Filed pursuant to Rule 424(b)(3)
Registration Statement
No. 333-175227
DATED JULY 11, 2012
Prospectus
54,166,684 Shares
THERMOENERGY CORPORATION
Common Stock
This prospectus relates
to the resale of up to 54,166,684 shares of Common Stock, par value $0.001 per share, of ThermoEnergy Corporation that may be
sold from time to time by the selling stockholders named in this prospectus on page 40. We will not receive any proceeds from
the sale of the Common Stock by the selling stockholders.
The selling stockholders
may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of Common Stock or interests in shares
of Common Stock on any market or trading facility on which our shares are traded or in private transactions. These dispositions
may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying
prices determined at the time of sale, or at negotiated prices. No underwriter or other person has been engaged to facilitate the
sale of shares of our Common Stock in this offering. We are paying the cost of registering the shares covered by this prospectus
as well as various related expenses. The selling stockholders are responsible for all discounts, selling commission and other costs
related to the offer and sale of their shares.
Our Common Stock is
currently traded on the Over-the-Counter Bulletin Board ("OTCBB") under the symbol "TMEN.OB." On
May
31,
2012, the last reported sale price of our Common Stock on the OTCBB was $0.15 per share.
You should read this
prospectus carefully before you invest. Investing in our Common Stock involves a high degree of risk. See the section entitled
"Risk Factors" beginning on page 7 of this prospectus for risks and uncertainties you should consider before buying shares
of our Common Stock.
None of the Securities
and Exchange Commission, any state securities commission, nor any other governmental agency has approved or disapproved of these
securities or determined that this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus
is July 11, 2012
TABLE OF CONTENTS
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Page
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ABOUT THIS PROSPECTUS
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2
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PROSPECTUS SUMMARY
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3
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RISK FACTORS
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7
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SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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11
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USE OF PROCEEDS
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12
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PRICE RANGE OF COMMON STOCK
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12
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DIVIDEND POLICY
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13
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BUSINESS
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13
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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21
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND EXECUTIVE OFFICERS OF THERMOENERGY
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29
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MANAGEMENT
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32
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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38
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SELLING STOCKHOLDERS
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39
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DESCRIPTION OF CAPITAL STOCK
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40
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO NON-U.S. HOLDERS
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44
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PLAN OF DISTRIBUTION
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47
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CHANGE IN ACCOUNTANTS
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49
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LEGAL MATTERS
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50
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EXPERTS
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50
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WHERE YOU CAN FIND MORE INFORMATION
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50
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CONSOLIDATED FINANCIAL STATEMENTS
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F-1
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ABOUT THIS PROSPECTUS
You should rely only on the
information contained in this prospectus and in the documents incorporated by reference herein or any amendment or supplement hereto
or any free writing prospectus prepared by us or on our behalf. We have not authorized any other person to provide you with different
information. We are not making an offer to sell our Common Stock in any jurisdiction in which the offer or sale is not permitted.
The information contained in this prospectus, the documents incorporated by reference or any free writing prospectus is accurate
only as of its date, regardless of the time of delivery of this prospectus or any free writing prospectus or of any sale of the
Common Stock.
Unless the context indicates
otherwise, all references in this prospectus to “the Company,” "ThermoEnergy," "we," "us," "our company" and "our"
refer to ThermoEnergy Corporation and its consolidated subsidiaries.
PROSPECTUS SUMMARY
This summary highlights information
contained elsewhere in this prospectus and may not contain all of the information that may be important to you. You should read
this entire prospectus, as well as the information to which we refer you and the information incorporated by reference herein,
before deciding whether to invest in our Common Stock. You should pay special attention to the "Risk Factors" section of this prospectus
to determine whether an investment in our Common Stock is appropriate for you.
ThermoEnergy Corporation
ThermoEnergy is 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 are based on our proprietary Controlled Atmosphere Separation Technology (“CAST”) platform. Our
patented and proprietary platform technology is combined with off-the-shelf technologies to provide systems that are inexpensive,
easy to operate and reliable. Our 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 our subsidiary, CASTion Corporation (“CASTion”).
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 while 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 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 our
subsidiary, ThermoEnergy Power Systems (“TEPS”) and will be developed and commercialized through our subsidiary, Unity Power Alliance.
For the years
ended December 31, 2011 and 2010, ThermoEnergy Corporation incurred net losses attributable to common stockholders of $17.3
million and $16.8 million (as revised), respectively, and cash outflows from operations of approximately $6.1 million and
$5.6 million, respectively. As of December 31, 2011 and 2010, ThermoEnergy had an accumulated deficit of approximately
$113.5 million and $96.1 million (as revised), respectively. ThermoEnergy Corporation's independent registered public
accounting firm included an emphasis of matter paragraph regarding the substantial doubt about the Company’s ability
to continue as a going concern in their report on ThermoEnergy Corporation's consolidated financial statements as of December
31, 2011 and 2010.
Industry Background
There are many federal, state
and local statutes and regulations enacted to protect and restore water and air quality. Federal legislation directed
at improving water quality include programs established under the Clean Water Act of 1977, as amended, the Coastal Zone Management
Act of 1972, as amended, the 1990 and 1996 Farm Bills, the Ocean Dumping Ban Act, and the Clean Water and Watershed Restoration
Initiative. The regulations established under these programs are intended to improve existing water quality programs. In
order to comply with these regulations, industrial, agricultural and municipal wastewater treatment facilities are seeking more
cost-effective methods of wastewater treatment and power generation.
Historically, industrial
companies would "treat and dispose" of wastewater created in their manufacturing or operating processes. Given the increasing need
to reduce operating costs to be competitive, industrial companies are implementing "treat and recover" technologies such as our
CAST technology. CAST technology is also used in the “treat and dispose” markets.
Notwithstanding the uncertainty
created by these regulatory and economic initiatives, we believe that pressurized oxycombustion will provide an economical and
environmentally friendly solution for building new power plants and retrofitting existing power plants once carbon pricing
is in place in the United States.
Our Technologies
are very attractive in the global marketplace, where clean water and clean air regulations of some countries are more
stringent than those in effect in the United States. The marketability of the pressurized oxycombustion technology
was significantly expanded with the ratification of the Kyoto Protocol by 141 nations, which took effect in February of
2005. As the Kyoto Protocol emission reductions are phased in through 2012, many older coal-fired power plants
will be among the first affected by the new regulations. Many of these plants utilize boiler designs that are 20
years old or more, making any upgrade using conventional combustion technology highly improbable. Collectively,
these plants represent an enormous sunk-cost for utilities and industry, creating an ideal opportunity for any new retrofit
technology that could potentially keep these plants operational. While there are a number of post-combustion
carbon capture technologies currently under development, management is unaware of any other primary combustion technology
currently available or nearing commercial deployment capable of achieving near zero air emissions as well as capturing
greater than 95% of carbon dioxide. There can be no assurance, however, that a competing technology or technologies will not
be developed in the future or that the passage of more stringent clean air requirements will result in our Technologies being
used in either the United States or abroad, or that the current trend of domestic and international environmental legislation
will continue.
Our Key Advantages
We believe that the key advantages
of our business include:
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Technology Leadership:
Our award winning wastewater treatment technology treats and disposes or treats and recovers feedstock and valuable resources depending on whether the need is driven by regulatory requirements or a return on investment. We have a comprehensive portfolio of wastewater treatment technology based on our CAST platform. Our technology supports a wide range of applications. This allows us to provide our customers with a simple or a "one-stop shop" solution. Our power generation technology utilizes pressurized oxyfuel combustion technology capturing and sequestering nearly all SOx, NOx, Mercury, and CO
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created in the power generation process.
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Large domestic and global markets:
We estimate the industrial and municipal tertiary wastewater removal and recovery market in the USA into which
our CAST wastewater technologies are sold to be approximately $12 billion over the next five years and growing. We
estimate the market for our pressurized oxycombustion power generation technology to be a $1 trillion segment of the global
market opportunity once fully commercialized.
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Proven Solution Provider:
We have approximately 70 CAST wastewater treatment systems
deployed worldwide. We sell systems to both large and small businesses, as well as to municipalities.
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Superior Performance:
Our performance advantage is derived from the physical-chemical
nature of our controlled atmosphere separation technology resulting in the lowest cost of operations versus biological and
other solutions. Our cost of capital and operating costs are lower, we have a smaller footprint, we are not temperature dependant,
we take less than an hour to reach equilibrium, produce no sludge, and no odor.
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Our Strategy
Our objective is to become
a significant force within the global municipal and industrial wastewater and power generation industries.
Our business model is based
on 1) new construction or retrofitting of existing wastewater treatment plants for federal, state and municipal governments, industrial
clients as well as power generation plants for public and/or merchant utilities worldwide, 2) privatization contracts where we
will build and operate, or build, own and operate municipal and/or industrial wastewater treatment and power plants, and 3) the
generation and sale of emission credits for emissions including nitrogen, carbon and mercury either directly to end-users or via
established public exchanges. In instances where the client has sufficient skill to design, build and operate our technologies,
we will enter into collaborative working relationships such as joint ventures, licenses and other similar agreements with companies
that are well-established in our targeted markets, and can greatly expedite the commercialization of our technologies.
Our long-term growth strategy
also includes the acquisition of other companies whose products or services are related to our core businesses. Ideally,
these candidate companies would (a) already be a well-established participant in one or more of our targeted markets; (b) have
ongoing revenues and profits; and (c) bring additional administrative and technical skills and expertise needed for us to achieve
our corporate mission and continue our growth.
Our business is subject to
numerous risks that are highlighted in the section entitled "Risk Factors" immediately following this prospectus summary. These
risks, among others, represent challenges to the successful implementation of our strategy and to the growth and future profitability
of our business. Some of these risks are:
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We will require additional capital to continue to fund our operations.
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We face intense competition and expect competition to increase in the future.
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Our future growth will suffer if we do not achieve sufficient market acceptance of our products.
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There may be a limited public market for our shares and the ability of our stockholders to dispose of their shares of Common Stock may be limited.
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Corporate History
The Company was incorporated
in Arkansas on January 19, 1988, under the name Innotek Corporation, at the direction of the Board of Directors of American Fuel
and Power Corporation ("AFP"). In exchange for the contribution by AFP of certain technologies, including an exclusive
sublicense of rights under a license from Batelle Memorial Institute, 70% of the Company's initial Common Stock was issued to AFP
and subsequently distributed to AFP shareholders. The Company subsequently entered directly into a license agreement
with Battelle Memorial Institute which supersedes the previous agreement between Battelle and AFP. On December 12, 1996
the Company changed its name from Innotek Corporation to ThermoEnergy Corporation.
On June 20, 2007, the Company
changed its jurisdiction of incorporation from Arkansas to Delaware by effecting a merger of the Company with and into its wholly-owned
Delaware subsidiary, ThermoEnergy Corporation, in a transaction in which the Delaware corporation was the surviving entity.
Corporate Information
Our principal executive offices
are located at 10 New Bond Street, Worcester, Massachusetts 01606 and our telephone number is (508) 854-1628. Our Internet
address is
www.thermoenergy.com
. Information contained on our website does not constitute part of this prospectus.`
The names "ThermoEnergy Corporation,"
"CAST," and "CASTion" are our registered trademarks. All other trademarks and trade names appearing in this prospectus are the
property of their respective owners.
Summary of the Offering
Common Stock offered
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54,166,684 shares of Common Stock, $0.001 par value per share, offered by the selling stockholders.
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Common Stock outstanding after the offering
(1)
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111,919,165 shares
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Use of proceeds
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We will not receive any of the proceeds from the sale of the Common Stock by the selling stockholders.
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Over-the-Counter Bulletin Board Symbol
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TMEN.OB
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Risk factors
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Investing in our Common Stock involves a number of risks. Before investing, you should carefully consider the information set forth under “Risk Factors” beginning on page 7 of this prospectus, for a discussion of the risks related to an investment in our Common Stock.
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(1)
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The number of shares of Common Stock outstanding after this offering includes 91,085,825
shares outstanding as of June 5
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2012, but does not
include:
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21,994,102 shares reserved for issuance upon exercise of stock options with a weighted-average
exercise price of $0.36 per share, which have been granted and remain outstanding;
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10,933,206 shares issuable under our stock option plan;
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76,812,100 shares underlying currently outstanding warrants;
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3,754,433 shares issuable upon conversion of convertible debt; and
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96,024,924 shares issuable upon conversion of convertible preferred stock held by persons other than the selling stockholders.
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RISK FACTORS
Investing in our Common Stock
involves risk. In deciding whether to invest in our Common Stock, you should carefully consider the following risks,
which should be read together with our other disclosures in this prospectus and in the documents we incorporate by reference. These
risks could materially affect our business, results of operations or financial condition and cause the trading price of our Common
Stock to decline. If any of the following risks occur, our business, financial condition or results of operations could
be materially and adversely affected. In that case, the value of our Common Stock could decline and you could lose part
or all of your investment.
Risks Related to Our Company
We have incurred substantial
operating losses in the past and we may not be able to achieve profitability in the future.
We have incurred
negative cash flows from operations since inception. For the years ended December 31, 2011 and 2010, we incurred net losses
of $17,386,000 and $14,856,000 (as revised), respectively, and cash outflows from operations of $6,101,000 and $5,628,000,
respectively. As of December 31, 2011 and 2010, we had an accumulated deficit of $113,510,000 and $96,124,000 (as revised), respectively.
We expect development, sales and other operating expenses to increase in the future as we expand our business. If our revenue
does not grow to offset these expected increased expenses, we may not be profitable. In fact, in future quarters we may not
have any revenue growth and our revenues could decline. Furthermore, if our operating expenses exceed expectations, financial
performance will be adversely affected and we may continue to incur significant losses in the future.
We will require additional
capital to continue to fund our operations. If we need but do not obtain additional capital, we may be required to substantially
limit operations.
We may not generate sufficient
cash needed to finance our anticipated operations for the foreseeable future from such operations. Accordingly, we may seek funding
through public or private financings, including equity financings, and through other arrangements including collaborations. Such
financing may be unavailable when needed or may not be available on acceptable terms. If we raise additional funds by issuing equity
or convertible debt securities, the percentage ownership of our current stockholders will be reduced, and these securities may
have rights superior to those of our Common Stock. If adequate funds are not available to satisfy either short-term or long-term
capital requirements, or if planned revenues are not generated, we may be required to limit our operations substantially. These
limitations of operations may include a possible sale or shutdown of portions of our business, reductions in capital expenditures
and reductions in staff and discretionary costs.
There is substantial doubt about our ability to continue
as a going concern.
We have incurred net
losses since inception and require substantial capital to continue commercialization of our water and power technologies
(together, the “Technologies”) and to fund our liabilities. For the years ended December 31, 2011 and 2010,
we incurred net losses of $17,386,000 and $14,856,000 (as revised), respectively, and cash outflows from operations
of $6,101,000 and $5,628,000, respectively. As of December 31, 2011 and 2010, we had an accumulated deficit of $113,510,000
and $96,124,000 (as revised), respectively. As of March 31, 2012, our liabilities included approximately $1.3 million in
accounts payable, $2.9 million of convertible debt, $4.0 million of billings in excess of costs, derivative liabilities of
$602,000 and approximately $1.8 million of other liabilities. Our ability to continue as a going concern is
dependent on many events outside of our direct control, including, among other things, obtaining additional financing either
privately or through public markets and customers’ purchasing our products in substantially higher volumes. Further,
our independent registered public accounting firm, in its report for the fiscal years ended December 31, 2011 and 2010,
included an emphasis of matter paragraph regarding the substantial doubt about our ability to continue as a going
concern.
On July 1, 2011, we prepaid
an aggregate of $1,568,267 of our outstanding debt, triggering the automatic conversion of an aggregate of $1,568,260 of additional
outstanding debt into shares of our Series B Convertible Preferred Stock. On August 11, 2011, we exercised our right to convert
an additional aggregate amount of $2,932,108 in outstanding debt into shares of our Series B Convertible Preferred Stock. Also
on August 11, 2011, certain holders of outstanding warrants exercised such warrants for the purchase of an aggregate of 3,469,387
shares of our Series B Preferred Stock at an aggregate exercise price, in cash, of $4,510,203. As a result of the debt conversion
and repayment and the warrant exercises, our total liabilities were reduced by approximately $6.9 million.
Our indebtedness could
affect our business adversely and limit our ability to plan for or respond to changes in our business, and we may be unable to
generate sufficient cash flows to satisfy our liquidity needs.
As of December 31,
2011, the carrying value of our indebtedness was $2,821,000, and our working capital (defined as current assets less
current liabilities) was in a deficit position. Our indebtedness could have important consequences, including:
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limiting our ability to obtain additional financing to fund future working capital or capital expenditures;
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exposing us to interest rate risk with respect to the portion of our indebtedness that bears interest at a variable rate;
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limiting our ability to pay dividends on our Common Stock or make payments in connection with our other obligations;
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requiring that a portion of our cash flows from operations be dedicated to the payment of the principal of and interest on our debt, thereby reducing funds available for future operations, acquisitions, dividends on our Common Stock or capital expenditures;
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limiting our ability to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions; and
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placing us at a competitive disadvantage compared to those of our competitors that have less debt.
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Material
weaknesses in our internal controls over financial reporting and in our disclosure controls and procedures existed
during 2011 and 2010 which led us to restate our 2011 interim financial results, as reflected in our 2011 Annual Report on
Form 10-K. If we fail to maintain effective internal control over financial reporting, we may not be able to report our financial
results accurately or on a timely basis. Any inability to report and file our financial results in an accurate and timely
manner could harm our business and adversely impact the trading price of our Common Stock.
As a public company, we are
required to comply with the Sarbanes-Oxley Act and other rules and regulations that govern public companies. In particular, we
are required to certify our compliance with Section 404 of the Sarbanes-Oxley Act as of the end of each fiscal year, which requires
us to perform system and process evaluation and testing of our internal control over financial reporting to allow management and
our registered public accounting firm to report on the effectiveness of our internal control over financial reporting. Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”).
In connection with the preparation
of our consolidated financial statements as of December 31, 2009, we and our independent registered public accountants identified
a number of material weaknesses in our internal controls over financial reporting and in our disclosure controls and procedures. Specifically,
we determined that our internal controls as of December 31, 2009 were deficient in that (i) we had not adequately allocated resources
to ensure that necessary internal controls were implemented and followed, (ii) there was a lack of segregation of duties in our
significant accounting functions, (iii) our period-end reporting process did not provide sufficiently timely and accurate financial
statements and required disclosures, (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 2008 consolidated financial statements
and subjected us to potential criminal and/or civil action with respect to the impact of our unpaid payroll tax matters. The
former Chief Financial Officer resigned on August 3, 2009 following a vote by our Board of Directors to terminate his employment
for cause. The above-referenced material weaknesses were discovered by Kemp & Company (“Kemp”), at the
time our independent registered public accounting firm. During their audit for the year ended December 31, 2007, Kemp
brought to the attention of our Audit Committee the failure to allocate adequate resources to the implementation of internal controls,
the failure to provide timely and accurate financial statements and disclosures, and deficiencies in our contract administration
and accounting procedures. During their audit for the year ended December 31, 2008, Kemp advised the Audit Committee
of the lack of segregation of duties in accounting functions and the misconduct of our former CFO.
We began our efforts to remediate
those areas of material weakness with the appointment of a new Chief Financial Officer in the fourth quarter of 2009. During the
first quarter of 2010, we engaged additional finance personnel with expertise and knowledge of the accounting and financial reporting
obligations of public companies. With the assistance of the new personnel and under the guidance of our new Chief Financial Officer
and our Audit Committee, during the first quarter of 2010 we implemented new reporting processes to assure that our financial statements
and required disclosures were timely and accurate. In the third quarter of 2010, we developed and implemented processes and procedures
related to the accounting for contract administration.
However, we have determined that our
internal controls over financial reporting and our disclosure controls and procedures as of December 31, 2011 were deficient due
to (i) our failure to adequately allocate 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. Management has discussed
its conclusions with the Audit Committee and with our independent registered public accounting firm and expects to hire
additional qualified personnel in the financial and accounting area in order to remediate these material weaknesses by December
31, 2012. We cannot provide assurance that we have eliminated all, or that we will not in the future have additional, material
weaknesses, any of which may subject us to additional regulatory scrutiny and cause future delays in filing our financial statements
and periodic reports with the SEC. Any such delays in the filing of our financial statements and periodic reports may result in
a loss of public confidence in the reliability of our financial statements and sanctions could be imposed on us by the SEC. We
believe that any such misstatements or delays could negatively impact our liquidity, access to capital markets, financial condition
and the market value of our Common Stock.
We face intense competition
and expect competition to increase in the future, which could have an adverse effect on our revenue, revenue growth rate, if any,
and market share.
We compete in different target
markets to various degrees on the basis of a number of principal competitive factors, including our products’ performance,
features and functionality, size, ease of system design, customer support, products, reputation, reliability and price, as well
as on the basis of our customer support, the quality of our product and our reputation.
Our competitors range from
large, international companies offering a wide range of products to smaller companies specializing in narrow markets and internal
engineering groups, some of which may be our customers. We expect competition in the markets in which we participate
to increase in the future as existing competitors improve or expand their product offerings. In addition, we believe that a number
of other public and private companies may in the future develop competing products.
Our ability to compete successfully
depends on elements both within and outside of our control, including industry and general economic trends. Many of
our competitors have substantially greater financial and other resources with which to withstand adverse economic or market conditions
in the future. Moreover, increased competition could result in price pressure, reduced profitability and loss of market share,
any of which could materially and adversely affect our business, revenue, revenue growth rates and operating results.
If we fail to develop
and introduce new or enhanced products on a timely basis, our ability to attract and retain customers could be impaired and our
competitive position could be harmed.
We operate in a dynamic environment
characterized by rapidly changing technologies and industry standards and technological obsolescence. To compete successfully,
we must design, develop, market and sell new or enhanced products that provide increasingly higher levels of performance and reliability
and meet the cost expectations of our customers. The introduction of new products by our competitors, the market acceptance of
products based on new or alternative technologies, or the emergence of new industry standards could render our existing or future
products obsolete. Our failure to anticipate or timely develop new or enhanced products or technologies in response to technological
shifts could result in decreased revenue. In particular, we may experience difficulties with product design, manufacturing, marketing
or certification that could delay or prevent our development, introduction or marketing of new or enhanced products. If we fail
to introduce new or enhanced products that meet the needs of our customers or penetrate new markets in a timely fashion, we will
lose market share and our operating results will be adversely affected.
Due to our limited
operating history, we may have difficulty accurately predicting our future revenue and appropriately budgeting our expenses.
We have only a limited operating
history from which to predict future revenue. This limited operating experience, combined with the rapidly evolving nature of the
markets in which we sell our products, substantial uncertainty concerning how these markets may develop and other factors beyond
our control, reduces our ability to accurately forecast quarterly or annual revenue.
Our customers often
require our products to undergo a lengthy and expensive qualification process which may delay and does not assure product sales.
Prior to purchasing our products,
our customers require that both our products and our third-party contractors undergo extensive qualification processes, which sometime
involve rigorous reliability testing. However, qualification of a product by a customer does not assure any sales of
the product to that customer.
Winning business is
subject to lengthy competitive selection processes that require us to incur significant expenditures. Even if we begin a product
design, a customer may decide to cancel or change its plans, which could cause us to generate no revenue from a product
and adversely affect our results of operations.
The selection process for
obtaining new business typically is lengthy and can require us to incur significant design and development expenditures and dedicate
scarce engineering resources in pursuit of a single customer opportunity. We may not win the competitive selection process and
may never generate any revenue despite incurring significant design and development expenditures.
The delays inherent in these
lengthy sales cycles increase the risk that a customer will decide to cancel, curtail, reduce or delay its product plans, causing
us to lose anticipated sales. In addition, any delay or cancellation of a customer’s plans could materially and adversely
affect our financial results, as we may have incurred significant expense and generated no revenue. Finally, our customers’
failure to successfully market and sell their products could reduce demand for our products and materially and adversely affect
our business, financial condition and results of operations. If we were unable to generate revenue after incurring substantial
expenses to develop any of our products, our business would suffer.
The failure to compete
successfully could harm our business.
We face competitive
pressures from a variety of companies in our target markets. We expect that domestic and international competition will increase
in these markets, due in part to rapid technological advances, price erosion, changing customer preferences and evolving regulatory
standards. Increased competition could result in significant price competition, reduced revenues or lower profit margins. Many
of our competitors and potential competitors have or may have substantially greater research and product development capabilities,
financial, scientific, marketing, and manufacturing and human resources, name recognition and experience than we do. As a result,
these competitors may:
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succeed in developing products that are equal to or superior to our products or that will achieve greater market acceptance than our products;
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devote greater resources to developing, marketing or selling their products;
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respond more quickly to new or emerging technologies or scientific advances and changes in customer requirements, which could render our technologies or potential products obsolete;
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introduce products that make the continued development of our potential products uneconomical;
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obtain patents that block or otherwise inhibit our ability to develop and commercialize potential products;
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withstand price competition more successfully than us;
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establish cooperative relationships among themselves or with third parties that enhance their ability to address the needs of prospective customers better than us; and
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take advantage of acquisitions or other opportunities more readily than us.
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Competitors may offer enhancements
to existing products, or offer new products based on new technologies, industry standards or customer requirements that are available
to customers on a more timely basis than comparable products from our company or that have the potential to replace or provide
lower cost alternatives to our products. The introduction of enhancements or new products by competitors could render our existing
and future products obsolete or unmarketable. Each of these factors could have a material adverse effect on our company’s
business, financial condition and results of operations.
Our future growth will
suffer if we do not achieve sufficient market acceptance of our products.
Our success depends, in part,
upon our ability to maintain and gain market acceptance of our products. To be accepted, these products must meet the quality,
technical performance and price requirements of our customers and potential customers. The wastewater treatment and power generation
industries are currently fragmented with many competitors developing different technologies. Some of these technologies may not
gain market acceptance. In addition, even if we achieve some degree of market acceptance for our potential products
in one industry, we may not achieve market acceptance in other industries for which we are developing products, which market acceptance
is critical to meeting our financial targets.
Achieving market acceptance
for our products will require marketing efforts and the expenditure of financial and other resources to create product awareness
and demand by customers. It will also require the ability to provide excellent customer service. We may be unable to offer products
that compete effectively due to our limited resources and operating history. Also, certain large corporations may be predisposed
against doing business with a company of our limited size and operating history. Failure to achieve broad acceptance of our products
by customers and to compete effectively would harm our operating results.
Successful commercialization
of current and future products will require us to maintain a high level of technical expertise.
To succeed in
our target markets, we will have to establish and maintain a leadership position in the technology supporting those markets. Accordingly,
our success will depend on our ability to:
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accurately predict the needs of target customers and develop, in a timely manner, the technology required to support those needs;
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provide products that are not only technologically sophisticated but are also available at a price acceptable to customers and competitive with comparable products;
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establish and effectively defend our intellectual property; and
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enter into relationships with other companies that have developed complementary technology into which our products may be integrated.
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We cannot assure you that
we will be able to achieve any of these objectives.
Risks Related to Our Common
Shares
There may be a limited
public market for our common shares, and the ability of our stockholders to dispose of their shares of Common Stock may be limited.
We cannot foresee the degree
of liquidity that will be associated with our common shares. A holder of our common shares may not be able to liquidate his, her
or its investment in a short time period or at the market prices that currently exist at the time the holder decides to sell. The
market price for our Common Stock may fluctuate in the future, and such volatility may bear no relation to our performance.
The exercise of options
and warrants, the conversion of preferred Stock and other issuances of shares of Common Stock or securities convertible into Common
Stock will dilute your interest.
As of June 5,
2012, there were (i) outstanding options to purchase an aggregate of 21,994,102 shares of our Common Stock at a weighted-average
exercise price of $0.36 per share, (ii) warrants outstanding to purchase 76,812,100 shares of our Common Stock at a weighted average
exercise price of $0.38 per share, (iii) convertible promissory notes with an aggregate principal amount of $1,877,217 convertible
into 3,754,433 shares of Common Stock, and (iv) shares of Preferred Stock convertible into 116,858,264 shares of Common Stock. The
exercise of options and warrants or the conversion of notes or Preferred Stock at prices below the market price of our Common
Stock could adversely affect the price of shares of our Common Stock. Additional dilution may result from the issuance of shares
of our capital stock in connection with acquisitions or in connection with financing efforts.
Any issuance of our Common
Stock (other than issuances solely to then-existing stockholders proportionate to their interests, such as in the case of a stock
dividend or stock split), will result in dilution to each stockholder by reducing his, her or its percentage ownership of the total
outstanding shares. Moreover, if we issue options or warrants to purchase our Common Stock in the future and those options or warrants
are exercised, or if we issue restricted stock, stockholders may experience further dilution.
Penny Stock Regulation
Broker−dealer practices
in connection with transactions in “penny stocks” are regulated by penny stock rules adopted by the Commission. Penny
stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities
exchanges, provided that current price and volume information with respect to transactions in such securities is provided by the
exchange or system). The penny stock rules require a broker−dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the
risks in the penny stock market. The broker−dealer must also provide the customer with current bid and offer quotations for
the penny stock, the compensation of the broker−dealer and its salesperson in the transaction, and monthly account statements
showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally
require that prior to a transaction in a penny stock, the broker−dealer make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that
becomes subject to the penny stock rules. Since the Company’s securities are subject to the penny stock rules, investors
in the Company may find it more difficult to sell their securities.
The market for penny stocks
has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security
by one or a few broker−dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged
matching of purchases and sales and false and misleading press releases; (iii) boiler room practices involving high−pressure
sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid−ask differential
and markups by selling broker dealers; and (v) the wholesale dumping of the same securities by promoters and broker−dealers
after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent
investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market.
Although we do not expect
to be in a position to dictate the behavior of the market or of broker−dealers who participate in the market, management
will strive within the confines of practical limitations to prevent the described patterns from being established with respect
to our securities.
SPECIAL CAUTIONARY NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the documents
incorporated herein by reference include "forward-looking statements" within the meaning and protections of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements
include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates,
intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our
control, and which may cause our actual results, performance or achievements to be materially different from future results, performance
or achievements expressed or implied by such forward-looking statements.
All statements other than
statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements
through our use of words such as "may," "will," "anticipate," "assume," "should," "indicate," "would," "believe," "contemplate,"
"expect," "estimate," "continue," "plan," "project," "could," "intend," "target" and other similar words and expressions of the
future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:
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we are an early stage company and have a history of incurring losses;
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our ability to remain competitive in the markets we serve;
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the effects of future economic, business and market conditions;
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general economic and capital market conditions and our ability to obtain additional funding;
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our ability to continue to develop, manufacture and market innovative products and services that meet customer requirements for performance and reliability;
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our ability to establish effective internal controls over our financial reporting;
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risks relating to the transaction of business internationally;
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our failure to realize anticipated benefits from acquisitions or the possibility that such acquisitions could adversely affect us, and risks relating to the prospects for future acquisitions;
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the loss of key employees and the ability to retain and attract key personnel, including technical and managerial personnel;
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quarterly and annual fluctuations;
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investments in research and development;
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protection and enforcement or our intellectual property rights and proprietary technologies;
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costs associated with potential intellectual property infringement claims asserted by third parties;
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the loss of one or more of our significant customers, or the diminished demand for our products;
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our dependence on contract manufacturing and outsourced supply chain, as well as the costs of materials;
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the effects of war, terrorism, natural disasters or other catastrophic events;
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our success at managing the risks involved in the foregoing items; and
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other risks and uncertainties, including those listed under the heading "Risk Factors" in this prospectus.
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The forward-looking statements
are based upon management's beliefs and assumptions and are made as of the date of this prospectus. We undertake no obligation
to publicly update or revise any forward-looking statements included or incorporated by reference in this prospectus or to update
the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future
events or otherwise, except to the extent required by federal securities laws. Any investor should consider all risks and uncertainties
disclosed in our filings with the Securities and Exchange Commission, or the SEC, described below under the heading "Where You
Can Find More Information," all of which is accessible on the SEC's website at www.sec.gov.
USE OF PROCEEDS
We will not receive any proceeds
from the sale of the Common Stock by the selling stockholders.
PRICE RANGE OF COMMON STOCK
Our Common Stock
is currently traded on the Over-the-Counter Bulletin Board under the symbol "TMEN.OB." From January 1, 2010
through October 27, 2010, our Common Stock was traded in the over-the-counter market on pink sheets under the symbol
“TMEN.PK”. The table below sets forth the high and low prices per share of our Common Stock for the periods
specified. As of June 5, 2012, we had 91,085,825 shares of Common Stock outstanding, held by
approximately 1,190 record holders.
