UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2008
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
transition period
from to
Commission
File Number 33−46104−FW
THERMOENERGY
CORPORATION
(Exact
Name of Registrant as specified in its Charter)
Delaware
|
|
71−00659511
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
124
W. Capitol Avenue, Suite 880
Little
Rock, Arkansas 72201
(Address
of principal executive offices) (Zip Code)
(501)
376−6477
(Issuer’s
telephone number, including area code)
SECURITIES
REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Common
Stock, $0.001 par value per share
SECURITIES
REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
o
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
o
No
x
Indicate
by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S−K contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10−K
or any amendment to this Form 10−K.
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated file, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
o
Accelerated
filer
o
Non-accelerated
filer
o
(Do not
check if a smaller reporting
company Smaller
reporting company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act) Yes
o
No
x
The
aggregate market value of the common stock held by non−affiliates of the
registrant was $26,214,374 computed by reference to the closing price of the
common stock on June 30, 2008, the last trading day of the registrant’s most
recently completed second fiscal quarter.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date
Class –
Common Stock, $.001 par
value Outstanding
at June 30, 2009 - 53,538,510 shares
CAUTIONARY
STATEMENT REGARDING
FORWARD–LOOKING
INFORMATION
This
annual report on Form 10−K contains statements that are considered
forward−looking statements. Forward−looking statements give the current
expectations of forecasts of future events of the Company. All statements other
than statements of current or historical fact contained in this annual report,
including statements regarding the Company’s future financial position, business
strategy, budgets, projected costs and plans and objectives of management for
future operations, are forward−looking statements. The words “anticipate,”
“believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” and
similar expressions, as they relate to the Company, are intended to identify
forward−looking statements. These statements are based on the Company’s current
plans, and the Company’s actual future activities, and results of operations may
be materially different from those set forth in the forward−looking statements.
These forward−looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from the statements made. These
include, but are not limited to, the risks and uncertainties associated with
statements relating to: (i) the ability of the Company to fund its continued
operations and development activities, primarily through the availability of
debt and equity financing on terms that are acceptable or otherwise to the
Company; (ii) the Company’s ability to commercialize its Technologies (as
defined below); (iii) changes in government policy and in legislation and
regulation of the waste treatment industry that adversely affect the Company’s
business prospects; and (iv) general economic and market
conditions.
Any or
all of the forward−looking statements in this annual report may turn out to be
inaccurate. The Company has based these forward−looking statements largely on
its current expectations and projections about future events and financial
trends that it believes may affect its financial condition, results of
operations, business strategy and financial needs. The forward−looking
statements can be affected by inaccurate assumptions or by known or unknown
risks, uncertainties and assumptions, including the risks, uncertainties and
assumptions described in Item 1A Risk Factors.
The
Company undertakes no obligation to publicly revise these forward−looking
statements occurring after the date hereof. All subsequent written and oral
forward−looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the cautionary statements
contained in this annual report.
The
Company’s filings with the Securities and Exchange Commission (the
“Commission”), including its reports under the Securities and Exchange Act of
1934, as amended (the “Exchange Act”), can be found through the Company’s
website at
http://www.thermoenergy.com/investorInformation.html
. The
information contained in the websites of the Company and its
subsidiaries is not deemed to be a part of this filing and the Company
disclaims any incorporation by reference of such information
herein.
PART
I
Item
1. Business
Overview
In this
Annual Report on Form 10-K, we use the terms “Company,” “we,” “our,” and “us” to
refer to ThermoEnergy Corporation and its subsidiaries. The Company
is a diversified technologies company engaged in the worldwide commercialization
of patented and/or proprietary municipal and industrial wastewater treatment and
power generation technologies. The Company was founded in 1988 and underwent a
name change in December 1996. The Company is incorporated under the laws of the
State of Delaware with its principle place of business in Little Rock, AR, with
offices in Worcester, MA. and New York, NY. The Company has approximately 1,250
shareholders and has been a public company since 1992. The Company’s Common
Stock, $0.001 par value per share (the “Common Stock”) has been publicly traded
on the Over-the-Counter Bulletin Board (“OTCBB”) since September of 2000, under
the symbol “TMEN.OB” until June 2, 2009 when we received from the Financial
Industry Regulatory Authority a Notice of Decision determining that
our securities were not eligible for continued quotation on the OTCBB as a
result of our failure to file and complete an annual report or quarterly report
by the due date three times in the last twenty-four months. Our
Common Stock continues to trade on “pink slips” under the symbol
“TMEN.PK”.
The
wastewater treatment technologies are consolidated in our majority owned
subsidiary, CASTion Corporation ("CASTion"), a Massachusetts corporation..
CASTion is a developer and manufacturer of innovative wastewater treatment and
recovery systems to industrial and municipal clients. Our process
systems not only meet local, state and federal environmental
regulations, but typically provide a rapid rate of return on
investment by recovering and reusing expensive feedstocks, reducing contaminated
wastewater discharge and recovering and reusing wastewater used in process
operations. Our patented and proprietary products are combined with
off-the-shelf technologies to provide systems that are inexpensive, easy to
operate and reliable. Our wastewater treatment systems have applications in
aerospace, food processing, metal finishing, pulp & paper, petrochemical,
refineries, microchip and circuit board manufacturing, heavy manufacturing and
municipal wastewater. From our 20,000 square
foot fabrication facility in Worcester, Massachusetts we assemble and
ship our systems anywhere. Additional information on our water technologies can
be found on CASTion’s website at
www.castion.com
.
The
Company is also the majority owner of a patented clean energy technology known
as the ThermoEnergy Integrated Power System (“TIPS”), which converts fossil
fuels (including coal, oil and natural gas) and biomass into electricity without
producing air emissions, and at the same time removes and captures carbon
dioxide in liquid form for sequestration or beneficial reuse. The TIPS
technology is consolidated in our majority owned subsidiary,
ThermoEnergy Power Systems, LLC (“TEPS”). The Company owns 85% of TEPS, Mr.
Alexander Fassbender, Executive Vice President, Chief Technology Officer and
Director owns 7.5% of TEPS, and the remaining 7.5% is owned by an unrelated
third party. On February 23, 2009, TEPS entered into a
fifty-fifty (50/50) joint venture with Babcock Power, Inc. called Babcock-Thermo
Carbon Capture, LLC ("BTCC") to commercialize the TIPS process. BTCC
received an exclusive worldwide license to the TIPS technology and BTCC is
currently in the process of designing a zero-air emission / carbon capture 600
Mw TIPS fossil fuel power plant.
TIPS and the Water Technologies are
collectively referred to as the “Technologies.” The economic and environmental
matrix of the Company’s technologies represents a significant advancement in
these key infrastructure industries. Additional information on the
Company and its technologies can be found on its website at
www.thermoenergy.com
and on CASTion’s website at
www.castion.com
.
Corporate
Mission
The
Company’s mission is to become a significant force within the global municipal
and industrial wastewater and power generation industries.
Water
Technologies
The
Company has several innovative and patented technologies in its intellectual
property portfolio pertaining to clean water. The Company’s clean water
technologies offer municipal and industrial clients superior economic and
process advantages over conventional wastewater treatment methods. The Company’s
water technologies include the following:
CASTion’s
CAST, R-CAST and Proprietary Water Technologies
Our
patented Controlled Atmosphere Separation Technology (“CAST ” and “R-CAST”)
systems can be utilized as an effective stand-alone wastewater or chemical
recovery system, or as part of an integrated plant-wide recovery solution. The
CAST wastewater and chemistry recovery system eliminates costly disposal of
hazardous waste or process effluent. The Zero-Liquid-Discharge (“ZLD”) program
can recover nearly 100% of a customer’s valuable chemical resources or
wastewater for immediate reuse or recycling at our customer’s facility. CAST
concentrates mixed hazardous waste down to as little as 5% of its original
volume for economical disposal or reclaim. CASTion’s water technologies fall
into three major categories: 1) Compliance Systems – designed to meet
strict local and federal regulatory mandates; 2) Primary Recovery Systems –
designed to treat the majority of an operations wastewater for reuse and
concentrated the contaminants; and 3) Final Recovery Systems – designed to
treat the remaining concentrated contaminants for disposal or additional
processing to achieve zero liquid discharge. Systems integration is key to the
success of any treatment or recovery project. While it is true that these
technologies are “state-of-the-art”, the real value we deliver is as a turnkey
solution provider.
ARP
The
Ammonia Recovery Process, or ARP technology, is a non−thermal, absorption
process which captures ammonia from dilute waste streams, converting it into
ammonium sulfate, a commercial grade fertilizer, which can utilized
in agriculture markets worldwide. The ARP technology was proven in
technology demonstration projects in conjunction with the Civil Engineering
Research Foundation (CERF) and the City of New York in 1998, and during the
EPA−sponsored demonstration at Colton, CA in 2000. The Company signed its
first commercial contract for a 500,000 gallon per day ARP system for New York
City’s Bowery Bay Water Pollution Control Plant (“WPCP”). That project was
cancelled during 2006 and is currently being moved to the 26
th
Ward
WPCP on Jamaica Bay. New York City filed a public notice of their
intent to enter into a sole-source contract with ThermoEnergy on February 18,
2009. On August 5, 2009 the New York City Office of Management and
Budget formally approved the contract for the 1.2 million gallon per day ARP
system for the 26th Ward WPCP in an amount not to exceed $29,450,000 for the
design, construction and operation of the ARP
facility. Construction of the plant is expected to begin
during 2009. This project is the first large−scale stand alone project ever
implemented by the City of New York designed to prevent excess ammonia from
flowing into Jamaica Bay.
ARP is a
patented physical/chemical process, comprised of various patented and/or
proprietary components, designed to remove and recover ammonia
from aqueous waste streams. In large-scale field demonstration as
well as laboratory tests, ARP has been proven to be a reliable, low−cost,
environmentally effective method of treating wastewater discharge streams
containing nitrogen in the form of ammonia. The ARP extracts ammonia out
of wastewater discharge streams from municipal,
industrial and livestock waste via chemisorption and converts it into
standard, commercial−grade, ammonium sulfate fertilizer. The Company is
targeting one such ammonia stream called "centrate"; a
liquid product resulting from centrifuging anaerobically digested sewage sludge
or animal waste. Ammonia concentrations found in
centrate ranges from approximately 300 to , 3,000 parts
per million. . In advanced wastewater treatment plants where nitrogen is
nitrified and denitrified, a portion of the nitrogen in the treatment plant is
converted into nitrogen gas. Such plants generate primary and waste activated
sludges which are typically treated with anaerobic digestion and then dewatered.
In the anaerobic digestion process, more than half of the nitrogen in organic
nitrogen compounds is converted into ammonia.
Once the
anaerobically digested sludge is dewatered, the organically bound
nitrogen stays with the sludge solids while virtually all of the aqueous
ammonia stays with the water portion or centrate. This centrate is
typically recycled to the front of the waste water treatment plant. ARP treats
the centrate as a relatively concentrated ammonia stream, and returns a very low
ammonia stream to the plant that is well below regulatory requirements. This
reduction in the nitrogen load on the plant can increase the overall plant
through−put by up to 30%. The removed and concentrated ammonia can thereafter be
converted into ammonium sulfate, a commercial grade fertilizer. The primary
markets for ARP are municipal and industrial wastewater treatment
and the treatment of wastewater discharge from large concentrated
animal farming operations, including dairy, pork, beef and poultry
facilities.
The
Company currently licenses one of its patented ARP technologies. the Ion
Exchange ("IX"), from BMI. Under the terms of the agreement, dated December 30,
1997, as amended, the Company agrees to pay to BMI the greater of 5% of revenues
received from customers using the BMI technology or $1.00 per 1,000 U.S. gallons
processed by the invention. However, if the Company enters into a contract under
which it or its sublicensee will design, build, own or operate a facility
licensed under the agreement, the Company will pay to BMI, subject to certain
adjustments, a lump sum of 5% of the cost of the installed equipment at the time
of commissioning the facility. The agreement also provides that the Company will
pay continuing royalties to BMI at a rate of 1.5% (one and one − half percent)
of all revenues, excluding certain amortization, received from the customers for
such operation; however not less than $0.02 (two cents) per pound of ammonia
recovered in the operation. BMI may terminate the agreement with respect to a
particular licensed territory (as described in the agreement) if the Company has
not made sufficient sales to generate royalties to BMI of at least $25,000 per
year in that particular territory. The Company has not generated such sales
figures to date. The agreement expires upon the expiration of the patents for
ARP technology, or at the discretion of BMI, if a contract is not in place to
build a commercial facility to practice the ARP Technology within three years of
the date of the agreement. Second generation ARP process
designs have not seen the need to incorporate IX as a component of the design,
however, the Company does not preclude the possibility of utilizing BMI's IX
technology in future applications.
Elements
of the Ammonia Recovery Process relating to alkalinity recovery in municipal
wastewater treatment plants is currently protected by a patent application held
by Alexander Fassbender. The Company currently licenses the patent pending
technology from Mr. Fassbender. Under the terms of the agreement with Mr.
Fassbender, at the time when cumulative sales of the licensed products exceed
$20 million, the Company agrees to pay to Mr. Fassbender 1% of the net sales
thereafter (as defined in the agreement). The Agreement may be assigned or
transferred by the Company with Mr. Fassbender’s consent, not to be unreasonably
withheld.
ThermoFuel
The
ThermoFuel Process ("TFP") is a renewable energy process that
converts digested or waste activated sewage sludge
(biosolids) into a high-energy fuel that can be converted into electricity for
use on-site (or exported to the local power grid), or sold as a low-cost
feedstock to third party industrial clients. This Technology is an upgrade of
the Company “STORS” process, which, along with the Company’s ARP technology, was
proven in a two-year, $3,000,000 large-scale demonstration project in Colton,
CA in 2000, which was sponsored and funded by the United States
Environmental Protection Agency (“EPA”). The ThermoFuel process is a renewable
energy process that provides a cost-effective solution for biosolids disposal
for municipal wastewater treatment. ThermoFuel integrates advanced primary
sludge digestion with hydrothermal treatment of waste activated sludge to expand
the capacity of existing municipal wastewater
facilities. TFP is designed to be a compact,
environmentally effective method of upgrading existing wastewater treatment
plants to Exceptional Quality (“EQ”) Class A biosolids production without the
use of storage tanks, ponds or lagoons, as is common practice for
municipal wastewater facilities. EQ Class A biosolids denotes the least health
risk of human exposure to biosolids as defined in the 40 CFR Part 503 Risk
Assessment study of the EPA. Over 95% of all municipal wastewater treatment
plants in the U.S. currently produce Class B biosolids that do not meet the
required pathogen and vector attraction reduction requirements and as such pose
a potential health risk in direct human contact. The high energy and low
moisture content of the TFP fuel make it suitable for use as a fuel
substitute or blending agent for power plants, municipal solid waste
incinerators, cement kilns, and similar applications. The Company and Mr.
Fassbender filed a patent application related to ThermoFuel (see − Sewage
Treatment System below) in February 2003. The U.S. Patent & Trademark Office
issued the Sewage Treatment System patent on March 17, 2005. The
ThermoFuel process is covered in the same license as enhanced
biogas.
ThermoFuel
can be utilized as a stand-alone system or combined with the Company’s ARP or
Enhanced Biogas Production technologies to provide the wastewater treatment
plant operator with a comprehensive and cost-effective method of upgrading
existing wastewater treatment plants to produce 100% EQ Class A biosolids; a
product which can then be safely applied to expired land, such as a landfill or
mining reclamation, or converted on-site to energy via a gasification plant or
boiler. ThermoFuel would allow wastewater treatment plant operators to control
the incoming waste stream entirely on-site, with only clean water and saleable
commodities leaving the plant. The primary target markets for ThermoFuel are
municipal and industrial wastewater treatment facilities.
Enhanced
Biogas Production
The
Enhanced Biogas Production process allows existing wastewater treatment plants
operators to upgrade the performance of key plant components making the plant
run more efficiently as well as recover excess ammonia coming off the digesters.
The Enhanced Biogas Production process is designed to retrofit existing
conventional wastewater treatment plants by allowing them to recover ammonia
from anaerobic digesters and thereby enhance the efficiency of the digesters.
The technique can be used as a stand-alone technology or in coordination with
the Company’s ARP technology. It can also be implemented with the Temperature
Phased Anaerobic Digestion technology (described below) used by wastewater
treatment plant operators, to make more biogas and destroy pathogens.
Temperature phasing is a relatively new method adopted by wastewater treatment
plant operators that uses two phases of anaerobic digestion. In the high
temperature phase (around 120 − 140º F) waste solids are disinfected and
conditioned to reduce pathogens below threshold levels and solubilize some of
the solids during the digestion phase. The Enhanced Biogas Production process
can also be integrated with ThermoFuel and used in conjunction with municipal
and industrial wastewater applications that use aerobic or anaerobic digestion.
The Enhanced Biogas Production process is intended to be a cost-effective method
of processing and treating animal waste from concentrated animal farming and in
which the waste is converted into two saleable commodities: (i) energy in the
form of methane and (ii) ammonium sulfate, a commercial grade
fertilizer.
The
Enhanced Biogas Production process is currently protected by two patents held by
Alexander Fassbender. The first patent was issued in June 2002, and the second
patent was issued in May 2004. Foreign patents applications have been filed and
are pending. The patents cover both single and multiple digester configurations
using the Enhanced Biogas method. The Company currently licenses the Enhanced
Biogas Production and Sewage Treatment Method technologies from Mr. Fassbender.
Under the terms of the agreement with Mr. Fassbender, at the time when
cumulative sales of the licensed products exceed $20 million, the Company agrees
to pay to Mr. Fassbender 1% of the net sales thereafter (as defined in the
agreement). The Agreement may be assigned or transferred by the Company with Mr.
Fassbender’s consent, not to be unreasonably withheld. Notwithstanding the
foregoing, the Agreement may be assigned or transferred without requiring Mr.
Fassbender’s consent in the following circumstances: in connection with a merger
or other reorganization of the Company, a transfer of all or a substantial part
of the assets of the Company including the technology licensed under the
Agreement, or the sale of the business operations to which the Agreement
relates, or if there are two or more business operations utilizing the licensed
technology, in connection with a transfer of partial rights under the Agreement.
Mr. Fassbender shall not be permitted to transfer the Agreement or my rights
thereunder without the consent of the Company, which shall not be unreasonably
withheld.
Sewage
Treatment System
The
Sewage Treatment System (“STS”) is a patented wastewater treatment system (U.S.
Patent No. 6,893,566) that takes advantage of the synergy of mechanical,
thermal, and chemical integration to generate EQ Class A biosolids at low
capital and operating costs. Among other things, STS significantly increases
operating temperatures and sludge retention time available at an existing
anaerobic digestion facility, increasing plant capacity. The excess thermal
energy from biogas generated by the digester can be used to supply between 50%
to 100% of the heat energy required for the ThermoFuel process, significantly
reducing energy costs.
The
target markets for STS and the Enhanced Biogas Production process technologies
are municipal and industrial wastewater treatment plants and wastewater
treatment facilities located on large and confined animal farming
operations.
The
performance of these wastewater treatment technologies 1) meets or exceeds all
current or proposed federal or state water quality discharge regulations, 2)
produces virtually no air emissions, 3) lowers capital, operating and
maintenance costs, and 4) provides beneficial reuse of virtually all
byproducts.
Power
Technologies
In
addition to its Water Technologies, the Company, along with its joint venture
partner, Babcock Power, Inc., is developing a new advanced power plant
design that offers a cost−effective and environmentally responsible
solution to both carbon capture and global warming. The power technology is
described below:
TIPS
ThermoEnergy
Integrated Power System, or 'TIPS' process, represents a novel thermodynamic
approach in power plant design. Based on reliable oxyfuel chemistry, it combines
the combustion of carbonaceous fuels (coal, oil, natural gas or biomass) with
essentially complete recovery of all by−products, including NOx, SOx, mercury,
particulates, and carbon dioxide (“CO2 ”), which can then be used for
sequestration or beneficial reuse. The key element that differentiates TIPS from
conventional oxy−fuel designs is that combustion shifts the temperatures at
which water, CO2, mercury and acid gases condense. Gas−to−liquid nucleate
condensation physics is then used to collect and remove the pollutants, while
CO2 is recovered as a liquid through direct condensation to reduce harmful air
emissions of acid gases, mercury, soot and CO2. TIPS is well−suited for new
construction and offers a cost−effective way to upgrade many existing coal−fired
power plants to zero air emission/carbon capture status.
The
primary markets for the TIPS process will be power generation plants for
electric utilities and combined heat and power plants for industrial clients,
many of which produce waste by−products that can be used as a feedstock for
TIPS. Some of the industries in which TIPS can be utilized include oil
refineries, petrochemical processing plants and pulp and paper mills. In March
2001, ThermoEnergy Power Systems was granted U.S. Patent No. 6,196,000 for TIPS.
The Company also received a second U.S. patent relating to the TIPS
process. (U.S. Patent No. 6,918,253). Foreign patent applications have been
filed in approximately 38 countries, including Australia, Canada, China, the
European Patent Office, India, Mexico, Poland, Romania, the Russian Federation,
South Africa and the Ukraine (collectively, the “International Applications”) as
provided for by the Patent Cooperation Treaty. To date, the Company has received
notice of allowance from China and Russia and has paid the issue fee. The
Company typically obtains continuances in countries where continuances are
permitted such as Canada and Japan. Continuances are used to keep the patenting
process alive in certain geographical markets until such time the Company deems
the cash outlay on patenting costs and subsequent maintenance fees appropriate
in that jurisdiction. This preserves all rights and the Company can request
examination at the appropriate time.
Business
Objectives and Strategy
The
Company’s business model is based on 1) new construction or retrofitting of
existing wastewater treatment plants for federal, state and municipal
governments, industrial clients as well as power generation plants for public
and/or merchant utilities worldwide, 2) privatization contracts wherein the
Company will build and operate, or build, own and operate municipal and/or
industrial wastewater treatment and power plants systems, and 3) the generation
and sales of emission credits for emissions including nitrogen, carbon and
mercury either directly to end-users or via established public exchanges. In
instances where the client has sufficient skill to design, build and operate the
Company’s technologies, the Company’s business strategy in pursuing these
multibillion dollar markets is to enter into collaborative working
relationships, such as joint ventures, licenses and other similar agreements
with companies that are well-established in the Company’s targeted markets, and
as such, can greatly expedite the commercialization of the Company’s
technologies.
The
Company previously completed large scale demonstration projects for ARP as well
as other wastewater treatment technologies called NitRem/DSR and STORS, which
the Company previously licensed from BMI, but that are now no longer used by the
Company. Each of the demonstration projects was funded either by the United
States government or by entities with which the Company has or had collaborative
working relationships. The Company was not required to make capital
contributions to any of these demonstration projects and has not received any
revenues or generated any income from them, other than reimbursement for certain
administrative and operating costs. These demonstration projects have allowed
the Company to develop, demonstrate and improve the Technologies without having
to finance them itself. From a competitive standpoint in the wastewater and
sludge treatment markets, the Company believes that the ability to meet various
state and federal environmental regulatory standards at lower capital
requirements than traditional wastewater and sludge treatment solutions should
make ARP, ThermoFuel, and Enhanced Biogas Treatment technologies an attractive
alternative solution for municipalities and certain industrial applications. The
Company continues to target those markets where state or federal
regulations have been enacted and are enforcing municipal and corporate
compliance for nitrogen/ammonia, sewage sludge by-products, and other chemical
compounds where the Company's technologies provides the most cost-effective and
environmentally responsible solution.
The
Company believes many of these markets represent suitable
opportunities for the Company to implement its primary business model of design,
build, own and operate ("DBOO") wastewater facilities over a contracted period
(anticipated by the Company to be a 10−20 year
period). Alternatively, the Company may license the Technologies to
the client and then enter into an operation contract for municipal owned systems
utilizing the Company’s Technologies over a similar time period. Under these
arrangements, the Company would seek to generate revenues and profits from a per
unit tolling fee on the volume of waste processed by the Company’s technologies,
as well as from the projected sale of the commodity byproducts (e.g. the
high-energy fuel generated by ThermoFuel or the ammonium sulfate generated by
ARP), or selling the electricity and/or process steam produced using the
high-energy fuel as a feedstock to the municipality or the local power
grid.
As part
of the Consolidated Appropriations Act of 2005 (the “Act”), the US Congress
authorized an aggregate of $2.3 million for research and development projects.
The Company has pursued funding under the Act that may help to further develop
the TIPS process in conjunction with other entities, including the Texas Energy
Center, the Alaska Energy Authority and the University of Nevada at Reno. The
Company completed grant contracts totaling $544,000 with the University of
Nevada, Reno and RDS, LLC (a prime contractor of the U.S. Department of Energy)
during 2006. The Company subcontracted portions of the work on these grants to
CANMET (Natural Resources − Canada), Reaction Systems Engineering, Ltd. (“RSE”),
Kent, UK and Stone and Webster, Inc. The Company began an additional $1.4
million grant project with the Alaska Energy Authority during 2007. The
Company completeed this grant during the second quarter of
2009. The technical data generated by this grant as well as the data
from the two previous grants, is being utilized in the current effort by BTCC to
design the initial TIPS demonstration plant.
Although
the severe economic environment currently effecting the US, and world, economies
causing the Company to recalibrate its business forecast for the third and
fourth quarter of 2009, the Company still projects that revenues for 2009 will
exceed those recorded in previous years. However, the
Company still forecasts a significant net loss from operations for the year
ending December 31, 2009 and there can be no assurances that the Company
will not experience conditions requiring revisions of revenue projections for
2009 and beyond.
In
addition, the Company’s long-term growth strategy includes the acquisition of
other companies whose products or services are related to the Company’s core
business. Ideally, these candidate companies would (a) already be a
well-established participant in one or more of the Company’s targeted markets,
(b) have ongoing revenues and profits, and (c) bring additional administrative
and technical skills and expertise needed for the Company to achieve its
corporate mission and continue its growth goals.
New
York City Contract
The
Company was awarded a $7,000,000 contract by New York City Department of
Environmental Protection (“NYCDEP”) for a 500,000 gallon per day ARP facility to
be located at the City’s Bowery Bay Water Pollution Control Plant (“WPCP”) on
June 13, 2005. The project encountered problems unrelated to the Company at the
Bowery Bay WPCP and was cancelled in September 2006 until such time that NYCDEP
could identify an alternative site. Subsequently the Company entered into
negotiation with NYCDEP to enter into a new contract to move the project to the
26
th
Ward
WPCP, situated on Jamaica Bay, in Brooklyn. Due to process
costs as well as plant operational variances between the Bowery Bay and 26th
Ward plant WPCP, the ARP project was enlarged to process up to 1,200,000 gallons
per day at a cost not to exceed $29,450,000. The Company
completed and submitted the redesign for the larger plant during the
fourth quarter of 2008. NYCDEP accepted the preliminary design and
subsequently filed a public notice of their intent to enter into a sole source
contract with ThermoEnergy on February 18, 2009, for the 26th Ward ARP
plant. On August 5, 2009, NYC Office of Management and
Budget approved the new $29,450,000 contract and the Company expects to formally
sign the new contract and begin construction of the facility during
2009. The Company believes that, based upon the proposed terms
of the ARP contract, the Company would be able to meet the operational
requirements of the contract assuming that substantial additional financing from
investors is obtained to meet the Company’s cash needs (see Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Liquidity and Capital Resources Discussion). If the 26
th
Ward ARP facility meets certain predetermined process and economic
efficiencies, the Company intends to pursue additional contracts with New York
City with respect to other facilities that will be needed by the city in order
to meet the terms of a Consent Decree entered against the city in 2002 pursuant
to which the city is required to develop a plan to upgrade the plants to meet
specific ammonia discharge limits set out in the Consent Decree.
The
Company released an engineering study by HydroQual Inc., internationally
renowned experts in water resources management, confirming the many economic and
process advantages of using the Company’s patented Ammonia Recovery Process
(“ARP”) technology to greatly reduce the amount of ammonia currently being
discharged from municipal and industrial wastewater treatment plants. The study
utilized the industry leading BioWin modeling software to support the report’s
conclusion that ARP requires significantly less space, uses less energy and
dramatically lowers both capital and operating costs for ammonia-nitrogen
treatment relative to the use of conventional biological methods.
