ThermoEnergy Corporation (“the Company”)
was incorporated in January 1988 for the purpose of developing and marketing advanced municipal and industrial wastewater treatment
and carbon reducing power generation technologies.
The Company’s
wastewater treatment systems are based on its proprietary Controlled Atmosphere Separation Technology (“CAST”) platform. The
Company’s patented and proprietary platform technology is combined with off-the-shelf technologies to provide systems that
are inexpensive, easy to operate and reliable. The Company’s wastewater treatment systems have global applications in aerospace,
food and beverage processing, metal finishing, pulp & paper, petrochemical, refining, microchip and circuit board manufacturing,
heavy manufacturing and municipal wastewater. The CAST platform technology is owned by its subsidiary, CASTion Corporation (“CASTion”).
The Company also
owns a patented pressurized oxycombustion technology that converts fossil fuels (including coal, oil and natural gas) and biomass
into electricity while producing near zero air emissions and removing and capturing carbon dioxide in liquid form for sequestration
or beneficial reuse. This technology is intended to be used to build new or to retrofit old fossil fuel power plants globally with
near zero air emissions while capturing carbon dioxide as a liquid for ready sequestration far more economically than any other
competing technology. The pressurized oxycombustion
technology is held in the Company’s subsidiary, ThermoEnergy
Power Systems, LLC (“TEPS”).
The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform to current year classifications.
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.
The 15% third party ownership interest
in TEPS is recorded as a noncontrolling interest in the consolidated financial statements. As of December 31, 2010, the noncontrolling
interest in TEPS was immaterial to the consolidated financial statements taken as a whole.
The Company recognizes revenues using the
percentage of completion method. Under this approach, revenue is earned in proportion to total costs incurred in relation to total
costs expected to be incurred. Contract costs include all direct material and labor costs and indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation.
Recognition of revenue and profit is dependent
upon a number of factors, including the accuracy of a variety of estimates made at the balance sheet date such as engineering progress,
materials quantities, the achievement of milestones, penalty provisions, labor productivity and cost estimates made. Due to uncertainties
inherent in the estimation process, actual completion costs may vary from estimates. Changes in job performance, job conditions
and estimated profitability may result in revisions to costs and income and are recognized beginning in the period in which they
become known. Provisions for estimated losses on uncompleted contracts are made in the period in which the estimated loss
first becomes known.
Certain long-term contracts include a number
of different services to be provided to the customer. The Company records separately revenues, costs and gross profit related to
each of these services if they meet the contract segmenting criteria in ASC 605-35. This policy may result in different interim
rates of profitability for each segment than if the Company had recognized revenues using the percentage-of-completion method based
on the project’s estimated total costs.
In circumstances when the Company cannot
estimate the final outcome of a contract, or when the Company cannot reasonably estimate revenue, the Company utilizes the percentage-of-completion
method based on a zero profit margin until more precise estimates can be made. If and when the Company can make more precise estimates,
revenues will be adjusted accordingly and recorded as a change in an accounting estimate. For the years ended December 31, 2011
and 2010, the Company has recorded one contract which represented approximately 5% and 35% of its revenues, respectively, utilizing
the percentage-of-completion method based on a zero profit margin.
The Company places its cash in highly rated
financial institutions, which are continually reviewed by senior management for financial stability. Effective December 31, 2010,
extending through December 31, 2012, all “noninterest-bearing transaction accounts” are fully insured, regardless of
the balance of the account. Generally the Company’s cash in interest-bearing accounts exceeds financial depository insurance
limits. However, the Company has not experienced any losses in such accounts and believes that its cash is not exposed to significant
credit risk.
Accounts receivable are recorded at their
estimated net realizable value. Receivables related to the Company’s contracts have realization and liquidation periods of
less than one year and are therefore classified as current.
The Company maintains allowances for specific
doubtful accounts based on estimates of losses resulting from the inability of customers to make required payments and record these
allowances as a charge to general and administrative expense. The Company’s method for estimating its allowance for doubtful
accounts is based on judgmental factors, including known and inherent risks in the underlying balances, adverse situations that
may affect the customer’s ability to pay and current economic conditions. Amounts considered uncollectible are written off
based on the specific customer balance outstanding.
The following is a summary of the Company’s
allowance for doubtful accounts activity for the years ended December 31, 2011 and 2010:
At December 31, 2011, one customer accounted
for 96% of the Company’s gross accounts receivable balance. For the year ended December 31, 2011, two customers each accounted
for more than 10% of the Company’s revenues and collectively accounted for 92% of total revenues. For the year ended December
31, 2010, three customers each accounted for more than 10% of the Company’s revenues and collectively accounted for 96% of
total revenues.
Inventories are stated at the lower of
cost or market using the first-in, first-out method and consist primarily of raw materials and supplies.
The Company evaluates its inventory for
excess quantities and obsolescence on an annual basis. In preparing our evaluation, we look at the expected demand for
our products for the next three to twelve months. Based on this evaluation, we establish and maintain a reserve so that
inventory is appropriately stated at the lower of cost or net realizable value.
Property and equipment are stated at cost
and are depreciated over the estimated useful life of each asset. Depreciation is computed using the straight-line method.
The Company evaluates long-lived assets based on estimated future undiscounted net cash flows or other fair value measures whenever
significant events or changes in circumstances occur that indicate the carrying amount may not be recoverable. If that evaluation
indicates that an impairment has occurred, a charge is recognized to the extent the carrying amount exceeds the undiscounted cash
flows or fair values of the asset, whichever is more readily determinable.
The Company recorded a loss of $62,000
on the disposal of property and equipment during 2011 in conjunction with relocating its corporate headquarters.
The Company accrues for costs relating
to litigation, including litigation defense costs, claims and other contingent matters, including liquidated damage liabilities,
when such liabilities become probable and reasonably estimable. Such estimates may be based on advice from third parties or on
management’s judgment, as appropriate. Revisions to payroll tax and other accruals are reflected in income in the period
in which different facts or information become known or circumstances change that affect the Company’s previous assumptions
with respect to the likelihood or amount of loss. Amounts paid upon the ultimate resolution of contingent liabilities may be materially
different from previous estimates and could require adjustments to the estimated liability to be recognized in the period
such new information becomes known.
The Company accounts for stock options
in accordance with Accounting Standards Codification (“ASC”) Topic 718, “Compensation – Stock Compensation”.
This topic requires that the cost of all share-based payments to employees, including grants of employee stock options, be recognized
in the financial statements based on their fair values on the measurement date, which is generally the date of grant. Such
cost is recognized over the vesting period of the awards. The Company uses the Black-Scholes option pricing model to
estimate the fair value of “plain vanilla” stock option awards.
The Company uses the liability method of
accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between
the financial reporting and tax basis of assets and liabilities and are measured using enacted rates and laws that will be in effect
when the deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance for deferred tax assets
is provided if it is more likely than not that all or a portion of the deferred tax assets will not be realized. The Company recognizes
interest and penalties related to underpayments of income taxes as a component of interest and other expense on its Consolidated
Statement of Operations.
The Company estimates contingent income
tax liabilities based on the guidance for accounting for uncertain tax positions as prescribed in ASC Topic 740, “Income
Taxes.” We use a two-step process to assess each income tax position. We first determine whether it is more likely
than not that the income tax position will be sustained, based on technical merits, upon examination by the taxing authorities.
If the income tax position is expected to meet the more likely than not criteria, we then record the benefit in the financial statements
that equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At December 31,
2011 and 2010, there are no uncertain tax positions that require accrual.
The Company is subject to taxation
in the U.S. and various states. As of December 31, 2011 the Company’s tax years for 2008, 2009 and 2010 are subject
to examination by the tax authorities. With few exceptions, as of December 31, 2001, the Company is no longer subject to
U.S. federal, state or local examinations by tax authorities for years before 2008. Tax year 2007 was open as of December 31, 2010.
The carrying amount of cash, accounts receivable,
other current assets, accounts payable, short-term borrowings and other current liabilities in the consolidated financial statements
approximate fair value because of the short-term nature of those instruments. The carrying amount of the Company’s convertible
debt was $2,821,000 and $8,892,000 at December 31, 2011 and 2010, respectively, and approximates the fair value of these instruments.
The Company’s warrant liabilities are recorded at fair value.
The Company's assets and liabilities carried
at fair value are categorized using inputs from the three levels of fair value hierarchy, as follows:
Level
1: Quoted prices in active markets for identical assets or liabilities.
Level
2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
Level
3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
liabilities.
Assets and liabilities measured at fair
value on a recurring basis as of December 31, 2011 are as follows: (in thousands)
Assets and liabilities measured at fair
value on a recurring basis as of December 31, 2010 are as follows: (in thousands)
The following table sets forth a reconciliation of changes in
the fair value of the Company’s derivative liabilities classified as Level 3 (in thousands):
The Company determined the initial value of the Series B Convertible Preferred Stock and investor warrants using valuation
models it considers to be appropriate. Because the Series B Convertible Preferred Stock has an indefinite life, it is classified
within the stockholders’ deficiency section of the Company's Consolidated Balance Sheets. The value of beneficial conversion
features are considered a “deemed dividend” and are accounted for as a component of net loss attributable to common
stockholders on the Company’s Consolidated Statements of Operations.
Basic earnings
(loss) per share (“EPS”) is computed by dividing the net income (loss) attributable to the common stockholders (the
numerator) by the weighted average number of shares of common stock outstanding (the denominator) during the reporting periods.
