UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal period ended Commission file Number
December 31, 2011 0-9180
THERMAL ENERGY STORAGE, INC.
(Exact name of registrant as specified in its charter.)
Colorado
(State of Incorporation)
95-3333931
(I.R.S. Employer Identification No.)
6362 Ferris Square, Suite C
San Diego, California 92121
(Address of principal executive offices)
Registrant's telephone number, including area code: (858) 453-1395
Securities registered pursuant to Section 12(g) of the Act:
Title of class: Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports requir-
ed 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 re-
quirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 31, 2011:
Common Stock, $.001 Par Value - 59,131,289 shares
THERMAL ENERGY STORAGE, INC.
2011 Annual Report on Form 10-K
TABLE OF CONTENTS
PART I
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7a. Quantitative and Qualitative Disclosures about Market Risks 14
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 15
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and Management 16
Item 13. Certain Relationships and Related Transactions 17
PART IV
Item 14. Exhibits Financial Statement Schedules and Reports on Form 8-K 17
PART I
Item 1. Business
General
During recent years the company has focused its efforts on research and
development of two separate initiatives:
1. The continuing effort to develop a marketable product using the companys
clathrate technology in the field of desalination, and;
2. Establishing a project development capability in the field of electric
power generation using hydrogen manufactured in an electrolyzer and stored
for use when needed, and then directing hydrogen fuel to produce electricity
in a fuel cell.
DESALINATION
Historically, the company, under contract to BUREC was developing and had
placed into limited service a 5 gallon per minute fresh water desalination
system using the companys clathrate technology. The contract was carried
out at the Natural Energy Laboratory of Hawaii (NELH) in Kona, Hawaii where
their existing capability to bring deep sea water to the surface fit
appropriately with the companys technology and patents.
When the research ended under the contract provisions with BUREC, the
company built a smaller demonstration unit in San Diego (near company
headquarters) that modified the design, taking into account lessons
learned at NELH, and continued the testing from the work just concluded
at NELH.
It was while performing this test work that the U.S. Environmental
Protection Agency issued a ruling barring any further production of
the material that was used by the company to form the clathrate used
in the desalination process.
Less than a year earlier the EPA had also banned the clathrate-former
the company was using, which led the company then to discuss with the
EPA the new clathrate-former that was selected for the NELH tests. The
discussions led the company to believe that the new clathrate would be
suitable for use for a period of time well beyond what the company
thought was a reasonable time to continue its use.
Although thoroughly disappointed at the second notification of banning a
material suitable for use in our desalination process, new work was
started to find a suitable replacement material the manufacture of
which would not be susceptible to banning by the EPA. This proved to be
difficult and many potential clathrate formers were tested. Throughout
the testing several opportunities were identified for patent application.
While no patents were applied for, should a cost- effective design be
produced in the future that would compete with the current reverse
osmosis designs in favor, the company would be able to protect some of
its work by applying for appropriate patents.
Because of funding limitations current work on development of a clathrate
driven desalination process has been halted.
The company is not able to predict whether it will be able to fully develop
a competitive desalination system in the future.
HYDROGEN PROJECT
Thermal Energy Storage Incorporated was founded as an energy storage
company in 1979.
Batteries currently are the accepted means for energy storage in the utility,
transportation and general industry. They have developed a place in the
plug-in electrical vehicle market, in the utility area for power backup
and in other industrial areas as well. Batteries are well known and
accepted by users, suppliers, designers, control manufacturers and other
companies in the energy storage field.
The advantages of hydrogen as an energy storage medium are much less
well known and the problems associated with hydrogen are often exaggerated
out of proportion. The negative issues relating to hydrogen as a fuel for
use in the utility industry are that green hydrogen is made from an
electrolyzer using electricity and that, if the intent is to have
hydrogen as a green fuel, the electricity must be generated by clean
renewable fuel or method of production including solar, photovoltaics,
hydro, nuclear, tidal, geothermal, wind, or other methodology.
The argument against hydrogen continues by saying that: since you start
with electricity to make hydrogen so that you can make electricity,
what is really being accomplished except for greatly reducing the overall
system efficiency?
The answer is that the electricity (which travels at the speed of light
and can only be stored in a cryogenic system) you generate in a fuel cell
is generated when you want or need it!
Thus storing energy in hydrogen provides a method to smooth out power
production curves as may be needed to accommodate the large increase
in intermittent power produced by solar and other forms of power from
the sun. The benefits accrue when planning for the installation of
smart meters and microgrids in the future.
Also hydrogen power produced by a fuel cell has made substantial
improvements in overall efficiency so that it approaches the same as one
gets from a combined cycle gas-fired plant generating electric power.
But the biggest reason for generating electric power with hydrogen is
that hydrogen burns only to water.