Thousands
of tons of nitrogen, in the form of ammonia, are being discharged into local
waterways everyday by wastewater treatment plants throughout the US and around
the world. Many states, as well as the federal government, have begun to
regulate the amount of ammonia discharged to protect the environment. While
ammonia, in small amounts, is present in many industrial and household products,
in large doses it is harmful to human health and extremely toxic to aquatic
life. The presence of ammonia in waterways and aquifers creates conditions
resulting in the creation of ‘Dead Zones’; areas within a body of water where
fish and shell fish cannot live. Currently, there are over 140 Dead Zones
throughout the world including some of the nations leading bodies of water such
as the Chesapeake Bay, Long Island Sound, Puget Sound, Gulf of Mexico and
Narragansett Bay among others.
Recent
Developments
On
September 16, 2009, the Company and an investor group, consisting of Quercus,
Empire Capital Partners, Robert S. Trump and the Focus Fund L.P., signed a term
sheet for a Series B Convertible Preferred Stock financing, which if fully
funded, would result in cash proceeds of $6,250,000 to the
Company. The term sheet provides for funding in four tranches, with
the first and second tranche amounts totaling $3,050,000 based on specified time
periods and the third and fourth tranche amounts totaling $3,200,000 based on
the occurrence of specified events.
In the
first tranche funding of $1,680,000, the Company issued 8% Secured Convertible
Promissory Notes on September 28, 2009 identical in form and substance to the
Company’s 8% Secured Convertible Promissory Note issued to the Focus Fund L.P.
on July 31, 2009, which was amended to provide for a conversion price of $.24
per share instead of $.30 per share and a maturity date of December 31,
2010. In addition, the Company’s outstanding Convertible Promissory
Notes payable to the investors in the original aggregate principal amount of
$3,550,000 were amended to conform to the same terms as the 8% Secured
Convertible Promissory Notes. The security for all of the 8% Secured
Convertible Promissory Notes is the Company’s 85% interest in ThermoEnergy Power
Systems.
In the
second tranche funding of $1,400,000, expected to occur on or before November
15, 2009, the Company will issue shares of Series B Convertible Preferred Stock
at a price per share to be specified at that date. Upon the closing
of the second tranche funding, the outstanding principal and accrued interest on
all of the 8% Secured Convertible Promissory Notes will convert automatically
into shares of the Company’s Series B Convertible Preferred Stock at the
price per share at which such Preferred Stock will be issued. Each
share of Series B Convertible Preferred Stock will be convertible, at any time
at the discretion of the holder, into ten shares of the Company’s Common
Stock. Except with respect to the election of the Board of Directors,
holders of Series B Convertible Preferred Stock will vote on an as-converted
basis together with the Common Stock holders on all matters. The term
sheet provides that the Company’s Board of Directors will consist of seven
members. Four Directors will be elected by holders of the Company’s
Series B Convertible Preferred Stock (three to be designated by Quercus and one
by Robert S. Trump) and three Directors will be elected by the holders of the
Company’s Common Stock.
If the
events specified in the term sheet occur, in the third tranche funding
of $1,800,000 and the fourth tranche funding of $1,400,000, the Company will
issue shares of Series B Convertible Preferred Stock.
Common
Stock warrants with an aggregate exercise price equal to 200% of the principal
amount invested will be issued to the investors at the closing of each
tranche. The warrants will expire in five years and provide for an
exercise price of $.50 per share.
The term
sheet also provides, among other things, for the following: (i) the
reduction of the exercise price to $.50 for the Company’s outstanding warrants
held by the investors which have an exercise price greater than $.50 and were
issued in conjunction with convertible notes which were amended in accordance
with the term sheet; (ii) the dismissal of the litigation filed by Quercus
against the Company; (iii) the execution by the Company and the
investors of mutual general releases of all prior claims (whether or not yet
asserted); (iv) the removal of the registration payment arrangements with
Quercus; (v) the employment of a new Chief Executive Officer and Chief Financial
Officer; and (vi) the termination of all existing employment agreements with the
Company’s executive officers.
On
September 28, 2009, the litigation filed in Arkansas against the Company was
dismissed. On September 30, 2009, the litigation filed in Delaware against the
Company was dismissed. See Note 14 of Notes to Consolidated Financial
Statements for additional information.
In
addition to the recent developments discussed in this Item 1, see Notes 13 and
14 of Notes to Consolidated Financial Statements included elsewhere herein for
additional recent developments that have had a significant impact on the
Company’s business.
Patents
and Patents Pending
The
Company owns or licenses all of its technologies, including the technologies
discussed previously in this document.
License
Payments to BMI
As
discussed earlier, currently the Company has only one remaining license
agreement with BMI (the “License Agreement”) for use of ARP. Pursuant to the
License Agreement, BMI continues to reserve rights in ARP for research and
development purposes.
During
2005, the Company made the strategic decision to cancel existing license
agreements with BMI for STORS, NitRem and DSR technologies in a move designed to
fully concentrate its human and financial resources on only those technologies
that management believes have significant long−term commercial
potential.
Research
and development activities with respect to STORS, NitRem and ARP have generally
been conducted by BMI, although BMI did not conduct any research and development
activities in 2005, 2006 or 2007. The Company conducts research and
development activities as it relates to product improvement on several of its
key water/wastewater process systems in its laboratory located in its Worcester
(MA) facility. License expenditures for the Company were $40,000 for
the years ended December 31, 2008, 2007 and 2006, based upon a minimum royalty
schedule. The Company expects future annual minimum royalty payments to BMI to
be $40,000, due to the cancellation by the Company of the STORS, NitRem and DSR
license agreements.
Employees
As of
June 30, 2009, the Company had nineteen full-time employees, located primarily
in the Worcester, MA fabrication facility, and the corporate
office in Little Rock, AR. Dennis C. Cossey, Chairman and Chief Executive
Officer, Shawn R. Hughes, President and Chief Operating Officer, and Andrew T.
Melton, Executive Vice President and Chief Financial Officer have employment
contracts that extend for five years. Mr. Melton resigned
on August 3, 2009 following a vote by the Board of Directors to terminate
his employment for cause (see Item 9A. Controls and Procedures and Note 13
of Notes to the Consolidated Financial Statements for additional discussion of
this matter). Mr. Arthur S, Reynolds, a member of the Company’s Board
of Directors, was appointed as Interim Chief Financial
Officer. Alexander G. Fassbender, Executive Vice President and Chief
Technology Officer has an employment contract that extends for
three years.
As more
fully described in Note 14 of Notes to Consolidated Financial Statements, the
Company’s employment contracts with its executive officers will
be terminated in connection with the Series B Convertible Preferred Stock
financing contemplated by the term sheet dated September 16, 2009 between the
Company and an investor group. The agreements will be replaced with
new contracts with revised salary amounts and severance provisions.
All of
the officers and engineers have agreements with the Company prohibiting them
from distributing the Company’s proprietary information and prohibiting them,
for a period of one year after termination of employment, from competing with
the Company or soliciting its customers or employees. The employees are not
represented by any labor union. The Company believes that relations are
satisfactory with each current employee.
Competition
The
Company’s Technologies are intended to enable the wastewater treatment and power
generation industries to comply with state and federal clean water and clean air
regulatory requirements in the United States. The Company believes that these
industries are dominated by process methods developed in the 1940s and 1950s,
with only minor improvements since that time. It is the
Company's belief that local, state and federal regulatory developments over the
past 25 years have rendered the majority of these conventional process methods
ineffective in meeting today's new regulatory mandates, especially as
they relate to green house gas ("GHG") reduction. Yet, conventional wisdom
continues to enable these technologies to compete with the Company’s
Technologies for share of the wastewater treatment market. Competitive factors
affecting the Company include entrenchment and familiarity of the older
technologies within the Company’s target markets. Likewise, individuals with
purchasing authority within the Company’s target markets are not as familiar
with the Company’s Technologies and may be hesitant to adopt the Technologies in
their municipal or corporate facilities. Plant operators have
attempted to meet the regulatory requirements by optimizing existing process
methods, rather than adopting new technologies, including the Company’s
technologies. The cost of developing new technologies and the ability of new
companies to enter the wastewater treatment and power generation industries are
barriers to entry for new or developing companies. The established companies in
the wastewater treatment and power generation markets who attempt to meet the
regulatory mandates by modifying conventional technologies comprise the
Company’s principal competition. The Company believes that more stringent State
and Federal clean water mandates, as well as admenments to previously enacted
clean water regulations (see Government Regulatiron, below) have rendered many
conventional technologies ineffective, either from an economic or process
efficiency standpoint, in meeting
these new regulatory
challenges, thereby creating opportunities for its
Technologies. However, there can be no assurance that there will not be
additional competitors in the future or that such competitors will not develop
technologies that are superior to those of the Company.
Government
Regulation
There are
federal, state and local statutes and regulations which implement a range of
programs to protect and restore water and air quality. Federal legislation
directed at improving water quality include programs established under the Clean
Water Act of 1977, as amended, the Coastal Zone Management Act of 1972, as
amended, the 1990 and 1996 Farm Bills, the Ocean Dumping Ban Act, and the Clean
Water and Watershed Restoration Initiative. The regulations established under
these plans are intended to improve existing water quality programs. In order to
comply with these regulations, municipal and industrial wastewater treatment
facilities are seeking more cost−effective methods of treatment of
wastewater.
The
Company believes that the new Obama Administration's philosophy relating to
environmental issues relevant to clean air and clean water
regulations are far more favorable toward both implementation
and enforcement than the last Administration. Management believes
that current leaders in both the House of Representatives and the Seante are
also far more favorable to environmental issues and as such will result in the
passage of new laws relevant to clean air and clean water, as well as
increased enforcement of existing regulatory requirements by the US EPA and US
Department of Justive. Management believes that should these efforts
be successful these efforts it would create additional opportunities
for the Company to market the Technologies.
A federal
appeals court on March 17, 2006, blocked the Bush administration from
implementing a regulation that would have eased clean air requirement for some
17,000 industrial facilities, including coal−fired power plants and oil
refineries. The court handed down a rebuke at the regulation, which it said is
"contrary to the plain language" of the Clean Air Act. The unanimous ruling by
the three judge panel of the U.S. Court of Appeals for the District of Columbia
Circuit is a major victory for a coalition of 15 states and a long list of
environmental and public health organizations who filed suit to block the August
2003 rule.
Notwithstanding
the uncertainty created by these regulatory and administrative initiatives, the
Company believes that some of the proposals should provide it with additional
potential customers for the Company’s TIPS zero air emission process once
development is complete, who desire to meet the regulatory limits and are
motivated by the possible economic benefits of selling “credits” under a cap and
trade program.
The
Company’s Technologies also could be attractive in the global marketplace, where
some clean water and clean air regulations of some countries are more stringent
than those in effect in the United States. The marketability of the TIPS
technology was significantly expanded with the recent ratification of the Kyoto
Protocol by 141 nations, which took effect in February of 2005. As the Kyoto
Protocol emission reductions are phased in through 2012, many older
coal−fired power plants will be among the first affected by the new regulations.
Many of these plants utilize boiler designs 20 years old or more, making any
upgrade using conventional combustion technology highly improbable.
Collectively, these plants represent an enormous sunk−cost for utilities and
industry, creating an ideal for any new retrofit technology that could
potentially be required to keep these plants operational., While there are a
number of post-combution carbon capture technologies currently under
development, management is unaware of any other primary
combustion technology currently available or nearing
commercial deployment capable . achieving zero air emission as well
as capturing >95% of carbon dioxide. There can be no assurance,
however, that a competing technology or technologies will not be developed in
the future, or that the passage of more stringent clean air
requirements will result in the Company’s Technologies being used in
either the United States or abroad, or that the current trend of domestic and
international environmental legislation will continue.
Item
1A. Risk Factors
Going
Concern
The
independent auditor of the Company, in its report for the fiscal year ended
December 31, 2008, issued a “going concern” opinion regarding the Company,
stating that there is a substantial doubt that the Company can continue as a
going concern, the Company’s net losses since inception and the need for
substantial capital to continue commercialization of the Technologies and to
fund the Company’s substantial liabilities at December 31, 2008, which included
approximately $2,022,000 of payroll tax liabilities, $3,478,000 of convertible
debt securities in default and $3,334,000 of contingent liability
reserves.
Need
for Additional Capital
At
December 31, 2008, the Company did not have sufficient working capital to
satisfy its anticipated operating expenses for the next 12 months. As of
December 31, 2008, the Company had a cash balance of approximately $115,000 and
current liabilities of approximately $10.9 million, which consisted primarily of
convertible debt in default of $3,478,000 (net of $313,000 of debt discounts),
contingent liability reserves of $3,334,000 and unpaid payroll taxes of
$2,022,000.
Due to
the Company’ financial condition and to the significant uncertainties resulting
from the actions of the Company’s former CFO regarding unpaid payroll taxes
and related matters (see Note 13 of Notes the Consolidated Financial
Statements), there are can be no assurance that the Company will be able to
obtain the capital funds that will be needed for the Company to continue it
operations. Furthermore, the Company is at risk that creditors could
put the Company into bankruptcy proceedings if additional funding is not
obtained.
Effect
of Recent Events on the Company’s Liquidity
Recent
events have had a significant adverse effect on the Company’s
liquidity. The Company’s former CFO’s actions involving payroll
tax matters resulted in an accrual during the fourth quarter of an additional
$1,064,000 of payroll taxes (resulting in total unpaid payroll taxes of
$2,022,000) and $2,105,000 of estimated interest and penalties for late filing
of the tax returns and nonpayment of the payroll taxes (see Note 13 of Notes to
Consolidated Financial Statements for further information regarding payroll tax
matters).
The
Company may become subject to tax liens if it cannot satisfactorily settle the
outstanding payroll tax liabilities. Furthermore, due to the actions
of the CFO, the Company may also face criminal and/or civil action with respect
to the impact of the payroll tax matters. The Company cannot predict
what, if any, actions may be taken by the tax authorities, the Securities and
Exchange Commission or other parties or the effect the actions may have on the
Company’s results of operations, financial condition or cash flows.
Lack
of Operating History; Accumulated Deficits
Although
the Company has been notified and the City of New York has publicly announced
their intent to enter into a commercial ARP facility with the City of New York,
it has not yet formally entered into a commercial contract with NYCDEP. Neither
has the Company entered into a strategic relationship with a third party that
has the resources to commercially exploit its Technologies. Since its inception,
the Company has generated negligible income from operations and has an
accumulated deficit of approximately $68 million as of December 31, 2008. Even
if the contract with New York City is completed, there can be no assurance that
the Company will be able to successfully implement future contracts for its
Technologies.
Lack
of Commercialization of the Technologies
Since its
formation in 1988, the Company has devoted substantially all of its resources to
funding the payments due under license agreements, searching for opportunities
to deploy its Technologies in demonstration facilities and seeking capital
necessary to sustain the Company’s efforts. Even though demonstration units have
been successfully operated and the Company has entered into a contract for an
ARP facility with the City of New York, none of the Technologies has yet been
implemented on a permanent basis by a municipal or industrial customer. Until
such time that the New York ARP plant is built and successfully operated, it
will remain difficult for the Company to gain acceptance of the Technologies in
other markets. The Company’s ability to penetrate these markets depends on 1)
fully developing and demonstrating the Technologies, 2) successfully
commercializing one or more of its Technologies and 3) finding a source of
capital to fund commercial projects or a larger, well−capitalized joint venture
partner to participate in such projects. There is no assurance that all of these
requirements will be successfully implemented or that the Technologies will be
deployed in future commercial contracts.
Lack
of Strategic Corporate Alliances
Management
believes that collaborative working arrangements are the most efficient and
effective way for the Company to commercialize the Technologies through
demonstrating the efficiency of the Technologies. While successful demonstration
projects are important prerequisites to commercializing the Technologies,
additional capital is required to exploit the opportunity. If the Company is
unable to form strategic corporate alliances, its ability to commercialize the
Technologies on a broad scale will be limited.
Lack
of Liquidity
On June
2, 2009, we received from the Financial Industry Regulatory Authority
a Notice of Decision determining that our securities were not
eligible for continued quotation on the OTC Bulletin Board as a result of our
failure to file an annual report or quarterly report by the due date three times
in the last twenty-four months. Our common stock continues to trade
on “pink slips” under the symbol “TMEN.PK”.
Pink
sheet trading provides significantly less liquidity than if the Common
Stock were listed on a securities exchange (e.g., the New York Stock Exchange or
NASDAQ) and may provide little or no liquidity for the Company’s shareholders.
Purchasers of shares of Common Stock may find it difficult to resell their
shares at prices quoted in the market. There is currently a limited volume of
trading in the Company’s Common Stock. The Company cannot predict when or
whether investor interest in its Common Stock might lead to an increase in its
market price or the development of a more active trading market or how liquid
that market might become.
The
Company is Dependent upon Its Ability to Attract and Retain Key
Personnel
The
Company will need to add additional skilled personnel in order to execute its
business plan. There can be no assurance that the Company will be
able to attract and retain the qualified personnel needed for its
business.
Penny
Stock Regulation
Broker−dealer
practices in connection with transactions in “penny stocks” are regulated by
penny stock rules adopted by the Commission. Penny stocks are generally equity
securities with a price of less than $5.00 (other than securities registered on
certain national securities exchanges, provided that current price and
volume information with respect to transactions in such securities is provided
by the exchange or system). The penny stock rules require a broker−dealer, prior
to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document that provides information about
penny stocks and the risks in the penny stock market. The broker−dealer must
also provide the customer with current bid and offer quotations for the penny
stock, the compensation of the broker−dealer and its salesperson in the
transaction, and monthly account statements showing the market value of each
penny stock held in the customer’s account. In addition, the penny stock rules
generally require that prior to a transaction in a penny stock, the
broker−dealer make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the purchaser’s written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for a stock
that becomes subject to the penny stock rules. Since the Company’s securities
are subject to the penny stock rules, investors in the Company may find it more
difficult to sell their securities.
The
market for penny stocks has suffered in recent years from patterns of fraud and
abuse. Such patterns include (i) control of the market for the security by one
or a few broker−dealers that are often related to the promoter or issuer; (ii)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (iii) boiler room practices involving
high−pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (iv) excessive and undisclosed bid−ask differential and markups
by selling broker dealers; and (v) the wholesale dumping of the same securities
by promoters and broker−dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market.
Although
we do not expect to be in a position to dictate the behavior of the market or of
broker−dealers who participate in the market, management will strive within the
confines of practical limitations to prevent the described patterns from being
established with respect to our securities.
We
Do Not Know if TIPS is Commercially Viable
The
Company has developed TIPS mostly from funding from federal grants, and recently
completed the approximately $1.5 million federal government grant sponsored by
the U.S. Environmental Protection Agency and administered through the Alaska
Energy Authority. The Company cannot predict the acceptability of
TIPS within its target markets.
Our
Stock Price has been Volatile, and Your Investment in our Common Stock Could
Suffer a Decline in Value
An
investment in our Common Stock is risky, and stockholders could suffer
significant losses and wide fluctuations in the market value of their
investment. The market price of our Common Stock has been extremely volatile
since it began trading in 2000. We expect our Common Stock to
continue to be subject to fluctuations. Broad market and industry factors may
adversely affect the market price of our Common Stock, regardless of our actual
operating performance. Volatility in the market price of shares may prevent
investors from being able to sell their shares of Common Stock at prices they
view as attractive. In the past, securities class action litigation has often
been instituted against companies following periods of volatility in their stock
price. This type of litigation could result in substantial costs and divert our
management's attention and resources.
Item
1B. Unresolved Staff Comments
Not
applicable
Item
2. Properties
The
Company’s principal executive offices are located at 124 West Capitol Avenue,
Suite 880, Little Rock, Arkansas, where the Company leases approximately 3,400
square feet from an unaffiliated third party under a three year lease. The
Company also leases approximately 20,000 square feet of space under a five year
lease in Worcester, Massachusetts from an unaffiliated third party. In the event
either of these leases is not extended or renewed, the Company believes that it
would be able to find comparable facilities in the same geographic area at lease
rates comparable to those it currently pays. The Company owns no real
property.
Item
3. Legal Proceedings
During
August 2006, Rock Capital LLC, a former consultant to the Company, filed a
lawsuit in the Circuit Court of Pulaski County, Arkansas, against the Company
and personally against Dennis Cossey, the Company’s CEO, and Andrew Melton, the
Company’s CFO, alleging breach of contract, slander, fraud in the inducement,
fraud, and negligence. In October 2006, the Plaintiff voluntarily
withdrew its slander claims against the Company and Messrs. Cossey and
Melton. On February 2, 2007 the Court granted Messrs. Cossey and
Melton’s Motion for Summary Judgment thereby dismissing with prejudice the
Plaintiff’s claims against them individually on the fraud in the inducement,
fraud and negligence claims. On February 9, 2007, in a 9 to 3
verdict, a jury found the Plaintiff on its breach of contract claim against the
Company, awarding it $298,720 (which was the balance due under its three year
consulting contract set to expire March 8, 2008). On April 13, 2007
the Company filed an appeal of the jury verdict on the breach of contract claim.
During the second quarter 2008 the Appellate Court ruled against the Company on
the breach of contract claim and for the company on all of Rock Capital’s
counterclaims. On July 15, 2008, the Company filed a petition for
Motion to Rehear on clarification of points the Company believes the Court did
not consider in its ruling. The Appellate Court ruled against the
Company and during September 2008 the Company paid the full amount of the
judgment plus interest. The Company had previously expensed and
accrued the payable of approximately $428,000 for the full amount
owed.
On April
6, 2009, David Gelbaum, as Trustee of The Quercus Trust (“Quercus”) brought an
action in the Delaware Chancery Court against the Company to enforce the
provisions of the Securities Purchase Agreement between Quercus and the Company
dated December 18, 2007 (the “Delaware Complaint”). The Delaware
complaint seeks specific enforcement of the Company’s “shelf” registration
obligation with respect to the shares of common stock issued or issuable to
Quercus pursuant to such agreement and the payment of liquidation damages for
the failure to register the securities. Mr. Gelbaum served as a
Director of the Company from September 10, 2008 until his resignation on January
22, 2009.
On April
29, 2009, Quercus brought an action in the United States District Court for the
Eastern District of Arkansas against the Company (the “Arkansas Complaint’) to
enforce the provisions of the 2008 Agreement for the $2,000,000 Convertible
Note. The Arkansas Complaint alleges that, as a result of the events of default,
the Note is now due and payable and seeks judgment in the amount of the Note
(plus costs of collection). The Arkansas Complaint also alleges that
we have breached our shelf registration obligation with respect to the shares of
our Common Stock issuable upon conversion of the Note or upon exercise of the
warrant issued to Quercus pursuant to the 2008 Agreement and seeks liquidated
damages for the failure to register such shares.
On
September 28, 2009, the Arkansas Complaint was desimised. On
September 30, 2009, the Delaware Complaint was dismissed, see Note 14 of Notes
to Consolidated Financial Statement for additional
information.
Item
4. Submission of Matters to a Vote of Security Holders
No
matters were submitted to a vote of security holders during the last quarter of
the fiscal year ended December 31, 2008.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issueer Purchases of Equity Securities
Market
Information
The
Common Stock was traded on the OTC Bulletin Board. The stock symbol was TMEN.OB
and the transfer agent is Registrar & Transfer Company, Cranford, New Jersey
07016. On June 2, 2009 we received from the Financial Industry
Regulatory Authority a Notice of Decision determining that our
securities were not eligible for continued quotation on the OTC Bulletion Board
as a result of our failure to file and complete an annual report or quarterly
report by the due date three times in the last twenty-four
months. Our common stock continues to trade on “pink slips” under the
symbol “TMEN.PK”.
The
Common Stock began trading on the OTC Bulletin Board on September 20, 2000. The
ranges of the high and low bid prices for the Common Stock for the four quarters
of 2006 and 2007 are shown below. This information is taken from the OTC
Bulletin Board’s quarterly trade and quote summary report. The quotations listed
herein reflect inter−dealer prices, without retail mark−up, mark−down or
commission and may not represent actual transactions.
BID
INFORMATION
|
|
HIGH
|
|
|
LOW
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.72
|
|
|
$
|
0.25
|
|
Second
Quarter
|
|
$
|
1.95
|
|
|
$
|
0.55
|
|
Third
Quarter
|
|
$
|
1.80
|
|
|
$
|
0.70
|
|
Fourth
Quarter
|
|
$
|
1.27
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.08
|
|
|
$
|
0.64
|
|
Second
Quarter
|
|
$
|
1.55
|
|
|
$
|
0.87
|
|
Third
Quarter
|
|
$
|
1.15
|
|
|
$
|
0.53
|
|
Fourth
Quarter
|
|
$
|
0.68
|
|
|
$
|
0.45
|
|
Holders
The
Certificate of Incorporation of the Company authorize capital stock consisting
of one hundred and seventy million (170,000,000) shares, of which one
hundred and fifty million (150,000,000) shares shall be Common Stock, par
value $0.001 per share, and twenty million (20,000,000) shares shall be
Preferred Stock, par value $0.01 per share. Of the authorized Preferred Stock,
ten million (10,000,000) shares shall be designated “Series A Convertible
Preferred Stock”, $0.01 par value per share (the “Preferred Stock”). As of
December 31, 2008, the Company had 50,247,537 shares of Common Stock issued and
50,163,740 shares outstanding, held by approximately 1,250 shareholders of
record, and 208,334 shares of Preferred Stock issued and outstanding, held by
one shareholder of record. As of June 30, 2009, the Company had 53,622,307
shares of Common Stock issued and 53,538,510 shares outstanding, and 208,334
shares of Preferred Stock issued and outstanding.
Dividends
The
Company has never paid any cash dividend on its Common Stock and does not
anticipate paying cash dividends in the near future. Any such dividend payment
is at the discretion of the Company’s Board of Directors and would depend on the
Company’s earnings, financial condition and other business and economic factors
affecting the Company at that time which the Board of Directors may consider
relevant.
Recent
Sales of Unregistered Securities
On
December 22, 2008, the Company entered into a Securities Purchase Agreement (the
“Purchase Agreement”) with Robert S. Trump. Pursuant to the Purchase
Agreement, on December 22, 2008 we issued and sold to Mr. Trump, at face value,
our 7.5% Convertible Promissory Note due March 31, 2009 (the “Maturity Date”) in
the principal amount of $500,000 (the “Note”). Mr. Trump may elect to convert
the Note at any time into shares of our common stock at a price of $0.75 per
share (the “Conversion Price”), which represents a premium of approximately 44%
to the market price for our Common Stock on December 22, 2008. At our election
by written notice and upon payment of a deferral fee in an amount equal to 10%
of the principal amount then outstanding (the “Deferral Fee”) no later than five
business days after the Maturity Date, the Maturity Date may be extended to June
30, 2009. At our election, the Deferral Fee may be paid by adding the amount of
the Deferral Fee to the principal amount of the Note. We may pay off the Note in
full or in part at any time without prepayment penalty. As further
consideration to Mr. Trump, on December 22, 2008 we issued to him a warrant (the
“Warrant”) to purchase one million shares of our Common Stock during the period
from December 31, 2008 through December 31, 2011. The exercise price of the
Warrant is $1.25 per share, which represents a premium of approximately 140%
over the market price for our Common Stock on December 22, 2008. The Warrant
expires on December 31, 2015, but includes a provision permitting us to
accelerate the expiration date if at any time the market price for our Common
Stock equals or exceeds 200% of the market price on December 22, 2008 ($1.04 per
share) for a period of thirty consecutive trading days. We have
agreed that, if we file a registration statement under the Securities Act
covering the sale by us or by any other person of shares of our Common Stock, we
will, at Mr. Trump’s request, include in such registration the shares issuable
upon conversion of the Note and exercise of the Warrant. The Company
estimated the fair value of the warrants issued using a Black-Scholes option
pricing model and allocated $185,000 of the proceeds received to the warrants on
a relative fair value basis. In addition, the difference between the effective
conversion price of the Note and the fair value of the Company’s Common Stock on
the date of issuance of the Note resulted in a beneficial conversion feature
amounting to $33,000, the intrinsic value of the conversion feature on that
date. The total debt discount of $218,000 is amortized to interest expense over
the stated term of the Note.
