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EX-31.1 - THERMOENERGY CORP | v182713_ex31-1.htm |
EX-31.2 - THERMOENERGY CORP | v182713_ex31-2.htm |
EX-32.1 - THERMOENERGY CORP | v182713_ex32-1.htm |
EX-32.2 - THERMOENERGY CORP | v182713_ex32-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K/A
(Amendement No.
1)
x ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2009
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
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71−0659511
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
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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 whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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. o
1
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer o
|
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 $8,555,587 computed by reference to the closing price of the
common stock on June 30, 2009, 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 March 26, 2010 - 53,679,473
shares
|
2
THERMOENERGY
CORPORATION
ANNUAL
REPORT ON FORM 10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009
Page
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Explanatory
Note
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4
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Forward
Looking Information
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4
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PART I
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Item
1:
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Business
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5
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Item
1A:
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Risk
Factors
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12
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Item
1B:
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Unresolved
Staff Comments
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12
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Item
2:
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Properties
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12
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Item
3:
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Legal
Proceedings
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12
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PART
II
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Item
4:
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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12
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Item
5:
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Selected
Financial Data
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13
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Item
6:
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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14
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Item
6A:
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Quantitative
and Qualitative Disclosures about Market Risk
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19
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Item
7:
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Financial
Statements and Supplementary Data
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19
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Item
8:
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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19
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Item
8A(T):
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Controls
and Procedures
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19
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Item
8B:
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Other
Information
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21
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PART
III
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Item
9:
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Directors,
Executive Officers and Corporate Governance
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22
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Item
10:
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Executive
Compensation
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31
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Item
11:
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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38
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Item
12:
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Certain
Relationships, Related Transactions and Director
Independence
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40
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Item
13:
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Principal
Accountant Fees and Services
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41
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PART
IV
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Item
14:
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Exhibits
and Financial Statement Schedules
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43
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Signatures
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44
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Financial
Statements:
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Report
of Independent Registered Public Accounting Firm
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A-2
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Consolidated
Balance Sheets – December 31, 2009 and 2008
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A-3
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Consolidated
Statements of Operations – Years Ended December 31, 2009 and
2008
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A-4
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Consolidated
Statements of Stockholders’ Equity (Deficit) – Years Ended December 31,
2009 and 2008
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A-5
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Consolidated
Statements of Cash Flows – Years Ended December 31, 2009 and
2008
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A-6
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Notes
to Consolidated Financial Statements
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A-7
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Index
of Exhibits
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B-1
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3
EXPLANATORY
NOTE
We are
filing this Amendment No. 1 to our Annual Report on Form 10-K for the fiscal
year ended December 31, 2009 for the purpose of amending Part III, Items 9, 10,
11, 12 and 13 to include information previously omitted from the original filing
in reliance on General Instruction G to Form 10-K, which provides that
registrants may incorporate by reference certain information from a definitive
proxy statement filed within 120 days after the end of the relevant fiscal
year. Our definitive proxy statement for our 2010 Annual
Meeting will not be filed within 120 days of the end of the fiscal year ended
December 31, 2009.
Except
for the inclusion of the information described above, this Amendment does not
reflect events occurring subsequent to the filing of our original Annual Report
on Form 10−K on March 31, 2010 or modify or update other information or exhibits
to our Annual Report on Form 10−K other than Exhibits 31.1, 31.2, 32.1 and 32.2,
which are being filed herewith.
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 in Item 1, 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.
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.
4
PART
I
ITEM
1. Business
We are a
clean technologies company engaged in the worldwide development of advanced
municipal and industrial wastewater treatment systems and carbon reducing clean
energy technologies.
Our
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 platform technology is combined
with off-the-shelf technologies to provide systems that are inexpensive, easy to
operate and reliable. Our wastewater treatment systems have applications in
aerospace, food and beverage processing, metal finishing, pulp & paper,
petrochemical, refining, microchip and circuit board manufacturing, heavy
manufacturing and municipal wastewater. Additional information on our
water technologies can be found on CASTion’s website at www.castion.com.
We are
also the majority owner of a patented clean energy technology known as the Zero
Emission Boiler System (“ZEBS”), formerly known as 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. In conjunction with our joint venture partner, Babcock
Power, Inc., we have changed the name of our carbon reducing energy technology
from TIPS to ZEBS. As our joint venture continues to develop this
technology for commercialization, we believe that the name change better
reflects the broad application of this radical new technology to build new or
retrofit old fossil fuel power plants globally with no emissions while capturing
carbon dioxide as a liquid for ready sequestration far more economically than
any other competing technology. The ZEBS technology is
consolidated in our majority-owned subsidiary, ThermoEnergy Power Systems, LLC
(“TEPS”). We own 85% of TEPS; Alexander Fassbender, a former officer, 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 joint venture with
Babcock Power, Inc. called Babcock-Thermo Carbon Capture, LLC ("BTCC") to
commercialize the ZEBS process. BTCC received an exclusive worldwide
license to the ZEBS technology, and BTCC is currently designing a 600 megawatt
power plant using the ZEBS technology.
ZEBS and
the water technologies are collectively referred to as the “Technologies.” The
economic and environmental matrix of our technologies represents a significant
advancement in these key infrastructure industries. Additional
information can be found on our website at www.thermoenergy.com and
on CASTion’s website at www.castion.com.
We were
founded in 1988, are incorporated under the laws of the State of Delaware, and
have been a public company since 1992. Our common stock was publicly
traded on the Over-the-Counter Bulletin Board (“OTCBB”) 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 an annual report or quarterly report by the due date
three times in the prior twenty-four months. Our common stock
continues to trade on “pink sheets” under the symbol “TMEN.PK”.
Corporate
Mission
Our
mission is to become a significant force within the global municipal and
industrial wastewater and power generation industries.
Water
Technologies
Our new
management team has refocused the Company on our key CAST and R-CAST patented
technologies (described below) in our 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:
5
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. When used in a Zero-Liquid-Discharge
(“ZLD”) application, we can recover nearly 90% of a customer’s valuable chemical
resources or wastewater for immediate reuse or recycling at our customer’s
facility. CAST concentrates mixed hazardous waste down to as little as 5% of its
original volume for economical disposal or reclaim. CASTion’s water technologies
fall into three major categories:
|
·
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Compliance
Systems – designed to meet strict local and federal regulatory
mandates;
|
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·
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Primary
Recovery Systems – designed to treat the majority of an operation’s
wastewater for reuse and concentrated the contaminants;
and
|
|
·
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Final
Recovery Systems – designed to treat the remaining concentrate
contaminants for disposal or additional processing to achieve zero liquid
discharge.
|
Systems
integration is key to the success of any treatment or recovery project. Because
of this, we provide significant value as a turnkey solution provider, thereby
ensuring these “state-of-the-art” technologies operate effectively.
ARP
The
Ammonia Recovery Process (“ARP technology”) captures ammonia from dilute waste
streams and converts it into ammonium sulfate, a commercial grade fertilizer,
which can be utilized in agriculture markets worldwide. The ARP
technology has been proven in more than 150 pilot tests nationwide.
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 RCAST 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. Such plants generate primary and waste activated sludges
which are typically treated with anaerobic digestion and then dewatered. In the
anaerobic digestion process, more than half of the nitrogen in organic nitrogen
compounds is converted into ammonia.
Once the
anaerobically digested sludge is dewatered, the organically bound
nitrogen stays with the sludge solids while virtually all of the aqueous
ammonia stays with the water portion or centrate. This centrate is
typically recycled to the front of the wastewater treatment plant. ARP treats
the centrate as a relatively concentrated ammonia stream, and returns a very low
ammonia stream to the plant that is well below regulatory requirements. This
reduction in the nitrogen load on the plant can increase the overall plant
through-put by up to 30%. The removed and concentrated ammonia can thereafter be
converted into ammonium sulfate, a commercial grade fertilizer. The primary
markets for ARP are municipal and industrial wastewater treatment
and the treatment of wastewater discharge from large concentrated
animal farming operations, including dairy, pork, beef and poultry
facilities.
We signed
our 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 in 2006 and is currently being moved to the 26th Ward
WPCP on Jamaica Bay. New York City filed a public notice of their
intent to enter into a sole-source contract with us on February 18,
2009. This project will be 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.
We
licensed one of our patented ARP technologies, the Ion Exchange ("IX"), from
Battelle Memorial Institute (“BMI”). Under the terms of the
agreement, dated December 30, 1997, as amended, we agreed 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
we enter into a contract under which we or our sublicensee were to design,
build, own or operate a facility licensed under the agreement, we would 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
provided that we would pay continuing royalties to BMI at a rate of 1.5% 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 could terminate the agreement with
respect to a particular licensed territory (as described in the agreement) if we
had not made sufficient sales to generate royalties to BMI of at least $25,000
per year in that particular territory. We have not generated
such sales 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. We have not
incorporated IX as a component of our second generation ARP process
designs.
6
Elements
of the ARP technology relating to alkalinity recovery in municipal wastewater
treatment plants is currently protected by patents that we
license. Under the terms of the license agreement, at the
time when cumulative sales of the licensed products exceed $20 million, we agree
to pay 1% of the net sales thereafter (as defined in the
agreement).
Other
technologies in our portfolio include:
ThermoFuel
The
ThermoFuel Process ("TFP") is a renewable energy process that
converts digested or waste activated sewage sludge
(biosolids) into a high-energy fuel that can be converted into electricity for
use on-site (or exported to the local power grid), or sold as a low-cost
feedstock to third party industrial clients. This Technology is an
upgrade of our “STORS” process, which, along with the Company’s ARP technology,
was proven in a two-year, $3 million large-scale demonstration project in
Colton, CA in 2000, which was sponsored and funded by the
EPA. The ThermoFuel process 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 denote the least health
risk of human exposure 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. These biosolids do not
meet 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 TFP fuel make it suitable for use as a
fuel substitute or blending agent for power plants, municipal solid waste
incinerators, cement kilns and similar applications. The U.S. Patent
& Trademark Office issued a patent for the Sewage Treatment System process
on March 17, 2005. The ThermoFuel process is covered in the same
license as enhanced biogas.
ThermoFuel
can be utilized as a stand-alone system or combined with our ARP or Enhanced
Biogas Production technologies (described below) to provide a comprehensive and
cost-effective method of upgrading existing wastewater treatment plants to
produce 100% EQ Class A biosolids; a product which can then be safely applied to
expired land, such as a landfill or mining reclamation, or converted on-site to
energy via a gasification plant or boiler. ThermoFuel allows
wastewater treatment plant operators to control the incoming waste stream
entirely on-site, with only clean water and saleable commodities leaving the
plant. The primary target markets for ThermoFuel are municipal and industrial
wastewater treatment facilities.
Enhanced
Biogas Production
Our
Enhanced Biogas Production process is a cost-effective method of processing and
treating animal waste from concentrated animal farming that improves the
efficiency of aerobic or anaerobic digesters in conventional wastewater
treatment plants. Our process retrofits existing wastewater treatment
plants to recover excess ammonia from the digesters, making the plant run more
efficiently. Through this process, waste is converted into two
saleable commodities: Energy in the form of methane, and ammonium
sulfate, a commercial-grade fertilizer. It can be used as a
stand-alone technology, together with our ARP technology, and/or together with
our ThermoFuel process. It can also be implemented with the
Temperature Phased Anaerobic Digestion technology used by wastewater treatment
plant operators to make more biogas and destroy
pathogens. Temperature phasing is a relatively new method adopted by
wastewater treatment plant operators that uses two phases of anaerobic
digestion. In the high temperature phase, (around 120-140ºF) waste
solids are disinfected and conditioned to reduce pathogens below threshold
levels and solubilize some of the solids during the digestion
phase.
The
Enhanced Biogas Production process is currently protected by patents that we
license exclusively. Under the terms of the license agreement, at the
time when cumulative sales of the licensed products exceed $20 million, we agree
to pay 1% of the net sales thereafter (as defined in the
agreement). We may assign or transfer the Agreement to third parties
with the licensee’s consent, not to be unreasonably withheld.
7
Energy
Technologies
In
addition to our Water Technologies, we are developing a new, advanced power
plant design with our joint venture partner, Babcock Power, Inc., that offers a
cost-effective and environmentally responsible solution to both carbon capture
and global warming. The power technology is described below.
ZEBS
Zero
Emission Boiler System, or “ZEBS” 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 ZEBS 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. ZEBS
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 ZEBS 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
ZEBS. Some of the industries in which ZEBS 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 ZEBS. We also received a second U.S. patent
relating to the ZEBS process (U.S. Patent No. 6,918,253). Foreign
patent applications have been filed in several countries, including Australia,
Canada, China, the European Patent Office, India, Mexico, the Russian Federation
and South Africa (collectively, the “International Applications”) as provided
for by the Patent Cooperation Treaty. To date, we have received
notice of allowance from China and Russia and have paid the issue
fee. We typically obtain continuances in countries where permitted
such as Canada and Japan. Continuances are used to keep the patenting
process alive in certain geographical markets until such time we deem the cash
outlay on patenting costs and subsequent maintenance fees appropriate in that
jurisdiction. This preserves all rights, and we can request
examination at the appropriate time.
Business
Objectives and Strategy
Our
business model is based on 1) new construction or retrofitting of existing
wastewater treatment plants for federal, state and municipal governments,
industrial clients as well as power generation plants for public and/or merchant
utilities worldwide, 2) privatization contracts where we will build and operate,
or build, own and operate municipal and/or industrial wastewater treatment and
power plants, and 3) the generation and 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 our technologies, we will enter
into collaborative working relationships such as joint ventures, licenses and
other similar agreements with companies that are well-established in our
targeted markets, and can greatly expedite the commercialization of our
technologies.
We
previously completed large scale demonstration projects for ARP as well as other
wastewater treatment technologies called NitRem/DSR and STORS, which we
previously licensed from BMI, but we do not use these
technologies. Each of these projects was funded either by the United
States government or by entities with which we have or had collaborative working
relationships. We were not required to make capital contributions to
any of these demonstration projects and have not received any revenues or
generated any income other than reimbursement for certain administrative and
operating costs. These demonstration projects have allowed us to
develop, demonstrate and improve the Technologies without having to finance them
itself. From a competitive standpoint in the wastewater and sludge
treatment markets, we believe that the ability to meet various state and federal
environmental regulatory standards at lower capital requirements than
traditional wastewater and sludge treatment solutions make ARP, ThermoFuel, and
Enhanced Biogas Treatment technologies an attractive alternative solution for
municipalities and certain industrial applications. We continue 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 our technologies
provide the most cost-effective and environmentally responsible
solution.
We
believe many of these markets represent suitable opportunities for us
to implement our primary business model of design, build, own and operate
("DBOO") wastewater facilities over a contracted period (anticipated to be a
10-20 year period). Alternatively, we may license the Technologies to
the client and enter into an operating contract for municipal-owned systems
utilizing our Technologies over a similar time period. Under these
arrangements, we would seek to generate revenues and profits from a per unit
tolling fee on the volume of waste processed by our technologies, as well as
from the projected sale of the commodity byproducts (i.e. the high-energy fuel
generated by ThermoFuel, the ammonium sulfate generated by ARP or selling the
electricity and/or process steam produced using the high-energy fuel as a
feedstock to the municipality or the local power grid.)
8
We
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. We 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. We completed a grant project totaling $1.4
million grant project with the Alaska Energy Authority in the second quarter of
2009. The technical data generated by this grant as well as the data
from the previous grants, is being used by BTCC to design the initial ZEBS
demonstration plant.
Our
long-term growth strategy also includes the acquisition of other companies whose
products or services are related to our core businesses. Ideally,
these candidate companies would (a) already be a well-established participant in
one or more of our targeted markets; (b) have ongoing revenues and profits; and
(c) bring additional administrative and technical skills and expertise needed
for us to achieve our corporate mission and continue our growth
goals.
New
York City Contract
We were
awarded a $7 million contract on June 13, 2005 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”). The project encountered problems at the Bowery Bay WPCP
unrelated to our Technologies or operations and was cancelled in September 2006
until such time that NYCDEP could identify an alternative site. Subsequently,
we entered into negotiation with NYCDEP to enter into a new contract to move the
project to the 26th Ward
WPCP, situated on Jamaica Bay, in Brooklyn. Due to process
costs and plant operational variances between the Bowery Bay and 26th Ward plant
WPCP, the ARP project was enlarged to process up to 1.2 million gallons per day
at a cost not to exceed $27.1 million. We 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 us on
February 18, 2009. On August 5, 2009, the City’s Office of Management
and Budget (“NYCOMB”) approved the new contract, and we expect to formally
sign the new contract and begin construction of the facility during
2010. We believe that, based upon the proposed terms of the ARP
contract, we would be able to meet the operational requirements of the contract,
assuming that substantial additional financing from investors is obtained to
meet our cash needs (see Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Liquidity and Capital Resources
Discussion). If the 26th
Ward facility meets certain predetermined process and economic
efficiencies, we intend to pursue additional contracts with New York City with
respect to other facilities that will be needed 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.
We
released an engineering study by HydroQual Inc., internationally renowned
experts in water resources management, confirming the many economic and process
advantages of using our patented 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 every day by wastewater treatment plants throughout the United States
and around the world. Many states, as well as the federal government, have
begun to regulate the amount of ammonia discharged to protect the
environment. While ammonia, in small amounts, is present in many
industrial and household products, it is harmful to human health and extremely
toxic to aquatic life in large doses. The presence of ammonia in waterways
and aquifers creates conditions resulting in the creation of “Dead Zones”; areas
within a body of water where fish and shell fish cannot live. Currently, there
are over 140 Dead Zones throughout the world including some of the nation’s
leading bodies of water such as the Chesapeake Bay, Long Island Sound, Puget
Sound, Gulf of Mexico and Narragansett Bay, among others.
Recent
Developments
In
September 2009, we engaged in a financing transaction (“the 2009
Financing”) with an investor group consisting of The Quercus Trust, Empire
Capital Partners, Robert S. Trump and Focus Fund L.P. which, if fully funded,
would result in cash proceeds of $6.4 million to us. The 2009
Financing provides for funding in four tranches, with the first and second
tranche amounts totaling $3.2 million fully funded and the third and fourth
tranche amounts totaling $3.2 million based on the occurrence of specified
events.
9
In the
first tranche funding of $1.68 million, we issued 8% Secured Convertible
Promissory Notes in September 2009 identical in form and substance to our 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 $0.24 per share and
a maturity date of December 31, 2010. In addition, our 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 our 85% interest in ThermoEnergy
Power Systems.
In the
second tranche funding of $1.4 million, we issued shares of Series B Convertible
Preferred Stock in November 2009 at a price of $2.40 per share. Upon
the closing of the second tranche funding, the outstanding principal and accrued
interest on all of the 8% Secured Convertible Promissory Notes automatically
converted into shares of our Series B Convertible Preferred
Stock. Each share of Series B Convertible Preferred Stock is
convertible, at any time at the discretion of the holder, into ten shares of our
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 our Board of Directors will
consist of seven members. Four Directors will be elected by holders
of our 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 our Common Stock.
We issued
Common Stock warrants with an aggregate exercise price equal to 200% of the
principal amount invested to the investors at the closing of each
tranche. The warrants have a five year term and provide for an
exercise price of $.50 per share.
The 2009
Financing 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 us; (iii) the execution 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 our executive officers.
On
September 28, 2009, litigation filed in Arkansas against us by the Quercus
Trust was dismissed. On September 30, 2009, litigation filed in
Delaware against us by the Quercus Trust was dismissed. See Note
15 of Notes to Consolidated Financial Statements for additional
information.
On March
10, 2010, we entered into a Bridge Loan Agreement, effective March 1, 2010,
with our principal investors pursuant to which the investors agreed to make
bridge loans to us up to $2.7 million prior to the satisfaction of the
conditions to the closing of the third and fourth tranches of the Series B
financing. We issued 3% Secured Convertible Promissory Notes in
the principal amount of each investor’s funding commitment (the “Bridge
Notes”). The Bridge Notes bear interest at the rate of 3% per annum
and are due and payable on February 28, 2011.
Patents
and Patents Pending
We own or
license all of our technologies, including the technologies discussed previously
in this document.
License
Payments to Battelle Memorial Institute
During
2005, we made the strategic decision to cancel existing license agreements with
BMI for STORS, NitRem and DSR technologies in a move designed to fully
concentrate our 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. We conduct research and development activities
as it relates to product improvement on several of its key water/wastewater
process systems in our Worcester, MA facility. License expenditures
totaled $40,000 for the years ended December 31, 2008 and 2007 based upon a
minimum royalty schedule. We do not expect any future annual minimum
royalty payments to BMI.
10
Employees
As of
December 31, 2009, we had 23 full-time employees, located primarily in the
Worcester, MA fabrication facility and the corporate headquarters in Little
Rock, AR. None of our employees are represented by a labor
union. We have experienced no work stoppages, and management believes
our employee relationships are generally good.
Competition
Our
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. We believe that these
industries are dominated by process methods developed in the 1940s and 1950s,
with only minor improvements since that time. It is our belief that
local, state and federal regulatory mandates, as well as amendments to
previously enacted clean water regulations (see Government Regulation, below)
have rendered the majority of these process methods ineffective, either from an
economic or process efficiency standpoint, in meeting these mandates,
especially as they relate to greenhouse gas ("GHG") reduction. Yet, conventional
wisdom continues to enable these technologies to compete with our
Technologies for share of the wastewater treatment
market. Competitive factors affecting us include entrenchment and
familiarity of the older technologies within our target
markets. Likewise, individuals with purchasing authority within our
target markets are not as familiar with our Technologies and may be hesitant to
adopt them in their municipal or industrial facilities. Plant
operators have attempted to meet the regulatory requirements by optimizing
existing process methods rather than adopting new technologies, including
ours. The cost of developing new technologies and the ability of new
companies to enter the wastewater treatment and power generation industries are
barriers to entry for new or developing companies. The established
companies in the wastewater treatment and power generation markets who attempt
to meet the regulatory mandates by modifying conventional technologies comprise
our principal competition. However, there can be no assurance that
there will not be additional competitors in the future or that such competitors
will not develop technologies that are superior to ours.
