UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
(Mark
one)
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended June 30, 2009
¨
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to
Commission
File Number 33-46104-FW
THERMOENERGY
CORPORATION
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
71-0659511
(IRS
Employer Identification No.)
|
124
WEST CAPITOL AVENUE, SUITE 880,
LITTLE
ROCK,
ARKANSAS 72201
(Address
of Principal Executive Offices) (Zip Code)
Registrant’s
Telephone Number, Including Area Code:
(501) 376-6477
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, and
(2) has been subject to such filing requirements for the past 90 days.
Yes
¨
No
x
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
¨
|
Accelerated filer
¨
|
Non-accelerated filer
¨
(Do not check if a smaller reporting
company)
|
Smaller reporting company
x
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
¨
No
x
APPLICABLE
ONLY TO CORPORATE ISSUERS:
State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 53,454,293 shares of Common Stock
as of June 30, 2009.
THERMOENERGY
CORPORATON
INDEX
|
|
|
|
|
|
Page
No.
|
|
|
|
Part I.
|
|
Financial
Information
|
|
|
Item 1.
|
|
Financial
Statements
|
|
|
|
|
|
|
Consolidated Balance Sheets as of
June 30, 2009 (Unaudited) and
December 31, 2008
|
|
3
|
|
|
|
|
Consolidated Statements of
Operations for the six months and three months ended June 30, 2009
and 2008 (Unaudited)
|
|
4
|
|
|
|
|
Consolidated Statements of Changes
in Stockholders’ Equity (Deficit) for the year ended January 1,
2008 through December 31, 2008 and the six months ended June 30, 2009
(Unaudited)
|
|
5
|
|
|
|
|
Consolidated Statements of Cash
Flows for the six months ended June 30, 2009 and 2008
(Unaudited)
|
|
6
|
|
|
|
|
Notes to Consolidated Financial
Statements (Unaudited)
|
|
7
|
|
|
Item 2.
|
|
Management's Discussion and
Analysis of Financial Condition and Results of
Operations
|
|
21
|
|
|
Item 3.
|
|
Quantitative and Qualitative
Disclosures About Market Risk
|
|
23
|
|
|
Item
4T.
|
|
Controls and
Procedures
|
|
23
|
Part II.
|
|
Other
Information
|
|
|
Item
1.
|
|
Legal
Proceedings
|
|
24
|
|
|
Item 1a.
|
|
Risk
Factors
|
|
24
|
|
|
Item 2.
|
|
Unregistered Sales of Equity
Securities and Use of Proceeds
|
|
24
|
|
|
Item 3.
|
|
Defaults Upon Senior
Securities
|
|
26
|
|
|
Item 4.
|
|
Submission of Matters to a Vote of
Security Holders
|
|
26
|
|
|
Item 5.
|
|
Other
Information
|
|
26
|
|
|
Item 6.
|
|
Exhibits
|
|
26
|
Signature
|
|
27
|
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except for share and par value amounts )
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
40
|
|
|
$
|
115
|
|
Accounts
Receivable, net
|
|
|
23
|
|
|
|
111
|
|
Inventories
|
|
|
161
|
|
|
|
164
|
|
Other
Current Assets
|
|
|
56
|
|
|
|
164
|
|
Total
Current Assets
|
|
|
280
|
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
|
271
|
|
|
|
305
|
|
Other
Assets
|
|
|
163
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
714
|
|
|
$
|
1,035
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
432
|
|
|
$
|
204
|
|
Short-Term
Borrowings
|
|
|
1,144
|
|
|
|
873
|
|
Convertible
Debt in Default
|
|
|
3,708
|
|
|
|
3,478
|
|
Contingent
Liability Reserves
|
|
|
3,234
|
|
|
|
3,334
|
|
Deferred
Revenue
|
|
|
652
|
|
|
|
264
|
|
Other
Current Liabilities
|
|
|
3,028
|
|
|
|
2,713
|
|
Total
Current Liabilities
|
|
|
12,198
|
|
|
|
10,866
|
|
|
|
|
|
|
|
|
|
|
Long
Term Liabilities:
|
|
|
|
|
|
|
|
|
Deferred
Comp Retirement Plan for Officers Net of Current Portion
|
|
|
254
|
|
|
|
261
|
|
Convertible
Debt
|
|
|
1,627
|
|
|
|
992
|
|
Total
Long Term Liabilities
|
|
|
1,881
|
|
|
|
1,253
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
14,079
|
|
|
|
12,119
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity (Deficit):
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.01 par value, liquidation value of $1.20 per share: authorized
-
|
|
|
|
|
|
|
|
|
20,000,000
shares; issued and outstanding: 2009 and 2008 - 208,334
shares
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, $.001 par value: authorized - 150,000,000
shares;
|
|
|
|
|
|
|
|
|
issued:
2009 - 53,538,090 shares; 2008 - 50,247,537 shares;
|
|
|
|
|
|
|
|
|
outstanding:
2009 - 53,454,293 shares; 2008 - 50,163,740 shares
|
|
|
54
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-In Capital
|
|
|
60,295
|
|
|
|
58,810
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Deficit
|
|
|
(73,716
|
)
|
|
|
(68,284
|
)
|
|
|
|
|
|
|
|
|
|
Total
ThermoEnergy Corporation Stockholders' Equity (Deficit)
|
|
|
(13,365
|
)
|
|
|
(9,422
|
)
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interest
|
|
|
|
|
|
|
(1,662
|
)
|
Total
Stockholders' Equity
|
|
|
(13,365
|
)
|
|
|
(11,084
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
714
|
|
|
$
|
1,035
|
|
See
notes to consolidated financial statements.
THERMOENERGY
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
|
|
Six
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
and Grant Income
|
|
$
|
1,638
|
|
|
$
|
1,185
|
|
|
$
|
1,262
|
|
|
$
|
776
|
|
Less:
Cost of Contract and Grant Income
|
|
|
1,852
|
|
|
|
1,134
|
|
|
|
1,372
|
|
|
|
722
|
|
Gross
Operating Income (Loss)
|
|
|
(214
|
)
|
|
|
51
|
|
|
|
(110
|
)
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative
|
|
|
1,702
|
|
|
|
2,053
|
|
|
|
741
|
|
|
|
1,003
|
|
Selling
Expense
|
|
|
245
|
|
|
|
155
|
|
|
|
160
|
|
|
|
88
|
|
Option
Expense
|
|
|
181
|
|
|
|
1,277
|
|
|
|
20
|
|
|
|
1,277
|
|
Warrant
Expense
|
|
|
1,030
|
|
|
|
699
|
|
|
|
-
|
|
|
|
616
|
|
Professional
Fees
|
|
|
742
|
|
|
|
774
|
|
|
|
540
|
|
|
|
544
|
|
Travel
and Entertainment
|
|
|
170
|
|
|
|
360
|
|
|
|
111
|
|
|
|
136
|
|
Total
Operating Expenses
|
|
|
4,070
|
|
|
|
5,318
|
|
|
|
1,572
|
|
|
|
3,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(4,284
|
)
|
|
|
(5,267
|
)
|
|
|
(1,682
|
)
|
|
|
(3,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
-
|
|
|
|
16
|
|
|
|
-
|
|
|
|
5
|
|
Interest
Expense
|
|
|
1,148
|
|
|
|
509
|
|
|
|
581
|
|
|
|
201
|
|
Total
Other Income (Expense)
|
|
|
(1,148
|
)
|
|
|
(493
|
)
|
|
|
(581
|
)
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(5,432
|
)
|
|
|
(5,760
|
)
|
|
|
(2,263
|
)
|
|
|
(3,806
|
)
|
Less: Net
loss attributable to noncontrolling interest
|
|
|
-
|
|
|
|
(85
|
)
|
|
|
-
|
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Attributable to ThermoEnergy Corporation
|
|
$
|
(5,432
|
)
|
|
$
|
(5,675
|
)
|
|
$
|
(2,263
|
)
|
|
$
|
(3,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Common Share Attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ThermoEnergy
Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
$
|
(0.08
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.08
|
)
|
Net
Loss
|
|
$
|
(0.10
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.08
|
)
|
See
notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Year
Ended December 31, 2008 and the Six Months Ended June 30, 2009
(Unaudited)
|
|
ThermoEnergy
Corporation Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
Series
A
Convertible
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Noncontrolling
Interest
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
(Deficit) January 1, 2008
|
|
$
|
53
|
|
|
$
|
40
|
|
|
$
|
50,794
|
|
|
$
|
(52,548
|
)
|
|
$
|
(1,414
|
)
|
|
$
|
(3,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued for services
|
|
|
|
|
|
|
|
|
|
|
1,331
|
|
|
|
|
|
|
|
|
|
|
|
1,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of 220,000 shares of Common Stock for services
|
|
|
|
|
|
|
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashless
exercise of 4,662,639 warrants for 1,854,984 shares of Common
Stock
|
|
|
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
741,493 warrants for 741,493 shares of Common Stock
|
|
|
|
|
|
|
1
|
|
|
|
473
|
|
|
|
|
|
|
|
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
grants issued to officers (250,000 shares at $1.11 per
share)
|
|
|
|
|
|
|
1
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options issued to officers, directors and employees
|
|
|
|
|
|
|
|
|
|
|
1,682
|
|
|
|
|
|
|
|
|
|
|
|
1,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Converted
Preferred Stock to Common Stock (5,051,668 shares)
|
|
|
(51
|
)
|
|
|
5
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Note converted to Common Stock 1,146,036 shares at $0.50 per
share)
|
|
|
|
|
|
|
1
|
|
|
|
572
|
|
|
|
|
|
|
|
|
|
|
|
573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued for interest payments (124,172 shares at $0.47 per
share)
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and beneficial conversion feature issued with convertible
notes
|
|
|
|
|
|
|
|
|
|
|
3,301
|
|
|
|
|
|
|
|
|
|
|
|
3,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,736
|
)
|
|
|
(248
|
)
|
|
|
(15,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
(Deficit) December 31, 2008
|
|
$
|
2
|
|
|
$
|
50
|
|
|
$
|
58,810
|
|
|
$
|
(68,284
|
)
|
|
$
|
(1,662
|
)
|
|
$
|
(11,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options issued to officers, directors and employees
|
|
|
|
|
|
|
|
|
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modification
of warrants
|
|
|
|
|
|
|
|
|
|
|
1,030
|
|
|
|
|
|
|
|
|
|
|
|
1,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued for services
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued for interest payments (313,005 shares)
|
|
|
|
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of 345,000 shares of Common Stock for services
|
|
|
|
|
|
|
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
1,428,571 shares of Common Stock for cash
|
|
|
|
|
|
|
2
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
435,442 shares of Common Stock and warrants to acquire CASTion's
noncontrolling interest
|
|
|
|
|
|
|
1
|
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of CASTion shares from noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
(2,282
|
)
|
|
|
|
|
|
|
1,662
|
|
|
|
(620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and beneficial conversion feature issued with convertible
notes
|
|
|
|
|
|
|
|
|
|
|
565
|
|
|
|
|
|
|
|
|
|
|
|
565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Note converted to Common Stock (768,535 shares at $.75 per
share)
|
|
|
|
|
|
|
1
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,432
|
)
|
|
|
|
|
|
|
(5,432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
(Deficit) June 30, 2009
|
|
$
|
2
|
|
|
$
|
54
|
|
|
|
60,295
|
|
|
$
|
(73,716
|
)
|
|
$
|
-
|
|
|
$
|
(13,365
|
)
|
See
notes to consolidated financial statements.