Fully diluted earnings per share is computed by increasing the denominator by the weighted average number of additional shares
that could have been outstanding from securities convertible into common stock, such as stock options and warrants (using the “treasury
stock” method), and convertible preferred stock and debt (using the “if-converted” method), unless the effect
on net income per share is antidilutive. Under the “if-converted” method, convertible instruments are assumed to have
been converted as of the beginning of the period or when issued, if later.
The Company identified prior period
errors relating to the accounting for certain debt transactions. As part of the Company’s accounting for these
transactions under extinguishment accounting, the fair value of certain warrants issued as partial consideration for the
extinguishment of debt during the quarter ended September 30, 2010 was recorded as deemed dividends to preferred
shareholders instead of being separately valued and included as a component of the loss recognized on debt extinguishment.
These errors impacted the quarter ended September 30, 2010 and the year ended December 31, 2010.
In evaluating whether the Company’s
previously issued consolidated financial statements were materially misstated, the Company considered the guidance in Accounting
Standards Codification (ASC) Topic 250, “Accounting Changes and Error Corrections,” ASC Topic 250-10-S99-1, “Assessing
Materiality,” and ASC Topic 250-10-S99-2, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements
in Current Year Financial Statements.” The Company concluded these errors were not material individually or in the aggregate
to any of the prior reporting periods, and therefore, amendments of previously filed reports were not required. As such, the revisions
for these corrections to the applicable prior periods are reflected in the financial information herein and will be reflected in
future filings containing such financial information.
The prior period financial statements included
in this filing have been revised to reflect the corrections of these errors, the effects of which have been provided in summarized
format below:
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
Revised consolidated statement of stockholders’ deficiency amounts
|
|
For the Year Ended December 31, 2010
|
|
|
|
As Previously
Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
Convertible debt and
accrued interest converted to Series B Convertible
Preferred Stock (791,668 shares at $2.40 per share)
|
|
$
|
1,900
|
|
|
$
|
5,006
|
|
|
$
|
6,906
|
|
Net loss
|
|
|
(9,850
|
)
|
|
|
(5,006
|
)
|
|
|
(14,856
|
)
|
Revised consolidated statement of cash flows amounts
|
|
For the Year Ended December 31, 2010
|
|
|
|
As Previously
Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
Net loss
|
|
$
|
(9,850
|
)
|
|
$
|
(5,006
|
)
|
|
$
|
(14,856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
614
|
|
|
|
5,006
|
|
|
|
5,620
|
|
Note 2: Management's consideration
of going concern matters
The Company has incurred net losses since
inception and will require substantial additional capital to continue commercialization of the Company’s power and water
technologies (the “Technologies”) and to fund the Company’s liabilities, which included accounts payable of $2.64
million, convertible debt of approximately $2.8 million, accrued payroll taxes of $599,000 (see Note 12), derivative liabilities
of $807,000 and approximately $1.4 million of other liabilities at December 31, 2011. In addition, the Company may be subject to
tax liens if it cannot satisfactorily settle the outstanding payroll tax liabilities and may also face criminal and/or civil action
with respect to the impact of the payroll tax matters (see Note 12). The consolidated financial statements have been
prepared assuming the Company will continue as a going concern, realizing assets and liquidating liabilities in the ordinary course
of business and do not reflect any adjustments that might result from the outcome of the aforementioned uncertainties. Management
is considering several alternatives for mitigating these conditions.
Management is actively seeking to raise
substantial working capital through additional equity or debt financing that will allow the Company to operate until it becomes
cash flow positive from operations. Management is also actively pursuing commercial contracts to generate operating revenue. Management
has determined that the financial success of the Company is primarily dependent upon the Company’s ability to collaborate
with financially sound third parties to pursue projects involving the Technologies.
Management has undertaken and successfully
completed a program to reduce the Company’s outstanding debt as follows:
As more fully described in Note 5, the
Company entered into Note Amendment and Forbearance Agreements in January 2011 with the holders of the CASTion Notes originally
due May 31, 2010. As part of these agreements, the Company issued amended CASTion Notes that extended the maturity date until February
29, 2012.
As more fully described in Note 5,
on
February 25, 2011,
the Company entered into
a Note Extension and Amendment
Agreement
with the holders of the Company’s 2010 Bridge Notes. The
Note
Extension and Amendment Agreement
extended the maturity date of the 2010 Bridge Notes to February 29, 2012 and increased
the interest rate on these Notes from 3% per annum to 10%.
As more fully described in Note 5, the
Company entered into a Bridge Loan and Warrant Amendment Agreement with certain investors on June 17, 2011 pursuant to which the
Company received proceeds totaling approximately $2.9 million. The Bridge Loan and Warrant Amendment Agreement was amended on July
12, 2011 to provide for an additional $1.6 million of funding, bringing the total proceeds to approximately $4.5 million (the “2011
Bridge Loans”).
On July 1, 2011, the Company used approximately
$1.6 million of these proceeds to pay down the principal balance of the CASTion Notes as described above. Per the terms of the
CASTion Notes, as amended, in the event the Company makes any payments of principal or accrued interest on or before July 5, 2011,
an equal amount of such payment shall automatically convert into shares of the Company’s Series B Convertible Preferred
Stock at the rate of $2.40 per share and Warrants for the purchase of the Company’s Common Stock equal to that number of
shares of the Company’s Common Stock determined by dividing 200% of the amount of principal and interest converted by $0.30.
Accordingly, on July 1, 2011, the Company issued 653,439 shares of its Series B Convertible Preferred Stock and Warrants for the
purchase of 10,455,024 shares of its Common Stock. As a result, the amended CASTion Notes were considered to be repaid in full.
Consequently, per the terms of the amended
2010 Bridge Loan Agreement, as described above, the repayment of the CASTion Notes triggered the Company’s right to convert
the entire outstanding balance of principal and interest on the 2010 Bridge Notes (approximately $4.5 million) into shares of Series
B Convertible Preferred Stock. The Company effected this conversion on August 11, 2011.
Also on August 11, 2011, upon satisfaction
of all of the conditions set forth in the 2011 Bridge Loan and Warrant Amendment Agreement, the holders of the 2011 Bridge Loans
exercised all of the Warrants in accordance with the 2011 Bridge Loan and Warrant Amendment Agreement and surrendered all of the
2011 Bridge Loans in payment of the exercise price for the purchase under the Warrants of an aggregate of 3,469,387 shares of Series
B Convertible Preferred Stock at a price of $1.30 per share.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
As more fully described in Note 5, the
Company entered into a Bridge Loan Agreement with certain investors on December 2, 2011 pursuant to which the Company received
proceeds totaling $1.25 million.
As more fully
described in Note 6, on December 30, 2011,
the Company received proceeds totaling $2,436,000, net of
issuance costs, from the exercise of an aggregate of 27.7 million warrants at an exercise price of $0.095 per share.
As more fully
described in Note 6, on January 10, 2012,
the Company received proceeds totaling $498,000, net of issuance
costs, from the exercise of an aggregate of 5,633,344 warrants at an exercise price of $0.095 per share.
Note 3. Restatement and Condensed Quarterly Financial
Information (Unaudited)
2011 Quarterly Restatement
The unaudited quarterly financial information
for the quarterly periods ended March 31, 2011, June 30, 2011 and September 30, 2011 have been restated to correct errors in the
valuation of the Company’s derivative liabilities and accounting for certain financing transactions in those periods. These
errors in the Company’s financing transactions were caused by the Company incorrectly accounting for the amendment of its
CASTion Notes and its 2010 Bridge Notes as a debt modification instead of a debt extinguishment in the first quarter of 2011 (see
Note 5). The errors in the Company’s derivative liabilities were due to deficiencies in the Company’s valuation model
and methodology used to calculate the fair value of such liabilities in the first three quarters of 2011. These errors did not
have any impact on the Company’s consolidated financial statements as of and for the year ended December 31, 2010.
