UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
S
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March
31, 2012
or
£
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _____
to_____
Commission File Number 33-46104-FW
THERMOENERGY CORPORATION
(Exact name of registrant as specified in
its charter)
Delaware
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71-0659511
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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10 New Bond Street,
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Worcester, Massachusetts
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01606
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrant’s telephone number,
including area code:
(508) 854-1628
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
o
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 (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
o
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 the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
Indicate the number of shares outstanding
of each of the issuer’s classes of common stock, as of the latest practicable date.
Class – Common Stock, $.001 par value Outstanding
at May 16, 2012 – 91,219,622 shares
THERMOENERGY CORPORATION
INDEX
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Page
No.
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Part I.
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Financial Information
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ITEM 1.
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Financial Statements
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3
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Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011
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3
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Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011 (As restated) (Unaudited)
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4
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Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (As Restated) (Unaudited)
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5
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Notes to Consolidated Financial Statements (Unaudited)
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6
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ITEM 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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16
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ITEM 3.
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Quantitative and Qualitative Disclosures About Market Risk
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18
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ITEM 4.
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Controls and Procedures
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18
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Part II.
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Other Information
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ITEM 1.
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Legal Proceedings
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19
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ITEM 1A.
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Risk Factors
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19
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ITEM 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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19
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ITEM 3.
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Defaults Upon Senior Securities
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19
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ITEM 4.
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Mine Safety Disclosures
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19
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ITEM 5.
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Other Information
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19
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ITEM 6.
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Exhibits
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19
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Signatures
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20
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PART I – FINANCIAL INFORMATION
ITEM 1. Financial Statements
THERMOENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value
amounts)
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March 31,
2012
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December 31,
2011
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(unaudited)
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ASSETS
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Current Assets:
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Cash
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$
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1,933
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$
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3,056
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Accounts receivable, net
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986
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4,228
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Costs in excess of billings
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392
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132
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Inventories
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297
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167
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Deposits
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820
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262
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Other current assets
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290
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328
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Total Current Assets
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4,718
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8,173
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Property and equipment, net
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480
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544
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Other assets
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68
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72
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TOTAL ASSETS
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$
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5,266
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$
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8,789
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LIABILITIES AND STOCKHOLDERS' DEFICIENCY
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Current Liabilities:
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Accounts payable
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$
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1,338
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$
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2,640
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Convertible debt, net - current portion
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2,926
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1,250
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Billings in excess of costs
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3,982
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5,131
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Derivative liability, current portion
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552
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706
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Other current liabilities
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1,672
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1,833
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Total Current Liabilities
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10,470
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11,560
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Long Term Liabilities:
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Derivative liability
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80
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101
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Convertible debt, net
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—
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1,571
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Other long term liabilities
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114
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160
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Total Long Term Liabilities
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194
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1,832
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Total Liabilities
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10,664
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13,392
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Commitments and contingencies (Note 8)
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Stockholders' Deficiency:
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Preferred Stock, $0.01 par value: authorized: 30,000,000 shares at March 31, 2012 and December 31, 2011:
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Series A Convertible Preferred Stock, liquidation value of $1.20 per share: designated: 208,334 shares at March 31, 2012 and December 31, 2011; issued and outstanding: 208,334 shares at March 31, 2012 and December 31, 2011
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2
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2
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Series B Convertible Preferred Stock, liquidation preference of $2.40 per share: designated: 12,000,000 shares at March 31, 2012 and December 31, 2011; issued and outstanding: 11,664,993 shares at March 31, 2012 and December 31, 2011
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117
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117
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Common Stock, $.001 par value: authorized – 425,000,000 shares at March 31, 2012 and December 31, 2011; issued: 91,219,622 shares at March 31, 2012 and 85,167,098 shares at December 31, 2011; outstanding: 91,085,825 shares at March 31, 2012 and 85,033,301 shares at December 31, 2011
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91
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85
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Additional paid-in capital
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109,470
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108,727
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Accumulated deficit
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(115,055
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)
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(113,510
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)
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Treasury stock, at cost: 133,797 shares at March 31, 2012 and December 31, 2011
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(18
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)
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(18
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)
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Total ThermoEnergy Corporation Stockholders’ Deficiency
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(5,393
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)
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(4,597
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)
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Noncontrolling interest
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(5
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)
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(6
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)
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Total Stockholders’ Deficiency
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(5,398
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)
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(4,603
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)
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TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
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$
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5,266
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$
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8,789
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See notes to consolidated financial statements.
THERMOENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except share and per share
amounts
(Unaudited)
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Three Months Ended
March 31,
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2012
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(As Restated – See
Note 3)
2011
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Revenue
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$
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1,688
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$
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948
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Less: cost of revenue
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1,428
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967
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Gross profit (loss)
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260
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(19
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)
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Operating Expenses:
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General and administrative
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1,031
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1,396
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Engineering, research and development
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109
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83
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Sales and marketing
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703
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513
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Total operating expenses
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1,843
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1,992
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Loss from operations
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(1,583
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)
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(2,011
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)
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Other income (expense):
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Change in fair value of derivative liabilities
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175
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2,703
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Loss on extinguishment of debt
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—
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(7,245
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)
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Interest and other expense, net
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(132
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)
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(694
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)
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Equity in losses of joint venture
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(5
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)
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(87
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)
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Net loss
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(1,545
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)
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(7,334
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)
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Net loss attributable to noncontrolling interest
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1
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13
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Net loss attributable to ThermoEnergy Corporation
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$
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(1,544
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)
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$
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(7,321
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)
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Net loss per share attributable to ThermoEnergy Corporation common stockholders, basic and diluted
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$
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(0.02
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)
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$
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(0.13
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)
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Weighted average shares used in computing loss per share, basic and diluted
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90,277,915
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55,848,585
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See notes to consolidated financial statements.
THERMOENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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Three Months Ended
March 31,
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2012
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2011
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(As
Restated –
See Note 3)
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Operating Activities:
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Net loss
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$
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(1,545
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)
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$
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(7,334
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)
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Adjustment to reconcile net loss to net cash used in operating activities:
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Stock-based compensation expense
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163
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354
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Equity in losses of joint venture
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5
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87
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Decrease in derivative liabilities
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(175
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)
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(2,703
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)
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Loss on extinguishment of debt
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—
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7,245
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Common stock issued for services
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89
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—
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Non-cash interest added to debt
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23
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45
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Loss on disposal of equipment
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131
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—
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Depreciation
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27
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17
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Amortization of discount on convertible debt
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59
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492
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Increase (decrease) in cash arising from changes in assets and liabilities:
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Accounts receivable
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3,242
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361
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Costs in excess of billings
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(260
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)
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—
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Inventories
|
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(130
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)
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(66
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)
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Deposits
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(558
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)
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—
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Other current assets
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38
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(393
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)
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Accounts payable
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(1,302
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)
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1,302
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Billings in excess of costs
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(1,149
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)
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(250
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)
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Other current liabilities
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(139
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)
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(461
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)
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Other long-term liabilities
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(46
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)
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176
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Net cash used in operating activities
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|
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(1,527
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)
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(1,128
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)
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Investing Activities:
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Investment in joint venture
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—
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(125
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)
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Purchases of property and equipment
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(94
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)
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(70
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)
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Net cash used in investing activities
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(94
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)
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(195
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)
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Financing Activities:
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Payments on convertible debt
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—
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(1,199
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)
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Proceeds from issuance of common stock, net of issuance costs of $38
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498
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|
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—
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Net cash provided by (used in) financing activities
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|
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498
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|
|
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(1,199
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)
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|
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|
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Net change in cash
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(1,123
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)
|
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(2,522
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)
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Cash, beginning of period
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3,056
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4,299
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Cash, end of period
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$
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1,933
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$
|
1,777
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Cash paid for interest
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$
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—
|
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$
|
81
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Supplemental schedule of non-cash financing activities:
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Accrued interest added to debt
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$
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23
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$
|
153
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|
See notes to consolidated financial statements.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
Note 1: Organization and summary
of significant accounting policies
Nature of business
ThermoEnergy Corporation (“the Company”)
was incorporated in January 1988 for the purpose of developing and marketing advanced municipal and industrial wastewater treatment
and carbon reducing power generation technologies.
The
Company’s wastewater treatment systems are based on its proprietary Controlled Atmosphere Separation Technology
(“CAST”) platform. The Company’s patented and proprietary platform technology is combined with
off-the-shelf technologies to provide systems that are inexpensive, easy to operate and reliable. The Company’s
wastewater treatment systems have global applications in aerospace, food and beverage processing, metal finishing, pulp &
paper, petrochemical, refining, microchip and circuit board manufacturing, heavy manufacturing and municipal wastewater. The
CAST platform technology is owned by the Company’s subsidiary, CASTion Corporation (“CASTion”).
The Company also
owns a patented pressurized oxycombustion technology that converts fossil fuels (including coal, oil and natural gas) and biomass
into electricity while producing near zero air emissions and removing and capturing carbon dioxide in liquid form for sequestration
or beneficial reuse. This technology is intended to be used to build new or to retrofit old fossil fuel power plants globally with
near zero air emissions while capturing carbon dioxide as a liquid for ready sequestration far more economically than any other
competing technology. The pressurized oxycombustion
technology is held in the Company’s subsidiary, ThermoEnergy
Power Systems, LLC (“TEPS”).
Principles of consolidation and basis
of presentation
The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation. The 15% third-party ownership interest in TEPS is recorded as a noncontrolling interest in the consolidated financial
statements. Certain prior year amounts have been reclassified to conform to current year classifications.
The accompanying unaudited financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
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 GAAP 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 three-month period ended March 31, 2012 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2012.
The preparation of these unaudited interim consolidated financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ from those estimates.
The balance sheet at December 31, 2011
has been derived from the audited financial statements at that date but does not include all of the information and footnotes required
by GAAP for complete financial statements. 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, 2011 of ThermoEnergy Corporation.
The Company has restated its unaudited
interim consolidated financial statements for the three-month period ended March 31, 2011. See Note 3.
Revenue recognition
The Company recognizes revenues using the
percentage of completion method. Under this approach, revenue is earned in proportion to total costs incurred in relation to total
costs expected to be incurred. Contract costs include all direct material and labor costs and indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
Recognition of revenue and profit is dependent
upon a number of factors, including the accuracy of a variety of estimates made at the balance sheet date such as engineering progress,
materials quantities, the achievement of milestones, penalty provisions, labor productivity and cost estimates made. Due to uncertainties
inherent in the estimation process, actual completion costs may vary from estimates. Changes in job performance, job conditions
and estimated profitability may result in revisions to costs and income and are recognized beginning in the period in which they
become known. Provisions for estimated losses on uncompleted contracts are made in the period in which the estimated loss
first becomes known.
Certain long-term contracts include a
number of different services to be provided to the customer. The Company records separately revenues, costs and gross profit
related to each of these services if they meet the contract segmenting criteria in Accounting Standards Codification
(“ASC”) 605-35. This policy may result in different interim rates of profitability for each segment than if the
Company had recognized revenues using the percentage-of-completion method based on the project’s estimated total
costs.
Accounts receivable, net
Accounts receivable are recorded at their
estimated net realizable value. Receivables related to the Company’s contracts have realization and liquidation periods of
less than one year and are therefore classified as current assets.
The Company maintains allowances for specific
doubtful accounts based on estimates of losses resulting from the inability of customers to make required payments and record these
allowances as a charge to general and administrative expense. The Company’s method for estimating its allowance for doubtful
accounts is based on judgmental factors, including known and inherent risks in the underlying balances, adverse situations that
may affect the customer’s ability to pay and current economic conditions. Amounts considered uncollectible are written off
based on the specific customer balance outstanding. The Company did not have any allowance for doubtful accounts as of March 31,
2012 and December 31, 2011.
Inventories
Inventories are stated at the lower of
cost or market using the first-in, first-out method and consist primarily of raw materials and supplies.
