UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the quarterly period ended September
30, 2012
or
|
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the transition period from _____
to_____
Commission File Number 33-46104-FW
THERMOENERGY CORPORATION
(Exact name of registrant as specified in
its charter)
Delaware
|
71-0659511
|
(State or other jurisdiction of
|
(I.R.S. Employer Identification No.)
|
incorporation or organization)
|
|
10 New Bond Street,
|
|
Worcester, Massachusetts
|
01606
|
(Address of Principal Executive Offices)
|
(Zip Code)
|
Registrant’s telephone number,
including area code:
(508) 854-1628
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
|
Accelerated filer
¨
|
|
|
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
|
Smaller reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
Indicate the number of shares outstanding
of each of the issuer’s classes of common stock, as of the latest practicable date.
Class – Common Stock, $.001 par value Outstanding
at November 12, 2012 – 120,454,575 shares
THERMOENERGY CORPORATION
INDEX
|
|
|
Page
No.
|
|
|
|
|
Part I.
|
Financial Information
|
|
|
ITEM 1.
|
Financial Statements
|
3
|
|
|
Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011
|
3
|
|
|
Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011 (As restated) (Unaudited)
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4
|
|
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Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (As restated) (Unaudited)
|
5
|
|
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Notes to Consolidated Financial Statements (Unaudited)
|
6
|
|
ITEM 2.
|
Management's Discussion and Analysis of Financial Condition and Results of Operations
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20
|
|
ITEM 3.
|
Quantitative and Qualitative Disclosures About Market Risk
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25
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|
ITEM 4.
|
Controls and Procedures
|
25
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Part II.
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Other Information
|
|
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ITEM 1.
|
Legal Proceedings
|
26
|
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ITEM 1A.
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Risk Factors
|
26
|
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ITEM 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
26
|
|
ITEM 3.
|
Defaults Upon Senior Securities
|
27
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|
ITEM 4.
|
Mine Safety Disclosures
|
27
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|
ITEM 5.
|
Other Information
|
27
|
|
ITEM 6.
|
Exhibits
|
27
|
|
|
|
|
Signatures
|
|
29
|
PART I – FINANCIAL INFORMATION
ITEM 1. Financial Statements
THERMOENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value
amounts)
|
|
September
30,
2012
|
|
|
December 31,
2011
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
528
|
|
|
$
|
3,056
|
|
Accounts receivable, net
|
|
|
1,343
|
|
|
|
4,228
|
|
Costs in excess of billings
|
|
|
515
|
|
|
|
132
|
|
Inventories
|
|
|
46
|
|
|
|
167
|
|
Deposits
|
|
|
445
|
|
|
|
262
|
|
Other current assets
|
|
|
209
|
|
|
|
328
|
|
Total Current Assets
|
|
|
3,086
|
|
|
|
8,173
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
705
|
|
|
|
544
|
|
Other assets
|
|
|
61
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
3,852
|
|
|
$
|
8,789
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,206
|
|
|
$
|
2,640
|
|
Convertible debt, net - current portion
|
|
|
1,250
|
|
|
|
1,250
|
|
Billings in excess of costs
|
|
|
3,338
|
|
|
|
5,131
|
|
Derivative liabilities, current portion
|
|
|
41
|
|
|
|
706
|
|
Other current liabilities
|
|
|
1,927
|
|
|
|
1,833
|
|
Total Current Liabilities
|
|
|
8,762
|
|
|
|
11,560
|
|
|
|
|
|
|
|
|
|
|
Long Term Liabilities:
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
2,400
|
|
|
|
101
|
|
Convertible debt, net
|
|
|
1,818
|
|
|
|
1,571
|
|
Other long term liabilities
|
|
|
86
|
|
|
|
160
|
|
Total Long Term Liabilities
|
|
|
4,304
|
|
|
|
1,832
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
13,066
|
|
|
|
13,392
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficiency:
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.01 par value: authorized: 20,000,000 shares at September 30, 2012 and December 31, 2011:
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred Stock, liquidation value of $1.20 per share: designated: 208,334 shares at September 30, 2012 and December 31, 2011; issued and outstanding: 208,334 shares at September 30, 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 September 30, 2012 and December 31, 2011; issued and outstanding: 11,664,993 shares at September 30, 2012 and December 31, 2011
|
|
|
117
|
|
|
|
117
|
|
Common Stock, $0.001 par value: authorized: 425,000,000 shares at September 30, 2012 and December 31, 2011; issued: 116,823,372 shares at September 30, 2012 and 85,167,098 shares at December 31, 2011; outstanding: 116,689,575 shares at September 30, 2012 and 85,033,301 shares at December 31, 2011
|
|
|
117
|
|
|
|
85
|
|
Additional paid-in capital
|
|
|
110,026
|
|
|
|
108,727
|
|
Accumulated deficit
|
|
|
(119,455
|
)
|
|
|
(113,510
|
)
|
Treasury stock, at cost: 133,797 shares at September 30, 2012 and December 31, 2011
|
|
|
(18
|
)
|
|
|
(18
|
)
|
Total ThermoEnergy Corporation Stockholders’ Deficiency
|
|
|
(9,211
|
)
|
|
|
(4,597
|
)
|
Noncontrolling interest
|
|
|
(3
|
)
|
|
|
(6
|
)
|
Total Stockholders’ Deficiency
|
|
|
(9,214
|
)
|
|
|
(4,603
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
|
|
$
|
3,852
|
|
|
$
|
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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(As Restated –
See Note 4)
|
|
|
|
|
|
(As Restated –
See Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,032
|
|
|
$
|
1,193
|
|
|
$
|
5,620
|
|
|
$
|
3,575
|
|
Less: cost of revenue
|
|
|
2,031
|
|
|
|
1,073
|
|
|
|
5,238
|
|
|
|
3,321
|
|
Gross profit
|
|
|
1
|
|
|
|
120
|
|
|
|
382
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,035
|
|
|
|
897
|
|
|
|
3,951
|
|
|
|
3,592
|
|
Engineering, research and development
|
|
|
160
|
|
|
|
132
|
|
|
|
363
|
|
|
|
259
|
|
Sales and marketing
|
|
|
598
|
|
|
|
561
|
|
|
|
2,188
|
|
|
|
1,699
|
|
Total operating expenses
|
|
|
1,793
|
|
|
|
1,590
|
|
|
|
6,502
|
|
|
|
5,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,792
|
)
|
|
|
(1,470
|
)
|
|
|
(6,120
|
)
|
|
|
(5,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liabilities
|
|
|
574
|
|
|
|
440
|
|
|
|
1,100
|
|
|
|
3,963
|
|
Other derivative expense
|
|
|
(565
|
)
|
|
|
—
|
|
|
|
(565
|
)
|
|
|
—
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
(5,159
|
)
|
|
|
—
|
|
|
|
(12,551
|
)
|
Interest and other expense, net
|
|
|
(109
|
)
|
|
|
(220
|
)
|
|
|
(374
|
)
|
|
|
(1,124
|
)
|
Equity in income (loss) of joint ventures
|
|
|
24
|
|
|
|
(117
|
)
|
|
|
14
|
|
|
|
(386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,868
|
)
|
|
|
(6,526
|
)
|
|
|
(5,945
|
)
|
|
|
(15,394
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
—
|
|
|
|
17
|
|
|
|
2
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation
|
|
$
|
(1,868
|
)
|
|
$
|
(6,509
|
)
|
|
$
|
(5,943
|
)
|
|
$
|
(15,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to ThermoEnergy Corporation, basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing loss per share, basic and diluted
|
|
|
111,015,893
|
|
|
|
56,867,098
|
|
|
|
97,509,352
|
|
|
|
56,506,905
|
|
See notes to consolidated financial statements.
THERMOENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(As Restated –
See Note 4)
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,945
|
)
|
|
$
|
(15,394
|
)
|
Adjustment to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
719
|
|
|
|
757
|
|
Equity in (income) losses of joint ventures
|
|
|
(14
|
)
|
|
|
386
|
|
Change in fair value of derivative liabilities
|
|
|
(1,100
|
)
|
|
|
(3,963
|
)
|
Other derivative expense
|
|
|
565
|
|
|
|
—
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
12,551
|
|
Common stock issued for services
|
|
|
89
|
|
|
|
—
|
|
Non-cash interest added to debt
|
|
|
113
|
|
|
|
245
|
|
Loss on disposal of equipment
|
|
|
131
|
|
|
|
62
|
|
Depreciation
|
|
|
81
|
|
|
|
57
|
|
Amortization of discount on convertible debt
|
|
|
134
|
|
|
|
592
|
|
Increase (decrease) in cash arising from changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,885
|
|
|
|
816
|
|
Costs in excess of billings
|
|
|
(383
|
)
|
|
|
(329
|
)
|
Inventories
|
|
|
(118
|
)
|
|
|
(69
|
)
|
Deposits
|
|
|
(183
|
)
|
|
|
—
|
|
Other current assets
|
|
|
248
|
|
|
|
(854
|
)
|
Accounts payable
|
|
|
(434
|
)
|
|
|
1,098
|
|
Billings in excess of costs
|
|
|
(1,793
|
)
|
|
|
1,354
|
|
Other current liabilities
|
|
|
(8
|
)
|
|
|
(1,023
|
)
|
Other long-term liabilities
|
|
|
(74
|
)
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(5,087
|
)
|
|
|
(3,672
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Investment in joint ventures
|
|
|
(101
|
)
|
|
|
(400
|
)
|
Purchases of property and equipment
|
|
|
(134
|
)
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(235
|
)
|
|
|
(527
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of common stock warrants, net of issuance costs of $38
|
|
|
498
|
|
|
|
—
|
|
Proceeds from issuance of common stock and warrants, net of issuance costs of $265
|
|
|
2,296
|
|
|
|
—
|
|
Proceeds from issuance of short-term borrowings
|
|
|
—
|
|
|
|
4,510
|
|
Payments on convertible debt
|
|
|
—
|
|
|
|
(2,803
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,794
|
|
|
|
1,707
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(2,528
|
)
|
|
|
(2,492
|
)
|
Cash, beginning of period
|
|
|
3,056
|
|
|
|
4,299
|
|
Cash, end of period
|
|
$
|
528
|
|
|
$
|
1,807
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
—
|
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Accrued interest added to debt
|
|
$
|
23
|
|
|
$
|
153
|
|
Conversion and tender of convertible debt and accrued interest to Series B Convertible Preferred Stock warrants
|
|
$
|
—
|
|
|
$
|
14,138
|
|
Tender of Roenigk 2007 and 2008 Convertible Promissory Notes in exchange for Roenigk 2012 Convertible Promissory Note
|
|
$
|
1,877
|
|
|
$
|
—
|
|
Debt premium recognized on convertible debt
|
|
$
|
—
|
|
|
$
|
(131
|
)
|
See notes to consolidated financial statements.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 hydraulic
fracturing (“fracking”) in the oil and gas industry, 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 (“POXC”) 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. Financial results for Unity Power Alliance (“UPA”) have been consolidated for
the period from inception until the date it became a Joint Venture. Accordingly, the Company includes approximately $129,000
of sales and marketing expense related to UPA on its Consolidated Statement of Operations for the nine-month period ended
September 30, 2012. Financial results for UPA as a Joint Venture are accounted for under the equity method, as discussed in
Note 5. 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 nine-month period ended September 30, 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 and nine-month periods ended September 30, 2011. See Note 4.
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
September 30, 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. The Company has not recorded any such provisions for the three and nine-month periods ended September 30,
2012.
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.
Variable interest entities
The Company assesses whether its
involvement with another related entity constitutes a variable interest entity (“VIE”) through either direct or
indirect variable interest in that entity. If an entity is deemed to be a VIE, the Company must determine if it is the
primary beneficiary (i.e. the party that consolidates the VIE), in accordance with the accounting standard for the
consolidation of variable interest entities. VIEs are entities that, by design, either (1) lack sufficient equity to permit
the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity
investors that do not have the ability to make significant decisions relating to the entity’s operations through voting
rights, or do not have the obligation to absorb the expected losses and/or the right to receive the residual returns of the
entity. The Company qualitatively evaluates if it is the primary beneficiary of the VIE’s based on whether the Company
has (i) the power to direct those matters that most significantly impacted the activities of the VIE; and (ii) the obligation
to absorb losses or the right to receive benefits of the VIE. See Note 5 for further discussion of UPA as a variable interest
entity.
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 records
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 September
30, 2012 and December 31, 2011.
Inventories
Inventories are stated at the lower of
cost or net realizable value using the first-in, first-out method and consist primarily of raw materials and supplies. Work in
process inventories relate to systems currently being constructed for future use or sale.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
Inventories consist of the following at
September 30, 2012 and December 31, 2011:
|
|
September
30,
2012
|
|
|
December
31,
2011
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
46
|
|
|
$
|
67
|
|
Work in process
|
|
|
—
|
|
|
|
100
|
|
|
|
$
|
46
|
|
|
$
|
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.
The Company recorded a loss of $131,000
in the first quarter of 2012 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 nine-month period ended September 30, 2012.
The Company performed an evaluation of
its property and equipment as of September 30, 2011 in conjunction with relocating its headquarters and recorded a write-off of
$62,000. This impairment loss is included as a component of interest and other expense on the Company’s Consolidated Statement
of Operations for the three and nine-month periods ended September 30, 2011.
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 vendors and 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 $3,068,000
and $2,821,000 at September 30, 2012 and December 31, 2011, respectively, and approximates the fair value of these instruments.
The Company’s derivative liabilities are recorded at fair value. No assets are recorded at fair value as measured on a recurring
basis.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
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.
|
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. There were no deemed
dividends in the three or nine-month periods ended September 30, 2012 or 2011.
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 including additional
shares using the treasury stock and if-converted methods in computing the Company’s diluted net loss per share would be antidilutive
and, accordingly, such additional shares have not been considered in computing diluted net loss per share for the nine-month periods
ended September 30, 2012 and 2011 (as restated).
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 losses from operations in recent years, and such
losses have continued through the quarter ended September 30, 2012.
At September 30, 2012, the Company had
cash of $528,000, a decrease of approximately $2.5 million from December 31, 2011. The Company has incurred net losses since inception,
including a net loss of approximately $5.9 million during the nine-month period ended September 30, 2012 and had an accumulated
deficit of approximately $119.5 million at September 30, 2012.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
Based upon management's projections, the
Company 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 approximately $5.7
million at September 30, 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 10). 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. 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 funding 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 7, the Company initiated the following financing transactions during 2012:
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.
On July 11, 2012,
the Company received proceeds totaling $1,566,000, net of issuance costs, from the issuance of 17,316,250 shares of the Company’s
Common Stock, warrants for the purchase of an additional 18,670,375 shares at an exercise price of $0.15 per share and warrants
for the purchase of an additional 1,354,125 shares at an exercise price of $0.10 per share.
On August 9, 2012,
the Company received proceeds totaling $729,000, net of issuance costs, from the issuance of 8,287,500 shares of the Company’s
Common Stock, warrants for the purchase of an additional 9,116,250 shares at an exercise price of $0.15 per share and warrants
for the purchase of an additional 828,750 shares at an exercise price of $0.10 per share.
Also, as more
fully described in Note 11, on October 9, 2012 the Company received proceeds of $331,000, net of issuance costs, from the issuance
of 3,765,000 shares of the Company’s Common Stock, warrants for the purchase of an additional 4,141,500 shares at an exercise
price of $0.15 per share and warrants for the purchase of an additional 376,500 shares at an exercise price of $0.10 per share.