The impact of the errors on the Company’s
consolidated statements of operations for the three and nine months ended September 30, 2011 is summarized below (in thousands):
|
|
Three Months Ended
September 30, 2011
|
|
|
Nine Months Ended
September 30, 2011
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
As Originally
Reported
|
|
|
As Restated
|
|
|
As Originally
Reported
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(1,470
|
)
|
|
$
|
(1,470
|
)
|
|
$
|
(5,296
|
)
|
|
$
|
(5,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant expense
|
|
|
(1,799
|
)
|
|
|
—
|
|
|
|
(1,799
|
)
|
|
|
—
|
|
Derivative liability income (loss)
|
|
|
(653
|
)
|
|
|
440
|
|
|
|
403
|
|
|
|
3,963
|
|
Loss on extinguishment of debt
|
|
|
(2,042
|
)
|
|
|
(5,159
|
)
|
|
|
(2,042
|
)
|
|
|
(12,551
|
)
|
Interest and other expense, net
|
|
|
(263
|
)
|
|
|
(220
|
)
|
|
|
(2,751
|
)
|
|
|
(1,124
|
)
|
Equity in losses of joint venture
|
|
|
(117
|
)
|
|
|
(117
|
)
|
|
|
(386
|
)
|
|
|
(386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(6,344
|
)
|
|
|
(6,526
|
)
|
|
|
(11,871
|
)
|
|
|
(15,394
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
17
|
|
|
|
17
|
|
|
|
57
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation
|
|
|
(6,327
|
)
|
|
|
(6,509
|
)
|
|
|
(11,814
|
)
|
|
|
(15,337
|
)
|
Deemed dividend on Series B Convertible Preferred Stock
|
|
|
(4,045
|
)
|
|
|
—
|
|
|
|
(4,271
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation common stockholders
|
|
$
|
(10,372
|
)
|
|
$
|
(6,509
|
)
|
|
$
|
(16,085
|
)
|
|
$
|
(15,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to ThermoEnergy Corporation common stockholders, basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing loss per share, basic and diluted
|
|
|
56,867,098
|
|
|
|
56,867,098
|
|
|
|
56,506,905
|
|
|
|
56,506,905
|
|
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
The impact of the errors on the Company’s consolidated
statements of operations for the three and six months ended June 30, 2011 is summarized below (in thousands):
|
|
Three Months Ended
June 30, 2011
(Unaudited)
|
|
|
Six Months Ended
June 30, 2011
(Unaudited)
|
|
|
|
As Originally
Reported
|
|
|
As Restated
|
|
|
As Originally
Reported
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(1,815
|
)
|
|
$
|
(1,815
|
)
|
|
$
|
(3,826
|
)
|
|
$
|
(3,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability income
|
|
|
39
|
|
|
|
820
|
|
|
|
1,056
|
|
|
|
3,523
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
(147
|
)
|
|
|
—
|
|
|
|
(7,392
|
)
|
Interest and other expense, net
|
|
|
(1,027
|
)
|
|
|
(210
|
)
|
|
|
(2,488
|
)
|
|
|
(904
|
)
|
Equity in losses of joint venture
|
|
|
(182
|
)
|
|
|
(182
|
)
|
|
|
(269
|
)
|
|
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,985
|
)
|
|
|
(1,534
|
)
|
|
|
(5,527
|
)
|
|
|
(8,868
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
27
|
|
|
|
27
|
|
|
|
40
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation
|
|
|
(2,958
|
)
|
|
|
(1,507
|
)
|
|
|
(5,487
|
)
|
|
|
(8,828
|
)
|
Deemed dividend on Series B Convertible Preferred Stock
|
|
|
(91
|
)
|
|
|
—
|
|
|
|
(226
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation common stockholders
|
|
$
|
(3,049
|
)
|
|
$
|
(1,507
|
)
|
|
$
|
(5,713
|
)
|
|
$
|
(8,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to ThermoEnergy Corporation common stockholders, basic and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing loss per share, basic and diluted
|
|
|
56,738,188
|
|
|
|
56,738,188
|
|
|
|
56,323,824
|
|
|
|
56,323,824
|
|
The impact of the errors on the Company’s
consolidated statement of operations for the three months ended March 31, 2011 is summarized below (in thousands):
|
|
Three Months Ended
March 31, 2011
(Unaudited)
|
|
|
|
As Originally
Reported
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(2,011
|
)
|
|
$
|
(2,011
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
(7,245
|
)
|
Derivative liability income
|
|
|
1,017
|
|
|
|
2,703
|
|
Equity in losses of joint venture
|
|
|
(87
|
)
|
|
|
(87
|
)
|
Interest and other expense, net
|
|
|
(1,461
|
)
|
|
|
(694
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,542
|
)
|
|
|
(7,334
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
13
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation
|
|
|
(2,529
|
)
|
|
|
(7,321
|
)
|
Deemed dividend on Series B Convertible Preferred Stock
|
|
|
(135
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation common stockholders
|
|
$
|
(2,664
|
)
|
|
$
|
(7,321
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share attributable to ThermoEnergy Corporation common stockholders, basic and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing loss per share, basic and diluted
|
|
|
55,848,585
|
|
|
|
55,848,585
|
|
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
The impact of the errors on the Company’s consolidated
balance sheets is summarized below (in thousands):
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
September 30, 2011
(Unaudited)
|
|
|
June 30, 2011
(Unaudited)
|
|
|
March 31, 2011
(Unaudited)
|
|
|
|
As Originally
Reported
|
|
|
As Restated
|
|
|
As Originally
Reported
|
|
|
As Restated
|
|
|
As Originally
Reported
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
11,090
|
|
|
$
|
9,684
|
|
|
$
|
15,984
|
|
|
$
|
19,476
|
|
|
$
|
13,156
|
|
|
$
|
18,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ deficiency
|
|
$
|
(6,813
|
)
|
|
$
|
(5,407
|
)
|
|
$
|
(11,653
|
)
|
|
$
|
(15,145
|
)
|
|
$
|
(9,182
|
)
|
|
$
|
(14,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficiency
|
|
$
|
4,277
|
|
|
$
|
4,277
|
|
|
$
|
4,331
|
|
|
$
|
4,331
|
|
|
$
|
3,974
|
|
|
$
|
3,974
|
|
The errors as detailed above had no effect
on net cash flows from operating, investing or financing activities in any period. Within the operating activities section of the
consolidated statements of cash flows, the effect of the error on net loss in each period as summarized above was offset by an
equal change in non-cash items, a non-cash adjustment to reconcile net loss to net cash used in operating activities. The Company
did not include consolidated statements of stockholders’ deficiency in its Quarterly Reports on Form 10-Q for any of the
three quarters of 2011.
Condensed Quarterly Financial Information (Unaudited)
The following table sets forth certain
unaudited quarterly financial information for fiscal 2010 and 2011. This data should be read together with the Company’s
consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The Company has
prepared the unaudited information on a basis consistent with its audited financial statements and has included all adjustments
of a normal and recurring nature, which, in the opinion of management, are considered necessary to fairly present the Company’s
revenue and operating expenses for the quarters presented. The Company’s historical operating results for any quarter are
not necessarily indicative of results for any future period.
|
|
(Unaudited)
For the Three Months Ended
|
|
(in thousands, except share and per share data)
|
|
March 31,
2010
|
|
|
June 30,
2010
|
|
|
September 30,
2010
|
|
|
December 31,
2010
|
|
|
March 31,
2011
|
|
|
June 30,
2011
|
|
|
September 30,
2011
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
|
As Revised
|
|
|
|
|
|
As Restated
|
|
|
As Restated
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,160
|
|
|
$
|
253
|
|
|
$
|
641
|
|
|
$
|
820
|
|
|
$
|
948
|
|
|
$
|
1,434
|
|
|
$
|
1,193
|
|
|
$
|
2,008
|
|
Cost of sales
|
|
|
1,170
|
|
|
|
141
|
|
|
|
612
|
|
|
|
876
|
|
|
|
967
|
|
|
|
1,280
|
|
|
|
1,073
|
|
|
|
1,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
(10
|
)
|
|
|
112
|
|
|
|
29
|
|
|
|
(56
|
)
|
|
|
(19
|
)
|
|
|
154
|
|
|
|
120
|
|
|
|
149
|
|
Operating expenses
|
|
|
1,649
|
|
|
|
1,842
|
|
|
|
1,819
|
|
|
|
2,414
|
|
|
|
1,992
|
|
|
|
1.969
|
|
|
|
1,590
|
|
|
|
2,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,659
|
)
|
|
|
(1,730
|
)
|
|
|
(1,790
|
)
|
|
|
(2,470
|
)
|
|
|
(2,011
|
)
|
|
|
(1,815
|
)
|
|
|
(1,470
|
)
|
|
|
(1,854
|
)
|
Other income (expense)
|
|
|
(329
|
)
|
|
|
(3,852
|
)
|
|
|
(4,138
|
)
|
|
|
1,112
|
|
|
|
(5,323
|
)
|
|
|
281
|
|
|
|
(5,056
|
)
|
|
|
(138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,988
|
)
|
|
|
(5,582
|
)
|
|
|
(5,928
|
)
|
|
|
(1,358
|
)
|
|
|
(7,334
|
)
|
|
|
(1,534
|
)
|
|
|
(6,526
|
)
|
|
|
(1,992
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13
|
|
|
|
27
|
|
|
|
17
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation
|
|
|
(1,988
|
)
|
|
|
(5,582
|
)
|
|
|
(5,928
|
)
|
|
|
(1,358
|
)
|
|
|
(7,321
|
)
|
|
|
(1,507
|
)
|
|
|
(6,509
|
)
|
|
|
(1,992
|
)
|
Deemed dividend on Series B Convertible Preferred Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,894
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ThermoEnergy Corporation common stockholders
|
|
$
|
(1,988
|
)
|
|
$
|
(5,582
|
)
|
|
$
|
(7,822
|
)
|
|
$
|
(1,358
|
)
|
|
$
|
(7,321
|
)
|
|
$
|
(1,507
|
)
|
|
$
|
(6,509
|
)
|
|
$
|
(1,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted:
|
|
$
|
(0.04
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing loss per share, basic and diluted
|
|
|
53,679,473
|
|
|
|
53,679,473
|
|
|
|
53,679,473
|
|
|
|
54,041,586
|
|
|
|
55,848,585
|
|
|
|
56,738,188
|
|
|
|
56,867,098
|
|
|
|
57,748,620
|
|
Note 4: Joint Venture
On February 25, 2009, the Company’s
subsidiary, TEPS, and Babcock Power Development, LLC (“BPD”), a subsidiary of Babcock Power, Inc., entered
into a Limited Liability Company Agreement (the “LLC Agreement”) establishing Babcock-Thermo Carbon Capture LLC, a
Delaware limited liability company (the “Joint Venture”) for the purpose of developing its proprietary pressurized
oxycombustion technology. In 2011, the joint venture changed its name to Babcock-Thermo Clean Combustion LLC.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
TEPS entered into a license agreement with
the Joint Venture and BPD, pursuant to which it has granted to the Joint Venture an exclusive, irrevocable (except as otherwise
provided therein), world-wide and royalty-free license to TEPS’ intellectual property related to or necessary to practice
the pressurized oxycombustion technology (the “License”). In the LLC Agreement, BPD has agreed to
develop, at its own expense, intellectual property in connection with three critical subsystems relating to the pressurized oxycombustion
technology: a combustor subsystem, a steam generating heating surface subsystem, and a condensing heat exchangers subsystem (collectively,
the “Subsystems”) and BPD has entered into a license agreement with the Joint Venture and TEPS pursuant
to which it has granted the Joint Venture an exclusive, irrevocable (except as otherwise provided therein), world-wide, fully paid
up and royalty-free license to BPD’s know-how and other proprietary intellectual property related to or necessary to practice
the Subsystems.