Inventories consist of the following at
March 31, 2012 and December 31, 2011:
|
|
(unaudited)
March 31,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
79
|
|
|
$
|
67
|
|
Work in process
|
|
|
218
|
|
|
|
100
|
|
|
|
$
|
297
|
|
|
$
|
167
|
|
Property and equipment
Property and equipment are stated at cost
and are depreciated over the estimated useful life of each asset. Depreciation is computed using the straight-line method. The
Company evaluates long-lived assets based on estimated future undiscounted net cash flows or other fair value measures whenever
significant events or changes in circumstances occur that indicate the carrying amount may not be recoverable. If that evaluation
indicates that an impairment has occurred, a charge is recognized to the extent the carrying amount exceeds the undiscounted cash
flows or fair values of the asset, whichever is more readily determinable.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
The Company recorded a loss
of $131,000 related to the disposal of a system previously used for pre-sales testing. This loss is included in sales and marketing
expense on its Consolidated Statement of Operations for the three-month period ended March 31, 2012.
Contingencies
The Company accrues for costs relating
to litigation, including litigation defense costs, claims and other contingent matters, including liquidated damage liabilities,
when such liabilities become probable and reasonably estimable. Such estimates may be based on advice from third parties or on
management’s judgment, as appropriate. Revisions to accruals are reflected in earnings (loss) in the period in which different
facts or information become known or circumstances change that affect the Company’s previous assumptions with respect to
the likelihood or amount of loss. Amounts paid upon the ultimate resolution of such liabilities may be materially different from
previous estimates and could require adjustments to the estimated liability to be recognized in the period such new information
becomes known.
Stock options
The Company accounts for stock options
in accordance with ASC Topics 505, “Equity”, and 718, “Compensation
– Stock Compensation”. These topics require that the cost of all share-based payments to employees, including grants
of employee stock options, be recognized in the consolidated financial statements based on their fair values on the measurement
date, which is generally the date of grant. Such cost is recognized over the vesting period of the awards. The Company uses the
Black-Scholes option pricing model to estimate the fair value of “plain vanilla” stock option awards.
Fair value of financial instruments
and fair value measurements
The carrying amount of cash, accounts receivable,
other current assets, accounts payable and other current liabilities in the consolidated financial statements approximate fair
value because of the short-term nature of the instruments. The carrying amount of the Company’s convertible debt was $2,926,000
and $2,821,000 at March 31, 2012 and December 31, 2011, respectively, and approximates the fair value of these instruments. The
Company’s warrant liabilities are recorded at fair value.
The Company's liabilities carried at fair
value are categorized using inputs from the three levels of the fair value hierarchy, as follows:
Level
1: Quoted prices in active markets for identical assets or liabilities.
Level
2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
Level
3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
liabilities.
Assets and liabilities measured at fair
value on a recurring basis as of March 31, 2012 are as follows: (in thousands)
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
Description
|
|
(Unaudited)
Balance as of
March 31, 2012
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
– current portion
|
|
$
|
552
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
552
|
|
Derivative
liability – long-term portion
|
|
|
80
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
632
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
632
|
|
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
The Monte Carlo Simulation lattice
model was used to determine the fair values at March 31, 2012. The significant assumptions used were: exercise prices between
$0.30 and $0.36; the Company’s stock price on March 31, 2012, $0.18; expected volatility of 81% - 83%; risk free
interest rate between 0.19% and 0.25%; and a remaining contract term between 9 months and 15 months.
Assets and liabilities measured at fair
value on a recurring basis as of December 31, 2011 are as follows: (in thousands)
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
Description
|
|
Balance as of
December 31,
2011
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability – current portion
|
|
$
|
706
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
706
|
|
Derivative liability –
long-term portion
|
|
|
101
|
|
|
|
-
|
|
|
|
-
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
807
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
807
|
|
The Monte Carlo Simulation lattice model was used to determine
the fair values at December 31, 2011. The significant assumptions used were: exercise prices between $0.185 and $0.36; the Company’s
stock price on December 31, 2011, $0.19; expected volatility of 82.9%; risk free interest rate between 0.12% and 0.25%; a remaining
contract term between 1 and 2 years; and a suboptimal exercise factor of 1.25.
The following table sets forth a reconciliation of changes in
the fair value of derivatives classified as Level 3 (in thousands):
|
|
(Unaudited)
Derivative Liability
|
|
Balance at December 31, 2011
|
|
$
|
807
|
|
Change in fair value
|
|
|
(175
|
)
|
Balance at March 31 2012
|
|
$
|
632
|
|
Series B Convertible Preferred Stock
The Company determined the initial value
of the Series B Convertible Preferred Stock and investor warrants using valuation models it considers to be appropriate. Because
the Series B Convertible Preferred Stock has an indefinite life, it is classified within the stockholders’ deficiency section
of the Company's consolidated balance sheets. The value of beneficial conversion features upon issuance are considered a “deemed
dividend” and are added as a component of net loss attributable to common stockholders in the Company’s Consolidated
Statements of Operations.
Net income (loss) per share
Basic net income
(loss) per share (“EPS”) is computed by dividing the net income (loss) attributable to the common stockholders (the
numerator) by the weighted average number of shares of common stock outstanding (the denominator) during the reporting periods.
Fully diluted net income (loss) per share is computed by increasing the denominator by the weighted average number of additional
shares that could have been outstanding from securities convertible into common stock, such as stock options and warrants (using
the “treasury stock” method), and convertible preferred stock and debt (using the “if-converted” method),
unless the effect on net income (loss) per share is antidilutive. Under the “if-converted” method, convertible instruments
are assumed to have been converted as of the beginning of the period or when issued, if later. The effect of computing the Company’s
diluted net income (loss) per share was antidilutive and, as such, basic and diluted net income (loss) per share are the same for
the three-month periods ended March 31, 2012 and 2011 (as restated).