Government
Regulation
There are
many federal, state and local statutes and regulations enacted to protect and
restore water and air quality. Federal legislation directed at improving water
quality include programs established under the Clean Water Act of 1977, as
amended, the Coastal Zone Management Act of 1972, as amended, the 1990 and 1996
Farm Bills, the Ocean Dumping Ban Act, and the Clean Water and Watershed
Restoration Initiative. The regulations established under these 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 wastewater
treatment.
We
believe that the policy relating to environmental issues relevant to clean
air and clean water regulations under President Obama is favorable toward
implementation and enforcement. Management believes that current
leaders in both the House of Representatives and the Senate are also far more
favorable to environmental issues, which will result in the passage of new
legislation relevant to clean air and clean water as well as increased
enforcement of existing regulatory requirements by the EPA and U.S. Department
of Justice. Management believes that should the legislative
environment improve, there will be additional opportunities for us to market and
develop the Technologies.
Notwithstanding
the uncertainty created by these regulatory and administrative initiatives, we
believe that some of the proposals should provide it with additional potential
customers for our ZEBS 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.
Our
Technologies are very attractive in the global marketplace, where clean water
and clean air regulations of some countries are more stringent than those in
effect in the United States. The marketability of the ZEBS technology
was significantly expanded with the ratification of the Kyoto Protocol by 141
nations, which took effect in February of 2005. As the Kyoto Protocol
emission reductions are phased in through 2012, many older coal-fired power
plants will be among the first affected by the new regulations. Many
of these plants utilize boiler designs that are 20 years old or more, making any
upgrade using conventional combustion technology highly
improbable. Collectively, these plants represent an enormous
sunk-cost for utilities and industry, creating an ideal opportunity for any new
retrofit technology that could potentially be required to keep these plants
operational. While there are a number of post-combustion carbon
capture technologies currently under development, management is
unaware of any other primary combustion technology currently
available or nearing commercial deployment capable of achieving zero
air emissions as well as capturing greater than 95% of carbon
dioxide. There can be no assurance, however, that a competing
technology or technologies will not be developed in the future or that the
passage of more stringent clean air requirements will result in our
Technologies being used in either the United States or abroad, or that the
current trend of domestic and international environmental legislation will
continue.
11
Item
1A. Risk Factors
Disclosures
required under this item are not applicable, as the Company has elected to
follow the reduced disclosure requirements as a smaller reporting company, as
defined in Rule 12b-2 of the Exchange Act.
ITEM
1B. Unresolved Staff Comments
Not
applicable.
ITEM
2. Properties
Our
principal executive offices are located at 124 West Capitol Avenue, Suite 880,
Little Rock, Arkansas, where we lease approximately 1,200 square feet from an
unaffiliated third party under a three year lease. We also lease approximately
20,000 square feet of space under a five year lease in Worcester, Massachusetts
from an unaffiliated third party which is our primary business
office. In the event either of these leases is not extended or
renewed, we believe that we can find comparable facilities in the same
geographic area at lease rates comparable to those it currently
pays. We do not own any real property.
ITEM
3. Legal Proceedings
None.
12
PART
II
Item
4. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer 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 Bulletin Board
as a result of our failure to file an annual report or quarterly report by the
due date three times in the prior twenty-four months. Our common
stock continues to trade on “pink sheets” under the symbol
“TMEN.PK”. The ranges of the high and low bid prices for the Common
Stock for the four quarters of 2008 and 2009 are shown below.
High
|
Low
|
|||||
Year Ended December
31, 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
|
||||
Year Ended December
31, 2009
|
||||||
First
Quarter
|
$0.80
|
$0.35
|
||||
Second
Quarter
|
$0.70
|
$0.27
|
||||
Third
Quarter
|
$0.41
|
$0.27
|
||||
Fourth
Quarter
|
$0.42
|
$0.27
|
Holders
At March
26, 2010, the number of holders of record of the issued and outstanding common
stock of the Company was 1,206.
Dividends
We have
never paid any cash dividend on our Common Stock and do not anticipate paying
cash dividends in the near future. Any such dividend payment is at the
discretion of our Board of Directors and would depend on our earnings, financial
condition and other business and economic factors affecting us at that time
which the Board of Directors may consider relevant.
ITEM
5. Selected Financial Data
Not
applicable.
13
ITEM
6. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The
following discussion should be read in conjunction with the financial statements
and notes thereto appearing elsewhere in this report.
Overview
We are a
clean technologies company engaged in the worldwide development of advanced
municipal and industrial wastewater treatment systems and carbon reducing clean
energy technologies.
Our
wastewater treatment systems not only meet local, state and federal
environmental regulations, but typically provide a rapid rate of
return on investment by recovering and reusing expensive feedstocks, reducing
contaminated wastewater discharge and recovering and reusing wastewater used in
process operations.
We are
also the majority owner of a patented clean energy technology known as the Zero
Emissions Boiler System (“ZEBS”), formerly known as 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. In conjunction with our joint
venture partner, Babcock Power, Inc., we have changed the name of our carbon
reducing energy technology from TIPS to ZEBS. As our joint venture
continues to develop this technology for commercialization, we believe that the
name change better reflects the broad application of this radical new technology
to build new or retrofit old fossil fuel power plants globally with no emissions
while capturing carbon dioxide as a liquid for ready sequestration far more
economically than any other competing technology. We, through our
majority-owned subsidiary, ThermoEnergy Power Systems, LLC, entered into a joint
venture with Babcock Power, Inc. called Babcock-Thermo Carbon Capture, LLC
("BTCC") to obtain the resources necessary to facilitate the development and
commercialization of this technology.
We
currently generate recurring revenues from the sale and development of
wastewater treatment systems. We enter into contracts with our
customers to provide a wastewater treatment solution that meets the customer’s
present and future needs. Our revenues are tied to the size and scale
of the wastewater treatment system required by the customer, as well as the
progress made on each customer contract. From time to time, we
receive funding from federal grants to continue the development of ZEBS;
however, there can be no assurance that such grants will be available to us in
the future.
There are
many federal, state and local statutes and regulations enacted to protect and
restore water and air quality. Federal legislation directed at improving water
quality include programs established under the Clean Water Act of 1977, as
amended, the Coastal Zone Management Act of 1972, as amended, the 1990 and 1996
Farm Bills, the Ocean Dumping Ban Act, and the Clean Water and Watershed
Restoration Initiative. The regulations established under these 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 wastewater
treatment. We believe that the legislative environment will create
additional opportunities to market our Technologies.
We own or
license all of the Technologies that we use in our business.
Research
and Development
Research
and development activity is an integral part of our business
activity. We continue to conduct research and development of
water/wastewater treatment products and services at our Worcester, MA facility
in a number of areas including testing various waste streams for potential
clients and other third parties, Chemcad and Aspen modeling for the ZEBS
process, centrate testing related to the Company’s New York project and ARP
process flow modifications. In addition, we will continue to
participate in joint research and development activities with Babcock Power, Inc
through our BTCC joint venture.
Liquidity
and Capital Resources
We have
historically lacked the financial and other resources necessary to market the
Technologies or to build demonstration projects without the financial backing of
government or industrial partners. During 2009 and 2008, we have
funded our operations primarily from the sale of convertible debt,
preferred stock and restricted stock, generally from stockholders and other
related parties who are sophisticated investors in clean
technology. Although we will require substantial additional funding
to continue existing operations, we are optimistic in our ability to obtain
capital and debt financing.
14
Cash used
in operations amounted to $3,816,000 and $6,781,000 for the years ended
December 31, 2009 and 2008, respectively. The reduction in cash used
from operations in 2009 is primarily the result of our cost cutting measures in
2009, which have reduced continuing operating expenses by more than $2
million. Cash used by investing activities included an investment in
our joint venture with Babcock Power of $50,000 for the year ended December 31,
2009 and purchases of property and equipment of $153,000 for the year ended
December 31, 2008.
At
December 31, 2009, we did not have sufficient working capital to satisfy our
anticipated operating expenses for the next 12 months. As of December 31, 2009,
the Company had a cash balance of approximately $1.1 million and current
liabilities of approximately $12.0 million, which consisted primarily of
convertible debt in default of $4.1 million (net of $104,000 of debt discounts),
contingent liability reserves of $3.05 million and unpaid payroll taxes of $2.6
million.
As more
fully described in Note 4 of Notes to the Consolidated Financial Statements, we
and an investor group engaged in a financing transaction (“the 2009
Financing”) that, if fully funded, would result in cash proceeds of $6.25
million. The 2009 Financing originally provided for funding in
four tranches, with the first and second tranche amounts totaling $3.05 million
based on specified time periods and the third and fourth tranche amounts
totaling $3.2 million based on the occurrence of specified events. The
first tranche of funding in the amount of $1.68 million was completed in
September 2009, and the second tranche of funding totaling $1.4 million was
completed in November 2009.
On March
10, 2010, we entered into a Bridge Loan Agreement, effective March 1, 2010, with
six of the investors who are parties to the 2009
Financing pursuant to which the investors agreed to make bridge loans to us
up to $2.7 million. We issued 3% Secured Convertible Promissory
Notes in the principal amount of each investor’s funding commitment (the “Bridge
Notes”). The Bridge Notes bear interest at the rate of 3% per annum
and are due and payable on February 28, 2011. The entire unpaid
principal amount, together with all interest then accrued and unpaid under each
Bridge Note, is convertible, at the election of the holder thereof, into shares
of Common Stock at a conversion price of $0.24 per share.
The
Bridge Loan Agreement amends the 2009 Financing (see Note 9) such that the
investors shall surrender the Bridge Notes as payment for the Third Tranche
Closing and/or the Fourth Tranche Closing upon the occurrence of certain
events. The Agreement also makes further amendments to the Series B
Convertible Preferred Stock financing to provide for additional warrant coverage
based on the amounts advanced and makes changes to funding
commitments among the various investors.
The
Bridge Notes contain other conventional provisions, including for the
acceleration of repayment obligations upon the occurrence of certain specified
Events of Default. The Bridge Notes are secured by a lien on all of
our assets except for the shares of our subsidiary, CASTion Corporation (in
which no security interest has been granted).
As more
fully discussed in Note 14 of Notes to Consolidated Financial Statements, in
2009 we discovered that the former Chief Financial Officer (“CFO”) failed to
file our payroll tax returns and pay the related payroll taxes since he assumed
his officer position in 2005. This resulted in an accrual during the
fourth quarter of 2008 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. In 2009, we accrued an additional
$246,000 of interest and penalties. We are currently in negotiations with
the applicable state and federal taxing authorities to schedule payment of these
outstanding taxes. We may become subject to tax liens if we cannot
satisfactorily settle the outstanding payroll tax
liabilities. Furthermore, due to the actions of the CFO, we may also
face criminal and/or civil action with respect to the impact of the payroll tax
matters. We cannot predict what, if any, actions may be taken by the
respective 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.
Because
of our financial condition, there can be no assurance that we will be able to
obtain the funding necessary to continue its operations and development
activities.
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.
15
Principles
of consolidation and basis of presentation
The
consolidated financial statements include the accounts of ThermoEnergy and our
wholly-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.
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.
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.
In
circumstances when we cannot estimate the final outcome of a contract, or when
we cannot reasonably estimate revenue, we utilize the percentage-of-completion
method based on a zero profit margin until more precise estimates can be
made. If and when we can make more precise estimates, revenues will
be adjusted accordingly and recorded as a change in an accounting
estimate. For the year ended December 31, 2009, we have recorded one
contract which represented approximately 80% of our revenues utilizing the
percentage-of-completion method based on a zero profit margin.
Costs and
estimated earnings in excess of billings on uncompleted contracts, which were
not significant at December 31, 2009 and 2008, 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 $398,000 and $264,000 at December 31, 2009 and 2008, respectively,
represent amounts billed in excess of revenues earned and are included in
deferred revenue.
Accounts
receivable, net
Accounts
receivable are recorded at their estimated net realizable
value. Receivables related to our 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
$9,000 at December 31, 2009. There was no such allowance at December 31,
2008. Our 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.
Inventory
Inventory
are stated at the lower of cost of market using the first-in, first-out method
and consist primarily of raw materials and supplies.
We
evaluate our inventory for excess and obsolescence on an annual
basis. In preparing our evaluation, we look at the expected demand
for our products for the next three to twelve months in order to determine
whether such equipment requires a change in the inventory reserve in order to
record the inventory at net realizable value. Based on this
evaluation, we establish and maintain a reserve so that inventory is
appropriately stated at the lower of cost or net realizable
value. Inventory reserves totaled $74,000 at December 31,
2009. There was no inventory reserve at December 31,
2008.
16
Property
and equipment
Property
and equipment are stated at cost and are depreciated over the estimated useful
life of each asset. Depreciation is computed using the straight-line
method. We evaluate long-lived assets based on estimated future
undiscounted net cash flows or other fair value measures whenever significant
events or changes in circumstances occur that indicate the carrying amount may
not be recoverable. If that evaluation indicates that an impairment
has occurred, a charge is recognized to the extent the carrying amount exceeds
the discounted cash flows or fair values of the asset, whichever is more readily
determinable. During the year ended December 31, 2008, we recorded
asset impairment charges of $105,116 related to property and equipment
(primarily a mobile ARP unit).
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 Consolidated Balance Sheets. All debt issue costs
were written off during 2009.
Contingencies
We accrue for costs relating to litigation,
including litigation defense costs, claims and other contingent matters,
including liquidated damage liabilities, when such liabilities become probable
and reasonably estimable. Such estimates may be based on advice
from third parties or on management’s judgment, as appropriate. Revisions to contingent liability
reserves are reflected in income in the period in which different facts or
information become known or circumstances change that affect our previous assumptions with respect to the
likelihood or amount of loss. Amounts paid upon the ultimate
resolution of contingent liabilities may be materially different from previous
estimates and could require adjustments to the estimated reserves to
be recognized in the period such new information becomes
known.
Stock
options
We
account for stock options in accordance with Accounting Standards Codification
(“ASC”) Topics 505 and 718 (formerly 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. We use the Black-Scholes option pricing model to estimate the
fair value of stock option awards.
Income
taxes
We use
the liability method of accounting for income taxes. Under this method, deferred
tax assets and liabilities are determined based on the differences between
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.
Series B
Convertible Preferred Stock
The
Company initially accounted for its Series B Convertible Preferred Stock by
allocating the proceeds based on the relative fair value of the Series B
Convertible Preferred Stock and the warrants issued to the investors, and then
to any beneficial conversion features contained in the Preferred
Stock. The Company determined the initial value of the Series B
Convertible Preferred Stock and investor warrants using valuation models it
considers to be appropriate. Because the Series B Convertible
Preferred Stock has an indefinite life, it is classified within the
stockholders’ equity (deficit) section of the Company's consolidated balance
sheet. The value of the warrants and beneficial conversion features
are considered a “deemed dividend” and are added as a component of net loss
attributable to common stockholders on the Company’s consolidated statement of
operations.
17
Effect
of New Accounting Pronouncements
In the
third quarter of 2009, we adopted the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) as the source of
authoritative generally accepted accounting principles (“GAAP”) for
nongovernmental entities. The ASC does not change GAAP but rather
takes the numerous individual pronouncements that previously constituted GAAP
and reorganizes them into approximately 90 accounting topics, and displays all
topics using a consistent structure. Citing particular content in the ASC
involves specifying the unique numeric path to the content. The
adoption of ASC did not have any effect on our consolidated results of
operations, financial position or cash flows.
On
January 1, 2009, we adopted FASB ASC Topic 815-40 "Determining Whether an
Instrument (or Embedded Feature) is indexed to an Entity's Own Stock" (formerly
EITF 07-5). ASC Topic 815-40 provides guidance on determining whether an
instrument (or an embedded feature) is indexed to an entity’s own stock, which
would qualify as a scope exception under prior authoritative literature FASB No.
133, “Accounting for Derivative Instruments and Hedging
Activities.” ASC 815-40 is effective for fiscal years beginning after
December 15, 2008. We adopted ASC topic 815-40 on January 1, 2009 and
as such some of our outstanding warrants that were previously classified in
equity were reclassified to liabilities as of January 1, 2009, as these warrants
contain down round provisions and were no longer deemed to be indexed to the
Company’s own stock. See Note 2 of the Notes to Consolidated
Financial Statements for further discussion.
During
the second quarter of 2009, we adopted ASC 855, “Subsequent Events” (formerly
Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent
Events”) which establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but prior to the issuance of the
financial statements. The adoption of this standard did not have a
material impact on our consolidated results of operations, financial position,
cash flows or disclosures.
During
the first quarter of 2009, we adopted ASC 805, “Business Combinations” (“ASC
805”) (formerly SFAS No. 141 (R), “Business Combinations”). ASC
805 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. The impact of adopting ASC 805
did not have a material impact on our consolidated results of operations,
financial position, cash flows or disclosures.
During
the first quarter of 2009, we adopted SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements”, which is now included in ASC
810, “Consolidations”. This Statement 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. As discussed in
Note 10, we reclassified $1,662,000 of noncontrolling interest in CASTion
Corporation as of December 31, 2008 from liabilities to stockholders’ equity
(deficit) on our Consolidated Balance Sheet, and we reduced consolidated
stockholders’ equity (deficit) by approximately $2,282,000 during the first
quarter of 2009 as a result of acquiring the minority interest in our
subsidiary, CASTion Corporation, on January 5, 2009.
Results
of Operations
Comparison
of Years Ended December 31, 2009 and 2008
Contract
and grant income increased by $2,286,000 to $4,016,000 in 2009 compared to
$1,730,000 in 2008. This increase is related to increased wastewater
systems activity in our CASTion subsidiary, as we secured and performed
substantial work on one major contract in 2009. Consequently, cost of
contract and grant income increased by $1,613,000 to $4,013,000 in 2009 compared
to $2,400,000 in 2008.
General
and administrative expenses and professional fees totaled $4,831,000 in 2009, a
decrease of $2,137,000 compared to 2008. The decrease was the result
of cost cutting measures taken during 2009 and an accrual of $1,064,000 of
payroll taxes during the fourth quarter of 2008 that did not repeat in
2009. Selling expenses totaled $533,000 in 2009, an increase of
$128,000 compared to 2008. The increase is primarily related to
increased commissions on our revenue base in 2009. Contingency
accruals totaling $3,334,000 in 2008 related to estimated interest and penalties
on our unpaid payroll taxes did not repeat in 2009. Stock option expense
was $663,000 in 2009, a decrease of $1,019,000 compared to 2008. The
decrease was due to extending the vesting period of options issued in 2009;
options issued in 2008 were immediately vested and
exercisable. Expenses related to the issuance of warrants totaled
$1,925,000 in 2009, an increase of $492,000 compared to 2008.
18
Because
of our various debt issuances and the restructuring of convertible debt into
preferred stock in 2009, we recognized a loss on the extinguishment of debt of
$3,285,000, which is primarily related to amortization of debt discounts for
beneficial conversion features and warrants issued with the various debt
issuances. In 2009, we were required to change our accounting for
certain warrants issued to investors as derivative liabilities. As a
result, we record income on these derivative instruments totaling $937,000 which
resulted from the net change in fair value. Interest expense in 2009
totaled $2,687,000 in 2009, an increase of $1,064,000 compared to 2008, due to
the large number of debt issuances during 2009 which were later converted to
preferred stock.
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 14 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 10 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 14 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.
ITEM
6A. Quantitative and Qualitative Disclosures About Market
Risk
Not
applicable.
ITEM
7. Financial Statements and Supplementary Data
See the
Company’s financial statements for the years ended December 31, 2009 and 2008,
beginning on page A-1.
ITEM
8. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
ITEM
8A(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 Board of
Directors, applicable to all Directors, officers and employees.
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.
19
The Audit
Committee of our 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.
Our Chief
Executive Officer and Chief Financial Officer have assessed the effectiveness of
our internal control over financial reporting as of December 31,
2009. 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, 2009. Specifically, we have
determined that our internal controls as of December 31, 2009 were deficient in
that (i) we had not adequately allocated resources to ensure that necessary
internal controls were implemented and followed, (ii) 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 our
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 us to potential criminal and/or
civil action with respect to the impact of our unpaid payroll tax
matters. The former Chief Financial Officer resigned on August 3,
2009 following a vote by our Board of Directors to terminate his employment for
cause.
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 our Section 404 reporting responsibilities in
2010.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by the Company’s registered public accounting firm 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, we carried out an evaluation, under
the supervision and with the participation of our Chief Executive Officer and
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, our Chief Executive Officer and Interim Chief
Financial Officer have concluded that as of the end of the period covered by
this report, our 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 our internal controls over financial reporting that occurred
during our most recently completed fiscal quarter that materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
20
ITEM
8B. Other Information
We held
our Annual Meeting of Stockholders on December 15, 2009. The matters
voted upon at this meeting and the number of shares cast for and against each
item are as follows:
1.
|
To
elect the following people to the Board to
Directors:
|
Director
|
For
|
Withheld
|
Dennis
C. Cossey
|
28,764,671
|
8,878,277
|
J.
Winder Hughes III
|
32,217,092
|
5,425,856
|
Arthur
S. Reynolds
|
32,238,927
|
5,404,021
|
2,
|
To
amend the Company’s Articles of Incorporation to increase the number of
authorized shares of Common Stock to
300,000,000:
|
For
|
Withheld
|
Abstain
|
32,336,707
|
4,317,528
|
988,712
|
3,
|
To
ratify the appointment of Kemp & Company as independent registered
public accountants for the Company for
2009:
|
For
|
Withheld
|
Abstain
|
33,809,942
|
2,577,738
|
1,255,267
|
21
ITEM 9. Directors, Executive Officers and
Corporate Governance
Directors and Executive
Officers
The following biographical descriptions
set forth certain information with respect to our directors and our executive
officers who are not directors.
Name
|
Position
|
|
Dennis C.
Cossey
|
Director, Chairman of the
Board
|
|
Cary G.
Bullock
|
Director, President and Chief
Executive Officer
|
|
David
Anthony
|
Director
|
|
J. Winder Hughes
III
|
Director
|
|
Shawn R.
