day BioOil co-generation project development. This amount will be a grant and will be accounted for as a reduction in the capital cost of the project. During 2005, the Company received payment of $657,322 (Cdn$ 796,478) [2004 - $3,056,468 (Cdn$3,703,522)] from SDTC. 17. SEGMENTED INFORMATION In 2005 the Company has one reportable segment, BioOil Power Generation. The BioOil Power Generation segment relates to the biomass-to-energy technology. Substantially all of the Company?s operations and assets are in Canada and are solely focused on the development and commercialization of its technology. BioOil Power Generation is biomass-to-energy technology that converts low value forest residues and agricultural by-products into BioOil for use in power generation or other industrial energy purposes. For the years ended December 31, 2005 and 2004 the Company recorded no revenue. DynaMotive Energy Systems Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (express in U.S. dollars) 18. PROJECT ADVANCE In June 2003 the Company received $166,003, translated at the rate on the balance sheet date, (C$200,000) from Ontario Power Generation Inc. (?OPG?) as an initial investment in a proposed Ontario based 100 TPD BioOil co- generation project (the ?Project?). The funds were used for pre-development work related to the Project and are to be converted into a Project ownership interest or Company equity upon the decision of whether or not to proceed with the Project. The Project has now proceeded at the site of Erie Flooring in West Lorne Ontario, and the Company has agreed with OPG to convert the Project Advance into Company?s equity on March 31, 2005 based on then current market value. In this regard, 342,287 shares were issued during 2005. 19. SUBSEQUENT EVENTS [a] As described in note 11(c), during the period from January 1 to 24, 2006, the Company issued 11,253,937 common shares for total proceeds of $7,542,878, inclusive of $1,615,000 received as at December 31, 2005 relating to a private placement commencing during the fourth quarter of 2005. Also during the period from January 1 to March 24, 2006, the Company received $1.64 million on the exercise of 269,172 options and 4,022,806 warrants. [b] On February 6, 2006 the Company?s market capitalization exceeded $100 million for the 20th consecutive trading day and as a result 225,334 shares were released from escrow and were issued to the holders. [c] On March 24, 2006 the Company?s shares closed at or above $1.00 for the 20th consecutive trading day and consequently all of the remaining 29.4 million Series P, Q, S, and U warrants with an aggregate exercise value of $15.2 million (including cash exercise of $1.57 million received during the period from January 1, 2006 to March 24, 2006) have become callable by the Company?s for between $0.001 and $0.01 per warrant upon 30 days written notice. If such notice is given, the warrant holders may exercise the warrants during the notice period. The Company has not yet issued notice to warrant holders as at March 24, 2006. 20. COMPARATIVE FIGURES Certain comparative figures have been reclassified in order to conform with the presentation adopted in the current year. -----END PRIVACY-ENHANCED MESSAGE-----