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Sale Price Per Share
of Common Stock
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High
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Low
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2010
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First Quarter
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$
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0.59
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$
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0.22
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Second Quarter
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$
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0.56
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$
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0.28
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Third Quarter
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$
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0.44
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$
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0.265
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Fourth Quarter
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$
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0.48
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$
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0.20
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2011
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First Quarter
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$
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0.35
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$
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0.16
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Second Quarter
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$
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0.32
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$
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0.11
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Third Quarter
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$
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0.25
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$
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0.15
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Fourth Quarter
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$
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0.28
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$
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0.11
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2012
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First Quarter
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$
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0.28
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$
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0.16
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Second Quarter (through May 31,
2012)
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$
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0.19
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$
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0.12
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DIVIDEND POLICY
We have never declared or
paid any dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance our operations and to expand our business.
BUSINESS
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 are based on our proprietary Controlled Atmosphere Separation Technology (“CAST”) platform. Our
CAST 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. Our patented and proprietary platform technology is combined with off-the-shelf
technologies to provide systems that are inexpensive, easy to operate and reliable. Our wastewater treatment systems
have 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 our subsidiary, CASTion Corporation (“CASTion”).
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 while 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 technology is held in our subsidiary,
ThermoEnergy Power Systems, LLC (“TEPS”) and will be developed and commercialized through the formation of our
new subsidiary, Unity Power Alliance.
Our pressurized oxycombustion
technology and the water technologies are collectively referred to as the “Technologies.” The economic
and environmental benefits of our technologies represent a significant advancement in these key infrastructure industries. Additional
information can be found on our website at
www.thermoenergy.com
.
We were founded in 1988,
are incorporated under the laws of the State of Delaware, and have been a public company since 1992. Our Common Stock
is traded on the OTC Bulletin Board under the stock symbol TMEN.OB.
Industry Background
There are many federal, state
and local statutes and regulations enacted to protect and restore water and air quality. Federal legislation directed
at improving water quality include programs established under the Clean Water Act of 1977, as amended, the Coastal Zone Management
Act of 1972, as amended, the 1990 and 1996 Farm Bills, the Ocean Dumping Ban Act, and the Clean Water and Watershed Restoration
Initiative. The regulations established under these programs are intended to improve existing water quality programs. In
order to comply with these regulations, industrial, agricultural and municipal wastewater treatment facilities are seeking more
cost-effective methods of wastewater treatment and power generation.
Historically, industrial
companies would "treat and dispose" of wastewater created in their manufacturing or operating processes. Given the increasing need
to reduce operating costs to be competitive, industrial companies are implementing "treat and recover" technologies such as our
CAST technology. CAST technology is also used in the “treat and dispose” markets.
Notwithstanding the uncertainty
created by these regulatory and economic initiatives, we believe that pressurized oxycombustion will provide an economical and
environmentally friendly solution for building new power plants and retrofitting existing power plants without any new government
legislation.
Our Technologies
are very attractive in the global marketplace, where clean water and clean air regulations of some countries are more
stringent than those in effect in the United States. The marketability of the pressurized oxycombustion technology
was significantly expanded with the ratification of the Kyoto Protocol by 141 nations, which took effect in February of
2005. As the Kyoto Protocol emission reductions are phased in through 2012, many older coal-fired power plants
will be among the first affected by the new regulations. Many of these plants utilize boiler designs that are 20
years old or more, making any upgrade using conventional combustion technology highly improbable. Collectively,
these plants represent an enormous sunk-cost for utilities and industry, creating an ideal opportunity for any new retrofit
technology that could potentially keep these plants operational. While there are a number of post-combustion
carbon capture technologies currently under development, management is unaware of any other primary combustion technology
currently available or nearing commercial deployment capable of achieving near zero air emissions as well as capturing
greater than 95% of carbon dioxide. There can be no assurance, however, that a competing technology or technologies will not
be developed in the future or that the passage of more stringent clean air requirements will result in our Technologies being
used in either the United States or abroad, or that the current trend of domestic and international environmental legislation
will continue.
Growth Strategy
Our business model is based
on 1) new construction or retrofitting of existing wastewater treatment plants for federal, state and municipal governments, industrial
clients as well as power generation plants for public and/or merchant utilities worldwide, 2) privatization contracts where we
will build and operate, or build, own and operate municipal and/or industrial wastewater treatment and power plants, and 3) the
generation and sale of emission credits for emissions including nitrogen, carbon and mercury either directly to end-users or via
established public exchanges. In instances where the client has sufficient skill to design, build and operate our technologies,
we will enter into collaborative working relationships such as joint ventures, licenses and other similar agreements with companies
that are well-established in our targeted markets, and can greatly expedite the commercialization of our technologies.
We believe many of these
markets represent suitable opportunities for us to implement our business model of design, build, own and operate ("DBOO") wastewater
facilities over a contracted period (anticipated to be a 5-20 year period). Alternatively, we may license the Technologies
to the client and enter into an operating contract for municipal-owned systems utilizing our Technologies over a similar time period. Under
these arrangements, we would seek to generate revenues and profits from a per unit tolling fee on the volume of waste processed
by our Technologies, as well as from the projected sale of the commodity byproducts (i.e. the high-energy fuel generated by ThermoFuel,
the ammonium sulfate generated by ARP or selling the electricity and/or process steam produced using the high-energy fuel as a
feedstock to the municipality or the local power grid.)
Our long-term growth strategy
also includes the acquisition of other companies whose products or services are related to our core businesses. Ideally,
these candidate companies would (a) already be a well-established participant in one or more of our targeted markets; (b) have
ongoing revenues and profits; and (c) bring additional administrative and technical skills and expertise needed for us to achieve
our corporate mission and continue our growth.
Technology and Research and
Development
We own or license all
of our Technologies, including the Technologies discussed previously and below in this document. Our product engineering and research
and development expenses were $299,000 and $643,000 for the fiscal years ended December 31, 2011 and 2010, respectively, and $109,000
for the three months ended March 31, 2012.
Products
Water Technologies
Our management team has focused
the Company on our proprietary CAST and R-CAST technologies (described below) in our intellectual property portfolio pertaining
to wastewater. The Company’s wastewater technologies offer industrial, agricultural and municipal clients superior
economic and process advantages over conventional wastewater treatment methods. The Company’s water technologies
include the following:
CASTion’s CAST,
R-CAST and Proprietary Water Technologies
Our proprietary Controlled
Atmosphere Separation Technology (“CAST” and “R-CAST”) systems can be utilized as an effective stand-alone
wastewater or chemical recovery system, or as part of an integrated plant-wide recovery solution. The CAST wastewater
and chemistry recovery system reduces and/or eliminates costly disposal of hazardous waste or process effluent. When
used in a Zero-Liquid-Discharge (“ZLD”) application, we can recover nearly 90% of a customer’s valuable chemical
resources or wastewater for immediate disposal, reuse or recycling at our customer’s facility. CAST concentrates
mixed hazardous waste down to as little as 5% of its original volume for economical disposal or reclaim. CASTion’s
water technologies fall into three major categories:
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Compliance Systems – designed
to meet strict local and federal regulatory mandates;
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Primary Recovery Systems –
designed to treat the majority of an operation’s wastewater for reuse and concentrate the contaminants; and
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Final Recovery Systems – designed to treat the remaining concentrate contaminants for disposal or additional processing to achieve zero liquid discharge.
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Systems integration is key
to the success of any treatment or recovery project. Because of this, we provide significant value as a turnkey solution
provider, thereby ensuring these “state-of-the-art” technologies operate effectively.
Turbo CAST
Turbo CAST is specifically
designed for use in areas where energy costs are high and in applications where there are high wastewater flows. Turbo CAST incorporates
the latest in heat recuperation technology that allows for the recovery of up to 90% of the thermal energy used in the system.
Turbo CAST opens up opportunities in several high flow industrial markets where previously we didn't have a competitive solution.
By combining vapor recompression technology with a vacuum assisted flash distillation process, this solution offers a highly energy
efficient, very simple to operate system that reduces operating costs. Turbo CAST can be retrofitted to our existing CAST systems
improving energy performance significantly.
Mobile CAST 2500
The Mobile CAST 2500 is a
completely self-contained wastewater processing system that uses the company’s CAST® platform technology. The unit is
capable of treating 2,500 gallons per day of wastewater. The Mobile CAST 2500 can be deployed on-site for a range of
applications, including: metals recovery, airport deicing fluid dewatering and recovery, antifreeze dewatering and recovery,
biological oxygen demand (BOD) reduction, and ammonia (nitrogen) recovery. It also facilitates on-site pilot testing that accelerates
the company's sales cycle.
ARP
Our patented Ammonia Recovery
Process (“ARP”) captures ammonia from dilute waste streams and converts it into ammonium sulfate, a commercial grade
fertilizer, which can be utilized in agricultural markets worldwide. The ARP technology has been proven in more than
150 pilot tests.
ARP is a physical/chemical
process, comprised of various patented and/or proprietary components, designed to remove and recover ammonia from aqueous waste
streams. In large-scale field demonstration as well as laboratory tests, ARP has been proven to be a reliable, low-cost,
environmentally effective method of treating wastewater discharge streams containing nitrogen in the form of ammonia. The
ARP separates ammonia out of wastewater discharge streams from municipal, industrial and agricultural waste via RCAST and converts
it into standard, commercial-grade, ammonium sulfate fertilizer. We are targeting one such ammonia stream called "centrate";
a liquid product resulting from centrifuging anaerobically digested sewage, sludge or animal waste. Ammonia concentrations
found in centrate ranges from approximately 300 to 3,000 parts per million. Such plants generate primary and waste activated
sludges which are typically treated with anaerobic digestion and then dewatered. In the anaerobic digestion process,
more than half of the nitrogen in organic nitrogen compounds is converted into ammonia.
Once the anaerobically digested
sludge is dewatered, the organically bound nitrogen stays with the sludge solids while virtually all of the aqueous ammonia stays
with the water portion or centrate. This centrate is typically recycled to the front of the wastewater treatment plant. ARP
treats the centrate as a relatively concentrated ammonia stream and returns a very low ammonia stream to the plant that is well
below regulatory requirements. This reduction in the nitrogen load on the plant can increase the overall plant through-put
by up to 30%. The removed and concentrated ammonia can thereafter be converted into ammonium sulfate, a commercial-grade
fertilizer. The primary markets for ARP are municipal and industrial wastewater treatment and the treatment of wastewater
discharge from large concentrated animal farming operations, including dairy, pork, beef and poultry facilities.
On May 11, 2010
we signed a contract with the New York City Department of Environmental Protection (“NYCDEP”) relating to the ThermoEnergy
Ammonia Removal Process System at the 26
th
Ward waste water pollution control plant
(the “Contract”). The proceeds originally expected under the Contract were estimated to be $27.1 million;
change orders have increased estimated proceeds to $27.9 million.
Under the Contract, we have
been engaged by NYCDEP to (a) provide engineering and design services with respect to the rehabilitation of the Cake Storage Building,
process equipment, and miscellaneous systems at the 26
th
Ward wastewater pollution
control plant, (b) supply and install our proprietary ARP equipment (the “System”) at the 26
th
Ward wastewater pollution control plant, and (c) operate and maintain the System at the 26
th
Ward wastewater pollution control plant for a period of twelve months. We are presently obligated to complete our services
under the Contract on or before December 24, 2013.
The first phase of the
Contract is for engineering and design services related to the rehabilitation of the Cake Storage Building and miscellaneous systems. We
are to be paid $6.6 million for this phase of the Contract, payable in installments upon achieving certain milestones. The
second phase of the Contract is for the supply and installation of the System. We are to be paid $13.4 million for
this phase of the Contract, payable in installments relating to the progress of the project. The last phase is for
operation and maintenance of the System. We are to be paid $2.3 million for this phase of the Contract, payable in
twelve equal monthly installments. In addition, we will be reimbursed, on a monthly basis, for our costs related to
chemicals and reagents used in the System and the handling, storage and transportation of byproducts of the System (including
internal costs and overhead), estimated to be $5.6 million.
We believe that, based
upon the terms of the ARP contract, we will be able to meet the operational requirements of the Contract. If the 26
th
Ward facility meets certain predetermined process and economic efficiencies, we intend to pursue additional contracts with
New York City with respect to other facilities that need to meet the terms of a Consent Decree entered against the city in 2002
pursuant to which the city is required to develop a plan to upgrade the plants to meet specific ammonia discharge limits set forth
in the Consent Decree.
Thousands of tons of nitrogen,
in the form of ammonia, are being discharged into local waterways every day by wastewater treatment plants throughout the United
States and around the world. Many states, as well as the federal government, have begun to regulate the amount of ammonia
discharged to protect the environment. While ammonia, in small amounts, is present in many industrial and household
products, it is harmful to human health and extremely toxic to aquatic life in large doses. The presence of ammonia
in waterways and aquifers creates conditions resulting in the creation of “Dead Zones”; areas within a body of water
where fish and shellfish cannot live. Currently, there are over 140 Dead Zones throughout the world, including some
of the nation’s leading bodies of water such as the Chesapeake Bay, Long Island Sound, Puget Sound, Gulf of Mexico and Narragansett
Bay, among others.
Thermo ARP™
We recently developed a new,
high-efficiency process for recovering nutrients from wastewater called Thermo ARP™. Thermo ARP™ is specifically
designed for use with industrial, agricultural and municipal anaerobic digesters where the wastewater stream requires a simpler
treatment strategy. Based on our proprietary CAST technology platform, Thermo ARP™ uniquely combines heat and
flash vacuum distillation to deliver the lowest cost per pound of nitrogen removed when compared with any digestate treatment technology
on the market today. For industrial, agricultural and municipal high rate anaerobic digesters, Thermo ARP™ has
a treatment cost per pound of nitrogen removed that is materially less than that of the most efficient competing technologies. Both
ARP and Thermo ARP™ have the economic and environmental advantage of recovering nitrogen as a fertilizer. Users
of this technology can generate revenue from the sale of fertilizer and combine that revenue with nutrient credits now offered
in several states to reduce the cost of operating the system and can accelerate payback on the equipment investment.
Other water technologies
in our portfolio include:
ThermoFuel
The ThermoFuel Process ("TFP")
is a renewable energy process that converts digested or waste-activated sewage sludge (biosolids) into a high-energy fuel that
can be converted into electricity for use on-site (or exported to the local power grid) or sold as a low-cost feedstock to third
party industrial clients. TFP provides a cost-effective solution for biosolids disposal for municipal wastewater treatment. TFP
integrates advanced primary sludge digestion with hydrothermal treatment of waste-activated sludge to expand the capacity of existing
municipal wastewater facilities. TFP is designed to be a compact, environmentally effective method of upgrading existing
wastewater treatment plants to Exceptional Quality (“EQ”) Class A biosolids production without the use of storage tanks,
ponds or lagoons, as is common practice for municipal wastewater facilities. EQ Class A biosolids denote the least health
risk of human exposure as defined in the 40 CFR Part 503 Risk Assessment study of the United States Environmental Protection Agency
(“EPA”). Over 95% of all municipal wastewater treatment plants in the U.S. currently produce Class B biosolids. These
biosolids do not meet required pathogen and vector attraction reduction requirements and, as such, pose a potential health risk
in the event of direct human contact. The high energy and low moisture content of TFP fuel make it suitable for use
as a fuel substitute or blending agent for power plants, municipal solid waste incinerators, cement kilns and similar applications. The
U.S. Patent & Trademark Office issued a patent for the Sewage Treatment System process on March 17, 2005. TFP is
covered in the same license as Enhanced Biogas.
TFP can be utilized as a
stand-alone system or combined with our ARP or Enhanced Biogas Production technologies (described below) to provide a comprehensive
and cost-effective method of upgrading existing wastewater treatment plants to produce 100% EQ Class A biosolids; a product which
can then be safely applied to expired land, such as a landfill or mining reclamation, or converted on-site to energy via a gasification
plant or boiler. ThermoFuel allows wastewater treatment plant operators to control the incoming waste stream entirely
on-site, with only clean water and saleable commodities leaving the plant. The primary target markets for ThermoFuel
are municipal and industrial wastewater treatment facilities.
Enhanced Biogas Production
Our Enhanced Biogas Production
process is a cost-effective method of processing and treating animal waste from concentrated animal farming that improves the efficiency
of aerobic or anaerobic digesters in conventional wastewater treatment plants. Our process retrofits existing wastewater
treatment plants to recover excess ammonia from the digesters, making the plant run more efficiently. Through this process,
waste is converted into two saleable commodities: Energy in the form of methane, and ammonium sulfate, a commercial-grade
fertilizer. It can be used as a stand-alone technology, together with our ARP technology, and/or together with our ThermoFuel
process. It can also be implemented with the Temperature Phased Anaerobic Digestion technology used by wastewater treatment
plant operators to make more biogas and destroy pathogens. Temperature phasing is a relatively new method adopted by
wastewater treatment plant operators that uses two phases of anaerobic digestion. In the high temperature phase, (around
120-140ºF) waste solids are disinfected and conditioned to reduce pathogens below threshold levels and solubilize some of
the solids during the digestion phase. In the lower temperature phase, (around 90-100ºF) waste solids already reduced
in the first phase are more completely broken down to generate additional biogas at lower energy costs.
The Enhanced Biogas Production
process is currently protected by patents that we license exclusively. Under the terms of the license agreement, (the
“Agreement”) at the time when cumulative sales of the licensed products exceed $20 million, we agree to pay 1% of the
net sales thereafter (as defined in the Agreement). We may assign or transfer the Agreement to third parties with the
licensee’s consent, not to be unreasonably withheld.
Energy Technologies
In addition to our Water
Technologies, we are developing a new, advanced power plant design, that offers
a cost-effective and environmentally responsible solution to both carbon capture and global warming. The power technology
is described below.
Pressurized Oxycombustion
Pressurized oxycombustion represents a novel thermodynamic approach in power plant design. Based on reliable
oxyfuel chemistry, it combines the combustion of carbonaceous fuels (coal, oil, natural gas or biomass) with essentially complete
recovery of all by-products, including NOx, SOx, mercury, particulates and carbon dioxide (CO
2
), which can then be
used for sequestration or beneficial reuse. The key element that differentiates pressurized oxycombustion from conventional oxy-fuel
designs is that combustion shifts the temperatures at which water, CO
2
, mercury and acid gases condense. Gas-to-liquid
nucleate condensation physics is then used to collect and remove the pollutants, while CO
2
is recovered as a liquid
through direct condensation to reduce harmful air emissions of acid gases, mercury, soot and CO
2
. pressurized
oxycombustion is well-suited for new construction and offers a cost-effective way to upgrade many existing coal-fired power
plants to zero air emission/carbon capture status.
The primary markets for
pressurized oxycombustion will be power generation plants for electric utilities and combined heat and power plants for industrial
clients, many of which produce waste by-products that can be used as a feedstock for pressurized oxycombustion. Some
of the industries in which pressurized oxycombustion can be utilized include oil refineries, petrochemical processing plants and
pulp and paper mills. In March 2001, ThermoEnergy Power Systems was granted U.S. Patent Nos. 6,196,000 and 6,918,253
for the pressurized oxycombustion process. We also received patents relating to the pressurized oxycombustion process
in Australia, China, India, Mexico, Poland, Romania, the Russian Federation and South Africa. Foreign patent applications
have also been filed in Canada and the European Patent Office.
Customers
We have approximately
70 CAST wastewater treatment systems deployed worldwide, mostly in the United States. We sell our systems to both small and large
businesses, as well as to municipalities. Historically, companies in the Fortune 1000 rankings have accounted for approximately
28% of units sold; these customers include Valero, Proctor & Gamble, General Electric and Caterpillar. Historically, municipalities,
including the New York City Department of Environmental Protection, have accounted for approximately 2% of units sold. The remaining
70% of units were sold to mid- and smaller-sized companies. All of our revenues in 2011 and 2010 came from the U.S. and the bulk
of revenues in each year were generated by a single customer.
The City of New York
Department of Environmental Protection was our largest customer during the fiscal years ended December 31, 2011 and 2010 and the three
months, ended March 31, 2012, representing approximately 80%, 48% and 91% of our total revenues, respectively.
Manufacturing
We design, manufacture, and
service our products from our 48,000 square foot facility at 10 New Bond Street, Worcester, Massachusetts. We primarily utilize
commercially available or off-the-shelf parts such as pumps, heat exchangers, vacuum vessels, and other balance of plant materials
to produce our proprietary solutions for our customers. No single vendor holds a sole source contract nor represents a significant
portion of our standard supply chain. We believe we could find alternative suppliers at competitive cost should any of our current
suppliers be unable to fulfill our needs.
Sales, Marketing and Technical
Support
We primarily sell our products
through our direct sales force supported by a network of manufacturer representatives in the U.S. and internationally. Our sales
force works closely with our field application engineers, business development and marketing teams in an integrated approach to
address a customer's current and future needs. The support provided by our field application engineers is critical in the product
qualification stage. Many customers have custom requirements to consider. We also sell through or with strategic partners such
as AECOM and Contego Systems on larger, long-term municipal and industrial opportunities.
We have actively communicated
our solutions and brands through participation at trade shows and industry conferences, publication of research papers, byline
articles in trade media, in interactive media, interactions with industry press and analysts, press releases, our company website,
as well as through print and electronic sales material.
Competition
Our Technologies enable the
wastewater treatment and power generation industries to comply with state and federal clean water and clean air regulatory requirements
while reducing their cost of operations. We believe that these industries are dominated by process methods developed
in the 1940s and 1950s, with only minor improvements since that time. It is our belief that local, state and federal
regulatory mandates, as well as amendments to previously enacted clean water regulations (see Government Regulation, below) have
rendered the majority of these process methods ineffective, either from an economic or process efficiency standpoint, in meeting
these mandates, especially as they relate to greenhouse gas ("GHG") reduction. Yet conventional wisdom continues to
enable these technologies to compete with our Technologies for a share of the wastewater treatment market. Competitive
factors affecting us include entrenchment and familiarity of the older technologies within our target markets. Likewise,
individuals with purchasing authority within our target markets are not as familiar with our Technologies and may be hesitant to
adopt them in their municipal or industrial facilities. Plant operators have attempted to meet the regulatory requirements
by optimizing existing process methods rather than adopting new technologies, including ours. The cost of developing
new technologies and the ability of new companies to enter the wastewater treatment and power generation industries are barriers
to entry for new or developing companies. The established companies in the wastewater treatment and power generation
markets who attempt to meet the regulatory mandates by modifying conventional technologies comprise our principal competition. However,
there can be no assurance that there will not be additional competitors in the future or that such competitors will not develop
technologies that are superior to ours.
We believe the principal
competitive factors impacting our solutions are:
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price to performance characteristics;
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delivery performance and lead times;
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breadth of product solutions;
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sales, technical and post-sales service and support;
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technical partnerships in early stages of product development;
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ability to drive standards and comply with new industry regulations.
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Patents and Other Intellectual
Property Rights
We own or license all of
our Technologies, including the Technologies discussed previously in this document.
We rely on patent, trademark,
copyright and trade secret laws and internal controls and procedures to protect our technology. We believe that a robust technology
portfolio that is assessed and refreshed periodically is an essential element of our business strategy. We believe that our success
will depend in part on our ability to:
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Obtain patent and other proprietary protection for the technology and processes that we develop;
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Enforce and defend patents and other rights in technology, once obtained;
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Operate without infringing the patent and proprietary rights of third parties; and
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Preserve our company's trade secrets.
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We presently have been issued
approximately twelve patents and have eight patent applications are pending. Patents have been issued in various countries with
the main concentration in the United States. Our existing significant U.S. patents will expire between 2021 and 2027.
We take extensive measures
to protect our intellectual property rights and information. For example, every employee enters into a confidential information,
non-competition and invention assignment agreement with us when they join and are reminded of their responsibilities when they
leave. We also enter into and enforce a confidential information and invention assignment agreement with contractors.
We own or license patents
and pending patents covering technologies relating to:
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ARP - Ammonia removal from a stream
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Pressurized Oxycombustion - Thermodynamic efficiency and pollution control
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Enhanced biogas recovery and production
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Although we believe our patent
portfolio is a valuable asset, the discoveries or technologies covered by the patents, patent applications or licenses may not
have commercial value. Issued patents may not provide commercially meaningful protection against competitors. Other parties may
be able to design around our issued patents or independently develop technology having effects similar or identical to our patented
technology.
We periodically evaluate
our patent portfolio based on our assessment of the value of the patents and the cost of maintaining such patents, and may choose
from time to time to let various patents lapse, terminate or be sold.
Employees
As of March 31,
2012, we had 27 employees, including 4 in manufacturing, 7 in engineering, 10 in sales and marketing, and 6 in
general and administrative. All of our employees were full-time employees, located primarily in our Worcester, Massachusetts
fabrication facility. None of our employees are represented by a labor union. We have experienced no work
stoppages, and management believes our employee relationships are generally good.
Facilities
Our principal executive offices
are located at 10 New Bond Street, Worcester, Massachusetts 01606, where we lease approximately 48,000 square feet of space from
an unaffiliated third party. In the event we require further space, we believe that we can find appropriate facilities
in the same geographic area at lease rates comparable to those we currently pay. We do not own any real property.
Environmental
Our operations involve
the use, generation and disposal of hazardous substances and are regulated under federal, state, and local laws governing health
and safety and the environment. Our compliance costs were less than $100,000 in the years ended December 31, 2011 and
2010, and less than $50,000 for the three month period ended March 31, 2012. We believe that our products and operations
at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however,
the risk of environmental liabilities cannot be completely eliminated.
Legal Proceedings
From time to time, we may
become subject to various legal proceedings that are incidental to the ordinary conduct of our business. We are not currently party
to any material legal proceedings.
Government Regulations
We are subject to federal,
state and local laws and regulations relating to the generation, handling, treatment, storage and disposal of certain toxic or
hazardous materials and waste products that we use or generate in our operations. We regularly assess our compliance
with environmental laws and management of environmental matters. We believe that our products and operations at our
facilities comply in all material respects with applicable environmental laws.
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following
discussion and analysis in conjunction with our consolidated financial statements and the related notes for the year ended December
31, 2011 and for the three month period ended March 31, 2012, which are included in this prospectus. This discussion
and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Actual results
may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but
not limited to, those set forth under "Risk Factors," "Special Cautionary Note Regarding Forward-Looking Statements" and elsewhere
in this prospectus.
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 emissions while capturing carbon dioxide as a liquid for ready sequestration
far more economically than any other competing technology.
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 net losses of $17.4 million and $14.9 million (as revised) for the years ended December
31, 2011 and 2010, respectively. Cash outflows from operations totaled $1.5 million for the three-month period
ended March 31, 2012 and $6.1 million and $5.6 million and for the years ended December 31, 2011 and 2010,
respectively. As a result, we will require additional capital to continue to fund our operations.
Research and Development
We own or license all of
the Technologies that we use in our business.
We conduct research and
development of water/wastewater treatment products and services in a number of areas including testing various waste streams for
potential clients and other third parties, Chemcad and Aspen modeling for the pressurized oxycombustion process, centrate testing
related to our New York project and Ammonia Recovery Process (“ARP”) flow modifications.
Critical Accounting Policies
and Estimates
We have identified the policies
and estimates below as critical to our current and future business operations and the understanding of our results of operations.
These policies and estimates are considered "critical" because they either had a material impact or they have the potential to
have a material impact on our financial statements, and because they require significant judgments, assumptions or estimates. The
preparation of our consolidated financial statements requires us to make estimates and judgments that affect both the results of
operations as well as the carrying values of our assets and liabilities. Some of our accounting policies require us to make difficult
and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We base estimates
on historical experience and/or on various other assumptions that we believe to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities as of the date of the financial
statements that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions
or conditions, making it possible that a change in these estimates could occur in the near term. Set forth below is a summary of
our most critical accounting policies.
Principles of consolidation
and basis of presentation
The consolidated financial
statements include the accounts of ThermoEnergy and our subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America 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 15% third party ownership
interest in TEPS is recorded as a noncontrolling interest in the consolidated financial statements. As of December 31, 2011,
the noncontrolling interest in TEPS was immaterial to the consolidated financial statements taken as a whole.
Revenue recognition
We recognize 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.
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. We record separately revenues, costs and gross profit related to
each of these services if they meet the contract segmenting criteria in ASC 605-35. This policy may result in different interim
rates of profitability for each segment than if we 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.
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.
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. We evaluate 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.
Contingencies
We accrue 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 payroll tax and other accrued expenses are reflected
in income in the period in which different facts or information become known or circumstances change that affect our previous assumptions
with respect to the likelihood or amount of loss. Amounts paid upon the ultimate resolution of contingent 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
We account for stock
options in accordance with Accounting Standards Codification (“ASC”) Topic 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 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. We use the
Black-Scholes option pricing model to estimate the fair value of “plain vanilla” stock option awards.
Income taxes
We use the liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial
reporting and tax basis of assets and liabilities and are measured using enacted rates and laws that will be in effect when the
deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance for deferred tax assets is provided
if it is more likely than not that all or a portion of the deferred tax assets will not be realized. We recognize interest and
penalties related to underpayments of income taxes as a component of interest and other expenses on our Consolidated Statements
of Operations.
We estimate contingent income tax liabilities
based on the guidance for accounting for uncertain tax positions as prescribed in ASC Topic 740, “Income Taxes.” We
use a two-step process to assess each income tax position. We first determine whether it is more likely than not that the
income tax position will be sustained, based on technical merits, upon examination by the taxing authorities. If the income
tax position is expected to meet the more likely than not criteria, we then record the benefit in the financial statements that
equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement.
We are subject to taxation in the U.S.
and various states. As of December 31, 2011 our tax years for 2008, 2009 and 2010 are subject to examination by the tax authorities.
With few exceptions, as of December 31, 2011, we are no longer subject to U.S. federal, state or local examinations by tax authorities
for years before 2008. Tax year 2007 was open as of December 31, 2009.
Series B Convertible Preferred
Stock
We determine the initial
value of the Series B Convertible Preferred Stock and investor warrants using valuation models we consider to be appropriate. Because
the Series B Convertible Preferred Stock has an indefinite life, it is classified within the stockholders’ deficiency section
of our consolidated balance sheets. The value of the warrants and beneficial conversion features are considered a “deemed
dividend” and are added as a component of net loss attributable to common stockholders on our consolidated statements of
operations.
Recent Accounting Pronouncement
s
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
adoption of the provisions of ASU 2011-04 did not have a material impact on our financial statements or disclosures.
Restatement of Financial Statements
In connection with the preparation
and audit of our consolidated financial statements as of, and for the year ended, December 31, 2011, we reviewed the accounting
treatment of our debt and equity transactions during such year. During this review we uncovered errors that impacted our previously
issued unaudited 2011 interim consolidated financial statements for the quarterly periods ended March 31, 2011, June 30, 2011
and September 30, 2011 (collectively, the “2011 Interim Consolidated Financial Statements”).
We have concluded that we incorrectly
accounted for a series of related transactions effected pursuant to certain Note Amendment and Forbearance Agreements, effective
as of January 4, 2011 (the “Note Amendment and Forbearance Agreements”), with the holders of our Convertible Promissory
Notes due May 31, 2010 (the “Old Notes”), including the partial repayment of the Old Notes, the conversion of a portion
of the Old Notes into shares of our Series B Convertible Preferred Stock, the issuance to the holders of the Old Notes of warrants
for the purchase of shares of our Common Stock and the issuance to the holders of the Old Notes, upon cancellation of the Old
Notes, of Amended and Restated Promissory Notes due February 29, 2012 (the “Restated Notes”) by treating such transactions
as debt modifications rather than debt extinguishment. Our management also concluded that, due to deficiencies in the methodology
we had used to calculate our derivative warrant liabilities, we had overstated the quarterly valuation of such liabilities.
Upon discovering these errors, we re-examined
our accounting for similar transactions and the calculation of our derivative warrant liabilities in prior years and, although
similar errors occurred in accounting for certain transactions in prior periods, the effect of such errors were not material.
In our Annual Report on Form
10-K as of and for the year ended December 31, 2011, we restated in Item 8, “Financial Statements and Supplementary
Data,” our consolidated balance sheets and consolidated statements of operations for the first three quarters of 2011.
This restatement is more fully described in Note 3, “Restatement and Condensed Quarterly Financial Information
(Unaudited)” to our audited consolidated financial statements for the year ended December 31, 2011. We do not intend to
restate separately our Quarterly Reports on Form 10-Q for the first three quarters of 2011. The financial statements included
in such reports should not be relied on.