It is a zero emissions fuel!
Which is to say that for coal, oil or natural gas to get to zero emissions,
would raise the costs associated with each substantially, perhaps even
beyond the overall cost of hydrogen as an energy storage medium and
power generation fuel
Thats correct No emissions, but water! Imagine the world-wide health
benefits that would accumulate to each and every person. There would be
millions of people whose health would improve dramatically almost
immediately.
But talking about that is not credible at this point. What is needed
is a program to have people learn and understand both the risks and
benefits of using hydrogen.
It is why we have proposed to an engineering college in the New York
area that they combine a hydrogen refueling station with a Learning
Center on campus. We believe that in the long term such a program
will greatly benefit the use of hydrogen and help fund and build the
substantial infrastructure needed to have hydrogen take its place as
a premier electric generating fuel in this country.
Envisioned is a Learning Center not unlike what one finds in todays
Apple store, where the public, students, faculty and staff can have
hands on experiences with all facets of hydrogen, from production
to use, overseen by keen and knowledgeable staff. The intent is to
help educate people in the safe use of hydrogen and to have them
understand both the risks and benefits of its use as a fuel for
electric power generation.
The company is actively engaged in developing this learning center
and Hydrogen refueling project and intends to pursue other colleges/
universities in establishing similar arrangements. When the projects
are funded, the company expects to receive contracts that will provide
an earnings stream commensurate with its total participation.
Since fuel cells for power generation are in a state of development
there exists the potential of developing a product that would add
to the companys potential for sales and income.
Theres no way of knowing whether the company will be successful in
this venture.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Securities Market
The Common Shares of the Company are traded via Pink Sheets an over-the-counter
bulletin board (OTCBB) and quoted under the symbol "THES". The National
Quotation Bureau does not currently quote TESI Common Shares. The Company
10
acts as Transfer Agent for the Common Shares. There are approximately 3,000
shareholders of record of Common Shares.
The Company has not, since inception, declared or paid cash or other dividends
with respect to the Common Shares. Management does not contemplate the pay-
ment of such dividend on the Common Shares in the foreseeable future.
On June 26, 1984, the Company was removed from the NASDAQ automated reporting
system, as the Company was not in compliance with requirements of the NASD
Bylaws because it no longer met the financial net worth standards set by
NASDAQ.
Delinquent filings and effects in market for securities
The Company has not held annual meetings since 1992 and did not timely file all
of the quarterly form 10-Q reports required to be filed under Section 13 or
Section 15(d) of the Securities Exchange Act of 1934, therefore, the Company
failed during these periods to qualify for the use of Rule 144 under the
Securities Act of 1933. By filing this 10-K the company will be current in its
reporting under the referenced provisions of the 1934 act.
In 1998 the company failed to file the first of two required Y2K compliance
reports and in 1999 the Securities and Exchange Commission cited the Company
for violations of Section 17 (a)(3) and Section 17A (d) (1) of the Securities
Exchange Act of 1934 and Rule 17Ad-18. In 1999 the company submitted the first
and second of the required Y2K planning reports, and entered into a settlement
agreement with the Securities and Exchange Commission ordering the firm to
cease and desist from further such violations. The civil penalty was waived
by the SEC because of the financial condition of the Company.
Sales of restricted Common Shares under Rule 144 under the Securities Act of
1933 are available.
Item 6. Selected Financial Data
The following table summarizes certain financial data of the Company for the
years ended December 31, 2000 through December 31, 2004 and is qualified in
its entirety by the financial statements and notes thereto included in "ITEM 8.
Financial Statements and Supplementary Data."
Year Ended December 31,
2004 2003 2002 2001
Revenues $0 $0 $7,374 $0
Net income (loss) (2,174) (2,868) (10,156) (22,953)
Per common share (0.000) (0.000) (0.000) (0.000)
Total assets 2,751 2,781 5,649 15,805
Long term obligations 0 0 0 0
Cash dividends per share 0 0 0 0
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
11
Liquidity and capital resources
In 1990 a new United States federal excise tax on the material R11 used in the
formation of the Company's storage media forced the Company to terminate its
U.S. marketing efforts until a suitable substitute material was identified and
successfully demonstrated.
The Company's Board of Directors has directed management to seek an alignment
with a financially strong company with compatible business interests to market
its 'Snopeak Storage System and to remain cognizant of any new development with
clathrate forming materials that have zero ODP, such as certain hydrofluoro-
carbons (HFC's) that are not now being manufactured but which are under study
by several U.S. chemical companies. Without such an alignment the company may
be unable to market its products and may terminate its business.
The Company is actively seeking additional operating funds to sustain operations
until such time as it generates a positive cash flow from internal operations.