On
September 15, 2008, we entered into a Securities Purchase Agreement with The
Quercus Trust (“Quercus”), pursuant to which we have agreed to issue to Quercus
up to $7,000,000 face amount of our 10% Convertible Promissory Notes (“Notes”)
and Common Stock Purchase Warrants (“Warrants”) entitling the holder to purchase
up to 14,000,000 shares of our Common Stock. Pursuant to the
Agreement, at an initial closing on September 15, 2008, we issued and sold to
Quercus, for an aggregate purchase price of $2,000,000, a Note, due September
30, 2013, in the original principal amount of $2,000,000 and a Warrant for the
purchase of 4,000,000 shares of Common Stock. Quercus may elect to
convert the Note at any time into shares of our common stock at a price of $0.75
per share (the “Conversion Price”), which represents a discount of approximately
6.25% off the closing price for our common stock on September 12, 2008. Interest
on the Note is payable quarterly in arrears; at our election, all or any portion
of the interest may be paid by the issuance of shares of our Common Stock valued
at 90% of the volume weighted average trading price per share of our Common
Stock for the ten trading days immediately preceding the respective interest
payment date. We may not pre-pay the Note without the prior written consent of
the holder. The Warrant permits the holder to purchase, at any time
on or before September 30, 2013, up to 4,000,000 shares of our Common Stock at a
purchase price of $1.25 per share, which represents a premium of approximately
56.25% over the closing price for our common stock on September 12,
2008. The Warrant contains conventional anti-dilution provisions for the
adjustment of the exercise price in the event we issue additional shares of our
Common Stock or securities convertible into Common Stock (subject to certain
specified exclusions) at a price per share less than $0.80 per share (the
closing price for our Common Stock on September 12, 2008). The Warrant also
includes conventional provisions permitting “cashless” exercise under certain
specified circumstances. The Agreement provides that Quercus will
purchase an additional Note (in form substantially identical to the Note issued
at the initial closing) in the original principal amount of $5,000,000 and an
additional Warrant (in form substantially identical to the Warrant issued at the
initial closing) for the purchase of 10,000,000 shares of our Common Stock upon
the satisfaction of certain conditions set forth in the Agreement.
Pursuant
to the Agreement, we amended the Common Stock Purchase Warrant issued to Quercus
on December 18, 2007 (the “2007 Warrant”) to reduce the exercise price of such
warrant from $1.50 to $1.25 per share. In the Agreement, we agreed to
file one or more registration statements under the Securities Act of 1933
covering the resale by Quercus of the shares of our Common Stock issuable in
payment of interest on the notes, upon conversion of the Notes or upon exercise
of the Warrants. The registration rights provisions of the Agreement contain
conventional terms including indemnification and contribution undertakings and a
provision for liquidated damages in the event the required registration
statements are not filed or are not declared effective prior to deadlines set
forth in the Agreement. The Agreement also grants to Quercus a right
of first refusal to participate in any subsequent financing we undertake prior
to the earlier of (i) the date on which we first report results of operations
reflecting a positive cash flow in each of two successive fiscal quarters or
(ii) September 15, 2010 (subject to certain conventional exceptions) in order to
permit Quercus to maintain its fully-diluted ownership interest in our Common
Stock.
The
Company estimated the fair value of the warrants issued using a Black-Scholes
option pricing model and allocated $846,000 of the proceeds received to the
warrants on a relative fair value basis. In addition, the difference between the
effective conversion price of the Note and the fair value of the Company’s
Common Stock on the date of issuance of the Note resulted in a beneficial
conversion feature amounting to $987,000, the intrinsic value of the conversion
feature on that date. The total debt discount of $1,833,000 is amortized to
interest expense over the stated term of the Note. For its services
in connection with our sale of the Note and the Warrant to Quercus, we paid
Merriman Curhan Ford & Co. a placement fee of $160,000 and issued to that
firm a Warrant (in form substantially identical to the Warrant issued to
Quercus) for the purchase of 453,334 shares of our Common Stock. The
Warrant was issued to Merriman Curhan Ford & Co. in a transaction not
involving a public offering and without registration under the Securities Act of
1933 in reliance on the exemption from registration provided by Section 4(2) of
such Act. The Company estimated the fair value of the warrants issued
using a Black-Scholes option pricing model of $166,000 on a relative fair value
basis.
On August
12, 2008, the Company entered into a Securities Purchase Agreement (the
“Purchase Agreement”) with Robert S. Trump. Pursuant to the Purchase
Agreement, on August 12, 2008 we issued and sold to Mr. Trump, at face value,
our 7.5% Convertible Promissory Note due December 31, 2008 (the “Maturity Date”)
in the principal amount of $500,000 (the “Note”). Mr. Trump may elect to convert
the Note at any time into shares of our Common Stock at a price of $0.75 per
share (the “Conversion Price”), which represents a discount of approximately 28%
off the market price for our Common Stock on August 12, 2008. At our election by
written notice and upon payment of a deferral fee in an amount equal to 10% of
the principal amount then outstanding (the “Deferral Fee”) no later than five
business days after the Maturity Date, the Maturity Date may be extended to
March 31, 2009. At our election, the Deferral Fee may be paid by adding the
amount of the Deferral Fee to the principal amount of the Note. We may pay off
the Note in full or in part at any time without prepayment penalty. In the event
we have not paid off the Note in full by March 31, 2009, the full amount of
principal, accrued interest and Deferral Fee (if such fee has been added to the
Note’s principal amount) will convert into shares of our Common Stock at $0.75
per share. As further consideration to Mr. Trump, on August 12, 2008 we issued
to him a warrant (the “Warrant”) to purchase one share of our Common Stock
for each dollar invested by Mr. Trump in the purchase of our Common Stock or
other convertible securities during the period from December 31, 2008 through
December 31, 2011. The exercise price of the Warrant is $1.50 per
share, which represents a premium of approximately 44% over the market price for
our Common Stock on August 12, 2008. The Warrant expires on December 31, 2015,
but includes a provision permitting us to accelerate the expiration date if at
any time the market price for our Common Stock equals or exceeds 200% of the
market price on August 12, 2008 ($1.04 per share) for a period of thirty
consecutive trading days. We have agreed that, if we file a
registration statement under the Securities Act covering the sale by us or by
any other person of shares of our Common Stock, we will, at Mr. Trump’s request,
include in such registration the shares issuable upon conversion of the Note and
exercise of the Warrant. The Company estimated the fair value of the
warrants issued using a Black-Scholes option pricing model and allocated
$192,000 of the proceeds received to the warrants on a relative fair value
basis. In addition, the difference between the effective conversion price of the
Note and the fair value of the Company’s Common Stock on the date of issuance of
the Note resulted in a beneficial conversion feature amounting to $308,000, the
intrinsic value of the conversion feature on that date. The total debt discount
of $500,000 is amortized to interest expense over the stated term of the
Note.
On March
7, 2008, Mr. Martin A. Roenigk, a member of the Company’s Board of Directors,
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 23, 2007. The Company issued to Mr. Roenigk, at face value,
its 5% Convertible Promissory Note due March 7, 2013 in the principal amount of
$750,000. Mr. Roenigk may elect to convert the Note at any time into shares of
Common Stock at a price of $0.50 per share. Interest on the outstanding
principal amount is payable semi-annually, subject to our right, upon payment of
a $2,500 deferral fee, to defer any scheduled interest payment until the
maturity date. As of December 31, 2008, the Company had added $19,063
interest to the principal of the Note.
As
further consideration to Mr. Roenigk, on March 7, 2008 the Company issued to him
a six-year warrant to purchase an aggregate of 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 Note and warrant
were issued in a private placement not involving any public offering and exempt
from registration under the Securities Act of 1933 pursuant to the exemptions
provided by Section 4(2) of such Act and by Regulation D promulgated under such
Act. The Note and warrant were sold for cash at an aggregate offering price of
$750,000. No broker or placement agents were involved in the offering of such
securities.
The
Company estimated the fair value of the warrant issued using a 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 of the Note 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 amortized to
interest expense over the stated term of the Note.
On
December 18, 2007 the Company issued 6,666,667 shares of Common Stock to Quercus
for $5,000,000 net of issuance cost of $667,284, and a warrant for the purchase
of 10,000,000 shares of Common Stock. The warrant permits the holder to
purchase, at any time on or before December 31, 2012, up to 10,000,000 shares of
our Common Stock at a purchase price of $1.50 per share, which was subsequently
reduced to $1.25 per share (see Note 4). The warrant contains conventional
anti-dilution provisions for the adjustment of the exercise price in the event
we issue additional shares of our Common Stock or securities convertible
into Common Stock (subject to certain specified exclusions) at a price per share
less than the then-effective exercise price. The warrant also includes
conventional provisions permitting “cashless” exercise under certain specified
circumstances.
On August
23, 2007, the Company entered into financing agreements with two existing
shareholders (the “Holders”) that consisted of the Company issuing $1,000,000 of
7.5% convertible debt maturing on December 31, 2007 (the “Notes”). At the
election of the Borrower by written notice to the Holders (a “Deferral Notice”)
and payment to the Holders of a deferral fee in the amount equal to ten percent
(10%) of the principal amount then outstanding (the “Deferral Fee”) no later
than five business days after the Maturity Date, the Maturity Date may be
extended to March 31, 2008. At the election of the Borrower, the Deferral Fee
may be paid by adding such amount of the Deferral Fee to the principal amount of
the Notes. The Company may pay off the Notes in full or in part at any time
without any prepayment penalties. In the event that the Company has not paid off
these Notes in full with interest and penalty by March 31, 2008, the full amount
of principal, accrued interest and penalty will convert to restricted Common
Stock at $0.50 per share. In addition to the interest on the Notes, the Company
granted to the Holders a Warrant to purchase 1,000,000 shares of Common Stock
for an exercise price of $0.75 per share. One of the $500,000 notes was repaid
on December 23, 2007, and the second note payable to shareholder, Robert S.
Trump, was extended until March 31, 2008. The Company paid a 10% fee to extend
the maturity of the note.
On July
2, 2007, the Company entered into an Agreement for the Purchase and Sale of
Securities with CASTion and six investment funds (the “Funds”), pursuant to
which the Company issued an aggregate of 4,588,088 shares of the Company’s
Common Stock, Convertible Promissory Notes in the aggregate principal amount of
$3,353,127 (the “Notes”), and six-year Common Stock Purchase Warrants for the
purchase of an aggregate of 4,569,925 shares of the Company’s Common Stock at an
exercise price of $0.50 per share (the “Warrants”). The outstanding principal
and accrued interest on the Notes are convertible, at any time at the election
of the holders, into shares of the Company’s Common Stock at the rate of $0.50
per share. The Warrants and the Notes contain conventional weighted-average
anti-dilution provisions for the adjustment of the exercise price of the
Warrants and the conversion price of the Notes in the event we issue additional
shares of the Company’s Common Stock (or securities convertible into Common
Stock) at a price per share less than the then-effective exercise price or
conversion price. The Warrants include conventional provisions permitting
“cashless” exercise. The Warrants also include a provision permitting us to
accelerate their expiration date if, at any time after July 2, 2009, the market
price for the Company’s Common Stock equals or exceeds 200% of the market price
on July 2, 2007 ($1.39 per share) for a period of thirty consecutive trading
days.
On June
27, 2007, the Company issued and sold 3,000,000 shares of Common Stock to Robert
S. Trump at a price of $0.75 per share in cash. In connection with such
issuance, on June 27, 2007, the Company also issued to Mr. Trump a Common Stock
Purchase Warrant entitling him to purchase up to 1,500,000 additional shares of
Common Stock, at any time on or before June 28, 2010, at a price per share equal
to the volume-weighted average price per share of the Company’s Common Stock for
the 365 day period immediately preceding the date of exercise (subject to a
minimum exercise price of $0.75 per share and a maximum exercise price of $1.50
per share). The Warrant includes a provision permitting the Company to
accelerate its expiration date if at any time the market price for its Common
Stock equals or exceeds 125% of the minimum exercise price of $0.75 per share
for a period of thirty consecutive trading days.
On June
21, 2007, the Company issued and sold 1,000,000 shares of Common Stock to The
Focus Fund at a price of 0.75 per share in cash. In connection with such
issuance, on June 21, 2007, the Company also issued to The Focus Fund a Common
Stock Purchase Warrant entitling The Focus Fund to purchase up to 500,000
additional shares of Common Stock, at any time on or before June 22, 2010, at a
price per share equal to the volume-weighted average price per share of the
Company’s Common Stock for the 365 day period immediately preceding the date of
exercise (subject to a minimum exercise price of $0.75 per share and a maximum
exercise price of $1.50 per share). The Warrant includes a provision permitting
the Company to accelerate its expiration date if at any time the market price
for its Common Stock equals or exceeds 125% of the minimum exercise price of
$0.75 per share for a period of thirty consecutive trading days.
On March
21, 2007 the Company issued to Mr. Martin A. Roenigk the Company’s 5%
Convertible Promissory Note due March 21, 2013 in the principal amount of
$750,000 and a Common Stock warrant. The principal amount of, and accrued
interest on, the Note is convertible, at any time at the election of the holder,
into shares of the company’s Common Stock at a conversion price of $0.50 per
share. The warrant entitles the holder to purchase up to 750,000
share of Common Stock, at any time on or before March 21, 2013, 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 Note
and warrant were issued in a private placement not involving any public offering
and exempt from registration under the Securities Act of 1933 pursuant to the
exemptions provided by Section 4(2) of such Act and by Regulation D promulgated
under such Act. The Note and warrant were sold for cash at an aggregate offering
price of $750,000. The Company estimated the fair value of the warrant issued
using a 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 into the
Company’s Common Stock on the date of issuance of the Notes 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
amortized to interest expense over the stated term of the Note.
Item
6. Selected Financial Data
Not
applicable to a smaller reporting company.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The
following discussion should be read in conjunction with the financial statements
and notes thereto appearing elsewhere in this report.
Overview
Currently
the Company is primarily a “water company” with patented and proprietary water
technologies that reside in the Company’s water subsidiary,
CASTion. The water technologies address wastewater problems for
municipal and a broad range of industrial markets including water management and
conservation, chemical recovery, and water purification. The
Company’s advanced power plant technology, TIPS, is aimed at competing with and
ultimately replacing conventional energy fossil fuel combustion technologies for
both large stationary utility power plants and small industrial combined heat
and power package plants. The Company has developed TIPS mostly from funding
from federal grants, and recently completed the approximately $1.5 million
federal government grant sponsored by the U.S. Environmental Protection Agency
and administered through the Alaska Energy Authority. The Company
cannot predict the acceptability of TIPS within its target
markets. The Company currently does not possess the technical,
operational or financial resources necessary to construct or operate TIPS
commercial facilities without external project funding and the ability to source
engineering skills.
This was a major factor
in the Company’s subsidiary, ThermoEnergy Power System, LLC
and Babcock Power Development, LLC, a subsidiary of Babcock Power,
Inc., entering into a Limited Liability Company Agreement on February
25, 2009 confirming the formation of Babcock-Thermo Carbon Capture LLC, a
Delaware limited liability company for the purpose of developing and
commercializing TIPS.
Recent
events have had a significant adverse effect on the Company’s liquidity and
results of operations. As more fully discussed in Note 13 of Notes to
Consolidated Financial Statements, in 2009 the Company discovered that the
former Chief Financial Officer (“CFO”) failed to file the Company’s payroll tax
returns and to pay the related payroll taxes since he assumed his officer
position in 2005. This resulted in an accrual during the fourth
quarter of an additional $1,064,000 of payroll taxes (resulting in total unpaid
payroll taxes of $2,022,000) and $2,105,000 of estimated interest and penalties
for late filing of the tax returns and nonpayment of the payroll
taxes. The Company’s investigation into the CFO’s actions
regarding payroll taxes and other activities of the former CFO have resulted in
significant delays in the Company being able to file this Annual Report on Form
10-K and the Company’s Form 10-Q reports for the quarters ended March 31, 2009
and June 30, 2009.
Management
has determined that obtaining substantial additional funding is essential to its
continued existence. Management actively engaged in negotiations with
a group of investors that had previously provided funding to the Company in the
past. As more fully described in Note 14 of Notes to the Consolidated
Financial Statements, the Company and the investor group approved a term sheet
on September 16, 2009 for a Series B Convertible Preferred Stock financing that,
if fully funded, would result in cash proceeds to the Company of
$6,250,000. The financing provides for funding in four tranches,
with the first and second tranche amounts totaling $3,050,000 based on specified
time periods and the third and fourth tranche amounts totaling $3,200,000 based
on the occurrence of specified events. The first
tranche
Secured Convertible Promissory Notes with an aggregate principal balance of
$1,680,000 were issued by the Company on September 28, 2009.
Since the
financing described in the preceding paragraph is in stages, with over half of
the potential funding dependent on the occurrence of specific events, and due to
the Company’ financial condition and to the significant uncertainties resulting
from the actions of the former CFO, there are can be no assurance that the
Company will be able to obtain the capital funds that will be needed for the
Company to continue it operations.
Results
of Operations
Comparison
of Years Ended December 31, 2008 and 2007
Contract
and grant income increased by $1,108,000 during 2008 compared to 2007 due
primarily to an increase of $981,000 in contract income at the CASTion
subsidiary. CASTion was acquired by the Company on July 2, 2007 and,
therefore, only six months of its revenue were included in the year ended
December 31, 2007. Grant income increased by $127,000 during 2008
compared to 2007. Cost of contract and grant income increased by
$1,344,000 during 2008 compared to 2007 which resulted in the $236,000 increase
in the gross operating loss during 2008.
General
and administrative expenses increased by $1,417,000 during 2008 compared to 2007
due primarily to the impact of the accrual of $1,064,000 of payroll taxes during
the fourth quarter of 2008. See Note 13 of Notes to Consolidated
Financial Statements for additional information regarding this
matter. During the year ended December 31, 2007, the Company recorded
a goodwill impairment charge of $10,665,000 relating to the 2007 acquisition of
CASTion (see Note 9 of Notes to Consolidated Financial Statements for additional
information). Contingency accruals increased significantly during
2008 compared to 2007 due primarily to the estimated interest and penalties on
the Company’s $2,022,000 of unpaid payroll taxes at December 31,
2008. See Note 13 of Notes to Consolidated Financial Statements for
additional information regarding contingency accruals. Compensation
expense associated with the issuance of stock options increased by $778,000
during 2008 compared to 2007 due primarily to the increase in the option term to
ten years for the 2008 grants compared to three years for the 2007
grants.
Comparison
of Years Ended December 31, 2007 and 2006
Contract
and grant income decreased by $435,000 during 2007 compared to 2006 due
primarily to the decrease of $360,000 in contract income due to the cancellation
of the New York City contract. Grant income decreased by $75,000
during 2007 compared to 2006 due to the completion of certain grants during
2007. Cost of contract and grant income increased by $127,000 during
2007 compared to 2006 which resulted in the $562,000 increase in the gross
operating loss during 2007.
General
and administrative expenses increased by $2,356,000 during 2007 compared to 2006
due primarily to a bonus accrual of $716,000 at December 31, 2007 and to the
effect of the CASTion acquisition on July 2, 2007. During the year
ended December 31, 2007, the Company recorded a goodwill impairment charge of
$10,665,000 relating to the 2007 acquisition of CASTion (see Note 9 of Notes to
Consolidated Financial Statements for additional
information). Compensation expense associated with the issuance of
stock options increased by $606,000 during 2007 compared to 2006 due primarily
to the increase in 2007 awards by 1,345,000 option grants. Warrant
expense increased by $521,000 during 2007 compared to 2006 due primarily to the
$622,000 of broker compensation expense associated with the large private
placement offering during 2007.
Impact
of Inflation
Although
inflation has slowed in recent years, it is still a factor in our
economy. The Company’s net revenue from operations for the three
years ended December 31, 2008 has not been severely impacted by inflation due
primarily to the low volume and nature of its revenues (grants and fixed price
contracts). The Company’s results of operations have been impacted by
inflationary effects on travel expenses, professional fees and other
expenses. If the Company is able to execute its business plan, it
will have to consider the impact of inflation in setting its pricing policies as
projects and the related contracts become more complex.
Liquidity
and Capital Resources Discussion
Historical
View
The
Company has historically lacked the financial and other resources necessary to
market the Technologies or to build demonstration projects without the financial
backing of government or industrial partners. During 2008 and 2007,
the Company funded its operations primarily from the sale
of convertible debt and restricted stock, generally from stockholders
and other related parties. There were no financing activities during
2006 as the Company had sufficient cash to fund 2006 operations from the
issuance of preferred stock in a private placement offering during
2005.
Cash used
in operations amounted to $6,781,000, $4,339,000 and $3,501,000 for the years
ended December 31, 2008, 2007 and 2006, respectively. The majority of
cash used in operating activities for the three year period ended December 31,
2008 relates to cash utilized in our on-going operations, as adjusted for
non-cash items, and changes in operating assets and liabilities as detailed in
the Consolidated Statements of Cash Flows included herein. Cash used
by investing activities included purchases of property and equipment of $153,000
and $187,000 for the years ended December 31, 2008 and 2006, respectively, and
the purchase of CASTion of $2,147,000 (net of cash acquired) for the year ended
December 31, 2007.
Current
Cash Requirements; Need for Additional Funds
At
December 31, 2008, the Company did not have sufficient working capital to
satisfy its anticipated operating expenses for the next 12 months. As of
December 31, 2008, the Company had a cash balance of approximately $115,000 and
current liabilities of approximately $10.9 million, which consisted primarily of
convertible debt in default of $3,478,000 (net of $313,000 of debt discounts),
contingent liability reserves of $3,334,000 and unpaid payroll taxes of
$2,022,000.
Recent
events have had a significant adverse effect on the Company’s
liquidity. The Company’s former CFO’s actions regarding payroll
tax matters resulted in an accrual during the fourth quarter of an additional
$1,064,000 of payroll taxes (resulting in total unpaid payroll taxes of
$2,022,000) and $2,105,000 of estimated interest and penalties for late filing
of the tax returns and nonpayment of the payroll taxes (see Note 13 of Notes to
Consolidated Financial Statements for further information regarding payroll tax
matters).
The
Company may become subject to tax liens if it cannot satisfactorily settle the
outstanding payroll tax liabilities. Furthermore, due to the actions
of the CFO, the Company may also face criminal and/or civil action with respect
to the impact of the payroll tax matters. The Company cannot predict
what, if any, actions may be taken by the tax authorities, the Securities and
Exchange Commission or other parties or the effect the actions may have on the
Company’s results of operations, financial condition or cash flows.
Management
has determined that obtaining substantial additional funding is essential to its
continued existence. Management actively engaged in negotiations with
a group of investors that had previously provided funding to the Company in the
past. As more fully described in Note 14 of Notes to the Consolidated
Financial Statements, the Company and the investor group approved a term sheet
on September 16, 2009 for a Series B Convertible Preferred Stock financing
that, if fully funded, would result in cash proceeds to the Company of
$6,250,000. The financing provides for funding in four tranches,
with the first and second tranche amounts totaling $3,050,000 based on specified
time periods and the third and fourth tranche amounts totaling $3,200,000 based
on the occurrence of specified events.
The first
tranche Secured Convertible Promissory Notes with an aggregate principal balance
of $1,680,000 were issued by the Company on September 28,
2009.
Since the
financing described in the preceding paragraph is in stages, with over half of
the potential funding dependent on the occurrence of specific events, and due to
the Company’ financial condition and to the significant uncertainties resulting
from the actions of the former CFO, there are can be no assurance that the
Company will be able to obtain the capital funds that will be needed for the
Company to continue it operations.
Management anticipates
that its cash requirements during the next 12 months will be approximately $6
million.
In the
event that the Company cannot raise the necessary capital to fund the Company’s
future operations and development activities, the Company will not be able to
continue its operations.
Research
and Development
Research
and development activity has been, and the Company expects that it will continue
to be, an integral part of the Company’s business activity. The Company
continues to conduct research and development of water/wastewater treatment
products and services through its Worcester, MA laboratory in a number of areas
including testing various waste streams for potential clients, testing various
waste streams for third parties, Chemcad and Aspen modeling for the TIPS
process, centrate testing related to the Company’s New York project and, ARP
process flow modifications. In addition, the Company will participate in joint
research and development with Babcock Power, Inc. The Company expects to expand
its R&D capabilities as it relates to TIPS in conjunction with the joint
venture formed with Babcock Power Inc.
Expected
Changes in the Number of Employees
While the
Company will continue to rely on extended overtime from its current production
workers as the most cost-effective method of meeting increased sales, it will
need to hire additional employees to complete staffing needs if sales goals are
achieved and if the proposed NYCDEP contract is finalized. The Company foresees
increases in the number of employees in the next 12 months, especially with the
expected growth in business related to the proposed NYCDEP contract. Upon
completion of the anticipated increases and the success of the Company’s efforts
to obtain additional funding to meet its short-term cash needs, the Company
expects to have approximately 29 employees by December 31, 2009.
Critical
Accounting Policies and Estimates
We have
identified the policies and estimates below as critical to our current and
future business operations and the understanding of our results of operations.
For a detailed discussion on the application of these and other significant
accounting policies, see the Notes to Consolidated Financial Statements included
elsewhere herein. These policies and estimates are considered "critical" because
they either had a material impact or they have the potential to have a material
impact on our financial statements, and because they require significant
judgments, assumptions or estimates. The preparation of our financial statements
in this Annual Report on Form 10-K requires us to make estimates and
judgments that affect both the results of operations as well as the carrying
values of our assets and liabilities. Some of our accounting policies require us
to make difficult and subjective judgments, often as a result of the need to
make estimates of matters that are inherently uncertain. We base estimates on
historical experience and/or on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities as of the
date of the financial statements that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions, making it possible that a change in these estimates
could occur in the near term. Set forth below is a summary of our most critical
accounting policies.
Contract revenue
- Revenues
from fixed-price contracts are recognized on the percentage of completion
method, measured by the percentage of costs incurred to total estimated costs.
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. Provisions for estimated losses on
uncompleted contracts are made in the period in which losses are determined.
Changes in job performance, job conditions, and estimated profitability may
result in revisions to costs and income and recognized in the period in which
revisions are determined. If these estimates are incorrect, we may be
required to record losses as contracts are completed.
Stock grants, stock options and
warrants
- We issue stock grants, options and warrants to employees,
members of the Board of Directors and other parties in connection with our
various business activities. In accounting for these awards we are required to
make estimates of the fair value of the related instruments and the periods
benefited. These estimates may affect such financial statement categories as
stockholders' equity and operating expenses. If these estimates are incorrect,
we may be required to incur additional expense in the future.
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 contingent liability reserves 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 reserves to be recognized in the
period such new information becomes known.
Accounting for acquisitions
-
We are required to record the net assets acquired at the estimated fair value at
the date of acquisition. The determination of the fair value of the assets
acquired and liabilities assumed requires us to make significant estimates and
assumptions that affect our financial statements. For example, the value and
estimated life of assets may affect the amount of future depreciation expense
for the assets as well as possible impairment charges that may be
incurred.
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
2007),
Business
Combinations
, (“SFAS 141R”). SFAS 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, including goodwill, the liabilities
assumed and any non-controlling interest in the acquiree. The Statement also
establishes disclosure requirements to enable users of the financial statements
to evaluate the nature and financial effects of the business combination.
SFAS 141R is effective for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. The impact of adopting SFAS 141R will
be dependent on the future business combinations that the Company may pursue
after its effective date.
In
December 2007, the FASB issued SFAS No. 160 "Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51"
("SFAS 160"), which requires ownership interests in subsidiaries held by
others to be clearly identified, labeled and presented in the consolidated
balance sheet within equity but separate from the parent company's equity.
SFAS 160 also affects the accounting requirements when the parent company
either purchases a higher ownership interest or deconsolidates the equity
investment. SFAS No. 160 applies prospectively as of the beginning of the
fiscal year in which this Statement is initially applied, January 1, 2009
for entities that have a calendar year end, except for the presentation and
disclosure requirements. The presentation and disclosure requirements shall be
applied retrospectively for all periods presented. An entity may not apply it
before that date.