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
Recent accounting pronouncements
In
May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements
in U.S. GAAP and IFRS,” which converges fair value measurement and disclosure guidance in U.S. GAAP with fair value measurement
and disclosure guidance issued by the International Accounting Standards Board (“IASB”). The amendments in the authoritative
guidance do not modify the requirements for when fair value measurements apply. The amendments generally represent clarifications
on how to measure and disclose fair value under ASC 820, “Fair Value Measurement.” The authoritative guidance is effective
prospectively for interim and annual periods beginning after December 15, 2011. Early adoption of the authoritative guidance
is not permitted.
The Company has adopted the provisions of ASU 2011-04 in the Company’s fiscal year beginning January
1, 2012, and the provisions of this guidance did not have a material impact on its financial statements or disclosures.
Note 2: Management's consideration
of going concern matters
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the
Company as a going concern. However, the Company has sustained substantial loses from operations in recent years, and such losses
have continued through the unaudited quarter ended March 31, 2012.
At March 31, 2012, we had cash and
cash equivalents of $1,933,000, a decrease of $1,123,000 from December 31, 2011. The Company has incurred net losses since
inception, including a net loss of $1,544,000 during the quarter ended March 31, 2012 and had an accumulated deficit of
approximately $115,055,000 at March 31, 2012.
Based upon management's projections, we
will require additional capital to continue commercialization of the Company’s power and water technologies (the “Technologies”)
and to support current operations. The Company had a working capital deficit of $5,752,000 at March 31, 2012. Any change to management
projections will increase or decrease this deficit. In addition, the Company may be subject to tax liens if it cannot abide by
the terms of the Offer in Compromise approved by the Internal Revenue Service to satisfactorily settle outstanding payroll tax
liabilities (see Note 8). Management is considering several alternatives for mitigating these conditions.
These uncertainties raise substantial doubt
about the Company's ability to continue as a going concern for a reasonable period of time. The financial statements
included in this Form 10-Q have been prepared on a going concern basis and as such do not include any adjustments that might result
from the outcome of this uncertainty.
Management successfully completed a program
to eliminate the Company’s outstanding secured debt in 2011 and is actively seeking to raise substantial capital
through additional equity or debt financing that will allow the Company to operate until it becomes cash flow positive from operations.
Management is also actively pursuing commercial contracts to generate operating revenue. Management has determined that the financial
success of the Company is largely dependent upon the Company’s ability to collaborate with financially sound third parties
to pursue projects involving the Technologies.
As more fully
described in Note 6, on January 10, 2012,
the Company received proceeds totaling $498,000, net of issuance
costs, from the exercise of an aggregate of 5,633,344 warrants at an exercise price of $0.095 per share.
Note 3: Restatement
The unaudited quarterly financial information
for the quarterly periods ended March 31, 2011, June 30, 2011 and September 30, 2011 have been restated to correct errors in the
valuation of the Company’s derivative liabilities and accounting for certain financing transactions in those periods. These
errors in the Company’s financing transactions were caused by the Company incorrectly accounting for the amendment of its
CASTion Notes and its 2010 Bridge Notes as a debt modification instead of a debt extinguishment in the first quarter of 2011. The
errors in the Company’s derivative liabilities were due to deficiencies in the Company’s valuation model and methodology
used to calculate the fair value of such liabilities in the first three quarters of 2011.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
The Company restated the effects of these
errors for the affected periods in its Annual Report on Form 10-K as of and for the year ended December 31, 2011. The net effect
of these errors is (i) a $4.7 million understatement of the Company’s net loss to common stockholders in the quarter ended
March 31, 2011, (ii) a $1.5 million overstatement of the Company’s net loss to common stockholders in the quarter ended June
30, 2011 and (iii) a $3.9 million overstatement of the Company’s net loss to common stockholders in the quarter ended September
30, 2011. The net effect is that the Company’s net loss to common stockholders for the nine-month period ended September
30, 2011 was overstated by approximately $0.7 million. None of the errors related to the Company’s cash position, revenues
or loss from operations for any of the periods in which such errors occurred.
This Quarterly Report on Form 10-Q for
the quarter ended March 31, 2012 includes the impact of this restatement on the applicable unaudited quarterly financial information
for the three months ended March 31, 2011 presented in the Consolidated Statements of Operations and Consolidated Statements of
Cash Flows. In addition, the Company’s future Quarterly Reports on Form 10-Q for subsequent periods in 2011 will include
restated quarter and year to date financial information.
Previously filed Quarterly Reports on Form
10-Q for each of the first three quarters of 2011 have not been and will not be amended. The financial statements included in such
reports should not be relied on.
The impact of the errors on the Company’s
Consolidated Statement of Operations for the three months ended March 31, 2011 is summarized below (in thousands):
|
|
(Unaudited)
Three Months Ended March 31, 2011
|
|
|
|
As Originally
Reported
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(2,011
|
)
|
|
$
|
(2,011
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
(7,245
|
)
|
Derivative liability income
|
|
|
1,017
|
|
|
|
2,703
|
|
Equity in losses of joint venture
|
|
|
(87
|
)
|
|
|
(87
|
)
|
Interest and other expense, net
|
|
|
(1,461
|
)
|
|
|
(694
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,542
|
)
|
|
|
(7,334
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
13
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation
|
|
|
(2,529
|
)
|
|
|
(7,321
|
)
|
Deemed dividend on Series B Convertible Preferred Stock
|
|
|
(135
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation common stockholders
|
|
$
|
(2,664
|
)
|
|
$
|
(7,321
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share attributable to ThermoEnergy Corporation common stockholders, basic and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing loss per share, basic and diluted
|
|
|
55,848,585
|
|
|
|
55,848,585
|
|
Note 4: Joint Ventures
Babcock-Thermo Clean Combustion LLC
On February 25, 2009, the Company’s
majority-owned subsidiary, TEPS, 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 now known as Babcock-Thermo Clean Combustion LLC (the “Joint Venture”) for the purpose
of developing and commercializing its proprietary ZEBS technology.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
TEPS 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 and royalty-free license to TEPS’ intellectual property related to or necessary to practice
the ZEBS technology (the “ZEBS 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 ZEBS technology. BPD entered into a license agreement with
the Joint Venture and TEPS pursuant to which it 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 relevant proprietary intellectual
property. Pursuant to the LLC Agreement, TEPS and BPD each owned a 50% membership interest in the Joint Venture.