Hughes
|
Director
|
|
Arthur S.
Reynolds
|
Director
|
|
Teodor Klowan,
Jr.
|
Executive Vice President, Chief
Financial Officer, Treasurer and Secretary
|
|
David
Delasanta
|
President, CASTion
Corporation
|
Dennis C. Cossey, age 64, has
served as a director of the Company since 1988 and as Chairman of our Board of
Directors since 1990. Since March 1, 2010, he has held the title “Executive
Chairman.” Mr. Cossey was our Chief Executive Officer from 1988
through January 27, 2010. Mr. Cossey also serves as a member of the
Boards of Directors of our subsidiaries, CASTion Corporation and ThermoEnergy
Power Systems LLC. Prior to joining the Company, Mr. Cossey served in
executive and marketing positions at a number of companies, including IBM and
Peter Kiewit Sons. Mr. Cossey is a member of several industry
professional groups including the US Naval Institute, the New York Academy of
Sciences, the National Safety Council, the American Chemical Society, the Asia
Pacific Water Council, the International Power Producers Forum and the
Association of Energy Engineers. Mr. Cossey has testified before
Congress on various environmental issues. Mr. Cossey brings to the
Board deep experience in the management of publicly-financed research and
operating projects and in the development and maintenance of government
relationships on the federal, state and municipal levels.
Cary G. Bullock, age 64, was
appointed as our President and Chief Executive Officer and was elected to our
Board of Directors on January 27, 2010. Mr. Bullock also serves as
Chief Executive Officer and a member of the Board of Directors of our
subsidiary, ThermoEnergy Power Systems LLC, as a member of the Board of Managers
of Babcock-Thermo Carbon Capture LLC, our joint venture with Babcock Power,
Inc., and as a member of the Board of Directors of our subsidiary, CASTion
Corporation. Prior to becoming our President and CEO, Mr. Bullock had
been employed by GreenFuel Technologies Corporation, serving as Chief Executive
Officer from February 2005 through July 2007 and as Vice President for Business
Development from July 2007 through January 2009; he was a member of the Board of
Directors of GreenFuel Technologies Corporation from February 2005 through
August 2009. In May 2009, GreenFuel Technologies ceased business operations and
made an assignment of its assets to a trustee for the benefit of its
creditors. From February 2009 through January 2010, Mr. Bullock
served a variety of clients as an independent consultant and business
advisor. Prior to joining GreenFuel Technologies, Mr. Bullock was
Chairman and Chief Executive Officer of Excelergy Corporation, Vice President of
KENETECH Management Services and President of its affiliate, KENETECH Energy
Management, Inc., Chairman and Chief Executive Officer of Econoler/USA Inc.,
Vice President of Engineering and Operations and Principal Engineer of Xenergy
Inc., Director of Special Engineering and a Senior Engineer at ECRM, Inc. and a
Senior Engineer at Sylvania Electronics Systems. Mr. Bullock received
an A.B. from Amherst College and an S.B. and an S.M. from Massachusetts
Institute of Technology. Having worked as a senior executive in
several early stage energy companies, Mr. Bullock brings to the Board extensive
industry and strategic experience.
22
David Anthony, age 49, has
been a director of the Company since October 2009. Mr. Anthony also
serves as a member of the Board of Managers of Babcock-Thermo Carbon Capture
LLC, our joint venture with Babcock Power, Inc., and as a member of the Board of
Directors of our subsidiary, CASTion Corporation. Since 2003, he has
been Managing Director of 21 Ventures, LLC, a VC management firm providing seed,
growth and bridge capital for technology ventures. Mr. Anthony sits
on numerous boards, including: Axion Power International, Inc.; Clean Power
Technologies Inc.; Solar EnerTech Corp.; Energy Focus, Inc.; Advanced Hydro,
Inc.; Advanced Telemetry, LLC; Aero Farm Systems LLC; Applied Solar LLC;
BioPetroClean, Inc.; Expansion Media, LLC; ETV Motors, Ltd.; Graphene Energy,
Inc.; Gravity Power, LLC; GreenRay, Inc.; Lightwave Power, Inc.; Magenn Power,
Inc.; ReGen Power Systems LLC; Safe Hydrogen, LLC; Variable Wind Solutions Ltd.;
Agent Video Intelligence Ltd.; and Command Speech Ltd. Prior to 21
Ventures, Mr. Anthony launched Notorious Entertainment, a developer of
multimedia brands. Mr. Anthony received a B.A. in Economics from
George Washington University and an M.B.A. from Dartmouth
College. Mr. Anthony brings to the Board extensive public company
corporate governance and venture capital experience.
J. Winder Hughes III, age 51,
has been a director of the Company since July 2009 (except for the period from
January 27, 2010 to February 5, 2010). Mr. Hughes also serves as a
member of the Board of Managers of Babcock-Thermo Carbon Capture LLC, our joint
venture with Babcock Power, Inc., and as a member of the Board of Directors of
our subsidiary, CASTion Corporation. Since 1995, Mr. Hughes has
served as the managing partner of Hughes Capital Investors, LLC, which manages
private assets and raises money for small public companies. He formed the
Focus Fund, LP in 2000 (with Hughes Capital as the fund manager), which is a
highly-concentrated equity partnership that focuses on publicly-traded emerging
growth companies. From November 2007 to November 2009, Mr. Hughes was a
director of Viking Systems, Inc, a manufacturer of surgical
tools. From 1983 to 1995, Mr. Hughes was an investment executive,
first with Kidder Peabody & Co. and subsequently with Prudential
Securities. Mr. Hughes holds a B.A. in Economics from the University
of North Carolina at Chapel Hill. Mr. Hughes brings to the Board
significant experience with capital raising, corporate restructuring, and
managing strategic business relationships.
Shawn R. Hughes, age 49, has
been a director of the Company since October 2009. He previously
served as a member of our Board of Directors from September 2008 until January
2009. Mr. Hughes also serves as a member of the Board of Directors of
our subsidiary, CASTion Corporation. He served as President and Chief
Operating Officer of the Company from January 1, 2008 to January 27, 2010. From
June 15, 2007 through December 31, 2007, he was employed by us to assist the
Chief Executive Officer in administering corporate affairs and overseeing all of
our business operating functions. From November 2006 to May 2007, Mr. Hughes
served as President and Chief Operating Officer of Mortgage Contract
Services. From 2001 to 2006, Mr. Hughes served as Chief Executive
Officer of Fortress Technologies. Mr. Hughes holds a B.S.B.A. from
Slippery Rock University and an M.B.A. from Florida State
University. Mr. Hughes brings to the Board extensive experience in
executive management and strategic planning.
23
Arthur S. Reynolds, age 66,
has been a director of the Company since October 2008. He also serves
as a member of the Board of Directors of our subsidiary, CASTion
Corporation. From August 3, 2009 through November 16,
2009, Mr. Reynolds served as our interim Chief Financial Officer, and except
during that period, has been Chairman of the Audit Committee of the Board of
Directors. He is the founder of Rexon Limited of London and New York
where, since 1999, he has served as managing director. Mr. Reynolds was
founder and, from 1997 to 1999, managing partner of London-based Value
Management & Research (UK) Limited. Mr. Reynolds was
the founder and, from 1982 to 1997, served as managing director of Ferghana
Financial Services Limited. Prior thereto, Mr. Reynolds held
executive positions at Merrill Lynch International Bank Limited, Banque de la
Société Financière Européene, J.P. Morgan & Company and Mobil
Corporation. Mr. Reynolds is a director of Apogee Technology,
Inc. Mr. Reynolds holds an A.B. from Columbia University, a M.A. from
Cambridge University, and an M.B.A. in Finance from New York
University. Mr. Reynolds brings to the Board extensive financial and
executive experience across multiple sectors, with special strength in the
international arena.
Teodor Klowan, Jr., age 41,
was appointed as our Executive Vice President, Secretary and Treasurer on
November 2, 2009 and became our Chief Financial Officer on November 16,
2009. He also serves as Clerk and Treasurer of our subsidiary,
CASTion Corporation. Mr. Klowan has been a certified public
accountant since 1991. From November 2007 through February 2009 he
was Chief Financial Officer and from May 2006 to November 2007 he was Vice
President, Corporate Controller and Chief Accounting Officer of Nestor, Inc., a
publicly held automated speed and red light technology company. On
June 3, 2009, a receiver was appointed by the Rhode Island Superior Court for
the business and assets of Nestor, Inc. Mr. Klowan was
Corporate Controller of MatrixOne, Inc. in 2005 and Corporate Controller and
Chief Accounting Officer at Helix Technology Corporation from 1999 to 2004. He
was Assistant Corporate Controller of Waters Corporation from 1996 to 1999.
Prior to 1996, Mr. Klowan worked in management and staff positions at Banyan
Systems, Inc. and Ernst & Young. Mr. Klowan holds a B.A. in
Accounting from Bryant University and an M.B.A. in International Finance from
Clark University.
David W. Delasanta, age 59,
has been President of our subsidiary, CASTion Corporation, since December 15,
2008; prior to assuming that position he was our Senior Vice
President of Marketing. Before joining ThermoEnergy in 2008, Mr. Delasanta had
30 years of experience in the environmental and energy fields. From March
1997 to April 2007, he was Regional Vice-President, Business Development for
Shaw Group, a major environmental and energy engineering firm. From 1994
to 1997, he was Regional Director of Government Business Development for
ICF Kaiser Engineers. Prior to 1994, he served in various management,
sales and marketing positions at RESNA Industries, Air & Water Technologies,
ACUREX, and SynGas Systems, and as a consultant with DHR, a Washington DC
consulting company where, among other things, he managed the technical support
contract for the Department of Energy’s National Energy Plan for coal
gasification. Mr. Delasanta holds a B.S. in Physics from Providence
College, a M.S. in Environmental Engineering from Washington University in St.
Louis and an M.B.A. from San Jose State University.
24
Pursuant
to our Certificate of Incorporation, as amended, the holders of our Series B
Convertible Preferred Stock are entitled to elect four members of our Board of
Directors (the “Series B
Directors”), which
Series B Directors are subject to removal only by a vote of the holders of not
less than 66⅔% of the then-outstanding shares of Series B Convertible Preferred
Stock voting as a separate class; any vacancy created by the resignation or
removal of a Series B Director may be filled either by (i) the vote or consent
of the holders of a majority of the then-outstanding shares of Series B
Convertible Preferred Stock or (ii) the unanimous vote or consent of the
remaining Series B Directors. The holders of our Common Stock, voting
together with the holders of our Series A Preferred Stock, are entitled to elect
three members of our Board of Directors (the “Common Stock Directors”), which Common Stock
Directors are subject to removal only by a vote of the holders of a majority of
the then-outstanding shares of Common Stock (taken together as a single class
with the then-outstanding shares of Series A Preferred Stock); any vacancy
created by the resignation or removal of a Common Stock Director may be filled
either by (i) the vote or consent of the holders of a majority of the
then-outstanding shares of Common Stock and Series A Preferred Stock (voting or
consenting together as a single class) or (ii) the unanimous vote or consent of
the remaining Common Stock Directors. The holders of our Series B
Convertible Preferred Stock are parties to a Voting Agreement dated as of
November 19, 2009, pursuant to which they have agreed to vote all of their
shares of Series B Convertible Preferred Stock for the election to our Board of
Directors of three persons designated by The Quercus Trust and one person
designated by Robert S. Trump. The Series B Directors are David
Anthony and J. Winder Hughes III (both of whom are designees of The Quercus
Trust) and Shawn R. Hughes (who is the designee of Robert S. Trump); one Series
B Directorship is vacant. The Common Stock Directors are Cary G.
Bullock, Dennis C. Cossey and Arthur S. Reynolds. All directors serve
terms of one year.
The
Executive Employment Agreement of our President and Chief Executive Officer,
Cary G. Bullock, provides that, during the term of his employment, Mr. Bullock
will be elected to serve on our Board of Directors.
None of
our directors or executive officers is related by blood or marriage to any other
director or executive officer.
Committees
of the Board of Directors
Compensation and Benefits
Committee. The Compensation and Benefits Committee consists of
Mr. Anthony, as Chairman, Mr. Shawn Hughes, and Mr. Winder
Hughes. 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, Mr. Winder Hughes, and Mr. Anthony. 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. A copy of
the Audit Committee charter was provided to shareholders as Annex A to the
Company’s 2007 proxy statement. 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 Messrs.
Anthony and Hughes are “independent directors” and that all of the members
are audit committee financial experts (as defined in Item 407(d)(5)(ii) of
Regulation S-K). Mr. Reynolds is not considered independent due to
his service as interim Chief Financial Officer during the period August 3, 2009
through November 16, 2009 but, because of Mr. Reynolds’s prior service as an
independent member of the Audit Committee, the extraordinary circumstances under
which he agreed to serve as interim Chief Financial Officer, and the brief
period of such service, the Board of Directors has determined that Mr. Reynolds
will be able to exercise independent judgment as a member of the Audit Committee
and that his service as Chairman of the Audit Committee is in the best interests
of the Company and its shareholders.
25
Nominating
Committee. The directors elected by the holders of our Common
Stock and our Series A Convertible Preferred Stock (Messrs. Bullock, Cossey, and
Reynolds) serve as the Nominating Committee, with Mr. Cossey serving as
Chairman. The Nominating Committee identifies the individuals to be
nominated for election to the Board of Directors by the holders of our Common
Stock and our Series A Convertible Preferred Stock. 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.
Ad hoc Executive Search
Committee. During the period from October 15, 2009 through
January 27, 2010, a special committee comprised of Mr. Reynolds, as
Chairman, Mr. Anthony and Mr. Winder Hughes, was appointed by the Board of
Directors to conduct searches for suitable candidates for the positions of Chief
Executive Officer and Chief Financial Officer, to review resumes and interview
selected candidates, to recommend to the Board of Directors individuals for
appointment to such offices and to negotiate employment agreements with the
successful candidates. At the recommendation of the ad hoc Executive
Search Committee, Teodor Klowan, Jr. was appointed Executive Vice President and
Chief Financial Officer in November 2009 and Cary G. Bullock was appointed
President and Chief Executive Officer in January 2010. The Committee
dissolved upon the appointment of Mr. Bullock.
Audit
Committee Report
The Audit Committee reviews the
financial reporting process of ThermoEnergy Corporation (the “Company”) on
behalf of the Board of Directors. Management has the primary
responsibility for the financial statements and the reporting process, including
the system of internal controls. The Company’s independent public
accountants are responsible for performing an independent audit of the Company's
consolidated financial statements in accordance with generally accepted auditing
standards and to issue a report thereon. The Audit Committee monitors
these processes.
The composition of the Audit Committee
changed significantly during the period commencing January 1, 2009, due to the
temporary departure from the Audit Committee of Arthur S. Reynolds during his
service as interim Chief Financial Officer from August 3, 2009 through November
16, 2009, the resignation of Paul A. Loeffler as a director on October 15, 2009,
the appointment of J. Winder Hughes III to the Audit Committee on
July 28, 2009 (and his appointment as interim Chairman of the Audit Committee
during Mr. Reynolds’s service as interim CFO), the appointment of David Anthony
to the Audit Committee on October 15, 2009, the resignation of J. Winder Hughes
as a member of the Audit Committee on January 27, 2010, and the appointment of
Shawn R. Hughes to the Audit Committee on January 27, 2010.
26
In
May 2009, Kemp & Company, a Professional Association (“Kemp”), which was
then our independent public accounting firm, made the Audit Committee aware of
the following disagreements between Kemp and Andrew T. Melton who was, at the
time, our Chief Financial Officer, on matters of accounting principles or
practices, financial statement disclosures or auditing scope or procedures,
which disagreements, if not resolved to Kemp’s satisfaction, would have caused
Kemp to make reference to the subject matter of such disagreements in its report
on our financial statements for the fiscal year ended December 31,
2008:
(i) Payroll
tax adjustments: Mr. Melton did not agree with Kemp’s estimated
adjustment for penalties and interest with respect to unpaid payroll
taxes. Following termination of Mr. Melton’s employment, our interim
Chief Financial Officer and our Board of Directors discussed the matter with
Kemp and the matter was resolved to Kemp’s satisfaction;
(ii) Debt
covenant violations: Mr. Melton would not agree to classify our
Convertible Promissory Note to The Quercus Trust in the original principal
amount of $2,000,000 as in default at December 31, 2008 due to the violation of
certain covenants relating to unpaid payroll taxes and the non-disclosure of
such violations. Following termination of Mr. Melton’s employment,
our interim Chief Financial Officer and the Audit Committee discussed the matter
with Kemp and the matter was resolved to Kemp’s satisfaction; and
(iii) Failure
to provide requested audit information: Mr. Melton refused to provide
critical audit documentation to Kemp. Following termination of
Mr. Melton’s employment, our interim Chief Financial Officer and the
Audit Committee discussed the matter with Kemp, our interim Chief Financial
Officer provided all of the requested information to Kemp, and the matter was
resolved to Kemp’s satisfaction.
Kemp
also brought to the attention of the Audit Committee a number of potential
illegal acts which they believed Mr. Melton had committed in his capacity as our
Chief Financial Officer.
The
Audit Committee engaged special legal counsel to investigate the information
brought to our attention by Kemp and, through special legal counsel, engaged an
independent public accounting firm to perform a forensic audit of our corporate
financial records. Based on the results of that forensic audit and on
the investigation by special legal counsel, on July 31, 2009 the Audit Committee
recommended to the Board of Directors that Mr. Melton be removed from office
for cause due to the commission of material violations of law with respect to
the Company’s obligations to file and pay federal and state employment
and unemployment tax returns. On August 3, 2009, the Board of
Directors accepted Mr. Melton’s resignation as an officer and director of the
Company.
At
the request of the Board of Directors, Arthur S. Reynolds, then the Chairman of
the Audit Committee, agreed to serve as interim Chief Financial Officer
following termination of Mr. Melton’s employment. Mr. Reynolds served
as interim Chief Financial Officer from August 3, 2009 until the
appointment of Teodor Klowan, Jr. to that office on November 16,
2009.
27
As
a result of the above-described matters, the completion of our financial
statements for the fiscal year ended December 31, 2008 was delayed until October
2009, and the Corporation was unable to file on time its Annual
Report on Form 10-K for such fiscal year and its Quarterly Reports on
Form 10-Q for the periods ended March 31, 2009 and June 30,
2009.
With
respect to the fiscal year ended December 31, 2009, the Audit Committee met frequently
and held extensive discussions with management and the independent public
accountants. Management represented to us that the Company’s
consolidated financial statements for such fiscal year were prepared in
accordance with generally accepted accounting principles, and the Audit
Committee has reviewed and discussed the audited financial statements and
related disclosures with management and the independent public accountants,
including a review of the significant management judgments underlying the
financial statements and disclosures. The Audit Committee also discussed with
the independent public accountants the matters required to be discussed by
Statement on Auditing Standards No. 61 (Codification of Statements on Auditing
Standards, AU 380), as amended.
In addition, the Audit Committee
discussed with the independent public accountants that
firm’s independence from the Company and its management, and
also considered whether the non-audit services performed during fiscal
year 2009 by the independent public accountants were compatible with maintaining
the accountants’ independence. The independent public accountants have
provided to the Committee the written disclosures and letter required by the
Independence Standards Board Standard No. 1 (Independence Discussions With Audit
Committees).
The Committee discussed with the
Company's independent public accountants the overall scope and plans for its
audit. The Committee met with the independent public accountant, with and
without management present, to discuss the results of its examinations, the
evaluations of the Company’s internal controls, and the overall quality of the
Company’s financial reporting.
Based on the reviews and discussions
referred to above, the Committee recommended to the Board of Directors, and the
Board approved, that the audited financial statements be included in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2009, for filing with the Securities and Exchange
Commission.
In
consultation with the Company’s management and the independent public
accountants, the Audit Committee determined that the Company’s internal controls
and reporting as of December 31, 2009 were deficient in that (i) the Company had
not allocated adequate resources to ensure that necessary internal controls were
implemented and followed throughout the Company, (ii) the Company’s 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) the Company’s
contract administration and accounting procedures were deficient, and (v) the
Company’s 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. The Audit
Committee has met with Teodor Klowan, Jr., the Company’s
recently-appointed Chief Financial Officer, to discuss the deficiencies in
internal controls and reporting and is working with Mr. Klowan to
implement new controls and to address the identified deficiencies.
28
The
Company’s independent public accountants report to us and to the
Board. The Audit Committee has sole authority to appoint (subject to
shareholder ratification) and to terminate the engagement of the independent
public accountants. The Audit Committee has approved the dismissal of
Kemp and Company as the Company’s independent auditing firm and the appointment
of CCR LLP as the Company’s principal independent accountants to audit our
financial statements for the fiscal year ending December 31, 2010.
April
15, 2010
Audit
Committee
|
|
Arthur
S. Reynolds, Chairman
|
|
David
Anthony
|
|
Shawn
R. Hughes
|
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 the Chairman of our Board of Directors 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 provisions that
apply to our Chief Executive Officer and our Chief Financial Officer, 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.
Attendance
at the Annual Meeting and at Board and Committee Meetings
Although
we do not have a requirement that all members of the Board of Directors attend
the Annual Meeting of Shareholders, such attendance is strongly
encouraged. Six of the seven directors then in office attended the
2009 Annual Meeting of Shareholders. During the fiscal year ended December 31,
2009, the Board of Directors held 17 meetings and every director attended at
least 75% of those meetings. During 2009, the Audit Committee held 9 meetings
and the Compensation and Benefits Committee held 4 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, 2009.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended requires our
executive officers and directors and persons who own more than 10% of our Common
Stock to file reports of ownership and changes in ownership with the SEC. Such
executive officers, directors and shareholders are also required by SEC rules to
furnish us with copies of all Section 16(a) forms they file. Based on
information supplied to us and filings made with the SEC, during the fiscal year
ended December 31, 2009 the following executive officers and directors failed to
make Section 16(a) filings on a timely basis:
29
Director or Officer
|
Number of Delinquent Filings
|
Number of Transactions
|
||
Dennis C.
Cossey
|
1
|
1
|
||
Alexander
G. Fassbender
|
1
|
1
|
||
J.