None of the errors related to our cash
position, revenues or loss from operations for any of the periods in which such errors occurred. The net effect of these errors
is (i) a $4.7 million understatement of our net loss to common stockholders in the quarter ended March 31, 2011, (ii) a $1.5 million
overstatement of our net loss to common stockholders in the quarter ended June 30, 2011 and (iii) a $3.9 million overstatement
of our net loss to common stockholders in the quarter ended September 30, 2011. The net effect is that our net loss to common
stockholders for the nine-month period ended September 30, 2011 was overstated by approximately $0.7 million.
Results of Operations
Comparison of Years Ended December
31, 2011 and 2010 (as revised)
Revenues for 2011 were $5,583,000 compared
to $2,874,000 in 2010. In 2010, we substantially completed production on two large industrial contracts in the first half of 2010
and started engineering and design work on our $27.9 million contract with NYCDEP in the third quarter of 2010. In
2011, we completed engineering and design work on our NYCDEP contract and started system construction activities, which resulted
in significantly higher revenues from the NYCDEP contract in 2011 compared to 2010. This contract, along with other new contracts,
is expected to generate further increases in revenues in 2012.
Gross profit increased to $404,000
or 7.2% of revenues in 2011 compared to gross profit of $75,000 or 2.6% in 2010. The increase is mainly due to higher gross margins
realized on the NYCDEP contract in 2011 as we completed engineering and design work and shifted toward higher margin system construction
activities in the third quarter of 2011.
General and administrative expenses
totaled $4,807,000 in 2011, a decrease of $993,000 compared to 2010. The decrease is attributable to lower non-cash
stock option expense in 2011 as certain tranches of stock options for our executive officers vested ratably at the end of 2010
and ended in early 2011.
Engineering, research and development
expenses totaled $299,000 in 2011, a decrease of $344,000 compared to 2010. Our engineering group was fully utilized in the
first three quarters of 2011 performing design and system fabrication work related to our NYCDEP contract. Our engineering group
was not fully utilized until the third quarter of 2010. As a result, we charged $679,000 of engineering costs to costs of revenues
in 2011 compared to $324,000 in 2010.
Selling expenses totaled $2,448,000
in 2011, an increase of $1,167,000 compared to 2010. The increase is due to increased sales headcount in 2011, as we focused on
building our sales force to generate new business, as well as increased marketing and business development activity in 2011, as
we began to market our product offerings in Europe and Asia.
Because of our various financing transactions,
including the amendment of existing debt issuances and the extinguishment of convertible debt in 2011 and 2010, we recognized
losses on the extinguishment of debt of $12,551,000 and $5,620,000 in 2011 and 2010, respectively. Losses recognized in 2011 relate
to the restructuring of our CASTion Notes and our 2010 Bridge Notes in the first quarter of 2011 and the extinguishment of these
issuances in the third quarter of 2011; losses in 2010 relate primarily to the writeoff of unamortized debt discounts for beneficial
conversion features and warrants issued with the various debt issuances.
We did not incur any warrant-related
expenses in 2011. Warrant totaling $107,000 expense in 2010 related to the issuance of warrants to our investment advisor in partial
consideration for its services in connection with our private placement of shares of our Series B Convertible Preferred Stock
in August 2010.
In 2011, we recorded income of $3,936,000
related to the net change in fair value on our derivative instruments. We recorded an expense on these derivative instruments
totaling $293,000 in 2010.
We did not recognize any additional
gains on payroll tax settlement in 2011 as a result of the IRS accepting our Offer in Compromise in March 2011. We recorded a
gain on payroll tax settlement of approximately $2.3 million in 2010 related to this Offer in Compromise.
In 2011, we recorded losses in our
joint venture with Babcock Power, Inc. totaling $389,000, an increase of $315,000 compared to 2010. The joint venture performed
significant development work related to our pressurized oxycombustion technology in 2011; losses in 2010 related primarily to
start-up related costs.
Interest and other expense in 2011
totaled $1,232,000 in 2011, a decrease of approximately $2.1 million compared to 2010. This decrease is due to reduced amortization
of debt discount in 2011 and our repaying and converting all of our secured debt by August 2011.
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
Cash and cash flow data for
the periods presented were as follows (in thousands of dollars):
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Year Ended December 31,
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Three Months
Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(as restated)
|
|
Cash
|
|
$
|
3,056
|
|
|
$
|
4,299
|
|
|
$
|
1,933
|
|
|
$
|
1,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in
operating activities
|
|
|
(6,101
|
)
|
|
|
(5,628
|
)
|
|
|
(1,527
|
)
|
|
|
(1,128
|
)
|
Net cash used in
investing activities
|
|
|
(535
|
)
|
|
|
(432
|
)
|
|
|
(94
|
)
|
|
|
(195
|
)
|
Net cash provided
by (used in) financing activities
|
|
|
5,393
|
|
|
|
9,250
|
|
|
|
498
|
|
|
|
(1,199
|
)
|
Over the past year, we have continued
to make significant progress in resolving our past legal and financial issues, strengthening our balance sheet and building our
business for future growth. In the past year, we have:
|
•
|
Raised $8.2 million in additional funding in 2011;
|
|
•
|
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.
|
However, 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 industrial partners. During 2011 and 2010, we 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. Although we will require substantial additional funding to continue existing operations, we believe
that we will be able to obtain additional equity or debt financing on reasonable terms; however, there is no certainty that we
will be able to do so.
Cash used in operations amounted to
$6,101,000 and $5,628,000 for the years ended December 31, 2011 and 2010, respectively. The increase in cash used in operations
in 2011 is primarily due to higher operating expenses attributed to building our sales and marketing functions throughout 2011.
Cash used in investing activities included purchases of property and equipment of $135,000 for the year ended December 31, 2011
and investments in our joint venture with Babcock Power (subsequently dissolved) of $400,000 and $61,000 for the years ended December
31, 2011 and 2010, respectively.
At March 31, 2012, we did not have sufficient working capital to satisfy our
anticipated operating expenses for the next 12 months. As of March 31, 2012, the Company had a cash balance of approximately
$1.9 million and current liabilities of approximately $10.5 million, which consisted of
accounts payable of approximately $1.3 million, short-term convertible debt of approximately $2.9 million, billings in excess
of costs of approximately $4 million, derivative liabilities of $552,000 and other current
liabilities of approximately $1.7 million.
The following financing
transactions describe our sources of funding for 2010, 2011 and 2012 to date:
On March 10, 2010, we entered into a Bridge Loan
Agreement (the “2010 Bridge Loan Agreement”), effective as of March 1, 2010, with six of our principal investors (The
Quercus Trust, Robert S. Trump, Focus Fund, L.P., Empire Capital Partners, LP, Empire Capital Partners, Ltd, and Empire Capital
Partners Enhanced Master Fund Ltd) (collectively, the “Investors”) pursuant to which the Investors agreed to make bridge
loans to us in the following amounts:
Lender
|
|
Commitment
|
|
The Quercus Trust
|
|
$
|
1,200,000
|
|
Robert S. Trump
|
|
$
|
600,000
|
|
Focus Fund L.P.
|
|
$
|
200,000
|
|
Empire Capital Partners, LP
|
|
$
|
233,333
|
|
Empire Capital Partners, Ltd
|
|
$
|
233,333
|
|
Empire Capital Partners Enhanced Master Fund Ltd
|
|
$
|
233,333
|
|
We issued 3% Secured Convertible
Promissory Notes in the principal amount of each Investor’s funding commitment (the “2010 Bridge Notes”). The
2010 Bridge Notes bore interest at the rate of 3% per annum and were originally due and payable on February 28, 2011. The
entire unpaid principal amount, together with all interest then accrued and unpaid under each 2010 Bridge Note, was convertible,
at the election of the holder, into shares of our Common Stock at a conversion price of $0.24 per share. The 2010 Bridge
Notes were secured by a lien on all of our assets except for the shares of our subsidiary, CASTion Corporation.
On June 30, 2010 we amended the 2010 Bridge Loan
Agreement to provide for $2 million of additional funding from the following investors:
Lender
|
|
Commitment
|
|
The Quercus Trust
|
|
$
|
980,000
|
|
Robert S. Trump
|
|
$
|
620,000
|
|
Empire Capital Partners, LP
|
|
$
|
133,333
|
|
Empire Capital Partners, Ltd
|
|
$
|
133,333
|
|
Empire Capital Partners Enhanced Master Fund Ltd
|
|
$
|
133,334
|
|
The new loans made under
the amended 2010 Bridge Loan Agreement were on terms identical to the original loans under the 2010 Bridge Loan Agreement. We received
$4.6 million in proceeds under the Bridge Loan Agreement.
On July 8, 2010, upon our
receipt of an Order to Commence under our contract with the New York City Department of Environmental Protection which triggered
a purchase obligation on the part of the Investors under the Securities Purchase Agreement dated as of November 19, 2009 between
us and the Investors, the Investors surrendered an aggregate of $1.9 million of principal and accrued interest under the 2010 Bridge
Notes as payment for an aggregate of 791,668 shares of Series B Convertible Preferred Stock and warrants to purchase approximately
8.3 million shares of stock at $0.24 per share.
On February 25, 2011 we entered
into Note Extension and Amendment Agreements with the Investors holding our 2010 Bridge Notes, further amending the terms of the
remaining balance of the 2010 Bridge Notes. As amended, the 2010 Bridge Notes bore interest at the rate of
10% per annum with a maturity date of February 29, 2012. The 2010 Bridge Notes were convertible into shares of our Series
B Convertible Preferred Stock at the rate of $2.40 per share at any time at the election of the holders. Pursuant to
the Note Extension and Amendment Agreements, on August 11, 2011 following the retirement of certain notes issued
to former stockholders in our subsidiary, CASTion Corporation, (the “CASTion Notes”) the entire outstanding balance
of principal and interest due under the 2010 Bridge Notes ($2,932,107.65 in the aggregate) was converted into shares of our Series
B Convertible Preferred Stock at the rate of $2.40 per share.
On July 1, 2011 we repaid
50% of the balance of the CASTion Notes and, in accordance with the terms of the CASTion Notes, the remaining balance automatically
converted into shares of our Series B Convertible Preferred Stock at the rate of $2.40 per share. On August 11, 2011
we elected to convert the balance of the 2010 Bridge Notes into shares of our Series B Convertible Preferred Stock at the rate
of $2.40 per share.
On August 9, 2010, we entered
into a Securities Purchase Agreement with the following investors, all of which are affiliates of Security Investors, LLC and which
are the selling stockholders in the offering to which this Prospectus relates: Security Equity Fund, Mid Cap Value Fund; SBL
Fund, Series V (Mid Cap Value); Security Equity Fund, Mid Cap Value Institutional Fund; SBL Fund, Series
Q (Small Cap Value); and Security Equity Fund, Small Cap Value Fund (collectively, the “Security Investors”). Pursuant
to the Securities Purchase Agreement, we issued to the Security Investors an aggregate of 2,083,334 shares of our Series B Convertible
Preferred Stock at a purchase price of $2.40 per share and Common Stock Purchase Warrants (the “Warrants”) entitling
the holders to purchase up to an aggregate of 33,333,344 shares of our Common Stock, at an exercise price of $0.30 per share, as
follows:
Investor
|
|
Purchase Price
|
|
Series B Shares
|
|
Warrant Shares
|
Security Equity Fund, Mid Cap Value Fund
|
|
$
|
2,060,001.60
|
|
858,334 shares
|
|
13,733,344 shares
|
SBL Fund, Series V (Mid Cap Value)
|
|
$
|
739,999.20
|
|
308,333 shares
|
|
4,933,328 shares
|
Security Equity Fund, Mid Cap Value Institutional Fund
|
|
$
|
1,905,000.00
|
|
793,750 shares
|
|
12,700,000 shares
|
SBL Fund, Series Q (Small Cap Value)
|
|
$
|
280,000.80
|
|
116,667 shares
|
|
1,866,672 shares
|
Security Equity Fund, Small Cap Value Fund
|
|
$
|
15,000.00
|
|
6,250 shares
|
|
100,000 shares
|
Total
|
|
$
|
5,000,001.60
|
|
2,083,334 shares
|
|
33,333,344 shares
|
On January 7, 2011 we entered into Note Amendment
and Forbearance Agreements (the “Agreements”) with the following holders of the CASTion Notes which had come due on
May 31, 2010 but remained outstanding: Spencer Trask Specialty Group LLC; Massachusetts Technology Development Corporation; BCLF
Ventures I, LLC; Essex Regional Retirement Board; and BancBoston Ventures Inc. Pursuant to the Agreements, (i) we made an
aggregate of $1,144,336 in payments against the outstanding balances of the CASTion Notes; (ii) the Noteholders converted an aggregate
of $902,710 in principal and accrued interest under the CASTion Notes into shares of our Series B Convertible Preferred Stock at
a conversion price of $2.40 per share; (iii) we issued to the Noteholders restated promissory notes (the “Restated CASTion
Notes”) for an aggregate of $11,300,309 representing the remaining balance due under the CASTion Notes, (iv) we issued to
the Noteholders warrants for the purchase of an aggregate of 17,585,127 shares of our Common Stock at an exercise price of $0.40
per share and an aggregate of 6,018,065 shares of our Common Stock at an exercise price of $0.30 per share; and (v) the Noteholders
agreed to forbear until February 29, 2012 from exercising their rights and remedies under the Restated CASTion Notes.
The original principal amount
of each CASTion Noteholder’s Restated CASTion Note, the number of shares of our Series B Convertible Preferred Stock issued
to each CASTion Noteholder, and the number of shares of our Common Stock issuable upon exercise of the Warrants issued to each
are as follows:
Investor
|
|
Restated Note
|
|
Series B Shares
|
|
$0.30 Warrant Shares
|
|
$0.40 Warrant Shares
|
|
BancBoston Ventures Inc.
|
|
$
|
28,839.73
|
|
3,469 shares
|
|
55,502 shares
|
|
152,710 shares
|
|
BCLF Ventures I, LLC
|
|
$
|
476,989.34
|
|
57,372 shares
|
|
917,957 shares
|
|
2,525,718 shares
|
|
Essex Regional Retirement Board
|
|
$
|
14,420.34
|
|
1,743 shares
|
|
27,752 shares
|
|
76,357 shares
|
|
Massachusetts Technology Development Corporation
|
|
$
|
874,791.74
|
|
105,220 shares
|
|
1,683,521 shares
|
|
4,632,132 shares
|
|
Spencer Trask Specialty Group, LLC
|
|
$
|
2,032,067.98
|
|
208,333 shares
|
|
3,333,333 shares
|
|
10,198,210 shares
|
|
Prior to the Agreements and
the issuance of the Restated CASTion Notes, we had been in default of our obligations under the original CASTion Notes since January
2008 as a result of our failure to apply to payment of the CASTion Notes a portion of the proceeds from our equity and convertible
debt financings, as required by the CASTion Notes. Further, our failure to pay the entire outstanding balance of principal
and interest due of the CASTion Notes at maturity (May 31, 2010) constituted a separate event of default under the CASTion Notes. As
part of the Agreements in January 2011, the holders of the CASTion Notes waived these defaults.
The Restated CASTion Notes
bore interest at the rate of 10% per annum (with penalty interest at the rate of 18% per annum following maturity or an event of
default). Installment payments (based on a 10-year amortization schedule) were due on the last day of each month beginning
January 31, 2011 and continuing through February 29, 2012, at which time the entire unpaid principal amount of, and accrued interest
on, the Restated Notes would be due and payable. The Restated CASTion Notes were convertible, in whole or in part, at
any time at the election of the Noteholders, into shares of our Series B Convertible Preferred Stock at the rate of $2.40 per share. The
Agreements and the Restated CASTion Notes provided that, in the event we made any payments of principal or accrued interest on
the Restated CASTion Notes on or before July 5, 2011, then simultaneously with the making of each such payment a portion of the
remaining principal and accrued and unpaid interest on the Restated Notes in an amount equal to the amount of such payment would
automatically convert into shares of our Series B Convertible Preferred Stock at the rate of $2.40 per share.
On the last business day
of each month from January 31, 2011 through and including May 31, 2011, we made payments of principal and interest on the CASTion
Notes in the aggregate amount of $45,290 (totaling $226,448 over the course of the 5-month period). Simultaneously with each payment,
an additional aggregate amount of $45,283 (totaling $226,416 over the course of the 5-month period) of principal and accrued interest
on the CASTion Notes was converted into shares of our Series B Convertible Preferred Stock at the rate of $2.40 per share.
On July 1, 2011 we made payments
totaling $1,568,267 to the holders of the Restated CASTion Notes, which represented 50% of the outstanding principal and accrued
interest balance. In accordance with the terms of the Restated CASTion Notes, the remaining balance of the CASTion Notes
automatically converted into shares of our Series B Convertible Preferred Stock.
On June 17, 2011, we entered
into a Bridge Loan and Warrant Amendment Agreement (the “2011 Bridge and Warrant Agreement”) with Robert S. Trump;
Focus Fund L.P.; Hughes Capital; Scott A. Fine; Peter J. Richards, Empire Capital Partners, LP; Empire Capital Partners, Ltd; and
Empire Capital Partners Enhanced Master Fund, Ltd (collectively, the “Bridge Investors”), who held warrants for the
purchase, in the aggregate, of 22,379,232 shares of our Common Stock (collectively, the “Warrants”).
Pursuant to the 2011 Bridge
and Warrant Agreement, the Bridge Investors made loans to us in the respective principal amounts set forth below opposite the name
of each Bridge Investor, against our issuance to each Bridge Investor of our Promissory Note (collectively, the “2011 Bridge
Notes”) in such amount:
Noteholder
|
|
Principal Amount
of Note
|
|
Robert S. Trump
|
|
$
|
1,522,443.00
|
|
Focus Fund L.P.
|
|
$
|
390,000.00
|
|
Hughes Capital
|
|
$
|
20,000.00
|
|
Scott A. Fine
|
|
$
|
65,000.00
|
|
Peter J. Richards
|
|
$
|
65,000.00
|
|
Empire Capital Partners, LP
|
|
$
|
285,728.69
|
|
Empire Capital Partners, Ltd
|
|
$
|
284,584.43
|
|
Empire Capital Partners Enhanced Master Fund, Ltd
|
|
$
|
276,543.54
|
|
Pursuant to the 2011 Bridge
and Warrant Agreement, we agreed, subject to the satisfaction of certain conditions, to amend the Warrants (i) to provide that
they would be exercisable for the purchase of shares of our Series B Convertible Preferred Stock (the “Series B Stock”)
instead of Common Stock (with the number of shares of the Series B Stock determined by dividing by ten (10) the number of shares
of Common Stock for which the Warrants were previously exercisable) and (ii) to change the exercise prices of all Warrants (which
ranged from $0.30 to $1.82 per share of Common Stock) to $1.30 per share of Series B Stock (the equivalent of $0.13 per share of
Common Stock). The Bridge Investors agreed, subject to the satisfaction of certain conditions, to exercise all of the
Warrants. The principal amount of the 2011 Bridge Notes was equal to the aggregate exercise price of the Warrants (after
they were amended as described above).
The 2011 Bridge Notes were
payable on demand at any time on or after February 29, 2012 (the “Maturity Date”). They did not bear interest
until the Maturity Date and would bear interest at the rate of 10% per annum from and after the Maturity Date.
On July 12, 2011, we amended
the 2011 Bridge and Warrant Agreement to provide for the extension to us by Mr. Trump and the Empire Capital funds of additional
bridge loans in the following amounts:
Noteholder
|
|
Principal Amount
of Note
|
|
Robert S. Trump
|
|
$
|
855,422.10
|
|
Empire Capital Partners, LP
|
|
$
|
248,493.70
|
|
Empire Capital Partners, Ltd
|
|
$
|
248,493.70
|
|
Empire Capital Partners Enhanced Master Fund, Ltd
|
|
$
|
248,493.70
|
|
The new loans made under
the amended 2011 Bridge Loan Agreement were made on terms identical to the original loans under the 2011 Bridge Loan Agreement.
On August 11, 2011, upon
satisfaction of all of the conditions set forth in the 2011 Bridge and Warrant Agreement, the Bridge Investors exercised all
of the Warrants in accordance with the 2011 Bridge and Warrant Agreement and surrendered all of the 2011 Bridge Notes in payment
of the exercise price for the purchase under the Warrants of an aggregate of 3,469,387 shares of our Series B Convertible Preferred
Stock at a price of $1.30 per share.
On December
30, 2011,
we entered into Warrant Amendment Agreements (the “Agreements”) with 21 individuals
and entities who acquired warrants from five funds affiliated with Security Investors, LLC for the purchase of an aggregate of
27.7 million shares of our Common Stock (collectively, the “Warrants”). 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 $2,436,000, net of issuance costs, from the exercise of the Warrants.
On January
10, 2012,
we entered into additional Warrant Amendment Agreements (the “Agreements”) with
6 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.
During the period from
January 1, 2011 through January 10, 2012, pursuant to the financing transactions described above, we raised an aggregate of $7,452,057
in equity. During such period, an aggregate of $6,295,045 of debt (over and above bridge loans reflected in the $7,452,057 of
equity financing) was converted into shares of our Series B Convertible Preferred Stock at the rate of $2.40 per share and we
repaid in cash an additional aggregate amount of $2,939,051 of outstanding debt.
As of March 31, 2012,
we had outstanding convertible debt of approximately $3,127,000 (exclusive of debt discounts). Of this
amount, debt totaling $1,877,000 is convertible into shares of our Common Stock at the rate of $0.50 per share.
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.
Off-Balance Sheet Arrangements
We do not use off-balance-sheet
arrangements with unconsolidated entities or related parties, nor do we use other forms of off-balance-sheet arrangements such
as special purpose entities and research and development arrangements. Accordingly, we are not exposed to any financing or other
risks that could arise if we had such relationships.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS, DIRECTORS
AND EXECUTIVE OFFICERS OF THERMOENERGY
Common Stock
The following table sets forth certain
information as of June 5, 2012 with respect to beneficial ownership of our Common Stock by each shareholder known by the Company
to be the beneficial owner of more than 5% of our Common Stock and by each of our directors and executive officers and by all
of the directors, nominees for election as director, and executive officers as a group.
|
|
Amount and Nature
|
|
|
|
|
|
|
of Beneficial
|
|
|
Percent of
|
|
Beneficial Owners
|
|
Ownership
(1)
|
|
|
Class
(2)
|
|
|
|
|
|
|
|
|
|
|
Directors and Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dileep Agnihotri
|
|
|
|
|
|
|
|
|
2324 Ridgepoint Dr., Suite G
|
|
|
|
|
|
|
|
|
Austin, Texas 78754
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Joseph P. Bartlett
|
|
|
|
|
|
|
|
|
1900 Avenue of the Stars, 20
th
Floor
|
|
|
|
|
|
|
|
|
Los Angeles, California 90067
|
|
|
30,000
|
(3)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Cary G. Bullock
|
|
|
|
|
|
|
|
|
10 New Bond Street
|
|
|
|
|
|
|
|
|
Worcester, Massachusetts 01606
|
|
|
5,099,623
|
(3)
|
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
J. Winder Hughes III
|
|
|
|
|
|
|
|
|
PO Box 389
|
|
|
|
|
|
|
|
|
Ponte Vedra, Florida 32004
|
|
|
11,905,842
|
(4)
|
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
|
Shawn R. Hughes
|
|
|
|
|
|
|
|
|
717 South Edison Avenue
|
|
|
|
|
|
|
|
|
Tampa, Florida 33606
|
|
|
982,500
|
(5)
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
Teodor Klowan, Jr.
|
|
|
|
|
|
|
|
|
10 New Bond Street
|
|
|
|
|
|
|
|
|
Worcester, Massachusetts 01606
|
|
|
2,804,796
|
(3)
|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
Arthur S. Reynolds
|
|
|
|
|
|
|
|
|
230 Park Avenue, Suite 1000
|
|
|
|
|
|
|
|
|
New York, New York 10169
|
|
|
781,103
|
(6)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All executive officers and directors as a group
(7 persons)
|
|
|
21,603,864
|
(7)
|
|
|
19.8
|
%
|
|
|
|
|
|
|
|
|
|
Other 5% Beneficial Owners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Gelbaum and Monica Chavez Gelbaum
|
|
|
|
|
|
|
|
|
Quercus Trust
|
|
|
|
|
|
|
|
|
1835 Newport Blvd.
|
|
|
|
|
|
|
|
|
A109-PMC 467
|
|
|
|
|
|
|
|
|
Costa Mesa, California 92627
|
|
|
61,139,857
|
(9)
|
|
|
42.2
|
%
|
|
|
|
|
|
|
|
|
|
Security Investors, LLC
|
|
|
|
|
|
|
|
|
One Security Benefit Place
|
|
|
|
|
|
|
|
|
Topeka, Kansas 66636
|
|
|
24,441,140
|
(9)
|
|
|
21.8
|
%
|
|
|
|
|
|
|
|
|
|
Robert S. Trump
|
|
|
|
|
|
|
|
|
89 10th Street
|
|
|
|
|
|
|
|
|
Garden City, New York 11530
|
|
|
39,511,798
|
(10)
|
|
|
32.1
|
%
|
|
|
|
|
|
|
|
|
|
Elise C. Roenigk
PO Box 230
Eureka Springs, Arkansas 72632
|
|
|
5,954,022
|
(11)
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
The Focus Fund
|
|
|
|
|
|
|
|
|
PO Box 389
|
|
|
|
|
|
|
|
|
Ponte Vedra, Florida 32004
|
|
|
11,595,838
|
(12)
|
|
|
11.7
|
%
|
|
|
|
|
|
|
|
|
|
Empire Capital Management and Affiliates
|
|
|
|
|
|
|
|
|
One Gorham Island, Suite 201
|
|
|
|
|
|
|
|
|
Westport, Connecticut 06880
|
|
|
26,202,181
|
(13)
|
|
|
4.99
|
%
(13)
|
|
|
|
|
|
|
|
|
|
Kevin B. Kimberlin
c/o Spencer Trask
|
|
|
|
|
|
|
|
|
535 Madison Avenue
|
|
|
|
|
|
|
|
|
New York, NY 10022
|
|
|
28,875,225
|
(14)
|
|
|
24.5
|
%
|
|
|
|
|
|
|
|
|
|
Massachusetts Technology Development Corp.
|
|
|
|
|
|
|
|
|
40 Broad St. Suite 230
|
|
|
|
|
|
|
|
|
Boston, MA 02109
|
|
|
14,908,23
|
(15)
|
|
|
14.2
|
%
|
|
|
|
|
|
|
|
|
|
BCLF Ventures I, LLC
|
|
|
|
|
|
|
|
|
56 Warren St.
|
|
|
|
|
|
|
|
|
Boston, MA 02119
|
|
|
8,403,041
|
(16)
|
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
|
Francis Howard
|
|
|
|
|
|
|
|
|
376 Victoria Place
|
|
|
|
|
|
|
|
|
London, United Kingdom SW1V 1AA
|
|
|
6,000,000
|
(17)
|
|
|
6.6
|
%
|
* Less than 1%.
|
(1)
|
Includes shares as to
which the identified person or entity directly or
indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares voting power and/or
investment power, as these terms are defined in Rule 13d-3(a)
of the Exchange Act. Shares of Common
Stock underlying options to purchase shares of Common Stock
and securities convertible into shares of Common Stock,
which were exercisable or convertible on, or become exercisable
or convertible within 60 days after, June 5, 2012 are
deemed to be outstanding with respect to a person or entity
for the purpose of computing the outstanding shares of
Common Stock owned by the particular person and by the
group, but are not deemed outstanding for any other purpose.
|
|
(2)
|
Based
on 91,219,622 shares of Common Stock
issued and outstanding on June 5,
2012 plus, with respect to each individual
or entity (but not with respect to other
individuals or entities), the number
of shares of Common Stock underlying
options to purchase shares of Common
Stock and securities convertible into
shares of Common Stock, held by such
individual or entity which were exercisable
or convertible on, or which become exercisable
or convertible within 60 days after, June 5,
2012.
|
|
(3)
|
All
shares are issuable upon exercise of
options.
|
|
(4)
|
Includes 3,357,500 shares
owned by The Focus Fund. Also includes 8,238,338 shares
issuable to The Focus Fund and 250,004 shares issuable
to Hughes Capital upon the exercise of warrants or conversion
of shares of Series B Convertible Preferred Stock.
Mr. Hughes is the Managing Director of both funds and may
be deemed to be the beneficial owner of the securities
held by such funds; he disclaims beneficial ownership of
such securities except to the extent of his pecuniary interest
therein. Also includes 60,000 shares issuable
upon exercise of options.
|
|
(5)
|
Includes 880,000 shares
issuable upon exercise of options and warrants.
|
|
(6)
|
Includes 600,000 shares
issuable upon exercise of options and warrants. Also
includes 181,103 shares issuable upon the exercise of warrants
held by Christine Reynolds, Mr. Reynolds’s wife. Mr.
Reynolds disclaims beneficial ownership of the shares issuable
to Mrs. Reynolds.
|
|
(7)
|
Includes shares issuable
upon exercise of options and warrants and conversion of
shares of Series B Convertible Preferred Stock, as detailed
in notes (3) through (6) above.
|
|
(8)
|
This beneficial ownership
information is based, in part, on
information contained in Amendment No. 8 to the Statement
on Schedule 13D filed by The Quercus Trust and Mr. and
Mrs. Gelbaum as its trustees on August 13, 2010. Includes
23,987,090 shares issuable upon conversion of shares of
Series B Convertible Preferred Stock, 29,761,423 shares
issuable upon the exercise of warrants, and 30,000 shares
issuable upon exercise of options.
|
|
(9)
|
This beneficial ownership
information is based, in part, on information contained
in Amendment No. 3 to the Statement on Schedule 13G
filed by Security Investors, LLC on September 10, 2010. Includes
20,833,340 shares issuable upon conversion of shares of
Series B Convertible Preferred Stock. Security Investors,
LLC is the investment adviser to the following funds (the
“Funds”): (i) Security Equity Fund, Mid Cap
Value Fund, (ii) SBL Fund Series V (Mid Cap Value), (iii)
Security Equity Fund, Mid Cap Value Institutional Fund,
(iv) SBL Fund, Series Q (Small Cap Value) and (v) Security
Equity Fund, Small Cap Value Fund. Each of the
Funds is an investment company registered under the Investment
Company Act of 1940, as amended. The securities
owned by each Fund are as follows:
|
|
|
|
|
|
Shares of Common Stock
|
|
|
|
|
|
|
Issuable upon Conversion of
|
|
|
|
Shares of
|
|
|
Shares of Series B
|
|
Fund
|
|
Common Stock
|
|
|
Preferred Stock
|
|
Security Equity Fund, Mid Cap Value Fund
|
|
|
2,701,839
|
|
|
|
8,583,340
|
|
SBL Fund, Series V (Mid Cap Value)
|
|
|
905,961
|
|
|
|
3,083,330
|
|
Security Equity Fund, Mid Cap Value Institutional Fund
|
|
|
-
|
|
|
|
7,937,500
|
|
SBL Fund, Series Q (Small Cap Value)
|
|
|
-
|
|
|
|
1,166,670
|
|
Security Equity Fund, Small Cap Value Fund
|
|
|
-
|
|
|
|
62,500
|
|
As investment adviser to
the Funds, Security Investors, LLC may be deemed to be the beneficial owner of such securities.
|
(10)
|
Includes 31,773,770 shares issuable upon conversion
of shares of Series B Convertible Preferred Stock.
|
|
(11)
|
Includes 30,000 shares issuable the exercise of
options, 1,500,000 shares issuable upon the exercise
of warrants, and 3,754,433 shares issuable upon conversion
of convertible debt.
|
|
(12)
|
Includes 6,093,840 shares issuable upon conversion
of shares of Series B Convertible Preferred Stock and
2,144,498 shares issuable upon the exercise of warrants.
|
|
(13)
|
This beneficial ownership information is based,
in part, on information contained in Amendment No.
6 to the Statement on Schedule 13G filed by the group
consisting of Empire Capital Management LLC and its affiliates
on February 14, 2012. Includes 23,198,610
shares issuable upon conversion of outstanding
shares of Series B Convertible Preferred Stock. The shares
of Series B Convertible Preferred Stock over which Empire
Capital Management and its affiliates have shared voting
and dispositive power (the "Blocker Securities")
are subject to a 4.99% "blocker" provision. The
percentage set forth in the column under the heading
“Percent of Class” gives effect to such blocker;
however, the number of shares of Common Stock set forth
in the column under the heading “Amount and Nature
of Beneficial Ownership” includes all shares that
would be issuable upon full conversion of the Blocker
Securities without giving effect to such blocker.
|
|
(14)
|
Includes 5,517,250 shares issuable upon conversion
of shares of Series B Convertible Preferred Stock and
20,922,108 shares issuable upon the exercise of warrants.
|
|
(15)
|
Includes 3,146,130 shares issuable upon conversion
of shares of Series B Convertible Preferred Stock and
10,754,832 shares issuable upon the exercise of warrants.
|
|
(16)
|
Includes 1,799,670 shares issuable upon conversion
of shares of Series B Convertible Preferred Stock and
6,025,098 shares issuable upon the exercise of warrants.
|
|
(17)
|
This beneficial ownership information is based on
information contained on Schedule 13G filed by Mr. Howard
on March 14, 2012.
|
Series A Convertible Preferred
Stock
As of June 5,
2012, there were 208,334 shares of Series A Convertible Preferred Stock issued and outstanding, all of which were held by Mr.