On March 2, 2012, TEPS entered into a Dissolution
Agreement with BPD to terminate the Limited Liability Company Agreement and dissolve the Joint Venture. The BTCC Board of Managers
is supervising the wind down and dissolution process.
Unity Power Alliance
On March 8, 2012, the Company announced
the formation of Unity Power Alliance (“UPA”). UPA was formed with the intention to work with partners and stakeholders
to develop and commercialize its pressurized oxycombustion technology, and will seek the involvement of other major firms and organizations
with an interest in promoting the technology. As of March 31, 2012, UPA is a wholly-owned subsidiary of the Company until it enters
into a Joint Venture agreement with outside parties.
Note 5: Convertible debt
Convertible debt consisted of the following
at March 31, 2012 and December 31, 2011 (in thousands):
|
|
March 31,
2012
|
|
|
December
31,
2011
|
|
|
|
(unaudited)
|
|
|
|
|
Roenigk 2007 Convertible Promissory Note, 5%, due March 21, 2013, less discount of $64 at March 31, 2012 and $78 at December 31, 2011
|
|
$
|
899
|
|
|
$
|
860
|
|
Roenigk 2008 Convertible Promissory Note, 5%, due March 7, 2013, less discount of $138 at March 31, 2012 and $181 at December 31, 2011
|
|
|
777
|
|
|
|
711
|
|
December 2011 Convertible Promissory Notes, 12.5%, due December 31, 2012
|
|
|
1,250
|
|
|
|
1,250
|
|
|
|
|
2,926
|
|
|
|
2,821
|
|
Less: Current portion
|
|
|
(2,926
|
)
|
|
|
(1,250
|
)
|
|
|
$
|
—
|
|
|
$
|
1,571
|
|
Roenigk 2007 Convertible Promissory
Note
On March 21, 2007 the Company issued to
Mr. Martin A. Roenigk, a member of the Company’s Board of Directors as of that date, a 5% Convertible Promissory Note due
March 21, 2013 in the principal amount of $750,000. The principal amount and accrued interest on the Note is convertible into shares
of Common Stock at a conversion price of $0.50 per share at any time at the election of the holder. Interest on the Note is payable
semi-annually. The Company may, at its discretion, defer any scheduled interest payment until the maturity date of the Note upon
payment of a $2,500 deferral fee. The Company added $24,000 of accrued interest to the principal balance of the Note during the
three months ended March 31, 2012. Total interest added to the principal balance of the Note was $213,000 as of March 31, 2012.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
Roenigk 2008 Convertible Promissory
Note
On March 7, 2008, Mr. Roenigk exercised
his option to make an additional $750,000 investment in the Company under the terms of the Securities Purchase Agreement between
the Company and Mr. Roenigk dated March 21, 2007. The Company issued to Mr. Roenigk a 5% Convertible Promissory Note due March
7, 2013 in the principal amount of $750,000. The principal amount and accrued interest on the Note is convertible into shares of
Common Stock at a conversion price of $0.50 per share at any time at the election of the holder. Interest on the Note is payable
semi-annually. The Company may, at its discretion, defer any scheduled interest payment until the maturity date of the Note upon
payment of a $2,500 deferral fee. The Company added $22,000 of accrued interest to the principal balance of the Note during the
three months ended March 31, 2012. Total interest added to the principal balance of the Note was $165,000 as of March 31, 2012.
December 2011 Convertible Promissory
Notes
On December 2, 2011 the Company entered
into Bridge Loan Agreements with four of its principal investors pursuant to which the Investors agreed to make bridge loans to
the Company of $1.25 million in exchange for 12.5% Promissory Notes (the “December 2011 Bridge Notes”). The
December 2011 Bridge Notes bear interest at the rate of 12.5% per year and are due and payable on December 31, 2012. The entire
unpaid principal amount, together with all interest then accrued and unpaid under each December 2011 Bridge Note, is convertible
into shares of a future series of Preferred Stock.
The December 2011 Bridge Notes contain
other conventional provisions, including the acceleration of repayment obligations upon the occurrence of certain specified Events
of Default.
Note 6: Equity
Common Stock
On January 10,
2012,
the Company entered into Warrant Amendment Agreements (the “Agreements”) with six
individuals who acquired warrants from five funds affiliated with Security Investors, LLC for the purchase of an aggregate of 5,633,344
shares of the Company’s Common Stock (collectively, the “Warrants”). Pursuant to the Agreements, the Company
amended the Warrants to change the exercise prices from $0.30 per share to $0.095 per share, and the Investors agreed to exercise
all of the Warrants immediately for cash. The Company received proceeds totaling $498,000, net of issuance costs, from the exercise
of the Warrants.
On February 10, 2012, the Company
issued 419,180 shares of Common Stock to ARC Capital (BVI) Limited. (“ARC”) in partial consideration for
financial advisory and other consulting services performed by ARC pursuant to a Financial Advisory and Consulting Agreement
dated as of November 7, 2011. The value of this Common Stock was recorded as a component of general and administrative
expense on the Company’s Consolidated Statement of Operations in the fourth quarter of 2011.
At March 31, 2012, approximately 231 million
shares of Common Stock were reserved for future issuance under convertible debt and warrant agreements, stock option arrangements
and other commitments.
Stock Options
During the three-month period ended March
31, 2012, the Board of Directors awarded employees and an advisor to the Board of Directors a total of 1,530,000 stock options
under the Company’s 2008 Incentive Stock Plan. The options are exercisable at $0.15 - $0.268 per share for a ten year period.
The exercise price was equal to or greater than the market price on the respective grant dates. Options granted to non-employee
directors vest on the date of the Company’s 2012 Annual Meeting of Stockholders; options granted to employees vest ratably
over a four-year period.