THERMOENERGY
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,432
|
)
|
|
$
|
(5,760
|
)
|
|
|
|
|
|
|
|
|
|
Items
not requiring (providing) cash:
|
|
|
|
|
|
|
|
|
Options
issued to officers and directors
|
|
|
487
|
|
|
|
1,277
|
|
Warrant
expense
|
|
|
1,030
|
|
|
|
699
|
|
Warrants
issued for services
|
|
|
46
|
|
|
|
|
|
Depreciation
expense
|
|
|
34
|
|
|
|
23
|
|
Common
Stock issued for services
|
|
|
188
|
|
|
|
247
|
|
Amortization
|
|
|
746
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
Changes
in:
|
|
|
|
|
|
|
|
|
Accounts
and notes receivable
|
|
|
88
|
|
|
|
(10
|
)
|
Inventories
|
|
|
3
|
|
|
|
(91
|
)
|
Other
current assets
|
|
|
108
|
|
|
|
1
|
|
Accounts
payable
|
|
|
228
|
|
|
|
(154
|
)
|
Deferred
revenue
|
|
|
388
|
|
|
|
(254
|
)
|
All
other current liabilities
|
|
|
560
|
|
|
|
(182
|
)
|
Deferred
compensation retirement plan
|
|
|
(7
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(1,533
|
)
|
|
|
(3,941
|
)
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
|
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used by investing activities
|
|
|
|
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of Common Stock and warrants
|
|
|
500
|
|
|
|
348
|
|
Proceeds
from Convertible Promissory Notes
|
|
|
958
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
1,458
|
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease) in cash
|
|
|
(75
|
)
|
|
|
(2,920
|
)
|
Cash,
beginning of year
|
|
|
115
|
|
|
|
3,185
|
|
Cash,
end of period
|
|
$
|
40
|
|
|
$
|
265
|
|
See
notes to consolidated financial statements.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June
30, 2009
Note 1: Basis of
presentation
In the
Notes to the Consolidated Financial Statements, we use the terms “Company”,
“we”, “our” and “us” to refer to ThermoEnergy Corporation and its
subsidiaries. The accompanying unaudited financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
8-03 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six-month and
three-month periods ended June 30, 2009 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2009.
Loss per
common share is computed by dividing the net loss for the period by the weighted
average number of shares outstanding during the period. Stock
options, warrants, and dilutive effect of the Company’s Series A Convertible
Preferred Stock were not included in the computation of diluted loss per share
since the effect would be anti-dilutive. The adjusted weighted average number of
common shares used in the basic and diluted loss per share computations were
52,019,133 and 42,706,199 shares for the six-month periods ended June 30, 2009
and 2008, respectively, and 53,054,942 and 44,419,979 shares for the three-month
periods ended June 30, 2009 and 2008, respectively.
The
balance sheet at December 31, 2008 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. As more fully discussed in Note 2, the balance
sheet at December 31, 2008 has been reclassified in connection with the adoption
of Statement of Financial Accounting Standards No. 160 “Noncontrolling Interests
in Consolidated Financial Statements, an Amendment of ARB No. 51” (“SFAS 160”)
as of January 1, 2009.
For
further information, refer to the financial statements and footnotes thereto
included in the annual report on Form 10-K for the year ended December 31, 2008
of ThermoEnergy Corporation.
Note 2: Adoption
of SFAS 160 and purchase of CASTion Corporation noncontrolling
interest
As of
January 1, 2009, the Company implemented SFAS 160 which modifies the accounting
and disclosure requirements for subsidiaries which are not wholly-owned. In
accordance with the provisions of SFAS 160, the Company has reclassified the
noncontrolling interest previously reflected between long-term liabilities and
stockholders’ equity and included the amount as a component of stockholders’
equity in the accompanying consolidated balance sheets and consolidated
statements of stockholders’ equity. Additionally, the Company has presented the
net income attributable to the Company and the noncontrolling ownership
interests separately in the accompanying consolidated condensed statements of
operations.
On
January 5, 2009, the Company acquired substantially all of the remaining
outstanding shares of CASTion Corporation (“CASTion”). The Company issued to six
individuals and/or entities 435,442 shares of restricted Common Stock, $351,614
face amount of 10% convertible debt (conversion price of $.50 per share and a
maturity date of May 31, 2010) and warrants to acquire 424,164 shares of
restricted Common Stock. The fair value of the total consideration was $619,955.
The warrants have an exercise price of $0.50 per share and expire in
approximately 4.5 years. In addition, the Company escrowed $12,500 cash to fund
the purchase of the shares held by the remaining
noncontrolling stockholders that represents less than one percent of
the outstanding shares. The completion of this transaction resulted in
CASTion becoming a wholly-owned subsidiary of the Company.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June
30, 2009
Note 2: Adoption
of SFAS 160 and purchase of CASTion Corporation noncontrolling interest
(continued)
The
acquisition of the CASTion non-controlling interest was accounted for in
accordance with SFAS 160, which requires that the acquisition be recorded as an
equity transaction. This resulted in a reduction of consolidated
stockholders’ equity (deficit) of approximately $2,282,000 during the first
quarter of 2009.
Note 3: Formation
of Babcock-Thermo Carbon Capture LLC
On
February 25, 2009, the Company’s subsidiary, ThermoEnergy Power Systems
LLC, and Babcock Power Development, LLC (“BPD”), a subsidiary of
Babcock Power, Inc., entered into a Limited Liability Company
Agreement (the “LLC Agreement”) establishing Babcock-Thermo Carbon Capture LLC,
a Delaware limited liability company (the “Joint Venture”) for the purpose of
developing and commercializing our proprietary TIPS
technology.
ThermoEnergy
Power Systems has entered into a license agreement with the Joint Venture and
BPD, pursuant to which it has granted to the Joint Venture an exclusive,
irrevocable (except as otherwise provided therein), world-wide, fully paid up
and royalty-free license to ThermoEnergy Power Systems’ intellectual property
related to or necessary to practice the TIPS technology (the “TIPS
License”). In the LLC Agreement, BPD has agreed to develop, at
its own expense, intellectual property in connection with three critical
subsystems relating to the TIPS technology: a combustor subsystem, a steam
generating heating surface subsystem, and a condensing heat exchangers subsystem
(collectively, the “Subsystems”) and BPD has entered into a license
agreement with the Joint Venture and ThermoEnergy Power Systems pursuant to
which it has granted the Joint Venture an exclusive, irrevocable (except as
otherwise provided therein), world-wide, fully paid up and royalty-free license
to BPD’s know-how and other proprietary intellectual property related to or
necessary to practice the Subsystems.