Pursuant to the LLC Agreement, each of
ThermoEnergy Power Systems and BPD owned a 50% membership interest in the Joint Venture. The LLC Agreement provides
that each member may be required, from time to time, to make capital contributions to the Joint Venture to fund its operations. The
Company made capital contributions of $50,000 in 2009, $61,000 in 2010, and $400,000 in 2011.
The Company accounted for the Joint Venture
using the equity method of accounting. Accordingly, the Company reduced the value of its investment in the Joint Venture by $389,000
in 2011 and $74,000 in 2010 to account for its share of net losses incurred by the Joint Venture. The carrying value of the Company’s
investment in the Joint Venture is $32,000 and $37,000 as of December 31, 2011 and 2010, respectively, and is classified as Other
Assets on the Company’s Consolidated Balance Sheets.
As further discussed in Note 13, on March
2, 2012, TEPS entered into a Dissolution Agreement with BPD to terminate the Limited Liability Company Agreement and dissolve the
Joint Venture. The BTCC Board of Managers is supervising the wind down and dissolution process.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
Note 5: Convertible debt
Convertible debt consisted of the following
at December 31, 2011 and 2010 (in thousands):
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Convertible Promissory Note, 5%, due March 7, 2013, less discount of $78 in 2011 and $132 in 2010
|
|
$
|
860
|
|
|
$
|
762
|
|
Convertible Promissory Note, 5%, due March 21, 2013, less discount of $181 in 2011 and $345 in 2010
|
|
|
711
|
|
|
|
504
|
|
Convertible Promissory Notes, 12.5%, due December 31, 2012
|
|
|
1,250
|
|
|
|
—
|
|
Convertible Promissory Notes, 10%, due February 29, 2012
|
|
|
—
|
|
|
|
5,380
|
|
Convertible Bridge Notes, 10%, due February 29, 2012, net of discount of $496 in 2010
|
|
|
—
|
|
|
|
2,246
|
|
|
|
|
2,821
|
|
|
|
8,892
|
|
Less: Current portion
|
|
|
(1,250
|
)
|
|
|
—
|
|
|
|
$
|
1,571
|
|
|
$
|
8,892
|
|
March 21, 2007 Financing
On March 21, 2007 the Company issued to
Mr. Martin A. Roenigk, a member of the Company’s Board of Directors as of that date, a 5% Convertible Promissory Note due
March 21, 2013 in the principal amount of $750,000. The principal amount and accrued interest on the Note is convertible into shares
of common stock at a conversion price of $0.50 per share at any time at the election of the holder. As further consideration,
the Company issued a warrant to purchase 750,000 shares of common stock at an exercise price equal to the daily volume weighted
average price per share of the common stock for the 365-day period immediately preceding the date on which the warrant is exercised,
subject to a minimum exercise price of $0.50 per share and a maximum exercise price of $1.00 per share. The warrant expires on
March 21, 2013.
The Company estimated the fair value of
the warrant issued using the Black-Scholes option pricing model and allocated $193,000 of the proceeds received to the warrant
on a relative fair value basis. In addition, the difference between the effective conversion price of the Note and the fair value
of the Company’s common stock on the date of issuance resulted in a beneficial conversion feature amounting to $88,000, the
intrinsic value of the conversion feature on that date. The total debt discount of $281,000 is being amortized to interest expense
over the stated term of the Note.
Interest on the Note is payable semi-annually.
The Company may, at its discretion, defer any scheduled interest payment until the maturity date of the Note upon payment of a
$2,500 deferral fee. The Company added $188,000 and $144,000 of accrued interest to the principal balance of the Note
as of December 31, 2011 and 2010, respectively.
March 7, 2008 Financing
On March 7, 2008, Mr. Roenigk exercised
his option to make an additional $750,000 investment in the Company under the terms of the Securities Purchase Agreement between
the Company and Mr. Roenigk dated March 21, 2007. The Company issued to Mr. Roenigk a 5% Convertible Promissory Note due March
7, 2013 in the principal amount of $750,000. The principal amount and accrued interest on the Note is convertible into shares of
common stock at a conversion price of $0.50 per share at any time at the election of the holder. As further consideration, the
Company issued a warrant to purchase 750,000 shares of common stock at an exercise price equal to the daily volume weighted average
price per share of the Company’s common stock for the 365-day period immediately preceding the date on which the warrant
is exercised, subject to a minimum exercise price of $0.50 per share and a maximum exercise price of $1.00 per share. The warrant
expires on March 7, 2014.
The Company estimated the fair value of
the warrant issued using the Black-Scholes option pricing model and allocated $321,000 of the proceeds received to the warrant
on a relative fair value basis. In addition, the difference between the effective conversion price of the Note and the fair value
of the Company’s common stock on the date of issuance resulted in a beneficial conversion feature amounting to $429,000,
the intrinsic value of the conversion feature on that date. The total debt discount of $750,000 is being amortized to interest
expense over the stated term of the Note.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
Interest on the Note is payable semi-annually.
The Company may, at its discretion, defer any scheduled interest payment until the maturity date of the Note upon payment of a
$2,500 deferral fee. The Company added $142,000 and $99,000 of accrued interest to the principal balance of the Note
as of December 31, 2011 and 2010, respectively.
CASTion Minority Interest Financing
In January 2009, the Company issued Convertible
Promissory Notes (the “Convertible Notes”) in the aggregate principal amount of $351,614, originally due May 31, 2010,
as part of the consideration for the acquisition of the minority shareholders’ interest in CASTion. The Convertible Notes
were issued with the same terms and conditions as the Convertible Promissory Notes issued as part of the acquisition of CASTion
on July 2, 2007.
On October 20, 2010, in conjunction with
the settlement reached between former minority shareholders of CASTion and former majority shareholders of CASTion as discussed
in Note 12, the Company entered into a settlement agreement with the former minority shareholders pursuant to which the former
minority shareholders converted notes plus accrued interest totaling $433,000 into 1,802,445 shares of the Company’s common
stock at a price of $0.24 per share.
CASTion Acquisition Financing
On July 2, 2007, the Company issued Convertible
Promissory Notes in the aggregate principal amount of $3,353,127 as part of the consideration for the acquisition of CASTion. The
outstanding principal and accrued interest are convertible into shares of the Company’s Common Stock at a conversion price
of $0.50 per share at any time at the holders’ discretion. The Notes contain conventional weighted-average anti-dilution
provisions for the adjustment of the conversion price of the Notes in the event the Company issues additional shares of Common
Stock (or securities convertible into Common Stock) at a price less than the then-effective exercise price or conversion price.
The Notes originally matured on May 31, 2010, and were in default, as the Company had not made required prepayments from a private
placement of equity that closed on December 18, 2007.
Interest on the Notes was payable semi-annually,
and the Company has the option of deferring interest payments and rolling the deferred amount into the principal amount of the
Notes. At December 31, 2010, deferred accrued interest amounts added to the principal balances of the Notes totaled $2,027,000.
A valuation discount of $313,425 was computed
on the Notes based on a fair market value interest rate of 10% compared to the stated rate of 6.5%, which was adjusted to 10% as
of November 30, 2007 in accordance with the terms of the Notes. The valuation discount resulted in a beneficial conversion feature
of $313,182, the intrinsic value of the conversion feature on that date. The total debt discount of $626,607 was amortized to interest
expense over the stated term of the Notes.
On January 7, 2011 the Company entered
into Note Amendment and Forbearance Agreements (the “Agreements”) with the holders of the CASTion Notes (the “CASTion
Noteholders”). Pursuant to the Agreements, the Company (i) made payments totaling $1,144,336 against the outstanding balances
of the CASTion Notes; (ii) converted an aggregate of $902,710 in principal and accrued interest on the CASTion Notes into a total
of 376,129 shares of the Company’s Series B Convertible Preferred Stock; (iii) issued to the CASTion Noteholders warrants
for the purchase of an aggregate of 17,585,127 shares of its Common Stock at an exercise price of $0.40 per share and an aggregate
of 6,018,065 shares of its Common Stock at an exercise price of $0.30 per share ; (iv) made additional cash payments to the CASTion
Noteholders totaling $37,914; and (v) the CASTion Notes were amended and restated.