Gregg Frankel. Shares of Series A Convertible Preferred Stock are convertible into shares of Common Stock on a 1-for-1
basis. The shares of Series A Convertible Preferred Stock held by Mr. Frankel represent a beneficial ownership of less
than 1% of our issued and outstanding Common Stock. None of our directors or executive officers owns any shares of
Series A Convertible Preferred Stock.
Series B Convertible Preferred
Stock
As of June 5,
2012, there were 11,664,993 shares of Series B Convertible Preferred Stock issued and outstanding. The following table
sets forth certain information as of June 5, 2012 with respect to beneficial ownership of our Series B Convertible
Preferred Stock by each shareholder known by the Company to be the beneficial owner of more than 5% of our Series B Convertible
Preferred Stock and by each of our directors and executive officers and by all of the directors, nominees for election as director,
and executive officers as a group. Shares of Series B Convertible Preferred Stock are convertible into shares of Common
Stock on a 10-for-1 basis.
Beneficial Owners
|
|
Amount and Nature
of Beneficial
Ownership
(1)
|
|
|
Percent of
Class
(2)
|
|
|
|
|
|
|
|
|
Directors and Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dileep Agnihotri
|
|
|
|
|
|
|
2324 Ridgepoint Drive
,
Suite G
|
|
|
|
|
|
|
Austin
,
Texas 78754
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Joseph P. Bartlett
|
|
|
|
|
|
|
|
|
1900 Avenue of the Stars, 20
th
Floor
|
|
|
|
|
|
|
|
|
Los Angeles
, California 90067
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Cary G. Bullock
|
|
|
|
|
|
|
|
|
10 New Bond Street
|
|
|
|
|
|
|
|
|
Worcester, Massachusetts 01606
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
J. Winder Hughes III
|
|
|
|
|
|
|
|
|
PO Box 389
|
|
|
|
|
|
|
|
|
Ponte Vedra, Florida 32004
|
|
|
624,769
|
(3)
|
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
|
Shawn R. Hughes
|
|
|
|
|
|
|
|
|
717 South Edison Avenue
|
|
|
|
|
|
|
|
|
Tampa, Florida 33606
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Arthur S. Reynolds
|
|
|
|
|
|
|
|
|
230 Park Avenue, Suite 1000
|
|
|
|
|
|
|
|
|
New York, New York 10169
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Teodor Klowan, Jr.
|
|
|
|
|
|
|
|
|
10 New Bond Street
|
|
|
|
|
|
|
|
|
Worcester, Massachusetts 01606
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All executive officers and directors as a group
(7 persons)
|
|
|
624,769
|
(3)
|
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
|
Other 5% Beneficial Owners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Gelbaum and Monica Chavez Gelbaum
|
|
|
|
|
|
|
|
|
Quercus Trust
|
|
|
|
|
|
|
|
|
1835 Newport Blvd.
|
|
|
|
|
|
|
|
|
A109-PMC 467
|
|
|
|
|
|
|
|
|
Costa Mesa, California 92627
|
|
|
2,398,709
|
|
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
|
Security Investors, LLC
|
|
|
|
|
|
|
|
|
One Security Benefit Place
|
|
|
|
|
|
|
|
|
Topeka, Kansas 66636
|
|
|
2,083,334
|
(4)
|
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
Robert S. Trump
|
|
|
|
|
|
|
|
|
89 10
th
Street
|
|
|
|
|
|
|
|
|
Garden City, New York 11530
|
|
|
3,177,377
|
|
|
|
27.2
|
%
|
|
|
|
|
|
|
|
|
|
The Focus Fund
|
|
|
|
|
|
|
|
|
PO Box 389
|
|
|
|
|
|
|
|
|
Ponte Vedra, Florida 32004
|
|
|
609,384
|
|
|
|
5.2
|
%
|
|
|
|
|
|
|
|
|
|
Empire Capital Management and Affiliates
|
|
|
|
|
|
|
|
|
One Gorham Island, Suite 201
|
|
|
|
|
|
|
|
|
Westport, Connecticut 06880
|
|
|
2,319,861
|
|
|
|
19.9
|
%
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes shares as to which the identified person or entity directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power and/or investment power, as these terms are defined in Rule 13d-3(a) of the Exchange Act.
|
(2)
|
Based on 11,664,993 shares of Series B Convertible Preferred Stock issued and outstanding
on June 5, 2012.
|
(3)
|
Includes 609,384 shares owned by The Focus Fund and 15,385 shares owned by Hughes Capital. Mr. Hughes is the Managing Director of both funds and may be deemed to be the beneficial owner of the securities held by such funds; he disclaims beneficial ownership of such securities except to the extent of his pecuniary interest therein.
|
(4)
|
Security Investors, LLC may be deemed to be the beneficial owner of these shares because it is the investment adviser to the following funds (the “Funds”) which own shares of Series B Convertible Preferred Stock: (i) Security Equity Fund, Mid Cap Value Fund, (ii) SBL Fund Series V (Mid Cap Value), (iii) Security Equity Fund, Mid Cap Value Institutional Fund, (iv) SBL Fund, Series Q (Small Cap Value) and (v) Security Equity Fund, Small Cap Value Fund. Each of the Funds is an investment company registered under the Investment Company Act of 1940, as amended. The shares of Series B Convertible Preferred Stock owned by each Fund are as follows:
|
Fund
|
Shares of Series B Convertible Preferred
Stock
|
Security Equity Fund, Mid Cap Value Fund
|
858,334 shares
|
SBL Fund, Series V (Mid Cap Value)
|
308,333 shares
|
Security Equity Fund, Mid Cap Value Institutional Fund
|
793,750 shares
|
SBL Fund, Series Q (Small Cap Value)
|
116,667 shares
|
Security Equity Fund, Small Cap Value Fund
|
6,250 shares
|
Equity Compensation Plan
Information
The following table sets
forth the securities that are authorized for issuance under our equity compensation plans as of December 31, 2011:
Plan Category
|
|
(A)
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants
and rights
|
|
|
(B)
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
|
|
|
(C)
Number of securities
remaining available
for future issuance
under equity
compensation
plans
(excluding securities
reflected in column
A)
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation plans approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Incentive Stock Plan
|
|
|
7,566,794
|
|
|
$
|
0.34
|
|
|
|
12,433,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
12,107,308
|
|
|
$
|
0.40
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
1,281,103
|
|
|
$
|
0.35
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
20,955,205
|
|
|
$
|
0.38
|
|
|
|
12,433,206
|
|
MANAGEMENT
Directors and Executive Officers
The following biographical descriptions
set forth certain information with respect to our directors and our executive officers who are not directors:
Name
|
|
Position
|
Cary G. Bullock
|
|
Director, Chairman of the Board, President and Chief Executive Officer
|
Dileep Agnihotri
|
|
Director
|
Joseph P. Bartlett
|
|
Director
|
J. Winder Hughes III
|
|
Director
|
Shawn R. Hughes
|
|
Director
|
Arthur S. Reynolds
|
|
Director
|
Teodor Klowan, Jr.
|
|
Executive Vice President and Chief Financial Officer
|
Cary G. Bullock,
age
66, was appointed as our President and Chief Executive Officer and was elected to our Board of Directors on January 27, 2010.
Mr. Bullock also serves as Chief Executive Officer and a member of the Board of Directors of our subsidiary, ThermoEnergy Power
Systems LLC, and as President and a member of the Board of Directors of our subsidiary, CASTion Corporation. Prior to becoming
our President and CEO, Mr. Bullock had been employed by GreenFuel Technologies Corporation, serving as Chief Executive Officer
from February 2005 through July 2007 and as Vice President for Business Development from July 2007 through January 2009; he was
a member of the Board of Directors of GreenFuel Technologies Corporation from February 2005 through August 2009. In May 2009,
GreenFuel Technologies ceased business operations and made an assignment of its assets to a trustee for the benefit of its creditors.
From February 2009 through January 2010, Mr. Bullock served a variety of clients as an independent consultant and business
advisor. Prior to joining GreenFuel Technologies, Mr. Bullock was Chairman and Chief Executive Officer of Excelergy Corporation,
Vice President of KENETECH Management Services and President of its affiliate, KENETECH Energy Management, Inc., Chairman and
Chief Executive Officer of Econoler/USA Inc., Vice President of Engineering and Operations and Principal Engineer of Xenergy Inc.,
Director of Special Engineering and a Senior Engineer at ECRM, Inc. and a Senior Engineer at Sylvania Electronics Systems.
Mr. Bullock received an A.B. from Amherst College and an S.B. and an S.M. from Massachusetts Institute of Technology. Having
worked as a senior executive in several early stage energy companies, Mr. Bullock brings to the Board extensive industry and strategic
experience.
Dr. Dileep Agnihotri
,
age 42, has been a director of the Company since January 2012. He is CEO, President, and a member of the Board of Directors of
Advanced Hydro Inc., a privately held company commercializing novel membranes technology and turn-key systems for treatment of
waste-water in the oil and gas industry, including hydraulic fracturing wastewater recycling applications. He is also serving
as acting CEO and a member of the Board of Directors of Graphene Energy, Inc. also a privately held company. Dr. Agnihotri
has been a principal at 21 Ventures, LLC, a venture capital management firm providing seed, growth and bridge capital for technology
ventures, since 2008. Prior to 21 Ventures and Advanced Hydro, he spent 8 years, from 2001 to 2008, as director and
world-wide manager of Jordan Valley Semiconductors Inc., an Israeli private company in the thin-film metrology market, where he
managed technology development, applications development and strategic, technical and product marketing. Dr.
Agnihotri holds a PhD in Nuclear Chemistry and an MS in Physical Chemistry from the University of Rochester. He also
has an MS degree in Physics from Agra University. He has published more than 30 articles and holds more than half a dozen patents.
Dr. Agnihotri brings to the Board expertise in new and disruptive technologies, their market potential and commercialization aspects.
Joseph P.
Bartlett
, age 54, has been a director of the Company since May 2012. He previously served as a member of our Board
of Directors from October 2009 until December 2009. Mr. Bartlett is an attorney in private practice in Los Angeles,
California and is counsel to The Quercus Trust. He has practiced corporate and securities law since 1985. From September
2004 until August 2008 he was a partner at Greenberg Glusker LLP and from September 2000 until
September 2004 he was a partner at Spolin Silverman Cohen and Bartlett LLP. Mr. Bartlett graduated, magna cum laude, from the
University of California, Hastings College of Law in 1985, and received an AB in English literature from the University of
California at Berkeley in 1980. Mr. Bartlett is 54 years old. He brings to our Board of Directors expertise in corporate
finance, corporate governance and the oversight of smaller reporting companies.
J. Winder Hughes III
,
age 53, has been a director of the Company since July 2009 (except for the period from January 27, 2010 to February 5,
2010). Mr. Hughes also serves as a member of the Board of Directors of our subsidiary, CASTion Corporation. Since
1995, Mr. Hughes has served as the managing partner of Hughes Capital Investors, LLC, which manages private assets and raises
money for small public companies. He formed the Focus Fund, LP in 2000 (with Hughes Capital as the fund manager), which
is a highly-concentrated equity partnership that focuses on publicly-traded emerging growth companies. From November 2007
to November 2009, Mr. Hughes was a director of Viking Systems, Inc, a manufacturer of surgical tools. From 1983 to 1995,
Mr. Hughes was an investment executive, first with Kidder Peabody & Co. and subsequently with Prudential Securities.
Mr. Hughes holds a B.A. in Economics from the University of North Carolina at Chapel Hill. Mr. Hughes brings to the Board
significant experience with capital raising, corporate restructuring, and managing strategic business relationships.
Shawn R. Hughes
, age
51, has been a director of the Company since October 2009. He previously served as a member of our Board of Directors from
September 2008 until January 2009. Mr. Hughes also serves as a member of the Board of Directors of our subsidiary, CASTion
Corporation. He served as President and Chief Operating Officer of the Company from January 1, 2008 to January 27,
2010. From June 15, 2007 through December 31, 2007, he was employed by us to assist the Chief Executive Officer in administering
corporate affairs and overseeing all of our business operating functions. From November 2006 to May 2007, Mr. Hughes served as
President and Chief Operating Officer of Mortgage Contract Services. From 2001 to 2006, Mr. Hughes served as Chief Executive
Officer of Fortress Technologies. Mr. Hughes holds a B.S.B.A. from Slippery Rock University and an M.B.A. from Florida State
University. Mr. Hughes brings to the Board extensive experience in executive management and strategic planning.
Arthur S. Reynolds
, age
68, has been a director of the Company since October 2008. He also serves as a member of the Board of Directors of our subsidiary,
CASTion Corporation. From August 3, 2009 through November 16, 2009, Mr. Reynolds served as our interim Chief
Financial Officer, and except during that period, has been Chairman of the Audit Committee of the Board of Directors. He
is the founder of Rexon Limited of London and New York where, since 1999, he has served as managing director. Mr. Reynolds was
founder and, from 1997 to 1999, managing partner of London-based Value Management & Research (UK) Limited. Mr.
Reynolds was the founder and, from 1982 to 1997, served as managing director of Ferghana Financial Services Limited. Prior
thereto, Mr. Reynolds held executive positions at Merrill Lynch International Bank Limited, Banque de la Société
Financière Européene, J.P. Morgan & Company and Mobil Corporation. From July 30 to November 30, 2011,
Mr. Reynolds was the Chief Executive Officer of Clean Power Technologies. Mr. Reynolds is a director of Apogee Technology,
Inc. Mr. Reynolds holds an A.B. from Columbia University, a M.A. from Cambridge University, and an M.B.A. in Finance from
New York University. Mr. Reynolds brings to the Board extensive financial and executive experience across multiple sectors,
with special strength in the international arena.
Teodor Klowan, Jr.
, age
43, was appointed as our Executive Vice President, Secretary and Treasurer on November 2, 2009 and became our Chief Financial
Officer on November 16, 2009. He also serves as Clerk and Treasurer of our subsidiary, CASTion Corporation. Mr.
Klowan has been a certified public accountant since 1991. From November 2007 through February 2009 he was Chief Financial
Officer and from May 2006 to November 2007 he was Vice President, Corporate Controller and Chief Accounting Officer of Nestor,
Inc., a publicly held automated speed and red light technology company. On June 3, 2009, a receiver was appointed by
the Rhode Island Superior Court for the business and assets of Nestor, Inc. Mr. Klowan was Corporate Controller of MatrixOne,
Inc. in 2005 and Corporate Controller and Chief Accounting Officer at Helix Technology Corporation from 1999 to 2004. He was Assistant
Corporate Controller of Waters Corporation from 1996 to 1999. Prior to 1996, Mr. Klowan worked in management and staff positions
at Banyan Systems, Inc. and Ernst & Young. Mr. Klowan holds a B.A. in Accounting from Bryant University and an M.B.A.
in International Finance from Clark University.
Pursuant to our Certificate of Incorporation,
as amended, the holders of our Series B Convertible Preferred Stock are entitled to elect four members of our Board of Directors
(the
“
Series B Directors
”
), which Series B Directors are subject to removal only by a vote of the holders
of not less than 66⅔% of the then-outstanding shares of Series B Convertible Preferred Stock voting as a separate class;
any vacancy created by the resignation or removal of a Series B Director may be filled either by (i) the vote or consent
of the holders of a majority of the then-outstanding shares of Series B Convertible Preferred Stock or (ii) the unanimous
vote or consent of the remaining Series B Directors. The holders of our Common Stock, voting together with the holders
of our Series A Preferred Stock, are entitled to elect three members of our Board of Directors (the
“
Common Stock
Directors
”
), which Common Stock Directors are subject to removal only by a vote of the holders of a majority of the
then-outstanding shares of Common Stock (taken together as a single class with the then-outstanding shares of Series A Preferred
Stock); any vacancy created by the resignation or removal of a Common Stock Director may be filled either by (i) the vote
or consent of the holders of a majority of the then-outstanding shares of Common Stock and Series A Preferred Stock (voting or
consenting together as a single class) or (ii) the unanimous vote or consent of the remaining Common Stock Directors.
The holders of our Series B Convertible Preferred Stock are parties to a Voting Agreement dated as of November 19, 2009,
pursuant to which they have agreed to vote all of their shares of Series B Convertible Preferred Stock for the election to
our Board of Directors of three persons designated by The Quercus Trust and one person designated by Robert S. Trump. The
Series B Directors are Dileep Agnihotri, Joseph P. Bartlett
and J. Winder Hughes III (all of whom are designees of
The Quercus Trust) and Shawn R. Hughes (who is the designee of Robert S. Trump). The Common Stock Directors are Cary G.
Bullock and Arthur S. Reynolds. All directors serve terms of one year.
The Executive Employment Agreement
of our President and Chief Executive Officer, Cary G. Bullock, provides that, during the term of his employment, Mr. Bullock will
be elected to serve on our Board of Directors.
None of our directors or executive
officers is related by blood or marriage to any other director or executive officer.
Executive Officer and
Director Compensation
Executive Officer
Compensation
The table set forth below summarizes
the compensation earned by our named executive officers in 2011 and 2010.
Executive Compensation
(1)
|
|
|
|
|
|
|
|
|
|
|
Medical and
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
Insurance
|
|
|
|
|
|
|
|
|
|
Salary
|
|
|
Awards
|
|
|
Reimbursement
|
|
|
Total
|
|
Name and Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)
(2)
|
|
|
($)
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cary G. Bullock
|
|
|
2011
|
|
|
$
|
200,349
|
|
|
$
|
0
|
|
|
$
|
60,237
|
|
|
$
|
260,586
|
|
Chairman, President and CEO
(3)
|
|
|
2010
|
|
|
$
|
207,285
|
|
|
$
|
1,731,170
|
|
|
$
|
57,008
|
|
|
$
|
1,995,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Teodor Klowan, Jr.
|
|
|
2011
|
|
|
$
|
175,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
175,000
|
|
Executive Vice President and CFO
|
|
|
2010
|
|
|
$
|
177,883
|
|
|
$
|
335,168
|
|
|
$
|
0
|
|
|
$
|
513,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Marrs
|
|
|
2011
|
|
|
$
|
132,231
|
|
|
$
|
99,409
|
(5)
|
|
$
|
11,876
|
|
|
$
|
243,516
|
|
Vice President, International Business Development
(4)
|
|
|
2010
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick Scalli
|
|
|
2011
|
|
|
$
|
145,000
|
|
|
$
|
162,079
|
|
|
$
|
22,423
|
|
|
$
|
329,502
|
|
Vice President, Sales
(6)
|
|
|
2010
|
|
|
$
|
25,096
|
|
|
$
|
0
|
|
|
$
|
3,742
|
|
|
$
|
28,838
|
|
|
(1)
|
Certain columnar
information required by Item 402(m) of Regulation
S-K has been omitted for categories where there was
no compensation awarded to, or paid to, the named
executive officers required to be reported in such
columns during 2011 or 2010.
|
|
(2)
|
Amounts in the
column “Option Awards” reflect the grant
date fair value of stock options awarded in accordance
with FASB ASC Topic 718. The fair value of options
granted during 2011 and 2010 were estimated at the
date of grant using a Black-Scholes option pricing
model with the following assumptions:
|
|
|
2011
|
|
|
2010
|
|
Risk-free interest rate
|
|
|
2.0% - 3.5
|
%
|
|
|
2.5% - 3.8
|
%
|
Expected option life (years)
|
|
|
10.0
|
|
|
|
10.0
|
|
Expected volatility
|
|
|
91% - 92
|
%
|
|
|
80% - 97
|
%
|
Expected dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
(3)
|
Mr. Bullock was
hired on January 27, 2010.
|
|
(4)
|
Mr. Marrs was hired
on April 1, 2011.
|
|
(5)
|
The option award
to Mr. Marrs reflects the grant date value based on
the probable outcome of performance conditions as
set forth in the option agreement. If the highest
level of performance conditions were achieved in 2011,
the value of this option award would be $397,465.
|
|
(6)
|
Mr. Scalli was
hired on November 1, 2010.
|
Compensation Discussion and
Analysis
Philosophy and Objectives
The objective of our executive
compensation program is to attract, retain and motivate the talented and dedicated executives who are critical to our goals of
continued growth, innovation, increasing profitability and, ultimately, maximizing shareholder value. We provide these
executives with what we believe to be a competitive total compensation package consisting primarily of base salary and long-term
equity incentive compensation. Our executive compensation program aims to provide a risk-balanced compensation package which
is competitive in our market sector and, more importantly, relevant to the individual executive.
Our policy for allocating
between long-term and currently-paid compensation is to ensure adequate base compensation to attract and retain personnel, while
providing incentives to maximize long-term value for our Company and our shareholders. Accordingly, (i) we provide
cash compensation in the form of base salary to meet competitive cash compensation norms and (ii) we provide non-cash compensation,
primarily in the form of stock option awards, to encourage superior performance against long-term strategic goals. Although
on occasion we grant cash bonuses, we do not maintain a formal short-term incentive plan, as our strategic philosophy is to focus
on long-term goals. The Compensation and Benefits Committee of our Board of Directors believes this compensation structure focuses
our executives’ attention primarily on long-term stock price appreciation, rather than short-term results, and yet enables
us to recruit and retain talented executives by ensuring that their annual cash compensation in the form of base salary is competitive
with the annual cash compensation paid by other similarly situated companies.
Executive Compensation
Process
We have employment agreements
with both of our executive officers. These agreements provide for payment of base compensation at a rate negotiated at the
time of the agreement, with eligibility for cash bonuses from time to time upon achievement of certain performance goals to be
established through discussions with the Compensation and Benefits Committee of our Board of Directors (in the case of our Chief
Executive Officer) or with such Committee and our Chief Executive Officer (in the case of Chief Financial Officer). The employment
agreements with our Chief Executive Officer and our Chief Financial Officer also provide for an initial grant of stock options,
with provision for future grants of stock options at the discretion of the Compensation and Benefits Committee of our Board of
Directors.
In negotiating the employment
agreements of our executive officers and establishing their base compensation, the
ad hoc
Executive Search Committee (which
had primary responsibility for recruitment of our Chief Executive Officer and our Chief Financial Officer), the Compensation and
Benefits Committee and management considered the practices of comparable companies of similar size, geographic location and market
focus. We did not utilize any standard executive compensation index or engage the services of a compensation consultant in setting
executive compensation, although management, the
ad hoc
Executive Search Committee and the Compensation and Benefits Committee
analyzed publicly available compensation data.
In determining each component
of each executive’s compensation, numerous factors particular to the executive are considered, including:
|
•
|
The individual’s particular background, including prior relevant work experience;
|
|
•
|
The market demand for individuals with the executive’s specific expertise and experience;
|
|
•
|
The individual’s role with us; and
|
|
•
|
Comparison to other executives within our Company.
|
Elements of Compensation
Executive compensation consists
of the following elements:
Base Salary
. Base
salary is established based on the factors discussed above. Our general compensation philosophy, as described above, is to offer
a competitive package of base salary plus long-term, equity-based incentive compensation. Because we place emphasis on the long-term
equity-based portion of our compensation package, we believe that the cash portion of our executive’s compensation is below
the average of the range of annual cash compensation (base salary plus annual non-equity incentive compensation) for executives
in similar positions with similar responsibilities at comparable companies.
Bonuses
.
Cash
bonuses and non-equity incentive compensation are generally not a regular or important element of our executive compensation strategy,
and we focus instead on stock-based awards designed to reward long-term performance.
Stock Option and Stock-Based
Awards
.
We believe that long-term performance is best stimulated through an ownership culture that encourages
such performance through the use of stock-based awards. The ThermoEnergy Corporation 2008 Incentive Stock Plan was established
to provide certain of our employees, including our executive officers, with incentives to help align those employees’ interests
with the interests of shareholders and with our long-term success. Our Board of Directors believes that the use of stock options
and other stock-based awards offers the best approach to achieving our long-term compensation goals. While the 2008 Incentive Stock
Plan provides for a variety of stock-based awards, to date we have relied exclusively on stock options to provide equity incentive
compensation. We believe that stock options most effectively focus the attention of our executives and management on long-term
performance and stock price appreciation. Stock option grants to our executive officers are made in connection with the commencement
of employment, in conjunction with an annual review of total compensation and, occasionally, to meet special retention or
performance objectives. Proposals to grant stock options to our executive officers are made by our CEO to the Compensation and
Benefits Committee. The Compensation and Benefits Committee considers the estimated Black-Scholes valuation of each proposed stock
option grant in determining the number of shares subject to each option grant.
In light of the significance
we place on equity-based incentive compensation, in January 2010 our Board of Directors amended the 2008 Incentive Plan to increase
the number of shares of our common stock available for grant under such Plan from 10,000,000 to 20,000,000 and to remove the limit
on the number of shares with respect to which stock options may be granted to any individual. At the Special Meeting in lieu of
the 2010 Annual Meeting in November 2010, the shareholders ratified the amendments to the 2008 Incentive Stock Plan.
We have not adopted stock
ownership guidelines.
Other Compensation
.
Our
executive officers are not eligible to participate in, and do not have any accrued benefits under, any Company-sponsored defined
benefit pension plan. They are eligible to, and in some cases do, participate in defined contributions plans, such as a 401(k)
plan, on the same terms as other employees. In addition, consistent with our compensation philosophy, we intend
to continue to maintain our current benefits and perquisites for our executive officers; however, the Compensation and Benefits
Committee in its discretion may revise, amend or add to the officer’s executive benefits and perquisites if it deems it advisable.
We believe these benefits and perquisites are currently lower than median competitive levels for comparable companies. Finally,
all of our executives are eligible to participate in our other employee benefit plans, including medical, dental, life and disability
insurance.
Tax Implications
. Section 162(m)
of the Internal Revenue Code of 1986, as amended, limits the deductibility on our tax return of compensation of over $1,000,000
to certain of our executive officers unless, in general, the compensation is paid pursuant to a plan which is performance-related,
non-discretionary and has been approved by our shareholders. We periodically review the potential consequences of Section 162(m)
and may structure the performance-based portion of our executive compensation to comply with the exemptions available under Section 162(m). We
believe that options granted under our 2008 Incentive Stock Plan will generally qualify as performance-based compensation under
Section 162(m). However, we may authorize compensation payments that do not comply with these exemptions when we
believe that such payments are appropriate and in the best interest of the shareholders, after taking into consideration changing
business conditions or the officer’s performance.
Outstanding Equity Awards
at Fiscal Year-End (2011)
The following table summarizes
information concerning outstanding equity awards held by the named executive officers at December 31, 2011. No named
executive officer exercised options in the fiscal year ended December 31, 2011.
|
|
Stock Option Awards
|
|
|
|
Securities Underlying
|
|
|
Option
|
|
|
Option
|
|
|
|
Unexercised Options (#)
|
|
|
Exercise
|
|
|
Expiration
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price
|
|
|
Date
|
|
Cary G. Bullock
|
|
|
4,079,699
|
|
|
|
4,079,702
|
|
|
$
|
0.30
|
|
|
|
01/27/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Teodor Klowan, Jr.
|
|
|
1,406,250
|
|
|
|
1,083,750
|
|
|
$
|
0.32
|
|
|
|
11/02/2019
|
|
|
|
|
888,584
|
|
|
|
691,117
|
|
|
$
|
0.30
|
|
|
|
01/27/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Marrs
|
|
|
none
|
|
|
|
2,000,000
|
|
|
$
|
0.26
|
|
|
|
04/01/2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick Scalli
|
|
|
175,000
|
|
|
|
525,000
|
|
|
$
|
0.30
|
|
|
|
03/07/2021
|
|
Employment Arrangements with
Named Executive Officers
We have written employment
agreements with each of our senior executives. Set forth below are descriptions of the agreements with each of our current executive
officers and with each person who was an executive officer during the year ended December 31, 2011.
Cary G. Bullock
. On
January 27, 2010, we entered into an Executive Employment Agreement with our President and Chief Executive Officer, Cary G. Bullock,
pursuant to which we agreed to pay him a base salary of $200,000, with eligibility for performance bonuses, from time to time,
in accordance with incentive compensation arrangements to be established by the Compensation Committee of our Board of Directors. Mr.
Bullock’s employment is terminable by either party upon 30 days’ written notice; provided that we may terminate Mr.
Bullock’s employment immediately for “Cause” (as such term is defined in the Executive Employment Agreement)
and Mr. Bullock may terminate his employment immediately for “Good Reason” (as such term is defined in the Executive
Employment Agreement). If Mr. Bullock’s employment is terminated for any reason other than (i) by us for Cause
or (ii) voluntarily by Mr. Bullock without Good Reason, Mr. Bullock will be entitled to receive severance payments of $16,667 per
month for six months following the termination of his employment, and we will keep in force for such six-month period all health
insurance benefits afforded to Mr. Bullock and his family at the time of termination. Mr. Bullock’s Executive
Employment Agreement contains other conventional terms, including covenants relating to the confidentiality and non-use of our
proprietary information, and a provision prohibiting Mr. Bullock, for a period of six months or one year following the termination
of his employment (depending on the circumstances of termination), from competing against us or soliciting our customers or employees.
Teodor Klowan, Jr
. On
November 2, 2009 we entered into an Executive Employment Agreement with our Executive Vice President and Chief Financial Officer,
Teodor Klowan, Jr., pursuant to which we agreed to pay him an annual base salary of $175,000, with eligibility for performance
bonuses, from time to time, in accordance with incentive compensation arrangements to be established by the Compensation Committee
of our Board of Directors. Mr. Klowan’s employment is terminable by either party upon 30 days’ written notice;
provided that we may terminate Mr. Klowan’s employment immediately for “Cause” (as such term is defined in the
Executive Employment Agreement) and Mr. Klowan may terminate his employment immediately for “Good Reason” (as such
term is defined in the Executive Employment Agreement). If Mr. Klowan’s employment is terminated for any reason
other than (i) by us for Cause or (ii) voluntarily by Mr. Klowan without Good Reason, Mr. Klowan will be entitled to receive severance
payments of $14,583 per month for six months following the termination of his employment, and we will keep in force for such six-month
period all health insurance benefits afforded to Mr. Klowan and his family at the time of termination. Mr. Klowan’s
Executive Employment Agreement contains other conventional terms, including covenants relating to the confidentiality and non-use
of our proprietary information and a provision prohibiting Mr. Klowan, for a period of one year following the termination of his
employment, from competing against us or soliciting our customers or employees.
Director Compensation
Directors do not receive cash
compensation for serving on the Board or its committees. Non-employee directors are awarded annual grants of non-qualified
stock options. All directors are reimbursed for their reasonable expenses incurred in attending all board meetings. We
maintain directors and officers liability insurance.