Pursuant
to the LLC Agreement, each of ThermoEnergy Power Systems and BPD owns a 50%
membership interest in the Joint Venture. The LLC Agreement provides
that each member may be required, from time to time, to make capital
contributions to the Joint Venture to fund its operations (see Note
11).
The Joint
Venture will be managed by a six-person Board of Managers, with three managers
appointed by each member. The Board of Managers has adopted a set of
milestones by which it will measure the progress of the Joint
Venture. Pursuant to the LLC Agreement, either member may withdraw
from the Joint Venture if any milestone is not met (unless the failure to meet
such milestone is primarily attributable to a failure by such member to perform
its obligations under the LLC Agreement or any related
agreements). If a member exercises its right to withdraw, the
license that such member has granted to the Joint Venture will automatically
terminate.
The LLC
Agreement obligates the Joint Venture and each member to indemnify and hold the
other member and its affiliates harmless against damages and losses resulting
from such member’s fraud, gross negligence or intentional misconduct with
respect to the Joint Venture. We and Babcock Power, Inc. have entered
into separate agreements to indemnify the joint venture and its members (other
than our respective subsidiary-members) and their respective affiliates against
damages and losses resulting from fraud, gross negligence or intentional
misconduct of our respective subsidiary-members with respect to the Joint
Venture.
The LLC
Agreement contains other conventional terms, including provisions relating to
governance of the entity, allocation of profits and losses, and restrictions on
transfer of a member’s interest.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June
30, 2009
Note
4: Short-term borrowings
Short-term
borrowings consisted of the following at June 30, 2009 and December 31, 2008 (in
thousands):
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Convertible
Promissory Note dated December 22, 2008, 7.5%, due June 30,
2009, less discount of $194 in 2008
|
|
$
|
571
|
|
|
$
|
307
|
|
|
|
|
|
|
|
|
|
|
Convertible
Promissory Note dated August 12, 2008, 7.5%, due March 31,
2009
|
|
|
|
|
|
|
566
|
|
|
|
|
|
|
|
|
|
|
Convertible
Promissory Note dated February 11, 2009, 10%, due December 31,
2009
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Promissory Note dated April 27, 2009, 10%, due October 31, 2009, less
discount of $336
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
Convertible Promissory Note dated June 25, 2009, 10%, due
December 31, 2009
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
Convertible Promissory Note dated June 26, 2009, 10%, due
October 15, 2009, less discount of $49
|
|
|
59
|
|
|
|
|
|
|
|
$
|
1,144
|
|
|
$
|
873
|
|
On March
31, 2009, the Company extended the maturity of the December 22, 2008 Convertible
Promissory Note to June 30, 2009, and added an extension fee of $50,000 to the
principal balance. On June 30, 2009, the Company added accrued
interest of $10,000 to the outstanding principal balance of the
Note. The Note remained outstanding after June 30, 2009 and was
amended on September 28, 2009 in connection with the Series B Convertible
Preferred Stock financing contemplated by a term sheet dated September 16, 2009
between the Company and an investor group. (see Note 11).
The Note
dated August 12, 2008 maturing on March 31, 2009 was converted to 768,535 shares
of the Company’s Common Stock on April 1, 2009.
On
February 11, 2009, the Company issued to the Quercus Trust (“Quercus”) a 10%
Secured Convertible Promissory Note in the principal amount of $250,000 and
entered into a Security Agreement with Quercus. The Note matures on
the earlier to occur of (i) the closing of an equity or convertible debt
investment in our Company yielding gross proceeds of not less than $2,000,000.00
(a “Financing”) or (ii) December 31, 2009. Quercus may elect to
participate in the Financing by converting the principal amount of the Note into
shares of the securities to be issued in the Financing at a price per share
equal to 90% of the price per share to be paid by the other investors in the
Financing. Quercus’ right to participate in the Financing by
conversion of the Note shall be conditioned on Quercus’ entering into such
purchase agreements and related agreements as shall be executed at the closing
of the Financing by the other investors participating in the
Financing.
The Note was amanded and restated on September 28, 2009 in
connection with the Series B Convertible Preferred Stock Financing (see Note
11).
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June
30, 2009
Note 4: Short-term
borrowings (continued)
Interest
on the Note is payable quarterly in arrears; at our election, all or any portion
of the interest may be paid by the issuance of shares of our Common Stock valued
at 90% of the volume weighted average trading price per shareof our Common Stock
for the ten trading days immediately preceding the respective interest payment
date. We may not pre-pay the Note without the prior written consent
of Quercus.
To secure
payment of, and performance of our other obligations under, the Note, we and our
subsidiary CASTion, granted to Quercus, pursuant to the Security Agreement, a
security interest in all of our intellectual property assets other than certain
expressly excluded patent rights, licenses and related intellectual property
identified in the Security Agreement, including, without limitation, the
intellectual property rights used in or relating to our ThermoEnergy Power
Systems business.
On April
27, 2009, the Company issued to three different funds and two individual
affiliates of Empire Capital Partners 10% Convertible Promissory Notes
aggregating $500,000 in principal amount. The Notes mature on the
earlier to occur of (i) the closing of the proposed funding with Quercus as
reported in the September 15, 2008 Agreement with Quercus or (ii)
October 31, 2009. Pursuant to the Purchase Agreement, Empire Capital
Partners and its affiliates may elect to convert the Notes at any time into
shares of our Common Stock at a price of $0.40 per share. The Company
also issued warrants to acquire 2,500,000 shares of Common Stock to the holders
of the Notes. The warrants have an exercise price of $0.55 and expire
five years from the grant date.
The
Company estimated the fair value of the warrants issued using a Black-Scholes
option pricing model and allocated $349,000 of the proceeds received to the
warrants on a relative fair value basis. In addition, the difference between the
effective conversion price of the Note and the fair value of the Company’s
Common Stock on the date of issuance of the Note resulted in a beneficial
conversion feature amounting to $151,000, the intrinsic value of the conversion
feature on that date. The total debt discount of $500,000 is amortized to
interest expense over the stated term of the Note.
On June
25, 2009, the Company issued to Quercus a 10% Secured Convertible Promissory
Note. Under the terms of the Note, Quercus has agreed to make
advances to the Company, from time to time, up to an aggregate principal amount
of $150,000. The Note provides that advances may be used only to pay
legal and accounting fees and expenses related to the investigation by the Audit
Committee of the Board of Directors of our financial affairs or other matters
within the investigative authority of the Audit Committee (see Note
10). On June 26, 2009, Quercus made an initial advance under the Note
in the amount of $100,000. The Note matures on the earlier to occur
of (i) the closing of an equity or convertible debt investment in the Company
yielding gross proceeds of not less than $2,000,000.00 or (ii) December 31,
2009. Quercus may participate in the Financing by converting the
principal amount of the Note into shares of the securities to be issued in the
financing at a price per share equal to 80% of the price per share to be paid by
the other investors in the financing.
Advances
under the Note bear interest at the rate of 10% per annum, payable in arrears on
the last day of each March, June, September and December, commencing on
September 30, 2009. At our election, all or any portion of the
interest due on any particular interest payment date may be paid by the issuance
of shares of our Common Stock, par value $0.001 per share valued at 80% of the
volume weighted average trading price per share of our Common Stock for the ten
trading days immediately preceding the respective interest payment
date. We may not pre-pay the Note without prior written consent of
Quercus.
We had
previously entered into a Security Agreement dated February 11, 2009 with
Quercus securing certain of our obligations to Quercus. The June 25,
2009 Note amends that Security Agreement to provide that the June 25, 2009 Note
shall also be secured to the same extent as the February 11, 2009
obligations. We also entered into a letter
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June
30, 2009
Note 4: Short-term
borrowings (continued)
agreement
with Quercus in which we acknowledged that certain conditions to Quercus’
obligation to invest an additional $5,000,000 in the Company pursuant to the
September 15, 2008 Securities Purchase Agreement have not been and cannot be
met, and we irrevocably released any claim we may have on Quercus to make any
further investment.
On June
26, 2009, the Company issued to The Focus Fund a 10% Convertible Promissory Note
due October 15, 2009 in the principal amount of $108,000. The
outstanding principal and interest may be converted, at the holder’s election,
into shares of the Company’s Common Stock at $.36 per share. In
connection with the Note, we also issued a warrant to The Focus Fund to purchase
600,000 shares of the Company’s Common Stock on or before June 17, 2014 at an
exercise price of $.54 per share. The Company estimated the fair
value of the warrant issued using a Black-Scholes option pricing model and
allocated $46,000 of the proceeds received to the warrant on a relative fair
value basis. In addition, the difference between the effective conversion price
of the Note and the fair value of the Company’s Common Stock on the date of
issuance of the Note resulted in a beneficial conversion feature amounting to
$19,000, the intrinsic value of the conversion feature on that date. The total
debt discount of $65,000 is amortized to interest expense over the stated term
of the Note.