As discussed in
Note 6, the Company’s 2011 Convertible Bridge Notes mature on December 31, 2012. These Notes are convertible into shares
of a future series of Preferred Stock at a conversion price to be determined. While the Company intends to convert these Notes
before the maturity date, there can be no assurance that such a conversion will take place. If the Company does not convert these
Notes before the maturity date, it will seek to extend the maturity date on these Notes, which are held by four principal investors
of the Company.
See Note 3
for a discussion of the termination of the Company’s contract with the New York City Department of Environmental
Regulation (“NYCDEP”).
Note 3: Risks and Uncertainties
On August 22, 2012, the NYCDEP
issued a stop work order to the Company relative to its contract to install an Ammonia Removal Process (“ARP”)
system at the NYCDEP’s wastewater treatment facility in the 26
th
Ward. On November 13, 2012, the NYCDEP
notified the Company that it is terminating the contract, effective November 29, 2012.
The Company suspended all work on this
contract as of August 22, 2012 and has halted all work with its major vendors. The Company has accordingly ceased recognition of
revenues as of August 22, 2012 and has recorded all incremental costs as period costs on its Consolidated Statement of Operations.
As of November 13, 2012, the Company has billed approximately $14.8 million to the NYCDEP related to this contract, of which
approximately $13.3 million has been paid and $1.5 million remains outstanding. These amounts do not include any future billings
for costs incurred as a result of this termination.
Because of this contract termination, the Company's revenues, expenses,
and income will be adversely affected in future periods, as this contract represented approximately 80% of the Company's revenues
for the year ended December 31, 2011 and approximately 63% and 81% of the Company's revenues for the three and nine-month
periods ended September 30, 2012, respectively. The Company has yet to begin discussions with the NYCDEP about the termination,
and accordingly, the Company cannot determine a final outcome at this time.
Note 4: 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.
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 September 30, 2012 reflects the impact of this restatement on the applicable unaudited quarterly financial information
for the three and nine months ended September 30, 2011 presented in the Consolidated Statements of Operations and Consolidated
Statements of Cash Flows.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
Quarterly Reports on Form 10-Q, as originally
filed, 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 and nine months ended September 30, 2011 is summarized below (in thousands):
|
|
Three Months Ended
September 30, 2011
|
|
|
Nine Months Ended
September 30, 2011
|
|
|
|
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
|
|
Note 5: 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 POXC technology.
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 POXC technology. In the LLC Agreement, BPD agreed to develop, at its own expense, intellectual property in connection with
three critical subsystems relating to the POXC 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.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
Unity Power Alliance LLC
On March 8, 2012, the Company announced
the formation of Unity Power Alliance LLC (“UPA”). UPA was formed with the intention to work with partners and stakeholders
to develop and commercialize its pressurized oxycombustion technology.
On June 20, 2012, the Company entered into
an agreement with Itea S.p.A. (“Itea”) for the development of pressurized oxycombustion in North America. The two parties,
through UPA, will utilize the two parties’ propriety technology to advance, develop and promote the use of the coal application
of pressurized oxycombustion, construct a pilot plant utilizing the technology, and subsequently construct a demonstration facility
based on the technology as implemented in the pilot plant. Itea was granted the option to acquire a 50% ownership interest in UPA
for $1,250. On July 16, 2012, Itea exercised its option and acquired the 50% ownership interest in UPA.
UPA is governed by a Board of Directors,
with half of the directors nominated by each of the Company and Itea. Administrative expenses of UPA are borne jointly by the Company
and Itea, and financing for development expenses will be obtained from third parties.
Also on June 20, 2012 the Company and Itea
entered into a License Agreement whereby the Company and the Company’s majority-owned subsidiary, TEPS, and Itea granted
a non-exclusive, non-transferable royalty-free license to UPA to use their intellectual property relating to pressurized oxycombustion.
The licenses to UPA became effective upon Itea’s acquisition of its ownership interest in UPA. The License Agreement further
provides that, if UPA successfully obtains funding and project support to construct the pilot plant, the parties may grant licenses
of their respective intellectual property and know-how to each other or to third parties for the operation of power plants based
on such intellectual property and know-how, and royalties will be shared as defined in the License Agreement.
In September 2012, UPA was awarded a
$1 million Phase 1 grant from the U.S. Department of Energy to help fund a project under a special DOE program to advance
technologies for efficient, clean coal power and carbon capture. As of September 30, 2012, UPA has not received any funding
and has not recorded any revenues related to this grant. As part of UPA's project, in October 2012, the Company received a
$900,000 contract from UPA to build a bench-scale “flameless” combustion reactor under the grant.
In accordance with ASC 810,
Consolidation
,
the Company determined that it held an variable interest in UPA and that UPA was a variable-interest entity. However, the Company
has concluded that it is not required to consolidate the financial statements of UPA as of and for the three and nine-month periods
ended September 30, 2012. The
Company reviewed the most significant activities of UPA and determined that because the Company shares the power to direct the
activities of UPA with Itea, it is not the primary beneficiary of UPA. Accordingly, the financial results of UPA is accounted for under the equity method of accounting.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
Note 6: Convertible debt
Unsecured convertible debt consisted of
the following at September 30, 2012 and December 31, 2011 (in thousands):
|
|
September
30,
2012
|
|
|
December
31,
2011
|
|
Roenigk 2007 Convertible Promissory Note, 5%, due March 21, 2013, less discount of $78 at December 31, 2011
|
|
$
|
—
|
|
|
$
|
860
|
|
Roenigk 2008 Convertible Promissory Note, 5%, due March 7, 2013, less discount of $181 at December 31, 2011
|
|
|
—
|
|
|
|
711
|
|
December 2011 Convertible Promissory Notes, 12.5%, due December 31, 2012
|
|
|
1,250
|
|
|
|
1,250
|
|
Roenigk 2012 Convertible Promissory Note, 8%, due March 31, 2014, less discount of $126 at September 30, 2012
|
|
|
1,818
|
|
|
|
—
|
|
|
|
|
3,068
|
|
|
|
2,821
|
|
Less: Current portion
|
|
|
(1,250
|
)
|
|
|
(1,250
|
)
|
|
|
$
|
1,818
|
|
|
$
|
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
nine months ended September 30, 2012. Total interest added to the principal balance of the Note was $213,000 as of June 20, 2012.
On June 20, 2012, the Noteholder tendered
this Note, together with the 2008 Convertible Promissory Note discussed below, as consideration for the issuance of the 2012 Convertible
Promissory Note, as discussed below.
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
nine months ended September 30, 2012. Total interest added to the principal balance of the Note was $165,000 as of June 20, 2012.
On June 20, 2012, the Noteholder tendered
this Note, together with the 2007 Convertible Promissory Note discussed above, as consideration for the issuance of the 2012 Convertible
Promissory Note, as discussed below.
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 at a conversion price to be determined.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
The December 2011 Bridge Notes contain
other conventional provisions, including the acceleration of repayment obligations upon the occurrence of certain specified Events
of Default. No such Events of Default occurred as of September 30, 2012 and through the date of this filing.
Roenigk 2012 Convertible Promissory
Note
On June 20, 2012, the Company issued a
Convertible Promissory Note dated April 1, 2012 in the principal amount of $1,877,217 in exchange for the 2007 Convertible Promissory
Note and the 2008 Convertible Promissory Note (the “Old Notes”). The Note bears interest at the rate of 5% per annum
from April 1, 2012 through May 31, 2012, then bears interest at the rate of 8% per annum until the maturity date, March 31, 2014.
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 $5,000 deferral fee. The Company added
$67,000 of accrued interest to the principal balance of the Note during the nine months ended September 30, 2012.