The amended and restated CASTion Notes
bore interest at the rate of 10% per annum, and the maturity date on the CASTion Notes was extended to February 29, 2012. Installment
payments (based on a 10-year amortization schedule) were due on the last day of each month beginning January 31, 2011. The restated
CASTion Notes were convertible, in whole or in part, at any time at the election of the CASTion Noteholders, into shares of the
Company’s Series B Convertible Preferred Stock at the rate of $2.40 per share. The restated CASTion Notes provided that,
in the event, on or before July 5, 2011, the Company made any payments of principal or accrued interest, then simultaneously with
the making of such payment a portion of the remaining principal and accrued and unpaid interest on the restated CASTion Notes in
an amount equal to the amount of such payment automatically converted into shares of the Company’s Series B Convertible Preferred
Stock at the rate of $2.40 per share. The restated CASTion Notes also provided that, in the event that (i) the closing price of
the Company’s Common Stock equaled or exceeded $0.72 per share for 20 consecutive trading days and (ii) the daily average
trading volume of the Company’s Common Stock exceeded 30,000 shares for 20 consecutive trading days, then the entire principal
amount, plus all accrued and unpaid interest thereon, would automatically convert into shares of the Company’s Series B Convertible
Preferred Stock at the rate of $2.40 per share.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
The Company accounted for the restated
CASTion Notes as a debt extinguishment, as the present value of cash flows of the restated CASTion Notes was substantially different
than the present value under the original terms. The restructuring of the CASTion Notes resulted in the Company recording a loss
on extinguishment of debt of $7,361,000 in the first quarter of 2011.
On July 1, 2011, the Company exercised
its right to prepay a portion of the outstanding principal balance and accrued and unpaid interest on the restated CASTion Notes
by making payments in the aggregate amount of $1,568,267. These payments represent slightly in excess of 50% of the balance of
principal and accrued interest balance on the restated CASTion Notes. Accordingly, on July 1, 2011, the Company issued 653,439
shares of its Series B Convertible Preferred Stock and Warrants for the purchase of 10,455,024 shares of its Common Stock per the
terms of the restated CASTion Notes. As a result, the restated CASTion Notes are repaid in full.
The Company accounted for the repayment
and conversion of the restated CASTion Notes as a debt extinguishment, as the fair value of the instruments tendered was substantially
different than the carrying value of the restated CASTion Notes. The extinguishment of the CASTion Notes resulted in the Company
recording a loss on extinguishment of debt of $952,000 in the third quarter of 2011.
2010 Bridge Note Financing
On March 10, 2010, the Company entered
into a Bridge Loan Agreement with six of its principal investors (“the Investors”), all related parties, pursuant to
which the Investors agreed to make bridge loans to the Company of $2.6 million in exchange for 3% Secured Convertible Promissory
Notes (the “Bridge Notes”). The Bridge Notes bear interest at the rate of 3% per year and were due and payable
on February 28, 2011. The entire unpaid principal amount, together with all interest then accrued and unpaid under each Bridge
Note, is convertible, at the election of the holder, into shares of Common Stock at a conversion price of $0.24 per share.
The Bridge Notes contain other conventional
provisions, including the acceleration of repayment obligations upon the occurrence of certain specified Events of Default. The
Bridge Notes are secured by all of the Company’s assets except for the shares of the Company’s subsidiary, CASTion
Corporation (in which no security interest has been granted).
On June 30, 2010, the parties amended the
Bridge Loan Agreement pursuant to which the Investors agreed to increase by $2 million the amount of the bridge loans as provided
under the Bridge Loan Agreement. The new loans made under the amended Bridge Loan Agreement have been made on terms identical to
the original loans under the Bridge Loan Agreement. The Company has received proceeds totaling $4.6 million under the Bridge Loan
Agreement.
The Company calculated the difference between
the effective conversion price of the Bridge Note and the fair value of the Company’s common stock as of each date of issuance,
resulting in a total beneficial conversion feature of $3,053,000, representing the intrinsic value of the conversion feature on
the respective issuance dates. The value of the beneficial conversion feature is recorded as a discount on the Bridge Notes and
is amortized to interest expense over the stated term of the Bridge Notes.
On July 8, 2010, the
Company converted $1.9 million of 2010 Bridge Notes and accrued interest into 791,668 shares of Series B Convertible
Preferred Stock, and the Company issued warrants to purchase 8.3 million shares of Common Stock at $0.24 per share. The
Company accounted for this conversion as a debt extinguishment, as the fair value of the consideration tendered was
substantially different than the carrying value of the converted Notes. The extinguishment of these Notes resulted in the
Company recording a loss on extinguishment of debt $5,620,000 in the third quarter of 2010.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
On February 25, 2011 the Company and the
Investors entered into Note Extension and Amendment Agreements amending the terms of the 2010 Bridge Notes. As amended, the “Amended
2010 Bridge Notes” bear interest at the rate of 10% per annum and mature on February 29, 2012. The Amended 2010 Bridge Notes
are convertible into shares of the Company’s Series B Convertible Preferred Stock at the rate of $2.40 per share at any time
at the election of the holders. In the event, prior to the maturity date of the Amended 2010 Bridge Notes, the Company pays in
full the restated CASTion Notes as detailed above, then the Amended 2010 Bridge Notes shall convert, at the Company’s election,
into shares of the Company’s Series B Convertible Preferred Stock at the rate of $2.40 per share. In the event that (i) the
closing price of the Company’s Common Stock equals or exceeds $0.72 per share for 20 consecutive trading days and (ii) the
daily average trading volume of the Company’s Common Stock exceeds 30,000 shares for 20 consecutive trading days, then the
entire principal amount of the Amended 2010 Bridge Notes, plus all accrued and unpaid interest, shall automatically convert into
shares of the Company’s Series B Convertible Preferred Stock at the rate of $2.40 per share. Upon conversion of all or any
portion of the Amended 2010 Bridge Notes, the Company will issue five-year warrants for the purchase, at an exercise price of $0.30
per share, of that number of shares of the Company’s Common Stock determined by dividing (i) 200% of the amount of principal
and interest so converted by (ii) $0.30 (the “Warrants”). The Amended 2010 Bridge Notes contain other conventional
terms, including events of default upon the occurrence of which the Amended 2010 Bridge Notes become immediately due and payable.
The Company accounted for the amendment
of the 2010 Bridge Notes as a debt extinguishment, as the change in fair value of the embedded and beneficial conversion features
of the Amended 2010 Bridge Notes was substantially different than the fair value under the original terms. The amendment of the
2010 Bridge Notes resulted in the Company recording a gain on extinguishment of debt of $327,000 in the first quarter of 2011.
As stated above, on July 1, 2011 the Company
repaid the entire principal balance of the restated CASTion Notes by making payments totaling $1,568,267 and converting the remaining
balance into shares of Series B Convertible Preferred Stock. Per the terms of the amended 2010 Bridge Loan Agreement, as described
above, the repayment of the CASTion Notes triggered the Company’s right to convert the entire outstanding balance of principal
and interest on the Amended 2010 Bridge Notes (approximately $4.5 million) into shares of Series B Convertible Preferred Stock
and five-year warrants for the purchase, at an exercise price of $0.30 per share, of that number of shares of the Company’s
Common Stock determined by dividing (i) 200% of the amount of principal and interest so converted by (ii) $0.30 (the “Warrants”).
The Company effected this conversion on August 11, 2011, and as a result, the Amended 2010 Bridge Notes are repaid in full.
The Company accounted for the conversion
of the Amended 2010 Bridge Notes as a debt extinguishment, as the fair value of the instruments tendered was substantially different
than the carrying value of the Amended 2010 Bridge Notes. The extinguishment of the CASTion Notes resulted in the Company recording
a loss on extinguishment of debt of $2,618,000 in the third quarter of 2011.
June 2011 Bridge Note Financing
On June 17, 2011 the Company entered into
a Bridge Loan and Warrant Amendment Agreement (the “June 2011 Bridge Loan Agreement”) with six of its principal investors
(“the 2011 Investors”), pursuant to which the Company issued Promissory Notes (the “June 2011 Bridge Notes”)
in exchange for proceeds of approximately $2.9 million. This Agreement was amended on July 12, 2011 to provide for an additional
$1.6 million of funding to the Company and the issuance of additional June 2011 Bridge Notes in such principal amount. The Company
used approximately $1.6 million of the proceeds from the issuance of the June 2011 Bridge Notes to pay down the principal balance
of the restated CASTion Notes as described above.
The June 2011 Bridge Notes were originally
payable on demand at any time on or after February 29, 2012 (the “Maturity Date”). They did not bear interest
until the Maturity Date and bore interest at the rate of 10% per annum from and after the Maturity Date. The 2011 Bridge
Notes may not be prepaid, in whole or in part, without the prior written consent of the 2011 Investors. The 2011 Investors
have agreed to surrender the June 2011 Bridge Notes in payment of the exercise price for warrants held by or issuable to them (the
“Warrants”) if and when the conditions to their amendment and exercise have been satisfied.
Pursuant to the June 2011 Bridge Loan Agreement,
the Company agreed, subject to the satisfaction of certain conditions, to amend the Warrants (i) to provide that they will be exercisable
for the purchase of shares of the Company’s Series B Convertible Preferred Stock (the “Series B Stock”) instead
of Common Stock (with the number of shares of the Series B Stock determined by dividing by ten (10) the number of shares of Common
Stock for which the Warrants are currently exercisable) and (ii) to change the exercise prices of all Warrants (which currently
range from $0.30 to $1.82 per share of Common Stock) to $1.30 per share of Series B Stock (the equivalent of $0.13 per Common-equivalent
share). The Investors agreed, subject to the satisfaction of certain conditions, to exercise all of the Warrants. The
principal amount of the June 2011 Bridge Notes was equal to the aggregate exercise price of the Warrants (after they are amended
as described above).
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
Because the June 2011 Bridge Notes did
not bear interest, the Company calculated the present value of the June 2011 Bridge Notes using an imputed interest rate of 10%
and recorded imputed interest of $60,000 as a debt discount. The debt discount was amortized to interest expense.