Note 5: Convertible debt in
default
For the
six months ended June 30, 2009, amortization of debt discount on the convertible
debt in default amounted to $104,000. In accordance with the Note
agreements, accrued interest of $126,000 was added to the outstanding principal
balances of the convertible debt as of March 31, 2009.
Note 6: Convertible
debt
Convertible
debt consisted of the following at June 30, 2009 and December 31, 2008 (in
thousands):
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Convertible
Promissory Note dated March 21, 2007, 5%, due March 21, 2013,
less discounts of $201 in 2009 and $221 in 2008
|
|
$
|
628
|
|
|
$
|
588
|
|
|
|
|
|
|
|
|
|
|
Convertible
Promissory Note dated March 7, 2008, 5%, due March 7, 2013, less discounts
of
$563
in 2009 and $628 in 2008
|
|
|
226
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
Convertible
Promissory Note dated September 15, 2008, 10%, due September 30, 2013,
less discounts of $1,587 in 2009 and $1,737 in 2008
|
|
|
413
|
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
Convertible
Promissory Notes dated January 5,
2009,
10%, due May 31, 2010
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,627
|
|
|
$
|
992
|
|
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June
30, 2009
Note 6: Convertible debt
(continued)
In
accordance with the terms of the Notes, as of March 31, 2009, the Company added
approximately $20,000 of accrued interest to each of the outstanding principal
balances of the 5% Convertible Promissory Notes.
As more
fully discussed in Note 2, on January 1, 2009 the Company issued $352,000 face
amount of 10% Convertible Promissory Notes in connection with the acquisition of
the remaining noncontrolling interest of CASTion. The Notes are
convertible by the holder into the Company’s Common Stock at $.50 per
share. As of March 31, 2009, the Company had added $8,000 of accrued
interest to the outstanding principal balances of the Notes.
Note 7: Common
Stock
As
discussed more fully in Note 2, the Company issued 435,442 shares of Common
Stock in connection with the acquisition of the remaining noncontrolling
interest of CASTion.
On
February 26, 2009, the Company awarded various officers a total of 1,000,000
non-qualified stock options. The options are exercisable at $1.50 per
share which was approximately 325% of the closing market price on the date of
issue, and expire in ten years from the date of award. Since the
options were granted as bonuses for 2008, an accrued bonus of $306,400, the fair
value of the options on the date of grant using the Black-Scholes option model,
was included in Other Current Liabilities in the 2008 Consolidated Balance
Sheet. On the grant date of February 26, 2009, additional paid-in
capital was increased by $306,400 in satisfaction of the outstanding liability
for the bonus.
On March
6, 2009, the Company issued and sold 1,428,571 shares of Common Stock for cash
at $.35 per share and issued warrants to acquire 714,286 shares of Common Stock
to an unrelated third party institutional investor. The warrants have
an exercise price of $0.525 and expire five years from the grant
date.
Pursuant
to the warrant agreements, we reduced the exercise price of the Quercus warrants
for 14,000,000 shares of the Company’s Common Stock from $1.25 to $0.525 per
share due to the March 6, 2009 sale of Common Stock at $0.35 per
share. The warrant modification resulted in the recording of
$1,030,000 of warrant expense in the first quarter of 2009.
As
discussed in Note 4, the Convertible Promissory Note dated August 12, 2008
maturing on March 31, 2009 was converted to 768,535 shares of the Company’s
Common Stock at $.75 per share on April 1, 2009.
During
the six months ended June 30, 2009, the Company issued 345,000 shares of Common
Stock for services and 437,177 shares of Common Stock in satisfaction of accrued
interest on convertible debt.
Note 8:
Segments
The Water
Group segment represents revenue and costs related to the development and
commercialization of patented water treatment technologies and includes our
headquarters and related operations. The Power Group segment represents revenue
and costs related to the development and commercialization of patented clean
energy technologies. The Water Group segment allocates support costs
to the Energy Group segment on a percentage basis. The Company’s operations are
currently conducted in the United States.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June
30, 2009
Note 8: Segments
(continued)
For
the six months ended June 30, 2009
(in
thousands)
|
|
Water
Group
|
|
|
Power
Group
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
Sales
of wastewater treatment and recovery systems
|
|
$
|
1,424
|
|
|
$
|
-
|
|
|
$
|
1,424
|
|
Grant
revenue
|
|
|
-
|
|
|
|
214
|
|
|
|
214
|
|
Total
operating income
|
|
|
1,424
|
|
|
|
214
|
|
|
|
1,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of wastewater treatment and recovery systems sales
|
|
|
1,634
|
|
|
|
218
|
|
|
|
1,852
|
|
General
and administrative
|
|
|
2,614
|
|
|
|
-
|
|
|
|
2,614
|
|
Selling
expenses
|
|
|
245
|
|
|
|
-
|
|
|
|
245
|
|
Total
operating expenses
|
|
|
4,493
|
|
|
|
218
|
|
|
|
4,711
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Segment
operating loss
|
|
$
|
(3,069
|
)
|
|
$
|
(4
|
)
|
|
$
|
(3,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
714
|
|
|
$
|
-
|
|
|
$
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment operating loss
|
|
|
|
|
|
|
|
|
|
$
|
(3,073
|
)
|
Warrant
and stock options
|
|
|
|
|
|
|
|
|
|
|
(1,211
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
(1,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to ThermoEnergy Corporation
|
|
|
|
|
|
|
|
|
|
$
|
(5,432
|
)
|
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June
30, 2009
Note 8: Segments (continued)
For
the six months ended June 30, 2008
|
|
Water
Group
|
|
|
Power
Group
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
Sales
of wastewater treatment and recovery systems
|
|
$
|
902
|
|
|
$
|
-
|
|
|
$
|
902
|
|
Grant
revenue
|
|
|
-
|
|
|
|
283
|
|
|
|
283
|
|
Total
operating income
|
|
|
902
|
|
|
|
283
|
|
|
|
1,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of wastewater treatment and recovery systems sales
|
|
|
1,051
|
|
|
|
83
|
|
|
|
1,134
|
|
General
and administrative
|
|
|
2,987
|
|
|
|
200
|
|
|
|
3,187
|
|
Selling
expenses
|
|
|
155
|
|
|
|
-
|
|
|
|
155
|
|
Total
operating expenses
|
|
|
4,193
|
|
|
|
283
|
|
|
|
4,476
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Segment
operating loss
|
|
$
|
(3,291
|
)
|
|
$
|
-
|
|
|
$
|
(3,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,429
|
|
|
$
|
-
|
|
|
$
|
1,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment operating loss
|
|
|
|
|
|
|
|
|
|
$
|
(3,291
|
)
|
Warrant
and stock options
|
|
|
|
|
|
|
|
|
|
|
(1,976
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
(493
|
)
|
Net
loss attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to ThermoEnergy Corporation
|
|
|
|
|
|
|
|
|
|
$
|
(5,675
|
)
|
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June
30, 2009
Note 8: Segments
(continued)
For
the three months ended June 30, 2009
(in
thousands)
|
|
Water
Group
|
|
|
Power
Group
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
Sales
of wastewater treatment and recovery systems
|
|
$
|
1,194
|
|
|
$
|
-
|
|
|
$
|
1,194
|
|
Grant
revenue
|
|
|
-
|
|
|
|
68
|
|
|
|
68
|
|
Total
operating income
|
|
|
1,194
|
|
|
|
68
|
|
|
|
1,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of wastewater treatment and recovery systems sales
|
|
|
1,311
|
|
|
|
61
|
|
|
|
1,372
|
|
General
and administrative
|
|
|
1,392
|
|
|
|
-
|
|
|
|
1,392
|
|
Selling
expenses
|
|
|
160
|
|
|
|
-
|
|
|
|
160
|
|
Total
operating expenses
|
|
|
2,863
|
|
|
|
61
|
|
|
|
2,924
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Segment
operating loss
|
|
$
|
(1,669
|
)
|
|
$
|
7
|
|
|
$
|
(1,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
714
|
|
|
$
|
-
|
|
|
$
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment operating loss
|
|
|
|
|
|
|
|
|
|
$
|
(1,662
|
)
|
Warrant
and stock options
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
(581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to ThermoEnergy Corporation
|
|
|
|
|
|
|
|
|
|
$
|
(2,263
|
)
|
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June
30, 2009
Note 8: Segments (continued)
For
the three months ended June 30, 2008
|
|
Water
Group
|
|
|
Power
Group
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
Sales
of wastewater treatment and recovery systems
|
|
$
|
676
|
|
|
$
|
-
|
|
|
$
|
676
|
|
Grant
revenue
|
|
|
-
|
|
|
|
100
|
|
|
|
100
|
|
Total
operating income
|
|
|
676
|
|
|
|
100
|
|
|
|
776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of wastewater treatment and recovery systems sales
|
|
|
700
|
|
|
|
22
|
|
|
|
722
|
|
General
and administrative
|
|
|
1,605
|
|
|
|
78
|
|
|
|
1,683
|
|
Selling
expenses
|
|
|
88
|
|
|
|
-
|
|
|
|
88
|
|
Total
operating expenses
|
|
|
2,393
|
|
|
|
100
|
|
|
|
2,493
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Segment
operating loss
|
|
$
|
(1,717
|
)
|
|
$
|
-
|
|
|
$
|
(1,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,429
|
|
|
$
|
-
|
|
|
$
|
1,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment operating loss
|
|
|
|
|
|
|
|
|
|
$
|
(1,717
|
)
|
Warrant
and stock options
|
|
|
|
|
|
|
|
|
|
|
(1,893
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
(196
|
)
|
Net
loss attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to ThermoEnergy Corporation
|
|
|
|
|
|
|
|
|
|
$
|
(3,765
|
)
|
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June
30, 2009
Note
9: Management’s consideration of going concern
matters
The
Company has incurred net losses since inception and will require substantial
additional capital to continue commercialization of the Technologies and to fund
the Company’s liabilities, which included approximately $2,263,000 of payroll
tax liabilities (see Note 10), $3,708,000 of convertible debt securities in
default, net of debt discounts aggregating $209,000 and $3,234,000 of contingent
liability reserves (see Note 10). In addition, the Company may be
subject to tax liens if it cannot satisfactorily settle the outstanding payroll
tax liabilities and may also face criminal and/or civil action with respect to
the impact of the payroll tax matters (see Note 10). The financial
statements have been prepared assuming the Company will continue as a going
concern, realizing assets and liquidating liabilities in the ordinary course of
business and do not reflect any adjustments that might result from the outcome
of the aforementioned uncertainties. Management is considering several
alternatives for mitigating these conditions.