The exchange of the Old Notes for this
Note has been accounted for as a troubled debt restructuring in the second quarter of 2012. In summary, the Company was granted
a one year extension of the maturity date of the Old Notes, and the interest rate was increased from 5% to 8% per annum. The Company
evaluated the anticipated future cash flows of this Note and determined that they exceed the carrying value (and accrued interest
thereon) of the Old Notes. As a result, the Company did not record a loss or gain on this transaction.
Note 7: Equity
Common Stock
On January 10,
2012,
the Company entered into Warrant Amendment 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 Warrant Amendment 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.
On July 11, 2012, the Company entered into
Securities Purchase Agreements (the “Agreements”) with twenty-four individuals and entities (the “Investors”)
pursuant to which the Company issued an aggregate of 17,316,250 shares of Common Stock, Warrants for the purchase of an additional
18,670,375 shares of Common Stock at an exercise price of $0.15 per share and Warrants for the purchase of an additional 1,354,125
shares of Common Stock at an exercise price of $0.10 per share. The aggregate purchase price for the Shares and Warrants was $1,731,625,
and the Company received proceeds of $1,565,908, net of issuance costs. The Warrants entitle the holders thereof to purchase shares
of Common Stock at any time on or prior to July 11, 2017.
On August 9, 2012, the Company entered
into Securities Purchase Agreements (the “Agreements”) with eleven additional individuals and entities (the “Investors”)
pursuant to which the Company issued an aggregate of 8,287,500 shares of Common Stock, Warrants for the purchase of an additional
9,116,250 shares of Common Stock at an exercise price of $0.15 per share and Warrants for the purchase of an additional 828,750
shares of Common Stock at an exercise price of $0.10 per share. The aggregate purchase price for the Shares and Warrants was $828,750,
and the Company received proceeds of $729,068, net of issuance costs. The Warrants entitle the holders thereof to purchase shares
of Common Stock at any time on or prior to July 11, 2017.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
The Agreements described above include
a price protection provision pursuant to which, at any time on or before January 11, 2014, the Company issues and sells any shares
of Common Stock or securities convertible into Common Stock (“Convertible Securities”) at a price less than $0.10 per
share (a “Dilutive Transaction”), the purchase price for the Shares shall automatically be reduced to a price equal
to the price at which such shares were issued and sold (the “Reduced Price”) and the Company will issue to the Investors,
for no additional consideration, a sufficient number of additional Shares so that the effective price per Share equals the Reduced
Price. The Warrants include a similar price protection provision pursuant to which, upon a Dilutive Transaction, the exercise price
of the Warrants shall automatically be reduced to a price equal to 150% of the Reduced Price. Upon such adjustment, the number
of Warrant Shares issuable upon exercise of a Warrant shall automatically be adjusted by multiplying the number of shares issuable
upon exercise of such Warrant immediately prior to the Dilutive Issuance by a fraction, (i) the numerator of which shall be the
exercise price immediately prior to the Dilutive Issuance and (ii) the denominator of which shall be the exercise price as adjusted.
See Note 8 for further discussion of the accounting treatment of these price protection revisions.
See Note 11 for discussion of the Company’s
sale of Common Stock on October 9, 2012.
At September 30, 2012, approximately 261
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 nine-month period ended September
30, 2012, the Board of Directors awarded employees and an advisor to the Board of Directors a total of 7,060,000 stock options
under the Company’s 2008 Incentive Stock Plan. The options are exercisable at $0.097 - $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. 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 nine-month periods ended September 30,
2012 and 2011:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
6
|
|
|
$
|
19
|
|
General and administrative
|
|
|
580
|
|
|
|
613
|
|
Engineering, research and development
|
|
|
70
|
|
|
|
51
|
|
Sales and marketing
|
|
|
63
|
|
|
|
74
|
|
Option expense before tax
|
|
|
719
|
|
|
|
757
|
|
Benefit for income tax
|
|
|
—
|
|
|
|
—
|
|
Net option expense
|
|
$
|
719
|
|
|
$
|
757
|
|
Option expense for the three and nine-month
periods ended September 30, 2012 was calculated using an expected forfeiture rate of 0% - 20%. A forfeiture rate of 0% was
used for the comparative period of 2011.
The fair value of options granted during
the nine-month periods ended September 30, 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
|
|
|
0.83% - 2.23%
|
|
|
|
3.5
|
%
|
Expected option life (years)
|
|
|
6.25 – 10.0
|
|
|
|
6.25
|
|
Expected volatility
|
|
|
91% - 92%
|
|
|
|
91
|
%
|
Expected dividend rate
|
|
|
0%
|
|
|
|
0
|
%
|
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
A summary of the Company’s stock
option activity and related information for the nine-month periods ended September 30, 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
|
|
|
7,060,000
|
|
|
$
|
0.16
|
|
|
|
1,200,000
|
|
|
$
|
0.30
|
|
Canceled
|
|
|
(800,000
|
)
|
|
$
|
0.30
|
|
|
|
(4,088,800
|
)
|
|
$
|
1.38
|
|
Outstanding, end of period
|
|
|
25,934,102
|
|
|
$
|
0.32
|
|
|
|
19,176,602
|
|
|
$
|
0.47
|
|
Exercisable, end of period
|
|
|
13,733,112
|
|
|
$
|
0.41
|
|
|
|
9,864,590
|
|
|
$
|
0.62
|
|
The weighted average fair value of options
granted was approximately $0.11 and $0.23 per share for the nine-month periods ended September 30, 2012 and 2011, respectively.
The weighted average fair value of options vested was approximately $942,000 and $718,000 for the nine-month periods ended September
30, 2012 and 2011, respectively.
Exercise prices for options outstanding
as of September 30, 2012 ranged from $0.097 to $1.50. The weighted average remaining contractual life of those options was approximately
7.9 years at September 30, 2012. The weighted average remaining contractual life of options vested and exercisable was approximately
7.1 years at September 30, 2012.
As of September 30, 2012, there was approximately
$730,000 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 1.3 years. The Company
recognizes stock-based compensation on the straight-line method.
Warrants
At September 30, 2012, there were outstanding
warrants for the purchase of 106,685,446 shares of the Company’s Common Stock at prices ranging from $0.01 per share to $0.55
per share (weighted average exercise price was $0.30 per share). The expiration dates of these warrants are as follows:
Year
|
|
Number
of
Warrants
|
|
2012
|
|
|
11,333,333
|
|
2013
|
|
|
8,896,554
|
|
2014
|
|
|
6,159,436
|
|
2015
|
|
|
6,188,879
|
|
2016
|
|
|
42,795,244
|
|
After 2016
|
|
|
31,312,000
|
|
|
|
|
106,685,446
|
|
Note 8: Derivative Liabilities
As part of the financing transactions in
the third quarter of 2012 as discussed in Note 7, if the Company issues and sells any shares of Common Stock or securities convertible
into Common Stock (“Convertible Securities”) at a price less than $0.10 per share at any time on or before January
11, 2014 (a “Dilutive Transaction”), the purchase price for the shares shall automatically be reduced to a price equal
to the price at which such shares were issued and sold (the “Reduced Price”), and the Company will issue to the Investors,
for no additional consideration, a sufficient number of additional shares so that the effective price per share equals the Reduced
Price.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
The Warrants include a similar price protection
provision pursuant to which, upon a Dilutive Transaction, the exercise price of the Warrants shall automatically be reduced to
a price equal to 150% of the Reduced Price. Upon such adjustment, the number of shares issuable upon exercise shall automatically
be adjusted by multiplying the number of shares issuable upon exercise of such warrant immediately prior to the Dilutive Transaction
by a fraction, (i) the numerator of which shall be the exercise price immediately prior to the Dilutive Transaction and (ii) the
denominator of which shall be the exercise price as adjusted.