The following table shows compensation
for the fiscal year ended December 31, 2011 to our directors who were not also named executive officers at the time they
received compensation as directors:
Director Compensation
(1)
|
|
|
|
Option
|
|
|
Other
|
|
|
|
|
|
|
Fees Earned or
|
|
Awards
|
|
|
Compensation
|
|
|
Total
|
|
Name
|
|
Paid in Cash
|
|
($)
(2)
|
|
|
($)
|
|
|
($)
|
|
David Anthony
|
|
None
|
|
$
|
3,391
|
(3)
|
|
$
|
None
|
|
|
$
|
3,391
|
|
Shawn R. Hughes
|
|
None
|
|
$
|
3,391
|
(3)
|
|
$
|
50,000
|
(4)
|
|
$
|
53,391
|
|
J. Winder Hughes III
|
|
None
|
|
$
|
3,391
|
(3)
|
|
$
|
None
|
|
|
$
|
3,391
|
|
Arthur S. Reynolds
|
|
None
|
|
$
|
3,391
|
(3)
|
|
$
|
None
|
|
|
$
|
3,391
|
|
|
(1)
|
Certain columnar information required by Item 402(m)
of Regulation S-K has been omitted for categories
where there was no compensation awarded to, or paid
to, the named directors required to be reported in
such columns during 2011.
|
|
(2)
|
The amounts in the column “Options Award”
reflect the dollar amount recognized for financial
statement reporting purposes in accordance with ASC
710. Assumptions used in the calculation of
these amounts are included in Note 5 to the Company’s
consolidated financial statements for the fiscal year
ended December 31, 2011. The amounts shown
exclude the impact of any forfeitures related to service-based
vesting conditions. The actual amount realized
by the director will likely vary based on a number
of factors, including the Company’s performance,
stock price fluctuations and applicable vesting.
|
|
(3)
|
An option to purchase 30,000 shares of Common
Stock at an exercise price of $0.15 per share was
granted to each of Messrs. Anthony, Shawn Hughes,
J. Winder Hughes III and Reynolds on December 13,
2011; these options vest on the date of our 2012 Annual
Meeting of Stockholders and expire on December 13,
2021.
|
|
(4)
|
A finder’s fee of $50,000 was paid to
Mr. Shawn Hughes in 2011 related to securing a large
industrial contract on our behalf. This fee was approved
by the Compensation Committee of the Board of Directors.
|
As of December 31,
2011, each director held option and warrant awards as follows:
Name
|
|
Aggregate Number of
Shares Underlying
Stock Options
(#)
|
|
|
Aggregate Number of
Shares Underlying
Warrants
(#)
|
|
David Anthony
|
|
|
90,000
|
|
|
none
|
|
Shawn R. Hughes
|
|
|
310,000
|
|
|
|
600,000
|
|
J. Winder Hughes III
|
|
|
90,000
|
|
|
none
|
|
Arthur S. Reynolds
|
|
|
130,000
|
|
|
|
681,103
|
|
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Director Independence
Our securities are not
listed on a national securities exchange or on an inter-dealer quotation system which has requirements that a majority of the
board of directors be independent. In determining which directors and which members of committees are “independent,”
our Board of Directors has voluntarily adopted the independence standards set forth in the Marketplace Rules of the Nasdaq Stock
Market. Our Board of Directors has determined that, in accordance with these standards, four of our current Directors, Dr. Agnihotri,
Mr. Bartlett, Mr. Winder Hughes and Mr. Reynolds, are “independent directors.”
Certain Relationships And
Related Transactions
We are a party to a license
agreement with Alexander G. Fassbender, who until March 3, 2010 was our Executive Vice President and Chief Technology Officer,
under which Mr. Fassbender has granted to us an exclusive license in the patents and patent applications for ThermoFuel and
Enhanced Biogas Production in the United States and certain foreign countries. We are required to pay to Mr. Fassbender
a royalty of 1% of net sales after the cumulative sales of all licensed products exceed $20,000,000. In December 2007,
Mr. Fassbender waived certain termination rights under the license agreement, agreed that we can assign or transfer the license
without his consent in connection with a merger or a sale of all or a portion of our business and assets, and agreed that he would
not transfer his interest in the license agreement without our consent.
We are members, along
with Mr. Fassbender and Mr. Fassbender’s ex-wife, of a limited liability company, ThermoEnergy Power Systems, LLC (“TEPS”),
which owns the pressurized oxycombustion technology. We hold an 85% ownership interest in TEPS, and Mr. Fassbender
and his ex-wife each own a 7.5% membership interest.
Our Board of Directors has
adopted a policy whereby all transactions between us and any of our affiliates, officers, directors, principal shareholders and
any affiliates of the foregoing must be approved in advance by the disinterested members of the Board of Directors based on a determination
that the terms of such transactions are no less favorable to us than would prevail in arm’s-length transactions with independent
third parties.
SELLING STOCKHOLDERS
We are registering for resale shares
of our Common Stock. We are registering the shares to permit the selling stockholders and their pledgees, donees, transferees
and other successors-in-interest that receive their shares from a selling stockholder as a gift, partnership distribution or other
non-sale related transfer after the date of this prospectus to resell the shares when and as they deem appropriate in the manner
described in the "Plan of Distribution." The information included below is based on information that has been provided
to us by or on behalf of the selling stockholders. The information assumes all of the shares covered hereby are sold or otherwise
disposed of by the selling stockholders pursuant to this prospectus. However, we do not know whether the selling stockholders
will in fact sell or otherwise dispose of the shares of Common Stock listed next to their names below.
The shares of our Common Stock offered
hereby are issuable upon conversion of shares of our Series B Convertible Preferred Stock or exercise of Common Stock Purchase
Warrants held by the selling stockholders. No shares of Series B Convertible Preferred Stock and none of the Common
Stock Purchase Warrants are being registered for resale.
Each share of Series B Convertible
Preferred Stock is convertible into ten shares of our Common Stock (at an effective conversion price of $0.24 per share of
Common Stock). Shares of Series B Convertible Preferred Stock are convertible at any time at the option of the holder
thereof and are subject to mandatory conversion (i) in the event the closing bid price for our Common Stock on the OTC Bulletin
Board exceeds $0.72 for a period of sixty consecutive trading days or (ii) at the written election of the holders of at least
66⅔% of the then-outstanding shares of Series B Convertible Preferred Stock.
The Common Stock Purchase Warrants
entitle the holders thereof to purchase shares of our Common Stock at an exercise price of $0.30 per share at any time on or before
6:00 pm on August 10, 2015. Each Warrant also provides for “cashless exercise” whereby, in lieu
of payment of the exercise price in cash, the holder may direct us to cancel a portion of the Warrant having a value equal to
the exercise price for the number of shares of our Common Stock as to which the Warrant is being exercised.
We are filing the registration statement
of which this prospectus is a part in satisfaction of a contractual obligation under the Securities Purchase Agreement dated as
of August 9, 2010 between us and the selling stockholders pursuant to which the selling stockholders purchased the shares of Series
B Convertible Preferred Stock and the Common Stock Purchase Warrants, upon the conversion and exercise of which the shares of
Common Stock offered hereby are issuable.
Pursuant to the Securities Purchase
Agreement, we agreed to issue to the selling stockholders, and the selling stockholders agreed to purchase from us, an aggregate
of 2,083,334 shares of our Series B Convertible Preferred Stock and Common Stock Purchase Warrants entitling the selling stockholders
to purchase up to an aggregate of 33,333,344 shares of our Common Stock in consideration of cash payments by the selling stockholders
to us in the aggregate amount of $5,000,001.06.
In the Securities Purchase Agreement
we agreed to bear all expenses, other than underwriting discounts and commissions, incurred in connection with registrations,
filings or qualifications of the shares of Common Stock offered by the selling stockholders, including, without limitation, all
registration, listing, and qualifications fees, printing and engraving fees, accounting fees, and the fees and disbursements of
counsel for the Company, and (with respect to the preparation and filing of the registration statement of which this prospectus
is a part) the reasonable fees of one firm of legal counsel for the selling stockholders.
In the Securities Purchase Agreement
we also agreed to indemnify and hold harmless each selling stockholder and each underwriter, if any, which facilitates the disposition
of the shares of Common Stock offered hereby, and each of their respective officers and directors and each person who controls
such selling stockholder or underwriter (each, an
“
Indemnified Person
”
)
from and
against any losses, claims, damages or liabilities, joint or several, to which such Indemnified Person may become subject under
the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any registration statement
or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements
therein, not misleading, or arise out of or are based upon an untrue statement or alleged untrue statement of a material fact
contained in any prospectus or an omission or alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and
we agreed to reimburse such Indemnified Person for all reasonable legal and other expenses incurred by them in connection with
investigating or defending any such action or claim as and when such expenses are incurred;
provided, however,
that we
shall not be liable to any such Indemnified Person in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon (i) an untrue statement or alleged untrue statement made in, or an omission or alleged omission
from, such registration statement or prospectus in reliance upon and in conformity with written information furnished to the Company
by such Indemnified Person expressly for use therein or (ii) the use by the Indemnified Person of an outdated or defective
prospectus after we have provided to such Indemnified Person an updated prospectus correcting the untrue statement or alleged
untrue statement or omission or alleged omission giving rise to such loss, claim, damage or liability.
Except for the issuance and sale of
shares of Series B Convertible Preferred Stock and Common Stock Purchase Warrants to the selling stockholders pursuant to the
Securities Purchase Agreement, we have not engaged in any material transactions with any of the selling stockholders or
any of their affiliates at any time since January 1, 2008.
The following table sets forth:
|
•
|
the name of the selling stockholders,
|
|
•
|
the number and percentage of shares of our Common Stock
that the selling stockholders beneficially owned prior to
the offering for resale of the shares under this prospectus
and the percentage of the class represented by such shares,
|
|
•
|
the maximum number of shares of our Common Stock that
may be offered for resale for the account of the selling stockholders
under this prospectus, and
|
|
•
|
the number and percentage of shares of our Common Stock
to be beneficially owned by the selling stockholders after
the offering of the shares (assuming all of the offered shares
are sold by the selling stockholders).
|
Name of Selling Stockholder
|
|
Shares of
Common Stock
Beneficially
Owned Prior
to Offering
(1)
|
|
|
Percentage
Ownership
Prior to
Offering
(1)
|
|
|
Maximum
Number of
Shares
to be Sold
|
|
|
Shares of
Common
Stock
beneficially
Owned
After
Offering
|
|
|
Percentage
Ownership
After
Offering
(1)
|
|
Security Equity Fund, Mid Cap Value Fund
(2)
|
|
|
11,285,179
|
(3)
|
|
|
10.11
|
%
|
|
|
8,583,340
|
|
|
|
2,701,839
|
|
|
|
2.42
|
%
|
SBL Fund, Series V (Mid Cap Value)
(2)
|
|
|
3,989,291
|
(4)
|
|
|
3.57
|
%
|
|
|
3,083,330
|
|
|
|
905,961
|
|
|
|
*
|
|
Security Equity Fund, Mid Cap Value Institutional Fund
(2)
|
|
|
7,937,500
|
(5)
|
|
|
7.11
|
%
|
|
|
7,937,500
|
|
|
|
0
|
|
|
|
0
|
%
|
SBL Fund, Series Q (Small Cap Value)
(2)
|
|
|
1,116,670
|
(5)
|
|
|
1.00
|
%
|
|
|
1,116,670
|
|
|
|
0
|
|
|
|
0
|
%
|
Security Equity Fund, Small Cap Value Fund
(2)
|
|
|
62,500
|
(5)
|
|
|
*
|
|
|
|
62,500
|
|
|
|
0
|
|
|
|
0
|
%
|
John Blum
|
|
|
1,000,000
|
|
|
|
*
|
|
|
|
1,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
Michael Brodherson
|
|
|
1,000,000
|
|
|
|
*
|
|
|
|
1,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
Ron Craft
|
|
|
1,000,000
|
|
|
|
*
|
|
|
|
1,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
Scott E. Douglass
|
|
|
1,000,000
|
|
|
|
*
|
|
|
|
1,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
Steve Elsey
|
|
|
1,000,000
|
|
|
|
*
|
|
|
|
1,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
Steven Etra
|
|
|
1,000,000
|
|
|
|
*
|
|
|
|
1,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
Jack and Mary Garson
|
|
|
1,182,609
|
|
|
|
1.06
|
%
|
|
|
1,182,609
|
|
|
|
0
|
|
|
|
0
|
%
|
Gunther Motor Company of Plantation, Inc.
|
|
|
1,000,000
|
|
|
|
*
|
|
|
|
1,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
Francis Howard
|
|
|
6,000,000
|
|
|
|
5.37
|
%
|
|
|
6,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
JSL Kids Partners
(6)
|
|
|
1,000,000
|
|
|
|
*
|
|
|
|
1,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
John S. Lemak, IRA Rollover
(6)
|
|
|
1,000,000
|
|
|
|
*
|
|
|
|
1,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
Patrick and Zoe Lynch
|
|
|
1,000,000
|
|
|
|
*
|
|
|
|
1,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
Next View Capital LP
|
|
|
3,000,000
|
|
|
|
2.69
|
%
|
|
|
3,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
Niamh O’Reilly
|
|
|
1,000,000
|
|
|
|
*
|
|
|
|
1,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
W.P. O’Reilly & Associates, Ltd.
|
|
|
2,000,000
|
|
|
|
1.79
|
%
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
*
|
|
Robert B. Prag
|
|
|
1,000,000
|
|
|
|
*
|
|
|
|
1,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
Bruce M. Robinson
|
|
|
1,450,735
|
|
|
|
1.30
|
%
|
|
|
1,450,735
|
|
|
|
0
|
|
|
|
0
|
%
|
Steven Sack
|
|
|
3,000,000
|
|
|
|
2.69
|
%
|
|
|
3,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
Samax Family Limited Partnership
|
|
|
1,000,000
|
|
|
|
*
|
|
|
|
1,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
Sandor Capital Master Fund, L.P.
(6)
|
|
|
1,700,000
|
|
|
|
1.52
|
%
|
|
|
1,700,000
|
|
|
|
0
|
|
|
|
0
|
%
|
John J. Shaw
|
|
|
1,000,000
|
|
|
|
*
|
|
|
|
1,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
Gerald and SeenaSperling
|
|
|
1,000,000
|
|
|
|
*
|
|
|
|
1,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
Robert Stranger
|
|
|
1,000,000
|
|
|
|
*
|
|
|
|
1,000,000
|
|
|
|
0
|
|
|
|
0
|
%
|
* Less than 1%
|
(1)
|
Beneficial ownership is determined
in accordance with the rules and regulations of the SEC. In computing
the number of shares beneficially owned by a person and the percentage
ownership of that person, securities that are currently convertible
or exercisable into shares of our common stock, or convertible or exercisable
into shares of our common stock within 60 days of the date hereof are
deemed outstanding. Such shares, however, are not deemed outstanding
for the purposes of computing the percentage ownership of any other
person. Except as indicated in the table below, each stockholder named
in the table has sole voting and investment power with respect to the
shares set forth opposite such stockholder's name. The percentage of
beneficial ownership is based on 91,219,622 shares of Common Stock
outstanding as of June 5, 2012, adjusted to reflect the issuance
of the aggregate of 20,833,340 shares issuable to the selling stockholders.
|
|
(2)
|
These selling stockholders are investment
companies registered under the Investment Company Act of 1940, as amended. James
P. Schier, Portfolio Manager of Security Investors, LLC (“SI”),
which is the investment adviser to each of the selling stockholders,
exercises voting and investment control over the securities held by
the selling stockholders. Mr. Schier’s voting and
investment control is subject to SI’s proxy voting procedures
adopted pursuant to Rule 206(4)-6 under the Investment Advisers Act
of 1940 and other applicable policies and procedures of SI. All
of these selling stockholders are affiliates of one or more registered
broker-dealers. These selling stockholders purchased the securities
offered for resale hereby in the ordinary course of business and, at
the time of purchase of such securities, had no agreements or understandings,
directly or indirectly, with any person to distribute the securities.
|
|
(3)
|
Includes 8,583,340 shares issuable
upon conversion of shares of Series B Convertible Preferred Stock.
|
|
(4)
|
Includes 3,083,330 shares issuable
upon conversion of shares of Series B Convertible Preferred Stock.
|
|
(5)
|
Represents shares issuable upon
conversion of shares of Series B Convertible Preferred Stock.
|
|
(6)
|
John S. Lemak may be deemed to be
the beneficial owner of the shares held by these selling stockholders,
inasmuch as in his capacity as the Manager of JSL Kids Partners and
of Sandor Capital Master Fund, L.P. and the owner of the John S. Lemak,
IRA Rollover he exercises voting and investment control over the securities
held by these selling stockholders. Mr. Lemak disclaims
beneficial ownership of these securities, except to the extent of his
pecuniary interest therein. Mr. Lemak is a registered representative
of WFG Investments Inc., a registered broker-dealer.
|
DESCRIPTION OF CAPITAL STOCK
The following is a summary of the material terms of our capital stock under our certificate of incorporation
and by-laws.
Authorized and Outstanding
Capital Stock
We are authorized
to issue 425,000,000 shares of Common Stock, par value $0.001 per share, and 30,000,000 shares of Preferred Stock, par value
$0.01 per share. Of our authorized Preferred Stock, 208,334 shares have been designated “Series A
Convertible Preferred Stock”, 12,000,000 shares have been designated “Series B Convertible Preferred
Stock” and 17,791,666 shares remain undesignated. As of June 5, 2012, 91,219,622 shares
of Common Stock were issued and outstanding, 133,797 shares of Common Stock were held as treasury shares, 208,334 shares of
Series A Convertible Preferred Stock were issued and outstanding and 11,664,993 shares of Series B Convertible Preferred
Stock were issued and outstanding.
Description of Common
Stock
Voting Rights
Each holder of shares of
our common stock is entitled to attend all special and annual meetings of our stockholders. In addition, each such holder is entitled,
together with the holders of all other classes of capital stock entitled to attend special and annual stockholder meetings (subject
to the provisions of any resolutions of the board of directors granting any holders of preferred stock exclusive or special voting
powers with respect to any matter), to cast one vote for each outstanding share of our common stock held upon any matter, including
the election of directors, which is properly considered and acted upon by the stockholders. Except as otherwise required by law,
holders of the our common stock, as such, are not entitled to vote on any amendment to the our amended and restated certificate
of incorporation (including the certificate of designation of any series of our preferred stock) that relates solely to the terms
of one or more outstanding series of our preferred stock if the holders of the affected series are entitled, either voting separately
or together with the holders of one or more other affected series, to vote on such amendment under the certificate of incorporation
(including the certificate of designation of any series of our preferred stock) or pursuant to the Delaware General Corporation
Law (the “DGCL”).
Liquidation Rights
The holders of our common
stock and the holders of any class or series of stock entitled to participate with the holders of our common stock as to the distribution
of assets in the event of any liquidation, dissolution or winding-up of the company, whether voluntary or involuntary, will become
entitled to participate in the distribution of any of our assets remaining after we have paid, or provided for the payment of,
all of its debts and liabilities and after we have paid, or set aside for payment, to the holders of any class or series of preferred
stock having preference over our common stock in the event of liquidation, dissolution or winding-up, the full preferential amounts,
if any, to which the holders of such class or series are entitled.
Dividends
Dividends may be paid on
our common stock and on any class or series of preferred stock entitled to participate with our common stock as to dividends on
an equal per-share basis, but only when, as and if declared by the board of directors. Holders of our company's common stock will
be entitled to receive any such dividends out of any assets legally available for the payment of dividends only after the provisions
with respect to preferential dividends on any outstanding series of preferred stock have been satisfied and after we have complied
with all the requirements, if any, with respect to redemption of, or the setting aside of sums as sinking funds or redemption or
purchase accounts with respect to, any outstanding series of our preferred stock.
Other Rights
Holders of our Common Stock
do not have any preemptive, cumulative voting, subscription, conversion, redemption or sinking fund rights.
Description of Series
A Convertible Preferred Stock
Voting Rights
In addition to any other
voting rights under law or as described below, the holders of Series A Convertible Preferred Stock are entitled to vote or consent,
together with the holders of Common Stock, as a single class on all matters submitted to the vote of Common Stock holders. Each
share of Series A Convertible Preferred Stock is entitled to the number of votes equal to the nearest number of whole shares of
Common Stock into which it is convertible on the record date. The separate vote or consent of 66
2
/3%
of the Series A Convertible Preferred Stock is required for any of the following:
|
(i)
|
directly or indirectly altering the rights, preferences, privileges, powers or restrictions of the Series A Convertible Preferred Stock;
|
|
(ii)
|
creating, or issuing securities of, any class or series having an equal or senior preference or priority to the Series A Convertible Preferred Stock; or
|
|
(iii)
|
amending our Articles of Incorporation in a way that adversely affects the rights, preferences or privileges of the holders of the Series A Convertible Preferred Stock.
|
Liquidation Rights
Upon a liquidation, dissolution
or winding up of the Company, the holder of each share of Series A Convertible Preferred Stock is entitled to a preference payment
in an amount equal to the greater of (i) $1.20 plus all declared and unpaid dividends on such share or (ii) the amount that would
be payable to such holder if all shares of Series A Convertible Preferred Stock had been converted to the liquidation event. A
consolidation or merger or a sale of all or substantially all of our assets (except for a transaction in which our shareholders
prior to the transaction hold 50% or more of the voting securities of the surviving or purchasing entity) shall be regarded as
a dissolution, liquidation or winding up unless the holders of 66
2
/3% of the
then outstanding shares of Series A Convertible Preferred Stock determine otherwise.
Conversion
Each share of Series A Convertible
Preferred Stock is convertible into one share of our Common Stock. The conversion ratio is adjusted to reflect any stock dividend,
distribution or stock split or combination or consolidation. Conversion rights are also adjusted to reflect any change in the Common
Stock by way of reorganization, recapitalization, reclassification, consolidation or merger. Fractional shares of Common Stock
will not be issued upon conversion of Series A Convertible Preferred Stock and we will make a cash payment to the holder in lieu
of any fractional share. Shares of Series A Convertible Preferred Stock may be converted at any time at the election of the holder
thereof. All outstanding shares of the Series A Convertible Preferred Stock will be automatically converted into Common Stock when
the market price for our Common Stock exceeds $3.00 (adjusted to reflect stock splits, stock dividends, combinations or consolidations)
for 30 consecutive trading days. All outstanding shares of the Series A Convertible Preferred Stock will also be automatically
converted into Common Stock at the election of the holders of 66
2
/3% of the
then outstanding Series A Convertible Preferred Stock.
Dividends
The Series A Convertible
Preferred Stock is entitled to participate, on a priority basis, in all dividends declared and paid on the Common Stock.
Other Rights
Holders of our Series A Convertible
Preferred Stock do not have any preemptive, cumulative voting, subscription, conversion, redemption or sinking fund rights.
Description of Series
B Convertible Preferred Stock
Voting Rights
Except with respect to the
election of members of our Board of Directors, the holders of our Series B Convertible Preferred Stock are entitled to vote together
with the holders of our Common Stock, as a single class, on all matters submitted to the holders of our Common Stock for a vote. Each
share of our Series B Convertible Preferred Stock entitles the holder thereof to a number of votes equal to the nearest number
of whole shares of our Common Stock into which such share of Series B Convertible Preferred Stock is convertible.
The holders of our Series
B Convertible Preferred Stock our entitled to elect four members of our Board of Directors (the
“
Series B Directors
”
),
which Series B Directors are subject to removal only by a vote of the holders of not less than 66⅔% of the then-outstanding
shares of Series B Convertible Preferred Stock as a separate class; any vacancy created by the resignation or removal of a Series
B Director may be filled either by (i) the vote or consent of the holders of a majority of the then-outstanding shares of Series
B Convertible Preferred Stock or (ii) the unanimous vote or consent of the remaining Series B Directors. The holders
of our Common Stock, voting together with the holders of our Series A Convertible Preferred Stock, are entitled to elect three
members of our Board of Directors (the
“
Common Stock Directors
”
), which Common Stock Directors are subject
to removal only by a vote of the holders of a majority of the then-outstanding shares of Common Stock (taken together as a single
class with the then-outstanding shares of Series A Convertible Preferred Stock); any vacancy created by the resignation or removal
of a Common Stock Director may be filled either by (i) the vote or consent of the holders of a majority of the then-outstanding
shares of Common Stock and Series A Convertible Preferred Stock (voting or consenting together as a single class) or (ii) the unanimous
vote or consent of the remaining Common Stock Directors.
The consent of the holders
of at least 66⅔% of the then-outstanding shares of our Series B Convertible Preferred Stock for certain corporate actions,
including any amendment of our Certificate of Incorporation or By-laws or any recapitalization which would adversely alter or changes
the rights, preferences or privileges of our Series B Convertible Preferred Stock, any increase or decrease the number of authorized
shares of our Series B Convertible Preferred Stock, the creation of a class or series of shares having preference or priority equal
or senior to our Series B Convertible Preferred Stock, the declaration or payment of a dividend on our Common Stock, the redemption
of any shares of our Common Stock (subject to certain specified exceptions), any merger or consolidation with another entity in
a transaction immediately following which our shareholders would hold less than a majority of the voting power of the outstanding
stock of the surviving corporation, the sale of all or substantially all of our assets, our liquidation or dissolution, or any
increase or decrease in the size of our Board of Directors.
Liquidation Rights
The shares of our Series
B Convertible Preferred Stock have a stated value of $2.40 per share (subject to adjustment for stock dividends, combinations or
splits). In the event of our voluntary or involuntary liquidation, dissolution or winding-up, after satisfaction of
the claims of creditors and payment or distribution of assets is made on any securities which, by their terms rank senior to our
Series B Convertible Preferred Stock, but before any payment or distribution of assets and any surplus funds is made on any securities
that do not expressly provide that they rank senior to our Series B Convertible Preferred Stock, including, without limitation,
our Common Stock, the holders of our Series B Convertible Preferred Stock shall receive a liquidation preference equal to the Stated
Value of their shares plus an amount equal to all declared and unpaid dividends with respect to their shares. Thereafter,
each holder of our Common Stock shall be paid an amount per share equal to the amount per share paid to each holder of our Series
B Convertible Preferred Stock, and any remaining assets will be distributed on a pro rata basis to the holders of our Common Stock
and our Series B Convertible Preferred Stock.
Conversion
Each share of our Series
B Convertible Preferred Stock may be converted at any time, at the option of the holder thereof, into that number of shares of
our Common Stock determined by dividing (i) the stated value of such shares of our Series B Convertible Preferred Stock ($2.40)
by (ii) the conversion price thereof (initially, $0.24). Initially, the conversion rate of our Series B Convertible
Preferred Stock is ten-for-one. The conversion price of our Series B Convertible Preferred Stock is subject to conventional
weighted-average formula adjustment in the event we issue shares of our common stock or securities convertible into shares of our
Common Stock at a price per share less than the conversion price then in effect, subject to certain conventional exclusions including,
without limitation, shares issued or issuable to employees, directors or consultants pursuant to a stock option plan or a restricted
stock plan approved by our Board of Directors, shares issued or issuable in connection with an acquisition transaction and shares
issued or issuable to financial institutions or lessors in connection with commercial credit arrangements, equipment financing
or similar transactions.
Dividends
The Series B Convertible
Preferred Stock is entitled to participate, on a priority basis, in all dividends declared and paid on the Common Stock.
Other Rights
Holders of our Series B Convertible
Preferred Stock do not have any preemptive, cumulative voting, subscription, conversion, redemption or sinking fund rights.
Description of Undesignated
Preferred Stock
Our certificate of incorporation
authorizes our board of directors from time to time and without further stockholder action to provide for the issuance of shares
of our unauthorized but previously unissued Preferred Stock in one or more series, and to fix the voting powers, preferences and
relative, participating, optional and other special rights, and the qualifications, limitations, and restrictions of each such
series, including, but not limited to, dividend rights, liquidation preferences, conversion privileges and redemption rights. Our
board of directors will have broad discretion with respect to the creation and issuance of Preferred Stock without stockholder
approval, subject to any applicable rights of holders of any shares of Preferred Stock outstanding from time to time.
The rights and privileges
of holders of the Common Stock may be adversely affected by the rights, privileges and preferences of holders of shares of any
series of Preferred Stock that the board of directors may designate and we may issue from time to time. Among other things, by
authorizing the issuance of shares of Preferred Stock with particular voting, conversion or other rights, the board of directors
could adversely affect the voting power of the holders of the Common Stock and could discourage any attempt to effect a change
in control of our Company, even if such a transaction would be beneficial to the interests of our stockholders.
Anti-Takeover
Effects of Provisions of Certificate of Incorporation and Bylaws
Our certificate of incorporation
and bylaws contain provisions that could have the effect of delaying or deferring a change in control of the company. These provisions,
among other matters:
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limit the
number of directors constituting the entire
board of directors to a maximum of 7 directors;
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grant the holders of our Series B Convertible Preferred Stock the exclusive right to elect 4 directors and thereby to control the board of directors;
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limit the types of persons who may call a special meeting of stockholders; and
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establish advance notice procedures for stockholders to make nominations of candidates for election as directors or to present any other business for consideration at any annual or special stockholder meetings.
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UNITED STATES FEDERAL INCOME
TAX
CONSIDERATIONS APPLICABLE
TO NON-U.S. HOLDERS
The following is a summary
of material United States federal income tax considerations related to the purchase, ownership and disposition of our common
stock that are applicable to a "non-U.S. holder" (defined below) of the common stock.
This summary:
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does not purport to be a complete analysis of all of the potential tax considerations that may be applicable to an investor as a result of the investor's particular tax situation;
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is based on the Internal Revenue Code of 1986, as amended (the "Code"), United States federal income tax regulations promulgated or proposed under the Code, which we refer to as the "Treasury Regulations," judicial authority and published rulings and administrative pronouncements, each as of the date hereof and each of which are subject to change at any time, possibly with retroactive effect;
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is applicable only to beneficial owners of common stock who hold their common stock as a "capital asset," within the meaning of section 1221 of the Code;
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does not address all aspects of United States federal income taxation that may be relevant to holders in light of their particular circumstances or who are subject to special treatment under United States federal income tax laws, including but not limited to:
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certain former citizens and long-term residents of the United States;
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"controlled foreign corporations" and "passive foreign investment companies"
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partnerships, other pass-through entities and investors in these entities; and
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investors that expect to receive dividends or realize gain in connection with the investors' conduct of a United States trade or business, permanent establishment or fixed base.
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banks, financial institutions and insurance companies;
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real estate investment trusts, regulated investment companies or grantor trusts;
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brokers and dealers in securities;
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holders of securities held as part of a "straddle," "hedge," "conversion transaction" or other risk–reduction or integrated transaction; and
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persons who hold or receive our common stock as compensation, such as that received pursuant to stock option plans and stock purchase plans.
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does not discuss any possible applicability of any United States state or local taxes, non-United States taxes or any United States federal tax other than the income tax, including, but not limited to, the federal gift tax and estate tax.
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This discussion is based
on current provisions of the Code, final, temporary and proposed U.S. Treasury regulations, judicial opinions, published positions
of the U.S. Internal Revenue Service, or the IRS, and other applicable authorities, all as in effect on the date hereof and all
of which are subject to differing interpretations or change, possibly with retroactive effect, which could materially affect the
tax consequences described herein. We have not requested, nor will we request, a ruling from the IRS or an opinion of counsel with
respect to the tax consequences discussed herein, and there can be no assurance that the IRS will not take a position contrary
to the tax consequences discussed below or that any position taken by the IRS would not be sustained.
This summary of United
States federal income tax considerations constitutes neither tax nor legal advice. Prospective investors are urged to consult their
own tax advisors to determine the specific tax consequences and risks to them of purchasing, holding and disposing of our common
stock, including the application to their particular situation of any United States federal estate and gift, United States state
and local, non-United States and other tax laws and of any applicable income tax treaty.
Non-U.S. Holder Defined
For purposes of this discussion,
a non-U.S. holder is a beneficial holder of our common stock that is neither a "United States person" nor a partnership or entity
or arrangement treated as a partnership for United States federal income tax purposes. A "United States person" is:
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an individual citizen or resident of the United States;
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a corporation, or other entity treated as an association taxable as a corporation, that is organized in or under the laws of the United States, any state thereof or the District of Columbia;
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an estate the income of which is subject to United States federal income taxation regardless of its source; or
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a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust, or (2) has a valid election in effect under applicable the Treasury Regulations to be treated as a United States person for United States federal income tax purposes.
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An individual may be treated,
for U.S. federal income tax purposes, as a resident of the United States in any calendar year by being present in the United States
on at least 31 days in that calendar year and for an aggregate of at least 183 days during a three–year period ending in
the current calendar year. The 183–day test is determined by counting all of the days the individual is treated as being
present in the current year, one–third of such days in the immediately preceding year and one–sixth of such days in
the second preceding year. Residents are subject to U.S. federal income tax as if they were U.S. citizens.
If a partnership holds our
common stock, then the United States federal income tax treatment of a partner in that partnership generally will depend on the
status of the partner and the partnership's activities. Partners and partnerships should consult their own tax advisors with regard
to the United States federal income tax treatment of an investment in our common stock.
Distributions
Distributions paid to a non-U.S.
holder of our common stock will constitute a "dividend" for United States federal income tax purposes to the extent paid out of
our current or accumulated earnings and profits, as determined for United States federal income tax purposes. Any distributions
that exceed both our current and accumulated earnings and profits would first constitute a non-taxable return of capital, which
would reduce the holder's basis in our common stock, but not below zero, and thereafter would be treated as gain from the sale
of our common stock (see "Sale or Taxable Disposition of Common Stock" below).
Subject to the following
paragraphs, dividends paid to a non-U.S. holder on our common stock generally will be subject to United States federal withholding
tax at a 30% gross rate, subject to any exemption or lower rate as may be specified by an applicable income tax treaty. We may
withhold up to 30% of either (i) the gross amount of the entire distribution, even if the amount of the distribution is greater
than the amount constituting a dividend, as described above, or (ii) the amount of the distribution we project will be a dividend,
based upon a reasonable estimate of both our current and our accumulated earnings and profits for the taxable year in which the
distribution is made. If tax is withheld on the amount of a distribution in excess of the amount constituting a dividend, then
you may obtain a refund of such excess amounts by timely filing a claim for refund with the Internal Revenue Service.