Management
has determined that obtaining substantial additional funding is essential to its
continued existence. Management actively engaged in negotiations with a group of
investors that had provided funding to the Company in the past. As more fully
described in Note 11, the Company and the investor group approved a term sheet
on September 16, 2009 for a Series B Convertible Preferred Stock financing that,
if fully funded, would result in cash proceeds to the Company of $6,250,000. The
financing provides for funding in four tranches, with the first and second
tranche amounts totaling $3,050,000 based on specified time periods and the
third and fourth tranche amounts totaling $3,200,000 based on the occurrence of
specified events. The first tranche Secured Convertible Promissory Notes with an
aggregate principal balance of $1,680,000 were issued on September 28,
2009.
Management
is also actively pursuing commercial contracts to produce fees from projects
involving the Technologies. Management has determined that the financial success
of the Company may be largely dependent upon the ability and financial resources
of established third parties collaborating with the Company with respect to
projects involving the Technologies. As discussed more fully in Note 3, on
February 25, 2009, ThermoEnergy Power Systems and Babcock Power Development,
LLC, a subsidiary of Babcock Power, Inc., entered into a Limited Liability
Company Agreement establishing Babcock-Thermo Carbon Capture, LLC, a Delaware
limited liability company for the purpose of developing and commercializing our
TIPS technology.
Note 10: Commitments and
contingencies
On June
2, 2009, the Company’s Audit Committee engaged special counsel to conduct an
in-depth investigation of the federal and state employment and unemployment tax
return filing and tax paying compliance record of the Company. Questions
concerning payroll tax matters arose during the preparation of the Company’s
consolidated financial statements for the year ended December 31, 2008 and the
Company’s Chief Financial Officer (“CFO”) could not produce reliable
documentation supporting the Company’s status with respect to compliance with
the tax return filing and tax paying requirements. After discovering that no
payroll tax returns had been filed and that no payroll taxes had been paid to
the Internal Revenue Service and state taxing authorities since the CFO assumed
his officer position in mid-2005, the special counsel’s investigation was
expanded to include a forensic accounting review of the Company’s financial
records by a certified public accounting firm not involved with the audit of the
Company’s financial statements.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June
30, 2009
Note 10: Commitments and
contingencies (continued)
On July
30, 2009, the special counsel presented a report to the Company’s Audit
Committee which summarized the findings of the investigation, including the
forensic accounting review. The report confirmed that the Company had
not filed any payroll tax returns or paid any payroll taxes since mid-2005 and
that the Company’s CFO had sole responsibility for performing those
functions. A computation of the outstanding payroll tax liabilities
and of statutory interest and penalties relating to the nonpayment of the
payroll taxes and the nonfiling of the payroll tax returns as of December 31,
2008 was included in the report.
On July
31, 2009, the Company’s Board of Directors unanimously approved a resolution
that the CFO’s employment be terminated for cause. The CFO resigned
on August 3, 2009.
During
the fourth quarter of 2008, the Company accrued additional payroll taxes of
approximately $1,064,000 resulting in total unpaid payroll taxes of
approximately $2,022,000 at December 31, 2008, and recorded a contingency
accrual of approximately $2,105,000 for estimated interest and penalties for
late filing of the payroll tax returns and nonpayment of the payroll
taxes. Unpaid payroll taxes and the contingency accrual for estimated
penalties and interest thereon as of June 30, 2009 amounted to approximately
$2,263,000 and $2,177,000, respectively. Management plans to file the
payroll tax returns as soon as possible and to present an offer in compromise
for settlement of the payroll tax liabilities to the tax authorities, which
would require a minimum cash payment of approximately $400,000 with the
offer. The Company cannot predict the outcome of the offer in
compromise proceedings.
The
Company may become subject to tax liens if it cannot satisfactorily settle the
outstanding payroll tax liabilities. Furthermore, due to the actions of the CFO
summarized above, the Company may also face criminal and/or civil action with
respect to the payroll tax matters. The Company cannot predict what, if any,
actions may be taken by the tax authorities or other parties or the effect the
actions may have on the Company’s results of operations, financial condition or
cash flows.
On April
6, 2009, the Company received a Complaint filed by David Gelbaum, as Trustee of
Quercus, bringing action against the Company in Delaware to enforce the
provisions of the Securities Purchase Agreement between Quercus and the Company
dated December 18, 2007. The complaint requests enforcement of the Agreement of
the shelf registration of the underlying securities and the payment of
liquidation damages for the failure to register the securities. On
April 13, 2009, the Company received a letter from Counsel of Quercus notifying
the acceleration and a demand for payment of the 10% Convertible Promissory Note
due September 30, 2013 in the principal amount of $2,000,000. The
letter claims events of default defined in the Note. On April 27,
2009, Quercus filed Form SC 13D/A (Amended Statement of Beneficial Ownership)
with The Securities and Exchange Commission disclosing that Quercus has proposed
that the Company change the composition of the Board of Directors, among other
things, and that if the Company does not make changes to the Board of Directors
and review other operational requirements, that Quercus may take other actions
to effect such changes. On April 29, 2009, Quercus brought an action
in the United States District Court for the Eastern District of Arkansas against
the Company (the “Arkansas Complaint’) to enforce the provisions of the 2008
Agreement for the $2,000,000 Convertible Note. The Arkansas Complaint alleges
that, as a result of the events of default, the Note is now due and payable and
seeks judgment in the amount of the Note (plus costs of
collection). The Arkansas Complaint also alleges that we have
breached our shelf registration obligation with respect to the shares of our
Common Stock issuable upon conversion of the Note or upon exercise of the
warrant issued to Quercus pursuant to the 2008 Agreement and seeks liquidated
damages for the failure to register such shares.
See Note
11 for a discussion of the subsequent dismissal of the
litigation.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June
30, 2009
Note 10: Commitments and
contingencies (continued)
The
Company’s contingent liability reserves consisted of the following at June 30,
2009 and December 31, 2008 (in thousands):
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Estimated
penalties and interest – payroll tax liabilities
|
|
$
|
2,177
|
|
|
$
|
2,105
|
|
|
|
|
|
|
|
|
|
|
Other,
including unasserted claims
|
|
|
1,057
|
|
|
|
1,229
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,234
|
|
|
$
|
3,334
|
|
Note
11: Subsequent events
On July
31, 2009, the Company issued an 8% Secured Convertible Promissory Note in the
principal amount of $600,000 to the Focus Fund L.P. The Note is due on the
earlier to occur of (i) the closing of an equity or convertible debt investment
yielding gross proceeds to the Company of not less than $2,000,000 or (ii)
December 31, 2011. The Note is convertible into to Common Stock of the Company
at the option of the holder at a price of $.30 per share and is secured by the
Company’s 85% ownership interest in ThermoEnergy Power Systems. In addition, the
Company issued a warrant to the Focus Fund L.P. for the purchase of 2,400,000
shares of the Company’s Common Stock at a price of $.50 per share. The warrant
expires on July 31, 2014.
On August
21, 2009, the Company received a short-term in the amount of $110,000 from the
Focus Fund L. P. This loan was repaid in September 2009.
The
Company made a $50,000 capital contribution to Bobcock Thermo Carbon Capture LLC
during August 2009.