Winder Hughes III
|
3
|
3
|
||
Shawn
R. Hughes
|
2
|
3
|
||
Teodor
Klowan, Jr.
|
2
|
1
|
||
Andrew
T. Melton
|
1
|
1
|
||
Arthur
S. Reynolds
|
5
|
5
|
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, 2009
to our directors who were not also named executive officers:
Director
Compensation (1)
Fees
Earned or
|
Option
Awards
|
|||||||||||
Name
|
Paid in Cash
|
($) (2)
|
Total ($)
|
|||||||||
Paul
A. Loeffler
|
none
|
none
|
$ | 0 | ||||||||
none
|
none
|
$ | 0 | |||||||||
Martin
A. Roenigk
|
none
|
none
|
$ | 0 | ||||||||
David
Gelbaum
|
none
|
$ | 9,192 | (3) | $ | 9,192 | ||||||
David
Anthony
|
none
|
$ | 9,192 | (4) | $ | 9,192 | ||||||
J.
Winder Hughes III
|
$ | 60,000 | (5) | $ | 17,920 | (6) | $ | 77,920 | ||||
David
A. Field
|
none
|
$ | 7,457 | (7) | $ | 7,457 | ||||||
Joseph
P. Bartlett
|
none
|
$ | 9,192 | (8) | $ | 9,192 |
(1)
|
Certain
columnar information required by Item 402(m) of Regulation S-K has been
omitted for categories where there was no compensation awarded to, or paid
to, the named executive officers required to be reported in such columns
during 2009 or 2008.
|
(2)
|
The
amounts in the column “Options Award” reflect the dollar amount recognized
for financial statement reporting purposes in accordance with FAS 123R.
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, 2009. The amounts shown exclude
the impact of any forfeitures related to service-based vesting
conditions. The actual amount realized by the director will
likely vary based on a number of factors, including the Company’s
performance, stock price fluctuations and applicable
vesting.
|
(3)
|
An
option to purchase 30,000 shares of Common Stock at an exercise price of
$0.37 per share was granted to Mr. Gelbaum on October 15, 2009; this
option expired when Mr. Gelbaum resigned from our Board of
Directors.
|
(4)
|
An
option to purchase 30,000 shares of Common Stock at an exercise price of
$0.37 per share was granted to Mr. Anthony on October 15, 2009; this
option expires on October 15, 2019 (subject to Mr. Anthony’s continued
service on our Board of Directors through the date of our 2010 Annual
Meeting).
|
(5)
|
We
paid Mr. Hughes a fee for certain consulting services prior to his
election to our Board of Directors.
|
(6)
|
An
option to purchase 30,000 shares of Common Stock at an exercise price of
$0.33 per share was granted to Mr. Hughes on July 28, 2009; this option
expires on July 28, 2019. An option to purchase an additional
30,000 shares of Common Stock at an exercise price of $0.39 per share was
granted to Mr. Hughes on December 15, 2009; this option expires on
December 15, 2019 (subject to Mr. Hughes’s continued service on our Board
of Directors through the date of our 2010 Annual
Meeting).
|
30
(7)
|
An
option to purchase 30,000 shares of Common Stock at an exercise price of
$0.299 per share was awarded to Mr. Field on December 28, 2009; this
option expired when Mr. Field resigned from our Board of
Directors.
|
(8)
|
An
option to purchase 30,000 shares of Common Stock at an exercise price of
$0.37 per share was granted to Mr. Bartlett on October 15, 2009; this
option expired when Mr. Bartlett resigned from our Board of
Directors.
|
ITEM
10. Executive Compensation
Summary
Compensation Table
The table
set forth below summarizes the compensation earned by our named executive
officers in 2009 and 2008.
Executive
Compensation (1)
Name
and Principal Position
|
Year
|
Salary
($) |
Option
Awards ($) (2) |
All
Other
Compensation ($) (3) |
Total
($) |
|||||||||||||
Dennis
C. Cossey
|
2009
|
$ | 228,750 | $ | 0 | $ | 41,944 | $ | 270,694 | |||||||||
Chairman
and CEO
|
2008
|
$ | 295,000 | $ | 774,093 | $ | 24,653 | $ | 1,093,746 | |||||||||
Andrew
T. Melton
|
2009
|
$ | 79,166 | $ | 0 | $ | 31,933 | $ | 111,099 | |||||||||
Executive
Vice President and CFO (4)
|
2008
|
$ | 250,000 | $ | 83,159 | $ | 24,466 | $ | 357,635 | |||||||||
Alexander
G. Fassbender
|
||||||||||||||||||
Executive
Vice President and
|
2009
|
$ | 232,500 | $ | 0 | $ | 23,184 | $ | 255,684 | |||||||||
Chief Technology Officer |
2008
|
$ | 295,000 | $ | 437,372 | $ | 109,000 | $ | 841,372 | |||||||||
Shawn
R. Hughes
|
2009
|
$ | 229,167 | $ | 143,000 | $ | 39,833 | $ | 412,000 | |||||||||
President
and Chief Operating Officer
|
2008
|
$ | 275,000 | $ | 76,600 | $ | 12,000 | $ | 363,300 | |||||||||
Arthur
S. Reynolds
|
2009
|
$ | 105,000 | $ | 138,856 | $ | 0 | $ | 243,856 | |||||||||
Interim
CFO (5)
|
2008
|
n/a | n/a | n/a | n/a |
|
(1)
|
Certain
columnar information required by Item 402(m) of Regulation S-K has been
omitted for categories where there was no compensation awarded to, or paid
to, the named executive officers required to be reported in such columns
during 2009 or 2008.
|
|
(2)
|
The
amounts in the column “Options Award” reflect the dollar amount recognized
for financial statement reporting purposes in accordance with FAS 123R.
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,
2009.
|
|
(3)
|
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.
|
|
(4)
|
Mr.
Melton’s employment as Executive Vice President and Chief Financial
Officer terminated on August 3,
2009
|
|
(5)
|
Mr.
Reynolds served as interim Chief Financial Officer from August 3, 2009
through November 16, 2009. The information for 2008 does not
reflect compensation paid to Mr. Reynolds during that year in his capacity
as a member of the Board of
Directors.
|
31
Outstanding
Equity Awards at December 31, 2009
The
following table summarizes information concerning outstanding equity awards held
by the named executive officers at December 31, 2009. No named
executive officer exercised options in the fiscal year ended December 31,
2009.
Stock Option Awards
|
||||||||||
Securities
|
Securities
|
|||||||||
Underlying
|
Underlying
|
|||||||||
Unexercised
|
Unexercised
|
Option
|
Option
|
|||||||
Options
(#)
|
Options
(#)
|
Exercise
|
Expiration
|
|||||||
Name
|
Exercisable
|
Unexercisable
|
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
|
250,000 |
none
|
$ | 1.50 |
2/27/2019
|
|||||
600,000 |
none
|
$ | 0.24 |
9/16/2019
|
||||||
Arthur
S. Reynolds
|
48,232 |
none
|
$ | 0.31 |
07/31/2014
|
|||||
45,455 |
none
|
$ | 0.33 |
08/31/2014
|
||||||
40,541 |
none
|
$ | 0.37 |
09/30/2014
|
||||||
46,875 |
none
|
$ | 0.32 |
10/31/2014
|
||||||
500,000 |
none
|
$ | 0.50 |
11/30/2014
|
||||||
30,000 |
none
|
$ | 1.24 |
10/03/2018
|
||||||
40,000 |
none
|
$ | 1.24 |
06/30/2019
|
||||||
none
|
30,000
|
$ | 0.39 |
12/15/2019
|
32
Equity
Compensation Plan Information
The
following table sets forth the securities that are authorized for issuance under
our equity compensation plans as of December 31, 2009:
Plan Category
|
(A)
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
|
(B)
Weighted-average exercise
price of outstanding options,
warrants and rights
|
(C)
Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities reflected
in column A)
|
|||||||||
Equity
Compensation plans approved by security holders
|
||||||||||||
2008
Incentive Stock Plan
|
3,850,000 | $ | 0.67 | 6,150,000 | ||||||||
Equity
Compensation plans not approved by security holders
|
||||||||||||
Stock
options
|
7,413,800 | $ | 1.43 | 0 | ||||||||
Total
|
11,263,800 | $ | 1.17 | 6, 510,000 |
Employment Contracts and
Agreements
We have
written employment agreements with each of our senior executives. Set forth
below are descriptions of the agreements with each of our current executive
officers and with each person who was an executive officer on December 31,
2009.
Dennis C.
Cossey. Our Executive Employment Agreement with our Executive
Chairman, Dennis C. Cossey, provides for an annual base
salary of $150,000, with eligibility for performance bonuses, from time to time,
in accordance with incentive compensation arrangements to be established by the
Compensation Committee of our Board of Directors. Mr. Cossey’s
employment is terminable by either party upon 30 days’ written notice; provided
that we may terminate Mr. Cossey’s employment immediately for “Cause” (as such
term is defined in the Executive Employment Agreement) and Mr. Cossey may
terminate his employment immediately for “Good Reason” (as such term is defined
in the Executive Employment Agreement) or with 60 days’ written notice upon his
“Retirement” (as such term is defined in the Executive Employment
Agreement). If Mr. Cossey’s employment is terminated for any reason
other than (i) by us for Cause or (ii) voluntarily by Mr. Cossey
without Good Reason, Mr. Cossey will be entitled to receive severance payments
of $12,500 per month for twelve months following the termination of his
employment, and we will keep in force for such twelve-month period all health
insurance benefits afforded to Mr. Cossey and his family at the time of
termination. Mr. Cossey’s Executive Employment Agreement contains
other conventional terms, including covenants relating to the confidentiality
and non-use of our proprietary information, and a provision prohibiting Mr.
Cossey, for a period of one year following the termination of his employment,
from competing against us or soliciting our customers or
employees. Mr. Cossey’s Executive Employment Agreement supersedes Mr.
Cossey’s Employment Agreement dated as of September 14, 2005 which provided,
among other things, for a contract term of five years (extended, each month for
an additional month), with a beginning base compensation of $200,000 (in 2005)
for Mr. Cossey and minimum annual 15% increases in compensation. The
prior employment agreement also provided that Mr. Cossey would be eligible for
discretionary incentive compensation of up to 100% of his base salary, as
determined by the Compensation and Benefits Committee. The prior
employment agreement also entitled Mr. Cossey to periodic performance-based
compensation upon the occurrence of certain unusual, but significant, events,
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 prior employment agreement provided that, upon a change in control of the
Company, Mr. Cossey would have been 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.
33
Cary G.
Bullock. On January 27, 2010, we entered into an Executive
Employment Agreement with our President and Chief Executive Officer, Cary G.
Bullock, pursuant to which we agreed to pay him a base salary of $200,000, with
eligibility for performance bonuses, from time to time, in accordance with
incentive compensation arrangements to be established by the Compensation
Committee of our Board of Directors. Mr. Bullock’s employment is
terminable by either party upon 30 days’ written notice; provided that we may
terminate Mr. Bullock’s employment immediately for “Cause” (as such term is
defined in the Executive Employment Agreement) and Mr. Bullock may terminate his
employment immediately for “Good Reason” (as such term is defined in the
Executive Employment Agreement). If Mr. Bullock’s employment is
terminated for any reason other than (i) by us for Cause or (ii) voluntarily by
Mr. Bullock without Good Reason, Mr. Bullock will be entitled to receive
severance payments of $16,667 per month for six months following the termination
of his employment, and we will keep in force for such six-month period all
health insurance benefits afforded to Mr. Bullock and his family at the time of
termination. Mr. Bullock’s Executive Employment Agreement contains
other conventional terms, including covenants relating to the confidentiality
and non-use of our proprietary information, and a provision prohibiting Mr.
Bullock, for a period of six months or one year following the termination of his
employment (depending on the circumstances of termination), from competing
against us or soliciting our customers or employees.
Teodor Klowan,
Jr. On November 2, 2009 we entered into an Executive
Employment Agreement with our Executive Vice President and Chief Financial
Officer, Teodor Klowan, Jr., pursuant to which we agreed to pay him an annual
base salary of $175,000, with eligibility for performance bonuses, from time to
time, in accordance with incentive compensation arrangements to be established
by the Compensation Committee of our Board of Directors. Mr. Klowan’s
employment is terminable by either party upon 30 days’ written notice; provided
that we may terminate Mr. Klowan’s employment immediately for “Cause” (as such
term is defined in the Executive Employment Agreement) and Mr. Klowan may
terminate his employment immediately for “Good Reason” (as such term is defined
in the Executive Employment Agreement). If Mr. Klowan’s employment is
terminated for any reason other than (i) by us for Cause or (ii) voluntarily by
Mr. Klowan without Good Reason, Mr. Klowan will be entitled to receive severance
payments of $14,583 per month for six months following the termination of his
employment, and we will keep in force for such six-month period all health
insurance benefits afforded to Mr. Klowan and his family at the time of
termination. Mr. Klowan’s Executive Employment Agreement contains
other conventional terms, including covenants relating to the confidentiality
and non-use of our proprietary information and a provision prohibiting Mr.
Klowan, for a period of one year following the termination of his employment,
from competing against us or soliciting our customers or
employees.
34
Alexander G.
Fassbender. Our employment agreement with Alexander G.
Fassbender, who was our Executive Vice President and Chief Technology Officer
until March 3, 2010, provided for a continuous three-year term (subject to our
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 was also eligible
for discretionary incentive compensation of up to 50% of his base salary, as
determined by the Compensation and Benefits Committee of our Board of Directors.
Upon the termination of his employment following a change in control of the
Company, Mr. Fassbender was 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 contained certain restrictive
covenants protecting trade secrets and prohibiting Mr. Fassbender from competing
with us or soliciting our customers or employees for a period of one year after
the termination of his employment.
Shawn R.
Hughes. On September 16, 2009 we entered into an Executive
Employment Agreement with Shawn R. Hughes, who was, until January 27, 2010, our
President and Chief Operating Officer. The agreement provided that
term of Mr. Hughes’s employment expired on the earlier of (i) the date on which
the Company had appointed both a new Chief Executive Officer as successor to
Dennis C. Cossey and a new Chief Financial Officer as successor to Arthur S.
Reynolds or (ii) March 31, 2010 (in either case, the “Termination Date”);
provided, however, that the Termination Date was extended until February 28,
2010 to permit Mr. Hughes to assist in the transition of authority to Cary
G. Bullock, our new President and CEO. Mr. Hughes’s Executive
Employment Agreement provided for a base salary of $150,000 per annum, with an
entitlement to a bonus, upon completion of a certain contract involving our
subsidiary, CASTion Corporation, in an amount equal to 10% of CASTion’s gross
profits on such contract. Pursuant to the agreement, we are obligated
to make severance payments in the amount of $20,834 per month to Mr. Hughes
during the period from March 1, 2010 through February 28, 2011. The
agreement also contained certain restrictive covenants protecting trade secrets
and prohibiting Mr. Hughes from competing with us or soliciting our customers or
employees for a period of one year after the termination of his
employment.
Compensation
Discussion and Analysis
Philosophy and
Objectives
The objective of our executive
compensation program is to attract, retain and motivate the talented and
dedicated executives who are critical to our goals of continued growth,
innovation, increasing profitability and, ultimately, maximizing shareholder
value. We provide these executives with what we believe to be a
competitive total compensation package consisting primarily of base salary and
long-term equity incentive compensation. Our executive compensation
program aims to provide a risk-balanced compensation package which is
competitive in our market sector and, more importantly, relevant to the
individual executive.
Our policy for allocating between
long-term and currently-paid compensation is to ensure adequate base
compensation to attract and retain personnel, while providing incentives to
maximize long-term value for our Company and our
shareholders. Accordingly, (i) we provide cash
compensation in the form of base salary to meet competitive cash compensation
norms and (ii) we provide non-cash compensation, primarily in the form of
stock option awards, to encourage superior performance against long-term
strategic goals. Although on occasion we grant cash bonuses, we do
not maintain a formal short-term incentive plan, as our strategic philosophy is
to focus on long-term goals. The Compensation and Benefits Committee of our
Board of Directors believes this compensation structure focuses our executives’
attention primarily on long-term stock price appreciation, rather than
short-term results, and yet enables us to recruit and retain talented executives
by ensuring that their annual cash compensation in the form of base salary is
competitive with the annual cash compensation paid by other similarly situated
companies.
35
Executive
Compensation Process
We have
recently entered into employment agreements with all of our executive
officers. These agreements provide for payment of base compensation
at a rate negotiated at the time of the agreement, with eligibility for cash
bonuses from time to time upon achievement of certain performance goals to be
established through discussions with the Compensation and Benefits Committee of
our Board of Directors (in the case of our Chief Executive Officer) or with such
Committee and our Chief Executive Officer (in the case of the other executive
officers). The employment agreements with our Chief Executive Officer
and our Chief Financial Officer, both our whom have been recently hired, also
provide for an initial grant of stock options, with provision for future grants
of stock options at the discretion of the Compensation and Benefits Committee of
our Board of Directors.
In negotiating the employment agreements
of our executive officers and establishing their base compensation, the
ad
hoc Executive Search
Committee (which had primary responsibility for recruitment of our Chief
Executive Officer and our Chief Financial Officer), the Compensation and
Benefits Committee and management considered the practices of comparable
companies of similar size, geographic location and market focus. We did not
utilize any standard executive compensation index or engage the services of a
compensation consultant in setting executive compensation, although management,
the ad
hoc Executive Search
Committee and the Compensation and Benefits Committee analyzed publicly
available compensation data.
In determining each component of each
executive’s compensation, numerous factors particular to the executive are
considered, including:
|
•
|
The individual’s particular
background, including prior relevant work
experience;
|
|
•
|
The market demand for individuals
with the executive’s specific expertise and
experience;
|
|
•
|
The individual’s role with
us; and
|
|
•
|
Comparison to other executives
within our Company.
|
Elements of
Compensation
Executive compensation consists of the
following elements:
Base
Salary. Base
salary is established based on the factors discussed above. Our general
compensation philosophy, as described above, is to offer a competitive package
of base salary plus long-term, equity-based incentive compensation. Because we
place emphasis on the long-term equity-based portion of our compensation
package, we believe that the cash portion of our executive’s compensation is
below the average of the range of annual cash compensation (base salary plus
annual non-equity incentive compensation) for executives in similar positions
with similar responsibilities at comparable companies.
Bonuses. Cash bonuses and non-equity
incentive compensation are generally not a regular or important element of our
executive compensation strategy, and we focus instead on stock-based awards
designed to reward long-term performance.
36
Stock Option and
Stock-Based Awards. We believe that long-term
performance is best stimulated through an ownership culture that encourages such
performance through the use of stock-based awards. The ThermoEnergy Corporation
2008 Incentive Stock Plan was established to provide certain of our employees,
including our executive officers, with incentives to help align those employees’
interests with the interests of shareholders and with our long-term success. Our
Board of Directors believes that the use of stock options and other stock-based
awards offers the best approach to achieving our long-term compensation goals.
While the 2008 Incentive Stock Plan provides for a variety of stock-based
awards, to date we have relied exclusively on stock options to provide equity
incentive compensation. We believe that stock options most effectively focus the
attention of our executives and management on long-term performance and stock
price appreciation. Stock options granted to our executive officers have an
exercise price equal to the fair market value of our common stock on the grant
date. Our stock options typically vest 25% on the first anniversary of grant and
thereafter in equal quarterly installments over an additional three-year period,
and generally expire ten years after the date of grant. Stock option grants to
our executive officers are made in connection with the commencement of
employment, in conjunction with an annual review of total compensation and,
occasionally, to meet special retention or performance objectives.
Proposals to grant stock options to our executive officers are made by our CEO
to the Compensation and Benefits Committee. The Compensation and Benefits
Committee considers the estimated Black-Scholes valuation of each proposed stock
option grant in determining the number of shares subject to each option grant.
In light of the significance we place on equity-based incentive compensation, in
January 2010 our Board of Directors amended the 2008 Incentive Plan (subject to
shareholder approval at our next Annual Meeting) to increase the number of
shares of our common stock available for grant under such Plan from 10,000,000
to 20,000,000.
We have not adopted stock ownership
guidelines.
Other
Compensation. Our executive officers are
not eligible to participate in, and do not have any accrued benefits under, any
Company-sponsored defined benefit pension plan. They are eligible to, and in
some cases do, participate in defined contributions plans, such as a 401(k)
plan, on the same terms as other employees. In addition,
consistent with our compensation philosophy, we intend to continue to maintain
our current benefits and perquisites for our executive officers; however, the
Compensation and Benefits Committee in its discretion may revise, amend or add
to the officer’s executive benefits and perquisites if it deems it advisable. We
believe these benefits and perquisites are currently lower than median
competitive levels for comparable companies. Finally, all of our executives are
eligible to participate in our other employee benefit plans, including medical,
dental, life and disability insurance.
Tax
Implications
Section 162(m) of the Internal
Revenue Code of 1986, as amended, limits the deductibility on our tax return of
compensation of over $1,000,000 to certain of our executive officers unless, in
general, the compensation is paid pursuant to a plan which is
performance-related, non-discretionary and has been approved by our
shareholders. We periodically review the potential consequences of
Section 162(m) and may structure the performance-based portion of our
executive compensation to comply with the exemptions available under
Section 162(m). We believe that options granted under our 2008 Incentive
Stock Plan will generally qualify as performance-based compensation under
Section 162(m). However, we may authorize compensation payments that do not
comply with these exemptions when we believe that such payments are appropriate
and in the best interest of the shareholders, after taking into consideration
changing business conditions or the officer’s
performance.
37
ITEM
11. Security Ownership by Certain Beneficial Owners, Directors and
Executive Officers
The
following table sets forth certain information as of March 26, 2010 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
|
Amount and Nature
of Beneficial
Ownership (1)
|
Percent of
Class
(2)
|
||||||
Directors
and Officers
|
||||||||
David
Anthony
|
||||||||
2105
Natalie Lane
|
||||||||
Birmingham,
Alabama 35244
|
0 | * | ||||||
Cary
G. Bullock
|
||||||||
10
New Bond Street
|
||||||||
Worcester,
Massachusetts 01606
|
0 | * | ||||||
Dennis
C. Cossey
|
||||||||
124
West Capitol Avenue, Suite 880
|
||||||||
Little
Rock, Arkansas 72201
|
3,751,049 | (3) | 6.7 | % | ||||
David
W. Delasanta
|
||||||||
10
New Bond Street
|
||||||||
Worcester,
Massachusetts 01606
|
137,500 | (4) | * | |||||
J.