On
January 5, 2009 the Company acquired substantially all of the remaining shares
outstanding of CASTion. The Company issued to six individuals and/or
entities 435,442 shares of restricted Common Stock, $351,614 face amount of 10%
convertible debt (conversion price of $.50 per share and a maturity date of May
31, 2010) and warrants to acquire 424,164 shares of restricted Common
Stock. The fair value of the total consideration was
$619,955. The warrants have an exercise price of $0.50 per share and
expire in approximately 4.5 years. In addition, the Company escrowed
$12,500 cash for the remaining minority shareholders that represents less than
one percent of the acquired shares. The completion of this
transaction resulted in CASTion becoming a wholly owned subsidiary of the
Company.
The
acquisition of the CASTion non-controlling interest was accounted for in
accordance with SFAS 160 which was adopted by the Company effective January 1,
2009. SFAS 160 requires that the acquisition be recorded as an equity
transaction, which resulted in a reduction of consolidated stockholders’ equity
(deficit) of approximately $2,282,000 during the first quarter of
2009.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with accounting principles generally accepted in the United
States, and expands disclosures about fair value measurements. The
Company adopted the provisions of SFAS 157 as of January 1, 2008. The
adoption of SFAS 157 did not materially impact the Company’s financial
condition, results of operations, or cash flows.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”). SFAS No. 159 provides
the Company with an option to report selected financial assets and liabilities
at fair value and establishes presentation and disclosure requirements to
facilitate reporting between companies. The fair value option established by
this Statement permits the Company to choose to measure eligible items at fair
value at specified election dates. The Company shall then report unrealized
gains and losses on items for which the fair value option has been elected in
earnings at each reporting date subsequent to implementation. The Statement,
which was effective for financial statements issued for fiscal years beginning
after November 15, 2007, was not adopted by the Company.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
Not
applicable
Item
8. Financial Statements and Supplementary Data.
See the
Company’s financial statements for the years ended December 31, 2008, 2007 and
2006, beginning on page F-1.
Item
9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
Item
9A(T). Controls and Procedures
Management's
Report On Internal Control Over Financial Reporting:
Our
Management is responsible for establishing and maintaining an adequate system of
internal control over financial reporting as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended
(“Exchange Act”). The Company’s internal control over financial reporting should
provide reasonable assurance to our Management and Board of Directors regarding
the reliability of financial reporting and the reliability, preparation and fair
presentation of published financial statements. Our internal control over
financial reporting should be supported by a program of appropriate reviews by
Management, written policies and guidelines, careful selection and training of
qualified personnel, and a written Code of Ethics adopted by our Company’s Board
of Directors, applicable to all Company Directors and all officers and employees
of our Company.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements and even when determined to be effective, can
only provide reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The Audit
Committee of our Company’s Board of Directors meets with the independent public
accountants and management periodically to discuss internal control over
financial reporting and auditing and financial reporting matters. The Audit
Committee reviews with the independent public accountants the scope and results
of the audit effort. The Audit Committee also meets periodically with the
independent public accountants without management present to ensure that the
independent public accountants have free access to the Audit Committee. The
Audit Committee’s Report can be found in the Definitive Proxy Statement to be
issued in connection with the Company’s 2009 Annual Meeting of
Stockholders.
Our Chief
Executive Officer and Interim Chief Financial Officer have assessed the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008. In making this assessment, Management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control – Integrated Framework. Based on Management’s
assessment, we believe the Company did not maintain effective internal control
over financial reporting as of December 31, 2008. Specifically, we have
determined that our internal controls as of December 31, 2008 were deficient in
that (i) we had not adequately allocated resources to ensure that necessary
internal controls were implemented and followed throughout the Company, (ii) our
period-end reporting process did not provide sufficiently timely and accurate
financial statements and required disclosures, (iii) there was a lack of
segregation of duties in the Company’s significant accounting functions , (iv)
our contract administration and accounting procedures were deficient, and (v)
our former Chief Financial Officer engaged in acts
that
resulted in significant adjustments to the 2008 consolidated financial
statements and subjected the Company to potential criminal and/or civil action
with respect to the impact of the Company’s unpaid payroll tax matters (see Note
13 of Notes to Consolidated Financial Statements).
The former
Chief Financial Officer resigned on August 3, 2009 following a vote by the
Company’s Board of Directors to terminate his employment for
cause. Mr. Arthur S. Reynolds, a member of the Company’s Board of
Directors, was appointed Interim Chief Financial Officer.
Management
has discussed its conclusions regarding the inadequacy of internal controls with
the Audit Committee and with representatives of our independent public
accountants and intends to address the remediation process for the material
weaknesses noted and the Company’s Section 404 reporting responsibilities during
the fourth quarter of 2009.
This
report does not include an attestation report of the Company’s independent
registered public accounting firm regarding internal control over financial
reporting, pursuant to temporary rules of the Securities and Exchange Commission
that permit the Company to provide only Management’s report in this annual
report.
Disclosure
Controls and Procedures and Internal Control Over Financial
Reporting:
Disclosure
controls and procedures are designed with the objective of ensuring that
information required to be disclosed in the Company’s reports filed under the
Exchange Act, such as this report, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms. Disclosure controls and procedures are also
designed with the objective of ensuring that such information is accumulated and
communicated to the Company’s Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Evaluation
of Disclosure Controls and Procedures:
As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s Chief
Executive Officer and Interim Chief Financial Officer, of the effectiveness of
disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act. Based on such evaluation, the Company’s Chief Executive
Officer and Interim Chief Financial Officer have concluded that as of the end of
the period covered by this report, the Company’s disclosure controls and
procedures were not effective at meeting their objectives in that our
period-ending reporting process did not provide sufficiently timely and accurate
financial statements and disclosures.
Changes
in Internal Controls:
There
were no changes in the Company’s internal controls over financial reporting that
occurred during the Company’s most recently completed fiscal quarter that
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Item
9B. Other Information
None.
PART
III
ITEM
10. Directors, Executive Officers and Corporate
Governance
The
following table shows information about our directors and executive officers as
of December 31, 2008:
Name
|
|
Age
|
|
Position
|
Dennis
C. Cossey
|
|
63
|
|
Chairman
of the Board of Directors, President and Chief Executive
Officer
|
Andrew
T. Melton
|
|
62
|
|
Director,
Executive Vice-President, Treasurer and Chief Financial
Officer
|
Alexander
G. Fassbender
|
|
55
|
|
Director,
Executive Vice-President and Chief Technology Officer
|
Shawn
R. Hughes
|
|
48
|
|
President
and Chief Operating Officer
|
Arthur
Reynolds
|
|
65
|
|
Director
|
Martin
A. Roenigk
|
|
66
|
|
Director
|
Paul
A. Loeffler, PhD
|
|
61
|
|
Director
|
Louis
J. Ortmann, DDS
|
|
71
|
|
Director
|
The
business experience of each of the persons listed above during the past five
years is as follows:
Dennis C. Cossey
has served as
Chairman of the Board of Directors since 1990. Mr. Cossey has been
the Chief Executive Officer and a director of the Company since
1988. Prior to joining the Company, Mr. Cossey served in executive
and sales positions at a number of companies, including IBM and Peter Kiewit and
Sons Engineering. Mr. Cossey is a member of several industry
professional groups including the American Chemical Society, the National Safety
Council, the US Naval Institute, the New York Academy of Science, the Asia
Pacific Water Council, the National Defense Industrial Association, and the
Association of Energy Engineers. Mr. Cossey has testified before
congress on various environmental issues.
Andrew T. Melton
has
served as a director of ThermoEnergy since 1997, and has served as Executive
Vice President and Chief Financial Officer since September
2005. Mr. Melton received an MBA in finance and a
Bachelor of Science degree in economics from Louisiana Tech
University. From 1986 to 1994, Mr. Melton served as Executive
Vice President, Chief Financial Officer and Treasurer of Worthen Banking
Corporation, Little Rock, Arkansas. From 1995 to 1998,
Mr. Melton was Vice President with Merrill Lynch Capital Markets in Little
Rock, Arkansas. From 1997 to 2005, Mr. Melton was involved in various
entreprenueral endeavers including a factory company and
restaurants. Mr. Melton is a Vietnam veteran and received an
Honorable Discharge from the United States Marine Corps. Mr. Melton
resigned on August 3, 2009.
Alexander G. Fassbender
has served as a director of ThermoEnergy since June 2005 and has served as
Executive Vice President and Chief Technology Officer since November
1998. Prior to joining the Company, Mr. Fassbender was Manager
of Technology Commercialization at Battelle Memorial Institute (BMI) Pacific
Northwest Laboratories. He had held various positions with BMI since
1976. Mr. Fassbender received his BS (Chemical Engineering) in
1976 from the University of California, Berkeley and his MBA in 1980 and his MS
(Chemical Engineering) in 1988, both from the University of Washington,
Seattle.
Shawn R. Hughes
has served as
President and Chief Operating Officer since January 2008. From 2006
to 2007, Mr. Hughes served as President and Chief Operating Officer of Mortgage
Contract Services. From 2001 to 2006, Mr. Hughes served as Chief
Executive Officer of Fortress Technologies.
Arthur Reynolds
has served as
a director of ThermoEnergy since 2008. Mr. Reynolds also serves as
the Chairman of the Audit Committee, and as a member of the Compensation and
Benefits Committee. Mr. Reynolds is the founder and current Managing
Director of Rexon Limited, a financial consulting firm based in New York and
London. Prior to this, Mr. Reynolds was Managing Director of
London-based Ferghana Financial Services Ltd., raising hundreds of millions in
equity finance for its clients - including a series of international mergers and
acquisitions for one of its largest clients, Sir James
Goldsmith. Beginning in the late ‘70’s Mr. Reynolds served as
Associate Director for Merrill Lynch International Bank Ltd., responsible for
conceiving and implementing Euro-finance strategies for Merrill’s US and
European energy-sector corporate clients. Mr. Reynolds career also includes
serving as Vice President and international representative for Banque de la
Société Financière Européenne, a large European consortium bank based in Paris,
France; Manager in charge of Corporate Research for Morgan Guaranty Trust
Company’s London branch; Assistant Treasurer at J.P. Morgan & Company,
responsible for fixed-rate lending; and developing and implementing product
marketing strategy for Mobil Corporation in France and West
Africa. On August 3, 2009, Mr. Reynolds was named interim Chief
Financial Officer by the Company’s Board of Directors.
Martin A. Roenigk
has served
as a director of ThermoEnergy since 2007. Mr. Roenigk also serves as
a member of the Compensation and Benefits Committee. From 1995 to
2007, Mr. Roenigk served as the Chairman and CEO of CompuDyne
Corporation. Mr. Roenigk joined CompuDyne as Chairman and CEO in
1995. Mr. Roenigk and his wife own two National Register listed
historic hotels in Eureka Springs, Arkansas, The Crescent Hotel & Spa and
the Basin Park Hotel. Mr Roenigk resigned on June 1,
2009.
Dr. Paul A. Loeffler, PhD
has
served as a director of ThermoEnergy since 1997. Dr. Loeffler also
serves as a member of the Audit Committee and the Compensation and Benefits
Committee. Since 1985, Dr. Loeffler has been a professor of chemistry
at Sam Houston State University, Huntsville, Texas, and has been with the
University’s chemistry department of Sam Houston University since
1975. Dr. Loeffler received his Ph.D. and MA in inorganic chemistry
from Rice University. Dr. Loeffler also serves as a member of the
Board of Directors of the Texas Regional Institute for Environmental Studies in
Huntsville, Texas, where he was associate director from 1992 until
2002.
Dr. Louis J. Ortmann,
DDS
has served as a director of ThermoEnergy since
1991. Dr. Ortmann also serves as a member of the Audit
Committee. Dr. Ortmann is an associate dentist with
Louis J. Ortmann Dental Clinic, Inc., in Festus,
Missouri. Dr. Ortmann is a graduate of the University of
St. Louis.
Committees
of the Board of Directors
Compensation and Benefits
Committee
. The Compensation and Benefits Committee consists of
Dr. Loeffler, as Chairman, Mr. Reynolds and Mr. Roenigk. This
committee makes recommendations to the Board of Directors on compensation
generally, executive officer salaries, bonus awards, stock option grants,
special awards and supplemental compensation. The Compensation and
Benefits Committee consults generally with management on matters concerning
executive compensation and other compensation issues where Board of Directors or
shareholder action is contemplated. The Board has determined that all
of the members of the Compensation and Benefits Committee are
independent.
Audit
Committee
. The Audit Committee consists of Mr. Reynolds, as
Chairman, Dr. Leoffler and Dr. Ortmann. This committee oversees the
Company’s financial reporting process and internal controls. The
Audit Committee is governed by a written charter approved by the Board of
Directors. The charter sets out the Audit Committee’s membership
requirements and responsibilities. As part of its duties, the Audit
Committee consults with management and the Company’s independent registered
public accounting firm during the year on matters related to the annual audit,
internal controls, the published financial statements and the accounting
principles and auditing procedures being applied. The Audit Committee
selects the Company’s registered public accounting firm, reviews the independent
registered public accounting firm’s audit fees, discusses relationships with the
auditor, and reviews and approves in advance non-audit services to ensure no
compromise of independence. The Board has determined that all of the
members of the Audit Committee are independent and that Mr. Reynolds is an audit
committee financial expert (as defined in Item 407(d)(5)(ii) of Regulation
S-B).
Nominating
Committee
. The Nominating Committee consisted of Mr. Cossey,
as Chairman, Dr. Loeffler and Mr. Roenigk. The Nominating Committee
identifies the individuals to be nominated for election to the Board of
Directors and selects those candidates to be presented for shareholder approval
at the Annual Meeting of Shareholders. In considering candidates, the Nominating
Committee seeks to assure that the Board of Directors will include persons with
a variety of skills and experience, including at least one director with
expertise in the areas of science and technology in which the Company operates
and at least one director who qualifies as an audit committee financial expert.
The Nominating Committee does not have a charter.
The
Nominating Committee will consider director candidates recommended by the
shareholders if a nominating shareholder complies with the following
requirements. If a shareholder wishes to recommend a candidate to the
Nominating Committee for consideration as a candidate for election to the Board
of Directors, the shareholder must submit in writing to the Nominating Committee
the nominee’s name and a brief resume setting forth the nominee’s business and
educational background and qualifications for service, and a notarized consent
signed by the recommended candidate stating the recommended candidate’s
willingness to be nominated and to serve. This information must be
delivered to the Chairman of the Nominating Committee at the following address:
ThermoEnergy Corporation, 124 W. Capitol Avenue, Suite 880, Little Rock,
Arkansas 72201, and must be received no later than December 31 in any year
to be considered as a potential director nominee at the Annual Meeting of
Shareholders for the following year. The Nominating Committee may
request additional information if it determines a potential candidate may be an
appropriate nominee.
Shareholder
Communications
The Board
of Directors does not have a formal policy for shareholder communications to the
Board of Directors. The small size of the Board of Directors and the
simple administrative structure of ThermoEnergy permits shareholders to have
easy access to ThermoEnergy’s management and its directors for any
communications, including those pertaining to director nominations as set forth
above. Shareholder inquiries, suggestions and other communications
may be directed to ThermoEnergy’s Chairman and Chief Executive Officer at
ThermoEnergy Corporation, 124 W. Capitol Avenue, Suite 880, Little Rock,
Arkansas 72201.
Code
of Ethics
A copy of
the Company’s Code of Business Conduct and Ethics, including additional
provisions which apply to the chief executive officer and senior financial
officers, may be obtained free of charge by making a written request to Investor
Relations, ThermoEnergy Corporation, 124 W. Capitol Avenue, Suite 880, Little
Rock, Arkansas 72201.
Board
Determination of Independence
The
Company’s securities are not listed on a national securities exchange or on an
inter-dealer quotation system which has requirements that a majority of the
board of directors be independent. In determining which directors and
which members of committees are “independent,” the Board of Directors has
applied the definition of independence set forth in Rule 4200(a)(15) of the
Nasdaq Marketplace Rules and has determined that each of Mr. Reynolds, Dr.
Loeffler, Dr. Ortmann and Mr. Roenigk does not have a relationship which would
interfere with the exercise of independent judgment in carrying out the
responsibilities of a director and that, consequently, each of these directors
is an “independent director.”
Attendance
at the Annual Meeting and at Board and Committee Meetings
Although
the Company does not have a requirement that all members of the Board of
Directors attend the Annual Meeting of Shareholders, such attendance is strongly
encouraged. All of the directors then in office attended the 2008 Annual Meeting
of Shareholders and the Company anticipates that all of the current directors
will be present for the next Annual Meeting of Shareholders. During the
fiscal year ended December 31, 2008, the Board of Directors held five meetings
and every director attended at least 75% of those meetings. During 2008, the
Audit Committee held four meetings and Compensation and Benefits Committee held
two meetings, and all members of those committees attended at least 75% of the
meetings of their respective committees. The Nominating Committee did not hold
any meetings during the fiscal year ended December 31, 2008.
Compensation
of the Board
Directors
do not receive cash compensation for serving on the Board or its
committees. Non-employee directors are awarded annual grants of
non-qualified stock options. All directors are reimbursed for their
reasonable expenses incurred in attending all board meetings. We
maintain directors and officers liability insurance.
The
following table shows compensation for the fiscal year ended December 31, 2008
to our directors who are not also named executive officers:
Director
Compensation (1)
|
|
Fees
Earned or
|
|
Option
Awards
|
|
|
|
|
Name
|
|
Paid in Cash ($)
|
|
($) (2)
|
|
|
Total ($)
|
|
Arthur
Reynolds (3)
|
|
none
|
|
$
|
10,920
|
(3)
|
|
$
|
10,920
|
|
Paul
A. Loeffler PhD(4)
|
|
none
|
|
$
|
31,459
|
(4)
|
|
$
|
31,459
|
|
Louis J. Ortmann DDS (5)
|
|
none
|
|
$
|
31,459
|
(5)
|
|
$
|
31,459
|
|
Martin
A. Roenigk (6)
|
|
none
|
|
$
|
21,051
|
(6)
|
|
$
|
21,051
|
|
(1)
|
Certain
columnar information required by Item 402(f)(2) of Regulation S-B has been
omitted for categories where there was no compensation awarded to, or paid
to, the named directors during the fiscal year ended December 31,
2008.
|
(2)
|
The
reported amounts reflect the dollar amounts recognized for financial
statement reporting purposes for the fiscal year ended December 31, 2008,
in accordance with FAS 123R, and may include amounts from awards granted
both in and prior to the fiscal year ended December 31,
2008. As required, the amounts shown exclude the impact of any
forfeitures related to service-based vesting conditions. The
actual amount realized by the director will likely vary based on a number
of factors, including the Company’s performance, stock price fluctuations
and applicable vesting.
|
(3)
|
An
option to purchase 30,000 shares at an exercise price of $1.24 per share
was granted to Mr. Reynolds on October 2, 2008. This option has
a termination date of October 3,
2018.
|
(4)
|
An
option to purchase 30,000 shares at an exercise price of $1.24 per share
was granted to Dr. Loeffler on June 26, 2008. This option has a
termination date of June 30, 2018. An option to purchase 11,900
shares at an exercise price of $1.75 was also granted to Dr. Loeffler on
June 26, 2008. This option has a termination date of June 30,
2018. At December 31, 2008, Dr. Loeffler held options for the
purchase of an aggregate of 141,900 shares, all of which were
exercisable.
|
(5)
|
An
option to purchase 30,000 shares at an exercise price of $1.24 per share
was granted to Dr. Ortmann on June 26, 2008. This option has a
termination date of June 30, 2018. An option to purchase 11,900
shares at an exercise price of $1.75 was also granted to Dr. Ortmann on
June 26, 2008. This option has a termination date of June 30,
2018. At December 31, 2008, Dr. Ortmann held options for the
purchase of an aggregate of 141,900 shares, all of which are
exercisable.
|
(6)
|
An
option to purchase 30,000 shares at an exercise price of $1.24 per share
was granted to Mr. Roenigk on June 26, 2008. This option has a
termination date of June 30, 2018. At December 31, 2008, Mr.
Roenigk held options for the purchase of an aggregate of 80,000 shares,
all of which are exercisable.
|
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
requires our executive officers and directors and persons who own more than 10%
of our common shock to file reports of ownership and changes in
ownership with the SEC. Such executive officers, directors and stockholders are
also required by SEC rules to furnish us with copies of all Sections 16(a) forms
they file. Based on information supplied to the Company and filings make with
the SEC, during the fiscal year ended December 31, 2008, no Section 16(a)
filings were not made in a timely manner by a director or officer or a
beneficial owner of 10% or more of our common stock.
Item
11.
Executive
Compensation
SUMMARY
COMPENSATION TABLE
The table
set forth below summarizes the compensation earned by our named executive
officers in 2008.
Name and Principal
Position
|
|
Year
|
|
Salary
|
|
|
Bonus
|
|
|
Option
Awards
(a)
|
|
|
All
Other Compensation
(b)
|
|
|
Securities Underlying
Options
(#)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis
C. Cossey
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman
of the Board, President and Chief
|
|
2008
|
|
$
|
295,000
|
|
|
$
|
0
|
|
|
$
|
774,093
|
|
|
$
|
24,653
|
|
|
|
1,047,500
|
|
|
$
|
1,093,746
|
|
Executive
Officer
|
|
2007
|
|
$
|
250,000
|
|
|
$
|
194,375
|
(c)
|
|
$
|
176,667
|
|
|
$
|
28,000
|
|
|
|
350,000
|
|
|
$
|
649,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew
T. Melton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Vice President, Treasurer and Chief
|
|
2008
|
|
$
|
250,000
|
|
|
$
|
0
|
|
|
$
|
83,159
|
|
|
$
|
24,466
|
|
|
|
257,500
|
|
|
$
|
357,625
|
|
Financial
Officer
|
|
2007
|
|
$
|
200,000
|
|
|
$
|
194,375
|
(c)
|
|
$
|
176,667
|
|
|
$
|
35,500
|
|
|
|
350,000
|
|
|
$
|
571,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alexander
G. Fassbender
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Vice President and Chief Technology
|
|
2008
|
|
$
|
295,000
|
|
|
$
|
0
|
|
|
$
|
437,372
|
|
|
$
|
109,000
|
|
|
|
662,500
|
|
|
$
|
771,372
|
|
Officer
|
|
2007
|
|
$
|
281,400
|
|
|
$
|
194,375
|
(c)
|
|
$
|
176,667
|
|
|
$
|
33,000
|
|
|
|
350,000
|
|
|
$
|
652,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shawn
R. Hughes (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President
and Chief Operating Officer
|
|
2008
|
|
$
|
275,000
|
|
|
$
|
0
|
|
|
$
|
76,600
|
|
|
$
|
12,000
|
|
|
|
250,000
|
|
|
$
|
363,600
|
|
|
|
2007
|
|
$
|
137,500
|
|
|
$
|
131,875
|
(e)
|
|
$
|
245,760
|
|
|
$
|
6,000
|
|
|
|
600,000
|
|
|
$
|
521,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
W. Delasanta
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASTion
Corporation
|
|
2008
|
|
$
|
150,000
|
|
|
$
|
0
|
|
|
$
|
70,170
|
|
|
$
|
0
|
|
|
|
100,000
|
|
|
$
|
220,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey
R. Powell (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President
and CEO
|
|
2008
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
CASTion
Corporation
|
|
2007
|
|
$
|
186,250
|
|
|
$
|
320,000
|
|
|
$
|
108,833
|
|
|
$
|
0
|
|
|
|
300,000
|
|
|
$
|
615,083
|
|
(a)
|
The
amounts in the column “Options Award” reflect the dollar amount recognized
for financial statement reporting purposes in accordance with FAS 123R,
for option awards granted pursuant to grants made by the Board of
Directors. Assumptions used in the calculation of these amounts are
included in Note 9 and Note 10 to the Company’s consolidated financial
statements for the fiscal year ended December 31,
2008.
|
(b)
|
The
amounts in the column “All Other Compensation” reflect the following
items: automobile expenses, medical and insurance reimbursement, temporary
living expenses, moving relocation expense reimbursement and salary to
executive officers’ spouses.
|
(c)
|
Includes
a cash bonus of $125,000. Also includes a grant of 62,500
shares of common stock valued at
$69,375.
|
(d)
|
In
the fiscal year ended December 31, 2006, the Company had only three named
executive officers. Messrs. Hughes and Powell were appointed in
2007 and the information with respect to their compensation during the
year ended December 31, 2007 reflects partial-year
information.
|
(e)
|
Includes
a cash bonus of $62,500. Also includes a grant of 62,500 shares
of common stock valued at $69,375.
|
Certain
columnar information required by Item 402(a) (2) of Regulation S-B has been
omitted for categories where there has been no compensation awarded to, or paid
to, the named executive officers required to be reported in the table during
2008.
Outstanding
Equity Awards at December 31, 2008
The
following table summarizes information concerning outstanding equity awards held
by the named executive officers at December 31, 2008. No named
executive officer exercised options in the fiscal year ended December 31,
2008.
|
|
Stock Option Awards
|
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
Option
|
|
|
|
Options
(#)
|
|
Options
(#)
|
|
Exercise
|
|
Expiration
|
|
Name
|
|
Exercisable
|
|
Unexerciable
|
|
Price ($)
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
Dennis
C. Cossey
|
|
|
250,000
|
|
none
|
|
$
|
1.22
|
|
6/10/2010
|
|
|
|
|
560,000
|
|
none
|
|
$
|
1.29
|
|
9/15/2010
|
|
|
|
|
150,000
|
|
none
|
|
$
|
0.94
|
|
1/20/2011
|
|
|
|
|
350,000
|
|
none
|
|
$
|
1.11
|
|
1/02/2011
|
|
|
|
|
797,500
|
|
none
|
|
$
|
1.75
|
|
6/30/2018
|
|
|
|
|
250,000
|
|
none
|
|
$
|
1.50
|
|
2/27/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew
T. Melton
|
|
|
150,000
|
|
none
|
|
$
|
1.22
|
|
6/10/2010
|
|
|
|
|
40,000
|
|
none
|
|
$
|
0.90
|
|
9/15/2010
|
|
|
|
|
150,000
|
|
none
|
|
$
|
0.94
|
|
1/20/2011
|
|
|
|
|
350,000
|
|
none
|
|
$
|
1.11
|
|
1/02/2011
|
|
|
|
|
7,500
|
|
none
|
|
$
|
1.75
|
|
6/30/2018
|
|
|
|
|
250,000
|
|
none
|
|
$
|
1.50
|
|
2/27/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alexander
G. Fassbender
|
|
|
250,000
|
|
none
|
|
$
|
1.22
|
|
6/10/2010
|
|
|
|
|
440,000
|
|
none
|
|
$
|
1.29
|
|
9/15/2010
|
|
|
|
|
150,000
|
|
none
|
|
$
|
0.94
|
|
1/20/2011
|
|
|
|
|
350,000
|
|
none
|
|
$
|
1.11
|
|
1/02/2011
|
|
|
|
|
412,500
|
|
none
|
|
$
|
1.75
|
|
6/30/2018
|
|
|
|
|
250,000
|
|
none
|
|
$
|
1.50
|
|
2/27/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shawn
R. Hughes
|
|
|
600,000
|
|
none
|
|
$
|
0.90
|
|
12/15/2010
|
|
|
|
|
250,000
|
|
none
|
|
$
|
1.50
|
|
2/27/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
W. Delasanta
|
|
|
100,000
|
|
none
|
|
$
|
1.24
|
|
6/30/2018
|
|
Equity
Compensation Plan Information
The
following table sets forth the securities that are authorized for issuance under
the equity compensation plans of ThermoEnergy as of December 31,
2008:
Plan Category
|
|
(A)
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
|
|
|
(B)
Weighted-average exercise
price of outstanding
options, warrants and
rights
|
|
|
(C)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column A)
|
|
Equity
Compensation plans approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Stock Option Plan
|
|
|
120,000
|
|
|
$
|
1.24
|
|
|
|
9,880,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
8,093,800
|
|
|
$
|
1.23
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,213,800
|
|
|
$
|
1.23
|
|
|
|
0
|
|
Employment
Contracts and Agreements
The
Company has written employment agreements with each of its senior executives.
The material terms of the employment agreements with Dennis C. Cossey, the
Chairman and Chief Executive Officer, Shawn R. Hughes, the President and Chief
Operating Officer, and Andrew T Melton, the Executive Vice President and Chief
Financial Officer, are substantially similar and are described
below.