On
September 16, 2009, the Company and an investor group, consisting of Quercus,
Empire Capital Partners, Robert S. Trump and the Focus Fund L.P., signed a term
sheet for a Series B Convertible Preferred Stock financing, which if fully
funded, would result in cash proceeds of $6,250,000 to the Company. The term
sheet provides for funding in four tranches, with the first and second tranche
amounts totaling $3,050,000 based on specified time periods and the third and
fourth tranche amounts totaling $3,200,000 based on the occurrence of specified
events.
In the
first tranche funding of $1,650,000, the Company issued 8% Secured Convertible
Promissory Notes on September 28, 2009 identical in form and substance to the
Company’s 8% Secured Convertible Promissory Note issued to the Focus Fund L.P.
on July 31, 2009, which was amended to provide for a conversion price of $.24
per share instead of $.30 per share and a maturity date of December 31, 2010. In
addition, the Company’s outstanding Convertible Promissory Notes payable to the
investors in the original aggregate principal amount of $3,550,000 were amended
to conform to the same terms as the 8% Secured Convertible Promissory Notes. The
security for all of the 8% Secured Convertible Promissory Notes is the Company’s
85% interest in ThermoEnergy Power Systems.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June
30, 2009
Note
11: Subsequent events (continued)
In the
second tranche funding of $1,400,000, expected to occur on or before November
15, 2009, the Company will issue shares of Series B Convertible Preferred Stock
at a price per share to be specified at that date. Upon the closing of the
second tranche funding, the outstanding principal and accrued interest on all of
the 8% Secured Convertible Promissory Notes will convert automatically into
shares of the Company’s Series B Convertible Preferred Stock at the price per
share at which such Preferred Stock will be issued. Each share of Series B
Convertible Preferred Stock will be convertible, at any time at the discretion
of the holder, into ten shares of the Company’s Common Stock. Except with
respect to the election of the Board of Directors, holders of Series B
Convertible Preferred Stock will vote on an as-converted basis together with the
Common Stock holders on all matters. The term sheet provides that the Company’s
Board of Directors will consist of seven members. Four Directors will be elected
by holders of the Company’s Series B Convertible Preferred Stock (three to be
designated by Quercus and one by Robert S. Trump) and three Directors will be
elected by the holders of the Company’s Common Stock.
If the
events specified in the agreement occur, in the third tranche funding of
$1,800,000 and the fourth tranche funding of $1,400,000, the Company will issue
shares of Series B Convertible Preferred Stock. Common Stock warrants
with an aggregate exercise price equal to 200% of the principal amount invested
will be issued to the investors at the closing of each tranche. The warrants
will expire in five years and provide for an exercise price of $.50 per
share.
The term
sheet also provides, among other things, for the following: (i) the reduction of
the exercise price to $.50 for the Company’s outstanding warrants held by the
investors which have an exercise price greater than $.50 and were issued in
conjunction with convertible notes which were amended in accordance with the
term sheet; (ii) the dismissal of the litigation filed by Quercus against the
Company; (iii) the execution by the Company and the investors of mutual general
releases of all prior claims (whether or not yet asserted); (iv) the removal of
the registration payment arrangements with Quercus; (v) the employment of a new
Chief Executive Officer and Chief Financial Officer; and (vi) the termination of
all existing employment agreements with the Company’s executive
officers.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with the financial statements
and notes thereto appearing elsewhere in this report.
Overview
Currently
the Company is primarily a “water company” with patented and proprietary water
technologies that reside in the Company’s water subsidiary,
CASTion. The water technologies address wastewater problems for
municipal and a broad range of industrial markets including water management and
conservation, chemical recovery, and water purification. The
Company’s advanced power plant technology, TIPS, is aimed at competing with and
ultimately replacing conventional energy fossil fuel combustion technologies for
both large stationary utility power plants and small industrial combined heat
and power package plants. The Company has developed TIPS mostly from funding
from federal grants, and recently completed the approximately $1.5 million
federal government grant sponsored by the U.S. Environmental Protection Agency
and administered through the Alaska Energy Authority. The Company
cannot predict the acceptability of TIPS within its target
markets. The Company currently does not possess the technical,
operational or financial resources necessary to construct or operate TIPS
commercial facilities without external project funding and the ability to source
engineering skills.
This was a major factor
in the Company’s subsidiary, ThermoEnergy Power System, LLC,
and Babcock Power Development, LLC, a subsidiary of Babcock Power,
Inc., entering into a Limited Liability Company Agreement on February
25, 2009 establishing Babcock-Thermo Carbon Capture LLC, a Delaware limited
liability company for the purpose of developing and commercializing TIPS (see
Note 3 of Notes to Consolidated Financial Statements).
Recent
events have had a significant adverse effect on the Company’s liquidity and
results of operations. As more fully discussed in Note 10 of Notes to
Consolidated Financial Statements, in 2009, the Company discovered that the
former Chief Financial Officer (“CFO”) failed to file the Company’s payroll tax
returns and to pay the related payroll taxes since he assumed his officer
position in 2005. This resulted in an accrual during the fourth
quarter of 2008 of an additional $1,064,000 of payroll taxes and $2,105,000 of
estimated interest and penalties for late filing of the tax returns and
nonpayment of the payroll taxes. The Company’s investigation into the
actions regarding payroll taxes and other activities of the former CFO have
resulted in significant delays in the Company being able to file the Annual
Report on Form 10-K for the year ended December 31, 2008 (which was filed on
October 8, 2009) and the Company’s Form 10-Q reports for the quarters ended
March 31, 2009 and June 30, 2009.
Management
has determined that obtaining substantial additional funding is essential to its
continued existence. Management actively engaged in negotiations with a group of
investors that had provided funding to the Company in the past. As more fully
described in Note 10 of Notes to the Consolidated Financial Statements, the
Company and the investor group approved a term sheet on September 16, 2009 for a
Series B Convertible Preferred Stock financing that, if fully funded, would
result in cash proceeds to the Company of $6,250,000. The financing provides for
funding in four tranches, with the first and second tranche amounts totaling
$3,050,000 based on specified time periods and the third and fourth tranche
amounts totaling $3,200,000 based on the occurrence of specified events. The
first tranche Secured Convertible Promissory Notes with an aggregate principal
balance of $1,680,000 were issued by the Company on September 28,
2009.
Since the
financing described in the preceding paragraph is in stages with over half of
the potential funding dependent on the occurrence of specific events and due to
the Company’ financial condition and to the significant uncertainties resulting
from the actions of the former CFO, there are can be no assurance that the
Company will be able to obtain the capital funds that will be needed for the
Company to continue it operations.
Results
of Operations
Comparison
of Six-Month and Three-Month Periods Ended June 30, 2009 and 2008
Contract
and grant income increased by $453,000 and $486,000 during the six-month and
three-month periods ended June 30, 2009, respectively, compared to the
corresponding periods for 2008 due to a $3 million contract that was started
during 2008. The corresponding increases in cost of contract income for the two
periods, however, exceeded the revenue increases resulting in the increases in
the gross operating loss of $265,000 and $164,000 during the six-month and
three-month periods ended June 30, 2009, respectively, compared to the
corresponding periods for 2008.
The
decreases in general and administrative expenses and travel and entertainment
expenses during the 2009 periods compared to the corresponding 2008 periods were
due to the Company’s efforts to conserve cash during 2009 due to difficulties in
obtaining financing. Selling expense increases during the 2009
periods were consistent with the increases in contract income. The
significant decreases in option expense during the 2009 periods were due to the
large stock option grants during 2008 compared to 2009. Warrant
expense increased by $331,000 during the six-month period ended June 30, 2009
compared to the corresponding period for 2008 due to the modification of
warrants held by the Quercus Trust (see Note 7 of Notes to Consolidated
Financial Statements) which resulted in the recording of an expense of
$1,030,000. Interest expense increased by $639,000 and $380,000
during the six-month and three-month periods ended June 30, 2009, respectively,
compared to the corresponding periods for 2008 due to the increase of $2,815,000
in outstanding debt between the June 30, 2009 and June 30,
2008. Included in interest expense are $746,000 and $285,000 of
amortization of debt discount for the six months ended June 30, 2009 and 2008,
respectively, and $377,000 and $90,000 for the three months ended June 30, 2009
and 2008, respectively.
Liquidity
and Capital Resources Discussion
Historical
View
The
Company has historically lacked the financial and other resources necessary to
market the Technologies or to build demonstration projects without the financial
backing of government or industrial partners. During the six months
ended June 30, 2009 and 2008, the Company funded its operations primarily from
the sale of convertible debt and restricted stock, generally from stockholders
and other related parties.
Cash used
in operations amounted to $1,533,000 and $3,941,000 for the six months ended
June 30, 2009 and 2008, respectively. The majority of cash used in
operating activities during those periods ended relates to cash utilized in our
on-going operations, as adjusted for non-cash items, and changes in operating
assets and liabilities as detailed in the Consolidated Statements of Cash Flows
included herein.