In order to claim the benefit
of a reduced rate of or an exemption from withholding tax under an applicable income tax treaty, a non-U.S. holder will be required
(a) to satisfy certain certification requirements, which may be made by providing us or our agent with a properly executed
and completed Internal Revenue Service Form W-8BEN (or other applicable form) certifying, under penalty of perjury, that the holder
qualifies for treaty benefits and is not a United States person or (b) if our common stock is held through certain non-United
States intermediaries, to satisfy the relevant certification requirements of Treasury Regulations. Special certification and other
requirements apply to certain non-U.S. holders that are pass-through entities.
Dividends that are effectively
connected with the conduct of a trade or business by the non-U.S. holder within the United States (and, if required by an applicable
income tax treaty, are attributable to a U.S. permanent establishment or, in the case of an individual non-U.S. holder, a fixed
base) are not subject to the withholding tax, provided that, prior to the making of a distribution, the non-U.S. holder so certifies,
under penalty of perjury, on a properly executed and delivered Internal Revenue Service Form W-8ECI (or other applicable form).
Instead, such dividends would be subject to United States federal income tax on a net income basis in the same manner as if the
non-U.S. holder were a United States person.
Corporate holders who receive
effectively connected dividends may also be subject to an additional "branch profits tax" at a gross rate of 30% on their earnings
and profits for the taxable year that are effectively connected with the holder's conduct of a trade or business within the United
States, subject to any exemption or reduction provided by an applicable income tax treaty.
A non–U.S. holder who
provides us with an Internal Revenue Service Form W–8BEN or W–8ECI will be required to periodically update such form.
Sale or Taxable Disposition
of Common Stock
Any gain realized on the
sale, exchange or other taxable disposition of our common stock generally will not be subject to United States federal income tax
(including by way of withholding) unless:
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the gain is effectively connected with a trade or business of the non-U.S. holder in the United States (and, if required by an applicable income tax treaty, is attributable to a U.S. permanent establishment of the non-U.S. holder or, in the case of an individual, a fixed base);
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the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of that disposition, and certain other conditions are met; or
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we are or have been a "United States real property holding corporation" for United States federal income tax purposes at any time during the shorter of the five-year period preceding such disposition or the non-U.S. holder's holding period in the common stock.
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A non-U.S. holder described
in the first bullet point above generally will be subject to United States federal income tax on the net gain derived from the
sale or disposition under regular graduated United States federal income tax rates, as if the holder were a United States person.
If such non-U.S. holder is a corporation, then it may also, under certain circumstances, be subject to an additional "branch profits"
tax at a gross rate of 30% on its earnings and profits for the taxable year that are effectively connected with its conduct of
its United States trade or business, subject to exemption or reduction provided by any applicable income tax treaty.
An individual non-U.S. holder
described in the second bullet point immediately above will be subject to a tax at a 30% gross rate, subject to any reduction or
reduced rate under an applicable income tax treaty, on the net gain derived from the sale, which may be offset by U.S. source capital
losses, even though the individual is not considered a resident of the United States.
We believe we are not,
have not been and will not become a "United States real property holding corporation" for United States federal income tax purposes.
In the event that we are or become a United States real property holding corporation at any time during the applicable period
described in the third bullet point above, any gain recognized on a sale or other taxable disposition of our common stock may
be subject to United States federal income tax, including any applicable withholding tax, if either (1) the non-U.S. holder
beneficially owns, or has owned, more than 5% of the total fair value of our Common Stock at any time during the applicable period,
or (2) our Common Stock ceases to be traded on an "established securities market" within the meaning of the Code. Non-U.S.
holders who own or may own more than 5% of our Common Stock are encouraged to consult their tax advisors with respect to the United
States tax consequences of a disposition of our Common Stock.
Information Reporting
and Backup Withholding
We must report annually to
the Internal Revenue Service and to each non-U.S. holder the amount of dividends paid to such holder, the name and address of such
holder and the amount of tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of
the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country
in which the non-U.S. holder resides under the provisions of an applicable income tax treaty.
A non-U.S. holder will be
subject to backup withholding, currently at a 28% rate, for dividends paid to such holder unless such holder certifies under penalty
of perjury as to non-United States person status (and neither we nor the paying agent has actual knowledge or reason to know that
such holder is a United States person), or such holder otherwise establishes an exemption.
Information reporting and,
depending on the circumstances, backup withholding will apply to the proceeds of a sale of our common stock within the United States
or conducted through certain U.S.-related financial intermediaries, unless the beneficial owner certifies under penalty of perjury
as to non-United States person status (and neither the broker nor intermediary has actual knowledge or reason to know that the
beneficial owner is a United States person), or such owner otherwise establishes an exemption.
Any amounts withheld under
the backup withholding rules may be allowed as a refund or a credit against a non-U.S. holder's United States federal income tax
liability provided the required information is timely furnished to the Internal Revenue Service.
Recent Legislative Developments
Recently proposed legislation
is pending in both houses of congress providing for new withholding taxes to enforce new reporting requirements on specified foreign
accounts owned by either specified United States persons or by foreign entities which are owned by United States persons. The
provisions specifically establish rules for withholdable payments (including dividends) to foreign financial institutions and
other foreign entities. The proposed legislation generally imposes a 30% withholding tax on payments of dividends made to a foreign
financial institution, unless such institution enters into an agreement with the U.S. Treasury agreeing to meet certain information
reporting and verification requirements regarding the U.S. accounts upon behalf of which it is acting. The proposed legislation
imposes similar requirements (absent the need for agreements) on non-financial institutions. These rules are currently scheduled
to be effective for payments made after December 31, 2010. It is unclear whether, or in what form, these proposals may be
enacted. Non-U.S. holders are encouraged to consult with their tax advisers regarding the possible implications of the proposed
legislation on their investment in respect of the Common Stock.
The foregoing discussion
is only a summary of material U.S. federal income and estate tax consequences of the acquisition, ownership and disposition
of our Common Stock by non–U.S. holders. You are urged to consult your own tax advisor with respect to the particular tax
consequences to you of ownership and disposition of our Common Stock, including the effect of any U.S., state, local, non–U.S.
or other tax laws and any applicable income or estate tax treaty.
PLAN OF DISTRIBUTION
The selling stockholders
and any of their pledgees, donees, assignees and successors-in-interest may, from time to time, sell any or all of their shares
of common stock being offered under this prospectus on any stock exchange, market or trading facility on which shares of our Common
Stock are traded or in private transactions. These sales may be at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or negotiated prices. The selling stockholders will pay any brokerage
commissions and similar selling expenses attributable to the sale of the shares. We will pay other expenses relating to the preparation,
updating and filing of this registration statement. We will not receive any of the proceeds from the sale of the shares by the
selling stockholders. The selling stockholders may use any one or more of the following methods when disposing of shares:
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ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
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block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
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purchases by a broker-dealer as principal and resales by the broker-dealer for its account;
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an exchange distribution in accordance with the rules of the applicable exchange;
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privately negotiated transactions;
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to cover short sales made after the effective date of the registration statement of which this prospectus is a part;
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broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;
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a combination of any of these methods of sale; and
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any other method permitted pursuant to applicable law.
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The shares may also be sold
under Rule 144 under the Securities Act, if available for a selling stockholder, rather than under this prospectus. There can be
no assurance that any selling stockholder will sell any or all of the shares of common stock registered pursuant to the registration
statement of which this prospectus is a part.
In connection with the
sale of our Common Stock or interest therein, the selling stockholders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales or our common stock in the course of hedging the positions
they assume. The selling stockholders may also sell shares of our Common Stock short and deliver these securities to close out
their short position, or loan or pledge our Common Stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transaction with broker-dealers or other financial institutions or the creation
of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares
offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus
(as supplemented or amended to reflect such transaction).
Broker-dealers engaged by
the selling stockholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or
discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser)
in amounts to be negotiated, which commissions as to a particular broker or dealer may be in excess of customary commissions to
the extent permitted by applicable law.
The selling stockholders
and any broker-dealers or agents that are involved in selling the shares offered under this prospectus may be deemed to be "underwriters"
within the meaning of Section 2(a)(11) of the Securities Act in connection with these sales. Commissions received by these
broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions
or discounts under the Securities Act. Selling stockholders who are deemed to be underwriters will be subject to the prospectus
delivery requirements of the Securities Act.
The selling stockholders
and any other persons participating in the sale or distribution of the shares offered under this prospectus will be subject to
applicable provisions of the Exchange Act, and the rules and regulations under that act, including Regulation M. These provisions
may restrict activities of, and limit the timing of purchases and sales of any of the shares by, the selling stockholders or any
other person. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously
engaging in market making and other activities with respect to those securities for a specified period of time prior to the commencement
of such distributions, subject to specified exceptions or exemptions. All of these limitations may affect the marketability of
the shares.
If any of the shares
of Common Stock offered for sale pursuant to this prospectus are transferred other than pursuant to a sale under this prospectus,
then subsequent holders could not use this prospectus until a post-effective amendment or prospectus supplement is filed, naming
such holders.
We have agreed to pay all
fees and expenses we incur incident to the registration of the shares being offered under this prospectus. However, each selling
stockholder and purchaser is responsible for paying any discounts, commissions and similar selling expenses they incur. We
have agreed to indemnify the selling stockholders against certain liabilities arising in connection with this prospectus, including
certain liabilities under the Securities Act and state securities laws. We may be indemnified by the selling stockholders
against certain losses, damages and liabilities arising in connection with this prospectus, including liabilities under the Securities
Act.
We have agreed with the selling
stockholders to keep the registration statement of which this prospectus constitutes a part effective until the earlier of: (1) such
time as all of the shares of selling stockholders eligible to be covered by this prospectus have been disposed of pursuant to and
in accordance with the registration statement or (2) such shares are eligible for resale without restriction (including volume
limitations) under Rule 144 of the Securities Act.
CHANGE IN ACCOUNTANTS
CCR LLP
On April 12, 2010, we
engaged CCR LLP ("CCR") as our principal independent accountants to audit our financial statements, replacing Kemp & Company,
a Professional Association ("Kemp"), who were dismissed as our principal independent accountants on the same day. We
made this change primarily because we relocated our financial operations from Little Rock, Arkansas to Worcester, Massachusetts.
CCR was a regional firm with headquarters in Westborough, Massachusetts which provided local support on a timely basis, while
Kemp does not maintain offices outside of Little Rock, Arkansas. On December 1, 2011 Grant Thornton LLP acquired the practice of
CCR.
These changes were approved
by the Audit Committee of our Board of Directors.
During the fiscal
years ended December 31, 2009 and 2008 and during the subsequent interim period prior to the engagement of CCR, we did not
consult with CCR regarding any matter, including without limitation (i) the application of accounting principles to a
specified transaction, either completed or proposed, (ii) the type of audit opinion that might be rendered on our
consolidated financial statements or (iii) any matter that was either the subject of a disagreement (as defined in Item 304,
paragraph (a)(1)(iv) of Regulation S-K and the instructions related to such Item 304) with Kemp or a reportable event (as
defined in paragraph (a)(1)(v) of such Item 304).
Kemp's reports on our financial
statements for the fiscal years ended December 31, 2008 and 2009 did not contain any adverse opinion or disclaimer of opinion and
were not qualified as to uncertainty, audit scope or accounting principles, except that Kemp’s reports on our financial statements
for both fiscal years contained explanatory paragraphs describing conditions that raised substantial doubt about our ability to
continue as a going concern.
During the fiscal years ended December 31, 2009 and 2008 and during the subsequent interim period prior to the engagement of CCR, there
were no disagreements between us and Kemp on any matter of accounting principles or practices, financial
statement disclosures or auditing scope or procedures, which disagreements, if not resolved to Kemp’s satisfaction,
would have caused Kemp to make reference to the subject matter of such disagreements in its report, except that, with respect
to the fiscal year ended December 31, 2008, the following disagreements arose:
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Payroll tax adjustments: Our prior Chief Financial Officer did not agree with Kemp’s estimated adjustment for penalties and interest with respect to unpaid payroll taxes. Following termination of our prior Chief Financial Officer’s employment, our interim Chief Financial Officer and our Board of Directors discussed the matter with Kemp and the matter was resolved to Kemp’s satisfaction;
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(ii)
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Debt covenant violations: Our prior Chief Financial Officer would not agree to classify our Convertible Promissory Note to The Quercus Trust in the original principal amount of $2,000,000 as in default at December 31, 2008 due to the violation of certain covenants relating to unpaid payroll taxes and the non-disclosure of such violations. Following termination of our prior Chief Financial Officer’s employment, our interim Chief Financial Officer and the Audit Committee of our Board of Directors discussed the matter with Kemp and the matter was resolved to Kemp’s satisfaction; and
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Failure to provide requested audit information: Our prior Chief Financial Officer refused to provide critical audit documentation to Kemp. Following termination of our prior Chief Financial Officer’s employment, our interim Chief Financial Officer and the Audit Committee of our Board of Directors discussed the matter with Kemp, our interim Chief Financial Officer provided all of the requested information to Kemp, and the matter was resolved to Kemp’s satisfaction.
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We have authorized Kemp to
respond fully to CCR concerning all of the foregoing disagreements.
In connection with its
audits of our financial statements for the fiscal years ended December 31, 2008 and 2009, Kemp advised us of certain matters involving
our internal controls over financial reporting that Kemp considered to be material weaknesses. Our Audit Committee
discussed such matters with Kemp and we have undertaken efforts to correct the deficiencies in internal controls identified by
Kemp. We have authorized Kemp to respond fully to CCR concerning such matters.
Grant Thornton LLP
As of December 1, 2011, the Audit Committee
of our Board of Directors engaged Grant Thornton LLP (“Grant Thornton”) as our new independent registered public accounting
firm. CCR LLP (“CCR”) our former independent registered public accounting firm, resigned as our independent
registered public accounting firm simultaneous with the engagement of Grant Thornton. This change was a result of Grant
Thornton’s acquisition of the practice of CCR on December 1, 2011.
CCR had been appointed as our independent
registered public accounting firm on April 12, 2010. CCR’s report on the Company’s consolidated financial
statements for the year ended December 31, 2010 did not contain any adverse opinion or disclaimer of opinion (except for
an emphasis of matter paragraph which discussed substantial doubt regarding our ability to continue as a going concern) and were
not qualified or modified as to uncertainty, audit scope or accounting principles.
During our fiscal year ended December 31,
2010 and during the period from January 1, 2011 through the resignation of CCR on December 1, 2011, there were no disagreements
between us and CCR on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures,
which, if not resolved to the satisfaction of CCR, would have caused CCR to make reference to the matter in their report. None
of the “reportable events” described in Item 304(a)(1)(v) of Regulation S-K have occurred during the fiscal
year ended December 31, 2010 or through December 1, 2011.
During the fiscal year ended December 31,
2010 and during the period from January 1, 2011 through the engagement of Grant Thornton on December 1, 2011, neither we nor anyone
acting on our behalf consulted Grant Thornton regarding (1) the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, and
Grant Thornton did not provide either a written report or oral advice to us that was a factor considered by us in reaching a decision
as to any accounting, auditing, or financial reporting issue, (2) any matter that was either the subject of a disagreement
with CCR, which, if not resolved to the satisfaction of CCR, would have caused CCR to make reference to the matter in their report,
or (3) a “reportable event” as described in Item 304(a)(1)(v) of Regulation S-K .
LEGAL MATTERS
The validity of the common
stock has been passed upon for us by Nixon Peabody LLP, 100 Summer Street, Boston, Massachusetts 02110.
EXPERTS
The consolidated
financial statements of ThermoEnergy Corporation as of December 31, 2011 and 2010 and for the years then ended included in
this prospectus and elsewhere in the Registration Statement have been so included in
reliance upon the report of Grant Thornton LLP, independent registered public accountants and successor to the practice
of CCR LLP, upon the authority of said firm as experts in auditing and accounting in giving said report.
WHERE YOU CAN FIND MORE
INFORMATION
We file annual, quarterly
and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public
over the Internet at the SEC's website at
www.sec.gov
and on the investor relations page of our website at
http://ir.stockpr.com/thermoenergy/sec-filings
.
Information on, or accessible through, our website is not part of this prospectus. You may also read and copy any document
we file with the SEC at the SEC's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. You can also obtain
copies of the documents upon the payment of a duplicating fee to the SEC. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of the Public Reference Room.
This prospectus omits some
information contained in the registration statement in accordance with SEC rules and regulations. You should review
the information and exhibits included in the registration statement for further information about us and the securities we are
offering. Statements in this prospectus concerning any document we filed as an exhibit to the registration statement or that we
otherwise filed with the SEC are not intended to be comprehensive and are qualified by reference to these filings. You should review
the complete document to evaluate these statements.
THERMOENERGY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
As of and For the Years ended December
31, 2011 and 2010
With
Report of Independent Registered Public
Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Board of Directors and Stockholders
ThermoEnergy Corporation
We have audited the accompanying consolidated
balance sheet of ThermoEnergy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December
31, 2011, and the related consolidated statements of operations, stockholders’ deficiency, and cash flows for the year then
ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit. The consolidated financial statements of the Company as of December 31,
2010 and for the year then ended were audited by CCR LLP. We have since succeeded to the practice of such firm.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of ThermoEnergy Corporation and subsidiaries
as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the two years in the period
ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial
statements, the Company incurred a net loss of $17,386,000 during the year ended December 31, 2011, and, as of that date, the Company’s
current liabilities exceeded its current assets by $3,387,000 and its total liabilities exceeded its total assets by $4,603,000.
These conditions, along with other matters as set forth in Note 2, raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
Boston, Massachusetts
May 14, 2012
THERMOENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value
amounts)
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,056
|
|
|
$
|
4,299
|
|
Accounts receivable, net
|
|
|
4,228
|
|
|
|
1,043
|
|
Costs in excess of billings
|
|
|
132
|
|
|
|
—
|
|
Inventories
|
|
|
167
|
|
|
|
65
|
|
Other current assets
|
|
|
590
|
|
|
|
289
|
|
Total Current Assets
|
|
|
8,173
|
|
|
|
5,696
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
544
|
|
|
|
560
|
|
Other assets
|
|
|
72
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
8,789
|
|
|
$
|
6,317
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,640
|
|
|
$
|
722
|
|
Convertible debt, current portion
|
|
|
1,250
|
|
|
|
—
|
|
Accrued payroll taxes
|
|
|
599
|
|
|
|
1,470
|
|
Billings in excess of costs
|
|
|
5,131
|
|
|
|
1,880
|
|
Derivative liability, current portion
|
|
|
706
|
|
|
|
—
|
|
Other current liabilities
|
|
|
1,234
|
|
|
|
1,995
|
|
Total Current Liabilities
|
|
|
11,560
|
|
|
|
6,067
|
|
|
|
|
|
|
|
|
|
|
Long Term Liabilities:
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
|
101
|
|
|
|
2,852
|
|
Convertible debt, net
|
|
|
1,571
|
|
|
|
8,892
|
|
Other long term liabilities
|
|
|
160
|
|
|
|
180
|
|
Total Long Term Liabilities
|
|
|
1,832
|
|
|
|
11,924
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
13,392
|
|
|
|
17,991
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficiency:
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.01 par value: authorized: 30,000,000 shares at December 31, 2011 and 20,000,000 shares at December 31, 2010:
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred Stock, liquidation value of $1.20 per share: designated: 208,334 shares at December 31, 2011 and 10,000,000 shares at December 31, 2010; issued and outstanding: 208,334 shares at December 31, 2011 and 2010
|
|
|
2
|
|
|
|
2
|
|
Series B Convertible Preferred Stock, liquidation preference of $2.40 per share: designated: 12,000,000 shares at December 31, 2011 and 6,454,621 shares at December 31, 2010; issued and outstanding: 11,664,993 shares at December 31, 2011 and 5,968,510 shares at December 31, 2010
|
|
|
117
|
|
|
|
60
|
|
Common Stock, $.001 par value: authorized –
425,000,000 shares at December 31, 2011 and 300,000,000 shares at December 31, 2010; issued: 85,167,098 shares at December
31, 2011 and 55,681,918 shares at December 31, 2010; outstanding: 85,033,301 shares at December 31, 2011 and 55,548,121
shares at December 31, 2010
|
|
|
85
|
|
|
|
55
|
|
Additional paid-in capital (Note 1)
|
|
|
108,727
|
|
|
|
84,351
|
|
Accumulated deficit (Note 1)
|
|
|
(113,510
|
)
|
|
|
(96,124
|
)
|
Treasury stock, at cost: 133,797 shares at December 31, 2011 and 2010
|
|
|
(18
|
)
|
|
|
(18
|
)
|
Total ThermoEnergy Corporation Stockholders’ Deficiency
|
|
|
(4,597
|
)
|
|
|
(11,674
|
)
|
Noncontrolling interest
|
|
|
(6
|
)
|
|
|
—
|
|
Total Stockholders’ Deficiency
|
|
|
(4,603
|
)
|
|
|
(11,674
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
|
|
$
|
8,789
|
|
|
$
|
6,317
|
|
See notes to consolidated financial statements.
THERMOENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share
amounts)
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
5,583
|
|
|
$
|
2,874
|
|
Cost of revenue
|
|
|
5,179
|
|
|
|
2,799
|
|
Gross profit
|
|
|
404
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
4,807
|
|
|
|
5,800
|
|
Engineering, research and development
|
|
|
299
|
|
|
|
643
|
|
Sales and marketing
|
|
|
2,448
|
|
|
|
1,281
|
|
Total operating expenses
|
|
|
7,554
|
|
|
|
7,724
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,150
|
)
|
|
|
(7,649
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Warrant expense
|
|
|
—
|
|
|
|
(107
|
)
|
Gain on payroll tax settlement
|
|
|
—
|
|
|
|
2,263
|
|
Loss on extinguishment of debt (Note 1)
|
|
|
(12,551
|
)
|
|
|
(5,620
|
)
|
Derivative liability income (expense)
|
|
|
3,936
|
|
|
|
(293
|
)
|
Equity in losses of joint venture
|
|
|
(389
|
)
|
|
|
(74
|
)
|
Interest and other expense, net
|
|
|
(1,232
|
)
|
|
|
(3,376
|
)
|
Total other expense
|
|
|
(10,236
|
)
|
|
|
(7,207
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(17,386
|
)
|
|
|
(14,856
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
57
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation
|
|
|
(17,329
|
)
|
|
|
(14,856
|
)
|
Deemed dividend on Series B Convertible Preferred Stock
(Note 1)
|
|
|
—
|
|
|
|
(1,894
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation common stockholders
|
|
$
|
(17,329
|
)
|
|
$
|
(16,750
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share attributable to ThermoEnergy Corporation common stockholders, basic and diluted
|
|
$
|
(0.30
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing loss per share, basic and diluted
|
|
|
56,819,885
|
|
|
|
54,041,586
|
|
See notes to consolidated financial statements.
THERMOENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
DEFICIENCY
(in thousands, except share and per share amounts)
Years Ended December 31, 2011 and 2010
|
|
Series A
Convertible
Preferred
Stock
|
|
|
Series B
Convertible
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Treasury
Stock
|
|
|
Noncontrolling
Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2009
|
|
$
|
2
|
|
|
$
|
30
|
|
|
$
|
54
|
|
|
$
|
66,711
|
|
|
$
|
(81,268
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(14,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options issued to officers, directors and employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,066
|
|
Common
Stock issued for services (200,000 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Convertible
Notes and accrued interest converted to Common Stock (1,802,445 shares at $0.24 per share)
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
433
|
|
Convertible
debt and accrued interest converted to Series B Convertible Preferred Stock (791,668 shares at $2.40 per share) (Note
1)
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
6,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,906
|
|
Series
B Convertible Preferred Stock and warrants issued for cash, net of issuance costs of $375 (2,083,334 shares at $2.40 per share)
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
4,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,625
|
|
Series
B Convertible Preferred Stock and warrants issued for settlement with Convertible note holders (55,554 shares at $2.40 per
share)
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
534
|
|
Beneficial
conversion features recognized upon issuance of short term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,053
|
|
Purchase of treasury stock
(50,000 shares at $0.35 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
(18
|
)
|
Net
Loss (Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,856
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2010
|
|
|
2
|
|
|
|
60
|
|
|
|
55
|
|
|
|
84,351
|
|
|
|
(96,124
|
)
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
(11,674
|
)
|
Stock
options issued to officers, directors and employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,002
|
|
Common
Stock issued for services (600,000 shares)
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114
|
|
Conversion
of Series B Convertible Stock (118,518 shares) to Common Stock (1,185,180 shares)
|
|
|
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Conversion
and tender of convertible debt and accrued interest to Series B Convertible Preferred Stock and warrants
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
14,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,138
|
|
Exercise
of Common Stock purchase warrants for cash, net of issuance costs of $196 (27,700,000 shares at $0.095 per share)
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
2,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,436
|
|
Issuance
of Common Stock purchase warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,879
|
|
Derecognition
of beneficial conversion features on extinguished debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,003
|
)
|
Repricing of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,799
|
|
Reclassification
of derivative liabilities to equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,037
|
|
Debt
discount recognized upon issuance of convertible debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
Contributions
to joint venture on behalf of noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63
|
)
|
|
|
(63
|
)
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,386
|
)
|
|
|
|
|
|
|
57
|
|
|
|
(17,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
2
|
|
|
$
|
117
|
|
|
$
|
85
|
|
|
$
|
108,727
|
|
|
$
|
(113,510
|
)
|
|
$
|
(18
|
)
|
|
$
|
(6
|
)
|
|
$
|
(4,603
|
)
|
See notes to consolidated financial statements.
THERMOENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss (Note 1)
|
|
$
|
(17,386
|
)
|
|
$
|
(14,856
|
)
|
Adjustment to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
1,002
|
|
|
|
2,066
|
|
Warrant expense
|
|
|
—
|
|
|
|
107
|
|
Common stock issued for services
|
|
|
114
|
|
|
|
54
|
|
Gain on payroll tax settlement
|
|
|
—
|
|
|
|
(2,263
|
)
|
Loss on extinguishment of debt (Note 1)
|
|
|
12,513
|
|
|
|
5,620
|
|
Loss on disposal of property, plant and equipment
|
|
|
62
|
|
|
|
—
|
|
Equity in losses of joint venture
|
|
|
389
|
|
|
|
74
|
|
Derivative liability (income) expense
|
|
|
(3,936
|
)
|
|
|
293
|
|
Non-cash interest added to debt
|
|
|
245
|
|
|
|
941
|
|
Series B Preferred Convertible Stock and warrants issued for note holder settlement expenses
|
|
|
—
|
|
|
|
534
|
|
Purchase of treasury stock
|
|
|
—
|
|
|
|
(18
|
)
|
Depreciation
|
|
|
89
|
|
|
|
52
|
|
Amortization of discount on convertible debt
|
|
|
687
|
|
|
|
2,243
|
|
Increase (decrease) in cash arising from changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,185
|
)
|
|
|
(1,036
|
)
|
Costs in excess of billings
|
|
|
(132
|
)
|
|
|
—
|
|
Inventories
|
|
|
(102
|
)
|
|
|
9
|
|
Other current assets
|
|
|
(307
|
)
|
|
|
(84
|
)
|
Accounts payable
|
|
|
1,918
|
|
|
|
(90
|
)
|
Billings in excess of costs
|
|
|
3,251
|
|
|
|
1,482
|
|
Other current liabilities
|
|
|
(1,303
|
)
|
|
|
(707
|
)
|
Other long-term liabilities
|
|
|
(20
|
)
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(6,101
|
)
|
|
|
(5,628
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Investment in joint venture
|
|
|
(400
|
)
|
|
|
(61
|
)
|
Purchases of property and equipment
|
|
|
(135
|
)
|
|
|
(371
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(535
|
)
|
|
|
(432
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Series B Convertible Preferred Stock and warrants, net of issuance costs of $375
|
|
|
—
|
|
|
|
4,625
|
|
Proceeds from issuance of common stock, net of issuance costs of $196
|
|
|
2,436
|
|
|
|
—
|
|
Proceeds from issuance of convertible promissory notes
|
|
|
5,760
|
|
|
|
4,625
|
|
Payments on convertible promissory notes
|
|
|
(2,803
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
5,393
|
|
|
|
9,250
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(1,243
|
)
|
|
|
3,190
|
|
Cash, beginning of year
|
|
|
4,299
|
|
|
|
1,109
|
|
Cash, end of year
|
|
$
|
3,056
|
|
|
$
|
4,299
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Conversion and
tender of convertible debt and accrued interest to Series B Convertible Preferred Stock and warrants
|
|
$
|
14,138
|
|
|
$
|
1,900
|
|
Conversion of convertible notes and accrued interest to common stock
|
|
$
|
—
|
|
|
$
|
433
|
|
Debt (premium) discount recognized on convertible debt
|
|
$
|
(131
|
)
|
|
$
|
3,053
|
|
Accrued interest added to debt
|
|
$
|
153
|
|
|
$
|
323
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
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 its 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. Certain prior year amounts have been reclassified to conform to current year classifications.
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America 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.
The 15% third party ownership interest
in TEPS is recorded as a noncontrolling interest in the consolidated financial statements. As of December 31, 2010, the noncontrolling
interest in TEPS was immaterial to the consolidated financial statements taken as a whole.
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.
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 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.
In circumstances when the Company cannot
estimate the final outcome of a contract, or when the Company cannot reasonably estimate revenue, the Company utilizes the percentage-of-completion
method based on a zero profit margin until more precise estimates can be made. If and when the Company can make more precise estimates,
revenues will be adjusted accordingly and recorded as a change in an accounting estimate. For the years ended December 31, 2011
and 2010, the Company has recorded one contract which represented approximately 5% and 35% of its revenues, respectively, utilizing
the percentage-of-completion method based on a zero profit margin.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
Cash
The Company places its cash in highly rated
financial institutions, which are continually reviewed by senior management for financial stability. Effective December 31, 2010,
extending through December 31, 2012, all “noninterest-bearing transaction accounts” are fully insured, regardless of
the balance of the account. Generally the Company’s cash in interest-bearing accounts exceeds financial depository insurance
limits. However, the Company has not experienced any losses in such accounts and believes that its cash is not exposed to significant
credit risk.
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.
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 following is a summary of the Company’s
allowance for doubtful accounts activity for the years ended December 31, 2011 and 2010:
|
|
Year Ended December 31,
|
|
(in $000’s)
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts, beginning of year
|
|
$
|
9
|
|
|
$
|
9
|
|
Bad debt expense
|
|
|
1
|
|
|
|
—
|
|
Write-offs
|
|
|
(10
|
)
|
|
|
—
|
|
Allowance for doubtful accounts, end of year
|
|
|
—
|
|
|
|
9
|
|
At December 31, 2011, one customer accounted
for 96% of the Company’s gross accounts receivable balance. For the year ended December 31, 2011, two customers each accounted
for more than 10% of the Company’s revenues and collectively accounted for 92% of total revenues. For the year ended December
31, 2010, three customers each accounted for more than 10% of the Company’s revenues and collectively accounted for 96% of
total revenues.
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.
The Company evaluates its inventory for
excess quantities and obsolescence on an annual basis. In preparing our evaluation, we look at the expected demand for
our products for the next three to twelve months. Based on this evaluation, we establish and maintain a reserve so that
inventory is appropriately stated at the lower of cost or net realizable value.
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.
The Company recorded a loss of $62,000
on the disposal of property and equipment during 2011 in conjunction with relocating its corporate headquarters.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
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 payroll tax and other accruals are reflected in income 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 contingent 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 Accounting Standards Codification (“ASC”) Topic 718, “Compensation – Stock Compensation”.
This topic requires that the cost of all share-based payments to employees, including grants of employee stock options, be recognized
in the 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.
Income taxes
The Company uses the liability method of
accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between
the financial reporting and tax basis of assets and liabilities and are measured using enacted rates and laws that will be in effect
when the deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance for deferred tax assets
is provided if it is more likely than not that all or a portion of the deferred tax assets will not be realized. The Company recognizes
interest and penalties related to underpayments of income taxes as a component of interest and other expense on its Consolidated
Statement of Operations.
The Company estimates contingent income
tax liabilities based on the guidance for accounting for uncertain tax positions as prescribed in ASC Topic 740, “Income
Taxes.” We use a two-step process to assess each income tax position. We first determine whether it is more likely
than not that the income tax position will be sustained, based on technical merits, upon examination by the taxing authorities.
If the income tax position is expected to meet the more likely than not criteria, we then record the benefit in the financial statements
that equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At December 31,
2011 and 2010, there are no uncertain tax positions that require accrual.