The
employment agreements with Messrs. Cossey, Hughes and Melton provide for a
contract term of five years (extended, each month for an additional month), with
a beginning base compensation of $250,000 (in 2005) for Mr. Cossey, $275,000 (in
2007) for Mr. Hughes and $200,000 (in 2005) for Mr. Melton and minimum annual
15% increases in compensation of 15% capped at $500,000, after which annual
increases will be determined on the basis of changes in the consumer price
index. Messrs. Cossey and Melton waived the right to receive the automatic
annual increase in base salary scheduled for 2007. The employment agreements
also provide that each officer will be eligible for discretionary incentive
compensation of up to 100% of his base salary, as determined by the Compensation
and Benefits Committee. The employment agreements also entitle each officer to
periodic performance-based compensation if certain unusual, but significant,
events occur, including but not limited to the acquisition of new technology,
the execution of new contracts in excess of 20% of existing revenues and other
events as determined by the Compensation and Benefits Committee. In addition,
the employment agreements provide that, upon the occurrence of a change in
control of the Company, each officer will be entitled to receive a lump sum
payment of five years’ base compensation from the date of such change of
control, as well as an immediate vesting of all unvested stock options and/or
restricted stock grants. The employment agreements also contain certain
restrictive covenants protecting trade secrets and prohibiting each officer from
competing with the Company of soliciting Company customers or employees for a
period of one year after the termination of his employment.
The
employment agreement with Alexander G. Fassbender, the Executive Vice President
and Chief Technology Officer, provides for a continuous three-year term (subject
to the Company’s right to terminate the annual extensions upon 60 days’ written
notice), with a beginning base compensation of $135,000 (in 1998) with 15%
annual increases, capped at $250,000, after which annual increases will be
determined on the basis of changes in the consumer price index. Mr. Fassbender
waived the right to receive the automatic annual increase in base salary
scheduled for 2007. Mr. Fassbender is also eligible for discretionary incentive
compensation of up to 50% of his base salary, as determined by the Compensation
and Benefits Committee. Upon the occurrence of a change in control of the
Company, Mr. Fassbender shall be entitled to a lump sum payment equal to 2.99
years’ base compensation in effect on the date of such change of control. The
employment agreement also contains certain restrictive covenants protecting
trade secrets and prohibiting Mr. Fassbender from competing with the Company or
soliciting Company customers or employees for a period of one year after the
termination of his employment.
ThermoEnergy
is the sole beneficiary of $1,500,000 key man life insurance policies of the
lives of Messrs. Melton and Fassbender.
As more
fully described in Note 14 of Notes to Consolidated Financial Statements, the
Company’s employment contracts with its executive officers will
be terminated in connection with the September 16, 2009 term sheet for
Series B Convertible Preferred Stock financing. The
agreements will be replaced with new contracts with revised salary and
severance amounts.
Item
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
The
following table sets forth certain information as of June 30, 2009 with respect
to beneficial ownership of our common stock by each shareholder known by the
Company to be the beneficial owner of more than 5% of our common stock and by
each of our directors and executive officers and by all of the directors,
nominees for election as director, and executive officers as a
group.
Beneficial
Owners (1)
|
|
Amount and Nature
of Beneficial
Ownership (2)
|
|
|
Percent of
Class
(3)
|
|
|
|
|
|
|
|
|
Directors,
Nominees and Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis
C. Cossey
|
|
|
3,751,049
|
(4)
|
|
|
6.7
|
%
|
David
W. Delasanta
|
|
|
100,000
|
(5)
|
|
|
*
|
|
Alexander
G. Fassbender
|
|
|
2,197,856
|
(6)
|
|
|
4.0
|
%
|
Arthur
S. Reynolds
|
|
|
70,000
|
(7)
|
|
|
*
|
|
Shawn
R. Hughes
|
|
|
952,500
|
(8)
|
|
|
1.8
|
%
|
Paul
A. Loeffler
|
|
|
146,900
|
(9)
|
|
|
*
|
|
Andrew
T. Melton
|
|
|
1,043,000
|
(10)
|
|
|
1.9
|
%
|
Louis
J. Ortmann
|
|
|
614,331
|
(11)
|
|
|
1.1
|
%
|
Martin
A. Roenigk
|
|
|
5,485,708
|
(12)
|
|
|
9.4
|
%
|
All
executive officers, directors and nominees as a group (8
persons)
|
|
|
14,361,344
|
(13)
|
|
|
22.2
|
%
|
|
|
|
|
|
|
|
|
|
5% Beneficial
Owners
|
|
|
|
|
|
|
|
|
Quercus
Trust
|
|
|
|
|
|
|
|
|
1835
Newport Blvd.
|
|
|
|
|
|
|
|
|
A109-PMC
467
|
|
|
23,893,982
|
(14)
|
|
|
33.9
|
%
|
Costa
Mesa, CA 92627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
Management
|
|
|
|
|
|
|
|
|
Security
Benefit Place
|
|
|
|
|
|
|
|
|
Topeka,
Kansas 66636
|
|
|
5,064,663
|
(15)
|
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|
Robert
Trump
|
|
|
|
|
|
|
|
|
167
E. 61
st
Street
|
|
|
|
|
|
|
|
|
New
York, NY 10021
|
|
|
12,387,766
|
(16)
|
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
|
Estate
of P.L. Montesi
|
|
|
2,976,150
|
(17)
|
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
|
The
Focus Fund
|
|
|
|
|
|
|
|
|
PO
Box 389
|
|
|
|
|
|
|
|
|
Ponte
Vedra, FL 32004
|
|
|
3,798,095
|
(18)
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
Empire
Capital
|
|
|
4,017,857
|
(19)
|
|
|
7.2
|
%
|
One
Gorham Island, Suite 201
|
|
|
|
|
|
|
|
|
Westport,
CT 06880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spencer
Trask
|
|
|
|
|
|
|
|
|
535
Madison Avenue
|
|
|
|
|
|
|
|
|
New
York, NY 10022
|
|
|
7,599,318
|
(20)
|
|
|
13.2
|
%
|
* Less
than 1%
|
|
(1)
Except as otherwise indicated in the beneficial ownership table, the address for
each person listed is: c/o ThermoEnergy Corporation, 124 West Capitol Avenue,
Suite 880, Little Rock, Arkansas 72201.
(2)
Includes shares as to which such person directly or indirectly, through any
contract, arrangement, understanding, relationship or otherwise, has or shares
voting power and/or investment power, as these terms are defined in
Rule 13d-3(a) of the Exchange Act. Shares of common stock underlying
options to purchase shares of common stock and securities convertible into
shares of common stock, which are exercisable or convertible on, or become
exercisable or convertible within 60 days after, June 30, 2009 are deemed to be
outstanding with respect to a person or entity for the purpose of computing the
outstanding shares of common stock owned by the particular person and by the
group, but are not deemed outstanding for any other purpose.
(3) Based
on 53,538,510 shares of common stock issued and outstanding on June 30, 2009,
plus, with respect to each individual or entity (but not with respect to other
individuals or entities), the number of shares of common stock underlying
options to purchase shares of common stock and securities convertible into
shares of common stock, held by such individual or entity which are exercisable
or convertible on, or become exercisable or convertible within 60 days after,
June 30, 2009.
(4)
Includes 1,391,049 shares owned directly by Mr. Cossey or jointly with the
estate of P.L. Montesi. Also includes 2,357,500 shares issuable upon the
exercise of options.
(5)
Includes 100,000 shares issuable upon the exercise of options.
(6)
Includes 340,356 shares owned directly by Mr. Fassbender. Also includes
1,852,500 shares issuable upon the exercise of options.
(7)
Includes 70,000 shares issuable upon the exercise of options.
(8)
Includes 102,500 shares owned directly by Mr. Hughes. Also includes 850,000
shares issuable upon the exercise of options.
(9)
Includes 5,000 shares owned directly by Dr. Loeffler. Also includes
141,900 shares issuable upon the exercise of options.
(10)
Includes 95,500 shares owned directly by Mr. Melton. Also includes 947,500
shares issuable upon the exercise of options.
(11)
Includes 472,431 shares owned directly by Dr. Ortmann and his wife and
beneficially through the Dr. Louis J. Ortmann Dental Clinic, Inc.,
Profit Sharing Plan. Also includes 141,900 shares issuable upon the exercise of
options.
(12)
Includes 669, 589 shares owned directly by Mr. Roenigk, 6,893,982 shares
issuable upon the exercise of warrants and conversion of convertible debt held
by Mr. Roenigk, and 80,000 shares issuable upon exercise of
options.
(13)
Includes 6,371,300 shares issuable upon the exercise of options, 6,893,982
shares issuable upon exercise of warrants and conversion of convertible
debt.
(14) This
beneficial ownership is based on information contained in a Schedule 13D dated
December 17, 2007 and filed with the U.S. Securities and Exchange Commission on
December 18, 2007. Includes 6,893,982 shares owned directly by
Quercus Trust and 17,000,000 shares issuable upon the exercise of warrants and
conversion of convertible debt held by Quercus Trust.
(15) This
beneficial ownership information is based on information contained in a
Schedule 13G dated December 31, 2008 and filed with the U.S. Securities and
Exchange Commission on February 13, 2009. Includes 5,064,663 shares owned
directly by Security Management.
(16) This
beneficial ownership information is based on information contained in a
Schedule 13D/A dated December 1, 2004 and filed with the U.S. Securities
and Exchange Commission on December 2, 2004. Includes 5,823,456 shares of common
stock owned directly by Mr. Trump and 6,564,310 shares issuable upon the
exercise of warrants.
(17)
Includes 1,251,150 shares of stock owned directly by the estate of
Mr. Montesi, by various members of Mr. Montesi’s family or jointly with
ThermoEnergy’s Chief Executive Officer, Dennis Cossey. Also includes 1,725,000
shares of common stock issuable upon the exercise of options.
(18)
Includes 2,798,095 shares of stock owned directly by The Focus Fund and
1,000,000 shares issuable upon exercise of warrants held by The Focus
Fund.
(19) Includes
1,428,571 shares of stock owned directly by Empire Capital and 2,589,286 shares
issuable upon the exercise of warrants and conversion of convertible debt held
by Empire Capital.
(20)
Includes 3,699,637 shares of stock owned directly by Spencer Trask, 3,899,681
shares issuable upon convertible debt owned by Spencer Trask.
Item
13.
Certain Relationships and Related Transactions, and
Director Independence.
In
October 2003, we entered into a license agreement with Alexander
G. Fassbender, the Executive Vice President for Technology, as the inventor
of certain patents and patent applications that ThermoEnergy has been
using. This agreement formalized the arrangements under which
ThermoEnergy and Mr. Fassbender had been operating for a number of years.
Under this license agreement, Mr. Fassbender granted to us an exclusive
license in the patents and patent applications for ThermoFuel and Enhanced
Biogas Production in the United States and the foreign countries in which
applications are pending. In addition to ThermoEnergy’s financial
obligations under Mr. Fassbender’s employment agreement, ThermoEnergy must pay a
royalty of 1% of net sales after the cumulative sales of all licensed products
exceed $20,000,000. Beginning in 2007, Mr. Fassbender waived
certain termination rights under the license agreement, agreed that we can
assign or transfer the license without his consent in connection with a merger
or a sale of all or a portion of our business and assets, and agreed that he
would not transfer his interest in the license agreement without our
consent.
During
2000, the Board of Directors approved the formation of ThermoEnergy Power
Systems, LLC, a Delaware limited liability company (“ThermoEnergy Power
Systems”) for the purpose of transferring ThermoEnergy’s rights and interests in
the TIPS technology. The organizational documents for ThermoEnergy Power Systems
indicate that ThermoEnergy will have an 85% ownership interest and Alexander G.
Fassbender, as the inventor of the technology, will have a 15% ownership
interest. As of December 31, 2007, ThermoEnergy Power Systems had not been
capitalized by the Company.
The Board
of Directors have adopted a policy whereby all future transactions between us
and any of its affiliates of the foregoing must approved in advance by the
disinterested members of the Board of Directors based on a determination that
the terms of such transactions are no less favorable to ThermoEnergy than would
prevail in arm’s-length transactions with independent third
parties.
Item
14. Principal Accounting Fees and Services
Auditors’
Fees
Fees
billed to the Company by Kemp & Company, our independent auditors for fiscal
years 2008 and 2007, all of which were approved by the Audit Committee, were
comprised of the following:
Audit Fees
. Kemp &
Company’s fee for its audit of the Company’s annual financial statements, its
review of the financial statements included in the Company’s quarterly reports
on Form 10−QSB, audits of statutory filings, comfort letter procedures and
review of other regulatory filings for 2008 and 2007 were $97,000 and $80,000,
respectively.
Audit Related Fees
. No fees
were billed to the Company for audit related services in 2008 or
2007.
Tax Fees.
Kemp &
Company’s fees for tax services provided to the Company, including tax
compliance, tax advice and planning, totaled $5,000 in 2008 and $1,000 in
2007.
All Other Fees.
No other fees
were billed to the Company by Kemp & Company in 2007 or 2008 for “other
services.”
Preapproval
Policies and Procedures
The Audit
Committee reviews and approves in advance any audit and permitted non−audit
services to be provided by the Company’s independent auditors. The Audit
Committee has the sole authority to make these approvals.
Item
15. Exhibits, Financial Statement Schedules
Exhibit
No.
|
|
Description of
Exhibit
|
2.1
|
|
Agreement
and Plan of Merger of ThermoEnergy Corporation (a Delaware corporation)
and ThermoEnergy Corporation (an Arkansas
corporation) — Incorporated by reference to Annex B
to Proxy Statement for 2007 Annual Meeting filed on Schedule 14A on May
18, 2007
|
3.1
|
|
Certificate
of Incorporation — Incorporated by reference to
Annex C to Proxy Statement for 2007 Annual Meeting filed on Schedule 14A
on May 18, 2007
|
3.2
|
|
Certificate
of Merger filed with the Secretary of State of the State of Delaware on
June 20, 2007 — Incorporated by reference to Exhibit
3.2 to Quarterly Report on Form 10-QSB for the period ended June 30,
2007
|
3.3
|
|
Articles
of Merger filed with the Secretary of State of the State of Arkansas on
June 25, 2007 — Incorporated by reference to Exhibit
3.3 to Quarterly Report on Form 10-QSB for the period ended June 30,
2007
|
3.4
|
|
By-laws
— Incorporated by reference to Annex D to Proxy Statement for
2007 Annual Meeting filed on Schedule 14A on May 18,
2007
|
4.1
|
|
Form
of 5% Convertible Promissory Note due March 21, 2013 issued to Martin A.
Roenigk - Incorporated by reference to Exhibit 4.2
to Current Report on Form 8-K filed March 22, 2007
|
4.2
|
|
Form
of Common Stock Purchase Warrant issued to Martin A.
Roenigk — Incorporated by reference to Exhibit 4.3
to Current Report on Form 8-K filed March 22, 2007
|
4.3
|
|
Form
of Convertible Promissory Notes issued pursuant to the Agreement for the
Purchase and Sale of Securities dated as of July 2, 2007 among
ThermoEnergy Corporation, CASTion Corporation and the Sellers named
therein — Incorporated by reference to Exhibit 4.1
to Current Report on Form 8-K filed July 10, 2007
|
4.4
|
|
Form
of Common Stock Purchase Warrants issued pursuant to the Agreement for the
Purchase and Sale of Securities dated as of July 2, 2007 among
ThermoEnergy Corporation, CASTion Corporation and the Sellers named
therein — Incorporated by reference to Exhibit 4.2
to Current Report on Form 8-K filed July 10, 2007
|
4.5
*
|
|
Common
Stock Purchase Warrant issued to Jeffrey L.
Powell — Incorporated by reference to Exhibit 4.3 to
Current Report on Form 8-K filed July 10, 2007
|
4.6
|
|
Form
of Common Stock Purchase Warrants issued to The Focus Fund and Robert S.
Trump — Incorporated by reference to Exhibit 4.4 to
Quarterly Report on Form 10-QSB for the period ended September 30,
2007
|
4.7
|
|
Form
of 7.5% Convertible Promissory Notes issued to The Focus Fund and Robert
S. Trump — Incorporated by reference to Exhibit 4.5
to Quarterly Report on Form 10-QSB for the period ended September 30,
2007
|
4.8
|
|
Form
of Warrants issued pursuant to Securities Purchase Agreement dated July
14, 2005 — Incorporated by reference to Exhibit 4.1
to Current Report on Form 8-K filed July 19,
2005
|
4.9
|
|
Warrant
Agreement dated November 5, 2004 by and between ThermoEnergy Corporation
and Robert S. Trump, together with Form of
Warrant — Incorporated by reference to Exhibit 99.SS
to Amendment No. 10 to Schedule 13D of Robert S. Trump filed on December
2, 2004
|
4.10
|
|
Form
of Common Stock Purchase Warrant issued pursuant to Securities Purchase
Agreement dated as of December 18, 2007 between ThermoEnergy Corporation
and The Quercus Trust — Incorporated by reference to
Exhibit 4.1 to Current Report on Form 8-K filed December 19,
2007
|
4.11
|
|
Amendment
No. 1 to Common Stock Purchase Warrant No.
2007-12-1 — Incorporated by reference to Exhibit 4.3
to Current Report on Form 8-K filed September 17, 2008
|
4.12
|
|
7.5%
Convertible Promissory Notes due December 31, 2008 issued to Robert S.
Trump — Incorporated by reference to Exhibit 4.1 to
Current Report on Form 8-K filed August 18, 2008
|
4.13
|
|
Common
Stock Purchase Warrant No. 2008-RT1 issued to Robert S.
Trump — Incorporated by reference to Exhibit 4.2 to
Current Report on Form 8-K filed August 18, 2008
|
4.14
|
|
Form
of Common Stock Purchase Warrant issuable pursuant
to Securities Purchase Agreement dated as of September 15, 2008
by and between ThermoEnergy Corporation and The Quercus
Trust — Incorporated by reference to Exhibit 4.1 to
Current Report on Form 8-K filed September 17, 2008
|
4.15
|
|
10%
Convertible Promissory Notes due September 30, 2013 issued to The Quercus
Trust — Incorporated by reference to Exhibit 4.2 to
Current Report on Form 8-K filed September 17, 2008
|
10.1
|
|
License
Agreement, effective December 30, 1997, by and between ThermoEnergy
Corporation and Batelle Memorial
Institute — Incorporated by reference to Exhibit 10
to Quarterly Report on Form 10-QSB for the period ended March 31,
1998
|
10.2
|
|
Amendment
No. 1 to License Agreement between ThermoEnergy Corporation and Batelle
Memorial Institute — Incorporated by reference to
Exhibit 10.5 to Annual Report on Form 10-KSB for the year ended December
31, 2004
|
10.3
|
|
Amendment
No. 2 to License Agreement between ThermoEnergy Corporation and Batelle
Memorial Institute — Incorporated by reference to
Exhibit 10.4 to Annual Report on Form 10-KSB for the year ended December
31, 2005
|
10.4
|
|
License
Agreement, effective October 1, 2003, by and between ThermoEnergy
Corporation and Alexander G.
Fassbender — Incorporated by reference to Exhibit
10.44 to Annual Report on Form 10-KSB for the year ended December 31,
2003
|
10.5
|
|
Letter
Agreement from Alexander G. Fassbender dated December 17, 2007 and
addressed to The Quercus Trust and ThermoEnergy
Corporation — Incorporated by reference to Exhibit
10.2 to Current Report on Form 8-K filed December 19,
2007
|
10.6
*
|
|
Employment
Agreement of Alexander G. Fassbender, dated November 18, 1998, and
Amendment No. 1 thereto — Incorporated by reference
to Exhibit 10.6 to Annual Report on Form 10-KSB for the year ended
December 31, 2004
|
10.7
*
|
|
Employment
Agreement of Dennis C. Cossey, dated September 14,
2005 — Incorporated by reference to Exhibit 10.13 to
Annual Report on Form 10-KSB for the year ended December 31,
2005
|
10.8
*
|
|
Employment
Agreement of Andrew T. Melton, dated May 1,
2005 — Incorporated by reference to Exhibit 10.14 to
Annual Report on Form 10-KSB for the year ended December 31,
2005
|
10.9
*
|
|
Employment
Agreement of Jeffrey L. Powell, dated July 2,
2007 — Incorporated by reference to Exhibit 10.3 to
Current Report on Form 8-K filed July 10, 2007
|
10.10
*
|
|
Bonus
Agreement dated July 2, 2007 among ThermoEnergy Corporation, CASTion
Corporation and Donald F. Farley, as agent for certain employees of
CASTion Corporation identified
therein — Incorporated by reference to Exhibit 10.2
to Current Report on Form 8-K filed July 10, 2007
|
10.11
*
|
|
Employment
Agreement of Shawn R. Hughes, dated June 15,
2007 — Incorporated by reference to Exhibit 10.1 to
Current Report on Form 8-K filed January 7, 2008
|
10.12
*
|
|
Option
Agreement by and between Thermoenergy Corporation and Dennis C.
Cossey — Incorporated by reference to Exhibit 10.37
to Quarterly Report on Form 10-Q for the period ended September 30,
1999
|
10.13
*
|
|
Retirement
Plan of P.L. Montesi — Incorporated by reference to
Exhibit 10.43 to Annual Report on Form 10-QSB for the year ended December
31, 2003
|
10.14
*
|
|
Agreement,
dated May 27, 2005, among ThermoEnergy Corporation, the Estate of P.L.
Montesi and Betty Johnson Montesi — Incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K filed June 3,
2005
|
10.15
|
|
Securities
Purchase Agreement dated as of December 18, 2007 between ThermoEnergy
Corporation and The Quercus Trust — Incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K filed December 19,
2007
|
10.16
|
|
First
Amendment to Securities Purchase Agreement dated as of June 25, 2008 by
and between ThermoEnergy Corporation and The Quercus
trust — Incorporated by reference to Exhibit 10.1 to
Current Report on Form 8-K filed June 30, 2008
|
10.17
|
|
Securities
Purchase Agreement, dated as of March 21, 2007, between ThermoEnergy
Corporation and Martin A. Roenigk — Incorporated by
reference to Exhibit 4.1 to Current Report on Form 8-K filed March 22,
2007
|
10.18
|
|
Agreement
for the Purchase and Sale of Securities dated as of July 2, 2007 among
ThermoEnergy Corporation, CASTion Corporation and the Sellers named
therein — Incorporated by reference to Exhibit 10.1
to Current Report on Form 8-K filed July 10, 2007
|
10.19
|
|
Securities
Purchase Agreement dated July 14,
2005 — Incorporated by reference to Exhibit 10.1 to
Current Report on Form 8-K filed July 19, 2005
|
10.20
|
|
Securities
Purchase Agreement, dated as of August 12, 2008, between ThermoEnergy
Corporation and Robert S. Trump — Incorporated by reference to
Exhibit 4.1 to Current Report on Form 8-K filed August 18,
2008
|
10.21
|
|
Stock Pledge
Agreement dated July 2, 2007 by ThermoEnergy Corporation in favor of
Spencer Trask Specialty Group, LLC (in its capacity as agent for itself
and for other Secured Parties who become parties
thereto — Incorporated by reference to Exhibit 10.4
to Current Report on Form 8-K filed July 10,
2007
|
10.22
|
|
Securities
Purchase Agreement dated as of September 15, 2008 by and between
ThermoEnergy Corporation and The Quercus
Trust — Incorporated by reference to Exhibit 10.1 to
Amended Current Report on Form 8-K/A filed January 13,
2009
|
21.1
|
|
Subsidiaries
of the Issuer — Filed herewith
|
24.1
|
|
Power
of Attorney of Dennis C. Cossey, Arthur S. Reynolds, Alexander G.
Fassbender, J. Winder Hughes III, Paul A. Loeffler and Louis G.
Ortmann — Filed herewith
|
31.1
|
|
Sarbanes
Oxley Act Section 302 Certificate of Principal Executive
Officer — Filed herewith
|
31.2
|
|
Sarbanes
Oxley Act Section 302 Certificate of Principal Financial
Officer — Filed herewith
|
32.1
|
|
Sarbanes
Oxley Act Section 906 Certificate of Principal Executive
Officer — Filed herewith
|
32.2
|
|
Sarbanes
Oxley Act Section 906 Certificate of Principal Financial
Officer — Filed
herewith
|
* May
be deemed a compensatory plan or arrangement
THERMOENERGY
CORPORATION
CONSOLIDATED
FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and 2006
With
Report
of Independent Registered Public Accounting Firm
Report of Independent
Registered Public Accounting Firm
Board of
Directors
ThermoEnergy
Corporation
We have
audited the accompanying consolidated balance sheets of ThermoEnergy Corporation
and subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity (deficit) and cash flows for each
of the three years in the period ended December 31, 2008. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of ThermoEnergy
Corporation and subsidiaries as of December 31, 2008 and 2007, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. As discussed in Note 12 to the financial
statements, the Company has incurred net losses since inception and will require
substantial capital to continue commercialization of the Company’s technologies
and to fund the Companies liabilities, which included $2,022,000 of unpaid
payroll taxes, $3,478,000 of convertible debt in default (net of debt discounts
of $313,000) and $3,334,000 of contingent liability reserves at December 31,
2008. These conditions raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note 12 to the financial statements. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Kemp & Company, a
Professional Association
Little
Rock, Arkansas
September
30, 2009
THERMOENERGY
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except for share and par value amounts )
|
|
December 31,
2008
|
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
115
|
|
|
$
|
3,185
|
|
Accounts
Receivable, net
|
|
|
111
|
|
|
|
260
|
|
Inventories
|
|
|
164
|
|
|
|
184
|
|
Other
Current Assets
|
|
|
164
|
|
|
|
239
|
|
Total
Current Assets
|
|
|
554
|
|
|
|
3,868
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
|
305
|
|
|
|
322
|
|
Other
Assets
|
|
|
176
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,035
|
|
|
$
|
4,195
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
204
|
|
|
$
|
844
|
|
Short-Term
Borrowings
|
|
|
873
|
|
|
|
679
|
|
Convertible
Debt in Default
|
|
|
3,478
|
|
|
|
2,921
|
|
Contingent
Liability Reserves
|
|
|
3,334
|
|
|
|
423
|
|
Deferred
Revenue
|
|
|
264
|
|
|
|
458
|
|
Other
Current Liabilities
|
|
|
2,713
|
|
|
|
1,129
|
|
Total
Current Liabilities
|
|
|
10,866
|
|
|
|
6,454
|
|
|
|
|
|
|
|
|
|
|
Long
Term Liabilities:
|
|
|
|
|
|
|
|
|
Deferred
Comp Retirement Plan for Officers Net of Current Portion
|
|
|
261
|
|
|
|
304
|
|
Convertible
Debt
|
|
|
992
|
|
|
|
512
|
|
Total
Long Term Liabilities
|
|
|
1,253
|
|
|
|
816
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest in Subsidiary
|
|
|
(1,662
|
)
|
|
|
(1,414
|
)
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
10,457
|
|
|
|
5,856
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity (Deficit):
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.01 par value, liquidation value of $1.20 per share: authorized
-
|
|
|
|
|
|
|
|
|
20,000,000
shares (2008), 20,000,000 shares (2007); issued and
outstanding:
|
|
|
|
|
|
|
|
|
2008
- 208,334 shares; 2007 - 5,301,670 shares
|
|
|
2
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, $.001 par value: authorized - 150,000,000
shares;
|
|
|
|
|
|
|
|
|
issued:
2008 - 50,247,537 shares; 2007 - 40,817,516 shares;
|
|
|
|
|
|
|
|
|
outstanding:
2008 - 50,163,740 shares; 2007 - 40,733,719 shares
|
|
|
50
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-In Capital
|
|
|
58,810
|
|
|
|
50,794
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Deficit
|
|
|
(68,284
|
)
|
|
|
(52,548
|
)
|
|
|
|
|
|
|
|
|
|
Total
Equity
|
|
|
(9,422
|
)
|
|
|
(1,661
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND EQUITY
|
|
$
|
1,035
|
|
|
$
|
4,195
|
|
See notes
to consolidated financial statements.