On August 11, 2011, upon satisfaction of
all of the conditions set forth in the 2011 Bridge Note and Warrant Amendment Agreement, the Company reduced the exercise price
of the Warrants, and the holders of the June 2011 Bridge Notes exercised all of the Warrants and tendered all of the June 2011
Bridge Notes for the purchase of an aggregate of 3,469,387 shares of Series B Convertible Preferred Stock at a price of $1.30 per
share. As a result, the June 2011 Bridge Notes are repaid in full. As a result of the tender of the June 2011 Bridge Notes, the
Company recorded a loss on extinguishment of debt of $1,799,000 in the third quarter of 2011.
December 2011 Bridge Note Financing
On December 2, 2011 the Company entered
into Bridge Loan Agreements with four of its principal investors pursuant to which the Investors agreed to make bridge loans to
the Company of $1.25 million in exchange for 12.5% Promissory Notes (the “December 2011 Bridge Notes”). The
December 2011 Bridge Notes bear interest at the rate of 12.5% per year and are due and payable on December 31, 2012. The entire
unpaid principal amount, together with all interest then accrued and unpaid under each December 2011 Bridge Note, is convertible
into shares of a future series of Preferred Stock.
The December 2011 Bridge Notes contain
other conventional provisions, including the acceleration of repayment obligations upon the occurrence of certain specified Events
of Default.
Note 6: Equity
On July 11, 2011 the Company received written
consents from stockholders representing 71.3% in voting power of the Company’s capital stock authorizing an amendment of
the Company’s Certificate of Incorporation for the following purposes:
|
·
|
to increase the total number of authorized
shares of stock to 455,000,000 shares, of which 425,000,000 shares shall be Common Stock and 30,000,000 shares shall be Preferred
Stock, with 208,334 shares of the Preferred Stock designated “Series A Convertible Preferred Stock”, 12,000,000 shares
of the Preferred Stock designated “Series B Convertible Preferred Stock” and the remaining shares undesignated; and
|
|
·
|
to modify the definition of “Additional
Stock” (as set forth in Section 6(g)(ii) of the Description of Series B Convertible Preferred Stock attached as Exhibit A
to the Certificate of Designation, Preferences and Rights filed in the Office of the Secretary of State of the State of Delaware
on November 18, 2009 (the “Series B Terms”)) to exclude any shares of Common Stock issued or deemed issued in a transaction
or series of related transactions approved by the holders of a majority of the then-outstanding Series B Convertible Preferred
Stock.
|
The Company filed a Certificate of Amendment
to its Certificate of Incorporation to effect the amendment on August 11, 2011.
Common Stock
During 2010, the Company received 50,000
shares of its Common Stock from a former officer as payment for medical benefits under COBRA regulations. These shares are held
as Treasury Stock and are recorded at $18,000, which represents the cost of benefits provided.
The Company issued 600,000 shares of Common
Stock valued at $114,000 and 200,000 shares of Common Stock valued at $54,000 during 2011 and 2010, respectively, for services.
As discussed in Note 5, on October 20,
2010, the Company converted notes plus accrued interest totaling $433,000 into 1,802,445 shares of the Company’s Common Stock
at a price of $0.24 per share.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
In March 2011, an investor of the Company
converted 100,000 shares of Series B Convertible Preferred Stock into 1 million shares of the Company’s Common Stock. In
May 2011, an investor of the Company converted 18,518 shares of Series B Convertible Preferred Stock into 185,180 shares of the
Company’s Common Stock.
On December 30,
2011,
the Company entered into Warrant Amendment Agreements (the “Agreements”) with 21 individuals
and entities who acquired warrants from five funds affiliated with Security Investors, LLC for the purchase of an aggregate of
27.7 million shares of the Company’s Common Stock (collectively, the “Warrants”). Pursuant to the Agreements,
the Company amended the Warrants to change the exercise prices from $0.30 per share to $0.095 per share, and the Investors agreed
to exercise all of the Warrants immediately for cash. The Company received proceeds totaling $2,436,000, net of issuance costs,
from the exercise of the Warrants.
At December 31, 2011, approximately 236
million shares of Common Stock were reserved for future issuance under convertible debt and warrant agreements, stock option arrangements
and other commitments.
Preferred Stock
As of December 31, 2011, the Company has
208,334 shares of Series A Convertible Preferred Stock outstanding, which is held by a single investor. Each share of Series A
Convertible Preferred Stock is convertible into one share of the Company’s Common Stock and has a liquidation value of $1.20
per share.
The Company designated and began issuing
shares of its Series B Convertible Preferred Stock in 2009. Each share of the Company’s Series B Convertible Preferred Stock
is convertible, at any time at the discretion of the holder, into ten shares of the Company’s Common Stock. Except with respect
to the election of the Board of Directors, holders of Series B Convertible Preferred Stock will vote on an as-converted basis together
with the Common Stock holders on all matters. The Company’s Board of Directors consists of seven members, four of whom are
elected by holders of the Company’s Series B Convertible Preferred Stock (three to be designated by Quercus and one by Robert
S. Trump) and three by the holders of the Company’s Common Stock.
As discussed in Note 5, on July 8, 2010,
in conjunction with receiving a Notice to Proceed on its contract with the New York City Department of Environmental Protection,
the Company converted $1.9 million of principal and interest on its 2010 Bridge Notes into 791,668 shares of Series B Convertible
Preferred Stock and warrants for the purchase of 8.3 million shares of the Company’s Common Stock at an exercise price of
$0.30 per share.
On August 9, 2010 the Company issued to
certain investors a total of 2,083,334 shares of the Company’s Series B Convertible Preferred Stock at a purchase price of
$2.40 per share and warrants to purchase up to 33,333,344 shares of the Company’s Common Stock at an exercise price of $0.30
per share. The total proceeds to the Company, net of issuance costs, was $4,625,000.
The Warrants may be exercised at any time
on or before August 10, 2015, subject to the Company’s right to accelerate the expiration date in the event the closing price
for the Company’s Common Stock exceeds 200% of the closing price on August 9, 2010 for a period of 30 consecutive trading
days. The Warrants contains other conventional terms, including provisions for cashless exercise and for adjustment in the Exercise
Price and/or the securities issuable upon exercise in the event of certain specified extraordinary corporate events, such as stock
splits, combinations, and stock dividends.
The Company estimated the fair value
of the warrants issued using the Black-Scholes option pricing model and allocated proceeds received to the warrant on
a relative fair value basis. The Company then calculated a beneficial conversion value of $1,894,000 related to the Series
B Convertible Preferred Stock based on its allocated fair value. Because the Series B Convertible Preferred Stock
is convertible at any time at the investor’s option, the value of the beneficial conversion feature is considered a
“deemed dividend” to the investors of the Preferred Stock as of the date of issuance and increases the net loss
attributable to common shareholders on the Company’s Consolidated Statements of Operations.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
As stated in Note 5, on July 1, 2011 the
Company repaid the entire principal balance of the restated CASTion Notes by making payments totaling $1,568,267 and converting
the remaining balance into 653,439 shares of Series B Convertible Preferred Stock and warrants to purchase a total of 10,455,424
shares of the Company’s Common Stock.
Per the terms of the amended 2010 Bridge
Loan Agreement, as described in Note 4 above, the repayment of the CASTion Notes triggered the conversion of the entire outstanding
balance of principal and interest on the 2010 Bridge Notes. As a result, on August 11, 2011 the Company converted principal and
accrued interest totaling $2,932,108 into 1,221,707 shares of Series B Convertible Preferred Stock and warrants to purchase 19,547,385
shares of the Company’s Common Stock at an exercise price of $0.30 per share.
As stated in Note 5, on August 11, 2011,
upon satisfaction of all of the conditions set forth in the 2011 Bridge Note and Warrant Amendment Agreement, the holders of the
June 2011 Bridge Notes exercised all of the Warrants in accordance with the Agreement and surrendered all of the June 2011 Bridge
Notes for the purchase under the Warrants of an aggregate of 3,469,387 shares of Series B Convertible Preferred Stock at a price
of $1.30 per share.
Stock Options
The Company’s 1997 Stock Option Plan
(the “Plan”) provided for incentive and non-incentive stock options for an aggregate of 750,000 shares of Common Stock
for key employees and non-employee Directors of the Company. The Plan, which expired on December 31, 2007, provided that the exercise
price of each option must be at least equal to 100% of the fair market value of the Common Stock on the date of grant. The Plan
contained automatic grant provisions for non-employee Directors of the Company.
The ThermoEnergy Corporation 2008 Incentive
Stock Plan (the “2008 Plan”) provides for the granting of non-qualified stock options, restricted stock, stock appreciation
rights (“SAR”) and incentive stock options for officers, employees, non-employee members of the Board of Directors,
consultants and other service providers. Options may not be granted at an exercise price less than the fair market value
of the Company’s Common Stock on the date of grant and the term of the options may not be in excess of ten years.
The Company has reserved 20,000,000 shares of Common Stock for issuance under the 2008 Plan.