The Company is subject to taxation
in the U.S. and various states. As of December 31, 2011 the Company’s tax years for 2008, 2009 and 2010 are subject
to examination by the tax authorities. With few exceptions, as of December 31, 2001, the Company is no longer subject to
U.S. federal, state or local examinations by tax authorities for years before 2008. Tax year 2007 was open as of December 31, 2010.
Fair value of financial instruments
and fair value measurements
The carrying amount of cash, accounts receivable,
other current assets, accounts payable, short-term borrowings and other current liabilities in the consolidated financial statements
approximate fair value because of the short-term nature of those instruments. The carrying amount of the Company’s convertible
debt was $2,821,000 and $8,892,000 at December 31, 2011 and 2010, respectively, and approximates the fair value of these instruments.
The Company’s warrant liabilities are recorded at fair value.
The Company's assets and liabilities carried
at fair value are categorized using inputs from the three levels of 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.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
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
|
|
Assets and liabilities measured at fair
value on a recurring basis as of December 31, 2010 are as follows: (in thousands)
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Description
|
|
Balance as of
December 31,
2010
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability – long-term portion
|
|
$
|
2,852
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,852
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,852
|
|
The following table sets forth a reconciliation of changes in
the fair value of the Company’s derivative liabilities classified as Level 3 (in thousands):
Balance at December 31, 2010
|
|
$
|
2,852
|
|
Issuance of warrants as derivative liabilities
|
|
|
3,928
|
|
Change in fair value
|
|
|
(3,936
|
)
|
Reclass of warrants to equity
|
|
|
(2,037
|
)
|
Balance at December 31, 2011
|
|
$
|
807
|
|
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 are considered a “deemed dividend” and are accounted for as a component of net loss attributable to common
stockholders on the Company’s Consolidated Statements of Operations.
Earnings (loss) per share
Basic earnings
(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 earnings 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 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.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
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 does not believe the adoption of the provisions of ASU 2011-04 in the Company’s fiscal
year beginning January 1, 2012 will have a material impact on its financial statements or disclosures.
Revision of prior period financial statements
The Company identified prior period
errors relating to the accounting for certain debt transactions. As part of the Company’s accounting for these
transactions under extinguishment accounting, the fair value of certain warrants issued as partial consideration for the
extinguishment of debt during the quarter ended September 30, 2010 was recorded as deemed dividends to preferred
shareholders instead of being separately valued and included as a component of the loss recognized on debt extinguishment.
These errors impacted the quarter ended September 30, 2010 and the year ended December 31, 2010.
In evaluating whether the Company’s
previously issued consolidated financial statements were materially misstated, the Company considered the guidance in Accounting
Standards Codification (ASC) Topic 250, “Accounting Changes and Error Corrections,” ASC Topic 250-10-S99-1, “Assessing
Materiality,” and ASC Topic 250-10-S99-2, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements
in Current Year Financial Statements.” The Company concluded these errors were not material individually or in the aggregate
to any of the prior reporting periods, and therefore, amendments of previously filed reports were not required. As such, the revisions
for these corrections to the applicable prior periods are reflected in the financial information herein and will be reflected in
future filings containing such financial information.
The prior period financial statements included
in this filing have been revised to reflect the corrections of these errors, the effects of which have been provided in summarized
format below:
Revised consolidated balance sheet amounts
|
|
December 31,
2010
|
|
|
|
As Previously
Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
Additional paid-in capital
|
|
|
79,345
|
|
|
|
5,006
|
|
|
|
84,351
|
|
Accumulated deficit
|
|
|
(91,118
|
)
|
|
|
(5,006
|
)
|
|
|
(96,124
|
)
|
Revised consolidated statement of operations amounts
|
|
For the
Year Ended December 31, 2010
|
|
|
|
As Previously
Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
Loss on extinguishment
of debt
|
|
$
|
(614
|
)
|
|
$
|
(5,006
|
)
|
|
$
|
(5,620
|
)
|
Total other expense
|
|
|
(2,201
|
)
|
|
|
(5,006
|
)
|
|
|
(7,207
|
)
|
Net loss
|
|
|
(9,850
|
)
|
|
|
(5,006
|
)
|
|
|
(14,856
|
)
|
Net loss attributable to ThermoEnergy
Corporation
|
|
|
(9,850
|
)
|
|
|
(5,006
|
)
|
|
|
(14,856
|
)
|
Deemed dividend on Series B Convertible
Preferred Stock
|
|
|
(6,900
|
)
|
|
|
5,006
|
|
|
|
(1,894
|
)
|
Net loss attributable to ThermoEnergy
Corporation common stockholders
|
|
|
(16,750
|
)
|
|
|
—
|
|
|
|
(16,750
|
)
|
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
Revised consolidated statement of stockholders’ deficiency amounts
|
|
For the
Year Ended December 31, 2010
|
|
|
|
As Previously
Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
Convertible debt and
accrued interest converted to Series B Convertible
Preferred Stock (791,668 shares at $2.40 per share)
|
|
$
|
1,900
|
|
|
$
|
5,006
|
|
|
$
|
6,906
|
|
Net loss
|
|
|
(9,850
|
)
|
|
|
(5,006
|
)
|
|
|
(14,856
|
)
|
Revised consolidated statement of cash flows amounts
|
|
For the
Year Ended December 31, 2010
|
|
|
|
As Previously
Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
Net loss
|
|
$
|
(9,850
|
)
|
|
$
|
(5,006
|
)
|
|
$
|
(14,856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
614
|
|
|
|
5,006
|
|
|
|
5,620
|
|
Note 2: 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 Company’s power and water
technologies (the “Technologies”) and to fund the Company’s liabilities, which included accounts payable of $2.64
million, convertible debt of approximately $2.8 million, accrued payroll taxes of $599,000 (see Note 12), derivative liabilities
of $807,000 and approximately $1.4 million of other liabilities at December 31, 2011. 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 12). The consolidated 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 is actively seeking to raise
substantial working 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 primarily dependent upon the Company’s ability to collaborate
with financially sound third parties to pursue projects involving the Technologies.
Management has undertaken and successfully
completed a program to reduce the Company’s outstanding debt as follows:
As more fully described in Note 5, the
Company entered into Note Amendment and Forbearance Agreements in January 2011 with the holders of the CASTion Notes originally
due May 31, 2010. As part of these agreements, the Company issued amended CASTion Notes that extended the maturity date until February
29, 2012.
As more fully described in Note 5,
on
February 25, 2011,
the Company entered into
a Note Extension and Amendment
Agreement
with the holders of the Company’s 2010 Bridge Notes. The
Note
Extension and Amendment Agreement
extended the maturity date of the 2010 Bridge Notes to February 29, 2012 and increased
the interest rate on these Notes from 3% per annum to 10%.
As more fully described in Note 5, the
Company entered into a Bridge Loan and Warrant Amendment Agreement with certain investors on June 17, 2011 pursuant to which the
Company received proceeds totaling approximately $2.9 million. The Bridge Loan and Warrant Amendment Agreement was amended on July
12, 2011 to provide for an additional $1.6 million of funding, bringing the total proceeds to approximately $4.5 million (the “2011
Bridge Loans”).
On July 1, 2011, the Company used approximately
$1.6 million of these proceeds to pay down the principal balance of the CASTion Notes as described above. Per the terms of the
CASTion Notes, as amended, in the event the Company makes any payments of principal or accrued interest on or before July 5, 2011,
an equal amount of such payment shall automatically convert into shares of the Company’s Series B Convertible Preferred
Stock at the rate of $2.40 per share and Warrants for the purchase of the Company’s Common Stock equal to that number of
shares of the Company’s Common Stock determined by dividing 200% of the amount of principal and interest converted by $0.30.
Accordingly, on July 1, 2011, the Company issued 653,439 shares of its Series B Convertible Preferred Stock and Warrants for the
purchase of 10,455,024 shares of its Common Stock. As a result, the amended CASTion Notes were considered to be repaid in full.
Consequently, per the terms of the amended
2010 Bridge Loan Agreement, as described above, the repayment of the CASTion Notes triggered the Company’s right to convert
the entire outstanding balance of principal and interest on the 2010 Bridge Notes (approximately $4.5 million) into shares of Series
B Convertible Preferred Stock. The Company effected this conversion on August 11, 2011.
Also on August 11, 2011, upon satisfaction
of all of the conditions set forth in the 2011 Bridge Loan and Warrant Amendment Agreement, the holders of the 2011 Bridge Loans
exercised all of the Warrants in accordance with the 2011 Bridge Loan and Warrant Amendment Agreement and surrendered all of the
2011 Bridge Loans in payment of the exercise price for the purchase under the Warrants of an aggregate of 3,469,387 shares of Series
B Convertible Preferred Stock at a price of $1.30 per share.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
As more fully described in Note 5, the
Company entered into a Bridge Loan Agreement with certain investors on December 2, 2011 pursuant to which the Company received
proceeds totaling $1.25 million.
As more fully
described in Note 6, on December 30, 2011,
the Company received proceeds totaling $2,436,000, net of
issuance costs, from the exercise of an aggregate of 27.7 million warrants at an exercise price of $0.095 per share.
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 and Condensed Quarterly Financial
Information (Unaudited)
2011 Quarterly 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 (see
Note 5). 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. These errors did not
have any impact on the Company’s consolidated financial statements as of and for the year ended December 31, 2010.
The impact of the errors on the Company’s
consolidated statements of operations for the three and nine months ended September 30, 2011 is summarized below (in thousands):
|
|
Three Months Ended
September 30, 2011
|
|
|
Nine Months Ended
September 30, 2011
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
As Originally
Reported
|
|
|
As Restated
|
|
|
As Originally
Reported
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(1,470
|
)
|
|
$
|
(1,470
|
)
|
|
$
|
(5,296
|
)
|
|
$
|
(5,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant expense
|
|
|
(1,799
|
)
|
|
|
—
|
|
|
|
(1,799
|
)
|
|
|
—
|
|
Derivative liability income (loss)
|
|
|
(653
|
)
|
|
|
440
|
|
|
|
403
|
|
|
|
3,963
|
|
Loss on extinguishment of debt
|
|
|
(2,042
|
)
|
|
|
(5,159
|
)
|
|
|
(2,042
|
)
|
|
|
(12,551
|
)
|
Interest and other expense, net
|
|
|
(263
|
)
|
|
|
(220
|
)
|
|
|
(2,751
|
)
|
|
|
(1,124
|
)
|
Equity in losses of joint venture
|
|
|
(117
|
)
|
|
|
(117
|
)
|
|
|
(386
|
)
|
|
|
(386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(6,344
|
)
|
|
|
(6,526
|
)
|
|
|
(11,871
|
)
|
|
|
(15,394
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
17
|
|
|
|
17
|
|
|
|
57
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation
|
|
|
(6,327
|
)
|
|
|
(6,509
|
)
|
|
|
(11,814
|
)
|
|
|
(15,337
|
)
|
Deemed dividend on Series B Convertible Preferred Stock
|
|
|
(4,045
|
)
|
|
|
—
|
|
|
|
(4,271
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation common stockholders
|
|
$
|
(10,372
|
)
|
|
$
|
(6,509
|
)
|
|
$
|
(16,085
|
)
|
|
$
|
(15,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to ThermoEnergy Corporation common stockholders, basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing loss per share, basic and diluted
|
|
|
56,867,098
|
|
|
|
56,867,098
|
|
|
|
56,506,905
|
|
|
|
56,506,905
|
|
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
The impact of the errors on the Company’s consolidated
statements of operations for the three and six months ended June 30, 2011 is summarized below (in thousands):
|
|
Three Months Ended
June 30, 2011
(Unaudited)
|
|
|
Six Months Ended
June 30, 2011
(Unaudited)
|
|
|
|
As Originally
Reported
|
|
|
As Restated
|
|
|
As Originally
Reported
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(1,815
|
)
|
|
$
|
(1,815
|
)
|
|
$
|
(3,826
|
)
|
|
$
|
(3,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability income
|
|
|
39
|
|
|
|
820
|
|
|
|
1,056
|
|
|
|
3,523
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
(147
|
)
|
|
|
—
|
|
|
|
(7,392
|
)
|
Interest and other expense, net
|
|
|
(1,027
|
)
|
|
|
(210
|
)
|
|
|
(2,488
|
)
|
|
|
(904
|
)
|
Equity in losses of joint venture
|
|
|
(182
|
)
|
|
|
(182
|
)
|
|
|
(269
|
)
|
|
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,985
|
)
|
|
|
(1,534
|
)
|
|
|
(5,527
|
)
|
|
|
(8,868
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
27
|
|
|
|
27
|
|
|
|
40
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation
|
|
|
(2,958
|
)
|
|
|
(1,507
|
)
|
|
|
(5,487
|
)
|
|
|
(8,828
|
)
|
Deemed dividend on Series B Convertible Preferred Stock
|
|
|
(91
|
)
|
|
|
—
|
|
|
|
(226
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation common stockholders
|
|
$
|
(3,049
|
)
|
|
$
|
(1,507
|
)
|
|
$
|
(5,713
|
)
|
|
$
|
(8,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to ThermoEnergy Corporation common stockholders, basic and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing loss per share, basic and diluted
|
|
|
56,738,188
|
|
|
|
56,738,188
|
|
|
|
56,323,824
|
|
|
|
56,323,824
|
|
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):
|
|
Three Months Ended
March 31, 2011
(Unaudited)
|
|
|
|
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
|
|
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
The impact of the errors on the Company’s consolidated
balance sheets is summarized below (in thousands):
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
September 30, 2011
(Unaudited)
|
|
|
June 30, 2011
(Unaudited)
|
|
|
March 31, 2011
(Unaudited)
|
|
|
|
As Originally
Reported
|
|
|
As Restated
|
|
|
As Originally
Reported
|
|
|
As Restated
|
|
|
As Originally
Reported
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
11,090
|
|
|
$
|
9,684
|
|
|
$
|
15,984
|
|
|
$
|
19,476
|
|
|
$
|
13,156
|
|
|
$
|
18,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ deficiency
|
|
$
|
(6,813
|
)
|
|
$
|
(5,407
|
)
|
|
$
|
(11,653
|
)
|
|
$
|
(15,145
|
)
|
|
$
|
(9,182
|
)
|
|
$
|
(14,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficiency
|
|
$
|
4,277
|
|
|
$
|
4,277
|
|
|
$
|
4,331
|
|
|
$
|
4,331
|
|
|
$
|
3,974
|
|
|
$
|
3,974
|
|
The errors as detailed above had no effect
on net cash flows from operating, investing or financing activities in any period. Within the operating activities section of the
consolidated statements of cash flows, the effect of the error on net loss in each period as summarized above was offset by an
equal change in non-cash items, a non-cash adjustment to reconcile net loss to net cash used in operating activities. The Company
did not include consolidated statements of stockholders’ deficiency in its Quarterly Reports on Form 10-Q for any of the
three quarters of 2011.
Condensed Quarterly Financial Information (Unaudited)
The following table sets forth certain
unaudited quarterly financial information for fiscal 2010 and 2011. This data should be read together with the Company’s
consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The Company has
prepared the unaudited information on a basis consistent with its audited financial statements and has included all adjustments
of a normal and recurring nature, which, in the opinion of management, are considered necessary to fairly present the Company’s
revenue and operating expenses for the quarters presented. The Company’s historical operating results for any quarter are
not necessarily indicative of results for any future period.
|
|
(Unaudited)
For the Three Months Ended
|
|
(in thousands, except share and per share data)
|
|
March 31,
2010
|
|
|
June 30,
2010
|
|
|
September 30,
2010
|
|
|
December 31,
2010
|
|
|
March 31,
2011
|
|
|
June 30,
2011
|
|
|
September 30,
2011
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
|
As Revised
|
|
|
|
|
|
As Restated
|
|
|
As Restated
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,160
|
|
|
$
|
253
|
|
|
$
|
641
|
|
|
$
|
820
|
|
|
$
|
948
|
|
|
$
|
1,434
|
|
|
$
|
1,193
|
|
|
$
|
2,008
|
|
Cost of sales
|
|
|
1,170
|
|
|
|
141
|
|
|
|
612
|
|
|
|
876
|
|
|
|
967
|
|
|
|
1,280
|
|
|
|
1,073
|
|
|
|
1,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
(10
|
)
|
|
|
112
|
|
|
|
29
|
|
|
|
(56
|
)
|
|
|
(19
|
)
|
|
|
154
|
|
|
|
120
|
|
|
|
149
|
|
Operating expenses
|
|
|
1,649
|
|
|
|
1,842
|
|
|
|
1,819
|
|
|
|
2,414
|
|
|
|
1,992
|
|
|
|
1.969
|
|
|
|
1,590
|
|
|
|
2,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,659
|
)
|
|
|
(1,730
|
)
|
|
|
(1,790
|
)
|
|
|
(2,470
|
)
|
|
|
(2,011
|
)
|
|
|
(1,815
|
)
|
|
|
(1,470
|
)
|
|
|
(1,854
|
)
|
Other income (expense)
|
|
|
(329
|
)
|
|
|
(3,852
|
)
|
|
|
(4,138
|
)
|
|
|
1,112
|
|
|
|
(5,323
|
)
|
|
|
281
|
|
|
|
(5,056
|
)
|
|
|
(138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,988
|
)
|
|
|
(5,582
|
)
|
|
|
(5,928
|
)
|
|
|
(1,358
|
)
|
|
|
(7,334
|
)
|
|
|
(1,534
|
)
|
|
|
(6,526
|
)
|
|
|
(1,992
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13
|
|
|
|
27
|
|
|
|
17
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation
|
|
|
(1,988
|
)
|
|
|
(5,582
|
)
|
|
|
(5,928
|
)
|
|
|
(1,358
|
)
|
|
|
(7,321
|
)
|
|
|
(1,507
|
)
|
|
|
(6,509
|
)
|
|
|
(1,992
|
)
|
Deemed dividend on Series B Convertible Preferred Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,894
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation common stockholders
|
|
$
|
(1,988
|
)
|
|
$
|
(5,582
|
)
|
|
$
|
(7,822
|
)
|
|
$
|
(1,358
|
)
|
|
$
|
(7,321
|
)
|
|
$
|
(1,507
|
)
|
|
$
|
(6,509
|
)
|
|
$
|
(1,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted:
|
|
$
|
(0.04
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing loss per share, basic and diluted
|
|
|
53,679,473
|
|
|
|
53,679,473
|
|
|
|
53,679,473
|
|
|
|
54,041,586
|
|
|
|
55,848,585
|
|
|
|
56,738,188
|
|
|
|
56,867,098
|
|
|
|
57,748,620
|
|
Note 4: Joint Venture
On February 25, 2009, the Company’s
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 (the “Joint Venture”) for the purpose of developing its proprietary pressurized
oxycombustion technology. In 2011, the joint venture changed its name to Babcock-Thermo Clean Combustion LLC.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
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 pressurized oxycombustion technology (the “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 pressurized oxycombustion
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 TEPS 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 owned 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. The
Company made capital contributions of $50,000 in 2009, $61,000 in 2010, and $400,000 in 2011.
The Company accounted for the Joint Venture
using the equity method of accounting. Accordingly, the Company reduced the value of its investment in the Joint Venture by $389,000
in 2011 and $74,000 in 2010 to account for its share of net losses incurred by the Joint Venture. The carrying value of the Company’s
investment in the Joint Venture is $32,000 and $37,000 as of December 31, 2011 and 2010, respectively, and is classified as Other
Assets on the Company’s Consolidated Balance Sheets.
As further discussed in Note 13, 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.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
Note 5: Convertible debt
Convertible debt consisted of the following
at December 31, 2011 and 2010 (in thousands):
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Convertible Promissory Note, 5%, due March 7, 2013, less discount of $78 in 2011 and $132 in 2010
|
|
$
|
860
|
|
|
$
|
762
|
|
Convertible Promissory Note, 5%, due March 21, 2013, less discount of $181 in 2011 and $345 in 2010
|
|
|
711
|
|
|
|
504
|
|
Convertible Promissory Notes, 12.5%, due December 31, 2012
|
|
|
1,250
|
|
|
|
—
|
|
Convertible Promissory Notes, 10%, due February 29, 2012
|
|
|
—
|
|
|
|
5,380
|
|
Convertible Bridge Notes, 10%, due February 29, 2012, net of discount of $496 in 2010
|
|
|
—
|
|
|
|
2,246
|
|
|
|
|
2,821
|
|
|
|
8,892
|
|
Less: Current portion
|
|
|
(1,250
|
)
|
|
|
—
|
|
|
|
$
|
1,571
|
|
|
$
|
8,892
|
|
March 21, 2007 Financing
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. As further consideration,
the Company issued a warrant to purchase 750,000 shares of common stock at an exercise price equal to the daily volume weighted
average price per share of the common stock for the 365-day period immediately preceding the date on which the warrant is exercised,
subject to a minimum exercise price of $0.50 per share and a maximum exercise price of $1.00 per share. The warrant expires on
March 21, 2013.
The Company estimated the fair value of
the warrant issued using the Black-Scholes option pricing model and allocated $193,000 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 resulted in a beneficial conversion feature amounting to $88,000, the
intrinsic value of the conversion feature on that date. The total debt discount of $281,000 is being amortized to interest expense
over the stated term of the Note.
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 $188,000 and $144,000 of accrued interest to the principal balance of the Note
as of December 31, 2011 and 2010, respectively.
March 7, 2008 Financing
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. As further consideration, the
Company issued a warrant to purchase 750,000 shares of common stock at an exercise price equal to the daily volume weighted average
price per share of the Company’s common stock for the 365-day period immediately preceding the date on which the warrant
is exercised, subject to a minimum exercise price of $0.50 per share and a maximum exercise price of $1.00 per share. The warrant
expires on March 7, 2014.
The Company estimated the fair value of
the warrant issued using the Black-Scholes option pricing model and allocated $321,000 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 resulted in a beneficial conversion feature amounting to $429,000,
the intrinsic value of the conversion feature on that date. The total debt discount of $750,000 is being amortized to interest
expense over the stated term of the Note.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
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 $142,000 and $99,000 of accrued interest to the principal balance of the Note
as of December 31, 2011 and 2010, respectively.
CASTion Minority Interest Financing
In January 2009, the Company issued Convertible
Promissory Notes (the “Convertible Notes”) in the aggregate principal amount of $351,614, originally due May 31, 2010,
as part of the consideration for the acquisition of the minority shareholders’ interest in CASTion. The Convertible Notes
were issued with the same terms and conditions as the Convertible Promissory Notes issued as part of the acquisition of CASTion
on July 2, 2007.
On October 20, 2010, in conjunction with
the settlement reached between former minority shareholders of CASTion and former majority shareholders of CASTion as discussed
in Note 12, the Company entered into a settlement agreement with the former minority shareholders pursuant to which the former
minority shareholders converted notes plus accrued interest totaling $433,000 into 1,802,445 shares of the Company’s common
stock at a price of $0.24 per share.
CASTion Acquisition Financing
On July 2, 2007, the Company issued Convertible
Promissory Notes in the aggregate principal amount of $3,353,127 as part of the consideration for the acquisition of CASTion. The
outstanding principal and accrued interest are convertible into shares of the Company’s Common Stock at a conversion price
of $0.50 per share at any time at the holders’ discretion. The Notes contain conventional weighted-average anti-dilution
provisions for the adjustment of the conversion price of the Notes in the event the Company issues additional shares of Common
Stock (or securities convertible into Common Stock) at a price less than the then-effective exercise price or conversion price.
The Notes originally matured on May 31, 2010, and were in default, as the Company had not made required prepayments from a private
placement of equity that closed on December 18, 2007.
Interest on the Notes was payable semi-annually,
and the Company has the option of deferring interest payments and rolling the deferred amount into the principal amount of the
Notes. At December 31, 2010, deferred accrued interest amounts added to the principal balances of the Notes totaled $2,027,000.
A valuation discount of $313,425 was computed
on the Notes based on a fair market value interest rate of 10% compared to the stated rate of 6.5%, which was adjusted to 10% as
of November 30, 2007 in accordance with the terms of the Notes. The valuation discount resulted in a beneficial conversion feature
of $313,182, the intrinsic value of the conversion feature on that date. The total debt discount of $626,607 was amortized to interest
expense over the stated term of the Notes.
On January 7, 2011 the Company entered
into Note Amendment and Forbearance Agreements (the “Agreements”) with the holders of the CASTion Notes (the “CASTion
Noteholders”). Pursuant to the Agreements, the Company (i) made payments totaling $1,144,336 against the outstanding balances
of the CASTion Notes; (ii) converted an aggregate of $902,710 in principal and accrued interest on the CASTion Notes into a total
of 376,129 shares of the Company’s Series B Convertible Preferred Stock; (iii) issued to the CASTion Noteholders warrants
for the purchase of an aggregate of 17,585,127 shares of its Common Stock at an exercise price of $0.40 per share and an aggregate
of 6,018,065 shares of its Common Stock at an exercise price of $0.30 per share ; (iv) made additional cash payments to the CASTion
Noteholders totaling $37,914; and (v) the CASTion Notes were amended and restated.
The amended and restated CASTion Notes
bore interest at the rate of 10% per annum, and the maturity date on the CASTion Notes was extended to February 29, 2012. Installment
payments (based on a 10-year amortization schedule) were due on the last day of each month beginning January 31, 2011. The restated
CASTion Notes were convertible, in whole or in part, at any time at the election of the CASTion Noteholders, into shares of the
Company’s Series B Convertible Preferred Stock at the rate of $2.40 per share. The restated CASTion Notes provided that,
in the event, on or before July 5, 2011, the Company made any payments of principal or accrued interest, then simultaneously with
the making of such payment a portion of the remaining principal and accrued and unpaid interest on the restated CASTion Notes in
an amount equal to the amount of such payment automatically converted into shares of the Company’s Series B Convertible Preferred
Stock at the rate of $2.40 per share. The restated CASTion Notes also provided that, in the event that (i) the closing price of
the Company’s Common Stock equaled or exceeded $0.72 per share for 20 consecutive trading days and (ii) the daily average
trading volume of the Company’s Common Stock exceeded 30,000 shares for 20 consecutive trading days, then the entire principal
amount, plus all accrued and unpaid interest thereon, would automatically convert into shares of the Company’s Series B Convertible
Preferred Stock at the rate of $2.40 per share.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
The Company accounted for the restated
CASTion Notes as a debt extinguishment, as the present value of cash flows of the restated CASTion Notes was substantially different
than the present value under the original terms. The restructuring of the CASTion Notes resulted in the Company recording a loss
on extinguishment of debt of $7,361,000 in the first quarter of 2011.
On July 1, 2011, the Company exercised
its right to prepay a portion of the outstanding principal balance and accrued and unpaid interest on the restated CASTion Notes
by making payments in the aggregate amount of $1,568,267. These payments represent slightly in excess of 50% of the balance of
principal and accrued interest balance on the restated CASTion Notes. Accordingly, on July 1, 2011, the Company issued 653,439
shares of its Series B Convertible Preferred Stock and Warrants for the purchase of 10,455,024 shares of its Common Stock per the
terms of the restated CASTion Notes. As a result, the restated CASTion Notes are repaid in full.
The Company accounted for the repayment
and conversion of the restated CASTion Notes as a debt extinguishment, as the fair value of the instruments tendered was substantially
different than the carrying value of the restated CASTion Notes. The extinguishment of the CASTion Notes resulted in the Company
recording a loss on extinguishment of debt of $952,000 in the third quarter of 2011.
2010 Bridge Note Financing
On March 10, 2010, the Company entered
into a Bridge Loan Agreement with six of its principal investors (“the Investors”), all related parties, pursuant to
which the Investors agreed to make bridge loans to the Company of $2.6 million in exchange for 3% Secured Convertible Promissory
Notes (the “Bridge Notes”). The Bridge Notes bear interest at the rate of 3% per year and were due and payable
on February 28, 2011. The entire unpaid principal amount, together with all interest then accrued and unpaid under each Bridge
Note, is convertible, at the election of the holder, into shares of Common Stock at a conversion price of $0.24 per share.
The Bridge Notes contain other conventional
provisions, including the acceleration of repayment obligations upon the occurrence of certain specified Events of Default. The
Bridge Notes are secured by all of the Company’s assets except for the shares of the Company’s subsidiary, CASTion
Corporation (in which no security interest has been granted).
On June 30, 2010, the parties amended the
Bridge Loan Agreement pursuant to which the Investors agreed to increase by $2 million the amount of the bridge loans as provided
under the Bridge Loan Agreement. The new loans made under the amended Bridge Loan Agreement have been made on terms identical to
the original loans under the Bridge Loan Agreement. The Company has received proceeds totaling $4.6 million under the Bridge Loan
Agreement.
The Company calculated the difference between
the effective conversion price of the Bridge Note and the fair value of the Company’s common stock as of each date of issuance,
resulting in a total beneficial conversion feature of $3,053,000, representing the intrinsic value of the conversion feature on
the respective issuance dates. The value of the beneficial conversion feature is recorded as a discount on the Bridge Notes and
is amortized to interest expense over the stated term of the Bridge Notes.
On July 8, 2010, the
Company converted $1.9 million of 2010 Bridge Notes and accrued interest into 791,668 shares of Series B Convertible
Preferred Stock, and the Company issued warrants to purchase 8.3 million shares of Common Stock at $0.24 per share. The
Company accounted for this conversion as a debt extinguishment, as the fair value of the consideration tendered was
substantially different than the carrying value of the converted Notes. The extinguishment of these Notes resulted in the
Company recording a loss on extinguishment of debt $5,620,000 in the third quarter of 2010.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
On February 25, 2011 the Company and the
Investors entered into Note Extension and Amendment Agreements amending the terms of the 2010 Bridge Notes. As amended, the “Amended
2010 Bridge Notes” bear interest at the rate of 10% per annum and mature on February 29, 2012. The Amended 2010 Bridge Notes
are convertible into shares of the Company’s Series B Convertible Preferred Stock at the rate of $2.40 per share at any time
at the election of the holders. In the event, prior to the maturity date of the Amended 2010 Bridge Notes, the Company pays in
full the restated CASTion Notes as detailed above, then the Amended 2010 Bridge Notes shall convert, at the Company’s election,
into shares of the Company’s Series B Convertible Preferred Stock at the rate of $2.40 per share. In the event that (i) the
closing price of the Company’s Common Stock equals or exceeds $0.72 per share for 20 consecutive trading days and (ii) the
daily average trading volume of the Company’s Common Stock exceeds 30,000 shares for 20 consecutive trading days, then the
entire principal amount of the Amended 2010 Bridge Notes, plus all accrued and unpaid interest, shall automatically convert into
shares of the Company’s Series B Convertible Preferred Stock at the rate of $2.40 per share. Upon conversion of all or any
portion of the Amended 2010 Bridge Notes, the Company will issue five-year warrants for the purchase, at an exercise price of $0.30
per share, of that number of shares of the Company’s Common Stock determined by dividing (i) 200% of the amount of principal
and interest so converted by (ii) $0.30 (the “Warrants”). The Amended 2010 Bridge Notes contain other conventional
terms, including events of default upon the occurrence of which the Amended 2010 Bridge Notes become immediately due and payable.
The Company accounted for the amendment
of the 2010 Bridge Notes as a debt extinguishment, as the change in fair value of the embedded and beneficial conversion features
of the Amended 2010 Bridge Notes was substantially different than the fair value under the original terms. The amendment of the
2010 Bridge Notes resulted in the Company recording a gain on extinguishment of debt of $327,000 in the first quarter of 2011.
As stated above, on July 1, 2011 the Company
repaid the entire principal balance of the restated CASTion Notes by making payments totaling $1,568,267 and converting the remaining
balance into shares of Series B Convertible Preferred Stock. Per the terms of the amended 2010 Bridge Loan Agreement, as described
above, the repayment of the CASTion Notes triggered the Company’s right to convert the entire outstanding balance of principal
and interest on the Amended 2010 Bridge Notes (approximately $4.5 million) into shares of Series B Convertible Preferred Stock
and five-year warrants for the purchase, at an exercise price of $0.30 per share, of that number of shares of the Company’s
Common Stock determined by dividing (i) 200% of the amount of principal and interest so converted by (ii) $0.30 (the “Warrants”).
The Company effected this conversion on August 11, 2011, and as a result, the Amended 2010 Bridge Notes are repaid in full.
The Company accounted for the conversion
of the Amended 2010 Bridge Notes as a debt extinguishment, as the fair value of the instruments tendered was substantially different
than the carrying value of the Amended 2010 Bridge Notes. The extinguishment of the CASTion Notes resulted in the Company recording
a loss on extinguishment of debt of $2,618,000 in the third quarter of 2011.