THERMOENERGY
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Contract
and Grant Income
|
|
$
|
1,730
|
|
|
$
|
622
|
|
|
$
|
1,057
|
|
Less:
Cost of Contract and Grant Income
|
|
|
2,400
|
|
|
|
1,056
|
|
|
|
929
|
|
Gross
Operating Income (Loss)
|
|
|
(670
|
)
|
|
|
(434
|
)
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative
|
|
|
4,822
|
|
|
|
3,405
|
|
|
|
1,049
|
|
Selling
Expense
|
|
|
405
|
|
|
|
133
|
|
|
|
—
|
|
Goodwill
Impairment
|
|
|
—
|
|
|
|
10,665
|
|
|
|
—
|
|
Contingency
Accruals
|
|
|
3,334
|
|
|
|
98
|
|
|
|
325
|
|
Option
Expense
|
|
|
1,682
|
|
|
|
904
|
|
|
|
298
|
|
Warrant
Expense
|
|
|
1,331
|
|
|
|
954
|
|
|
|
433
|
|
Professional
Fees
|
|
|
1,434
|
|
|
|
1,024
|
|
|
|
1,290
|
|
Travel
and Entertainment
|
|
|
712
|
|
|
|
353
|
|
|
|
501
|
|
Total
Operating Expenses
|
|
|
13,720
|
|
|
|
17,536
|
|
|
|
3,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(14,390
|
)
|
|
|
(17,970
|
)
|
|
|
(3,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
29
|
|
|
|
23
|
|
|
|
75
|
|
Interest
Expense
|
|
|
1,623
|
|
|
|
868
|
|
|
|
—
|
|
Total
Other Income (Expense)
|
|
|
(1,594
|
)
|
|
|
(845
|
)
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before minority interest in subsidiary
|
|
|
(15,984
|
)
|
|
|
(18,815
|
)
|
|
|
(3,693
|
)
|
Minority
interest in subsidiary
|
|
|
248
|
|
|
|
1,138
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(15,736
|
)
|
|
$
|
(17,677
|
)
|
|
$
|
(3,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
$
|
(0.31
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(0.16
|
)
|
Net
Loss
|
|
$
|
(0.34
|
)
|
|
$
|
(0.60
|
)
|
|
$
|
(0.16
|
)
|
See notes
to consolidated financial statements.
THERMOENERGY
CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years
Ended December 31, 2006 Through December 31, 2008
|
|
Common
Stock
|
|
|
Series A
Convertible
Preferred
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
|
(in
thousands
)
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
Balance
(Deficit) January 1, 2006
|
|
$
|
23
|
|
|
$
|
6,198
|
|
|
$
|
29,131
|
|
|
$
|
(31,178
|
)
|
|
$
|
4,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
issued to directors
|
|
|
—
|
|
|
|
—
|
|
|
|
299
|
|
|
|
—
|
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued for services
|
|
|
—
|
|
|
|
—
|
|
|
|
433
|
|
|
|
—
|
|
|
|
433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,693
|
)
|
|
|
(3,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
(Deficit) December 31, 2006
|
|
|
23
|
|
|
|
6,198
|
|
|
|
29,863
|
|
|
|
(34,871
|
)
|
|
|
1,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
issued to directors
|
|
|
|
|
|
|
|
|
|
|
904
|
|
|
|
|
|
|
|
904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued for services
|
|
|
—
|
|
|
|
—
|
|
|
|
52
|
|
|
|
—
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued for services
|
|
|
|
|
|
|
|
|
|
|
331
|
|
|
|
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Converted
Preferred Stock to Common Stock
(897,001
shares)
|
|
|
1
|
|
|
|
(686
|
)
|
|
|
685
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock (1,238,095 at $0.42 per share)
|
|
|
1
|
|
|
|
—
|
|
|
|
519
|
|
|
|
—
|
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of 113,886 shares of Common Stock from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cashless
exercise of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock, June 2007, net of issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
of $99,721 (4,000,000 shares at $0.75 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share)
and 2,000,000 warrants at a price equal to a 12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
month
average with a floor of $0.75 and a ceiling of
$1.50
per share
|
|
|
4
|
|
|
|
|
|
|
|
2,896
|
|
|
|
|
|
|
|
2,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and beneficial conversion option issued with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Notes
|
|
|
|
|
|
|
|
|
|
|
944
|
|
|
|
|
|
|
|
944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reincorporated
in Delaware and reduced par value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
|
|
|
|
(5,459
|
)
|
|
|
5,459
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock (4,588,088 shares at $.50 per
share)
and warrants for CASTion acquisition
|
|
|
5
|
|
|
|
|
|
|
|
4,163
|
|
|
|
|
|
|
|
4,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock, July 2007 (30,000 shares at $.99
per
share)
|
|
|
—
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock, December 2007, net of issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
of $667,284 (6,666,667 shares at $0.75 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
10,000,000 warrants
|
|
|
6
|
|
|
|
|
|
|
|
4,326
|
|
|
|
|
|
|
|
4,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
Issued as Broker Compensation for Private
Placement
of Common Stock
|
|
|
|
|
|
|
|
|
|
|
622
|
|
|
|
|
|
|
|
622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,677
|
)
|
|
|
(17,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
(Deficit) December 31, 2007
|
|
|
40
|
|
|
|
53
|
|
|
|
50,794
|
|
|
|
(52,548
|
)
|
|
|
(1,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued for services
|
|
|
|
|
|
|
|
|
|
|
1,331
|
|
|
|
|
|
|
|
1,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of 220,000 shares of Common Stock for services
|
|
|
|
|
|
|
|
|
|
|
277
|
|
|
|
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashless
exercise of 4,662,639 warrants for 1,854,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
of Common Stock
|
|
|
2
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of 741,493 warrants for 741,493 shares of
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
(average price of $0.64 per share)
|
|
|
1
|
|
|
|
|
|
|
|
473
|
|
|
|
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
grants issued to officers (250,000 shares at $1.11 per
share)
|
|
|
1
|
|
|
|
|
|
|
|
278
|
|
|
|
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options issued to officers, directors and employees
|
|
|
—
|
|
|
|
—
|
|
|
|
1,682
|
|
|
|
|
|
|
|
1,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Converted
Preferred Stock to Common Stock (5,051,668
shares)
|
|
|
5
|
|
|
|
(51
|
)
|
|
|
46
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Note converted to Common Stock (1,146,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
at $0.50 per share)
|
|
|
1
|
|
|
|
|
|
|
|
572
|
|
|
|
|
|
|
|
573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Common Stock Issued for Interest Payments
(124,172
shares at $.47 per share
|
|
|
—
|
|
|
|
—
|
|
|
|
58
|
|
|
|
—
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and beneficial conversion feature issued with
Convertible
Notes
|
|
|
|
|
|
|
|
|
|
|
3,301
|
|
|
|
|
|
|
|
3,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,736
|
)
|
|
|
(15,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
(Deficit) December 31, 2008
|
|
$
|
50
|
|
|
$
|
2
|
|
|
$
|
58,810
|
|
|
$
|
(68,284
|
)
|
|
$
|
(9,422
|
)
|
See notes
to consolidated financial statements.
THERMOENERGY
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(15,736
|
)
|
|
$
|
(17,677
|
)
|
|
$
|
(3,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items
not requiring (providing) cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
issued to officers and directors
|
|
|
1,682
|
|
|
|
904
|
|
|
|
298
|
|
Warrants
issued for services
|
|
|
1,331
|
|
|
|
953
|
|
|
|
433
|
|
Depreciation
Expense
|
|
|
65
|
|
|
|
41
|
|
|
|
24
|
|
Contingency
Accruals
|
|
|
3,334
|
|
|
|
98
|
|
|
|
325
|
|
Impairment
charge - Property and Equipment
|
|
|
105
|
|
|
|
—
|
|
|
|
—
|
|
Goodwill
Impairment Charge
|
|
|
—
|
|
|
|
10,665
|
|
|
|
—
|
|
Minority
Interest in Subsidiary
|
|
|
(248
|
)
|
|
|
(1,138
|
)
|
|
|
—
|
|
Restricted
Stock issued for services
|
|
|
277
|
|
|
|
329
|
|
|
|
—
|
|
Amortization
of Discount on Convertible Debt
|
|
|
1,090
|
|
|
|
689
|
|
|
|
—
|
|
Other
|
|
|
40
|
|
|
|
56
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
and Notes Receivable
|
|
|
149
|
|
|
|
296
|
|
|
|
(564
|
)
|
Inventories
|
|
|
20
|
|
|
|
59
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Current Assets
|
|
|
75
|
|
|
|
(63
|
)
|
|
|
(527
|
)
|
Other
assets
|
|
|
(19
|
)
|
|
|
—
|
|
|
|
—
|
|
Accounts
Payable
|
|
|
(640
|
)
|
|
|
(253
|
)
|
|
|
180
|
|
Deferred
Revenue
|
|
|
(194
|
)
|
|
|
79
|
|
|
|
—
|
|
All
Other Current Liabilities
|
|
|
1,931
|
|
|
|
666
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Compensation Retirement Plan
|
|
|
(43
|
)
|
|
|
(43
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash used in operating activities
|
|
|
(6,781
|
)
|
|
|
(4,339
|
)
|
|
|
(3,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of CASTion, net of cash required
|
|
|
—
|
|
|
|
(2,147
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of Property and Equipment
|
|
|
(153
|
)
|
|
|
—
|
|
|
|
(187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash used in investing activities
|
|
|
(153
|
)
|
|
|
(2,147
|
)
|
|
|
(187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Short-Term Borrowings
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
—
|
|
Payments
on Short-Term Borrowings
|
|
|
(200
|
)
|
|
|
(500
|
)
|
|
|
—
|
|
Proceeds
from issuance of Common Stock and Warrants
|
|
|
474
|
|
|
|
7,784
|
|
|
|
—
|
|
Proceeds
from Convertible Debt
|
|
|
2,750
|
|
|
|
750
|
|
|
|
—
|
|
Debt
Issue Costs
|
|
|
(160
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
3,864
|
|
|
|
9,034
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease) in cash
|
|
|
(3,070
|
)
|
|
|
2,548
|
|
|
|
(3,688
|
)
|
Cash,
beginning of period
|
|
|
3,185
|
|
|
|
637
|
|
|
|
4,325
|
|
Cash,
end of period
|
|
$
|
115
|
|
|
$
|
3,185
|
|
|
$
|
637
|
|
See notes
to consolidated financial statements.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 1: Organization and
summary of significant accounting policies
Nature of
business
In the
notes to the Consolidated Financial Statements, we use the terms “Company”,
“we”, “our” and “us” to refer to ThermoEnergy Corporation and its
subsidiaries. ThermoEnergy Corporation was incorporated in January
1988, for the purpose of marketing and developing certain environmental
technologies. The Company’s Intellectual Property (“I-P”) portfolio
includes three chemical process systems, including the ThermoFuel Process
(“ThermoFuel”), Enhanced Biogas Production (“Enhanced Biogas Production”)
process, and the Ammonia Recovery Process (“ARP”). The ARP technology is owned
by Battelle Memorial Institute (“BMI”) and licensed to the Company for municipal
wastewater treatment on a worldwide exclusive basis. ThermoFuel, which was
developed by the Company, is a renewable energy process that is a key component
of the Company’s patent-pending Sewage Treatment Method. ThermoFuel converts
municipal sewage sludge (or biosolids) into a high-energy solid fuel with an
equivalent Btu value equal to sub-bituminous coal. When utilized as a component
of the Company’s Enhanced Biogas Production and Sewage Treatment Method
technologies, ThermoFuel will allow existing municipal wastewater treatment
plants to up-grade from Class ‘B’ to Class ‘A’ biosolids production at
substantially less capital and operating cost than current wastewater treatment
methods. Combined, these three technologies will allow many municipal and
industrial clients to cost-effectively meet local, state and federal clean water
discharge requirements.
During
2001, the Company, through its subsidiary ThermoEnergy Power Systems, LLC (see
Note 7), received a patent from the US Patent and Trademark Office for the
ThermoEnergy Integrated Power Systems (“TIPS”) technology. TIPS is a new power
plant design that utilizes a different thermodynamic combustion pathway that
eliminates the atmospheric emissions of mercury, acid gases and particulates. In
addition, TIPS captures carbon dioxide in pressurized liquid form which can be
stored, sequestered or sold on the commercial market. TIPS produces electricity
and/or process steam from a diverse mixture of energy resources including coal,
oil, natural gas, biomass or by-products from certain manufacturing activities.
ThermoFuel, Enhanced Biogas Production, ARP, and TIPS are referred to
collectively as the “Technologies”.
The
Company acquired majority control of CASTion Corporation, a Massachusetts
corporation (“CASTion”) on July 2, 2007. The acquisition of CASTion resulted in
the Company becoming primarily a “water company” with many patented and
proprietary Water Technologies. The Water Technologies address wastewater
problems for municipal and a broad range of industrial markets. CASTion’s
patented Controlled Atmosphere Separation Technology (“CAST”) systems can be
utilized as an effective stand-alone wastewater or chemical recovery system, or
as part of an integrated recovery solution. The CAST wastewater and chemistry
recovery system eliminates costly disposal of hazardous waste or process
effluent. The Zero-Liquid-Discharge program can recover nearly 100% of a
customer’s valuable chemical resources or wastewater for immediate reuse or
recycling at our customer’s facility.
The
Company has historically lacked the financial and other resources necessary to
conduct the research and development activities involving the Technologies or to
build demonstration projects. Collaborative working relationships with
engineering and environmental companies have been established in order to assist
the Company in the commercialization of the Technologies. During
2005, the Company entered into its first commercial contract with New York
City’s Department of Environmental Practices (“NYCDEP”) for a 500,000 gallon per
day ARP facility to be sited at NYCDEP’s Bowery Bay Water Pollution
Control
Plant
(“WPCP”). During 2006, the contract for the Bowery Bay WPCP was cancelled and
the Company is currently negotiating with NYCDEP to move the project to the 26
th
Ward WPCP.
During
2007, the Company reincorporated in the state of Delaware and reduced the par
value of the Company’s Series A Convertible Preferred Stock from $1.00 to $.01
per share. The Company’s Series A Convertible Preferred Stock may be
converted by the holder into the Company’s Common Stock at $1.00 per
share.
Principles of consolidation
and basis of presentation
The
consolidated financial statements include the accounts of the Company and its
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Results of operations of
companies purchased are included from the dates of acquisition. Certain prior
year amounts have been reclassified to conform to current year
classifications.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 1: Organization and
summary of significant accounting policies (continued)
Accounts receivable,
net
Accounts
receivable are recorded at their estimated net realizable value and included
retainage amounts of $0 and $267,320 at December 31, 2008 and 2007,
respectively. Receivables related to the Company’s contracts and grants have
realization and liquidation periods of less than one year and are therefore
classified as current. The allowance for doubtful accounts totaled $0 and
$276,148 at December 31, 2008 and 2007, respectively. 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.
Inventories
Inventories
at December 31, 2008 include raw materials and supplies. Inventories are stated
at the lower of cost (first-in, first-out method) or market.
Property and
equipment
Property
and equipment are stated at cost and are depreciated over the estimated useful
life of each asset. Depreciation is computed primarily 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 discounted cash flows or fair values of the
asset, whichever is more readily determinable. During the year ended
December 31, 2008, the Company recorded asset impairment charges of $105,116
related to property and equipment (primarily a mobile ARP
unit).
Goodwill
Goodwill
is not amortized. It is evaluated at least annually for impairment. (See Note
9).
Debt issue
costs
Debt
issue costs incurred during 2008 are amortized using the effective interest rate
method over the life of the related debt. Debt issue costs net, of
amortization, amounted to $152,000 at December 31, 2008 and are included in
Other Assets in the 2008 Consolidated Balance Sheet.
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
contingent liability reserves 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 reserves to be
recognized in the period such new
information becomes known.
Revenue
recognition
Revenues
earned from grants are based on allowable costs and labor. Revenues from
fixed-price contracts are recognized on the percentage of completion method,
measured by the percentage of costs incurred to total estimated costs. 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. Selling and general and administrative costs are charged to
expense as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which losses are determined. Changes in job
performance, job conditions, and estimated profitability may result in revisions
to costs and income and recognized in the period in which revisions are
determined.
Costs and
estimated earnings in excess of billings on uncompleted contracts, which were
not significant at December 31, 2008 and 2007, represent revenues recognized in
excess of amounts billed and are included in accounts receivable.
Billings in excess of
costs and estimated earnings on uncompleted contracts, which amounted to
$264,000 at December 31, 2008 and $458,000 at December 31, 2007, represent
amounts billed in excess of revenues earned and are included in deferred
revenue.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 1: Organization and
summary of significant accounting policies (continued)
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles 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.
Loss per common
share
Loss per
common share is computed by dividing the net loss for the year by the weighted
average number of shares outstanding during the year. Stock options, warrants,
and the dilutive effect of the Company’s Series A Convertible Preferred Stock
were not included in the computation of diluted loss per share since the effect
would be anti-dilutive. The adjusted weighted average number of common shares
used in the basic and diluted loss per share computations were 46,372,059,
29,487,835, and 23,136,815, shares for the years ended December 31, 2008, 2007,
and 2006, respectively. For additional disclosures regarding Series A
Convertible Preferred Stock, stock options, warrants and contingently issuable
shares, see Notes 3, 4, 5, 8, 9, 13 and 14, respectively.
Stock
options
Prior to
January 1, 2006, the Company accounted for stock option grants to employees
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to
Employees
and related Interpretations. No stock-based employee
compensation was reflected in the Company’s financial statements since all
options granted had an exercise price equal to the market value of the
underlying Common Stock on the date of the grant.
Effective
January 1, 2006, the Company adopted the provisions of Statement of Financial
Standards No. 123 (Revised 2004) Share-Based Payment. This Statement 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 stock option awards.
Income
taxes
The
Company uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on the
differences between 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.
Advertising
Advertising
costs are expensed as incurred and amounted to $9,541, $4,768 and $49,887 for
the years ended December 31, 2008, 2007 and 2006, respectively.
Fair value of financial
instruments
The
carrying amount of cash, accounts receivable, inventories, other current assets,
accounts payable, short-term notes payable and other current liabilities in the
consolidated financial statements approximate fair value because of the
short-term nature of the instruments. As of December 31, 2008 the carrying
amount of the Company’s convertible debt in default and long-term convertible
debt was $4,470,000. The Company is unable to estimate the fair value
of that debt without incurring excessive costs because a quoted market price is
not available, the Company has not developed the valuation model necessary to
make the estimate, and the cost of obtaining an independent valuation would be
excessive.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 1: Organization and
summary of significant accounting policies (continued)
Effect of new accounting
pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
2007),
Business
Combinations
, (“SFAS 141R”). SFAS 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, including goodwill, the liabilities
assumed and any non-controlling interest in the acquiree. The Statement also
establishes disclosure requirements to enable users of the financial statements
to evaluate the nature and financial effects of the business combination.
SFAS 141R is effective for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. The impact of adopting SFAS 141R will
be dependent on the future business combinations that the Company may pursue
after its effective date.
In
December 2007, the FASB issued SFAS No. 160 "Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51"
("SFAS 160"), which requires ownership interests in subsidiaries held by
others to be clearly identified, labeled and presented in the consolidated
balance sheet within equity but separate from the parent company's equity.
SFAS 160 also affects the accounting requirements when the parent company
either purchases a higher ownership interest or deconsolidates the equity
investment. SFAS No. 160 applies prospectively as of the beginning of the
fiscal year in which this Statement is initially applied, January 1, 2009
for entities that have a calendar year end, except for the presentation and
disclosure requirements. The presentation and disclosure requirements shall be
applied retrospectively for all periods presented. An entity may not apply it
before that date. See Note 14 for a discussion of the impact of this
pronouncement on the Company’s financial statements during 2009.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with accounting principles generally accepted in the United
States, and expands disclosures about fair value measurements. The
Company adopted the provisions of SFAS 157 as of January 1, 2008. The
adoption of SFAS 157 did not materially impact the Company’s financial
condition, results of operations, or cash flows.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”). SFAS No. 159 provides
the Company with an option to report selected financial assets and liabilities
at fair value and establishes presentation and disclosure requirements to
facilitate reporting between companies. The fair value option established by
this Statement permits the Company to choose to measure eligible items at fair
value at specified election dates. The Company shall then report unrealized
gains and losses on items for which the fair value option has been elected in
earnings at each reporting date subsequent to implementation. The Statement,
which was effective for financial statements issued for fiscal years beginning
after November 15, 2007, was not adopted by the Company.
Note 2: License
agreements
The
license agreements with BMI (the “License Agreements”) permit the Company to
commercialize the Technologies with respect to municipal, industrial and
Department of Defense hazardous and non-hazardous water/wastewater/sludge
processing. Payments under the terms of the License Agreements have been charged
to operations. The License Agreements provide for payment of royalties to BMI
from revenues generated using the Technologies. The royalty schedule is
structured such that a minimum payment is required until such time that the
Company generates income from the Technologies. The Company has not yet sold a
commercial facility and has been required to make only minimum royalty payments
to BMI under the agreements since no revenues have been generated from the use
of the Technologies.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 3: Short-term
borrowings
Short-term
borrowings consisted of the following at December 31, 2008 and 2007 (in
thousands):
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Convertible
promissory note dated December 22, 2008, 7.5%, due March 31,
2009, less discount of $194
|
|
$
|
307
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Convertible
promissory note dated August 12, 2008, 7.5%, due March 31,
2009
|
|
|
566
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Convertible
promissory note dated August 23, 2007, 7.5%, due March 31, 2008, less
discount of $103
|
|
|
—
|
|
|
|
459
|
|
|
|
|
|
|
|
|
|
|
Short-term
notes payable by CASTion to related parties
|
|
|
—
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
873
|
|
|
$
|
679
|
|
On
December 22, 2008, we entered into a Securities Purchase Agreement with a
stockholder of the Company, Robert S. Trump. Pursuant to the
Agreement, on December 22, 2008, we issued and sold to Mr. Trump, at face value,
our 7.5% Convertible Promissory Note due March 31, 2009 in the principal amount
of $500,000. Mr. Trump may elect to convert the Note at any time into shares of
our Common Stock at a price of $0.75 per share. At our election by
written notice and upon payment of a deferral fee in an amount equal to 10% of
the principal amount then outstanding no later than five business days after the
maturity date, the maturity date may be extended to June 30, 2009 (see Note 14).
At our election, the deferral fee may be paid by adding the amount of the
deferral fee to the principal amount of the Note. We may pay off the Note in
full or in part at any time without prepayment penalty. As further
consideration to Mr. Trump, on December 22, 2008 we issued to him a warrant to
purchase 1,000,000 shares of our Common Stock at an exercise price of $1.25 per
share. The warrant expires on December 31, 2015, but includes a provision
permitting us to accelerate the expiration date if at any time the market price
for our Common Stock equals or exceeds 200% of the market price on December 22,
2008 ($0.52 per share) for a period of thirty consecutive trading
days.
We have
agreed that, if we file a registration statement under the Securities Act
covering the sale by us or by any other person of shares of our Common Stock, we
will, at Mr. Trump’s request, include in such registration the shares issuable
upon conversion of the Note and exercise of the warrant.
The
Company estimated the fair value of the warrants issued using a Black-Scholes
option pricing model and allocated $185,000 of the proceeds received to the
warrants on a relative fair value basis. In addition, the difference between the
effective conversion price of the Note and the fair value of the Company’s
common stock on the date of issuance of the Note resulted in a beneficial
conversion feature amounting to $33,000, the intrinsic value of the conversion
feature on that date. The total debt discount of $218,000 is amortized to
interest expense over the stated term of the Note.
As more
on September 28, 2009 fully discussed in Note 14, the maturity date of the Note
was extended to June 30, 2009, but the Note remained outstanding after that date
and was amended on September 28, 2009 in connection with the Series B
Convertible Preferred Stock financing contemplated by a term sheet dated
September 16, 2009 between the Company and an investor group. The
outstanding principal balance of the amended Note, and all accrued and unpaid
interest thereon, will be converted into Series B Preferred Stock of the Company
at the price per share at which such Preferred Stock will be issued upon
the closing of the second tranche of the Series B Convertible Preferred Stock
financing.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 3: Short-term
borrowings (continued)
On August
12, 2008, we entered into a Securities Purchase Agreement with a stockholder,
Robert S. Trump. Pursuant to the Agreement, we issued at face value,
our 7.5% Convertible Promissory Note due December 31, 2008 in the principal
amount of $500,000. Mr. Trump may elect to convert the Note at any time into
shares of our Common Stock at a price of $0.75 per share. Pursuant to
the terms of the Note, on December 31, 2008 the Company added accrued interest
of $14,486 and a deferral fee of $54,449 to the principal amount of the Note and
extended the maturity date of the Note March 31, 2009.
We may
pay off the Note in full or in part at any time without prepayment penalty. In
the event we have not paid off the Note in full by March 31, 2009, the full
amount of principal and accrued interest will convert into shares of our Common
Stock at $0.75 per share (see Note 14). As further consideration to Mr. Trump,
on August 12, 2008 we issued to him a warrant to purchase one share of our
Common Stock for each dollar invested by Mr. Trump in the purchase of our
Common Stock or other convertible securities during the period from December 31,
2008 through December 31, 2011. The exercise price of the warrant is $1.50
per share. The warrant expires on December 31, 2015, but includes a
provision permitting us to accelerate the expiration date if at any time the
market price for our Common Stock equals or exceeds 200% of the market price on
August 12, 2008 ($1.04 per share) for a period of thirty consecutive trading
days. We have agreed that, if we file a registration statement under
the Securities Act covering the sale by us or by any other person of shares of
our Common Stock, we will, at Mr. Trump’s request, include in such registration
the shares issuable upon conversion of the Note and exercise of the
warrant.
The
Company estimated the fair value of the warrants issued using a Black-Scholes
option pricing model and allocated $192,000 of the proceeds received to the
warrants on a relative fair value basis. In addition, the difference between the
effective conversion price of the Note and the fair value of the Company’s
Common Stock on the date of issuance of the Note resulted in a beneficial
conversion feature amounting to $308,000, the intrinsic value of the conversion
feature on that date. The total debt discount of $500,000 was amortized to
interest expense over the stated term of the Note.
On August
23, 2007, the Company entered into financing agreements with two stockholders
that consisted of the Company issuing to each stockholder $500,000 of 7.5%
Convertible Promissory Notes maturing on December 31, 2007. As
additional consideration to the stockholders, the Company granted warrants to
purchase a total of 1,000,000 shares of Common Stock with an exercise price of
$0.75 per share. The Company estimated the fair value of the warrants issued
using a Black-Scholes option pricing model and allocated $300,000 of the
proceeds received to the warrants on a relative fair value basis. In addition,
the difference between the effective conversion price of the Notes into the
Company’s Common Stock on the date of issuance of the Notes resulted in a
beneficial conversion feature amounting to $363,000, the intrinsic value of the
conversion feature on that date. The total debt discount of $663,000 was
amortized to interest expense over the stated term of the Note.
One of
the $500,000 Notes was repaid in cash on December 23, 2007, and the second Note
to a stockholder, Robert S. Trump, was extended until March 31, 2008 in
accordance with the terms of the Note. A deferral fee and accrued
interest aggregating $62,000 were added to the principal balance of the Note as
of December 31, 2007. On April 1, 2008, the Company issued Mr. Trump
1,146,036 shares of Common Stock at $.50 per share for full payment of the
balance of the Note.
Note 4: Convertible debt in
default
As more
fully described in Note 9, 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 on the Notes are convertible, at any time at the election of
the holders, into shares of the Company’s Common Stock at the rate of $0.50 per
share. 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 is amortized to interest expense over the stated
term of the Notes. The unamortized total debt discount amounted to
$313,000 and $522,000 at December 31, 2008 and 2007,
respectively. The Notes contain conventional weighted-average
anti-dilution provisions for the adjustment of the conversion price of the Notes
in the event we issue additional shares of the Company’s Common Stock (or
securities convertible into Common Stock) at a price per share less than the
then-effective exercise price or conversion price.
Interest
on the Notes is 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, 2008 and 2007, deferred accrued interest
amounts added to the principal balances of the Notes amounted to $438,000 and
$90,000, respectively.
The Notes
are technically in default and shown in current liabilities as of December 31,
2008 and 2007, due to the fact that the Company had not made the required
prepayments from the Quercus Trust private placement of equity closed on
December 18, 2007 (see Note 8).