An effort is currently underway to obtain private or public funding to construct
a modular desalination pilot capable of producing 250,000 gallons per day of
fresh water from sea or wastewater. This modular concept creates attractive
economies of scale applicable to communities with a wide range of populations.
The pilot advances the concept from research to commercial application and will
demonstrate the economic viability of the this form of fresh water reclamation.
The Company had no accounts receivable as of December 31, 2004 and December 31,
2003. As of December 31, 2004 the Company had a cash balance of $741 as
compared to $771 cash at December 31, 2003.
The Company had a net loss of $2,174 in 2004 as compared with a net loss of
$2,868 in 2003. This loss was due to an excess of expenses with no contract
revenues.
A negative cash flow from operations was approximately $974 per month through-
out 2004, as compared to a negative cash flow from operations of approximately
$760 per month in 2003.
Current assets and total assets were $2,751 as of December 31, 2004 compared
to current assets and total assets of $2,781 as of December 31, 2003.
As of December 31, 2004 the Company had a working capital deficiency of
$747,124. As of December 31, 2003 the Company had a working capital deficiency
of $744,256. This deficiency in working capital was due to operating losses.
As of December 31, 2004 the Company had no bank loans outstanding. A bank
loan to the company was paid off as of December 31, 1994. As of December 31,
2003 the Company had accounts payable totaling $24,458. As of December 31, 2004
the Company had accounts payable totaling $24,458.
Effective July 20, 1987, the Company entered into an agreement with Renewable
Resource Systems, Inc. (RRSI) of Menlo Park, California whereby RRSI purchased
3,000,000 Common Shares for $150,000 cash or $.05 per share, and an additional
6,375,000 Common Shares at $.133 per share for a total of $850,000. As of
December 31, 1987 the Company received the total of $1,000,000 and 9,375,000
Common Shares were issued to RRSI.
12
In October 1989 RRSI informed the Company that they were terminating their bus-
iness in the U.S. and intended to use their Company holdings to satisfy their
contractual agreements with certain key employees. As a result of negotiations
between RRSI, the Company and Mr. A. Philip Bray, (former CEO of RRSI, and who,
in 1992, became a Company Board Member) and in return for a release of
obligations and liabilities among the Company, RRSI and two (then current)
Company Board Members employed by RRSI, it was agreed that the Company would
issue to RRSI a warrant to purchase up to 2,280,427 Common Shares at a price of
$.13 1/3 per share, exercisable for a period of 5 years commencing October 15,
1989 and RRSI would return 3,000,000 of its shares to be canceled by the
Company. These canceled shares formed the basis of a non-dilutive Private
Placement completed by the Company in February 1990. Mr. Bray received the
remainder of the Common Shares held by RRSI and RRSI's warrant to purchase
2,280,427 Common Shares at $.13 1/3 per share. Mr. Bray also assumed RRSI's 40
percent guarantee obligation on the $50,000 bank loan. In 1990 Mr. Bray lent
the Company $15,000 in working capital.
During the period 1989 through 1996 there were periods when there were lapses
in the Company's liability insurance coverage. The Company may have financial
exposure for claims arising during the periods in which no coverage existed and
for the denial of coverage for the incident discussed in Item 3. The finding
of the arbitrator of liability and damages awarded are discussed in Note 3.
Management believes that the company can pursue a strategic alliance with
another firm only after it has been able to complete its desalination testing
successfully and has found a substitute clathrate former for both the desalin-
ation technology and the thermal storage technology. The most recent exper-
iments are encouraging but further work is required to have high confidence in
the technical and commercial feasibility of the TESI processes.
Results of Operations
In 1988, a field demonstration of a 250 ton-hour storage system was placed in
trial operation. At approximately the same time a 24 ton-hour system also was
placed in a field operation. Both systems immediately developed similar and
unexpected operating problems relating to equipment sizing and scale-up from
the Company's test stand system.
These scale up and sizing problems led to the decision by the Board of Di-
rectors to suspend marketing activities and to initiate the subsequent ex-
tensive testing program. These decisions further led to substantial cost
increases during 1988 and 1989.
To solve these technical operating problems management commenced an around-the-
clock test program on the Company's test stand and, at the same time, halted
field-testing of the field units. The test ran for over five months and was
completed in December 1988. Subsequently, all data was reduced and analyzed.
On the basis of this analysis certain modifications were made to the design of
the Company's system such that operation of the system at the 100% storage
capacity rating for each of the Company's field demonstration units was success-
fully demonstrated.
The Company had $0 in contract revenues for the year ended December 31, 2004
and $0 in contract revenues in 2003.
13
As of December 31, 2004 the Company had no backlog of business. The BuRec
contract awarded in 1999 was completed and no other new contracts were in place.