June 2011 Bridge Note Financing
On June 17, 2011 the Company entered into
a Bridge Loan and Warrant Amendment Agreement (the “June 2011 Bridge Loan Agreement”) with six of its principal investors
(“the 2011 Investors”), pursuant to which the Company issued Promissory Notes (the “June 2011 Bridge Notes”)
in exchange for proceeds of approximately $2.9 million. This Agreement was amended on July 12, 2011 to provide for an additional
$1.6 million of funding to the Company and the issuance of additional June 2011 Bridge Notes in such principal amount. The Company
used approximately $1.6 million of the proceeds from the issuance of the June 2011 Bridge Notes to pay down the principal balance
of the restated CASTion Notes as described above.
The June 2011 Bridge Notes were originally
payable on demand at any time on or after February 29, 2012 (the “Maturity Date”). They did not bear interest
until the Maturity Date and bore interest at the rate of 10% per annum from and after the Maturity Date. The 2011 Bridge
Notes may not be prepaid, in whole or in part, without the prior written consent of the 2011 Investors. The 2011 Investors
have agreed to surrender the June 2011 Bridge Notes in payment of the exercise price for warrants held by or issuable to them (the
“Warrants”) if and when the conditions to their amendment and exercise have been satisfied.
Pursuant to the June 2011 Bridge Loan Agreement,
the Company agreed, subject to the satisfaction of certain conditions, to amend the Warrants (i) to provide that they will be exercisable
for the purchase of shares of the Company’s Series B Convertible Preferred Stock (the “Series B Stock”) instead
of Common Stock (with the number of shares of the Series B Stock determined by dividing by ten (10) the number of shares of Common
Stock for which the Warrants are currently exercisable) and (ii) to change the exercise prices of all Warrants (which currently
range from $0.30 to $1.82 per share of Common Stock) to $1.30 per share of Series B Stock (the equivalent of $0.13 per Common-equivalent
share). The Investors agreed, subject to the satisfaction of certain conditions, to exercise all of the Warrants. The
principal amount of the June 2011 Bridge Notes was equal to the aggregate exercise price of the Warrants (after they are amended
as described above).
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
Because the June 2011 Bridge Notes did
not bear interest, the Company calculated the present value of the June 2011 Bridge Notes using an imputed interest rate of 10%
and recorded imputed interest of $60,000 as a debt discount. The debt discount was amortized to interest expense.
On August 11, 2011, upon satisfaction of
all of the conditions set forth in the 2011 Bridge Note and Warrant Amendment Agreement, the Company reduced the exercise price
of the Warrants, and the holders of the June 2011 Bridge Notes exercised all of the Warrants and tendered all of the June 2011
Bridge Notes for the purchase of an aggregate of 3,469,387 shares of Series B Convertible Preferred Stock at a price of $1.30 per
share. As a result, the June 2011 Bridge Notes are repaid in full. As a result of the tender of the June 2011 Bridge Notes, the
Company recorded a loss on extinguishment of debt of $1,799,000 in the third quarter of 2011.
December 2011 Bridge Note Financing
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
On July 11, 2011 the Company received written
consents from stockholders representing 71.3% in voting power of the Company’s capital stock authorizing an amendment of
the Company’s Certificate of Incorporation for the following purposes:
|
·
|
to increase the total number of authorized
shares of stock to 455,000,000 shares, of which 425,000,000 shares shall be Common Stock and 30,000,000 shares shall be Preferred
Stock, with 208,334 shares of the Preferred Stock designated “Series A Convertible Preferred Stock”, 12,000,000 shares
of the Preferred Stock designated “Series B Convertible Preferred Stock” and the remaining shares undesignated; and
|
|
·
|
to modify the definition of “Additional
Stock” (as set forth in Section 6(g)(ii) of the Description of Series B Convertible Preferred Stock attached as Exhibit A
to the Certificate of Designation, Preferences and Rights filed in the Office of the Secretary of State of the State of Delaware
on November 18, 2009 (the “Series B Terms”)) to exclude any shares of Common Stock issued or deemed issued in a transaction
or series of related transactions approved by the holders of a majority of the then-outstanding Series B Convertible Preferred
Stock.
|
The Company filed a Certificate of Amendment
to its Certificate of Incorporation to effect the amendment on August 11, 2011.
Common Stock
During 2010, the Company received 50,000
shares of its Common Stock from a former officer as payment for medical benefits under COBRA regulations. These shares are held
as Treasury Stock and are recorded at $18,000, which represents the cost of benefits provided.
The Company issued 600,000 shares of Common
Stock valued at $114,000 and 200,000 shares of Common Stock valued at $54,000 during 2011 and 2010, respectively, for services.
As discussed in Note 5, on October 20,
2010, the Company converted notes plus accrued interest totaling $433,000 into 1,802,445 shares of the Company’s Common Stock
at a price of $0.24 per share.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
In March 2011, an investor of the Company
converted 100,000 shares of Series B Convertible Preferred Stock into 1 million shares of the Company’s Common Stock. In
May 2011, an investor of the Company converted 18,518 shares of Series B Convertible Preferred Stock into 185,180 shares of the
Company’s Common Stock.
On December 30,
2011,
the Company entered into Warrant Amendment Agreements (the “Agreements”) with 21 individuals
and entities who acquired warrants from five funds affiliated with Security Investors, LLC for the purchase of an aggregate of
27.7 million 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 $2,436,000, net of issuance costs,
from the exercise of the Warrants.
At December 31, 2011, approximately 236
million shares of Common Stock were reserved for future issuance under convertible debt and warrant agreements, stock option arrangements
and other commitments.
Preferred Stock
As of December 31, 2011, the Company has
208,334 shares of Series A Convertible Preferred Stock outstanding, which is held by a single investor. Each share of Series A
Convertible Preferred Stock is convertible into one share of the Company’s Common Stock and has a liquidation value of $1.20
per share.
The Company designated and began issuing
shares of its Series B Convertible Preferred Stock in 2009. Each share of the Company’s Series B Convertible Preferred Stock
is 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 Company’s Board of Directors consists of seven members, four of whom are
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 by the holders of the Company’s Common Stock.
As discussed in Note 5, on July 8, 2010,
in conjunction with receiving a Notice to Proceed on its contract with the New York City Department of Environmental Protection,
the Company converted $1.9 million of principal and interest on its 2010 Bridge Notes into 791,668 shares of Series B Convertible
Preferred Stock and warrants for the purchase of 8.3 million shares of the Company’s Common Stock at an exercise price of
$0.30 per share.
On August 9, 2010 the Company issued to
certain investors a total of 2,083,334 shares of the Company’s Series B Convertible Preferred Stock at a purchase price of
$2.40 per share and warrants to purchase up to 33,333,344 shares of the Company’s Common Stock at an exercise price of $0.30
per share. The total proceeds to the Company, net of issuance costs, was $4,625,000.
The Warrants may be exercised at any time
on or before August 10, 2015, subject to the Company’s right to accelerate the expiration date in the event the closing price
for the Company’s Common Stock exceeds 200% of the closing price on August 9, 2010 for a period of 30 consecutive trading
days. The Warrants contains other conventional terms, including provisions for cashless exercise and for adjustment in the Exercise
Price and/or the securities issuable upon exercise in the event of certain specified extraordinary corporate events, such as stock
splits, combinations, and stock dividends.
The Company estimated the fair value
of the warrants issued using the Black-Scholes option pricing model and allocated proceeds received to the warrant on
a relative fair value basis. The Company then calculated a beneficial conversion value of $1,894,000 related to the Series
B Convertible Preferred Stock based on its allocated fair value. Because the Series B Convertible Preferred Stock
is convertible at any time at the investor’s option, the value of the beneficial conversion feature is considered a
“deemed dividend” to the investors of the Preferred Stock as of the date of issuance and increases the net loss
attributable to common shareholders on the Company’s Consolidated Statements of Operations.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
As stated in Note 5, on July 1, 2011 the
Company repaid the entire principal balance of the restated CASTion Notes by making payments totaling $1,568,267 and converting
the remaining balance into 653,439 shares of Series B Convertible Preferred Stock and warrants to purchase a total of 10,455,424
shares of the Company’s Common Stock.
Per the terms of the amended 2010 Bridge
Loan Agreement, as described in Note 4 above, the repayment of the CASTion Notes triggered the conversion of the entire outstanding
balance of principal and interest on the 2010 Bridge Notes. As a result, on August 11, 2011 the Company converted principal and
accrued interest totaling $2,932,108 into 1,221,707 shares of Series B Convertible Preferred Stock and warrants to purchase 19,547,385
shares of the Company’s Common Stock at an exercise price of $0.30 per share.
As stated in Note 5, on August 11, 2011,
upon satisfaction of all of the conditions set forth in the 2011 Bridge Note and Warrant Amendment Agreement, the holders of the
June 2011 Bridge Notes exercised all of the Warrants in accordance with the Agreement and surrendered all of the June 2011 Bridge
Notes for the purchase under the Warrants of an aggregate of 3,469,387 shares of Series B Convertible Preferred Stock at a price
of $1.30 per share.
Stock Options
The Company’s 1997 Stock Option Plan
(the “Plan”) provided for incentive and non-incentive stock options for an aggregate of 750,000 shares of Common Stock
for key employees and non-employee Directors of the Company. The Plan, which expired on December 31, 2007, provided that the exercise
price of each option must be at least equal to 100% of the fair market value of the Common Stock on the date of grant. The Plan
contained automatic grant provisions for non-employee Directors of the Company.
The ThermoEnergy Corporation 2008 Incentive
Stock Plan (the “2008 Plan”) provides for the granting of non-qualified stock options, restricted stock, stock appreciation
rights (“SAR”) and incentive stock options for officers, employees, non-employee members of the Board of Directors,
consultants and other service providers. Options may not be granted at an exercise price less than the fair market value
of the Company’s Common Stock on the date of grant and the term of the options may not be in excess of ten years.
The Company has reserved 20,000,000 shares of Common Stock for issuance under the 2008 Plan.
Although the granting of awards under the
2008 Plan is generally at the discretion of the Compensation Committee of the Board of Directors, the 2008 Plan provides for automatic
grants of stock options to the non-employee members of the Board of Directors. Each non-employee Director who is elected or appointed
to the Board for the first time shall automatically be granted a non-qualified stock option to purchase 30,000 shares of the Company’s
Common Stock. Thereafter, at each subsequent Annual Meeting of Stockholders, each non-employee Director who is re-elected
to the Board of Directors or continues to serve a term that has not expired will receive a non-qualified stock option grant
to purchase an additional 30,000 shares. All options granted to non-employee Directors vest and become fully exercisable on the
date of the first Annual Meeting of Stockholders occurring after the end of the fiscal year of the Company during which such option
was granted and shall have a term of ten years.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
The following table presents non-cash stock
option expense included in expenses in the Company’s Consolidated Statements of Operations for the years ended December 31,
2011 and 2010 (in thousands):
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
23
|
|
|
$
|
24
|
|
General and administrative
|
|
|
769
|
|
|
|
1,752
|
|
Engineering, research and development
|
|
|
41
|
|
|
|
177
|
|
Sales and marketing
|
|
|
169
|
|
|
|
113
|
|
Option expense before tax
|
|
|
1,002
|
|
|
|
2,066
|
|
Income tax benefit
|
|
|
—
|
|
|
|
—
|
|
Net option expense
|
|
$
|
1,002
|
|
|
$
|
2,066
|
|
During 2011, the Board of Directors awarded
officers, employees, and various members of the Board of Directors a total of 3,320,000 stock options. The options are
exercisable at exercise prices ranging from $0.15 to $0.30 per share for a ten year period. The exercise price was equal to or
greater than the market price on the respective grant dates during the year.
During 2010, the Board of Directors awarded
officers, employees, and various members of the Board of Directors a total of 13,659,102 stock options. The options
are exercisable at exercise prices ranging from $0.30 to $0.35 per share for a ten year period. The exercise price was equal to
or greater than the market price on the respective grant dates during the year.
The fair value of options granted during
2011 and 2010 were estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.0% - 3.5
|
%
|
|
|
2.5% - 3.8
|
%
|
Expected option life (years)
|
|
|
10.0
|
|
|
|
10.0
|
|
Expected volatility
|
|
|
91% - 92
|
%
|
|
|
80% - 97
|
%
|
Expected dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
A summary of the Company’s stock
option activity and related information for the years ended December 31, 2011 and 2010 follows:
|
|
2011
|
|
|
2010
|
|
|
|
Number of
Shares
|
|
|
Wtd. Avg.
Price per
Share
|
|
|
Number of
Shares
|
|
|
Wtd. Avg.
Price per
Share
|
|
Outstanding, beginning of year
|
|
|
22,065,402
|
|
|
$
|
0.57
|
|
|
|
11,203,800
|
|
|
$
|
1.18
|
|
Granted
|
|
|
3,320,000
|
|
|
$
|
0.27
|
|
|
|
13,659,102
|
|
|
$
|
0.30
|
|
Canceled and expired
|
|
|
(5,711,300
|
)
|
|
$
|
0.99
|
|
|
|
(2,797,500
|
)
|
|
$
|
1.92
|
|
Outstanding, end of year
|
|
|
19,674,102
|
|
|
$
|
0.38
|
|
|
|
22,065,402
|
|
|
$
|
0.57
|
|
Vested and exercisable, end of year
|
|
|
9,393,283
|
|
|
$
|
0.47
|
|
|
|
9,746,061
|
|
|
$
|
0.91
|
|
The weighted average grant date fair value
of options granted were $0.21 per share and $0.23 per share for the years ended December 31, 2011 and 2010, respectively. The total
fair value of options vested were approximately $958,000 and $885,000 as of December 31, 2011 and 2010, respectively.
Exercise prices for options outstanding
as of December 31, 2010 ranged from $0.15 to $1.50. The weighted average remaining contractual life of those options was approximately
7.9 years at December 31, 2011. The weighted average remaining contractual life of options vested and exercisable was approximately
7.4 years at December 31, 2011.
As of December 31, 2011, there was $1,056,000
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 1.0 year. The
Company recognizes stock-based compensation on the straight-line method.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
Warrants
At December 31, 2011, there were outstanding
warrants for the purchase of 83,695,444 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 $0.39 per share). The expiration dates of outstanding warrants as of December 31,
2011 are as follows:
Expiration
|
|
Warrants
Outstanding
|
|
2012
|
|
|
19,720,910
|
|
2013
|
|
|
8,896,554
|
|
2014
|
|
|
6,345,601
|
|
2015
|
|
|
11,822,223
|
|
2016 and later
|
|
|
36,910,156
|
|
|
|
|
|
|
|
|
|
83,695,444
|
|
Note 7: Derivative Liabilities
The Company has periodically issued Common
Stock purchase warrants with anti-dilution provisions as additional consideration with certain debt instruments. Additionally,
certain debt instruments have been convertible into shares of the Company’s Series B Convertible Preferred Stock, which are
convertible into shares of the Company’s Common Stock and have anti-dilution provisions and liquidation preferences. Because
these instruments contain provisions that are not indexed to the Company’s stock, the Company is required to record these
as derivative instruments.
As of December 31, 2009 the fair value
of the Company’s derivative liabilities was $2,559,000. The fair value as of December 31, 2009 was determined based on the
Black-Scholes valuation model. Effective January 1, 2010, the Company uses a binomial lattice model to more accurately reflect
the circumstances that could affect the valuation of these warrants. The Company re-measured its warrant liability using the binomial
lattice model as of December 31, 2009 using the same assumptions as originally used in the Black-Scholes model, including a suboptimal
exercise factor of 1.25. The difference in the fair value of these derivative liabilities using the binomial lattice model did
not have a material effect on the Company’s consolidated financial statements.
The increase in fair value of the Company’s
derivative liabilities resulted in an expense of $293,000 for the year ended December 31, 2010. The expense results primarily from
a reduction in the exercise price of certain warrants from $0.50 per share and $0.36 per share to $0.30 per share, partially offset
by the passage of time.
The fair value of these derivative liabilities
as of December 31, 2010 was $2,852,000. The binomial lattice model was used to determine the fair values. The significant assumptions
used were: exercise prices between $0.30 and $0.50; the Company’s stock price on December 31, 2010, $0.26; expected volatility
of 91.5%; risk free interest rate between 0.15% and 0.98%; a remaining contract term between 2 and 5 years; and a suboptimal exercise
factor of 1.25.
During 2011, as part of the amendments
to its CASTion Notes and 2010 Bridge Notes as discussed in Note 5, the Notes were convertible into shares of the Company’s
Series B Convertible Preferred Stock at a rate of $2.40 per share at any time at the discretion of the Noteholder. As discussed
in Note 6, the Series B Convertible Preferred Stock is convertible into 10 shares of the Company’s Common Stock at any time.
The Series B Convertible Preferred Stock also contains anti-dilution provisions that allow for a reduction on the conversion price
in the event of a future financing at an exercise price lower than the conversion price of the Preferred Stock. The Series B Convertible
Preferred Stock also contains liquidation preferences to the holder. Because these provisions in the Series B Stock are not indexed
to the Company’s Common Stock, the value of these conversion features must be bifurcated and treated as derivative liabilities.
As a result, the Company recorded derivative liabilities totaling $4,306,000 in the first quarter of 2011.
The decrease in fair value of the Company’s
derivative liabilities resulted in income of $3,936,000 for the year ended December 31, 2011. The income results primarily from
the passage of time and decreases in the Company’s stock price.
The fair value of these derivative liabilities
as of December 31, 2011 was $807,000, of which warrants with an aggregate value $706,000 expire in one year or less and are classified
as current liabilities on the Company’s Consolidated Balance Sheets. The lattice model was used to determine the fair values.
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.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
Note 8: Related party transactions
The Company has an 85% ownership interest
in ThermoEnergy Power Systems, LLC, a Delaware limited liability company (“TEPS”) for the purpose of transferring the
Company’s rights and interests in its pressurized oxycombustion technology. Alexander Fassbender, former Executive Vice President
and Chief Technology Officer, as the inventor of the technology, has a 7.5% ownership interest, and the remaining 7.5% is owned
by an unrelated third party.
As discussed in Note 4, on February
25, 2009, TEPS and Babcock Power Development, LLC (“BPD”), a subsidiary of Babcock Power,
Inc., entered into a joint venture establishing Babcock-Thermo Carbon Capture LLC, a Delaware limited liability company
for the purpose of developing and commercializing TEPS’s proprietary pressurized oxycombustion technology. The BTCC
Board of Managers is supervising the wind down and dissolution process.
The Company has employment agreements with
each of its senior officers that specify base compensation, minimum annual increases and lump sum payment amounts in the event
of a change in control of the Company.
See Notes 5 and 6 for additional related
party transactions.
Note 9: Income taxes
A valuation allowance equal to the total
of the Company's net deferred tax assets has been recognized for financial reporting purposes. The net changes in the valuation
allowance were decreases of approximately $1.9 million and increases of $1.3 million during the years ended December 31, 2011 and
2010, respectively. The Company's deferred tax liabilities are not significant.
Significant components of the Company's
deferred tax assets are as follows as of December 31, 2011 and 2010 (in thousands):
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
19,720
|
|
|
$
|
16,729
|
|
Contingent liability reserves
|
|
|
158
|
|
|
|
224
|
|
Stock options and warrants
|
|
|
1,973
|
|
|
|
5,590
|
|
Valuation discount
|
|
|
(99
|
)
|
|
|
1,371
|
|
Other
|
|
|
165
|
|
|
|
222
|
|
|
|
|
21,917
|
|
|
|
24,136
|
|
Valuation allowance – deferred tax assets
|
|
|
(21,917
|
)
|
|
|
(24,136
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation of income tax expense
(benefit) at the statutory rate to income tax expense at the Company's effective rate is shown below for the years ended December
31, 2011 and 2010 (in thousands):
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Computed at statutory rate (34%)
|
|
$
|
(5,911
|
)
|
|
$
|
(3,349
|
)
|
(Decrease) increase in valuation allowance for deferred tax assets
|
|
|
(2,220
|
)
|
|
|
1,336
|
|
Loss on extinguishment of debt
|
|
|
4,267
|
|
|
|
209
|
|
Stock and stock options
|
|
|
3,745
|
|
|
|
757
|
|
Derivative liabilities
|
|
|
(1,338
|
)
|
|
|
100
|
|
Valuation discount
|
|
|
1,558
|
|
|
|
763
|
|
Non-deductible items and other
|
|
|
(101
|
)
|
|
|
184
|
|
Benefit for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
At December 31, 2011, the Company
has net operating loss carryforwards, which expire in various amounts during 2012 through 2031, of approximately
$51.9 million. The Internal Revenue Code provides for limitations on the use of net operating loss carryforwards
for acquired entities. The Company’s annual limitation for the use of CASTion’s net operating loss carryforwards
for periods prior to the date of acquisition for income tax reporting purposes is approximately $300,000. As further
discussed in Note 12, the Company has agreed, in conjunction with the Offer in Compromise accepted by the IRS in March 2011,
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, which totaled $2,263,000.
Note 10: Employee benefit plans
The Company has adopted an Employee Stock
Ownership Plan. However, as of December 31, 2011, the Plan had not been funded nor submitted to the Internal Revenue Service for
approval. The Company has a 401(k) Plan, but no employer contributions have been made to date.
Note 11: 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. As stated in Note 1, the Company markets and develops advanced municipal
and industrial wastewater treatment and carbon reducing clean energy technologies. The Company currently generates a large majority
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
Babcock-Thermo Carbon Capture, LLC, a joint venture with Babcock Power Development, LLC, for the purpose of developing and commercializing
the Company’s clean energy technology. Separate disclosure of financial information related to the Company’s clean
energy technologies is not required, as all operating activity is captured in the Company’s joint venture. 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 12: Commitments and contingencies
In October 2011, the Company amended its
lease on its primary facility in Worcester, MA with an unaffiliated third party to expand from approximately 19,200 square feet
to approximately 48,000 square feet of space and to extend its lease until January 2017. The following table summarizes the
Company’s operating lease commitments on its primary facility at December 31, 2011: (in thousands)
Payments due in:
|
|
Amount
|
|
2012
|
|
$
|
168
|
|
2013
|
|
|
173
|
|
2014
|
|
|
178
|
|
2015
|
|
|
183
|
|
2016 and later
|
|
|
204
|
|
|
|
|
|
|
|
|
$
|
906
|
|
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 that were not paid by the Company’s
former Chief Financial Officer. Pursuant to the Offer in Compromise, it has agreed to satisfy its delinquent tax liabilities by
paying a total of $2,134,636 (representing the aggregate amount of tax due, without interest or penalties). As of December 31,
2011, the Company has made payments totaling $1,958,000; a remaining balance of $176,636 was paid in January 2012. 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.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
Accrued payroll taxes, which includes penalties
and interest related to state taxing authorities, totaled $599,000 as of December 31, 2011. The Company continues to work with
the various state taxing authorities to settle its remaining payroll tax obligations.
In April 2010, a group representing former
minority shareholders of CASTion Corporation (“CASTion”) (“the Plaintiffs”) filed a Complaint in the Suffolk
County, Massachusetts Superior Court against CASTion’s former majority shareholders (the “Defendants”) alleging
claims arising out of the Defendants’ sale to the Company of their shares of capital stock and other securities of CASTion.
The Defendants threatened to file a third party complaint against the Company (and others) alleging, among other things, that the
Company breached an obligation to the Defendants in not extending to the Plaintiffs an offer to purchase the CASTion securities
held by them in a timely manner.
On October 20, 2010 the Company, the Plaintiffs
and the Defendants entered into a settlement agreement (the “Settlement”) resolving all matters related to the Complaint.
As part of the Settlement, the Company agreed to pay $66,000 to the Defendants; issue 55,554 shares of our Series B Convertible
Preferred Stock to the Defendants; amend the terms of the Company’s Convertible Notes with the Plaintiffs to reduce the conversion
price of the Notes from $0.50 per share to $0.24 per share (which were immediately converted into Common Stock; see CASTion Minority
Interest Financing section of Note 4), modify the exercise price of certain warrants held by the Plaintiffs from $0.50 per share
to $0.24 per share, and issue to the Defendants additional warrants to purchase the Company’s Common Stock. Total expense
related to the Settlement totaled $600,000 and was recorded in general and administrative expense on the Company’s Consolidated
Statement of Operations for the year ended December 31, 2010.
On
April 21, 2010, Alexander G. Fassbender, the Company’s former Executive Vice President and Chief Technology Officer (“Fassbender”),
filed a Complaint in the Fairfax County, Virginia Circuit Court alleging that his employment had been terminated in breach of his
employment agreement and claiming damages in the aggregate amount of approximately $1 million, including unpaid salary, reimbursement
of expenses, and other payments under his employment agreement. On April 7, 2011, the two parties entered into a settlement
agreement through which, in exchange for mutual releases, the Company agreed to pay Fassbender a total of $400,000 in monthly installments
of $16,667 per month over a two-year period. The Company issued a non-interest bearing note to Fassbender for these
payments. In addition, Fassbender agreed to tender all outstanding stock options to the Company in exchange for an equal
number of warrants. The warrants are exercisable at an exercise price of $0.24 per share and have a five-year term.
In addition to the matters described above,
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.
Note 13: Subsequent events
On January 10,
2012,
the Company entered into additional Warrant Amendment Agreements (the “Agreements”)
with 6 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. 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 March 2, 2012, the Company entered into
a Dissolution Agreement with Babcock Power, Inc. to terminate the Limited Liability Company Agreement dated February 25, 2009 of
Babcock-Thermo Clean Combustion, LLC and dissolve BTCC, the joint venture which the Company and Babcock had organized for the
purpose of developing and commercializing the Company’s pressurized oxycombustion technology. Pursuant to the LLC Agreement,
and as confirmed by the Dissolution Agreement, the exclusive license of the Company’s pressurized oxycombustion technology
to BTCC has been terminated. The parties remain bound by the Master Non-Disclosure Agreement (the “Master Non-Disclosure
Agreement”) entered into in connection with the organization of BTCC, which imposes on all parties continuing confidentiality
obligations. The BTCC Board of Managers is supervising the wind down and dissolution process.
On March 8, 2012 the Company announced
the formation of Unity Power Alliance (“UPA”). UPA was formed 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.
FINANCIAL STATEMENTS
AS OF AND FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2012
THERMOENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value
amounts)
|
|
March 31,
2012
|
|
|
December 31,
2011
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,933
|
|
|
$
|
3,056
|
|
Accounts receivable, net
|
|
|
986
|
|
|
|
4,228
|
|
Costs in excess of billings
|
|
|
392
|
|
|
|
132
|
|
Inventories
|
|
|
297
|
|
|
|
167
|
|
Deposits
|
|
|
820
|
|
|
|
262
|
|
Other current assets
|
|
|
290
|
|
|
|
328
|
|
Total Current Assets
|
|
|
4,718
|
|
|
|
8,173
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
480
|
|
|
|
544
|
|
Other assets
|
|
|
68
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
5,266
|
|
|
$
|
8,789
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,338
|
|
|
$
|
2,640
|
|
Convertible debt, net - current portion
|
|
|
2,926
|
|
|
|
1,250
|
|
Billings in excess of costs
|
|
|
3,982
|
|
|
|
5,131
|
|
Derivative liability, current portion
|
|
|
552
|
|
|
|
706
|
|
Other current liabilities
|
|
|
1,672
|
|
|
|
1,833
|
|
Total Current Liabilities
|
|
|
10,470
|
|
|
|
11,560
|
|
|
|
|
|
|
|
|
|
|
Long Term Liabilities:
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
|
80
|
|
|
|
101
|
|
Convertible debt, net
|
|
|
—
|
|
|
|
1,571
|
|
Other long term liabilities
|
|
|
114
|
|
|
|
160
|
|
Total Long Term Liabilities
|
|
|
194
|
|
|
|
1,832
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
10,664
|
|
|
|
13,392
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficiency:
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.01 par value: authorized: 30,000,000 shares at March 31, 2012 and December 31, 2011:
|
|
|
|
|
|
|
|
|
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
|
|
|
2
|
|
|
|
2
|
|
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
|
|
|
117
|
|
|
|
117
|
|
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
|
|
|
91
|
|
|
|
85
|
|
Additional paid-in capital
|
|
|
109,470
|
|
|
|
108,727
|
|
Accumulated deficit
|
|
|
(115,055
|
)
|
|
|
(113,510
|
)
|
Treasury stock, at cost: 133,797 shares at March 31, 2012 and December 31, 2011
|
|
|
(18
|
)
|
|
|
(18
|
)
|
Total ThermoEnergy Corporation Stockholders’ Deficiency
|
|
|
(5,393
|
)
|
|
|
(4,597
|
)
|
Noncontrolling interest
|
|
|
(5
|
)
|
|
|
(6
|
)
|
Total Stockholders’ Deficiency
|
|
|
(5,398
|
)
|
|
|
(4,603
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
|
|
$
|
5,266
|
|
|
$
|
8,789
|
|
See notes to consolidated financial statements.
THERMOENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except share and per share
amounts
(Unaudited)
|
|
Three Months Ended
March
31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(As Restated –
See
Note 3)
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,688
|
|
|
$
|
948
|
|
Less: cost of revenue
|
|
|
1,428
|
|
|
|
967
|
|
Gross profit (loss)
|
|
|
260
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,031
|
|
|
|
1,396
|
|
Engineering, research and development
|
|
|
109
|
|
|
|
83
|
|
Sales and marketing
|
|
|
703
|
|
|
|
513
|
|
Total operating expenses
|
|
|
1,843
|
|
|
|
1,992
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,583
|
)
|
|
|
(2,011
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liabilities
|
|
|
175
|
|
|
|
2,703
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
(7,245
|
)
|
Interest and other expense, net
|
|
|
(132
|
)
|
|
|
(694
|
)
|
Equity in losses of joint venture
|
|
|
(5
|
)
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,545
|
)
|
|
|
(7,334
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
1
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to
ThermoEnergy Corporation
|
|
$
|
(1,544
|
)
|
|
$
|
(7,321
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable
to ThermoEnergy Corporation common stockholders, basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares
used in computing loss per share, basic and diluted
|
|
|
90,277,915
|
|
|
|
55,848,585
|
|
See notes to consolidated financial statements.
THERMOENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
|
Three Months Ended
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(As Restated –
See Note 3)
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,545
|
)
|
|
$
|
(7,334
|
)
|
Adjustment to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
163
|
|
|
|
354
|
|
Equity in losses of joint venture
|
|
|
5
|
|
|
|
87
|
|
Decrease in derivative liabilities
|
|
|
(175
|
)
|
|
|
(2,703
|
)
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
7,245
|
|
Common stock issued for services
|
|
|
89
|
|
|
|
—
|
|
Non-cash interest added to debt
|
|
|
23
|
|
|
|
45
|
|
Loss on disposal of equipment
|
|
|
131
|
|
|
|
—
|
|
Depreciation
|
|
|
27
|
|
|
|
17
|
|
Amortization of discount on convertible debt
|
|
|
59
|
|
|
|
492
|
|
Increase (decrease) in cash arising from changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,242
|
|
|
|
361
|
|
Costs in excess of billings
|
|
|
(260
|
)
|
|
|
—
|
|
Inventories
|
|
|
(130
|
)
|
|
|
(66
|
)
|
Deposits
|
|
|
(558
|
)
|
|
|
—
|
|
Other current assets
|
|
|
38
|
|
|
|
(393
|
)
|
Accounts payable
|
|
|
(1,302
|
)
|
|
|
1,302
|
|
Billings in excess of costs
|
|
|
(1,149
|
)
|
|
|
(250
|
)
|
Other current liabilities
|
|
|
(139
|
)
|
|
|
(461
|
)
|
Other long-term liabilities
|
|
|
(46
|
)
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,527
|
)
|
|
|
(1,128
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Investment in joint venture
|
|
|
—
|
|
|
|
(125
|
)
|
Purchases of property and equipment
|
|
|
(94
|
)
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(94
|
)
|
|
|
(195
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Payments on convertible debt
|
|
|
—
|
|
|
|
(1,199
|
)
|
Proceeds from issuance of common
stock, net of issuance costs of $38
|
|
|
498
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
498
|
|
|
|
(1,199
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(1,123
|
)
|
|
|
(2,522
|
)
|
Cash, beginning of period
|
|
|
3,056
|
|
|
|
4,299
|
|
Cash, end of period
|
|
$
|
1,933
|
|
|
$
|
1,777
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
—
|
|
|
$
|
81
|
|
Supplemental schedule of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Accrued interest added to debt
|
|
$
|
23
|
|
|
$
|
153
|
|
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 pressurized oxycombustion 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 pressurized oxycombustion technology. In the LLC Agreement, BPD has agreed to develop, at its own expense,
intellectual property in connection with three critical subsystems relating to the pressurized oxycombustion 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.
54,166,684 Shares
Common Stock
THERMOENERGY CORPORATION
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