Winder Hughes III
|
||||||||
PO
Box 389
|
||||||||
Ponte
Vedra, Florida 32004
|
10,865,820 | (5) | 17.8 | % | ||||
Shawn
R. Hughes
|
||||||||
717
South Edison Avenue
|
||||||||
Tampa,
Florida 33606
|
952,500 | (6) | 1.8 | % | ||||
Teodor
Klowan, Jr.
|
||||||||
10
New Bond Street
|
||||||||
Worcester,
Massachusetts 01606
|
0 | * | ||||||
Arthur
S. Reynolds
|
||||||||
230
Park Avenue, Suite 1000
|
||||||||
New
York, New York 10169
|
751,103 | (7) | 1.4 | % | ||||
All
executive officers and directors as a group
(8
persons)
|
16,457,972 | (8) | 25.3 | % | ||||
Other
5% Beneficial Owners
|
||||||||
David
Gelbaum and Monica Chavez Gelbaum
|
||||||||
Quercus
Trust
|
||||||||
1835
Newport Blvd.
|
||||||||
A109-PMC
467
|
||||||||
Costa
Mesa, California 92627
|
44,867,554 | (9) | 49.3 | % |
38
Security
Investors, LLC
|
||||||||
One
Security Benefit Place
|
||||||||
Topeka,
Kansas 66636
|
3,607,800 | (10) | 6.7 | % | ||||
Robert
S. Trump
|
||||||||
89
10th
Street
|
||||||||
Garden
City, New York 11530
|
28,151,230 | (11) | 37.1 | % | ||||
Estate
of P.L. Montesi
|
||||||||
3504
North Hills Boulevard
|
||||||||
North
Little Rock, Arkansas 72116
|
3,048,650 | (12) | 5.5 | % | ||||
Elise
C. Roenigk
PO
Box 230
Eureka
Springs, Arkansas 72632
|
5,650,921 | (13) | 9.7 | % | ||||
The
Focus Fund
|
||||||||
PO
Box 389
|
||||||||
Ponte
Vedra, Florida 32004
|
10,835,820 | (14) | 17.8 | % | ||||
Empire
Capital Management and Affiliates
|
||||||||
One
Gorham Island, Suite 201
|
||||||||
Westport,
Connecticut 06880
|
21,948,031 | (15) | 30.3 | % | ||||
Kevin
B. Kimberlin
c/o
Spencer Trask
|
||||||||
535
Madison Avenue
|
||||||||
New
York, NY 10022
|
7,955,816 | (16) | 13.8 | % | ||||
* Less
than 1%
|
(1)
|
Includes
shares as to which the identified person or entity directly or
indirectly, through any contract, arrangement, understanding, relationship
or otherwise, has or shares voting power and/or investment power, as these
terms are defined in Rule 13d-3(a) of the Exchange
Act. Shares of Common Stock underlying options to
purchase shares of Common Stock and securities convertible into shares of
Common Stock, which were exercisable or convertible on, or become
exercisable or convertible within 60 days after, March 26, 2010 are deemed
to be outstanding with respect to a person or entity for the purpose of
computing the outstanding shares of Common Stock owned by the particular
person and by the group, but are not deemed outstanding for any other
purpose.
|
(2)
|
Based
on 53,538,090 shares of Common Stock issued and outstanding on March 26,
2010 plus, with respect to each individual or entity (but not with respect
to other individuals or entities), the number of shares of Common Stock
underlying options to purchase shares of Common Stock and securities
convertible into shares of Common Stock, held by such individual or entity
which were exercisable or convertible on, or which become exercisable or
convertible within 60 days after, March 26,
2010.
|
(3)
|
Includes
2,357,500 shares issuable upon exercise of
options.
|
(4)
|
All
shares are issuable upon exercise of
options.
|
(5)
|
Includes
10,835,820 shares owned by, or issuable to The Focus
Fund. Mr. Hughes is the Managing Director of The Focus Fund and
may be deemed to be the beneficial owner of the securities held by such
fund; he disclaims beneficial ownership of such securities except to the
extent of his pecuniary interest therein. Also includes 30,000
shares issuable upon exercise of
options.
|
(6)
|
Includes
850,000 shares issuable upon exercise of options and
warrants.
|
(7)
|
Includes
570,000 shares issuable upon exercise of options and
warrants. Also includes 181,103 shares issuable upon
the exercise of warrants held by Christine Reynolds, Mr. Reynolds’s
wife. Mr. Reynolds disclaims beneficial ownership of the shares
issuable to Mrs. Reynolds.
|
(8)
|
Includes
shares issuable upon exercise of options and warrants, conversion of
shares of Series B Convertible Preferred Stock, and conversion of
convertible debt, as detailed in notes (3) through (7)
above.
|
(9)
|
This
beneficial ownership information is based on information
contained in Amendment No. 7 to the Statement on Schedule 13D filed by The
Quercus Trust and Mr. and Mrs. Gelbaum as its trustees on March
17, 2010. Includes 14,586,210 shares issuable upon conversion
of shares of Series B Convertible Preferred Stock, 17,920,000 shares
issuable upon the exercise of warrants and 5,000,000 shares issuable upon
conversion of convertible debt.
|
39
(10)
|
This
beneficial ownership information is based on information contained in
Amendment No. 2 to the Statement on Schedule 13G filed by
Security Investors, LLC on February 12,
2010.
|
(11)
|
Includes
8,116,670 shares issuable upon conversion of shares of Series B
Convertible Preferred Stock, 11,711,104 shares issuable upon the exercise
of warrants and 2,500,000 shares issuable upon conversion of convertible
debt.
|
(12)
|
Includes
shares owned directly by the estate of Mr. Montesi and by various
members of Mr. Montesi’s family. Also includes 1,797,500 shares of
issuable upon the exercise of
options.
|
(13)
|
Includes
80,000 shares issuable the exercise of options, 1,500,000 shares issuable
upon the exercise of warrants, and 3,401,322 shares issuable upon
conversion of convertible debt.
|
(14)
|
Includes
2,560,820 shares issuable upon conversion of shares of Series B
Convertible Preferred Stock, 4,458,333 shares issuable upon the exercise
of warrants, and 416,667 shares issuable upon conversion of convertible
debt.
|
(15)
|
This
beneficial ownership information is based on information contained in
Amendment No. 4 to the Statement on Schedule 13G filed by the group
consisting of Empire Capital Management LLC and its affiliates
on March 22, 2010. Includes 7,596,853 shares
issuable upon conversion of outstanding shares of Series B
Convertible Preferred Stock and 11,347,607 shares of Common
Stock issuable upon the exercise of
warrants.
|
(16)
|
This
beneficial ownership information is based on information contained in
Amendment No. 1 to the Statement on Schedule 13D filed by Mr. Kimberlin
on July 22, 2008. Includes 50,000 shares issuable
upon the exercise of warrants and 4,252,015 shares issuable upon
conversion of convertible debt.
|
ITEM
12. Certain Relationships and Related Transactions, and Director
Independence
Certain
Relationships and Related Transactions
We are a
party to a license agreement with Alexander G. Fassbender, who until March
3, 2010 was our Executive Vice President and Chief Technology Officer, under
which Mr. Fassbender has granted to us an exclusive license in the patents
and patent applications for ThermoFuel and Enhanced Biogas Production in the
United States and certain foreign countries. We are required to pay
to Mr. Fassbender a royalty of 1% of net sales after the cumulative sales of all
licensed products exceed $20,000,000. In December 2007, Mr.
Fassbender waived certain termination rights under the license agreement, agreed
that we can assign or transfer the license without his consent in connection
with a merger or a sale of all or a portion of our business and assets, and
agreed that he would not transfer his interest in the license agreement without
our consent.
We are
members, along with Mr. Fassbender and Mr. Fassbender’s ex-wife, of a limited
liability company, ThermoEnergy Power Systems, LLC (“TEPS”), which
owns the ZEBS technology and which is a 50% member of Babcock-Thermo
Carbon Capture, LLC, our joint venture with Babcock Power. We hold an
85% ownership interest in TEPS and Mr. Fassbender and his ex-wife each own a
7.5% membership interest. The Operating Agreement of TEPS provides,
among other things, that the interests of Mr. Fassbender and his ex-wife cannot
be diluted and that Mr. Fassbender will not be obligated to make capital
contributions to TEPS other than his initial contribution of intellectual
property.
The
Company and Rexon Limited, a company controlled by Arthur S. Reynolds, a member
of our Board of Directors, entered into a consulting agreement on August 21,
2009, pursuant to which Mr. Reynolds provided services as our interim Chief
Financial Officer. Under the Consulting Agreement, the Company paid
Rexon a retainer of $15,000 per month, reimbursed Rexon for all reasonable and
customary expenses incurred by it in connection with Mr. Reynolds’s services,
and issued to Rexon warrants, on the first business day of each month,
commencing on August 1, 2009 and continuing through November 1, 2009, for the
purchase of that number of shares of Common Stock determined by dividing (i)
$15,000 by (ii) the market price per share of the Common Stock on such
date. The consulting agreement with Rexon terminated on November 16, 2009
upon the appointment of Teodor Klowan, Jr. as our Chief Financial Officer; under
the consulting agreement, we are obligated to continue payment of the $15,000
monthly retainer to Rexon for six months following
termination. Pursuant to the consulting agreement, upon the
successful consummation of our Series B Preferred Stock financing, we paid Rexon
a success fee of $30,000 in cash, issued to Mr. Reynolds a five-year warrant for
the purchase of up to 500,000 shares of our Common Stock at an exercise price of
$0.50 per share, and agreed to pay Mr. Reynolds an additional amount of $53,000,
payable in five roughly equal monthly installments commencing in June
2010.
40
Our Board
of Directors has adopted a policy whereby all transactions between us and any of
our affiliates, officers, directors, principal shareholders and any affiliates
of the foregoing must be approved in advance by the disinterested members of the
Board of Directors based on a determination that the terms of such transactions
are no less favorable to us than would prevail in arm’s-length transactions with
independent third parties.
Board
Determination of Independence
Our
securities are not listed on a national securities exchange or on an
inter-dealer quotation system which has requirements that a majority of the
board of directors be independent. In determining which directors and
which members of committees are “independent,” our Board of Directors has
voluntarily adopted the independence standards set forth in the Marketplace
Rules of the Nasdaq Stock Market. Our Board of Directors has
determined that, in accordance with these standards, two of our current
Directors, David Anthony and J. Winder Hughes III are “independent
directors.” Further, six persons who served as members of our Board
of Directors for a portion of the fiscal ended December 31, 2009 (Joseph P.
Bartlett, David Gelbaum, David Fields, Paul A. Loeffler, Louis J. Ortmann and
Martin A. Roenigk) were “independent directors.” Although Shawn R. Hughes and
Arthur S. Reynolds do not satisfy the independence standards that we have
adopted because each of them, during part or all of the fiscal year ended
December 31, 2009, served as an executive officer, our Board of Directors
believes that neither Mr. Hughes nor Mr. Reynolds currently has a relationship
that would interfere with the exercise of independent judgment in carrying out
the responsibilities of a director. In determining the independence of our
directors, the Board of Directors considered all transactions in which we and
any director had any interest, including those discussed under “Certain
Relationships and Related Transactions” above.
ITEM
13. Principal Accountant Fees and Services.
Policy on Audit Committee
Pre-Approval of Audit and Permissible Non-Audit Services of Independent Public
Accountants
The Audit
Committee of our Board of Directors reviews and approves in advance
any audit and permitted non-audit services to be provided by our principal
independent public accountants. The Audit Committee has the sole authority to
make these approvals.
The
following describes the current policies and procedures of the Audit Committee
with respect to pre-approval of audit and permissible non-audit
services:
Audit
Services. All audit services must be pre-approved by the Audit
Committee. The Audit Committee approves the annual audit services
engagement and, if necessary, any changes in terms, conditions, and fees
resulting from changes in audit scope, company structure, or other
matters. Pre-approval is generally provided for up to one year and
any pre-approval is detailed as to the particular service or category of
services and is generally subject to a specific budget. The Audit Committee may
also grant pre-approval for other audit services, which are those services that
only the independent public accountant reasonably can provide.
41
Non-Audit
Services. The Audit Committee's policy is to pre-approve all
permissible non-audit services provided by the independent public
accountants. These services may include audit-related services, tax
services and other services. The independent public accountants and
management are required to periodically report to the Audit Committee regarding
the extent of services provided by the independent public accountants in
accordance with this pre-approval, and the fees for the services performed to
date. The Audit Committee may also pre-approve particular services on
a case-by-case basis.
Fees
billed to us by Kemp & Company Professional Association, our independent
public accountants for fiscal years 2009 and 2008 were comprised of the
following:
Audit Fees. Kemp &
Company’s fee for its audit of our annual financial statements, review of the
financial statements included in our quarterly reports on Forms 10−Q, audits of
statutory filings, comfort letter procedures and review of other regulatory
filings for 2009 and 2008 were $106,000 and $97,000, respectively.
Audit Related Fees. No fees
were billed to us for audit related services in 2009 or 2008.
Tax Fees. Kemp &
Company’s fees for tax services provided to us, including tax compliance, tax
advice and planning, totaled $4,000 in each of 2009 and 2008.
All Other Fees. No other fees
were billed to us by Kemp & Company in 2009 or 2008 for “other
services.”
In
accordance with the Audit Committee’s pre-approval policy, all audit services
performed by Kemp & Company during 2008 and 2009 were approved at the time
such firm was engaged to serve as our independent public accounts for such
fiscal years. The Audit Committee reviewed and approved, as
consistent with our policies and procedures, the tax services performed for us
in 2008 and 2009 by Kemp & Company.
42
PART
IV
ITEM
14. Exhibits, Financial Statement Schedules
(a)
|
The
following documents are filed as part of this
report:
|
|
(1)
|
The
financial statements of the Company and accompanying notes, as set forth
in the contents to the financial statements annexed hereto, are included
in Part II, Item 7.
|
|
(2)
|
All
financial statement schedules are omitted, as the Company has elected to
follow the reduced disclosure requirements as a smaller reporting company,
as defined in Rule 12b-2 of the Exchange
Act.
|
|
(3)
|
Exhibits
numbered in accordance with Item 601 of Regulation S-K and filed
herewith. See Index to Exhibits on Page
B-1.
|
43
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
THERMOENERGY
CORPORATION
(Registrant)
/s/
Teodor Klowan, Jr., CPA
|
April 30,
2010
|
||
Teodor
Klowan, Jr., CPA
Executive
Vice President and Chief Financial Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
*
|
Director
and Chairman of the Board
|
April
30, 2010
|
|||
Dennis
C. Cossey
|
|||||
/s/
Cary G. Bullock
|
Director,
President and Chief Executive Officer
|
April
30, 2010
|
|||
Cary
G. Bullock
|
(Principal
Executive Officer)
|
||||
/s/
Teodor Klowan, Jr., CPA
|
Executive
Vice President and Chief Financial Officer
|
April
30, 2010
|
|||
Teodor
Klowan, Jr., CPA
|
(Principal
Financial and Accounting Officer)
|
||||
*
|
Director
|
April
30, 2010
|
|||
David
Anthony
|
|||||
*
|
Director
|
April
30, 2010
|
|||
J.
Winder Hughes III
|
|||||
*
|
Director
|
April
30, 2010
|
|||
Shawn
R. Hughes
|
|||||
*
|
Director
|
April
30, 2010
|
|||
Arthur
S. Reynolds
|
|||||
* By | /s/ Cary G . Bullock | ||||
Attorney
- in - Fact
|
44
THERMOENERGY
CORPORATION
CONSOLIDATED
FINANCIAL STATEMENTS
Years
ended December 31, 2009 and 2008
With
Report
of Independent Registered Public Accounting Firm
A-1
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, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ equity (deficit) and cash flows for the
years then ended. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our 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 consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ThermoEnergy
Corporation and subsidiaries as of December 31, 2009 and 2008, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 13 to
the consolidated 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
$2,621,000 of unpaid payroll taxes, $4,133,000 of convertible debt in default
(net of debt discounts of $104,000) and $3,053,000 of contingent liability
reserves at December 31, 2009. 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 13 to the consolidated financial statements. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As
discussed in Note 2 to the consolidated financial statements, the Company
changed its method of evaluating when adjustment features within financial
instruments are considered to be equity due to the adoption of new accounting
requirements issued by the Financial Accounting Standards Board as of January 1,
2009.
/s/ Kemp
& Company, a Professional Association
Little
Rock, Arkansas
March 30,
2010
A-2
THERMOENERGY
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share and par value amounts)
December 31,
2009
|
December 31,
2008
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
|
$
|
1,109
|
$
|
115
|
||||
Accounts
receivable, net
|
7
|
111
|
||||||
Inventories,
net
|
74
|
164
|
||||||
Other
current assets
|
205
|
164
|
||||||
Total
Current Assets
|
1,395
|
554
|
||||||
Property
and equipment, net
|
241
|
305
|
||||||
Other
assets
|
74
|
176
|
||||||
Total
Assets
|
$
|
1,710
|
$
|
1,035
|
||||
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$
|
812
|
$
|
204
|
||||
Short-term
borrowings
|
—
|
873
|
||||||
Convertible
debt in default
|
4,133
|
3,478
|
||||||
Contingent
liability reserves
|
3,053
|
3,334
|
||||||
Deferred
revenue
|
398
|
264
|
||||||
Other
current liabilities
|
3,627
|
2,713
|
||||||
Total
Current Liabilities
|
12,023
|
10,866
|
||||||
Long
Term Liabilities:
|
||||||||
Deferred
comp retirement plan for officers, net of current portion
|
229
|
261
|
||||||
Warrant
liability
|
2,559
|
—
|
||||||
Convertible
debt
|
1,370
|
992
|
||||||
Total
Long Term Liabilities
|
4,158
|
1,253
|
||||||
Total
Liabilities
|
16,181
|
12,119
|
||||||
Stockholders'
Equity (Deficit):
|
||||||||
Preferred
Stock, $0.01 par value, 20,000,000 shares authorized:
|
||||||||
Class
A Preferred Stock, liquidation value of $1.20 per share:
designated:
|
||||||||
10,000,000
shares; issued and outstanding: 208,334 shares in 2009 and
2008
|
2
|
2
|
||||||
Class
B Preferred Stock, liquidation preference of $2.40 per share:
designated:
|
||||||||
4,371,287
shares; issued and outstanding: 3,037,954 shares in 2009
|
30
|
—
|
||||||
Common
Stock, $.001 par value: authorized - 300,000,000
shares;
|
||||||||
issued:
53,763,270 shares in 2009 and 50,247,537 shares in 2008;
|
||||||||
outstanding:
53,679,473 shares in 2009 and 50,163,740 shares in 2008
|
54
|
50
|
||||||
Additional
paid-in capital
|
66,711
|
58,810
|
||||||
Accumulated
deficit
|
(81,268
|
)
|
(68,284
|
)
|
||||
Total
ThermoEnergy Corporation Stockholders' Equity (Deficit)
|
(14,471
|
)
|
(9,422
|
)
|
||||
Noncontrolling
interest
|
—
|
(1,662
|
)
|
|||||
Total
Stockholders’ Equity (Deficit)
|
(14,471
|
)
|
(11,084
|
)
|
||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
$
|
1,710
|
$
|
1,035
|
See notes
to consolidated financial statements.
A-3
THERMOENERGY
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except share and per share amounts)
Year
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Contract
and grant income
|
$
|
4,016
|
$
|
1,730
|
||||
Less:
cost of contract and grant income
|
4,013
|
2,400
|
||||||
Gross
operating income (loss)
|
3
|
(670
|
)
|
|||||
Operating
Expenses:
|
||||||||
General
and administrative
|
3,071
|
5,534
|
||||||
Selling
expenses
|
533
|
405
|
||||||
Contingency
accruals
|
—
|
3,334
|
||||||
Option
expense
|
663
|
1,682
|
||||||
Warrant
expense
|
1,925
|
1,331
|
||||||
Professional
fees
|
1,760
|
1,434
|
||||||
Total
operating expenses
|
7,952
|
13,720
|
||||||
Loss
from operations
|
(7,949
|
)
|
(14,390
|
)
|
||||
Other
income (expense):
|
||||||||
Interest
income
|
—
|
29
|
||||||
Loss
on extinguishment of debt
|
(3,285
|
)
|
—
|
|||||
Derivative
investment income
|
937
|
—
|
||||||
Interest
expense
|
(2,687
|
)
|
(1,623
|
)
|
||||
Total
other income (expense)
|
(5,035
|
)
|
(1,594
|
)
|
||||
Net
loss before minority interest in subsidiary
|
(12,984
|
)
|
(15,984
|
)
|
||||
Minority
interest in subsidiary
|
—
|
248
|
||||||
Net
loss
|
$
|
(12,984
|
)
|
$
|
(15,736
|
)
|
||
Deemed
dividend on Series B Convertible Preferred Stock
|
(2,749
|
)
|
—
|
|||||
Net
loss attributable to common stockholders
|
$
|
(15,733
|
)
|
$
|
(15,736
|
)
|
||
Loss
per share attributable to common stockholders, basic and
diluted
|
$
|
(0.30
|
)
|
$
|
(0.34
|
)
|
||
Shares
used in computing loss per share, basic and diluted
|
52,742,611
|
46,372,059
|
See notes
to consolidated financial statements.