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 5: Convertible
debt
Convertible
debt consisted of the following at December 31, 2008 and 2007 (in
thousands):
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Convertible
Promissory Note, 5%, due March 7, 2013, less discount of
$628
|
|
$
|
141
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Convertible
Promissory Note, 5%, due March 21, 2013, less discounts of $221 in 2008
and $257 in 2007
|
|
|
588
|
|
|
|
512
|
|
|
|
|
|
|
|
|
|
|
Convertible
Promissory Note, 10%, due September 30, 2013, less discount of
$1,737
|
|
|
263
|
|
|
|
—
|
|
|
|
$
|
992
|
|
|
$
|
512
|
|
On March
7, 2008, Mr. Martin A. Roenigk, a member of the Company’s Board of Directors,
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, at face value,
its 5% Convertible Promissory Note due March 7, 2013 in the principal amount of
$750,000. Mr. Roenigk may elect to convert the Note at any time into shares of
Common Stock at a price of $0.50 per share. Interest on the outstanding
principal amount is payable semi-annually, subject to our right, upon payment of
a $2,500 deferral fee, to defer any scheduled interest payment until the
maturity date. As of December 31, 2008, the Company had added $19,063
interest to the principal of the Note.
As
further consideration to Mr. Roenigk, on March 7, 2008 the Company issued to him
a six-year warrant to purchase an aggregate of 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 Note and warrant
were issued in a private placement not involving any public offering and exempt
from registration under the Securities Act of 1933 pursuant to the exemptions
provided by Section 4(2) of such Act and by Regulation D promulgated under such
Act. The Note and warrant were sold for cash at an aggregate offering price of
$750,000. No broker or placement agents were involved in the offering of such
securities.
The
Company estimated the fair value of the warrant issued using a 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 of the Note 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 amortized to
interest expense over the stated term of the Note.
On March
21, 2007 the Company issued to Mr. Martin A. Roenigk the Company’s 5%
Convertible Promissory Note due March 21, 2013 in the principal amount of
$750,000 and a Common Stock warrant. The principal amount of, and accrued
interest on, the Note is convertible, at any time at the election of the holder,
into shares of the company’s Common Stock at a conversion price of $0.50 per
share. The warrant entitles the holder to purchase up to 750,000
share of Common Stock, at any time on or before March 21, 2013, 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.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 5: Convertible debt
(continued)
The Note
and warrant were issued in a private placement not involving any public offering
and exempt from registration under the Securities Act of 1933 pursuant to the
exemptions provided by Section 4(2) of such Act and by Regulation D promulgated
under such Act. The Note and warrant were sold for cash at an aggregate offering
price of $750,000. The Company estimated the fair value of the warrant issued
using a 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 into the
Company’s Common Stock on the date of issuance of the Notes 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
amortized to interest expense over the stated term of the Note.
In
accordance with the terms of the Note, the Company had added $59,104 and $18,750
of accrued interest and deferral fees to the principal balance of the Note as of
December 31, 2008 and 2007, respectively.
On
September 15, 2008, we entered into a Securities Purchase Agreement with the
Quercus Trust (“Quercus”), pursuant to which we agreed to issue up to $7,000,000
face amount of our 10% Convertible Promissory Notes and warrants entitling the
holder to purchase up to 14,000,000 shares of our Common
Stock. Pursuant to the Agreement, at an initial closing on September
15, 2008, we issued a $2,000,000 Note due September 30, 2013 and a warrant for
the purchase of 4,000,000 shares of Common Stock.
Quercus
may elect to convert the Note at any time into shares of our Common Stock at a
price of $0.75 per share. Interest on the Note is payable quarterly
in arrears; at our election, all or any portion of the interest may be paid by
the issuance of shares of our Common Stock valued at 90% of the volume weighted
average trading price per share of our Common Stock for the ten trading days
immediately preceding the respective interest payment date. We may not pre-pay
the Note without the prior written consent of the holder.
The
warrant permits the holder to purchase, at any time on or before September 30,
2013, up to 4,000,000 shares of our Common Stock at a purchase price of $1.25
per share which was subsequently adjusted to $0.525 as provided for in the
warrant agreement (see Note 14). The warrant contains conventional
anti-dilution provisions for the adjustment of the exercise price in the event
we issue additional shares of our Common Stock or securities convertible into
Common Stock (subject to certain specified exclusions) at a price per share less
than $0.80 per share (the closing price for our Common Stock on September 12,
2008). The warrant also includes conventional provisions permitting “cashless”
exercise under certain specified circumstances.
The
Agreement provides that Quercus will purchase an additional Note (in form
substantially identical to the Note issued at the initial closing) in the
original principal amount of $5,000,000 and an additional warrant (in form
substantially identical to the warrant issued at the initial closing) for the
purchase of 10,000,000 shares of our Common Stock upon the satisfaction of
certain conditions set forth in the Agreement (see Note 14). Pursuant
to the Agreement, we amended the warrant issued to Quercus on December 18, 2007
to reduce the exercise price of such warrant from $1.50 to $1.25 per share,
which resulted in the recording of $360,000 of general and administrative
expense.
In the
Agreement, we agreed to file one or more registration statements under the
Securities Act of 1933 covering the resale by Quercus of the shares of our
Common Stock issuable in payment of interest on the notes, upon conversion of
the Notes or upon exercise of the warrant. The registration rights provisions of
the Agreement contain conventional terms including indemnification and
contribution undertakings and a provision for liquidated damages in the event
the required registration statements are not filed or are not declared effective
prior to deadlines set forth in the Agreement (see Notes 8, 13 and
14).
The
Agreement also grants to Quercus a right of first refusal to participate in any
subsequent financing we undertake prior to the earlier of (i) the date on which
we first report results of operations reflecting a positive cash flow in each of
two successive fiscal quarters or (ii) September 15, 2010 (subject to certain
conventional exceptions) in order to permit Quercus to maintain its
fully-diluted ownership interest in our Common Stock.
The
Company estimated the fair value of the warrant issued using a Black-Scholes
option pricing model and allocated $846,000 of the proceeds received to the
warrant on a relative fair value basis. In addition, the difference between the
effective conversion price of the Note and the fair value of the Company’s
Common Stock on the date of issuance of the Note resulted in a beneficial
conversion feature amounting to $987,000, the intrinsic value of the conversion
feature on that date. The total debt discount of $1,833,000 is amortized to
interest expense over the stated term of the Note.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 5: Convertible debt
(continued)
Management
determined that the Company was in violation of debt covenants in the Agreement
regarding payment of payroll taxes and contingent liabilities (see Note
13). These violations were events of default as defined in the
Agreement. As more fully discussed in Note 14, in connection with the
September 2009 Series B Convertible Preferred Stock financing between the
Company and an investor group that included Quercus, all the investors agreed to
execute general releases of all prior claims (whether or not yet
asserted). Since management believes that it is probable that the
conditions specified in the release documents will be met prior to November 15,
2009, the Note was classified as long-term debt in the accompanying 2008 Balance
Sheet. Pursuant to the terms of the Series B Convertible Preferred
Stock financing contemplated by a term sheet between the Company and the
investors dated September 16, 2009, the Note was amended on September 28,
2009 in order to conform the terms of the Note to the terms specified in
the term sheet. The outstanding principal balance of the amended
Note, and all accrued and unpaid interest thereon, will be converted into Series
B Preferred Stock of the Company at the price per share at which such
Preferred Stock will be issued upon the closing of the second tranche of
the Series B Convertible Preferred Stock financing.
For its
services in connection with our sale of the Note and the warrant to Quercus, we
paid Merriman Curhan Ford & Co. a placement fee of $160,000 and issued to
that firm a warrant (in form substantially identical to the warrant issued to
Quercus) for the purchase of 453,334 shares of our Common Stock. The
warrant was issued to Merriman Curhan Ford & Co. in a transaction not
involving a public offering and without registration under the Securities Act of
1933 in reliance on the exemption from registration provided by Section 4(2) of
such Act. The Company estimated the fair value of the warrant using a
Black-Scholes option pricing model and recorded $166,056 of general and
administrative expense in connection with the issuance of the
warrant.
Note 6: Income
taxes
A
valuation allowance equal to the total of the Company's deferred tax assets has
been recognized for financial reporting purposes. The net changes in the
valuation allowance during the years ended December 31, 2008, 2007 and 2006 were
increases of approximately $4,320,000, $5,525,000 and $1,393,000, 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, 2008, 2007 and 2006 (in thousands):
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
operating loss carryforwards
|
|
$
|
12,920
|
|
|
$
|
11,549
|
|
|
$
|
7,550
|
|
Contingent
liability reserves
|
|
|
1,839
|
|
|
|
161
|
|
|
|
—
|
|
Stock
options and warrants
|
|
|
3,753
|
|
|
|
2,491
|
|
|
|
1,306
|
|
Other
|
|
|
324
|
|
|
|
315
|
|
|
|
135
|
|
|
|
|
18,836
|
|
|
|
14,516
|
|
|
|
8,991
|
|
Valuation
allowance - deferred tax assets
|
|
|
(18,836
|
)
|
|
|
(14,516
|
)
|
|
|
(8,991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
A
reconciliation of income tax expense (credit) at the statutory rate to income
tax expense at the Company's effective rate is shown below for the years ended
December 31, 2008, 2007 and 2006 (in thousands):
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Computed
at statutory rate (34%)
|
|
$
|
(5,435
|
)
|
|
$
|
(6,397
|
)
|
|
$
|
(1,256
|
)
|
Increase
in valuation allowance for deferred tax assets
|
|
|
4,320
|
|
|
|
5,525
|
|
|
|
1,393
|
|
Non-deductible
items and other
|
|
|
1,115
|
|
|
|
872
|
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 6: Income taxes
(continued)
The
Company has net operating loss carryforwards, which expire in various amounts
during 2009 through 2028, at December 31, 2008 of approximately
$34,000,000. 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.
Note 7: Related party
transactions
During
2000, the Board of Directors approved the formation of a ThermoEnergy Power
Systems, LLC, a Delaware limited liability company (“ThermoEnergy Power
Systems”) for the purpose of transferring the Company’s rights and interests in
TIPS. The organizational documents for ThermoEnergy Power Systems indicate that
the Company will have an 85% ownership interest and Mr. Alexander G. Fassbender,
Executive Vice President and Chief Technology Officer, as the inventor of the
technology, will have a 15% ownership interest. During 2008, by Court
Order, Mr. Fassbender’s 15% ownership interest was divided into a 7.5% ownership
interest to Mr. Fassbender and a 7.5% ownership interest to Mr. Fassbender’s
ex-wife. As of December 31, 2008, ThermoEnergy Power Systems had not
been capitalized by the Company and had no transactions.
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 2, 3 4, 5, 8,
9, and 14 for additional related party transactions.
Note 8: Common
Stock
The
Company owns 83,797 shares of its Common Stock pursuant to a settlement
agreement with a former stockholder. These treasury shares have a zero cost
basis.
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. No formal grant of stock options under
the Plan was made during 2007 and 2006.
During
2008, the Company’s stockholders approved the ThermoEnergy Corporation 2008
Incentive Stock Plan (the “2008 Plan”) for officers, employees, non-employee
members of the Board of Directors, consultants and other service
providers. The 2008 Plan provides for the granting of non-qualified
stock options, restricted stock, stock appreciation rights (“SAR”) and incentive
stock options. 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
maximum number of shares for stock options, restricted stock and SAR awards to
any one participant under the 2008 Plan is 500,000 shares per calendar year and
10,000,000 shares of the Company’s Common Stock have been reserved 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 members of the Board of Directors who
are not employees of the Company. Each non-employee Director who is elected or
appointed to the Board for the first time shall automatically be granted a
Nonqualified Stock Option to purchase 30,000 shares of 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 an Option grant to purchase an
additional 30,000 shares. All Options granted to non-employee Directors shall
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.
During
2008, the Board of Directors awarded officers, employees, and various members of
the Board of Directors a total of 2,031,300 non-qualified stock
options. The options are exercisable at exercise prices of $1.24
and/or $1.75 for a ten year period. The exercise price was at or above the
market price on the grant date.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 8: Common Stock
(continued)
During
2007, the Board of Directors awarded officers and various members of the Board
of Directors a total of 1,890,000 non-qualified stock options. The options are
exercisable at the quoted market price of the Company’s Common Stock on the
grant date (weighted average price of $1.04 per share and expire over a weighted
average expiration of 3 years from grant date.
During
2006, the Board of Directors awarded various officers and members of the Board
of Directors a total of 545,000 non-qualified stock options. The options are
exercisable at the quoted market price of the Company’s Common Stock on the
grant date ($0.94) and expire five years from that date.
The fair
value of options granted during 2008, 2007 and 2006 were estimated at the date
of grant using a Black-Scholes option pricing model with the following
assumptions:
|
|
2
008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Weighted
- average
|
|
|
|
|
|
|
|
|
|
Risk
free interest rate
|
|
|
4.05
|
%
|
3.51
|
%
|
|
4.31
|
%
|
Expected
option life (years)
|
|
|
10.0
|
|
3.0
|
|
|
5.0
|
|
Expected
volatility
|
|
|
65
|
%
|
65
|
%
|
|
65
|
%
|
Expected
dividends
|
|
|
None
|
|
None
|
|
|
None
|
|
A summary
of the Company’s stock option activity for the three years ended December 31,
2008, and related information follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
Number
|
|
Price
|
|
Number
|
|
|
|
of Shares
|
|
per Share
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
5,191,900
|
|
$
|
1.89
|
|
5,191,900
|
|
Granted
during 2006
|
|
545,000
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
5,736,900
|
|
$
|
1.80
|
|
5,736,900
|
|
Granted
during 2007
|
|
1,890,000
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
7,626,900
|
|
$
|
1.61
|
|
7,626,900
|
|
Granted
during 2008
|
|
2,031,300
|
|
$
|
1.56
|
|
|
|
Expired
unexercised
|
|
(1,444,400
|
)
|
$
|
2.84
|
|
|
|
Balance
at December 31, 2008
|
|
8,213,800
|
|
$
|
1.23
|
|
8,213,800
|
|
The
weighted average fair value of options granted during the periods presented
above were approximately $299,000, $904,000 and $1,682,000 for the years ended
December 31, 2006, 2007 and 2008, respectively.
Exercise
prices for options outstanding as of December 31, 2008 ranged from $.43 to
$6.36. The weighted average remaining contractual life of those options was
approximately 4.2 years at December 31, 2008.
See Note
14 for a discussion of the grant of 1,000,000 stock options to officers in
February 2009 as a non-cash bonus for 2008. An accrual of $306,400
for the bonus is included in Other Current Liabilities in the 2008 Consolidated
Balance Sheet.
During
2007, the Company issued and sold 1,238,095 shares of Common Stock to The Focus
Fund, LP for an aggregate purchase price of $520,000. The securities were issued
in private placements not involving any public offering and exempt from
registration under the Securities Act of 1933 pursuant to the exemption provided
by Section 4(2) of such Act. No brokers or placement agents were involved in the
offering of such securities.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS
December
31, 2008
Note 8: Common Stock
(continued)
In two
separate transactions during 2007, the Company issued shares of Common Stock to
two shareholders, Mr. Robert S. Trump and The Focus Fund, LP. In the
aggregate, the Company issued and sold 4,000,000 shares of Common Stock at a
price of $.75 per share for $2,900,000 net of costs of $99,721. The shareholders
received warrants to purchase one-half a share of restricted Common
Stock for each share purchased. The warrants entitle the holders to purchase up
to 2,000,000 shares of Common Stock, at any time for a three year period, at an
exercise price equal to the daily weighted average price per share of the Common
Stock for the 365-day period immediately preceding the date on which the
warrants are exercised, subject to a minimum exercise price of $0.75 per share
and a maximum exercise price of $1.50 per share. The securities were issued in
private placements not involving any public offering and exempt from
registration under the Securities Act of 1933 pursuant to the exemption provided
by Section 4(2) of such Act. No brokers or placement agents were involved in the
offering of such securities. The Company estimated the fair value of the
warrants using a Black-Scholes option pricing model and assigned $473,000 to
those warrants.
During
2007, the Company issued 4,588,088 shares at $.55 per share to the selling
stockholders for the acquisition of CASTion. See Note 9 for detail information
on the acquisition.
On
December 18, 2007 the Company issued 6,666,667 shares of Common Stock to Quercus
for $5,000,000 net of issuance cost of $667,284, and a warrant for the purchase
of 10,000,000 shares of Common Stock. The warrant permits the holder to
purchase, at any time on or before December 31, 2012, up to 10,000,000 shares of
our Common Stock at a purchase price of $1.50 per share, which was subsequently
reduced to $1.25 per share during 2008 (see Note 5) and to $0.525 per share
during 2009 (see Note 14). The warrant contains conventional anti-dilution
provisions for the adjustment of the exercise price in the event we issue
additional shares of our Common Stock or securities convertible into Common
Stock (subject to certain specified exclusions) at a price per share less than
the then-effective exercise price. The warrant also includes conventional
provisions permitting “cashless” exercise under certain specified
circumstances.
In
connection with the Quercus transaction closing, the Company committed to file
within 60 days a shelf registration statement covering the resale of the Common
Stock sold and issuable upon exercise of the warrant and to use its best efforts
to keep the registration statement continuously effective for a period of up to
five years. The Securities Purchase Agreement for the transaction provides that
the failure of the Company to file the registration statement within the
prescribed time period, or that the failure of the Company to perform five other
specific actions regarding a filed registration statement, triggers cash
liquidated damage payments to the investor. The specified cash payments are
equal to 1% of the gross amount invested payable on the date a failure to
perform occurs and on the same day of each successive month thereafter until the
failure to perform is cured. There is no stated limitation on the maximum
potential consideration to be transferred under the registration payment
arrangement. A similar registration payment arrangement was included
in the Securities Purchase Agreement for the $2,000,000 Convertible Promissory
Notes purchased by Quercus in September 2008 (see Note 5)
The
Company did not file the registration statements within the prescribed time
periods. As discussed more fully in Note 14, during April 2009,
Quercus filed lawsuits against the Company requesting, among other things,
payment of the liquidated damage specified by the registration payment
arrangements. However, in connection with the Series B Convertible
Preferred Stock financing contemplated by a term sheet dated September 16, 2009,
Quercus agreed to dismiss the lawsuits against the Company and to remove the
registration payment arrangements. An expense accrual for the
liquidated damages specified by the registration payment arrangements is not
included in the 2008 consolidated financial statements since management
concluded that it was not probable that the Company will be required to
make the liquidated damage payments.
The net
proceeds from the transaction of $4,332,716 were allocated to the Common Stock
and to the warrant on a relative fair value basis ($2,531,173 to the Common
Stock and $1,801,543 to the warrant). The fair value of the Warrant was
determined using a Black-Scholes option pricing model.
In
December 2007 the Board of Directors approved restricted stock awards for
officers of the Company for 250,000 shares of Common Stock. The terms of the
awards provided for issuance of the shares during 2008. Since the awards were
earned during 2007, a liability amounting to $278,000 was accrued as of December
31, 2007 (included in Other Current Liabilities in the accompanying 2007
Consolidated Balance Sheet) for the compensation expense associated with the
awards.
Also, on
June 26, 2008 the Company issued warrants to acquire 1,250,000 shares of Common
Stock to two shareholders for the final settlement of bridge loan obligations.
The Company recorded an expense of $616,000 during the second quarter for the
issuance of these warrants based upon the Black-Scholes options
model.
The
Company also issued 572,968 shares of Common Stock from the exercise of various
warrants at an average price of $0.61 per share, and 1,272,351 shares of Common
Stock from the cashless exercise of 2,581,164 warrants.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 8: Common Stock
(continued)
On June
2, 2008, a member of the Company’s Board of Directors, Mr. Martin A. Roenigk,
exercised a warrant to acquire 550,000 shares of Common Stock at an exercise
price of $0.60 per share.
During
2008 the Company issued 220,000 shares of Common Stock to consultants for
services rendered.
The
Company recorded general and administrative expense in connection with warrants
issued for services amounting to $1,331,000, $331,000 and $433,000 for the years
ended December 31, 2008, 2007 and 2006, respectively, and for broker
compensation in connection with a private placement of Common Stock during
2007. The value of the warrants was computed using a Black-Scholes
option model.
At
December 31, 2008, there were outstanding warrants for the purchase of
28,628,592 shares of the Company’s Common Stock at prices ranging from $0.27 per
share to $1.82 per share (weighted average exercise price was $1.12 per share)
until expiration (800,000 shares in 2009, 3,000,000 shares in 2010, 13,833,333
shares in 2012, 7,718,220 shares in 2013, and 3,277,039 shares in
2015).
At
December 31, 2008, approximately 50,000,000 shares of Common Stock were reserved
for future issuance under convertible debt and warrant agreements, stock option
arrangements and other commitments (see Note 14 for subsequent events involving
warrants, stock options and Common Stock of the Company).
Note 9:
Acquisition
On July
2, 2007, the Company entered into an Agreement for the Purchase and Sale of
Securities with CASTion and six investment funds, pursuant to which the Company
acquired shares of the preferred stock of CASTion representing, in the
aggregate, 90.31% of the total issued and outstanding shares of CASTion’s common
stock on an as-converted basis and, from certain of the investment funds,
$2,000,000 face amount of promissory notes and other debt obligations of
CASTion.
Under the
Agreement, the Company paid the following consideration: (i) $2,000,000 in cash,
(ii) an aggregate of 4,588,088 shares of the Company’s Common Stock, (iii)
Convertible Promissory Notes in the aggregate principal amount of $3,353,127,
and (iv) six-year Common Stock purchase warrants for the purchase of an
aggregate of 4,569,925 shares of the Company’s Common Stock at an exercise price
of $0.50 per share.
The
Company agreed to maintain the separate corporate existence of CASTion, and to
operate it as a separate division, until the Notes have been paid in full. We
have granted to the Note holders a security interest in the shares of CASTion as
collateral security for payment and performance of the Company’s obligations
under the Notes.
In the
Agreement for the Purchase and Sale of Securities, we agreed to include in any
registration statement that we may file under the Securities Exchange Act of
1934 (with certain specified exceptions) the shares of the Company’s Common
Stock issued in connection with the purchase of CASTion and the shares issuable
upon conversion of the Notes or exercise of the warrants.
CASTion
provides customized turnkey systems for industrial wastewater treatment. CASTion
offers a range of products and services including vacuum distillation,
evaporators, reverse osmosis, ion exchange, oil/water separators, water use
reduction and other water management services. The Company acquired
CASTion to; 1) enable the Company to become a full-service water company, 2) to
achieve synergisms from combining the technologies of CASTion and the Company,
and 3) to enable the Company to control the technologies. The Company
recorded goodwill at closing, equal to the difference between the purchase price
and the fair value of the net assets acquired. The recorded goodwill
was not deductible for income tax reporting purposes.
The
acquisition was accounted for using the purchase method of accounting.
Accordingly, the assets and liabilities of CASTion were recorded at their
respective fair values as of the date of acquisition.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 9: Acquisition
(continued)
The
calculation of the purchase price is as follows:
Shares
of the Company’s Common Stock issued
|
|
|
4,588,088
|
|
Assigned
stock price (1)
|
|
$
|
.55
|
|
Fair
Value of Common Stock issued
|
|
|
2,523,448
|
|
Plus:
Acquisition costs incurred
|
|
|
189,997
|
|
Total
cash and Common Stock
|
|
|
2,713,445
|
|
Plus
other consideration:
|
|
|
|
|
Convertible
Note $3,353,127, net of valuation discount of $313,425 and discount for
beneficial conversion feature of $313,182 (2)
|
|
|
2,726,520
|
|
Common
stock warrants (3)
|
|
|
1,644,259
|
|
Total
purchase price
|
|
$
|
7,084,224
|
|
(1)
|
Estimate
based on value assigned to Common Stock purchases for 4,000,000 shares
during late June 2007, approximately $.52, and the 365-day trailing
average quoted price for the Company’s Common Stock prior to the date of
acquisition, approximately $.60. The Company’s quoted stock price on July
2, 2007 was $1.39. Due to the Company’s small average trading volume and
the price volatility of the Company’s Common Stock during 2007, management
believes that the large-block cash sales of Common Stock near the
acquisition date and the 365-day trailing average stock price provide a
better estimate of the value of the Company’s Common
Stock.
|
(2)
|
Valuation discount of $313,425
computed based on an assumed fair market value interest rate of 10%
compared to the stated rate of 6.5%. The valuation discount results in a
beneficial conversion feature of $313,182, the intrinsic value of the
conversion feature on that
date.
|
(3)
|
The value of the warrants was
computed using a Black-Scholes option pricing
model.
|
The
consolidated financial statements as of and for the periods ended December 31,
2007 reflect the following purchase price allocation for CASTion:
Historical
net assets (deficit) applicable to the Company’s purchase of a 90.31%
interest in CASTion’s common stock on July 2, 2007
|
|
$
|
(3,581,372
|
)
|
|
|
|
|
|
Goodwill
|
|
|
10,665,596
|
|
Total
purchase price
|
|
$
|
7,084,224
|
|
CASTion’s
summary balance sheet is as follows:
Current
assets
|
|
$
|
635,090
|
|
Other
assets
|
|
|
116,876
|
|
|
|
$
|
751,966
|
|
|
|
|
|
|
Current
liabilities, net of minority interest
|
|
$
|
4,333,338
|
|
Net
assets (deficit)
|
|
|
(3,581,372
|
)
|
|
|
$
|
751,966
|
|
The
Company’s goodwill impairment analysis as of December 31, 2007 resulted in a
fair value valuation for goodwill, which was attributable to the Water Group
segment (see note 11), as of December 31, 2007 of $0. The impairment was
due partly to 1) the reduced revenue recorded at CASTion in 2007 compared to
prior years, 2) the net loss and negative cash flow history at CASTion, and
3) the inability of determining a comparative valuation for the patented and
patent pending technologies developed by CASTion.
The
results of operations of CASTion subsequent to the acquisition date are included
in the Company’s consolidated statements of operations. The following pro forma
information for the years ended December 31, 2007 and 2006 reflects the
Company’s estimated consolidated results of operations as if the acquisition of
CASTion occurred at January 1, 2006.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 9: Acquisition
(continued)
(dollars in thousands, except per share
data)
|
|
2007
|
|
|
2006
|
|
Gross
operating income
|
|
$
|
1,551
|
|
|
$
|
4,982
|
|
Loss
from operations
|
|
$
|
(18,628
|
)
|
|
$
|
(4,674
|
)
|
Net
loss
|
|
$
|
(18,313
|
)
|
|
$
|
(4,738
|
)
|
Net
loss from operations per share
|
|
$
|
(0.59
|
)
|
|
$
|
(0.17
|
)
|
Net
loss per share
|
|
$
|
(0.58
|
)
|
|
$
|
(0.17
|
)
|
Note 10: Employee benefit
plans
The
Company has adopted an Employee Stock Ownership Plan. However, as of December
31, 2008, the Plan had not been funded nor submitted to the Internal Revenue
Service for approval. CASTion has a 401(k) Plan, but no employer contributions
have been made by CASTion.
Note 11:
Segments
Due to
the acquisition of CASTion during 2007, the Company expanded its segment
presentation to better reflect how results of operations are now evaluated and
allocations of capital resources are determined. The Water Group segment
represents revenue and costs related to the development and commercialization of
patented water treatment technologies and includes our headquarters and related
operations. The Power Group segment represents revenue and costs
related to the development and commercialization of patented clean energy
technologies. The Water Group segment allocates support costs to the Water Group
segment on a percentage basis. The Company’s operations are currently conducted
in the United States. The Company will continue to evaluate how its business is
managed and, as necessary, adjust the segment reporting
accordingly.