The following table presents option expense
included in expenses in the Company’s Consolidated Statements of Operations for the three-month periods ended March 31, 2012
and 2011:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
4
|
|
|
$
|
9
|
|
General and administrative
|
|
|
137
|
|
|
|
286
|
|
Engineering, research and development
|
|
|
25
|
|
|
|
30
|
|
Sales and marketing
|
|
|
(3
|
)
|
|
|
29
|
|
Option expense before tax
|
|
|
163
|
|
|
|
354
|
|
Benefit for income tax
|
|
|
—
|
|
|
|
—
|
|
Net option expense
|
|
$
|
163
|
|
|
$
|
354
|
|
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
The fair value of options granted during
the three-month periods ended March 31, 2012 and 2011 were estimated at the date of grant using a Black-Scholes option pricing
model with the following assumptions:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
1.1% - 1.2
|
%
|
|
|
3.5
|
%
|
Expected option life (years)
|
|
|
6.25
|
|
|
|
6.25
|
|
Expected volatility
|
|
|
92
|
%
|
|
|
91
|
%
|
Expected dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected forfeiture rate
|
|
|
20
|
%
|
|
|
0
|
%
|
A summary of the Company’s stock
option activity and related information for the three-month periods ended March 31, 2012 and 2011 follows:
|
|
2012
|
|
|
2011
|
|
|
|
Number of
Shares
|
|
|
Wtd. Avg.
Exercise
Price per
Share
|
|
|
Number of
Shares
|
|
|
Wtd. Avg.
Exercise
Price per
Share
|
|
Outstanding, beginning of year
|
|
|
19,674,102
|
|
|
$
|
0.38
|
|
|
|
22,065,402
|
|
|
$
|
0.57
|
|
Granted
|
|
|
1,530,000
|
|
|
$
|
0.24
|
|
|
|
1,200,000
|
|
|
$
|
0.30
|
|
Canceled
|
|
|
(521,250
|
)
|
|
$
|
0.31
|
|
|
|
(1,832,500
|
)
|
|
$
|
1.12
|
|
Outstanding, end of period
|
|
|
20,682,852
|
|
|
$
|
0.37
|
|
|
|
21,432,902
|
|
|
$
|
0.51
|
|
Exercisable, end of period
|
|
|
9,540,783
|
|
|
$
|
0.51
|
|
|
|
9,084,754
|
|
|
$
|
0.80
|
|
The weighted average fair value of options
granted was approximately $0.18 and $0.23 per share for the three-month periods ended March 31, 2012 and 2011, respectively. The
weighted average fair value of options vested was approximately $141,000 and $221,000 for the three-month periods ended March 31,
2012 and 2011, respectively.
Exercise prices for options outstanding
as of March 31, 2012 ranged from $0.15 to $1.50. The weighted average remaining contractual life of those options was approximately
7.7 years at March 31, 2012. The weighted average remaining contractual life of options vested and exercisable was approximately
7.0 years at March 31, 2012.
As of March 31, 2012, there was approximately
$879,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the
Company’s stock option plans. That cost is expected to be recognized over a weighted-average period of 1.1 years. The Company
recognizes stock-based compensation on the straight-line method.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
Warrants
At March 31, 2012, there were outstanding
warrants for the purchase of 78,062,100 shares of the Company’s Common Stock at prices ranging from $0.01 per share to $1.50
per share (weighted average exercise price was $0.40 per share). The expiration date of these warrants are as follows:
Year
|
|
Number of
Warrants
|
|
2012
|
|
|
12,679,487
|
|
2013
|
|
|
8,896,554
|
|
2014
|
|
|
6,159,436
|
|
2015
|
|
|
6,188,879
|
|
2016
|
|
|
42,795,244
|
|
After 2016
|
|
|
1,342,500
|
|
|
|
|
78,062,100
|
|
Note 7: Segments
Operating segments are identified as components
of an enterprise about which separate discrete financial information is available to the chief operating decision maker, or decision-making
group, in assessing performance and allocating resources. The Company markets and develops advanced municipal and industrial wastewater
treatment and carbon reducing clean energy technologies. The Company currently generates almost all of its revenues from the sale
and application of its water treatment technologies. Revenues from its clean energy technologies have been limited to grants received
from governmental and other agencies for continued development. In 2009, the Company established BTCC, a joint venture with Babcock
Power Development, LLC, for the purpose of developing and commercializing the Company’s clean energy technology. Because
revenues and costs related to the Company’s clean energy technologies is immaterial to the entire Company taken as a whole,
the financial information presented in these financial statements represents all the material financial information related to
the Company’s water treatment technologies.
The Company’s operations are currently
conducted solely in the United States. The Company will continue to evaluate how its business is managed and, as necessary, adjust
the segment reporting accordingly.
Note 8: Commitments and contingencies
On March 25, 2011, the Company was notified
by the U.S. Internal Revenue Service that it had accepted the Company’s Offer in Compromise with respect to its tax liabilities
relating to (i) employee tax withholding for all periods commencing with the quarter ended September 30, 2005 and continuing through
September 30, 2009 and (ii) federal unemployment taxes (FUTA) for the years 2005 through 2008. Pursuant to the Offer in Compromise,
the Company has satisfied its delinquent tax liabilities by paying a total of $2,134,636 (representing the aggregate amount
of tax due, without interest or penalties).
In connection with the Offer
in Compromise, the Company has agreed that any net operating losses sustained for the years ending December 31, 2010
through December 31, 2012 will not be claimed as deductions under the provisions of Section 172 of the Internal Revenue Code
except to the extent that such net operating losses exceed the amount of interest and penalties abated. The IRS acceptance of
the Offer in Compromise is conditioned, among other things, on the Company filing and paying all required taxes for five
tax years commencing on the date of the IRS acceptance. The Company has filed all returns and made all required payments to
the IRS.
Accrued payroll taxes, which include taxes,
penalties and interest related to state taxing authorities, totaled approximately $422,000 and are included in other current liabilities
on the Company’s Consolidated Balance Sheets as of March 31, 2012. The Company continues to work with the various state taxing
authorities to settle its remaining payroll tax obligations.