Because these provisions as described above
are not indexed to the Company’s Common Stock, the value of the anti-dilution features of the Common Stock and the value
of the Warrants must be bifurcated and treated as derivative liabilities. As a result, the Company initially recorded derivative
liabilities totaling $2,734,000 in the third quarter of 2012. Because the Company recorded derivative liabilities that exceeded
the proceeds received in the third quarter of 2012, the Company recorded a charge of approximately $565,000. This amount is recorded
as other derivative expense on the Company’s Consolidated Statement of Operations for the three and nine-month periods ended
September 30, 2012.
Liabilities measured at fair value on a
recurring basis as of September 30, 2012 are as follows: (in thousands)
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Description
|
|
Balance as of
September 30,
2012
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities – current portion
|
|
$
|
41
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
41
|
|
Derivative liabilities – long-term portion
|
|
|
2,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,441
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,441
|
|
The Monte Carlo Simulation lattice model
was used to determine the fair values at September 30, 2012. The significant assumptions used were: exercise prices between $0.10
and $0.36; the Company’s stock price on September 28, 2012, $0.10; expected volatility of 55% - 75%; risk free interest rate
between 0.16% and 0.23%; and a remaining contract term between 3 months and 58 months.
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities – current portion
|
|
$
|
706
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
706
|
|
Derivative liabilities – 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%; and a remaining contract term between 1 and 2 years.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
The following table sets forth a reconciliation of changes in
the fair value of derivatives classified as Level 3 (in thousands):
Balance at December 31, 2011
|
|
$
|
807
|
|
Issuance of warrants as derivative liabilities
|
|
|
2,734
|
|
Change in fair value
|
|
|
(1,100
|
)
|
Balance at September 30, 2012
|
|
$
|
2,441
|
|
Note 9: 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. This joint
venture is currently in the dissolution process. In March 2012, the Company established UPA to work with partners and stakeholders
to develop and commercialize its pressurized oxycombustion technology, and in July 2012, Itea acquired a 50% ownership interest
in UPA, making it a joint venture.
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. While the Company has begun marketing and selling its products in Asia and Europe, the Company
has not generated any revenues from such activities. The Company will continue to evaluate how its business is managed and, as
necessary, adjust the segment reporting accordingly.
Note 10: 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.
Accrued payroll taxes, which include taxes,
penalties and interest related to state taxing authorities, totaled approximately $399,000 and are included in other current liabilities
on the Company’s Consolidated Balance Sheets as of September 30, 2012. The Company continues to work with the various state
taxing authorities to settle its remaining payroll tax obligations.
On July 16, 2012, Andrew T. Melton, the
Company’s former Executive Vice President and Chief Financial Officer (“Melton”), filed a Complaint in the United
States District Court, Eastern District of Arkansas alleging, among other things, wrongful termination of employment. Mr. Melton
is claiming damages in the aggregate amount of approximately $2.2 million, including unpaid salary, reimbursement of expenses,
and other payments under his employment agreement. The Company is currently in the discovery process and intends to vigorously
defend this litigation.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
On October 16, 2012, Alexander
Fassbender, a creditor of the Company pursuant to a promissory note dated as of April 11, 2011, filed for entry of a
confessed judgment against the Company in Fairfax County, Virginia, Circuit Court seeking payment of $100,000 in principal,
default interest at 18% and attorneys’ fees of not less than $25,000, resulting from an alleged late monthly
installment payment by the Company under the Note. The Company disputes that it defaulted under the promissory note,
and Mr. Fassbender has acknowledged receipt of the monthly installment payment, although he claims that it was paid
late. The Company has filed a Motion to Set Aside or Vacate the Confessed Judgment and has requested a hearing on
November 30, 2012. The Company has accrued all costs as of September 30, 2012, pending resolution of this matter.
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.
See Note 3 for a discussion of the
termination of the Company’s contract with NYCDEP.
Note 11: Subsequent events
On October 9, 2012, the Company entered
into Securities Purchase Agreements (the “Agreements”) with nine individuals (the “Investors”) pursuant
to which the Company issued an aggregate of 3,765,000 shares of Common Stock, Warrants for the purchase of an additional 4,141,500
shares of Common Stock at an exercise price of $0.15 per share and Warrants for the purchase of an additional 376,500 shares of
Common Stock at an exercise price of $0.10 per share. The aggregate purchase price for the Shares and Warrants was $376,500, and
the Company received proceeds of $331,196, net of issuance costs. The Common Stock and Warrants were issued on terms similar to
the Company’s financing transactions on July 11, 2012 and August 9, 2012 as discussed in Note 7.
On October 4, 2012, the Company entered
into a Loan Agreement (the “Loan Agreement”) with C13 Thermo LLC (the “Lender”) pursuant to which the Lender
established a credit facility allowing the Company to borrow up to $700,000 (the “Credit Facility”) to finance the
fabrication and testing of an Ammonia Reduction Process system utilizing the Company’s proprietary technology (the “Project”).
The Company issued to the Lender a promissory note in the principal amount of $700,000 (the “Note”).
Amounts borrowed under the Credit Facility
will not bear interest (except in the case of an event of default, in which case all amounts borrowed, together with all fees,
expenses and other amounts due, shall bear interest at the default rate of 8% per annum). Upon maturity of the Note, the Company
will be charged a commitment fee equal to 10% of the aggregate principal amount borrowed under the Credit Facility. The Credit
Facility expires, and all amounts due under the Note, together with all commitment fees incurred under the Loan Agreement, will
become due and payable, on the earlier of (i) March 4, 2013 or (ii) the date on which the Company first draws against an irrevocable
documentary letter of credit that has been issued for the Company’s benefit in connection with the Project. The Company may
repay the Note in whole or in part at any time without premium or penalty.
See Note 3 for a discussion of the
termination of the Company’s contract with NYCDEP.
ITEM 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read
in conjunction with the financial statements and notes thereto appearing elsewhere in this report.
Forward Looking Information
The part of this Quarterly Report on Form 10-Q
captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains certain
forward-looking statements, which involve risks and uncertainties. Forward-looking statements include, without limitation,
statements as to our future financial position, business strategy, budgets, projected costs and plans and objectives of management
for future operations. These statements are based on current expectations, estimates and projections about the industries
in which we operate, and the beliefs and assumptions made by management. Readers should refer to the discussions under “Forward
Looking Information” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 concerning
certain factors that could cause our actual results to differ materially from the results anticipated in such forward-looking statements.
These discussions are hereby incorporated by reference into this Quarterly Report.
Overview
Founded in 1988, ThermoEnergy is a diversified
technologies company engaged in the worldwide development, sale and commercialization of patented and/or proprietary technologies
for the recovery and recycling of wastewater, chemicals, metals, and nutrients from waste streams at oil & gas, biogas, powerplant,
industrial, and municipal operations. In addition, the company holds patents on pressurized oxy-combustion technology for clean,
coal-fired power generation.
Wastewater Solutions
The Company has spent nearly two decades
developing sustainable water treatment and recovery systems that help industry and municipalities operate more efficiently, save
money, reduce their carbon footprint and meet their sustainability goals.
Award-Winning Technology
We believe our TurboFrac system
provides versatile and cost effective solutions to recover and recycle clean, usable water from contaminated produce water
created by the hydraulic fracturing of oil and gas wells. Our FracGen systems create hydrofracking-grade water from briny
water in local aquifers located in arid areas. FracGen reduces demand on local potable water supplies and reduces the cost of
transporting fresh water from other geographic locations.
Our versatile, award-winning CAST®
(Controlled Atmospheric Separation Technology), RCAST®, and high-flow TurboCAST systems can be utilized as an effective stand-alone
wastewater, chemical, metal or nutrient recovery system, or as part of an integrated recovery solution. These state-of-the-art
vacuum assisted distillation units offer significant advantages over other evaporative technologies such as thin film and nucleate
boiling. They are specially designed for high-strength wastewaters with high Total Dissolved Solids and Total Suspended Solids
typically found in industrial, municipal and agricultural recovery processes.