Although the granting of awards under the
2008 Plan is generally at the discretion of the Compensation Committee of the Board of Directors, the 2008 Plan provides for automatic
grants of stock options to the non-employee members of the Board of Directors. Each non-employee Director who is elected or appointed
to the Board for the first time shall automatically be granted a non-qualified stock option to purchase 30,000 shares of the Company’s
Common Stock. Thereafter, at each subsequent Annual Meeting of Stockholders, each non-employee Director who is re-elected
to the Board of Directors or continues to serve a term that has not expired will receive a non-qualified stock option grant
to purchase an additional 30,000 shares. All options granted to non-employee Directors vest and become fully exercisable on the
date of the first Annual Meeting of Stockholders occurring after the end of the fiscal year of the Company during which such option
was granted and shall have a term of ten years.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
The following table presents non-cash stock
option expense included in expenses in the Company’s Consolidated Statements of Operations for the years ended December 31,
2011 and 2010 (in thousands):
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
23
|
|
|
$
|
24
|
|
General and administrative
|
|
|
769
|
|
|
|
1,752
|
|
Engineering, research and development
|
|
|
41
|
|
|
|
177
|
|
Sales and marketing
|
|
|
169
|
|
|
|
113
|
|
Option expense before tax
|
|
|
1,002
|
|
|
|
2,066
|
|
Income tax benefit
|
|
|
—
|
|
|
|
—
|
|
Net option expense
|
|
$
|
1,002
|
|
|
$
|
2,066
|
|
During 2011, the Board of Directors awarded
officers, employees, and various members of the Board of Directors a total of 3,320,000 stock options. The options are
exercisable at exercise prices ranging from $0.15 to $0.30 per share for a ten year period. The exercise price was equal to or
greater than the market price on the respective grant dates during the year.
During 2010, the Board of Directors awarded
officers, employees, and various members of the Board of Directors a total of 13,659,102 stock options. The options
are exercisable at exercise prices ranging from $0.30 to $0.35 per share for a ten year period. The exercise price was equal to
or greater than the market price on the respective grant dates during the year.
The fair value of options granted during
2011 and 2010 were estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.0% - 3.5
|
%
|
|
|
2.5% - 3.8
|
%
|
Expected option life (years)
|
|
|
10.0
|
|
|
|
10.0
|
|
Expected volatility
|
|
|
91% - 92
|
%
|
|
|
80% - 97
|
%
|
Expected dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
A summary of the Company’s stock
option activity and related information for the years ended December 31, 2011 and 2010 follows:
|
|
2011
|
|
|
2010
|
|
|
|
Number of
Shares
|
|
|
Wtd. Avg.
Price per
Share
|
|
|
Number of
Shares
|
|
|
Wtd. Avg.
Price per
Share
|
|
Outstanding, beginning of year
|
|
|
22,065,402
|
|
|
$
|
0.57
|
|
|
|
11,203,800
|
|
|
$
|
1.18
|
|
Granted
|
|
|
3,320,000
|
|
|
$
|
0.27
|
|
|
|
13,659,102
|
|
|
$
|
0.30
|
|
Canceled and expired
|
|
|
(5,711,300
|
)
|
|
$
|
0.99
|
|
|
|
(2,797,500
|
)
|
|
$
|
1.92
|
|
Outstanding, end of year
|
|
|
19,674,102
|
|
|
$
|
0.38
|
|
|
|
22,065,402
|
|
|
$
|
0.57
|
|
Vested and exercisable, end of year
|
|
|
9,393,283
|
|
|
$
|
0.47
|
|
|
|
9,746,061
|
|
|
$
|
0.91
|
|
The weighted average grant date fair value
of options granted were $0.21 per share and $0.23 per share for the years ended December 31, 2011 and 2010, respectively. The total
fair value of options vested were approximately $958,000 and $885,000 as of December 31, 2011 and 2010, respectively.
Exercise prices for options outstanding
as of December 31, 2010 ranged from $0.15 to $1.50. The weighted average remaining contractual life of those options was approximately
7.9 years at December 31, 2011. The weighted average remaining contractual life of options vested and exercisable was approximately
7.4 years at December 31, 2011.
As of December 31, 2011, there was $1,056,000
of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s
stock option plans. That cost is expected to be recognized over a weighted-average period of 1.0 year. The
Company recognizes stock-based compensation on the straight-line method.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
Warrants
At December 31, 2011, there were outstanding
warrants for the purchase of 83,695,444 shares of the Company’s Common Stock at prices ranging from $0.01 per share to $1.50
per share (weighted average exercise price was $0.39 per share). The expiration dates of outstanding warrants as of December 31,
2011 are as follows:
Expiration
|
|
Warrants
Outstanding
|
|
2012
|
|
|
19,720,910
|
|
2013
|
|
|
8,896,554
|
|
2014
|
|
|
6,345,601
|
|
2015
|
|
|
11,822,223
|
|
2016 and later
|
|
|
36,910,156
|
|
|
|
|
|
|
|
|
|
83,695,444
|
|
Note 7: Derivative Liabilities
The Company has periodically issued Common
Stock purchase warrants with anti-dilution provisions as additional consideration with certain debt instruments. Additionally,
certain debt instruments have been convertible into shares of the Company’s Series B Convertible Preferred Stock, which are
convertible into shares of the Company’s Common Stock and have anti-dilution provisions and liquidation preferences. Because
these instruments contain provisions that are not indexed to the Company’s stock, the Company is required to record these
as derivative instruments.
As of December 31, 2009 the fair value
of the Company’s derivative liabilities was $2,559,000. The fair value as of December 31, 2009 was determined based on the
Black-Scholes valuation model. Effective January 1, 2010, the Company uses a binomial lattice model to more accurately reflect
the circumstances that could affect the valuation of these warrants. The Company re-measured its warrant liability using the binomial
lattice model as of December 31, 2009 using the same assumptions as originally used in the Black-Scholes model, including a suboptimal
exercise factor of 1.25. The difference in the fair value of these derivative liabilities using the binomial lattice model did
not have a material effect on the Company’s consolidated financial statements.
The increase in fair value of the Company’s
derivative liabilities resulted in an expense of $293,000 for the year ended December 31, 2010. The expense results primarily from
a reduction in the exercise price of certain warrants from $0.50 per share and $0.36 per share to $0.30 per share, partially offset
by the passage of time.
The fair value of these derivative liabilities
as of December 31, 2010 was $2,852,000. The binomial lattice model was used to determine the fair values. The significant assumptions
used were: exercise prices between $0.30 and $0.50; the Company’s stock price on December 31, 2010, $0.26; expected volatility
of 91.5%; risk free interest rate between 0.15% and 0.98%; a remaining contract term between 2 and 5 years; and a suboptimal exercise
factor of 1.25.
During 2011, as part of the amendments
to its CASTion Notes and 2010 Bridge Notes as discussed in Note 5, the Notes were convertible into shares of the Company’s
Series B Convertible Preferred Stock at a rate of $2.40 per share at any time at the discretion of the Noteholder. As discussed
in Note 6, the Series B Convertible Preferred Stock is convertible into 10 shares of the Company’s Common Stock at any time.
The Series B Convertible Preferred Stock also contains anti-dilution provisions that allow for a reduction on the conversion price
in the event of a future financing at an exercise price lower than the conversion price of the Preferred Stock. The Series B Convertible
Preferred Stock also contains liquidation preferences to the holder. Because these provisions in the Series B Stock are not indexed
to the Company’s Common Stock, the value of these conversion features must be bifurcated and treated as derivative liabilities.
As a result, the Company recorded derivative liabilities totaling $4,306,000 in the first quarter of 2011.
The decrease in fair value of the Company’s
derivative liabilities resulted in income of $3,936,000 for the year ended December 31, 2011. The income results primarily from
the passage of time and decreases in the Company’s stock price.
The fair value of these derivative liabilities
as of December 31, 2011 was $807,000, of which warrants with an aggregate value $706,000 expire in one year or less and are classified
as current liabilities on the Company’s Consolidated Balance Sheets. The lattice model was used to determine the fair values.
The significant assumptions used were: exercise prices between $0.185 and $0.36; the Company’s stock price on December 31,
2011, $0.19; expected volatility of 82.9%; risk free interest rate between 0.12% and 0.25%; a remaining contract term between 1
and 2 years; and a suboptimal exercise factor of 1.25.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
Note 8: Related party transactions
The Company has an 85% ownership interest
in ThermoEnergy Power Systems, LLC, a Delaware limited liability company (“TEPS”) for the purpose of transferring the
Company’s rights and interests in its pressurized oxycombustion technology. Alexander Fassbender, former Executive Vice President
and Chief Technology Officer, as the inventor of the technology, has a 7.5% ownership interest, and the remaining 7.5% is owned
by an unrelated third party.
As discussed in Note 4, on February
25, 2009, TEPS and Babcock Power Development, LLC (“BPD”), a subsidiary of Babcock Power,
Inc., entered into a joint venture establishing Babcock-Thermo Carbon Capture LLC, a Delaware limited liability company
for the purpose of developing and commercializing TEPS’s proprietary pressurized oxycombustion technology. The BTCC
Board of Managers is supervising the wind down and dissolution process.
The Company has employment agreements with
each of its senior officers that specify base compensation, minimum annual increases and lump sum payment amounts in the event
of a change in control of the Company.
See Notes 5 and 6 for additional related
party transactions.
Note 9: Income taxes
A valuation allowance equal to the total
of the Company's net deferred tax assets has been recognized for financial reporting purposes. The net changes in the valuation
allowance were decreases of approximately $1.9 million and increases of $1.3 million during the years ended December 31, 2011 and
2010, respectively. The Company's deferred tax liabilities are not significant.