The Company is involved from time to time
in litigation incidental to the conduct of its business. Judgments could be rendered or settlements entered that could adversely
affect the Company’s operating results or cash flows in a particular period. The Company routinely assesses all of its litigation
and threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate
loss in situations where it assesses the likelihood of loss as probable.
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
We are a diversified technologies company
engaged in the worldwide commercialization of advanced municipal and industrial wastewater treatment systems and carbon reducing
power generation technologies.
Our wastewater treatment systems not only
meet local, state and federal environmental regulations, but typically provide a rapid rate of return on investment by recovering
and reusing expensive feedstocks, reducing contaminated wastewater discharge and recovering and reusing wastewater used in process
operations.
We
are also the owner of a patented pressurized oxycombustion technology that converts fossil fuels (including coal, oil and natural
gas) and biomass into electricity while producing near zero air emissions, and at the same time removing and capturing carbon dioxide
in liquid form for sequestration or beneficial reuse. This technology can be used to build new or retrofit old fossil fuel power
plants globally with near zero air emissions while capturing carbon dioxide as a liquid for ready sequestration far more economically
than any other competing technology. The technology is held by our subsidiary, ThermoEnergy Power Systems, LLC (“TEPS”)
and will be developed and commercialized through the formation of our new subsidiary, Unity Power Alliance.
We currently generate revenues from the
sale and development of wastewater treatment systems. We enter into contracts with our customers to provide a wastewater treatment
solution that meets the customer’s present and future needs. Our revenues are tied to the size and scale of the wastewater
treatment system required by the customer, as well as the progress made on each customer contract.
Historically we marketed and sold our products
in North America. In 2011, we began marketing and selling our products in Asia and Europe. These marketing and sales activities
are performed by our direct sales force and authorized independent sales representatives.
We have made significant progress over
the past year in resolving our past legal and financial issues, strengthening our balance sheet, hiring key management personnel
and building our business for future growth. However, we have incurred net losses and negative cash flows from operations since
inception. We incurred net losses of $1.5 million for the three-month period ended March 31, 2012 and $17.4 million for the year
ended December 31, 2011. Cash outflows from operations totaled $1.5 million for the three-month period ended March 31, 2012 and
$6.1 million for the year ended December 31, 2011. As a result, we will require additional capital to continue to fund our operations.
Restatement of Financial Statements
The unaudited quarterly financial information
for the quarterly period ended March 31, 2011 has been restated to correct errors in the valuation of our derivative liabilities
and accounting for certain financing transactions in those periods. These errors in our financing transactions were caused by our
incorrectly accounting for the amendment of our CASTion Notes and 2010 Bridge Notes as a debt modification instead of a debt extinguishment
in the first quarter of 2011. The errors in our derivative liabilities were due to deficiencies in our valuation model and methodology
used to calculate the fair value of such liabilities in the first quarter of 2011.
We restated the effects of
these errors for the affected periods in our Annual Report on Form 10-K as of and for the year ended December 31, 2011. The
net effect of these errors resulted in a $4.7 million increase in our net loss to common stockholders in the quarter ended
March 31, 2011 as compared to the amount that had previously been reported. None of these errors related to our cash position,
revenues or loss from operations for any of the periods in which such errors occurred.
This Quarterly Report on Form 10-Q for
the quarter ended March 31, 2012 includes the impact of this restatement on the applicable unaudited quarterly financial information
for the quarter ended March 31, 2011 presented in the Consolidated Statement of Operations and Consolidated Statement of Cash Flows.
In addition, our future Quarterly Reports on Form 10-Q for subsequent periods in 2012 will restate applicable 2011 comparable quarter
and year to date periods.
Previously filed Quarterly Reports on Form
10-Q for each of the first three quarters of 2011 have not been and will not be amended. The financial statements included in such
reports should not be relied on.
Results of Operations
Comparison of Quarters Ended March 31,
2012 and 2011 (as restated)
Revenues totaled $1,688,000 for
the first quarter of 2012 compared to $948,000 for the first quarter of 2011. We continued to devote significant resources
toward construction work on our $27.1 million contract with the New York City Department of Environmental
Protection (“NYCDEP”), which generated 91% of our revenues for the first quarter of 2012.
We expect to continue generating significant revenues from the NYCDEP contract throughout 2012. We were in the middle of
engineering and design work on our NYCDEP contract in the first quarter of 2011.
Gross profit for the first quarter of 2012
was $260,000 (15.4% of revenues) compared to gross profit (loss) of ($19,000) (-1.9% of revenues) for the first quarter of 2011.
Gross profit in 2012 relates mainly to work performed on the NYCDEP contract. We generate higher margins on the construction
phase of the NYCDEP contract when compared to the engineering and design phase of this contract. Gross profit in 2011 was the result
of our engineering and design efforts on the NYCDEP contract, offset by $72,000 of costs for maintaining our production group to
prepare for the manufacturing phase of the NYCDEP contract during the quarter.
General and administrative expenses decreased
by $365,000 or 26% in the first quarter of 2012 compared to 2011, primarily due to a $149,000 decrease in non-cash stock option
expenses as certain options granted to our Chief Executive Officer and Chief Financial Officer vested over time and a $211,000
decrease in legal expenses, as expenses incurred related to an employee lawsuit in the first quarter of 2011 did not repeat in
the first quarter of 2012.
Engineering, research and development expenses
increased by $26,000 or 31% in the quarter ended March 31, 2012 compared to 2011. The increase is attributable to reduced utilization
of our engineering team on our various projects in 2012 compared to 2011; costs directly related to our projects are charged to
Cost of Sales.
Sales and marketing expenses increased
by $190,000 or 37% in the first quarter of 2012 compared to 2011. This increase is mainly due to increased sales headcount and
expenses related to international business development activities in the first quarter of 2012. We did not begin devoting resources
to international business development activities until the second quarter of 2011.
Because of our various financing transactions,
including the amendment of our CASTion Notes and our 2010 Bridge Notes in the first quarter of 2011, we recognized losses on the
extinguishment of debt of $7,245,000 (as restated) in the first quarter of 2011. We did not incur any such losses in the first
quarter of 2012.