In industrial applications, our Zero-Liquid-Discharge
(ZLD) Systems can recover nearly 100% of valuable chemical resources or wastewater for immediate reuse or recycling with no liquid
leaving the facility. CAST concentrates mixed hazardous waste down to as little as 5% of its original volume for economical disposal
or reclaim. This patented technology is designed and constructed to exceed the demands of harsh chemical environments.
Fast Return on Investment
We believe our wastewater recovery
systems reduce costs by recovering process chemicals, metals, and clean water for reuse or recycling and eliminating most of
the costly disposal of hazardous waste or process effluent. These solutions offer a solid return on our customers’
investments and a quick payback with continued savings and efficiency for many years.
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. Our systems utilize proven technology to cost effectively process and treat brackish, flowback and produced water in
the hydraulic fracturing (“fracking”) process in the oil and gas industries. Our wastewater treatment systems also
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.
Specific wastewater solutions include:
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·
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Creating new supplies of usable water
and recycling wastewater in the oil and gas industry
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·
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Recovering ammonia and creating fertilizer
from anaerobic digesters
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·
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Recovering and recycling ammonia in industrial
and municipal operations
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·
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Recovering chemicals or metals from industrial
wastewater
|
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·
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Recovering and recycling glycol
|
Power Generation Technologies
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 around the world that produce near zero
air emissions while capturing carbon dioxide as a liquid for ready sequestration far more economically than any other competing
technology. The technology is held by our subsidiary, ThermoEnergy Power Systems, LLC (“TEPS”) and will be developed
and commercialized through our new joint venture, Unity Power Alliance (UPA).
On June 20, 2012, we entered into an Agreement
with Itea S.p.A. (“ITEA”) for the development of pressurized oxycombustion in North America. The two parties, through
UPA, will utilize their patented technologies to advance, develop and promote the use of the coal application of pressurized oxycombustion,
construct a pilot plant utilizing the technology, and subsequently construct a demonstration facility based on the technology as
implemented in the pilot plant. ITEA was granted the option to acquire a 50% ownership interest in UPA for nominal consideration.
On July 16, 2012, ITEA exercised its option and acquired the 50% ownership interest in UPA. As of September 30, 2012, the financial
results of UPA are accounted for as a joint venture under the equity method of accounting and are not consolidated in our financial
statements as a variable interest entity as defined by ASC 810.
In September 2012, Unity Power Alliance
received a $1 million Phase 1 grant from the U.S. Department of Energy to help fund a project under a special DOE program to advance
technologies for efficient, clean coal power and carbon capture. After successful completion of the first phase of the program,
it is anticipated that a much larger Phase 2 will occur, with DOE awards in the $10-20 million range applied toward the construction
of a pilot scale plant. As part of UPA's project, in October 2012, we received a $900,000 contract from UPA to build a bench-scale
“flameless” combustion reactor under the grant.
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
primarily 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.
On August 22, 2012, the New York City Department
of Environmental Regulation (“NYCDEP”) issued a stop work order to us relative to our contract to install an Ammonia
Removal Process (“ARP”) system at the NYCDEP’s wastewater treatment facility in the 26
th
Ward.
On November 13, 2012, the NYCDEP notified us that it is terminating the contract, effective November 29, 2012.
We suspended all work on this contract
as of August 22, 2012 and have halted all work with our major vendors. We have accordingly ceased recognition of revenues as of
August 22, 2012 and have recorded all incremental costs as period costs on its Consolidated Statement of Operations.
Because of this contract termination, our
revenues, expenses, and income will be adversely affected in future periods, as this contract represented approximately 80% of
our revenues for the year ended December 31, 2011 and approximately 63% and 81% of our revenues for the three and nine-month periods
ended September 30, 2012, respectively. We have yet to begin discussions with the NYCDEP about the termination, and accordingly,
we cannot determine a final outcome at this time.
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 $5.9 million for the nine-month period ended September 30, 2012 and $17.4 million for the
year ended December 31, 2011. Cash outflows from operations totaled $5.1 million for the nine-month period ended September 30,
2012 and $6.1 million for the year ended December 31, 2011. As a result, we will require additional capital to continue to fund
our operations.
Critical Accounting Policies
Our financial statements have been
prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Management
believes there have been no material changes during the nine months ended September 30, 2012 to the critical
accounting policies reported in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
Restatement of Financial Statements
The unaudited quarterly financial information
for the three and nine-month periods ended September 30, 2011 were restated to correct errors in the valuation of our derivative
liabilities and accounting for certain financing transactions in those periods. These errors in our financing transactions were
caused by our incorrectly accounting for the amendment of our CASTion Notes and 2010 Bridge Notes as a debt modification instead
of a debt extinguishment in the first quarter of 2011. The errors in our derivative liabilities were due to deficiencies in our
valuation model and methodology used to calculate the fair value of such liabilities in the first three quarters of 2011.
We restated the effects of these errors
for the affected periods in our Annual Report on Form 10-K as of and for the year ended December 31, 2011. The net effect of these
errors resulted in decreases in our net loss to common stockholders of $3.9 million and $0.7 million in the three and nine-month
periods ended September 30, 2011, respectively, as compared to the amounts that had previously been reported. None of these errors
related to our cash position, revenues or loss from operations for any of the periods in which such errors occurred.
This Quarterly Report on Form 10-Q for
the quarter ended September 30, 2012 includes the impact of this restatement on the applicable unaudited quarterly financial information
for the three and nine-month periods ended September 30, 2011 presented in the Consolidated Statement of Operations and Consolidated
Statement of Cash Flows as reported in our Annual Report on Form 10-K filed on May 14, 2012.
Results of Operations
Comparison of Quarters Ended September
30, 2012 and 2011 (as restated)
Revenues totaled $2,032,000 for the third
quarter of 2012, an increase of 70% compared to $1,193,000 for the third quarter of 2011. Revenues in the third quarter of 2012
were primarily driven by revenues from our New York City Department of Environmental Protection ("NYCDEP") contract as
well as our first sale of a mobile FracGen water production system to the oil and gas industry. In the third quarter of 2011, we
substantially completed production on one industrial contract and were in the later stages of engineering and design work on the
NYCDEP contract.
Gross profit for the third quarter of
2012 was $1,000 compared to gross profit of $120,000 in the third quarter of 2011. The decrease in gross profit is
attributable to lower margins on our first mobile FracGen water production system due to higher than expected production
costs on the first unit as well as a stop work order issued in August 2012 on the NYCDEP contract. Due to the stop work
order, we incurred ongoing production related costs that could not be charged to the project in the quarter. The contract was
terminated in November, which will result in fourth quarter and early 2013 revenues and gross margin to be adversely
affected. However, given our focus on the oil & gas and biogas industries, we expect the short-term effect of the
termination of the NYCDEP contract will be offset by implementing our long-term strategy. Gross profit in the third
quarter of 2011 related to work performed on NYCDEP and a completed industrial project, which generated higher margins.
General and administrative expenses for
the third quarter of 2012 was $1,035,000 compared to $897,000 for the third quarter of 2011. The increase in expenses were primarily
due to increased legal costs attributable to our third quarter financings and patent applications.
Engineering, research and development expenses
for the third quarter of 2012 was $160,000 compared to $132,000 for the third quarter of 2011. The increase is attributable to
reduced utilization of our engineering team in the third quarter of 2012 compared to 2011. Engineering costs directly related to
our projects are charged to Cost of Sales.
Sales and marketing expenses for the third
quarter of 2012 was $598,000 compared to $561,000 in the third quarter of 2011. The Company's sales and marketing efforts in the
third quarter of 2012 were redirected and increased to focus on the oil & gas and biogas industries over the municipal and
other traditional markets in the prior year.