A-4
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in
thousands, except share and per share amounts)
Years
Ended December 31, 2009 and 2008
ThermoEnergy Corporation Stockholders' Equity
(Deficit)
|
||||||||||||||||||||||||||||
Series A
Convertible
Preferred
Stock
|
Series B
Convertible
Preferred
Stock
|
Common
Stock
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Noncontrolling
Interest
|
Total
|
||||||||||||||||||||||
Balance
(Deficit) January 1, 2008
|
$ | 53 | $ | - | $ | 40 | $ | 50,794 | $ | (52,548 | ) | $ | (1,414 | ) | $ | (3,075 | ) | |||||||||||
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 | ) | - | ||||||||||||||||||||||||
Exercised
741,493 warrants for 741,493 shares of Common Stock
|
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)
|
(51 | ) | 5 | 46 | - | |||||||||||||||||||||||
Convertible
Note converted to Common Stock (1,146,036 shares at $0.50 per
share)
|
1 | 572 | 573 | |||||||||||||||||||||||||
Common
Stock Issued for interest payments (124,172 shares at $0.47 per
share)
|
58 | 58 | ||||||||||||||||||||||||||
Warrants
and beneficial conversion feature issued with convertible
notes
|
3,301 | 3,301 | ||||||||||||||||||||||||||
Net
loss
|
(15,736 | ) | (248 | ) | (15,984 | ) | ||||||||||||||||||||||
Balance
(Deficit) December 31, 2008
|
$ | 2 | $ | - | $ | 50 | $ | 58,810 | $ | (68,284 | ) | $ | (1,662 | ) | $ | (11,084 | ) | |||||||||||
Cumulative
effect of change in accounting principle
|
(3,195 | ) | (3,195 | ) | ||||||||||||||||||||||||
Stock
options issued to officers, directors and employees
|
663 | 663 | ||||||||||||||||||||||||||
Modification
of warrants
|
1,691 | 1,691 | ||||||||||||||||||||||||||
Warrants
issued for services
|
148 | 148 | ||||||||||||||||||||||||||
Common
Stock Issued for interest payments (313,005 shares)
|
109 | 109 | ||||||||||||||||||||||||||
Issuance
of 345,000 shares of Common Stock for services
|
188 | 188 | ||||||||||||||||||||||||||
Issued
1,428,571 shares of Common Stock for cash
|
2 | 498 | 500 | |||||||||||||||||||||||||
Issued
435,442 shares of Common Stock and warrants to acquire CASTion's
noncontrolling interest
|
1 | 268 | 269 | |||||||||||||||||||||||||
Purchase
of CASTion shares from noncontrolling interest
|
(2,282 | ) | 1,662 | (620 | ) | |||||||||||||||||||||||
Warrants
and beneficial conversion feature issued with convertible notes and Series
B Preferred Stock
|
4,211 | 4,211 | ||||||||||||||||||||||||||
Convertible
Note converted to Common Stock (768,535 shares at $.75 per
share)
|
1 | 576 | 577 | |||||||||||||||||||||||||
Convertible
Notes and accrued interest converted to Series B Preferred Stock
(2,454,621 shares at $2.40 per share), net of value of acquired beneficial
conversion features
|
24 | 3,632 | 3,656 | |||||||||||||||||||||||||
Issued
583,333 shares of Series B Preferred Stock for cash
|
6 | 1,394 | 1,400 | |||||||||||||||||||||||||
Net
Loss
|
(12,984 | ) | (12,984 | ) | ||||||||||||||||||||||||
Balance
(Deficit) December 31, 2009
|
$ | 2 | $ | 30 | $ | 54 | $ | 66,711 | $ | (81,268 | ) | $ | - | $ | (14,471 | ) |
See notes
to consolidated financial statements.
A-5
THERMOENERGY
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
Year
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Operating
Activities:
|
||||||||
Net
loss
|
$
|
(12,984
|
)
|
$
|
(15,736
|
)
|
||
Adjustment
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Options
issued to officers and directors
|
663
|
1,682
|
||||||
Warrant
expense
|
1,823
|
1,331
|
||||||
Warrants
issued for services
|
148
|
—
|
||||||
Common
stock issues for services
|
188
|
—
|
||||||
Loss
on extinguishment of debt
|
3,285
|
—
|
||||||
Change
in fair value of warrant liability
|
(937
|
)
|
||||||
Depreciation
|
64
|
65
|
||||||
Provision
for inventory reserves
|
74
|
—
|
||||||
Contingency
accruals
|
—
|
3,334
|
||||||
Impairment
charges - property and equipment
|
—
|
105
|
||||||
Minority
interest in subsidiary
|
—
|
(248
|
)
|
|||||
Stock
issued for services
|
—
|
277
|
||||||
Amortization
of discount on convertible debt
|
1,364
|
1,090
|
||||||
Other
|
—
|
40
|
||||||
Increase
(decrease) in cash arising from changes in assets and
liabilities:
|
||||||||
Accounts
and notes receivable
|
104
|
149
|
||||||
Inventories
|
16
|
20
|
||||||
Other
current assets
|
(41
|
)
|
75
|
|||||
Other
assets
|
—
|
(19
|
)
|
|||||
Accounts
payable
|
608
|
(640
|
)
|
|||||
Deferred
revenue
|
134
|
(194
|
)
|
|||||
All
other current liabilities
|
1,707
|
1,931
|
||||||
Deferred
compensation retirement plan
|
(32
|
)
|
(43
|
)
|
||||
|
||||||||
Net
cash used in operating activities
|
(3,816
|
)
|
(6,781
|
)
|
||||
Investing
activities:
|
||||||||
Investment
in joint venture
|
(50
|
)
|
—
|
|||||
Purchase
of property and equipment
|
—
|
(153
|
)
|
|||||
Net
cash used in investing activities
|
(50
|
)
|
(153
|
)
|
||||
Financing
Activities:
|
||||||||
Proceeds
from short-term borrowings
|
—
|
1,000
|
||||||
Payments
on short-term borrowings
|
—
|
(200
|
)
|
|||||
Proceeds
from issuance of Common Stock and warrants
|
500
|
474
|
||||||
Proceeds
from issuance of Preferred Stock and warrants
|
1,400
|
—
|
||||||
Proceeds
from convertible promissory notes
|
3,260
|
2,750
|
||||||
Payments
on convertible promissory notes
|
(300
|
)
|
—
|
|||||
Debt
issue costs
|
—
|
(160
|
)
|
|||||
Net
cash provided by financing activities
|
4,860
|
3,864
|
||||||
Net
change in cash
|
994
|
(3,070
|
)
|
|||||
Cash,
beginning of year
|
115
|
3,185
|
||||||
Cash,
end of year
|
$
|
1,109
|
$
|
115
|
See notes
to consolidated financial statements.
A-6
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
Note
1: Organization and summary of significant accounting
policies
Nature
of business
ThermoEnergy
Corporation (“the Company”) was incorporated in January 1988 for the purpose of
marketing and developing advanced municipal and industrial wastewater treatment
and carbon reducing clean energy technologies.
We are
the majority owner of a patented clean energy technology known as the Zero
Emission Boiler System (“ZEBS”), formerly known as 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. We, through our majority-owned subsidiary,
ThermoEnergy Power Systems, LLC, entered into a joint venture with Babcock
Power, Inc. in 2009 called Babcock-Thermo Carbon Capture, LLC ("BTCC") to obtain
the resources necessary to facilitate the development and commercialization of
this technology.
The
Company acquired a majority stake in CASTion Corporation (“CASTion”), a
Massachusetts corporation, on July 2, 2007. The acquisition of
CASTion resulted in the Company becoming primarily a “water company” with many
patented and proprietary Water Technologies. CASTion’s patented
Controlled Atmosphere Separation Technology (“CAST”) systems are 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 acquired the remaining minority
interest in CASTion Corporation on January 5, 2009. (see Note 10)
Principles
of consolidation and basis of presentation
The
consolidated financial statements include the accounts of the Company and its
wholly-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.
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.
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.
In
circumstances when the Company cannot estimate the final outcome of a contract,
or when the Company cannot reasonably estimate revenue, the Company utilizes the
percentage-of-completion method based on a zero profit margin until more precise
estimates can be made. If and when the Company can make more precise
estimates, revenues will be adjusted accordingly and recorded as a change in an
accounting estimate. For the year ended December 31, 2009, the
Company has recorded one contract which represented approximately 80% of its
revenues utilizing the percentage-of-completion method based on a zero profit
margin.
Costs and
estimated earnings in excess of billings on uncompleted contracts, which were
not significant at December 31, 2009 and 2008, 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 $398,000 and $264,000 at December 31, 2009 and 2008, respectively,
represent amounts billed in excess of revenues earned and are included in
deferred revenue.
A-7
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
Accounts
receivable, net
Accounts
receivable are recorded at their estimated net realizable
value. 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
$9,000 and $0 at December 31, 2009 and 2008, 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.
Inventory
Inventory
are stated at the lower of cost of market using the first-in, first-out method
and consist primarily of raw materials and supplies.
We
evaluate our inventory for excess and obsolescence on an annual
basis. In preparing our evaluation, we look at the expected demand
for our products for the next three to twelve months in order to determine
whether such equipment requires a change in the inventory reserve in order to
record the inventory at net realizable value. Based on this
evaluation, we establish and maintain a reserve so that inventory is
appropriately stated at the lower of cost or net realizable
value. Inventory reserves totaled $74,000 and $0 at December 31, 2009
and 2008, respectively.
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).
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 $0 and $152,000 at December 31, 2009 and 2008,
respectively, and are included in Other Assets in the Company’s Consolidated
Balance Sheets.
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.
Stock
options
The
Company accounts for stock options in accordance with Accounting Standards
Codification (“ASC”) Topics 505 and 718 (formerly 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.
A-8
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
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 totaled $2,720 and $9,541 for the years ended
December 31, 2009 and 2008, respectively.
Fair
value of financial instruments and fair value measurements
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. The carrying amount of the
Company’s convertible debt in default and long-term convertible debt was
$5,503,000 and $4,470,000 at December 31, 2009 and 2008,
respectively. 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. The Company’s warrant liabilities are recorded at fair
value.
The
Company's financial liabilities are measured using inputs from the three levels
of fair value hierarchy, as follows:
Level
1:
|
Quoted
prices in active markets for identical assets or
liabilities.
|
Level
2:
|
Inputs
other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
Level
3:
|
Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the
liabilities.
|
Liabilities
measured at fair value on a recurring basis as of December 31, 2009 are as
follows: (in thousands)
Fair
Value Measurements at Reporting Date Using
|
||||||||||||||||
Description
|
Balance
as of
December 31,
2009
|
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
||||||||||||
Liabilities
|
||||||||||||||||
Long-term
warrant liability
|
$ | 2,559 | $ | - | $ | - | $ | 2,559 | ||||||||
Total
Liabilities
|
$ | 2,559 | $ | - | $ | - | $ | 2,559 |
A-9
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
The
following table sets forth a reconciliation of changes in the fair value of
derivatives classified as Level 3 (in thousands):
Long-Term
Warrant
Liability
|
||||
Balance
at December 31, 2008
|
$
|
-
|
||
Fair
value of warrants at January 1, 2009 due to change in accounting
principle
|
3,195
|
|||
Fair
value of new warrants issued in 2009
|
301
|
|||
Change
in fair value
|
(937
|
)
|
||
Balance
at December 31, 2009
|
$
|
2,559
|
Series B
Convertible Preferred Stock
The
Company initially accounted for its Series B Convertible Preferred Stock by
allocating the proceeds based on the relative fair value of the Series B
Convertible Preferred Stock and the warrants issued to the investors, and then
to any beneficial conversion features contained in the Preferred
Stock. The Company determined the initial value of the Series B
Convertible Preferred Stock and investor warrants using valuation models it
considers to be appropriate. Because the Series B Convertible
Preferred Stock has an indefinite life, it is classified within the
stockholders’ equity (deficit) section of the Company's consolidated balance
sheet. The value of the warrants and beneficial conversion features
are considered a “deemed dividend” and are added as a component of net loss
attributable to common stockholders on the Company’s consolidated statement of
operations.
Effect
of new accounting pronouncements
In the
third quarter of 2009, the Company adopted the Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) as the source of
authoritative generally accepted accounting principles (“GAAP”) for
nongovernmental entities. The ASC does not change GAAP but rather
takes the numerous individual pronouncements that previously constituted GAAP
and reorganizes them into approximately 90 accounting topics, and displays all
topics using a consistent structure. Citing particular content in the
ASC involves specifying the unique numeric path to the content. The
adoption of ASC did not have any effect on the Company’s consolidated results of
operations, financial position or cash flows.
On
January 1, 2009, the Company adopted FASB ASC Topic 815-40 "Determining Whether
an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock"
(formerly EITF 07-5). ASC Topic 815-40 provides guidance on determining whether
an instrument (or an embedded feature) is indexed to an entity’s own stock,
which would qualify as a scope exception under prior authoritative literature
FASB No. 133, “Accounting for Derivative Instruments and Hedging
Activities.” ASC 815-40 is effective for fiscal years beginning after
December 15, 2008. The Company adopted ASC topic 815-40 on January 1,
2009 and as such some of the Company’s outstanding warrants that were previously
classified in equity were reclassified to liabilities as of January 1, 2009, as
these warrants contain down round provisions and were no longer deemed to be
indexed to the Company’s own stock. See Note 2 for further
discussion.
During
the second quarter of 2009, the Company adopted ASC 855, “Subsequent Events”
(formerly Statement of Financial Accounting Standards (“SFAS”) No. 165,
“Subsequent Events”) which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but prior to the
issuance of the financial statements. The adoption of this standard
did not have a material impact on the Company’s consolidated results of
operations, financial position, cash flows or disclosures.
During
the first quarter of 2009, the Company adopted ASC 805, “Business Combinations”
(“ASC 805”) (formerly SFAS No. 141 (R), “Business
Combinations”). ASC 805 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. The impact of adopting ASC 805 did not have a material
impact on the Company’s consolidated results of operations, financial position,
cash flows or disclosures.
A-10
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
During
the first quarter of 2009, the Company adopted SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements”, which is now
included in ASC 810, “Consolidations.” This Statement 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. The
effects of this Statement on the Company’s statement of operations and financial
position are discussed in Note 10.
Note
2: Derivative Liabilities; Adoption of ASC Topic
815-40
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 at a purchase price of $1.50 per
share. The warrant contains anti-dilution provisions for the
adjustment of the exercise price in the event the Company issues additional
shares of 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. As of December 31, 2008, the exercise price of the
warrants was reduced to $1.25 per share. The Company also issued
warrants to purchase 1,333,333 shares of Common Stock to Merriman Curhan Ford
& Co. (“Merriman”) as part of the placement fee paid. These
warrants have the same terms as the warrants issued to Quercus.
As
further discussed in Note 6, on September 15, 2008 the Company entered into a
Securities Purchase Agreement with Quercus to issue up to $7 million of 10%
Convertible Promissory Notes and warrants to purchase up to 14 million shares of
Common Stock. At the initial closing on September 15, 2008, the
Company issued a $2 million Note due September 30, 2013 and a warrant to
purchase up to 4 million shares of Common Stock at an exercise price of $1.25
per share. The warrants have a five year term and contain
anti-dilution provisions for the adjustment of the exercise price in the event
the Company issues additional shares of 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 of the Company’s Common Stock on
September 12, 2008). The Company also issued warrants to purchase
453,334 shares of Common Stock to Merriman as part of the placement fee
paid. These warrants have the same terms as the warrants issued to
Quercus.
As
discussed in Note 4, on August 12, 2008 the Company entered into a Securities
Purchase Agreement with a stockholder, Robert S. Trump, through which the
Company issued, at face value, a 7.5% Convertible Promissory Note due December
31, 2008 in the principal amount of $500,000. The Company also issued
a warrant to purchase one share of Common Stock for each dollar invested
by Mr. Trump in the purchase of Common Stock or other convertible
securities during the period from December 31, 2008 through December 31, 2011 at
an exercise price of $1.50 per share. The warrant expires on December
31, 2015, subject to acceleration provisions as provided in the
Agreement. As of December 31, 2008, the Company did not issue any
warrants under this arrangement.
On
January 1, 2009 the Company adopted ASC Topic 815-40. This
pronouncement provides guidance for determining whether an equity-linked
financial instrument (or embedded feature) is indexed to an entity’s own
stock. Any financial instrument that is not indexed to an entity’s
own stock must be recorded as a derivative instrument. The Company
evaluated whether its stock warrants and determined that warrants issued with
anti-dilution provisions that protect holders from declines in the stock price
and warrants issued for a variable number of shares of common stock were no
longer deemed to be indexed to the Company’s own stock. The fair
value of these derivative liabilities as of January 1, 2009 was $3,195,000 and
was reclassified from additional paid-in capital. The Company used
the Black-Scholes valuation model to determine the fair value of the
warrants. The significant assumptions used were: exercise prices
between $0.50 and $1.25; the Company’s stock price on January 1, 2009, $0.45;
expected volatility of 80%; risk free interest rate between 1.3% and 1.6%; and a
remaining contract term between 4 and 4.7 years.
During
2009, the Company issued a total of 1.4 million warrants to Mr. Trump in
conjunction with the August 12, 2008 Securities Purchase
Agreement. The exercise price of the warrants was reduced to $0.50
per share as of September 2009. The Company recognized an additional
warrant liability of $320,000 for these warrants. In addition, in
accordance with the anti-dilution provisions in the warrants issued to Quercus
and Merriman, the exercise price was reduced to $0.36 per share in September
2009.
A-11
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
The fair
value of these derivative liabilities as of December 31, 2009 was $2,559,000.
The Black-Scholes stock option valuation model was used to determine the fair
values. The significant assumptions used were: exercise prices between $0.36 and
$0.50; the Company’s stock price on January 1, 2009, $0.28; expected volatility
of 80%; risk free interest rate between 1.7% and 3.0%; and a remaining contract
term between 3 and 6 years.
The
decrease in fair value of the Company’s derivative liabilities resulted in a
gain of $937,000 for the year ended December 31, 2009. The gain
includes an decrease in the derivative liability due to a decrease in the
Company’s stock price and the passage of time, partially offset by a reduction
in the exercise price of the warrants previously issued to Quercus and Merriman
Curhan Ford & Co. from $1.25 to $0.36 per share.
Note 3: Formation
of Babcock-Thermo Carbon Capture LLC
On
February 25, 2009, the Company’s subsidiary, ThermoEnergy Power Systems LLC,
and Babcock Power Development, LLC (“BPD”), a subsidiary of Babcock
Power, Inc., entered into a Limited Liability Company Agreement (the “LLC
Agreement”) establishing Babcock-Thermo Carbon Capture LLC, a Delaware limited
liability company (the “Joint Venture”) for the purpose of developing and
commercializing its proprietary ZEBS 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,
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 ZEBS technology (the “ZEBS
License”). In the LLC Agreement, BPD has agreed to develop, at
its own expense, intellectual property in connection with three critical
subsystems relating to the ZEBS technology: 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 in cash to the Joint Venture in
August 2009. This investment is included in Other Assets on the
Company’s Consolidated Balance Sheet as of December 31, 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.
The
Company accounts for the Joint Venture using the equity method of
accounting.
A-12
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
Note
4: Short-term borrowings
Short-term
borrowings consisted of the following at December 31, 2009 and 2008 (in
thousands):
2009
|
2008
|
||||||
Convertible
promissory note dated December 22, 2008, 7.5%, due March 31,
2009, less discount of $194 in 2008
|
$
|
-
|
$
|
307
|
|||
Convertible
promissory note dated August 12, 2008, 7.5%, due March 31,
2009
|
-
|
566
|
|||||
-
|
873
|
On August
12, 2008, the Company entered into a Securities Purchase Agreement with a
stockholder, Robert S. Trump, through which the Company issued, at face value, a
7.5% Convertible Promissory Note due December 31, 2008 in the principal amount
of $500,000. The Note is convertible into shares of Common Stock at a price of
$0.75 per share. The Company may defer the maturity date of the Note
to March 31, 2009 at its discretion upon payment of a deferral fee equal to 10%
of the principal amount. The full amount of principal and accrued
interest will convert into shares of Common Stock at $0.75 per
share. As further consideration, the Company issued a warrant to
purchase one share of Common Stock for each dollar invested by Mr. Trump in
the purchase of Common Stock or other convertible securities during the period
from December 31, 2008 through December 31, 2011 at an exercise price of $1.50
per share, reduced to $0.50 per share in September 2009. The warrant
expires on December 31, 2015, subject to acceleration provisions as provided in
the Agreement. As of December 31, 2009, the Company issued warrants
to purchase 1.4 million shares of common stock under this
arrangement.
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 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.
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 to March 31, 2009. On
April 1, 2009 the Note was converted to 768,535 shares of Common
Stock.
On
December 22, 2008, the Company entered into a Securities Purchase Agreement with
Mr. Trump through which the Company issued, at face value, a 7.5% Convertible
Promissory Note due March 31, 2009 in the principal amount of
$500,000. The Note is convertible into shares of Common Stock at a
price of $0.75 per share. The Company may defer the maturity date of
the Note to June 30, 2009 at its discretion upon payment of a deferral fee equal
to 10% of the principal amount. As further consideration, the Company
issued a warrant to purchase 1 million shares of Common Stock at a price of
$1.25 per share. The warrant expires on December 31, 2015 subject to
acceleration provisions as provided in the Agreement.
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 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.
The
Company extended the maturity of the Note to June 30, 2009, and added the
deferral 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 as discussed
below. The amended Note was converted into shares of Class B
Convertible Preferred Stock in November 2009.
On
February 11, 2009, the Company issued to the Quercus Trust (“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 of the closing of an equity or convertible debt investment yielding
gross proceeds of not less than $2 million to the Company (a “Financing”) or
December 31, 2009. Quercus may convert the principal amount of the
Note into shares of the securities to be issued in the Financing at a price
equal to 90% of the price per share to be paid by the other investors in the
Financing. Interest on the Note is payable quarterly in arrears; at
the Company’s discretion, interest may be paid by the issuance of Common Stock
valued at 90% of the volume weighted average trading price per share for the ten
trading days immediately preceding the respective interest payment
date. The Note is secured by the Company’s 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.
A-13
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
The Note
was amended on September 28, 2009 in connection with the Series B Convertible
Preferred Stock financing as discussed below. The amended Note was
converted into shares of Series B Convertible Preferred Stock in November
2009.