Changes in fair value reduced
our derivative liabilities by $175,000 in the first quarter of 2012 compared to a reduction of approximately $2.7 million
(as restated) in the first quarter of 2011. Decreases in fair value in 2012 mainly relates to the passage of time on warrants
classified as derivative liabilities. Decreases in fair value in 2011 primarily relates to the decrease in our stock price,
which significantly decreased the value of the various conversion features embedded in our debt instruments that were
classified as derivative instruments.
Interest and other expense decreased by
$562,000 during the first quarter of 2012 compared to the first quarter of 2011 (as restated) due to reduced debt levels in 2012.
We recognized losses related to our BTCC
joint venture of $5,000 in the first quarter of 2012 compared to losses of $87,000 in the first quarter of 2011. The decrease in
losses were mainly due to the wind down and dissolution of BTCC in the first quarter of 2012.
Liquidity and Capital Resources
We have historically lacked the financial
and other resources necessary to market the Technologies or to build demonstration projects without the financial backing of government
or investment partners. We have funded our operations primarily from the sale of convertible debt, short-term borrowings, preferred
stock and common stock, generally from stockholders and other parties who are sophisticated investors in clean technology. We are
currently in discussions with current and potential new investors for equity or debt financing to fund our operations until we
can operate on a cash flow positive basis.
However, over the past year, we have continued
to make significant progress in strengthening our balance sheet and building our business for future growth. In the past year,
we have:
|
·
|
Raised $8.2 million of funding in 2011 and $500,000 of funding in 2012;
|
|
·
|
Made debt service payments totaling $2.8 million and converted all outstanding secured debt and accrued interest totaling $10.1 million into Series B Convertible Preferred Stock;
|
|
·
|
Paid all amounts due to the Internal Revenue Service under the Offer in Compromise that was accepted in March 2011; and
|
|
·
|
Settled a lawsuit related to a former officer’s employment agreement.
|
Cash used in operations amounted to $1,547,000
and $1,128,000 for the three-month periods ended March 31, 2012 and 2011, respectively. Cash used in operations is primarily
a result of our continued net losses in 2012 and 2011. Cash used in investing activities included investments in BTCC of $125,000
in 2011 and purchases of property and equipment of $94,000 and $70,000 for the three-month periods ended March 31, 2012 and 2011,
respectively. Cash provided by financing activities for the three-month period ended March 31, 2012 included proceeds from the
issuance of common stock of $498,000; cash used in financing activities for the three-month period ended March 31, 2011 included
payments on convertible debt of approximately $1.2 million.
At March 31, 2012, we do not have sufficient
working capital to satisfy our anticipated operating expenses for the next 12 months. As of March 31, 2012, we had a cash balance
of approximately $1.9 million and current liabilities of approximately $10.5 million, which consisted primarily of accounts payable
of approximately $1.3 million, billings in excess of costs of approximately $4 million, convertible debt of $2.9 million (net of
discounts), derivative liabilities of $552,000 and other current liabilities of approximately $1.7 million.
On January 10,
2012,
we entered into Warrant Amendment Agreements (the “Agreements”) with six individuals
who acquired warrants from five funds affiliated with Security Investors, LLC for the purchase of an aggregate of 5,633,344 shares
of our Common Stock. Pursuant to the Agreements, we amended the Warrants to change the exercise prices from $0.30 per share to
$0.095 per share, and the Investors agreed to exercise all of the Warrants immediately for cash. We received proceeds totaling
$498,000, net of issuance costs, from the exercise of the Warrants.
Although our financial condition has improved,
there can be no assurance that we will be able to obtain the funding necessary to continue our operations and development activities.
We continue to engage current and potential new investors in discussions for equity or debt financing to fund our operations until
we can operate on a cash flow positive basis.
ITEM 3. Quantitative and
Qualitative Disclosures About Market Risk
Not applicable.
ITEM 4. Controls and Procedures
The Company, under the direction of its
Chief Executive Officer and Chief Financial Officer, has 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 Company’s Chief Executive
Officer and Chief Financial Officer carried out an evaluation of the effectiveness of disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period covered by this report. Based on
this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the
Company’s disclosure controls and procedures were not effective as of March 31, 2012 due to (i) our failure to
adequately allocate a proper and sufficient amount of resources to ensure that necessary internal controls were implemented
and followed, specifically, but not limited, to the accounting and valuation of complex debt and equity transactions; and (ii)
a lack of segregation of duties in our significant accounting functions to ensure that internal controls were designed and
operating effectively.
The Company did not make any changes
to its internal controls over financial reporting during the quarter ended March 31, 2012 that materially affected, or are
reasonably likely to materially affect, our internal controls over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 1A. Risk Factors
Not applicable.
ITEM 2. Unregistered Sales of Equity
Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
The following exhibits are filed as part
of this report:
Exhibit No.
|
|
Description
|
|
|
|
10.1
|
|
Dissolution Agreement effective as of March 2, 2012, by and among Babcock-Thermo Clean Combustion LLC, Babcock Power Development, LLC, Babcock Power Inc., ThermoEnergy Power Systems, LLC, and ThermoEnergy Corporation. - Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed March 8, 2012.
|
|
|
|
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
|
|
|
|
101.INS *
|
|
XBRL Instance Document
|
|
|
|
101.SCH *
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
101.CAL *
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
101.DEF *
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
|
101 LAB *
|
|
XBRL Extension Labels Linkbase Document
|
|
|
|
101.PRE *
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
* In accordance with SEC rules, this interactive
data file is deemed “furnished” and not “filed” for purposes of Sections 11 or 12 of the Securities Act
of 1933 and Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under those sections
or acts.
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 21, 2012
|
THERMOENERGY CORPORATION
|
|
|
|
/s/ Cary G. Bullock
|
|
Cary G. Bullock
President and Chief Executive Officer
|
|
/s/ Teodor Klowan, Jr.
|
|
Teodor Klowan, Jr. CPA
Executive Vice President and Chief Financial Officer
|
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