There were $0 in internally funded research and development expenses during 2004
compared to $0 expenses in 2003.
There was no interest income or interest expense for 2004.
There were $6,041 in general and administrative expenses in the year ended
December 31, 2004 compared to $5,331 reported in 2003.
It is Management's opinion that inflation had no significant effect on Company
operations in 2004 and no significant effect is forecast for 2005.
Item 7a. Quantitative and Qualitative Disclosures about Market Risks
The company has not prepared quantitative evaluations of market risks for its
systems. In the recent past regulatory actions have made the use of the
company's clathrate formers impracticable, precluding the sale of the company's
systems, both for thermal energy storage and for desalination. The research
completed to date into alternative clathrate formers to find a suitable chemical
that is safe, non-toxic, and commercially available at prices that result in
competitive desalination systems has been encouraging. There is no assurance,
however, that the Company will be able to find a suitable clathrate former for
desalination or thermal storage systems, nor is there assurance that future
regulatory actions will not have a similar adverse effect on the ability of the
Company to market its systems.
The Company's product and proposed products are subject to, or are affected
directly and indirectly by various aspects of federal, state and local govern-
mental regulations and tax laws. The federal excise tax imposed on R11, which
made the Company's use of R11 impractical, is an example. After 2003 the
clathrate former R141b will also be prohibited by EPA regulations. Resident-
ial and commercial use of the Company's thermal energy storage systems is also
affected by various state and local building codes. Such regulations, while
not directed specifically to thermal energy storage devices, can impact the
use of systems in which the Company's energy storage units are used.
There is growing interest and activity at all levels relating to government
and industry regulation of alternate energy sources. Governmental entities
could impose regulations applicable to the Company and its products, which
might require the Company to submit its products to various testing,
certifcation and labeling programs. Management also expects that private
industry associations will become more active in this area. In the future the
Company may also be required to submit its products for testing and
certification to independent organizations. Compliance with future regulatory
or private industry standards could involve substantial costs and have a
material impact on Company operations.
Item 8. Financial Statements and Supplementary Data
The information required by this item is Included in Part IV, Item 14.
14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
In December 1992, the Company's management, citing severe financial restrict-
ions, instituted a change to the Company's use of independent auditors, approv-
ing instead the change from Peterson & Co., a La Jolla based accounting firm,
to use financial results as prepared by the Company's independent bookkeeper
since 1988, Mr. William Jankowski. Management had no disagreements with Peter-
son & Co. during the 1990 and 1991 fiscal year audits on any matter of account-
ing principles or practices, financial statement disclosure or auditing scope
or procedure. All financial results presented herein are in accord with all
previous practices used by the Company and past auditors and are considered
accurate. The sole reason for making this change is to conserve operating
funds.
In 1998 the Company hired William G. McKee, Inc., CPA, to prepare the financial
statements without audit or review and has continued this relationship. Since
1998 10-K and 10-Q reports have been prepared using the unreviewed and unaudited
financial reports of William G. McKee, Inc. In 2004 Donald McLean,
CPA was hired.
PART III
Item 10. Directors and Executive Officers of the Registrant
The company has a single Executive Officer who holds all of the
executive pos-
itions. Mr. Richard A. McCormack is President, Secretary, and
Treasurer. Mr.
McCormack is also Chairman of the Board of Directors. The
Directors include Mr.
A. Philip Bray, and Mr. Richard A. McCormack. Mr. Sidney
Stoller, previously
a Director, has retired and no longer serves as a Director.
The Company regrets
his decision to retire and will miss his wise counsel.
Item 11. Executive Compensation
Compensation of Management
No executive officers have been paid compensation since December
31, 1993. Com-
pensation due to the President for management services provided
through RAMCO,
Inc. has been accrued as a loan from RAMCO to the company. No
compensation was
accrued for any executive officer during the years ended December
31, 1997, and
1998 or 2000. In 1999, unpaid compensation due of $30,000 was
accrued. Prev-
iously, unpaid compensation of $30,000 was accrued in 1996 and
$90,000 was
accrued in 1995.
The Company adopted a Stock Option Plan (the "Plan") on March 18,
1981 that
was approved by the shareholders on May 28, 1981 and further
amended on October
30, 1987, and approved by the shareholders in June 1988. The
purpose of the
Plan is to advance the interest of the Company and shareholders
by affording
to employees an opportunity to acquire or increase their
proprietary interest
in the Company by the grant to such employees of options.
Options granted pursuant to the Plan shall be options to
purchase shares of
the Company's Common Stock, $.001 par value. Subject to
adjustments described
in the Plan the aggregate number of Common Shares that may
be issued upon the
exercise of options granted cannot exceed 7,500,000 Common
Shares.