On April
27, 2009, the Company issued to three different funds and two individual
affiliates of Empire Capital Partners 10% Convertible Promissory Notes
aggregating $500,000 in principal amount. The Notes mature on the
earlier of the closing of the proposed funding with Quercus as reported in the
September 15, 2008 Agreement with Quercus or October 31,
2009. Empire Capital Partners and its affiliates may convert the
Notes at any time into shares of Common Stock at a price of $0.40 per
share. The Company also issued warrants to acquire 2.5 million shares
of Common Stock to the holders of these 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 Notes into the Company’s Common
Stock on the date of issuance 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 was amortized to interest
expense over the stated term of the Note.
The Notes
were amended and restated on September 28, 2009 in connection with the Series B
Convertible Preferred Stock financing as discussed below. As a result
of the amendment and restatement of the Note, the exercise price of the warrants
issued was further reduced from $0.55 per share to $0.50 per
share. The Notes were converted into shares of Series B Convertible
Preferred Stock in November 2009.
On June
25, 2009, the Company issued to Quercus a 10% Secured Convertible Promissory
Note. Under the terms of the Note, Quercus agreed to make advances to
the Company up to an aggregate principal amount of $150,000. These
advances may only be used to pay expenses related to the investigation by the
Audit Committee of the Board of Directors of the Company’s financial affairs or
other matters within the investigative authority of the Audit Committee (see
Note 14). The Note matures on the earlier of the closing of an equity
or convertible debt investment yielding gross proceeds of not less than $2
million to the Company (a “Financing”) or 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 at a price equal to 80% of the price
per share to be paid by the other investors in the
financing. Interest on the Note is payable quarterly in arrears; at
the Company’s discretion, interest may be paid by the issuance of Common Stock
valued at 80% of the volume weighted average trading price per share for the ten
trading days immediately preceding the respective interest payment
date.
The
Company amended its Security Agreement with Quercus dated February 11, 2009 to
include this Note. The Company also entered into an agreement with
Quercus in which the Company acknowledged that certain conditions to Quercus’
obligation to invest an additional $5 million in the Company pursuant to the
September 15, 2008 Securities Purchase Agreement (See Note 6) have not been and
cannot be met, and the Company irrevocably released any claim on Quercus to make
any further investment.
The Note
was amended and restated on September 28, 2009 in connection with the Series B
Convertible Preferred Stock financing as discussed below. The Note
was converted into shares of Series B Convertible Preferred Stock in November
2009.
On June
26, 2009, the Company issued to the Focus Fund, L.P. (“Focus Fund”) a 10%
Convertible Promissory Note due October 15, 2009 in the principal amount of
$108,000. As further consideration, the Company issued a warrant to
The Focus Fund to purchase 600,000 shares of Common Stock on or before June 17,
2014 at an exercise price of $0.54 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 into the Company’s Common
Stock on the date of issuance 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 was amortized to interest
expense over the stated term of the Note.
A-14
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
On July
31, 2009, the outstanding principal balance of the Note was rolled into the
Convertible Promissory Note described in the next paragraph.
On July
31, 2009, the Company issued an 8% Secured Convertible Promissory Note in the
principal amount of $600,000 to the Focus Fund. The Note matures on the earlier
of the closing of an equity or convertible debt investment yielding gross
proceeds to the Company of not less than $2 million or December 31,
2011. The Note is convertible into shares of Common Stock at the
option of the holder at a price of $0.30 per share. The Note is
secured by the Company’s 85% ownership interest in TEPS. As further
consideration, the Company issued a warrant to the Focus Fund L.P. for the
purchase of 2.4 million shares of Common Stock at a price of $0.50 per share.
The warrant expires on July 31, 2014.
The
Company estimated the fair value of the warrant issued using a Black-Scholes
option pricing model and allocated $246,000 of the proceeds received to the
warrant on a relative fair value basis. In addition, the difference
between the effective conversion price of the Note and the fair value of the
Company’s common stock on the date of issuance resulted in a beneficial
conversion feature amounting to $266,000, the intrinsic value of the conversion
feature on that date. The total debt discount of $512,000 is amortized to
interest expense over the stated term of the Note.
The Note
was amended and restated on September 28, 2009 in connection with the Series B
Convertible Preferred Stock financing as discussed below. As a result
of the amendment and restatement of the Note, the conversion price of the Note
was reduced from $0.30 per share to $0.24 per share, and the exercise price of
the warrants issued on June 26, 2009 was reduced from $0.54 per share to $0.50
per share. The Note was converted into shares of Series B Convertible
Preferred Stock in November 2009.
On August
21, 2009, the Company received a short-term loan in the amount of $110,000 from
the Focus Fund. This loan was repaid in September 2009.
On
September 16, 2009, the Company and an investor group consisting of The Quercus
Trust, Empire Capital Partners, Robert S. Trump and the Focus Fund (“the
Investors”) engaged in a financing transaction, which if fully funded, would
result in cash proceeds of $6.25 million to the Company. The term
sheet provides for funding in four tranches as further detailed in Note
9. On September 28, 2009, the Company issued 8% Convertible
Promissory Notes in the principal amount of $1.68 million (the “First
Tranche”). The Notes mature on the earlier of (i) the closing of the
Second Tranche of the Series B Convertible Preferred Stock financing or (ii)
December 31, 2010. The Notes are convertible into shares of Common
Stock at a price of $0.24 per share at any time at the Investors’
discretion. As further consideration, the Company issued warrants to
acquire 6,720,000 shares of Common Stock to the Investors of the First
Tranche. The warrants have an exercise price of $0.50 and expire five
years from the grant date, subject to acceleration provisions as provided in the
Agreement. Upon the closing of the Second Tranche, the entire
outstanding principal amount of the Notes plus any accrued and unpaid interest
shall convert automatically into Class B Convertible Preferred
Stock. The Notes issued in the First Tranche are secured by the
Company’s 85% ownership interest in TEPS. In addition, all other
Notes held by the Investors were amended and restated to be identical in form to
the Convertible Promissory Note issued to the Focus Fund on July 31, 2009, as
described above.
The
Company estimated the fair value of the warrants issued using a Black-Scholes
option pricing model and allocated $815,000 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 and the fair value of the
Company’s Common Stock on the date of issuance resulted in a beneficial
conversion feature amounting to $865,000, the intrinsic value of the conversion
feature on that date. The total debt discount of $1,680,000 was
recorded as a component of loss on extinguishment of debt upon the closing of
the Second Tranche.
Management
determined that the amended and restated note transactions discussed above,
aggregating $4 million in outstanding principal amount, were exchanges of debt
instruments with substantially different terms requiring debt extinguishment
accounting. A portion of the reacquisition price was allocated to the
beneficial conversion options associated with the original debt based on the
options’ intrinsic values at the extinguishment date, which resulted in a
reduction of $762,000 in additional paid-in capital. The intrinsic value
of the amended and restated Notes was $2.5 million, which was recorded as debt
discount and was recorded as a component of loss on extinguishment of debt upon
the closing of the Second Tranche.
A-15
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
The
principal and accrued interest on the Notes issued in the First Tranche were
converted into shares of Class B Convertible Preferred Stock at a price of $2.40
per preferred share on November 19, 2009.
See Note
15 for a discussion of the Company’s Bridge Loan Agreement entered in March
2010.
Note
5: Convertible debt in default
On July
2, 2007, the Company issued Convertible Promissory Notes in the aggregate
principal amount of $3,353,127 as part of the consideration for the acquisition
of CASTion. The outstanding principal and accrued interest are convertible into
shares of the Company’s Common Stock at a conversion price of $0.50 per share at
any time at the holders’ discretion. The Notes mature on May 31,
2010. The Notes contain conventional weighted-average anti-dilution
provisions for the adjustment of the conversion price of the Notes in the event
the Company issues additional shares of Common Stock (or securities convertible
into Common Stock) at a price less than the then-effective exercise price or
conversion price.
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, 2009 and 2008, deferred accrued
interest amounts added to the principal balances of the Notes amounted to
$884,000 and $438,000, respectively.
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 $104,000 and $313,000 at December 31, 2009 and 2008,
respectively.
The Notes
are technically in default and shown in current liabilities as of December 31,
2009 and 2008, as the Company had not made the required prepayments from the
Quercus Trust private placement of equity closed on December 18, 2007 (see Note
6). Because the Notes are in default, the Company accrues interest at
the default interest rate of 18%.
Note
6: Convertible debt
Convertible
debt consisted of the following at December 31, 2009 and 2008 (in
thousands):
2009
|
2008
|
||||||
Convertible
Promissory Note, 5%, due March 7, 2013, less discount of $494 in 2009 and
$628 in 2008
|
$
|
315
|
$
|
141
|
|||
Convertible
Promissory Note, 5%, due March 21, 2013, less discounts of $180 in 2009
and $221 in 2008
|
671
|
588
|
|||||
Convertible
Promissory Note, 7.5%, due March 31, 2009
|
-
|
263
|
|||||
Convertible
Promissory Notes, 10%, due May 31, 2010
|
384
|
263
|
|||||
$
|
1,370
|
$
|
992
|
On March
21, 2007 the Company issued to Mr. Martin A. Roenigk, a member of the Company’s
Board of Directors as of that date, a 5% Convertible Promissory Note due March
21, 2013 in the principal amount of $750,000. The principal amount and accrued
interest on the Note is convertible into shares of Common Stock at a conversion
price of $0.50 per share at any time at the election of the
holder. As further consideration, the Company issued a warrant to
purchase 750,000 shares of Common Stock at an exercise price equal to the daily
volume weighted average price per share of the Common Stock for the 365-day
period immediately preceding the date on which the warrant is exercised, subject
to a minimum exercise price of $0.50 per share and a maximum exercise price of
$1.00 per share. The warrant expires on March 21, 2013.
A-16
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
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 and the fair value of the
Company’s Common Stock on the date of issuance resulted in a beneficial
conversion feature amounting to $88,000, the intrinsic value of the conversion
feature on that date. The total debt discount of $281,000 is
amortized to interest expense over the stated term of the Note.
Interest
on the Note is payable semi-annually. The Company may, at its
discretion, defer any scheduled interest payment until the maturity date of the
Note upon payment of a $2,500 deferral fee. The Company added
$101,000 and $59,000 of accrued interest to the principal balance of the Note as
of December 31, 2009 and 2008, respectively.
On March
7, 2008, Mr. Roenigk exercised his option to make an additional $750,000
investment in the Company under the terms of the Securities Purchase Agreement
between the Company and Mr. Roenigk dated March 21, 2007. The Company
issued to Mr. Roenigk a 5% Convertible Promissory Note due March 7, 2013 in the
principal amount of $750,000. The principal amount and accrued
interest on the Note is convertible into shares of Common Stock at a conversion
price of $0.50 per share at any time at the election of the
holder. As further consideration, the Company issued a warrant to
purchase 750,000 shares of Common Stock at an exercise price equal to the daily
volume weighted average price per share of the Company’s Common Stock for the
365-day period immediately preceding the date on which the warrant is exercised,
subject to a minimum exercise price of $0.50 per share and a maximum exercise
price of $1.00 per share. The warrant expires on March 7,
2104.
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 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.
Interest
on the Note is payable semi-annually. The Company may, at its
discretion, defer any scheduled interest payment until the maturity date of the
Note upon payment of a $2,500 deferral fee. The Company added $59,000
and $19,000 of accrued interest to the principal balance of the Note as of
December 31, 2009 and 2008, respectively.
On
September 15, 2008, the Company entered into a Securities Purchase Agreement
with Quercus to issue up to $7 million of 10% Convertible Promissory Notes and
warrants to purchase up to 14 million shares of Common
Stock. Pursuant to the Agreement, at an initial closing on September
15, 2008, the Company issued a $2 million Note due September 30, 2013 and a
warrant to purchase up to 4 million shares of Common Stock.
Quercus
may convert the Note at any time into shares of Common Stock at a price of $0.75
per share. Interest on the Note is payable quarterly in arrears; at
the Company’s discretion, all or any portion of the interest may be paid by the
issuance of Common Stock valued at 90% of the volume weighted average trading
price of the Company’s Common Stock for the ten trading days immediately
preceding the respective interest payment date. The Company may not
prepay 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. The warrant contains anti-dilution provisions for the
adjustment of the exercise price in the event the Company issues additional
shares of 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 of the Company’s Common Stock on September 12,
2008). In March 2009, the Company effected a sale of Common Stock at
an exercise price of $0.35 per share. (see Note 9) As a result, the
exercise price on the warrants issued to Quercus was reduced to $0.525 per
share. The warrant modification resulted in the recording of $1,030,000 of
warrant expense in the first quarter of 2009. 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.
A-17
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
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. The Agreement also
grants 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
the Company’s 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 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 the sale of the Note and the warrant to Quercus, the
Company 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 Common
Stock. 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.
The Note
was amended and restated on September 28, 2009 in connection with the Series B
Convertible Preferred Stock financing as discussed in Note 4. As a
result of the amendment and restatement of the Note, the exercise price of the
warrants issued was further reduced from $0.525 per share to $0.36 per
share. The Note was converted into shares of Series B Convertible
Preferred Stock in November 2009.
Note 7: 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, 2009 and 2008 were
increases of approximately $3,964,000 and $4,320,000, 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, 2009 and 2008 (in thousands):
2009
|
2008
|
|||||||
Net
operating loss carryforwards
|
$
|
15,506
|
$
|
12,920
|
||||
Contingent
liability reserves
|
1,267
|
1,425
|
||||||
Stock
options and warrants
|
4,744
|
3,753
|
||||||
Valuation
discount
|
1,061
|
414
|
||||||
Other
|
222
|
324
|
||||||
22,800
|
18,836
|
|||||||
Valuation
allowance – deferred tax assets
|
(22,800
|
)
|
(18,836
|
)
|
||||
$
|
-
|
$
|
-
|
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, 2009 and 2008 (in thousands):
2009
|
2008
|
|||||||
Computed
at statutory rate (34%)
|
$
|
(5,436
|
)
|
$
|
(5,435
|
)
|
||
Increase
in valuation allowance for deferred tax assets
|
3,964
|
4,320
|
||||||
Non-deductible
items and other
|
1,472
|
1,115
|
||||||
Provision
for income taxes
|
$
|
-
|
$
|
-
|
A-18
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
The
Company has net operating loss carryforwards, which expire in various amounts
during 2010 through 2029, at December 31, 2009 of approximately
$41,000,000. 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 8: Related
party transactions
During
2000, the Board of Directors approved the formation of a ThermoEnergy Power
Systems, LLC, a Delaware limited liability company (“TEPS”) for the purpose of
transferring the Company’s rights and interests in ZEBS. The Company has an 85%
ownership interest, Alexander Fassbender, former Executive Vice President and
Chief Technology Officer, as the inventor of the technology, has a 7.5%
ownership interest, and the remaining 7.5% is owned by an unrelated third
party. As of December 31, 2009, TEPS had not been capitalized by the
Company and had no transactions.
As
discussed in Note 3, On February 25, 2009, TEPS and Babcock Power
Development, LLC (“BPD”), a subsidiary of Babcock Power, Inc., entered into
a joint venture establishing Babcock-Thermo Carbon Capture LLC, a Delaware
limited liability company for the purpose of developing and commercializing the
Company’s proprietary ZEBS technology.
During
2009, Arthur S. Reynolds, a member of the Company’s Board of Directors,
performed the duties of Interim Chief Financial Officer of the Company from
August 2009 through November 2009. As compensation for his services,
the Company paid Mr. Reynolds a total of $90,000 and issued warrants to purchase
681,103 shares of the Company’s Common Stock at a price between $0.31 and $0.50
per share. The fair value of the warrants on the respective grant
dates totaled $102,270, which was recorded as warrant expense in
2009.
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 3, 4, 5, 6, 9
and 15 for additional related party transactions.
Note
9: Equity
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.
On March
6, 2009, the Company issued and sold 1,428,571 shares of Common Stock for cash
at $0.35 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, the Company 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.
As
discussed in Note 4, the Convertible Promissory Note dated August 12, 2008
maturing on March 31, 2009 was converted to 768,535 shares of the Company’s
Common Stock at $.75 per share on April 1, 2009.
On April
1, 2008 the Company issued 1,146,036 shares of Common Stock at $0.50 per share
for full payment of principal, accrued interest and deferral fees related to a
$500,000 face value Convertible Promissory Note issued on August 23,
2007.
During
2009, the Company issued 345,000 shares of Common Stock for services and 313,005
shares of Common Stock in satisfaction of accrued interest on convertible
debt.
Preferred
Stock
On
September 16, 2009, the Company and an investor group consisting of Quercus,
Empire Capital Partners, Robert S. Trump and the Focus Fund (“the Investors”)
engaged in a financing transaction, which if fully funded, would result in cash
proceeds of $6.25 million to the Company. The term sheet provides for
funding in four tranches, with the first and second tranche amounts totaling
$3.05 million based on specified time periods and the third and fourth tranche
amounts totaling $3.2 million based on the occurrence of specified
events.
A-19
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
On
September 28, 2009, the Company issued 8% Convertible Promissory Notes in the
principal amount of $1,680,000 for the first tranche of funding, as discussed in
Note 4.
The
Company received $1.4 million in the second tranche funding on November 19,
2009. The Company issued 583,333 shares of Series B Convertible
Preferred Stock at a price of $2.40 per share. Upon the closing of
the second tranche funding, the outstanding principal and accrued interest on
all of the 8% Secured Convertible Promissory Notes converted into 2,454,621
shares of Series B Convertible Preferred Stock at a price of $2.40 per
share.
Each
share of Series B Convertible Preferred Stock is convertible, at any time at the
discretion of the holder, into ten shares of the Company’s Common Stock and
contains anti-dilution provisions. Except with respect to the
election of the Board of Directors, holders of Series B Convertible Preferred
Stock will vote on an as-converted basis together with the Common Stock holders
on all matters. The Company’s Board of Directors consists of seven
members, four of whom are elected by holders of the Company’s Series B
Convertible Preferred Stock (three to be designated by Quercus and one by Robert
S. Trump) and three by the holders of the Company’s Common Stock.
If the
events specified in the agreement occur, in the third tranche funding of $1.8
million and the fourth tranche funding of $1.4 million, the Company will issue
shares of Series B Convertible Preferred Stock.
As
further consideration, the Company issued warrants to purchase 5.6 million
shares of common stock. The warrants expire in five years and provide
for an exercise price of $.50 per share. The Company estimated the
fair value of the warrant issued using a Black-Scholes option pricing model and
allocated $926,000 of the proceeds received to the warrant on a relative fair
value basis. In addition, the difference between the effective
conversion price of the Note and the fair value of the Company’s common stock on
the date of issuance resulted in a beneficial conversion feature amounting to
$1,823,000, the intrinsic value of the conversion feature on that
date. Because the Series B Convertible Preferred Stock is convertible
at any time at the investor’s option, the total discount of $2,749,000 is
considered a “deemed dividend” to the investors of the Preferred Stock as of the
date of issuance and increases the net loss attributable to common shareholders
on the Company’s consolidated statement of operations.
See Note
15 for a discussion of the Company’s Bridge Loan Agreement entered in March
2010.
Stock
Options
The
Company’s 1997 Stock Option Plan (the “Plan”) provided for incentive and
non-incentive stock options for an aggregate of 750,000 shares of Common Stock
for key employees and non-employee Directors of the Company. The Plan, which
expired on December 31, 2007, provided that the exercise price of each option
must be at least equal to 100% of the fair market value of the Common Stock on
the date of grant. The Plan contained automatic grant provisions for
non-employee Directors of the Company.
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. The Company has reserved 10,000,000 shares of Common Stock for
issuance under the 2008 Plan.
Although
the granting of awards under the 2008 Plan is generally at the discretion of the
Compensation Committee of the Board of Directors, the 2008 Plan provides for
automatic grants of stock options to the non-employee members of the Board of
Directors. Each non-employee Director who is elected or appointed to
the Board for the first time shall automatically be granted a 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 a grant to purchase an additional 30,000
shares. All options granted to non-employee Directors vest and become
fully exercisable on the date of the first annual meeting of stockholders
occurring after the end of the fiscal year of the Company during which such
option was granted and shall have a term of ten years.
A-20
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
During
2009, the Board of Directors awarded officers, employees, and various members of
the Board of Directors a total of 3,720,000 non-qualified stock
options. The options are exercisable at exercise prices ranging from
$0.299 to $1.50 per share for a ten year period. The exercise price
was equal to or greater than the market price on the respective grant dates
during the year.
During
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 equal to or greater
than the market price on the respective grant dates during the
year.
The fair
value of options granted during 2009 and 2008 were estimated at the date of
grant using a Black-Scholes option pricing model with the following
assumptions:
2009
|
2008
|
|||||||
Risk-free
interest rate
|
3.0%
- 3.9%
|
3.7%
– 4.1%
|
||||||
Expected
option life (years)
|
10.0
|
10.0
|
||||||
Expected
volatility
|
77%
- 80%
|
65%
|
||||||
Expected
dividend rate
|
0%
|
0%
|
A summary
of the Company’s stock option activity and related information for the years
ended December 31, 2009 and 2008 follows:
2009
|
2008
|
|||||||||
Number
of Shares
|
Wtd.
Avg. Price per Share
|
Number
of Shares
|
Wtd.
Avg. Price per Share
|
|||||||
Outstanding,
beginning of year
|
8,213,800
|
$1.23
|
7,626,900
|
$1.61
|
||||||
Granted
|
3,720,000
|
$0.65
|
2,031,300
|
$1.56
|
||||||
Canceled
and expired
|
(730,000
|
)
|
$0.83
|
(1,444,400
|
)
|
$2.84
|
||||
Outstanding,
end of year
|
11,203,800
|
$1.18
|
8,213,800
|
$1.23
|
||||||
Exercisable,
end of year
|
8,583,800
|
$1.44
|
8,213,800
|
$1.23
|
The
weighted average fair value of options granted were approximately $1,021,000 and
$1,682,000 for the years ended December 31, 2009 and 2008,
respectively. The weighted average fair value of options vested were
approximately $584,000 and $1,682,000 for the years ended December 31, 2009 and
2008, respectively.