Changes in the fair value of our derivative
warrant liabilities resulted in the recognition of derivative mark-to-market income of $574,000 in the third quarter of 2012 compared
to $440,000 in the third quarter of 2011. Income in the third quarter of 2012 and 2011 relate primarily to the passage of time
and the decrease in our stock price and an increase in warrants that are classified as derivative liabilities.
Other derivative expense of $565,000 in
the third quarter of 2012 represents the amounts by which the initial valuation of derivative liabilities created in conjunction
with our financing transactions in July and August of 2012 exceeded the amounts raised by these financing transactions. We had
no such expenses in the third quarter of 2011.
There was no loss on extinguishment of
debt in the third quarter of 2012 in comparison to a loss of $5,159,000 in the third quarter of 2011. The loss on extinguishment
of debt in the third quarter of 2011 relates to the conversion of our CASTion Notes, 2010 Bridge Notes and 2011 Bridge Notes into
shares of our Series B Convertible Preferred Stock.
Interest and other expense decreased during
the third quarter of 2012 compared to 2011 by $111,000, due mainly to lower debt levels in 2012.
We recognized income related to our joint
ventures totaling $24,000 in the third quarter of 2012 compared to losses of $117,000 in the third quarter of 2011. Income in the
third quarter of 2012 is attributable to Itea assuming certain expenses of UPA in the third quarter of 2012.
Comparison of Nine-Month Periods Ended
September 30, 2012 and 2011 (as restated)
Revenues totaled $5,620,000 for the first
nine months of 2012 compared to $3,575,000 for the first nine months of 2011, an increase of $2,045,000 or 57%. We devoted significant
resources toward construction-related activities on our NYCDEP contract in 2012, which accounted for most of our revenues in the
first nine months of 2012 as well as our first sale of a mobile FracGen water production system to the oil and gas industry. In
2011, we were in the later stages of engineering and design work on our $27.1 million contract with the NYCDEP. These efforts generated
lower revenues as stipulated in our NYCDEP contract. In 2011, we also substantially completed production on one industrial contract
and started installation work on an industrial contract for which production was completed in 2010.
Gross profit for the first
nine months of 2012 was $382,000 (7% of revenues), an increase of $128,000 compared to $254,000 (7% of revenues) in the first
nine months of 2011. Gross margin for the first nine months of 2012 were negatively affected by lower margins on our first
mobile FracGen water production system due to higher than expected production costs on the first unit as well as a stop work
order in issued in August 2012 on the NYCDEP contract. Due to the stop work order, we incurred ongoing production related
costs that could not be charged to the project in the quarter. The contract was terminated in November, which will result in
fourth quarter and early 2013 revenues and gross margin to be adversely affected. However, given our focus on the oil &
gas and biogas industries, we expect the short-term effect due to the termination of the NYCDEP contract will be offset by
implementing our long term strategy.
General and administrative expenses increased
by $359,000 or 10% in the nine-month period ended September 30, 2012 compared to 2011, primarily due to increased accounting expenses
in 2012 and increased legal, consulting and other professional expenses associated with our recent financing efforts, partially
offset by decreases in non-cash stock option expenses.
Engineering, research and development expenses
increased by $104,000 or 40% in the nine-month period ended September 30, 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 $489,000 or 29% in the nine-month period ended September 30, 2012 compared to 2011. This increase is due to increased pre-sales
pilot activity, expenses related to development of our water treatment solutions for hydraulic fracturing in the oil & gas
industry and higher expenses related to our international business development activities.
Changes in the fair value of our derivative
warrant liabilities resulted in the recognition of derivative mark-to-market income of $1,100,000 in the nine-month period ended
September 30, 2012 compared to $3,963,000 in the nine-month period ended September 30, 2011. Income in the first half of 2012 relates
primarily to the passage of time and decrease in our stock price. This derivative income is lower in the first nine months of 2012,
as certain derivative liabilities valued in the previous year no longer exist in 2012. Income in 2011 relates to the change in
our stock price at September 30, 2011 compared to December 31, 2010 and increasing the expected volatility rate assumption used
as of September 30, 2011.
Other derivative expense of $565,000 in
the third quarter of 2012 represents the amounts by which the initial valuation of derivative liabilities created in conjunction
with our financing transactions in July and August of 2012 exceeded the amounts raised by these financing transactions. We had
no such expenses in the third quarter of 2011.
There was no loss on extinguishment of
debt in the first nine months of 2012 in comparison to a loss of $12,551,000 in the first nine months of 2011. The 2011 loss on
extinguishment of debt relates to the restructuring and then the conversion of certain notes into Company stock during the nine
months ended September 30, 2012.
Interest and other expense decreased during
the nine-month period ended September 30, 2012 compared to 2011 by $750,000, due mainly to lower debt levels in 2012.
We recognized income related to our joint
ventures totaling $14,000 in the first nine months of 2012 compared to losses of $386,000 in the first nine months of 2011. Income
in the first nine months of 2012 is attributable to Itea assuming certain expenses of UPA in the third quarter of 2012.
Liquidity and Capital Resources
We have historically lacked the financial
and other resources necessary to market the Technologies or to build demonstration projects without the financial backing of government
or investment partners. We have funded our operations primarily from the sale of convertible debt, short-term borrowings, preferred
stock and common stock, generally from stockholders and other parties who are sophisticated investors in clean technology. We are
currently in discussions with current and potential new investors for equity or debt financing to fund our operations until we
can operate on a cash flow positive basis.
However, since the beginning of 2011, we
have continued to make significant progress in strengthening our balance sheet and building our business for future growth. We
have:
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Raised $8.2 million of funding in 2011 and $3.1 million of funding
in 2012;
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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;
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Paid all amounts due to the Internal Revenue Service
under the Offer in Compromise that was accepted in March 2011; and
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Settled a lawsuit related to a former officer’s
employment agreement.
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Cash used in operations amounted to $5,087,000
and $3,672,000 for the nine-month periods ended September 30, 2012 and 2011, respectively. Cash used in operations is
primarily a result of our continued net losses in 2012 and 2011. Cash used in investing activities included investments in BTCC
of $400,000 in 2011, investments in UPA of $101,000 in 2012 and purchases of property and equipment of $134,000 and $127,000 for
the nine-month periods ended September 30, 2012 and 2011, respectively. Cash provided by financing activities for the nine-month
period ended September 30, 2012 included proceeds from the exercise of common stock warrants of $498,000 and proceeds from the
issuance of common stock and warrants totaling $2,296,000; cash provided by financing activities for the nine-month period ended
September 30, 2011 included proceeds from the issuance of short-term borrowings of $4,510,000, partially offset by payments on
convertible debt of approximately $2,803,000.
At September 30, 2012, we do not have sufficient
working capital to satisfy our anticipated operating expenses for the next 12 months. As of September 30, 2012, we had a cash balance
of $528,000 and current liabilities of approximately $8.8 million, which consisted primarily of accounts payable of approximately
$2.2 million, billings in excess of costs of approximately $3.3 million, convertible debt of $1.25 million, derivative liabilities
of $41,000 and other current liabilities of approximately $1.9 million.
On January 10,
2012,
we entered into Warrant Amendment Agreements (the “Agreements”) with six individuals
who acquired warrants from five funds affiliated with Security Investors, LLC for the purchase of an aggregate of 5,633,344 shares
of our Common Stock. Pursuant to the Agreements, we amended the Warrants to change the exercise prices from $0.30 per share to
$0.095 per share, and the Investors agreed to exercise all of the Warrants immediately for cash. We received proceeds totaling
$498,000, net of issuance costs, from the exercise of the Warrants.
On July 11, 2012,
we received proceeds totaling approximately $1,566,000, net of issuance costs, from the issuance of 17,316,250 shares of our Common
Stock, warrants for the purchase of an additional 18,670,375 shares at an exercise price of $0.15 per share and warrants for the
purchase of an additional 1,354,125 shares at an exercise price of $0.10 per share.