Current
Cash Requirements; Need for Additional Funds
At June
30, 2009, the Company did not have sufficient working capital to satisfy its
anticipated operating expenses for the next 12 months. As of June 30, 2009, the
Company had a cash balance of approximately $40,000 and current liabilities of
approximately $12.2 million, which consisted primarily of convertible debt in
default of $3,708,000 (net of $209,000 of debt discounts), contingent liability
reserves of $3,234,000 and unpaid payroll taxes of $2,263,000.
Recent
events have had a significant adverse effect on the Company’s
liquidity. The Company’s former CFO’s actions regarding payroll tax
matters resulted in an accrual during the fourth quarter of 2008 of an
additional $1,064,000 of payroll taxes and $2,105,000 of estimated interest and
penalties for late filing of the tax returns and nonpayment of the payroll taxes
(see Note 10 of Notes to Consolidated Financial Statements for further
information regarding payroll tax matters).
The
Company may become subject to tax liens if it cannot satisfactorily settle the
outstanding payroll tax liabilities. Furthermore, due to the actions of the CFO,
the Company may also face criminal and/or civil action with respect to the
impact of the payroll tax matters. The Company cannot predict what, if any,
actions may be taken by the tax authorities or other parties or the effect
the actions may have on the Company’s results of operations, financial condition
or cash flows.
Management
has determined that obtaining substantial additional funding is essential to its
continued existence. Management actively engaged in negotiations with a group of
investors that had provided funding to the Company in the past. As more fully
described in Note 11 of Notes to the Consolidated Financial Statements, the
Company and the investor group approved a term sheet on September 16, 2009 for a
Series B Convertible Preferred Stock financing that, if fully funded, would
result in cash proceeds to the Company of $6,250,000. The financing provides for
funding in four tranches, with the first and second tranche amounts totaling
$3,050,000 based on specified time periods and the third and fourth tranche
amounts totaling $3,200,000 based on the occurrence of specified events. The
first tranche Secured Convertible Promissory Notes with an aggregate principal
balance of $1,680,000 were issued by the Company on September 28,
2009.
Since the
financing described in the preceding paragraph is in stages, with over half of
the potential funding dependent on the occurrence of specific events, and due to
the Company’ financial condition and to the significant uncertainties resulting
from the actions of the former CFO, there are can be no assurance that the
Company will be able to obtain the capital funds that will be needed for the
Company to continue it operations.
Management anticipates
that its cash requirements during the next 12 months will be approximately $6
million.
In the
event that the Company cannot raise the necessary capital to fund the Company’s
future operations and development activities, the Company will not be able to
continue its operations.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Not
required.
Item
4T. Controls and Procedures.
The
Company, under the direction of its Chief Executive Officer and Chief Financial
Officer, have established disclosure controls and procedures that are designed
to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act, is recorded, processed,
summarized, and reported within the time periods specified in the Commission’s
rules and forms. The disclosure controls and procedures are also intended to
ensure that such information is accumulated and communicated to the Company’s
management, consisting of the Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosures.
The Chief
Executive Officer and Chief Financial Officer have reviewed and evaluated the
Company’s disclosure controls and procedures as of the end of the period covered
by this report. Based on, and as of the effective date of, that review and
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company did not maintain effective internal control over
financial reporting as of June 30, 2009. Specifically, we have
determined that our internal controls as of June 30, 2009 were deficient in that
(i) we had not adequately allocated resources to ensure that necessary internal
controls were implemented and followed throughout the Company, (ii) our
period-end reporting process did not provide sufficiently timely and accurate
financial statements and required disclosures, (iii) there was a lack of
segregation of duties in the Company’s significant accounting functions, (iv)
our contract administration and accounting procedures were deficient, and (v)
our former Chief Financial Officer engaged in acts that resulted in significant
adjustments to the Company’s consolidated financial statements and subjected the
Company to potential criminal and/or civil action with respect to the Company’s
unpaid payroll tax matters (see Note 10 of Notes to the Consolidated Financial
Statements). The former Chief Financial Officer resigned on August 3,
2009 following a vote by the Company’s Board of Directors to terminate his
employment for cause. Mr. Arthur S. Reynolds, a member of the
Company’s Board of Directors, was appointed Interim Chief Financial
Officer.
Management
has discussed its conclusions regarding the inadequacy of internal controls with
the Audit Committee and with representatives of our independent public
accountants and intends to address the remediation process for the material
weaknesses noted and the Company’s Section 404 reporting responsibilities during
the fourth quarter of 2009.
As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s Chief
Executive Officer and Chief Financial Officer, of the effectiveness of
disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act. Based on such evaluation, the Company’s Chief
Executive Officer and Chief Financial Officer have concluded that as of the end
of the period covered by this report, the Company’s disclosure controls and
procedures were not effective at meeting their objectives in that our
period-ending reporting process did not provide sufficiently timely and accurate
financial statements and disclosures.
There
have been no changes in the Company’s internal control over financial reporting
that occurred during the quarter ended June 30, 2009 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART
II — OTHER INFORMATION
Item
1. Legal Proceedings
On April
6, 2009, David Gelbaum, as Trustee of The Quercus Trust (“Quercus”) brought an
action in the Delaware Chancery Court against the Company to enforce the
provisions of the Securities Purchase Agreement between Quercus and the Company
dated December 18, 2007 (the “Delaware Complaint”). The Delaware
complaint seeks specific enforcement of the Company’s “shelf” registration
obligation with respect to the shares of common stock issued or issuable to
Quercus pursuant to such agreement and the payment of liquidation damages for
the failure to register the securities. Mr. Gelbaum served as a
Director of the Company from September 10, 2008 until his resignation on January
22, 2009.
On April
29, 2009, Quercus brought an action in the United States District Court for the
Eastern District of Arkansas against the Company (the “Arkansas Complaint’) to
enforce the provisions of the 2008 Agreement for the $2,000,000 Convertible
Note. The Arkansas Complaint alleges that, as a result of the events of default,
the Note is now due and payable and seeks judgment in the amount of the Note
(plus costs of collection). The Arkansas Complaint also alleges that
we have breached our shelf registration obligation with respect to the shares of
our Common Stock issuable upon conversion of the Note or upon exercise of the
warrant issued to Quercus pursuant to the 2008 Agreement and seeks liquidated
damages for the failure to register such shares.
On
September 28, 2009, the Arkansas Complaint was dismissed. On
September 30, 2009, the Delaware Complaint was dismissed. See
Note 11 of Notes to Consolidated Financial Statement for additional
information.
Item
1a. Risk Factors
There
have been no material changes from the risk factors disclose in Item 1A to Part
I of our Annual Report on Form 10-K for the year ended December 31,
2008.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
During
the quarter ended June 30, 2009, we issued shares of our Common Stock to the
following persons, on the dates and in the amounts indicated, as payment for
services:
Issued
to
|
Number
of Shares
|
Date
|
J.
H. Darby
|
20,000 shares
|
April 1, 2009
|
Alliance
Investors
|
225,000
shares
|
May 5, 2009
|
Bartley
O’Hara
|
100,000
shares
|
June
25, 2009
|
We issued
shares of our Common Stock to The Quercus Trust on the dates and in the amounts
indicated, in payment of interest due on loans from The Quercus
Trust:
Number
of Shares
|
Date
|
220,869
|
April
13, 2009
|
6,446
|
May
26, 2009
|
209,862
|
June
30, 2009
|
On April
27, 2009, we entered into a Securities Purchase Agreement (the “Agreement”) with
Empire Capital Partners, two funds affiliated with Empire and two
individuals affiliated with Empire (the “Investors”), pursuant to which we
issued to the Investors an aggregate of $500,000 face amount of our 10%
Convertible Promissory Notes due October 31, 2009 (the “Notes”) and warrants to
purchase an aggregate of 2,500,000 shares of our Common Stock at an exercise
price of $0.55 per share. The principal of, and interest on,
the Notes are convertible at any time into shares of our Common Stock at a
conversion price of $0.40 per share. The expiration date of the
warrants is April 30, 2014. The Agreement contains conventional
representations, warranties and covenants and an undertaking to file a
registration statement covering resale of all of the shares of our Common Stock
issuable upon conversion of the Notes or upon exercise of the warrants issued to
the Investors pursuant to the Agreement.
In the
Agreement, the Investors represented to us that each of them is an “accredited
investor” (as such term is defined in Rule 501 of Regulation D promulgated under
the Securities Act of 1933) and a “qualified institutional buyer” (as such term
is defined in Rule 144A under the Securities Act of 1933) and that each of them
was acquiring the Notes and the warrants for its own account, for investment
purposes, and without a view toward distribution or resale of such
securities. The shares of our Notes and the warrants were issued
to the Investors in a transaction not involving a public offering and without
registration under the Securities Act of 1933 in reliance on the exemption from
registration provided by Section 4(2) of such Act.
On June
25, 2009, we issued to The Quercus Trust (“Quercus”) a 10% Secured Convertible
Promissory Note (the “Quercus Note”). Under the Quercus
Note, Quercus has agreed to make advances to us, from time to time,
up to an aggregate principal amount of $150,000. The Quercus Note
provides that advances may be used only to pay legal and accounting fees and
expenses related to the investigation by the Audit Committee of our Board of
Directors of our financial affairs or other matters within the investigative
authority of the Audit Committee. On June 26, 2009, Quercus made an
initial advance under the Quercus Note in the amount of
$100,000.