15
There were no Common Shares acquired through the exercise of
options granted
by the Company to its executive officers during the fiscal years
ended December
31, 1998, 1997 and 1996 and to all executive officers as a group.
A terminating employee exercised options for 100,000 Common Shares
in 1988.
No stock options were exercised during the years ended December 31,
1991, 1990,
1989, 1987 and 1986. In February 1985, the Board of Directors
accelerated the
vesting period to make all options granted prior to December 31,
1984 fully
exercisable.
A standing Compensation and Stock Option Committee of the Board
of Directors
administer the Plan. The Compensation and Stock Option Committee
met in 1994
and issued stock options listed in Note 7.
Prior to 1999, the members of the Compensation and Stock Option
Committee were
Messrs. Lawrence O'Donnell and Sidney Stoller. Mr. O'Donnell died
in 1999 and
has not been replaced on this Committee. Mr. Stoller has retired
as a Director
and has not been replaced on this Committee.
Management believes that the terms of the transactions described
were as fav-
orable to the Company as could have been arranged with unaffiliated
parties.
Compensation of Directors
Directors of the Company who are employees receive no special
compensation for
serving as Directors or for their attendance at Board or Committee
meetings.
Company policy is to pay non-employee Directors a fee of $480, or
stock equiv-
alents, per day for Board and Committee meetings, except that if a
committee
meeting is held in conjunction with a Board meeting there is no
compensation
for the committee meeting. Since December 31, 1992 no Directors
fees were
accrued or paid.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth, as of December 31, 1999 certain
information
with respect to all stockholders known by the Company to be
beneficial owners
of more than five percent of its outstanding Common Stock, and
all officers
and directors of the Company as a group.
Name and Address of Shares Owned Percent of
Beneficial Owner Beneficially Class
Richard A. McCormack 10,067,503 17.1% (1)
8155 Paseo del Ocaso
La Jolla, CA 92037
A. Philip Bray 6,719,573 11.4%
1912 Piper Ridge Court
Walnut Creek, CA 94596
All Officers and 19,328,944 32.8%
Directors as a Group
(1) Includes 857,000 shares held of record by RAMCO, Inc. a
(2) corporation wholly-
owned by Richard A. McCormack.
16
Item 13. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 14. Exhibits Financial Statement Schedules and Reports on
Form 8-K
(a) Documents filed as part of this report
(1) Financial Statements
The financial statements of Thermal Energy Storage, Inc.
are included
in a separate section of this report beginning on Page F-1.
(b) Reports on Form 8-K
No reports have been filed on Form 8-K during the year ended
December 31,
1999.
(c) Exhibits
3a Articles of Incorporation of the Company incorporated by
reference to
Exhibit 2.1 to the Company's Registration Statement on
Form S-18, dated
September 21, 1979, Registration No. 2-65548, (hereinafter
"1979 Form
s-18).
3b By Laws of the Company incorporated by reference to Exhibit
2.2 of
the Company's 1979 Form S-18.
3c Form of Common Share Purchase Warrant, issued by the Company
to certain
Underwriters for 600,000 Common Shares incorporated by
reference to
1979 Form S-18.
10a Cross License Agreement, dated March 2, 1979 by and between
Kay Labor-
atories, Inc. and the Company incorporated by reference to
Exhibit
11.1(d) of the Company's 1979 Form S-18.
10b Contract to Supply Equipment and Services dated August 28,
1986 by
and between Pacific Gas and Electric and the Company
incorporated by
reference to Exhibit 10(b) to the Company's Annual Report
on Form 10-K
dated December 31, 1987 (hereinafter "1987 10-K").
10c Contract to Supply Equipment and Services, dated April 28,
1987 by
and between Southern California Edison and the Company
incorporated by
reference to Exhibit 10(c) to the Company's 1987 10-K.
10d Stock Purchase Agreement effective July 20, 1987 by and
Renewable
Resource Systems, Inc. and the Company, incorporated by
reference to
Exhibit 10.6 to the Company's Form 8-K dated September 17,
1987.
10e Consulting Agreement between the Company and Sidney
Stoller, Director,
incorporated by reference to Exhibit 10(c) to the Company's
1987 10-K.
10f Settlement Agreement between Company and RRSI and Philip
Bray in-
corporated by reference to Exhibit 10(f) to the Company's
1989 10-K.
28a U.S. Patent No. 4,696,338, incorporated by reference to
Exhibit 28(a)
to the Company's 1987 10-K.
28b U.S. Patent Application Serial No. 07/176,934 incorporated
by refer-
ence to Exhibit 28(b) to the Company's 1987 10-K.
17
THERMAL ENERGY STORAGE, INC.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934,
the regist-
rant has duly caused this report to be signed on its behalf by the
undersigned
thereunto duly authorized.