Exercise
prices for options outstanding as of December 31, 2009 ranged from $0.299 to
$6.36. The weighted average remaining contractual life of those options was
approximately 5.6 years at December 31, 2009. The weighted average
remaining contractual life of options vested and exercisable was approximately
3.3 years at December 31, 2009.
As of
December 31, 2009, there was $615,000 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
Company’s stock option plans. That cost is expected to be recognized
over a weighted-average period of 1.9 years. The Company recognizes
stock-based compensation on the straight-line method.
See Note
15 for a discussion of material stock option grants issued in 2010.
Warrants
During
2009, Arthur S. Reynolds, a member of the Company’s Board of Directors,
performed the duties of Interim Chief Financial Officer of the Company from
August 2009 through November 2009. The Company issued warrants to
purchase 681,103 shares of the Company’s Common Stock at a price between $0.31
and $0.50 per share as part of his compensation. The fair value of
the warrants on the respective grant dates totaled $102,270, which was recorded
as warrant expense in 2009.
A-21
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
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.
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 $1,925,000 and $1,331,000 for the years ended
December 31, 2009 and 2008, respectively. The value of the warrants
was computed using a Black-Scholes option model.
At
December 31, 2009, there were outstanding warrants for the purchase of
48,419,710 shares of the Company’s Common Stock at prices ranging from $0.24 per
share to $1.82 per share (weighted average exercise price was $0.55 per share)
until expiration (3,000,000 shares in 2010, 13,833,333 shares in 2012, 8,479,884
shares in 2013, 19,715,389 in 2014, 2,711,104 shares in 2015 and 680,000 shares
in 2019).
At
December 31, 2009, approximately 105 million shares of Common Stock were
reserved for future issuance under convertible debt and warrant agreements,
stock option arrangements and other commitments (see Note 15 for subsequent
events involving warrants).
Note
10: Acquisition of CASTion Corporation
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 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.
As of
January 1, 2009, the Company adopted SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements”, which is now included in ASC
810, “Consolidations.” SFAS 160 modifies the accounting and
disclosure requirements for subsidiaries which are not
wholly-owned. In accordance with the provisions of SFAS 160, the
Company reclassified $1,662,000 of noncontrolling interest previously reflected
between long-term liabilities and stockholders’ equity and included the amount
as a component of stockholders’ equity in the accompanying consolidated balance
sheets and consolidated statements of stockholders’ equity as of December 31,
2008. Additionally, the Company has presented the net income
attributable to the Company and the noncontrolling ownership interests
separately in the accompanying consolidated statements of
operations.
On
January 5, 2009, the Company acquired substantially all of the remaining
outstanding shares of CASTion Corporation (“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 to fund the purchase of the shares held by the remaining
noncontrolling stockholders that represent 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 noncontrolling interest was accounted for in
accordance with SFAS 160, which requires that the acquisition be recorded as an
equity transaction. This resulted in a reduction of additional
paid-in capital of approximately $2,282,000.
A-22
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
Note 11: Employee
benefit plans
The
Company has adopted an Employee Stock Ownership Plan. However, as of December
31, 2009, 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
12: Segments
Operating
segments are identified as components of an enterprise about which separate
discrete financial information is available to the chief operating decision
maker, or decision-making group, in assessing performance and allocating
resources. As stated in Note 1, the Company markets and develops
advanced municipal and industrial wastewater treatment and carbon reducing clean
energy technologies. The Company currently generates a large majority
of its revenues from the sale and application of its water treatment
technologies. Revenues from its clean energy technologies have been
limited to grants received from governmental and other agencies for continued
development. In 2009, the Company established Babcock-Thermo Carbon
Capture, LLC, a joint venture with Babcock Power Development, LLC, for the
purpose of developing and commercializing the Company’s clean energy
technology. Because revenues and costs related to the Company’s clean
energy technologies is immaterial to the entire Company taken as a whole, the
financial information presented in these financial statements represents all the
material financial information related to the Company’s water treatment
technologies.
The
Company’s operations are currently conducted solely in the United
States. The Company will continue to evaluate how its business is
managed and, as necessary, adjust the segment reporting
accordingly.
Note
13: 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 $2.6 million of payroll
tax liabilities (see Note 14); approximately $4.1 million of convertible debt
securities in default, net of debt discounts of $104,000 (see Note 5); and $3.05
million of contingent liability reserves at December 31, 2009 (see Note
14). 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 14). 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. As more fully described in Note 9, the Company
and a group of investors entered into a Series B Convertible Preferred Stock
financing in September 2009 that, if fully funded, would result in cash proceeds
to the Company of $6.25 million. The financing provides for
funding in four tranches, with the first and second tranche amounts totaling
$3.05 million completed by November 2009. The final two tranches
totaling $3.2 million in funding are based on the occurrence of specified
events. There can be no assurance that those specified events will
occur in order to receive the remaining funding. Also, see Note 15
for a discussion of the Bridge Loan Agreement entered by the Company in March
2010.
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 in Note 3, 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 forming Babcock-Thermo Carbon Capture, LLC, a Delaware limited
liability company, for the purpose of developing and commercializing the
Company’s ZEBS clean energy technology.
Note 14: Commitments and
contingencies
In June
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 taxpaying 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 former Chief Financial Officer
(“CFO”) could not produce reliable documentation supporting the Company’s status
with respect to compliance with the tax return filing and taxpaying
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 former 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.
A-23
THERMOENERGY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
In July
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 former CFO had sole responsibility for performing those
functions. The report indicated that the former 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 former CFO’s employment be terminated for cause. The
former 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 $2.6 million at December 31, 2009, and recorded a contingency
accrual of $2,105,000 at December 31, 2008 for estimated interest and
penalties for late filing of the payroll tax returns and nonpayment of the
payroll taxes. This accrual was increased to $2,351,000 during
2009. Management has filed the payroll tax returns and is working
with the various federal and state taxing authorities to present an offer in
compromise for settlement of the payroll tax liabilities. The Company
has made payments to the various taxing authorities totaling $377,000 in the
first quarter of 2010. The Company cannot predict the outcome of the
offer in compromise proceedings.
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 then-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.
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. These amounts had already
been accrued on the Company’s balance sheet, and there was no financial impact
to the Company in 2008.
The
Company’s contingent liability reserves total $3,053,000 and $3,334,000 at
December 31, 2009 and 2008, respectively, and consist of the following: (in
thousands):
2009
|
2008
|
||||||
Estimated
penalties and interest – payroll tax liabilities
|
$
|
2,351
|
$
|
2,105
|
|||
Other,
including unasserted claims
|
702
|
1,229
|
|||||
$
|
3,053
|
$
|
3,334
|
At
December 31, 2009, the Company had cash in financial institutions that exceeded
the limit insured by the Federal Deposit Insurance Corporation.
Note
15: Subsequent events
On March
10, 2010, the Company entered into a Bridge Loan Agreement, effective March 1,
2010, with six of its principal investors (“the Investors”) pursuant to which
the Investors agreed to make bridge loans to the Company up to $2.7
million. The Company shall issue 3% Secured Convertible Promissory
Notes in the principal amount of each Investor’s funding commitment (the “Bridge
Notes”). The Bridge Notes bear interest at the rate of 3% per annum
and are due and payable on February 28, 2011. The entire unpaid
principal amount, together with all interest then accrued and unpaid under each
Bridge Note, is convertible, at the election of the holder thereof, into shares
of Common Stock at a conversion price of $0.24 per share.
A-24
The
Bridge Loan Agreement amends the 2009 Financing (see Note 9) such that the
Investors shall surrender the Bridge Notes as payment for the Third Tranche
Closing and/or the Fourth Tranche Closing upon the execution of certain
events. The Agreement also makes further amendments to the Series B
Convertible Preferred Stock financing to provide for additional warrant coverage
based on the amounts advances and makes changes to funding
commitments among the various Investors.
The
Bridge Notes contain other conventional provisions, including for the
acceleration of repayment obligations upon the occurrence of certain specified
Events of Default. The Bridge Notes are secured by all of the
Company’s assets except for the shares of the Company’s subsidiary, CASTion
Corporation (in which no security interest has been granted).
On
January 27, 2010, the Company awarded Mr. Cary G. Bullock, the Company’s
President and Chief Executive Officer effective as of that date, a stock option
for the purchase of 8,159,401 shares of our Common Stock (representing 5% of our
fully diluted capital stock) at an exercise price of $0.30 per share (the
closing price of our Common Stock in the over-the-counter market on January 26,
2010), with a provision for net surrender cashless exercise. The
option has a term of ten years, subject to Mr. Bullock’s continued employment
with us, and vests with respect to the first 2,039,851 shares on December 31,
2010 and thereafter in quarterly installments of 509,962.5 shares each through
December 31, 2013; provided, however, that if prior or December 31, 2010, a
“Change of Control” (as such term is defined in Mr. Bullock’s Executive
Employment Agreement) occurs, the option will immediately vest with respect to
2,039,851 shares; and provided, further, that if Mr. Bullock’s employment is
terminated prior to December 31, 2010 for any reason other than (i) by us during
the Probationary Period, (ii) by us for Cause, or (iii) voluntarily by Mr.
Bullock without Good Reasons, the option will immediately vest with respect to
2,039,851 shares.
On
January 27, 2010, the Company awarded Mr. Teodor Klowan, Jr., the Company’s
Executive Vice President and Chief Financial Officer, a stock option for the
purchase of 1,579,701 shares of our Common Stock at an exercise price of $0.30
per share (the closing price of our Common Stock in the over-the-counter market
on January 26, 2010), with a provision for net surrender cashless
exercise. The option has a term of ten years, subject to Mr. Klowan’s
continued employment with us, and vests with respect to the first 394,929 shares
on September 30, 2010 and thereafter in quarterly installments of 98,731 shares
each through September 30, 2013; provided, however, that if prior or September
30, 2010, a “Change of Control” (as such term is defined in Mr. Klowan’s
Executive Employment Agreement) occurs, the option will immediately vest with
respect to 394,929 shares.
On March
9, 2010, the Company entered into a new Executive Employment Agreement,
effective March 1, 2010 with Dennis C. Cossey, the Chairman of our Board of
Directors. In connection with this, Agreement, the Company awarded
Mr. Cossey an option for the purchase of 1,000,000 shares of our Common Stock as
an exercise price of $0.30 per share (the closing price of our Common Stock in
the over-the-counter market on February 19, 2010, the trading day immediately
prior to the date on which the Compensation Committee of our Board of Directors
approved such grant), with a provision for net surrender cashless
exercise. The option has a term of ten years, subject to Mr.
Cossey’s continued service as an officer or director, and vests with respect to
250,000 shares on January 1, 2011 and with respect to an additional 62,500
shares on the first day of each April, July, October and January thereafter,
commencing on April 1, 2011 and continuing through January 1, 2014 (subject to
Mr. Cossey’s continued service as an officer or director); provided, however,
that in the event of Mr. Cossey’s Retirement (as such term is defined in Mr.
Cossey’s Executive Employment Agreement) or his death or permanent disability,
such option shall immediately vest in its entirety and shall become fully
exercisable.
A-25
Index
of Exhibits
Exhibit
No.
|
Description
of Exhibit
|
|
3(i)
|
Certificate
of Incorporation, as amended — Incorporated by reference
to Exhibit 3(i) to Current Report on Form 8-K filed December 17,
2009
|
|
3(ii)
|
By-laws,
as amended — Incorporated by reference to Exhibit 3(ii)
to Current Report on Form 8-K filed November 24, 2009
|
|
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
|
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
|
|
4.9
|
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
|
|
4.10
|
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
|
|
4.11
|
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
|
|
4.12
|
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
|
|
4.13
|
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
|
|
4.14
|
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
|
|
4.15
|
10%
Secured Convertible Promissory Note issued to The Quercus
Trust — Incorporated by reference to Exhibit 10.1 to
Current Report on Form 8-K filed February 17, 2009
|
|
4.16
|
Form
of Common Stock Purchase Warrant issued pursuant to Securities Purchase
Agreement dated as of March 6, 2009 — Incorporated
by reference to Exhibit 4.1 to Current Report on Form 8-K filed April 28,
2009
|
|
4.17
|
Form
of 10% Convertible Promissory Note due October 31, 2009 issued pursuant to
Securities Purchase Agreement dated as of April 27,
2009 — Incorporated by reference to Exhibit 4.2 to
Current Report on Form 8-K filed April 28, 2009
|
|
4.18
|
Form
of Common Stock Purchase Warrant issued pursuant to Securities Purchase
Agreement dated as of April 27, 2009 — Incorporated
by reference to Exhibit 4.3 to Current Report on Form 8-K filed April 28,
2009
|
B-1
4.19
|
Warrant
No. W09-10 for the purchase of 600,000 shares of the Common Stock of
ThermoEnergy Corporation issued to The Focus Fund,
LP — Incorporated by reference to Exhibit 4.1 to
Current Report on Form 8-K filed June 30, 2009
|
|
4.20
|
10%
Secured Convertible Promissory Note of ThermoEnergy Corporation dated June
25, 2009 in the principal amount of $150,000 issued to The Quercus Trust
— Incorporated by reference to Exhibit 10.1 to
Current Report on Form 8-K filed June 30, 2009
|
|
4.21
|
10%
Convertible Promissory Note of ThermoEnergy Corporation dated June 17,
2009 in the principal amount of $108,000 issued to The Focus Fund,
LP — Incorporated by reference to Exhibit 10.3 to
Current Report on Form 8-K filed June 30, 2009
|
|
4.22
|
8%
Secured Convertible Promissory Note in the principal amount of $600,000
issued to Focus Fund L.P. — Incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K filed August 27,
2009
|
|
4.23
|
Common
Stock Purchase Warrants issued to Focus Fund L.P.
— Incorporated by reference to Exhibit 4.1 to
Current Report on Form 8-K filed August 27, 2009
|
|
4.24
|
Form
of 8% Secured Convertible Promissory Notes issued
to issued to Empire Capital Partners, LP, Empire Capital
Partners, Ltd, Empire Capital Partners Enhanced Master Fund,
Ltd, Robert S. Trump and The Quercus Trust —
Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K
filed October 2, 2009
|
|
4.25
|
Form
of Common Stock Purchase Warrants issued to Empire Capital Partners, LP,
Empire Capital Partners, Ltd, Empire Capital Partners Enhanced
Master Fund, Ltd, Robert S. Trump and The Quercus Trust
— Incorporated by reference to Exhibit 4.2 to
Current Report on Form 8-K filed October 2, 2009
|
|
4.26
|
Form
of Common Stock Purchase Warrant issued pursuant to the Securities
Purchase Agreement dated as of November 19, 2009 by and among ThermoEnergy
Corporation and the Investors named therein
— Incorporated by reference to Exhibit 4.1 to
Current Report on Form 8-K filed November 24, 2009
|
|
10.1
|
License
Agreement, effective December 30, 1997, by and between ThermoEnergy
Corporation and Battelle 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 Battelle
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 Battelle
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
*
|
Amendment
to Employment Agreement by and between Alexander G. Fassbender and
ThermoEnergy Corporation, dated as of February 25,
2009 — Incorporated by reference to Exhibit 10.4 to
Current Report on Form 8-K filed March 2,
2009
|
|
10.8
*
|
Executive
Employment Agreement dated as of March 1, 2010 by and between ThermoEnergy
Corporation and Dennis C. Cossey — Incorporated by
reference to Exhibit 10.4 to Current Report on Form 8-K filed
March 9, 2010
|
|
10.9
*
|
Executive
Employment Agreement dated January 27, 2010 by and between ThermoEnergy
Corporation and Cary G. Bullock — Incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K filed
February 2, 2010
|
|
10.10
*
|
Executive
Employment Agreement dated November 2, 2009 by and between ThermoEnergy
Corporation and Teodor Klowan, Jr. — Incorporated
by reference to Exhibit 10.1 to Current Report on Form 8-K
filed November 3, 2009
|
B-2
10.11
*
|
Consulting
Services Agreement between Rexon Limited and ThermoEnergy Corporation
dated as of August 3, 2009 — Incorporated by reference
to Exhibit 10.1 to Current Report on Form 8-K filed August 26,
2009
|
|
10.12
*
|
Form
of Common Stock Purchase Warrant issued to Rexon Limited pursuant to
Consulting Services Agreement between Rexon Limited and ThermoEnergy
Corporation dated as of August 3, 2009
— Incorporated by reference to Exhibit 10.2 to
Quarterly Report on Form 10-Q for the period ended September 30,
2009
|
|
10.13
*
|
Executive
Employment Agreement dated September 16, 2009 by and between ThermoEnergy
Corporation and Shawn R. Hughes — Incorporated by
reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the period
ended September 30, 2009
|
|
10.14
*
|
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
|
|
10.15
*
|
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
|
|
10.16
*
|
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
|
|
10.17
*
|
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
|
|
10.18
*
|
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
|
|
10.19
*
|
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
|
|
10.20
|
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
|
|
10.21
|
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
|
|
10.22
|
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
|
|
10.23
|
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
|
|
10.24
|
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
|
|
10.25
|
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
|
|
10.26
|
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
|
|
10.27
|
Security
Agreement dated as of February 11, 2009 among ThermoEnergy Corporation,
CASTion Corporation and The Quercus Trust —
Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K
filed February 17, 2009
|
|
10.28
|
Limited
Liability Company Agreement of Babcock-Thermo Carbon Capture LLC, dated as
of February 25, 2009 — Incorporated by reference to
Exhibit 10.1 to Current Report on Form 8-K filed March 2,
2009
|
|
10.29
|
TEPS
License Agreement, dated as of February 25,
2009 — Incorporated by reference to Exhibit 10.2 to
Current Report on Form 8-K filed March 2, 2009
|
|
10.30
|
Agreement
to Indemnify Certain Members of Babcock-Thermo Carbon Capture LLC, dated
as of February 25, 2009 — Incorporated by reference
to Exhibit 10.3 to Current Report on Form 8-K filed March 2,
2009
|
B-3
10.31
|
Form
of Securities Purchase Agreement dated as of March 6, 2009 by and between
ThermoEnergy Corporation and each of the Investors party
thereto — Incorporated by reference to Exhibit 10.1
to Current Report on Form 8-K filed April 28, 2009
|
|
10.32
|
Securities
Purchase Agreement dated as of April 27, 2009 by and between ThermoEnergy
Corporation and the Investors party
thereto — Incorporated by reference to Exhibit 10.2
to Current Report on Form 8-K filed April 28, 2009
|
|
10.33
|
Letter
Agreement between The Quercus Trust and ThermoEnergy Corporation dated
June 25, 2009 — Incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K filed June 30,
2009
|
|
10.34
|
Letter
Agreement between The Focus Fund, LP and ThermoEnergy Corporation dated
June 15, 2009 — Incorporated by
reference to Exhibit 10.4 to Current Report on Form 8-K filed June 30,
2009
|
|
10.35
|
Security
Agreement between The Focus Fund, L.P. and ThermoEnergy Corporation dated
July 31, 2009 — Incorporated by reference to
Exhibit 10.2 to Current Report on Form 8-K filed August 27,
2009
|
|
10.36
|
Promissory
Note in the principal amount of $110,000 issued pursuant to Focus Fund
L.P. — Incorporated by reference to Exhibit 10.1 to
Current Report on Form 8-K filed August 31, 2009
|
|
10.37
|
Security
Agreement dated as of September 28, 2009 between ThermoEnergy Corporation
and Empire Capital Partners, LP, Empire Capital Partners,
Ltd, Empire Capital Partners Enhanced Master Fund, Ltd, Robert
S. Trump and The Quercus Trust — Incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K filed October 2,
2009
|
|
10.38
|
Securities
Purchase Agreement dated as of November 19, 2009 by and among ThermoEnergy
Corporation and the Investors named
therein — Incorporated by reference to Exhibit 10.1
to Current Report on Form 8-K filed November 24, 2009
|
|
10.39
|
Form
of Mutual Release between ThermoEnergy Corporation and the several
Investors party to the Securities Purchase Agreement dated as of November
19, 2009 — Incorporated by reference to Exhibit 10.2
to Current Report on Form 8-K filed November 24, 2009
|
|
10.40
|
Voting
Agreement dated as of November 19, 2009 by and among ThermoEnergy
Corporation and the Series B Preferred Stockholders named
therein — Incorporated by reference to Exhibit 10.3
to Current Report on Form 8-K filed November 24, 2009
|
|
10.41
|
Bridge
Loan Agreement dated as of March 1, 2010 by and among The Quercus Trust,
Robert S. Trump, Focus Fund, L.P., Empire Capital Partners, LP, Empire
Capital Partners, Ltd, and Empire Capital Partners Enhanced Master Fund
Ltd and ThermoEnergy Corporation — Incorporated
by reference to Exhibit 10.1 to Current Report on Form 8-K filed March 16,
2010
|
|
10.42
|
Form
of 3% Secured Convertible Promissory Note issued pursuant to Bridge Loan
Agreement dated as of March 1, 2010 by and among The Quercus Trust, Robert
S. Trump, Focus Fund, L.P., Empire Capital Partners, LP, Empire Capital
Partners, Ltd, and Empire Capital Partners Enhanced Master Fund
Ltd and ThermoEnergy Corporation — Incorporated
by reference to Exhibit 10.2 to Current Report on Form 8-K filed March 16,
2010
|
|
10.43
|
Security
Agreement dated as of March 1, 2010 by and among ThermoEnergy Corporation,
The Quercus Trust, Robert S. Trump, Focus Fund, L.P., Empire Capital
Partners, LP, Empire Capital Partners, Ltd, and Empire Capital Partners
Enhanced Master Fund Ltd and The Quercus Trust (as agent for
itself and the other Investors) — Incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K filed March 16,
2010
|
|
21.1
|
Subsidiaries
of the Issuer — Previously filed
|
|
24.1
|
Power
of Attorney of Dennis C. Cossey, Cary G. Bullock, Teodor Klowan, Jr.,
David Anthony, J. Winder Hughes III, Shawn R. Hughes, and Arthur S.
Reynolds — Previously filed
|
|
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
B-4