On August 9, 2012,
we received proceeds totaling approximately $729,000, net of issuance costs, from the issuance of 8,287,500 shares of our Common
Stock, warrants for the purchase of an additional 9,116,250 shares at an exercise price of $0.15 per share and warrants for the
purchase of an additional 828,750 shares at an exercise price of $0.10 per share.
On October 9, 2012 we received proceeds
of approximately $331,000, net of issuance costs, from the issuance of 3,765,000 shares of our Common Stock, warrants for the purchase
of an additional 4,141,500 shares at an exercise price of $0.15 per share and warrants for the purchase of an additional 376,500
shares at an exercise price of $0.10 per share.
In September 2012, we reduced our operating
costs by fifteen percent through a reduction in force and the elimination of certain sales and administrative costs, the benefit
of which will begin to take effect in our fourth quarter's financial results.
Although our financial condition has improved,
there can be no assurance that we will be able to obtain the funding necessary to continue our operations and development activities.
We continue to engage current and potential new investors in discussions for equity or debt financing to fund our operations until
we can operate on a cash flow positive basis.
ITEM 3. Quantitative and
Qualitative Disclosures About Market Risk
Not applicable.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and
Procedures
The Company, under the direction of its
Chief Executive Officer and Chief Financial Officer, has established disclosure controls and procedures that are designed to ensure
that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is recorded,
processed, summarized, and reported within the time periods specified in the Commission’s rules and forms. The disclosure
controls and procedures are also intended to ensure that such information is accumulated and communicated to the Company’s
management, consisting of the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosures.
The Company’s Chief Executive Officer
and Chief Financial Officer carried out an evaluation of the effectiveness of disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period covered by this report. Based on this evaluation,
the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls
and procedures were not effective as of September 30, 2012 due to (i) our failure to adequately allocate a proper and sufficient
amount of resources to ensure that necessary internal controls were implemented and followed, specifically, but not limited, to
the accounting and valuation of complex debt and equity transactions; and (ii) a lack of segregation of duties in our significant
accounting functions to ensure that internal controls were designed and operating effectively.
Changes in Internal Controls
The Company did not make any changes to
its internal controls over financial reporting during the quarter ended September 30, 2012 that materially affected, or are reasonably
likely to materially affect, its internal controls over financial reporting.
Management expected to hire additional
qualified personnel in the financial and accounting area in order to remediate these material weaknesses by December 31, 2012.
Given our financial condition and other business priorities during the year, management has delayed the hiring and remediation
plan to the year ending December 31, 2013.
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings
On July 16, 2012, Andrew T. Melton, our
former Executive Vice President and Chief Financial Officer (“Melton”), filed a Complaint in the United States District
Court, Eastern District of Arkansas alleging that his employment had been terminated in breach of his employment agreement and
claiming damages in the aggregate amount of approximately $2.2 million, including unpaid salary, reimbursement of expenses, and
other payments under his employment agreement. We are currently in the discovery process and intend to vigorously defend this litigation.
On October 16, 2012, Alexander Fassbender,
a creditor pursuant to a promissory note dated as of April 11, 2011, filed for entry of a confessed judgment against us in Fairfax
County, Virginia, Circuit Court seeking payment of $100,000 in principal, default interest at 18% and attorneys’ fees of
not less than $25,000, resulting from an alleged late monthly installment payment by us under the Note. We dispute that
we defaulted under the promissory note, and Mr. Fassbender has acknowledged receipt of the monthly installment payment, although
he claims that it was paid late. We have filed a Motion to Set Aside or Vacate the Confessed Judgment and have requested
a hearing on November 30, 2012. We make no prediction as to the likely outcome of the Motion to Set Aside the Confessed
Judgment.
ITEM 1A. Risk Factors
Not applicable.
ITEM 2. Unregistered Sales of Equity
Securities and Use of Proceeds
On October 9, 2012, we issued and sold
to the Investors identified below, for an aggregate purchase price of $376,500, the number of Shares and Warrants for the purchase
of the number of Warrant Shares set forth opposite the names of such Investors:
Investor
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Number of Shares
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Number of Warrant Shares
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Jeffrey Burt IRA
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925,000
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925,000
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Brenda Forwood
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250,000
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250,000
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Jim Guistolisi
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625,000
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625,000
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Michael E. Greene
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160,000
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160,000
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Cecelia Maben IRA
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250,000
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250,000
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Charles McElheney IRA
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360,000
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360,000
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Fred Militello, IRA
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250,000
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250,000
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Owen Family Trust
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625,000
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625,000
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Vincent Rose, Jr. IRA
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320,000
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320,000
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Each Investor has represented that
he, she or it is an “accredited investor” (as such term is defined in Rule 501 of Regulation D) and that he, she or
it was acquiring his, her or its Shares and Warrants and would acquire the Warrant Shares issuable upon exercise of such Warrant
for investment for his, her or its own account and not with a plan or present intention to distribute such shares.
The Shares and Warrants were issued
to the Investors in a series of transactions not involving a public offering and without registration under the Securities Act
in reliance on the exemption from registration provided by Section 4(2) of such Act. For its services in connection with these
transactions, we paid Dawson James Securities, Inc. (“Dawson James”), a registered broker-dealer, a fee of $37,650
and a non-accountable expense allowance of $7,530. As additional compensation for their services, on October 9, 2012 we issued
to Dawson James two Common Stock Purchase Warrants, in form identical to the Warrants issued to the Investors except that the cashless
exercise provision will apply under all circumstances; one Warrant entitles Dawson James to purchase of up to 376,500 shares of
our Common Stock at an exercise price of $0.10 per share and the other Warrant entitles Dawson James to purchase of up to 376,500
shares of our Common Stock at an exercise price of $0.15 per share .
We intend to use the net proceeds
from the sale of the Shares and Warrants (after payment of fees and expenses) for general working capital purposes.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
The following exhibits are filed as part
of this report:
Exhibit No.
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Description
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4.1
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Form of Common Stock Purchase Warrant issued pursuant to the Securities Purchase Agreements dated as of July 11, 2012 by and between ThermoEnergy Corporation and each of the individuals and entities identified therein as “Investors” — Filed by reference to Exhibit 10.2 to Current Report on Form 8-K filed July 17, 2012.
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10.1
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Form of Securities Purchase Agreement dated as of July 11, 2012 by and between ThermoEnergy Corporation and each of the individuals and entities identified therein as “Investors” — Filed by reference to Exhibit 10.1 to Current Report on Form 8-K filed July 17, 2012.
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31.1
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Sarbanes Oxley Act Section 302 Certificate of Principal Executive Officer — Filed herewith
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31.2
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Sarbanes Oxley Act Section 302 Certificate of Principal Financial Officer — Filed herewith
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32.1
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Sarbanes Oxley Act Section 906 Certificate of Principal Executive Officer — Filed herewith
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32.2
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Sarbanes Oxley Act Section 906 Certificate of Principal Financial Officer — Filed herewith
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101.INS *
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XBRL Instance Document
|
|
|
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101.SCH *
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XBRL Taxonomy Extension Schema Document
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101.CAL *
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.DEF *
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XBRL Taxonomy Extension Definition Linkbase Document
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101 LAB *
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XBRL Extension Labels Linkbase Document
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101.PRE *
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XBRL Taxonomy Extension Presentation Linkbase Document
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* In accordance with SEC rules, this interactive
data file is deemed “furnished” and not “filed” for purposes of Sections 11 or 12 of the Securities Act
of 1933 and Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under those sections
or acts.
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 14, 2012
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THERMOENERGY CORPORATION
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/s/ Cary G. Bullock
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Cary G. Bullock
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President and Chief Executive Officer
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/s/ Teodor Klowan, Jr.
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Teodor Klowan, Jr. CPA
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Executive Vice President and Chief
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Financial Officer
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