THERMAL ENERGY STORAGE, INC.
Registrant
Richard A. McCormack, President
December 31, 2011
_________________________________________
Date
Richard A. McCormack
President and Principal Executive Officer
THERMAL ENERGY STORAGE, INC.
STATEMENTS OF EARNINGS (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010
(Unaudited)
(Amount in thousands, except
per share data) 2010 2011
REVENUES
Contract services $0 $0
COST OF REVENUES
Contract services 0 0
Gross profit (loss) 0 (0)
OPERATING EXPENSES
Research and development 0 0
Selling, general and administrative 0 0
Total operating expenses 0 0
Income (Loss) from operations (0) (0)
Other Income 0 0
NET INCOME (LOSS) (0) (0)
LOSS PER COMMON SHARE ($0.000) ($0.000)
See Accompanying Notes to Financial Statements
F-1
THERMAL ENERGY STORAGE, INC.
BALANCE SHEET
AT DECEMBER 31, 2011, 2010,
(Unaudited)
(Amount in thousands) 2010 2011
ASSETS
CURRENT ASSETS
Cash $0 $0
Accounts receivable 0 0
Inventories 0 0
Prepaid expenses and deposits 0 0
Total current assets 0 0
PROPERTY AND EQUIPMENT, at cost 0 0
Less - Accumulated depreciation (0) (0)
TOTAL ASSETS $0 $0
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $0 $0
Accrued payroll 0 0
Reserve for legal expense 0 0
Payable to officers and affiliates 0 0
Total current liabilities 585 587
SHAREHOLDERS' DEFICIT
Preferred stock, par value $.10 per share;
30,000,000 shares authorized; none issued 0 0
Common stock, par value $.001 per share;
110,000,000 shares authorized; 59,131,289
shares issued and outstanding at 2000 59 59
Additional paid-in capital 4,046 4,046
Accumulated deficit (4,849) 4,849)
Total shareholders' deficit (744) (744)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $6 $6
Note: Totals reflect effects of rounding
See Accompanying Notes to Financial Statements
F-2
THERMAL ENERGY STORAGE, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010,
(Unaudited)
(Amounts in thousands) 2010 2011
CASH FLOWS FROM OPERATING ACTIVITIES
Gain (Loss) from Operations $(0) $(0)
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities
Depreciation 0 0
DECREASE (INCREASE) FROM CHANGES
Accounts receivable 0 0
Prepaid expenses and deposits (0) (0)
Adjustment to inventory 0 0
INCREASE (DECREASE) FROM CHANGES
Accounts payable 0 0
Payable to officers and affiliates 0 0
Net cash provided (used) by
operating activities (0) (0)
CASH FLOW FROM INVESTING ACTIVITIES 0 0
CASH FLOW FROM FINANCING ACTIVITIES 0 0
NET INCREASE (DECREASE) IN CASH (0) (0)
Cash and cash equivalents at
beginning of year 0 0
Cash and cash equivalents at
end of year $0 $0
See Accompanying Notes to Financial Statements
F-3
Notes to Financial Statements
Note 1. Organization and Nature of Operations
Thermal Energy Storage, Inc needs to raise additional
funding to sustain
operations until the Company becomes self-sustaining through
the sale of its
thermal energy storage (TES) systems or funding of its freeze
desalination
development. The Company has sought to align itself or merge
with a finan-
cially strong company with compatible business interests.
Since 1994 the
Company has discussed possible mergers, acquisitions, and
affiliations with
several suitable companies. Management believes that the
company can pursue
a strategic alliance with another firm only after it has been
able to complete
its desalination testing successfully and has found a
substitute clathrate
former for both the desalination technology and the thermal
storage technology.
Without additional funding, or merger with a financially
strong company,
the Company may be unable to market its products and may terminate
its business.
For the last four years, the Company has been funded in part by
RAMCO, a company
wholly owned by the Company's president, who for three of those
years has served
without compensation. RAMCO has notified the Company that it
does not intend to
continue such support of the Company's activities beyond 2000.
It is therefore
likely that the Company will cease operations if a new funding
source is not
found. In October 1993 the Company was awarded a $103,000
participatory contract
from the US Department of Interior, Bureau of Reclamation
BuRec), to perform a
feasibility study to determine if the technology was suitable
for the desalin-
ation of seawater. Known as "freeze desalination", a clathrate
system has the
potential to be a more efficient desalination system than reverse
osmosis sys-
tems currently in use. The study, completed in April 1995,
theoretically ver-
ified the technical feasibility of the clathrate desalination
process and
showed that this system has the potential to compete with other
desalination
systems now in commercial use.