Significant components of the Company's
deferred tax assets are as follows as of December 31, 2011 and 2010 (in thousands):
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
19,720
|
|
|
$
|
16,729
|
|
Contingent liability reserves
|
|
|
158
|
|
|
|
224
|
|
Stock options and warrants
|
|
|
1,973
|
|
|
|
5,590
|
|
Valuation discount
|
|
|
(99
|
)
|
|
|
1,371
|
|
Other
|
|
|
165
|
|
|
|
222
|
|
|
|
|
21,917
|
|
|
|
24,136
|
|
Valuation allowance – deferred tax assets
|
|
|
(21,917
|
)
|
|
|
(24,136
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation of income tax expense
(benefit) at the statutory rate to income tax expense at the Company's effective rate is shown below for the years ended December
31, 2011 and 2010 (in thousands):
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Computed at statutory rate (34%)
|
|
$
|
(5,911
|
)
|
|
$
|
(3,349
|
)
|
(Decrease) increase in valuation allowance for deferred tax assets
|
|
|
(2,220
|
)
|
|
|
1,336
|
|
Loss on extinguishment of debt
|
|
|
4,267
|
|
|
|
209
|
|
Stock and stock options
|
|
|
3,745
|
|
|
|
757
|
|
Derivative liabilities
|
|
|
(1,338
|
)
|
|
|
100
|
|
Valuation discount
|
|
|
1,558
|
|
|
|
763
|
|
Non-deductible items and other
|
|
|
(101
|
)
|
|
|
184
|
|
Benefit for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
At December 31, 2011, the Company
has net operating loss carryforwards, which expire in various amounts during 2012 through 2031, of approximately
$51.9 million. The Internal Revenue Code provides for limitations on the use of net operating loss carryforwards
for acquired entities. The Company’s annual limitation for the use of CASTion’s net operating loss carryforwards
for periods prior to the date of acquisition for income tax reporting purposes is approximately $300,000. As further
discussed in Note 12, the Company has agreed, in conjunction with the Offer in Compromise accepted by the IRS in March 2011,
that any net operating losses sustained for the years ending December 31, 2010 through December 31, 2012 will not be claimed
as deductions under the provisions of Section 172 of the Internal Revenue Code except to the extent that such net operating
losses exceed the amount of interest and penalties abated, which totaled $2,263,000.
Note 10: Employee benefit plans
The Company has adopted an Employee Stock
Ownership Plan. However, as of December 31, 2011, the Plan had not been funded nor submitted to the Internal Revenue Service for
approval. The Company has a 401(k) Plan, but no employer contributions have been made to date.
Note 11: Segments
Operating segments are identified as components
of an enterprise about which separate discrete financial information is available to the chief operating decision maker, or decision-making
group, in assessing performance and allocating resources. As stated in Note 1, the Company markets and develops advanced municipal
and industrial wastewater treatment and carbon reducing clean energy technologies. The Company currently generates a large majority
of its revenues from the sale and application of its water treatment technologies. Revenues from its clean energy technologies
have been limited to grants received from governmental and other agencies for continued development. In 2009, the Company established
Babcock-Thermo Carbon Capture, LLC, a joint venture with Babcock Power Development, LLC, for the purpose of developing and commercializing
the Company’s clean energy technology. Separate disclosure of financial information related to the Company’s clean
energy technologies is not required, as all operating activity is captured in the Company’s joint venture. The financial
information presented in these financial statements represents all the material financial information related to the Company’s
water treatment technologies.
The Company’s operations are currently
conducted solely in the United States. The Company will continue to evaluate how its business is managed and, as necessary, adjust
the segment reporting accordingly.
Note 12: Commitments and contingencies
In October 2011, the Company amended its
lease on its primary facility in Worcester, MA with an unaffiliated third party to expand from approximately 19,200 square feet
to approximately 48,000 square feet of space and to extend its lease until January 2017. The following table summarizes the
Company’s operating lease commitments on its primary facility at December 31, 2011: (in thousands)
Payments due in:
|
|
Amount
|
|
2012
|
|
$
|
168
|
|
2013
|
|
|
173
|
|
2014
|
|
|
178
|
|
2015
|
|
|
183
|
|
2016 and later
|
|
|
204
|
|
|
|
|
|
|
|
|
$
|
906
|
|
On March 25, 2011, the Company was notified
by the U.S. Internal Revenue Service that it had accepted the Company’s Offer in Compromise with respect to its tax liabilities
relating to (i) employee tax withholding for all periods commencing with the quarter ended September 30, 2005 and continuing through
September 30, 2009 and (ii) federal unemployment taxes (FUTA) for the years 2005 through 2008 that were not paid by the Company’s
former Chief Financial Officer. Pursuant to the Offer in Compromise, it has agreed to satisfy its delinquent tax liabilities by
paying a total of $2,134,636 (representing the aggregate amount of tax due, without interest or penalties). As of December 31,
2011, the Company has made payments totaling $1,958,000; a remaining balance of $176,636 was paid in January 2012. In connection
with the Offer in Compromise, the Company has agreed that any net operating losses sustained for the years ending December 31,
2010 through December 31, 2012 will not be claimed as deductions under the provisions of Section 172 of the Internal Revenue Code
except to the extent that such net operating losses exceed the amount of interest and penalties abated. The IRS acceptance of the
Offer in Compromise is conditioned, among other things, on the Company filing and paying all required taxes for five tax years
commencing on the date of the IRS acceptance.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
Accrued payroll taxes, which includes penalties
and interest related to state taxing authorities, totaled $599,000 as of December 31, 2011. The Company continues to work with
the various state taxing authorities to settle its remaining payroll tax obligations.
In April 2010, a group representing former
minority shareholders of CASTion Corporation (“CASTion”) (“the Plaintiffs”) filed a Complaint in the Suffolk
County, Massachusetts Superior Court against CASTion’s former majority shareholders (the “Defendants”) alleging
claims arising out of the Defendants’ sale to the Company of their shares of capital stock and other securities of CASTion.
The Defendants threatened to file a third party complaint against the Company (and others) alleging, among other things, that the
Company breached an obligation to the Defendants in not extending to the Plaintiffs an offer to purchase the CASTion securities
held by them in a timely manner.
On October 20, 2010 the Company, the Plaintiffs
and the Defendants entered into a settlement agreement (the “Settlement”) resolving all matters related to the Complaint.
As part of the Settlement, the Company agreed to pay $66,000 to the Defendants; issue 55,554 shares of our Series B Convertible
Preferred Stock to the Defendants; amend the terms of the Company’s Convertible Notes with the Plaintiffs to reduce the conversion
price of the Notes from $0.50 per share to $0.24 per share (which were immediately converted into Common Stock; see CASTion Minority
Interest Financing section of Note 4), modify the exercise price of certain warrants held by the Plaintiffs from $0.50 per share
to $0.24 per share, and issue to the Defendants additional warrants to purchase the Company’s Common Stock. Total expense
related to the Settlement totaled $600,000 and was recorded in general and administrative expense on the Company’s Consolidated
Statement of Operations for the year ended December 31, 2010.
On
April 21, 2010, Alexander G. Fassbender, the Company’s former Executive Vice President and Chief Technology Officer (“Fassbender”),
filed a Complaint in the Fairfax County, Virginia Circuit Court alleging that his employment had been terminated in breach of his
employment agreement and claiming damages in the aggregate amount of approximately $1 million, including unpaid salary, reimbursement
of expenses, and other payments under his employment agreement. On April 7, 2011, the two parties entered into a settlement
agreement through which, in exchange for mutual releases, the Company agreed to pay Fassbender a total of $400,000 in monthly installments
of $16,667 per month over a two-year period. The Company issued a non-interest bearing note to Fassbender for these
payments. In addition, Fassbender agreed to tender all outstanding stock options to the Company in exchange for an equal
number of warrants. The warrants are exercisable at an exercise price of $0.24 per share and have a five-year term.
In addition to the matters described above,
the Company is involved from time to time in litigation incidental to the conduct of its business. Judgments could be rendered
or settlements entered that could adversely affect the Company’s operating results or cash flows in a particular period.
The Company routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a
liability and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable.
Note 13: Subsequent events
On January 10,
2012,
the Company entered into additional Warrant Amendment Agreements (the “Agreements”)
with 6 individuals who acquired warrants from five funds affiliated with Security Investors, LLC for the purchase of an aggregate
of 5,633,344 shares of the Company’s Common Stock. Pursuant to the Agreements, the Company amended the Warrants to change
the exercise prices from $0.30 per share to $0.095 per share, and the Investors agreed to exercise all of the Warrants immediately
for cash. The Company received proceeds totaling $498,000, net of issuance costs, from the exercise of the Warrants.
On March 2, 2012, the Company entered into
a Dissolution Agreement with Babcock Power, Inc. to terminate the Limited Liability Company Agreement dated February 25, 2009 of
Babcock-Thermo Clean Combustion, LLC and dissolve BTCC, the joint venture which the Company and Babcock had organized for the
purpose of developing and commercializing the Company’s pressurized oxycombustion technology. Pursuant to the LLC Agreement,
and as confirmed by the Dissolution Agreement, the exclusive license of the Company’s pressurized oxycombustion technology
to BTCC has been terminated. The parties remain bound by the Master Non-Disclosure Agreement (the “Master Non-Disclosure
Agreement”) entered into in connection with the organization of BTCC, which imposes on all parties continuing confidentiality
obligations. The BTCC Board of Managers is supervising the wind down and dissolution process.
On March 8, 2012 the Company announced
the formation of Unity Power Alliance (“UPA”). UPA was formed to work with partners and stakeholders to develop and
commercialize its pressurized oxycombustion technology, and will seek the involvement of other major firms and organizations with
an interest in promoting the technology.
THERMOENERGY CORPORATION
FINANCIAL STATEMENTS
AS OF AND FOR THE THREE- AND NINE-MONTH
PERIODS
ENDED SEPTEMBER 30, 2012
(unaudited)
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.
63,856,250 Shares
Common Stock
THERMOENERGY CORPORATION
PROSPECTUS
______________ , 2012