For
the Year ended December 31, 2008
(in
thousands)
|
|
Water Group
|
|
|
Power Group
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
Sales
of wastewater treatment and recovery systems
|
|
$
|
1,146
|
|
|
$
|
—
|
|
|
$
|
1,146
|
|
Grant
revenue
|
|
|
—
|
|
|
|
584
|
|
|
|
584
|
|
Total
operating income
|
|
|
1,146
|
|
|
|
584
|
|
|
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of wastewater treatment and recovery systems sales
|
|
|
1,816
|
|
|
|
584
|
|
|
|
2,400
|
|
General
and administrative
|
|
|
6,661
|
|
|
|
—
|
|
|
|
6,661
|
|
Selling
expenses
|
|
|
405
|
|
|
|
—
|
|
|
|
405
|
|
Total
operating expenses
|
|
|
8,882
|
|
|
|
584
|
|
|
|
9,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating loss
|
|
$
|
(7,736
|
)
|
|
$
|
—
|
|
|
$
|
(7,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,035
|
|
|
$
|
—
|
|
|
$
|
1,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment operating loss
|
|
|
|
|
|
|
|
|
|
$
|
(7,736
|
)
|
Warrants
and stock options
|
|
|
|
|
|
|
|
|
|
|
(3,320
|
)
|
Contingent
liability accruals
|
|
|
|
|
|
|
|
|
|
|
(3,334
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
(1,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
$
|
(15,736
|
)
|
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 11: Segments
(continued)
For
the Year ended December 31, 2007
|
|
(in
thousands)
|
|
|
|
Water Group
|
|
|
Power Group
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
Sales
of wastewater treatment and recovery systems
|
|
$
|
165
|
|
|
$
|
—
|
|
|
$
|
165
|
|
Grant
revenue
|
|
|
—
|
|
|
|
457
|
|
|
|
457
|
|
Total
operating income
|
|
|
165
|
|
|
|
457
|
|
|
|
622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of wastewater treatment and recovery systems sales
|
|
|
599
|
|
|
|
457
|
|
|
|
1,056
|
|
General
and administrative
|
|
|
4,881
|
|
|
|
—
|
|
|
|
4,881
|
|
Selling
expenses
|
|
|
133
|
|
|
|
—
|
|
|
|
133
|
|
Total
operating expenses
|
|
|
5,613
|
|
|
|
457
|
|
|
|
6,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating loss
|
|
$
|
(5,448
|
)
|
|
$
|
—
|
|
|
$
|
(5,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
4,195
|
|
|
$
|
—
|
|
|
$
|
4,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment operating loss
|
|
|
|
|
|
|
|
|
|
$
|
(5,448
|
)
|
Goodwill
impairment
|
|
|
|
|
|
|
|
|
|
|
(10,664
|
)
|
Warrants
and stock options
|
|
|
|
|
|
|
|
|
|
|
(1,858
|
)
|
Minority
interest
|
|
|
|
|
|
|
|
|
|
|
1,138
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
(845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
$
|
(17,677
|
)
|
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 11: Segments
(continued)
For
the Year ended December 31, 2006
|
|
(in
thousands)
|
|
|
|
Water Group
|
|
|
Power Group
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
New
York contract revenue
|
|
$
|
525
|
|
|
$
|
—
|
|
|
$
|
525
|
|
Grant
revenue
|
|
|
—
|
|
|
|
532
|
|
|
|
532
|
|
Total
operating income
|
|
|
525
|
|
|
|
532
|
|
|
|
1,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of contract or grant revenue
|
|
|
397
|
|
|
|
532
|
|
|
|
929
|
|
General
and administrative
|
|
|
3,164
|
|
|
|
—
|
|
|
|
3,164
|
|
Total
operating expenses
|
|
|
3,561
|
|
|
|
532
|
|
|
|
4,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating loss
|
|
$
|
(3,036
|
)
|
|
$
|
—
|
|
|
$
|
(3,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,408
|
|
|
$
|
—
|
|
|
$
|
2,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment operating loss
|
|
|
|
|
|
|
|
|
|
$
|
(3,036
|
)
|
Warrants
and stock options
|
|
|
|
|
|
|
|
|
|
|
(732
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
$
|
(3,693
|
)
|
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 12: Management's
consideration of going concern matters
The
Company has incurred net losses since inception and will require substantial
additional capital to continue commercialization of the Technologies and to fund
the Company’s liabilities, which included approximately $2,022,000 of payroll
tax liabilities (see Note 13), $3,478,000 of convertible debt securities in
default, net of debt discounts aggregating $313,000 (see Note 4) and $3,334,000
of contingent liability reserves (see Note 13). 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 13). The financial
statements have been prepared assuming the Company will continue as a going
concern, realizing assets and liquidating liabilities in the ordinary course of
business and do not reflect any adjustments that might result from the outcome
of the aforementioned uncertainties. Management is considering several
alternatives for mitigating these conditions.
Management
has determined that obtaining substantial additional funding is essential to its
continued existence. Management actively engaged in negotiations with
a group of investors that had previously provided funding to the Company in the
past. As more fully described in Note 14, the Company and the
investor group approved term sheet on September 16, 2009 for a Series B
Convertible Preferred Stock financing that, if fully funded, would result in
cash proceeds to the Company of $6,250,000. The financing
provides for funding in four tranches, with the first and second tranche amounts
totaling $3,050,000 based on specified time periods and the third and fourth
tranche amounts totaling $3,200,000 based on the occurrence of specified events.
The first tranche secured Convertible Promissory notes with an aggregate
principal balance of $1,680,000 were issued on September 28, 2009.
Management
is also actively pursuing commercial contracts to produce fees from projects
involving the Technologies. Management has determined that the
financial success of the Company may be largely dependent upon the ability and
financial resources of established third parties collaborating with the Company
with respect to projects involving the Technologies. As discussed more fully in
Note 14, on February 25, 2009, ThermoEnergy Power Systems and Babcock Power
Development, LLC, a subsidiary of Babcock Power, Inc., entered into a Limited
Liability Company Agreement confirming the formation of Babcock-Thermo Carbon
Capture, LLC, a Delaware limited liability company for the purpose of developing
and commercializing our TIPS technology.
Note 13: Commitments and
contingencies
On June
2, 2009, the Company’s Audit Committee engaged special counsel to conduct an
in-depth investigation of the federal and state employment and unemployment tax
return filing and tax paying compliance record of the
Company. Questions concerning payroll tax matters arose during the
preparation of the Company’s consolidated financial statements for the year
ended December 31, 2008 and the Company’s Chief Financial Officer (“CFO”) could
not produce reliable documentation supporting the Company’s status with respect
to compliance with the tax return filing and tax paying
requirements. After discovering that no payroll tax returns had been
filed and that no payroll taxes had been paid to the Internal Revenue Service
and state taxing authorities since the CFO assumed his officer position in
mid-2005, the special counsel’s investigation was expanded to include a forensic
accounting review of the Company’s financial records by a certified public
accounting firm not involved with the audit of the Company’s financial
statements.
On July
30, 2009, the special counsel presented a report to the Chairman of the
Company’s Audit Committee which summarized the findings of the investigation,
including the forensic accounting review. The report confirmed that
the Company had not filed any payroll tax returns or paid any payroll taxes
since mid-2005 and that the Company’s CFO had sole responsibility for performing
those functions. The report indicated that the CFO’s representations
regarding the status of the payroll tax matters were false and misleading and
that he had made false accounting entries in the Company’s records to conceal
the nonpayment of the payroll taxes. A computation of the outstanding
payroll tax liabilities and of statutory interest and penalties relating to the
nonpayment of the payroll taxes and the nonfiling of the payroll tax returns as
of December 31, 2008 was included in the report.
On July
31, 2009, the Company’s Board of Directors unanimously approved a resolution
that the CFO
’
s
employment be terminated for cause. The CFO resigned on August
3, 2009.
During
the fourth quarter of 2008, the Company accrued additional payroll taxes of
approximately $1,064,000 resulting in total unpaid payroll taxes of
approximately $2,022,000 at December 31, 2008, and recorded a contingency
accrual of approximately $2,105,000 for estimated interest and penalties for
late filing of the payroll tax returns and nonpayment of the payroll
taxes. Management plans to file the payroll tax returns as soon as
possible and to present an offer in compromise for settlement of the payroll tax
liabilities to the tax authorities which would require a minimum cash payment of
approximately $400,000 with the offer. The Company cannot predict the
outcome of the offer in compromise proceedings.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note 13: Commitments and
contingencies (continued)
The
Company may become subject to tax liens if it cannot satisfactorily settle the
outstanding payroll tax liabilities. Furthermore, due to the actions
of the CFO summarized above, the Company may also face criminal and/or civil
action with respect to the impact of the payroll tax matters. The
Company cannot predict what, if any, actions may be taken by the tax
authorities, the Securities and Exchange Commission or other parties or the
effect the actions may have on the Company’s results of operations, financial
condition or cash flows.
See Note
14 for a discussion of litigation filed against the Company in 2009 by Quercus
and the subsequent dismissal of the litigation.
During
2008, the Company exhausted the appeals process of the 2007 jury award against
the Company for terminating a consulting contract with Rock Capital and was
required to pay $431,762 to the plaintiff.
The
Company’s contingent liability reserves consisted of the following at December
31, 2008 and 2007 (in thousands):
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Estimated
penalties and interest – payroll tax liabilities
|
|
$
|
2,105
|
|
|
$
|
—
|
|
Rock
Capital jury verdict
|
|
|
—
|
|
|
|
423
|
|
Other,
including unasserted claims
|
|
|
1,229
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,334
|
|
|
$
|
423
|
|
At
December 31, 2007, the Company had cash in financial institutions that exceeded
the limit insured by the Federal Deposit Insurance Corporation.
Note
14: Subsequent events
On
January 5, 2009 the Company acquired substantially all of the remaining shares
outstanding of CASTion. The Company issued to six individuals and/or
entities 435,442 shares of restricted Common Stock, $351,614 face amount of 10%
convertible debt (conversion price of $.50 per share and a maturity date of May
31, 2010) and warrants to acquire 424,164 shares of restricted Common
Stock. The fair value of the total consideration was
$619,955. The warrants have an exercise price of $0.50 per share and
expire in approximately 4.5 years. In addition, the Company escrowed
$12,500 cash for the remaining minority shareholders that represents less than
one percent of the acquired shares. The completion of this
transaction resulted in CASTion becoming a wholly owned subsidiary of the
Company.
The
acquisition of the CASTion non-controlling interest was accounted for in
accordance with SFAS 160 which was adopted by the Company effective January 1,
2009. SFAS 160 requires that the acquisition be recorded as an equity
transaction, which resulted in a reduction of consolidated stockholders’ equity
(deficit) of approximately $2,282,000 during the first quarter of
2009.
On
February 11, 2009, the Company issued to Quercus a 10% Secured Convertible
Promissory Note in the principal amount of $250,000 and entered into a Security
Agreement with Quercus. The Note matures on the earlier to occur of
(i) the closing of an equity or convertible debt investment in our Company
yielding gross proceeds of not less than $2,000,000.00 (a “Financing”) or (ii)
December 31, 2009. Quercus may elect to participate in the Financing
by converting the principal amount of the Note into shares of the securities to
be issued in the Financing at a price per share equal to 90% of the price per
share to be paid by the other investors in the
Financing. Quercus’ right to participate in the Financing by
conversion of the Note shall be conditioned on Quercus’ entering into such
purchase agreements and related agreements as shall be executed at the closing
of the Financing by the other investors participating in the
Financing.
Interest
on the Note is payable quarterly in arrears; at our election, all or any portion
of the interest may be paid by the issuance of shares of our Common Stock valued
at 90% of the volume weighted average trading price per share of our Common
Stock for the ten trading days immediately preceding the respective interest
payment date. We may not pre-pay the Note without the prior written
consent of Quercus.
To secure
payment of, and performance of our other obligations under, the Note, we and our
subsidiary CASTion, granted to Quercus, pursuant to the Security Agreement, a
security interest in all of our intellectual property assets other than certain
expressly excluded patent rights, licenses and related intellectual property
identified in the Security Agreement, including, without limitation, the
intellectual property rights used in or relating to our TEPS
business.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note
14: Subsequent events (continued)
On
February 25, 2009, the Company’s subsidiary, ThermoEnergy Power Systems
and Babcock Power Development, LLC (“BPD”), a subsidiary of Babcock
Power, Inc., entered into a Limited Liability Company Agreement (the
“LLC Agreement”) confirming the formation of Babcock-Thermo Carbon Capture LLC,
a Delaware limited liability company (the “Joint Venture”) for the purpose of
developing and commercializing our proprietary TIPS
technology.
ThermoEnergy
Power Systems has entered into a license agreement with the Joint Venture and
BPD, pursuant to which it has granted to the Joint Venture an exclusive (even as
to TEPS), irrevocable (except as otherwise provided therein), world-wide, fully
paid up and royalty-free license to ThermoEnergy Power Systems’ intellectual
property related to or necessary to practice the TIPS technology (the “TIPS
License”). In the LLC Agreement, BPD has agreed to develop, at
its own expense, intellectual property in connection with three critical
subsystems relating to the TIPS technology: a combustor subsystem, a steam
generating heating surface subsystem, and a condensing heat exchangers subsystem
(collectively, the “Subsystems”) and BPD has entered into a license
agreement with the Joint Venture and ThermoEnergy Power Systems pursuant to
which it has granted the Joint Venture an exclusive, irrevocable (except as
otherwise provided therein), world-wide, fully paid up and royalty-free license
to BPD’s know-how and other proprietary intellectual property related to or
necessary to practice the Subsystems.
Pursuant
to the LLC Agreement, each of ThermoEnergy Power Systems and BPD owns a 50%
membership interest in the Joint Venture. The LLC Agreement provides
that each member may be required, from time to time, to make capital
contributions to the Joint Venture to fund its operations. The
Company made a $50,000 capital contribution during August 2009.
The Joint
Venture will be managed by a six-person Board of Managers, with three managers
appointed by each member. The Board of Managers has adopted a set of
milestones by which it will measure the progress of the Joint
Venture. Pursuant to the LLC Agreement, either member may withdraw
from the Joint Venture if any milestone is not met (unless the failure to meet
such milestone is primarily attributable to a failure by such member to perform
its obligations under the LLC Agreement or any related
agreements). If a member exercises its right to withdraw, the
license that such member has granted to the Joint Venture will automatically
terminate.
The LLC
Agreement obligates the Joint Venture and each member to indemnify and hold the
other member and its affiliates harmless against damages and losses resulting
from such member’s fraud, gross negligence or intentional misconduct with
respect to the Joint Venture. We and Babcock Power, Inc. have entered
into separate agreements to indemnify the joint venture and its members (other
than our respective subsidiary-members) and their respective affiliates against
damages and losses resulting from fraud, gross negligence or intentional
misconduct of our respective subsidiary-members with respect to the Joint
Venture.
The LLC
Agreement contains other conventional terms, including provisions relating to
governance of the entity, allocation of profits and losses, and restrictions on
transfer of a member’s interest. In connection with the formation of
the Joint Venture, we and Mr. Alexander G. Fassbender entered into an Amendment
to his Employment Agreement. Among other things, the Amendment
provides that Mr. Fassbender will not compete against our business or the
business of any of our subsidiaries following termination of his Employment
Agreement.
On
February 26, 2009, the Company awarded various officers a total of 1,000,000
non-qualified stock options. The options are exercisable at $1.50 per
share which was approximately 325% of the closing market price on the date of
issue, and expire in ten years from the date of award. Since the
options were granted as bonuses for 2008, an accrued bonus of $306,400, the fair
value of the options on the date of grant using the Black Scholes option model,
is included in Other Current Liabilities in the 2008 Consolidated Balance
Sheet.
On March
6, 2009, the Company issued 1,428,571 shares of Common Stock at $.35 per share
and issued warrants to acquire 714,286 shares of Common Stock to an unrelated
third party institutional investor. The warrants have an exercise
price of $0.525 and expire five years from the grant
date.
Pursuant
to the warrant agreements, we reduced the exercise price of the Quercus warrants
for 14,000,000 shares of the Company’s Common Stock from $1.25 to $0.525 per
share due to the March 6, 2009 sale of Common Stock at $0.35 per
share. The warrant modification resulted in the recording of
$1,030,000 of warrant expense in the first quarter of 2009.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note
14: Subsequent events (continued)
Also, on
March 6, 2009, the Company offered to Quercus the right to participate in the
March 6, 2009 financing pursuant to the Agreement with Quercus dated September
18, 2008 which permits Quercus to maintain its fully-diluted ownership interest
in our Common Stock. Quercus elected to not participate in the
financing.
On April
1, 2009, the Company converted the balance of the August 12, 2008 Convertible
Promissory Note payable to Robert S. Trump of $576,401 to 768,535 shares of
restricted Common Stock. On March 31, 2009, the Company extended the
maturity of the December 22, 2008 Convertible Promissory Note payable to Robert
S. Trump to June 30, 2009, and added the extension fee of $50,000 to the
principal balance. The Note remained outstanding after that date and
was amended on September 28, 2009 in connection with the Series B Convertible
Preferred Stock financing contemplated by a term sheet dated
September 16, 2009 between the Company and an investor group and approved
by the Company’s Board of Directors in September 2009.
On April
6, 2009, the Company received a Complaint filed by David Gelbaum, as Trustee of
Quercus, bringing action against the Company in Delaware to enforce the
provisions of the Securities Purchase Agreement between Quercus and the Company
dated December 18, 2007. The complaint requests enforcement of the
Agreement of the shelf registration of the underlying securities and the payment
of liquidation damages for the failure to register the securities. On
April 13, 2009, the Company received a letter from Counsel of Quercus notifying
the acceleration and a demand for payment of the 10% Convertible Promissory Note
due September 30, 2013 in the principal amount of $2,000,000. The
letter claims events of default defined in the Note. On April 27,
2009, Quercus filed Form SC 13D/A (Amended Statement of Beneficial Ownership)
with The Securities and Exchange Commission disclosing that Quercus has proposed
that the Company change the composition of the Board of Directors, among other
things, and that if the Company does not make changes to the Board of Directors
and review other operational requirements, that Quercus may take other actions
to effect such changes. On April 29, 2009, Quercus brought an action
in the United States District Court for the Eastern District of Arkansas against
the Company (the “Arkansas Complaint’) to enforce the provisions of the 2008
Agreement for the $2,000,000 Convertible Note. The Arkansas Complaint alleges
that, as a result of the events of default, the Note is now due and payable and
seeks judgment in the amount of the Note (plus costs of
collection). The Arkansas Complaint also alleges that we have
breached our shelf registration obligation with respect to the shares of our
Common Stock issuable upon conversion of the Note or upon exercise of the
warrant issued to Quercus pursuant to the 2008 Agreement and seeks liquidated
damages for the failure to register such shares.
On April
27, 2009, the Company issued to three different funds and two affiliates of
Empire Capital Partners 10% Convertible Promissory Notes aggregating
$500,000. The Notes mature on the earlier to occur of (i) the closing
of the proposed funding with Quercus as reported in the September 15, 2008
Agreement with Quercus or (ii) October 31, 2009. Pursuant
to the Purchase Agreement, Empire Capital Partners and its affiliates may elect
to convert the Notes at any time into shares of our Common Stock at a price of
$0.40 per share. The Company also issued warrants to acquire
2,500,000 shares of Common Stock to the holders of the Notes. The
warrants have an exercise price of $0.55 and expire five years from the grant
date.
The
Company estimated the fair value of the warrants issued using a Black-Scholes
option pricing model and allocated $349,000 of the proceeds received to the
warrants on a relative fair value basis. In addition, the difference between the
effective conversion price of the Note and the fair value of the Company’s
Common Stock on the date of issuance of the Note resulted in a beneficial
conversion feature amounting to $151,000, the intrinsic value of the conversion
feature on that date. The total debt discount of $500,000 is amortized to
interest expense over the stated term of the Note.
Also, on
April 27, 2009, the Company offered to Quercus the right to participate in the
April 27, 2009 financing pursuant to the Agreement with Quercus dated September
18, 2008 which permits Quercus to maintain its fully-diluted ownership interest
in our Common Stock. Quercus elected to not participate in the
financing.
On June
25, 2009, the Company issued to Quercus a 10% Secured Convertible Promissory
Note. Under the terms of the Note, Quercus has agreed to make
advances to the Company, from time to time, up to an aggregate principal amount
of $150,000. The Note provides that advances may be used only to pay
legal and accounting fees and expenses related to the investigation by the Audit
Committee of the Board of Directors of our financial affairs or other matters
within the investigative authority of the Audit Committee (see Note
13). On June 26, 2009, Quercus made an initial advance under the Note
in the amount of $100,000. The Note matures on the earlier to occur
of (i) the closing of an equity or convertible debt investment in the Company
yielding gross proceeds of not less than $2,000,000.00 or (ii) December 31,
2009. Quercus may participate in the Financing by converting the
principal amount of the Note into shares of the securities to be issued in the
financing at a price per share equal to 80% of the price per share to be paid by
the other investors in the financing.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note
14: Subsequent events (continued)
Advances
under the Note bear interest at the rate of 10% per annum, payable in arrears on
the last day of each March, June, September and December, commencing on
September 30, 2009. At our election, all or any portion of the
interest due on any particular interest payment date may be paid by the issuance
of shares of our Common Stock, par value $0.001 per share valued at 80% of the
volume weighted average trading price per share of our Common Stock for the ten
trading days immediately preceding the respective interest payment
date. We may not pre-pay the Note without prior written consent of
Quercus.
We had
previously entered into a Security Agreement dated February 11, 2009 with
Quercus securing certain of our obligations to Quercus. The June 25,
2009 Note amends that Security Agreement to provide that the June 25, 2009 Note
shall also be secured to the same extent as the February 11, 2009
obligations. We also entered into a letter agreement with Quercus in
which we acknowledged that certain conditions to Quercus’ obligation to invest
an additional $5,000,000 in the Company pursuant to the September 15, 2008
Securities Purchase Agreement have not been and cannot be met, and we
irrevocably released any claim we may have on Quercus to make any further
investment.
On June
26, 2009, the Company issued to The Focus Fund a 10% Convertible Promissory Note
due October 15, 2009 in the principal amount of $108,000. The
outstanding principal and interest may be converted, at the holder’s election,
into shares of the Company’s Common Stock at $.36 per share. In
connection with the Note, we also issued a warrant to The Focus Fund to purchase
600,000 shares of the Company’s Common Stock on or before June 17, 2014 at an
exercise price of $.54 per share.
The
Company estimated the fair value of the warrant issued using a Black-Scholes
option pricing model and allocated $46,000 of the proceeds received to the
warrant on a relative fair value basis. In addition, the difference between the
effective conversion price of the Note and the fair value of the Company’s
Common Stock on the date of issuance of the Note resulted in a beneficial
conversion feature amounting to $19,000, the intrinsic value of the conversion
feature on that date. The total debt discount of $65,000 is amortized to
interest expense over the stated term of the Note.
As more
fully discussed in Note 13, the Company recorded a contingent liability reserve
of approximately $2,105,000 at December 31, 2008 for estimated interest and
penalties for the late filing of the Company’s payroll tax returns and
nonpayment of payroll taxes. Additional accruals to the reserve for
penalties and interest for the six months ended June 30, 2009 amounted to
approximately $56,000.
On July
28, 2009, J. Winder Hughes was elected to the Company’s Board of Directors and
was granted a stock option under the Company’s 2008 Incentive Stock Plan to
purchase 30,000 shares of the Company’s Common Stock at an exercise price of
$.33 per share. Mr. Hughes is responsible for the formation of the
Focus Fund L.P.
On July
31, 2009, the Company issued an 8% Secured Convertible Promissory Note in the
principal amount of $600,000 to the Focus Fund L.P. The Note is due
on the earlier to occur of (i) the closing of an equity or convertible debt
investment yielding gross proceeds to the Company of not less than $2,000,000 or
(ii) December 31, 2011. The Note is convertible into to Common Stock
of the Company at the option of the holder at a price of $.30 per share and is
secured by the Company’s 85% ownership interest in ThermoEnergy Power
Systems. In addition, the Company issued a warrant to the Focus Fund
L.P. for the purchase of 2,400,000 shares of the Company’s Common Stock at a
price of $.50 per share. The warrant expires on July 31,
2014.
On August
21, 2009, the Company’s Board of Directors approved a bridge financing proposal
in the amount of $110,000 from the Focus Fund L. P.
On
September
16
, 2009,
the Company and an investor group, consisting of Quercus, Empire Capital
Partners, Robert S. Trump and the Focus Fund L.P., signed a term
sheet for a Series B Convertible Preferred Stock financing, which if fully
funded, would result in cash proceeds of $6,250,000 to the
Company. The term sheet provides for funding in four
tranches, with the first and second tranche amounts totaling $3,050,000 based on
specified time periods and the third and fourth tranche amounts totaling
$3,200,000 based on the occurrence of specified events.
In the
first tranche funding of $1,680,000, the Company issued 8% Secured Convertible
Promissory Notes on September
28
, 2009 identical in form
and substance to the Company’s 8% Secured Convertible Promissory Note issued to
the Focus Fund L.P. on July 31, 2009, which was amended to provide for a
conversion price of $.24 per share instead of $.30 per share and a maturity date
of December 31, 2010. In addition, the Company’s outstanding
Convertible Promissory Notes payable to the investors in the original aggregate
principal amount of $3,550,000 were amended to conform to the same terms as the
8% Secured Convertible Promissory Notes. The security for all of the
8% Secured Convertible Promissory Notes is the Company’s 85% interest in
ThermoEnergy Power Systems.
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note
14: Subsequent events (continued)
In the
second tranche funding of $1,400,000, expected to occur on or before November
15, 2009, the Company will issue shares of Series B Convertible Preferred Stock
at a price per share to be specified at that date. Upon the closing
of the second tranche funding, the outstanding principal and accrued interest on
all of the 8% Secured Convertible Promissory Notes will convert automatically
into shares of the Company’s Series B Convertible Preferred Stock at the
price per share at which such Preferred Stock will be issued. Each
share of Series B Convertible Preferred Stock will be convertible, at any time
at the discretion of the holder, into ten shares of the Company’s Common
Stock. Except with respect to the election of the Board of Directors,
holders of Series B Convertible Preferred Stock will vote on an as-converted
basis together with the Common Stock holders on all
matters. The term sheet provides that the Company’s Board
of Directors will consist of seven members. Four Directors will be
elected by holders of the Company’s Series B Convertible Preferred Stock (three
to be designated by Quercus and one by Robert S. Trump) and three Directors will
be elected by the holders of the Company’s Common Stock.
If the
events specified in the term sheet occur, in the third tranche funding of
$1,800,000 and the fourth tranche funding of $1,400,000, the Company will issue
shares of Series B Convertible Preferred Stock.
Common
Stock warrants with an aggregate exercise price equal to 200% of the principal
amount invested will be issued to the investors at the closing of each
tranche. The warrants will expire in five years and provide for an
exercise price of $.50 per share.
The term
sheet also provides, among other things, for the following: (i)
the reduction of the exercise price to $.50 for the Company’s outstanding
warrants held by the investors which have an exercise price greater than $.50
and were issued in conjunction with convertible notes which were amended in
accordance with the term sheet; (ii) the dismissal of the litigation filed by
Quercus against the Company; (iii) the execution by the Company and
the investors of mutual general releases of all prior claims (whether or not yet
asserted); (iv) the removal of the registration payment arrangements with
Quercus; (v) the employment of a new Chief Executive Officer and Chief Financial
Officer; and (vi) the termination of all existing employment agreements with the
Company’s executive officers.
On September 28, 2009, the litigation filed in Arkansas against
the Company was dismissed. On September 30, 2009, the litigation filed in
Delaware against the Company was dismissed.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
ThermoEnergy Corporation
(Registrant)
|
|
|
|
|
By:
|
/s/ Dennis C.
Cossey
|
|
Dennis
C. Cossey
Chairman
of the Board and
Chief
Executive Officer
|
Date:
October 7, 2009
In
accordance with the Exchange Act, this report on Form 10-K has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated:
/s/ Dennis C.
Cossey
|
|
|
October
7, 2009
|
Dennis
C. Cossey
President
and Chief Executive Officer, Director
|
|
|
|
/s/ Arthur S.
Reynolds
|
|
|
October
7, 2009
|
Arthur
A. Reynolds
Chief
Financial Officer, Director
|
|
|
|
/s/ Alexander G.
Fassbender
|
|
|
October
7, 2009
|
Alexander
G. Fassbender
Executive
Vice President and
Chief
Technology Officer, Director
|
|
|
|
|
|
|
|
/s/ Paul A. Loeffler
|
|
|
October
7, 2009
|
Paul
A. Loeffler
Director
|
|
|
|
/s/ Louis J. Ortmann
|
|
|
October
7, 2009
|
Louis
J. Ortmann
Director
|
|
|
|
/s/ J. Winder Hughes
III
|
|
|
October
7, 2009
|
J.
Winder Hughes III
Director
|
|
|
|
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