In October 1995 the Company received a follow-on
participatory contract for
$450,000 to build a small clathrate desalination demonstration
plant to be
located at the Natural Energy Laboratory of Hawaii. Certain
costs associated
with obtaining the follow-on contract and funding for the
$178,000 participa-
tory share, were paid by RAMCO since the Company does not
have sufficient in
kind funds to meet the funding requirements. This contract
was completed in
September 1998. The company has sought, and expects to
receive, follow on
funding from BuRec as discussed under "Marketing".
In March 1999, the company received a support agreement
from BuRec for add-
itional research into clathrate formers and for development
testing of a key
subsystem of the desalination system. This work is largely
completed and
completion of the work and final report is expected in the first
half of 2000.
In September of 2001, the company entered into an agreement
with an energy
related company to evaluate the applicability of using the
companies clathrate-
based desalination system in conjunction with a cryogenic
application. As of
the end of the reporting period the evaluation had not yet
been completed.
Note 2. Summary of Significant Accounting Policies
F-4
Basis of presentation
The accompanying financial statements have been prepared
assuming the Com-
pany will continue as a going concern; they do not include
adjustments relating
to the recoverability of recorded asset amounts and
classification of assets and
liabilities that would be necessary should the Company be
unable to continue
as a going concern. The going concern basis might not be a
ppropriate since
the Company has required additional funds in the form of loans
from the Pres-
ident's solely owned consulting company to sustain operations.
As of Decem-
ber 31, 1999 its current liabilities exceeded its current assets
and total lia-
bilities exceeded its total assets.
Inventories
Inventories, which were stated at the lower of cost
(first-in, first-out)
or market, were entirely composed of purchased parts as of
December 31, 2001.
During 2002 management determined that these inventories
had been disposed of
as scrap because they no longer had value for on-going operations.
Property and equipment
Depreciation is provided using the straight-line method over the
estimated
useful lives of the related property, as follows:
Machinery and equipment 3-7 years
Furniture and fixtures 5-10 years
Accrued payroll and related taxes
Accrued payroll of $131,000 consists of accrued compensation
due to
the Company's President as of December 31, 2001.
Revenue and cost recognition for contract services
Revenues from fixed-price contracts are recognized as they
are earned,
measured by the costs incurred are recognized on the basis of
costs incurred
during the period plus the fee earned. Provisions for estimated
losses on
uncompleted contracts are made in the period in which such losses
are deter-
mined.
Contract costs include all direct material and labor costs
and those in-
direct costs related to contract performance, such as indirect
labor, supplies,
tools and repairs. Selling, general and administrative costs
are charged to
expense as incurred.
Note 3. Loss Per Share
Computation of loss per share was based on the 59,131,289
Common shares
outstanding in 2004. Common share equivalents (stock purchase
warrants and
stock options) have not been included in the calculation of net
loss per com-
mon share because the effect would be insignificant for the years
reported.
Note 4. Related Party Transactions
The Company's President is the President and sole shareholder
of RAMCO,
which is a holder of the Company's equity securities. At various
times RAMCO
F-5
has advanced the Company both cash and services that have been
accrued as loans
by the Company.
In 1998 RAMCO advanced the Company $40,000 with a balance due of
$503,554 as of
December 31, 1998. In 1997 RAMCO advanced the Company $38,161 with
a balance
due of $463,554 as of December 31, 1997. In 1996 RAMCO charged the
company
$30,000 for services and advanced the company $58,942, with a balance
due of
$425,393 as of December 31, 1996. In 1995 RAMCO charged the Company,
but was
not paid, $90,000 for services and advanced the Company $14,950
with a balance
due of $336,450 as of December 31, 1995. In 1994 RAMCO did not
charge the
Company for services and advanced the Company $22,302 with a balance
due of
$231,500 as of December 31, 1994. In 1993 RAMCO did not charge
the Company for
services and was repaid $9,174 with a balance of $209,198 as of
December 31,
1993. In 1992 RAMCO charged the Company, but was not paid,
1994. $90,000 for ser-
vices, and advanced the Company $24,632 with a balance due as
of December 31,
1992 of $218,372. In 1991 RAMCO charged the Company $90,000 for
services and
was paid $21,737 with a balance due as of December 31, 1991 of
$103,740. In
1990 RAMCO charged the Company $90,000 for management services
and was paid
$72,924 with a balance due as of December 31, 1990 and 1989 of
$35,477 and
$18,401, respectively. In 1990, 1991, 1992 and 1995, the
Company's President
provided his service to the Company through the RAMCO affiliate,
an arrange-
ment approved by the Company's Board of Directors in 1990.