Advances
under the Quercus Note bear interest at the rate of 10% per annum, payable in
arrears on the last day of each March, June, September and December, commencing
on September 30, 2009. At our election, all or any portion of the
interest due on any particular interest payment date may be paid by the issuance
to Quercus of shares of our Common Stock, par value $0.001 per share (the
“Common Stock”). The number of shares of Common Stock to be issued in
payment of interest shall be determined by dividing (i) the amount of interest
to be so paid by (ii) 80% of the volume weighted average trading price per share
of Common Stock for the 10 trading days immediately preceding date on which such
interest is to be paid.
The
Quercus Note matures on the earlier of the closing of an equity or convertible
debt investment yielding gross proceeds to us of not less than $2,000,000 (the
“Financing”) or December 31, 2009. Quercus may participate in the
Financing by converting the principal amount of the Quercus Note into shares of
the securities to be issued in the Financing at a price per share equal to 80%
of the price per share at which such securities will be issued to other
investors in the Financing.
We had
previously entered into a Security Agreement dated February 11, 2009 with
Quercus (the “Security Agreement”) securing certain of our obligations to
Quercus. In the Quercus Note we pledge all Collateral (as defined in
the Security Agreement) to secure our obligations under the Quercus
Note. The Quercus Note amends the Security Agreement to provide that
the Quercus Note shall be secured by the Security Agreement to the same extent
as the Note defined therein.
We may
not prepay the Quercus Note without the prior written consent of
Quercus. The Quercus Note contains other customary provisions,
including events of default, choice of law and consent to the exclusive
jurisdiction of state and federal courts in Delaware to resolve disputes arising
under the Quercus Note.
In
connection with the Quercus Note, on June 25, 2009, we entered into a letter
agreement with Quercus in which we acknowledged that certain conditions to
Quercus’ obligation to invest an additional $5,000,000 in us pursuant to a
Securities Purchase Agreement dated September 15, 2008, have not been and cannot
be met, and we irrevocably released any claim we may have on Quercus to make any
further investment. We also agreed that the choice of law and choice
of forum clause in the Note shall be applicable to any and all disputes that
arise between us and Quercus and shall be deemed to amend and supersede all
contrary choice of law and choice of forum clauses previously agreed to in any
and all agreements between the parties, except only for the dispute as to late
fees for failure to file a registration statement currently pending in Arkansas
courts.
On June
26, 2009, we issued to The Focus Fund, LP (“Focus”) a 10% Convertible
Promissory Note dated June 17, 2009 in the principal amount of $108,000 (the
“Focus Note”). The principal and accrued interest on the Focus Note
is due and payable on October 15, 2009 and may be prepaid without premium or
penalty. The proceeds from the Focus Note will be used by us to fund
business operations and for other general corporate
purposes. . In connection with the Focus Note, we also
issued a warrant (the “Focus Warrant”) to The Focus Fund to purchase 600,000
shares of the Company’s Common Stock on or before June 17, 2014 at an exercise
price of $.54 per share.
The
outstanding principal and accrued interest on the Focus Note may be converted,
at Focus’s election, into shares of Common Stock at a conversion price of $0.36
per share. The conversion price and the number of shares into which
the Focus Note may be converted are subject to proportionate adjustment in the
event of certain fundamental changes to the Common Stock, including stock
splits, subdivisions or combinations, or upon certain extraordinary transactions
affecting our corporate status, such as capital reorganizations, mergers or
dispositions of our assets.
The Focus
Note contains other customary provisions, including events of default, choice of
law and consent to the exclusive jurisdiction of state and federal courts in
Arkansas to resolve disputes arising under the Focus
Note.
In
connection with the Focus Note, we agreed in a letter to Focus dated June 15,
2009 that, should the conversion price or the exercise price of securities
issued to Quercus (the “Quercus Securities”) be less than the conversion price
of the Focus Note and the exercise price of the Focus Warrant, the conversion
price of the Focus Note and/or the exercise price of the Focus Warrant will be
adjusted to a price equal to the applicable conversion price or exercise price
of the Quercus Securities. In our letter to Focus, we also agreed
that all shares of Common Stock purchased by Focus directly from us and all
shares of Common Stock issuable upon exercise or conversion of any convertible
notes or warrants issued by us to Focus will be entitled to piggyback
registration rights entitling Focus to include, subject to the rules and
regulations of the Securities and Exchange Commission, such shares of Common
Stock in any registration statement we file with the Commission during the
period prior to the date on which such shares of Common Stock may be freely
resold by Focus without registration in reliance on the exemption from
registration provided in Rule 144.
The Focus
Warrant provides for early expiration at our election in the event the trading
price for the Common Stock exceeds 300% of the Focus Warrant’s exercise
price for a period of 30 consecutive trading days.
The
conversion price of the Focus Warrant and the number of shares for which the
Focus Warrant may be exercised are subject to proportionate adjustment in the
event of certain fundamental changes to the Common Stock, including stock
splits, subdivisions or combinations, or upon certain extraordinary transactions
affecting our corporate status, such as capital reorganizations, mergers or
dispositions of our assets.
Item
3. Defaults Upon Senior Securities
On July
2, 2007, the Company issued Convertible Promissory Notes in the aggregate
principal amount of $3,353,127 (the “Notes”) as part of the consideration for
the acquisition of CASTion. The balance of the Notes is technically
in default and is shown in current liabilities as of June 30, 2009, due to the
fact that the Company had not made the required prepayments from the Quercus
private placement of equity closed on December 17, 2007.
Item
4. Submission of Matters to a Vote of Security Holders
No
matters were submitted to a vote of securities holders during the quarter ended
June 30, 2009.
Item
5. Other Information
None.
Item
6. Exhibits
The
following exhibits are filed as part of this report:
Exhibit No.
|
|
Description
of Exhibit
|
4.1
|
|
Form
of 10% Convertible Promissory Note due October 31, 2009 issued pursuant to
Securities Purchase Agreement dated as of April 27, 2009 —
Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K
filed April 28, 2009
|
4.2
|
|
Form
of Common Stock Purchase Warrant issued pursuant to Securities Purchase
Agreement dated as of April 27, 2009 — Incorporated by
reference to Exhibit 4.3 to Current Report on Form 8-K filed April 28,
2009
|
4.3
|
|
Warrant
No. W09-10 for the purchase of 600,000 shares of the Common Stock of
ThermoEnergy Corporation issued to The Focus Fund, LP — Incorporated by
reference to Exhibit 4.1 to Current Report on Form 8-K filed June 30,
2009
|
4.4
|
|
10%
Secured Convertible Promissory Note of ThermoEnergy Corporation dated June
25, 2009 in the principal amount of $150,000 issued to The Quercus
Trust — Incorporated by reference to Exhibit 10.1 to
Current Report on Form 8-K filed June 30, 2009
|
4.5
|
|
10%
Convertible Promissory Note of ThermoEnergy Corporation dated June 17,
2009 in the principal amount of $108,000 issued to The Focus Fund,
LP — Incorporated by reference to Exhibit 10.3 to
Current Report on Form 8-K filed June 30, 2009
|
10.1
|
|
Securities
Purchase Agreement dated as of April 27, 2009 by and between ThermoEnergy
Corporation and the Investors party thereto — Incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K filed April 28,
2009
|
10.2
|
|
Letter
Agreement between The Quercus Trust and ThermoEnergy Corporation dated
June 25, 2009 — Incorporated by reference to Exhibit
10.2 to Current Report on Form 8-K filed June 30, 2009
|
10.3
|
|
Letter
Agreement between The Focus Fund, LP and ThermoEnergy Corporation dated
June 15, 2009 — Incorporated by reference to Exhibit
10.4 to Current Report on Form 8-K filed June 30, 2009
|
31.1
|
|
Sarbanes
Oxley Act Section 302 Certificate of Principal Executive
Officer — Filed herewith
|
31.2
|
|
Sarbanes
Oxley Act Section 302 Certificate of Principal Financial
Officer — Filed herewith
|
32.1
|
|
Sarbanes
Oxley Act Section 906 Certificate of Principal Executive
Officer — Filed herewith
|
32.2
|
|
Sarbanes
Oxley Act Section 906 Certificate of Principal Financial
Officer — Filed
herewith
|
SIGNATURE
In
accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date:
October 14, 2009
|
THERMOENERGY
CORPORATION
|
|
|
|
/s/ Dennis C. Cossey
|
|
Dennis
C. Cossey, Chairman, and
|
|
Chief
Executive Officer
|
ThermoEnergy (CE) (USOTC:TMEN)
Historical Stock Chart
From Jun 2024 to Jul 2024
ThermoEnergy (CE) (USOTC:TMEN)
Historical Stock Chart
From Jul 2023 to Jul 2024