RAMCO charged the
Company $5,237 and $5,765 during 1986 and 1987 respectively,
for travel, sec-
retarial and engineering services of which $5,539 was outstanding
at December
31, 1988. It was anticipated that the balance owed RAMCO of
$43,598 would be
paid at the rate of $7,500 per month commencing January 1,
1989 in lieu of
equivalent salary that will be accrued and paid from Company
profits in accord
with an agreement requested by the Company's President and
approved by the
Company's Board of Directors. No such payments were made in
1989 nor did the
President receive any cash for salary in 1989. RAMCO lent
the Company funds
at various times throughout 1989. From 1983 to 1985, RAMCO
loaned the Company
a total of $123,517 on an interest free basis of which $7,500
was repaid in
1983, $9,022 in 1985, $5,000 in 1987, and $63,936 in 1988.
In order for the Company to qualify to receive a BuRec
contract, in 1995
RAMCO agreed to fund up to $178,000 of the participatory BuRec
contract until
another funding source can be obtained. RAMCO is the holder
of a patent
application for a clathrate-based desalination system and has
agreed to cross-
license the technology, as embodied in the patent application
and any develop-
ments through completion of the BuRec contract, to TESI on a
worldwide, royal-
ty-free basis, in perpetuity. Additionally, RAMCO has agreed
to assign all
its rights to the desalination technology to the Company upon
reimbursement of
expenditures and amounts owed RAMCO by the Company.
Note 5. Revenues
A substantial portion of the Company's revenues was derived
from a lim-
ited number of customers. In 2001, there were no revenues.
In 2000 and 1999
one customer accounted for 100 percent of revenues. In 1998
and 1997 two
customers accounted for 100 percent of revenues. In 1996,
1995 and 1993 one
customer accounted for 100 percent of revenues. There were
no revenues in 1994.
F-6
Note 6. Common Shares and Warrants
On September 17, 1987, the Company entered into a common
stock purchase
agreement (the "Agreement") with Renewable Resource Systems,
Inc. (RRSI) of
Menlo Park, California. On July 20, 1987 the Company sold
3,000,000 Common
Shares at a price of $.05 per share for $150,000 cash and
during September
through December 1987 sold an additional 6,375,000 Common
Shares at $0.13 1/3
per share for $850,000 cash.
In October 1989 RRSI informed the Company that they were
terminating their
business in the U.S. and intended to use their holdings in the
Company to
satisfy their contractual agreements with certain key employees.
As a result
of a negotiation between RRSI, the Company and Mr. A. Philip
Bray (former CEO
of RRSI and subsequent to the year ending December 31, 1991 a
Company Board
Member), and in return for a release of obligations and
liabilities among the
Company RRSI and two (then current) Company Board Members employed
by RRSI, it
was agreed that the Company would issue a warrant to purchase up
to 2,280,427
Common Shares at a price of $.13 1/3 per share, exercisable for a
period of 5
years commencing October 15, 1989 and RRSI would return 3,000,000
of its shares
to be canceled by the Company. The canceled shares formed the basis
of a non-
dilutive Private Placement completed by the Company in February 1990.
Mr. Bray
received the remainder of the Common Shares held by RRSI and the RRSI
warrant
to purchase up to 2,280,427 Common Shares at $.13 1/3 per share. Mr.
Bray also
assumed RRSI's 40 percent guarantee obligation on the $50,000 bank
loan. In
1990 Mr. Bray lent the Company $15,000 in working capital.
In connection with the sale of Common Shares to RRSI and in
consideration
of other services rendered, in 1987 the Company issued to a
consultant 500,000
Common Shares valued at $.03 per share. The consultant, Sidney M.
Stoller,
also become a member of the Board of Directors. On December 14,
1987, the
Company entered into an agreement with Mr. Stoller under which he
could acquire
warrants for the purchase of up to 300,000 shares of the Company's
Common
Shares at an exercise price of $.1333 per share, and as of December
31, 1988
Mr. Stoller had acquired warrants to purchase 300,000 Common
Shares. The war-
rants were issued in exchange for consulting services to be
provided through
December 1988 and expire two years from completion of such
services. The
consulting contract was extended through December 31, 1992.
During 1990 Mr.
Stoller acquired warrants to purchase an additional 300,000
Common Shares.
The Board of Directors directed that the exercise price be
established at $.03
per share.
Common Shares reserved for issuance on the exercise of
warrants and
options as of December 31, 1998 are as follows (excluding
subsequently expired
warrants):
Description Shares Reserved
Warrants 4,830,047
Non-qualified stock options 350,000
Incentive stock options (Note 7) 7,400,000
Total 12,580,047
F-7
Note 7. Stock Options
Pursuant to a stock plan approved by the Company's stockholders
in June
1988, the Company reserved 7,500,000 Common Shares (100,000 Shares
were pur-
chased in 1988 pursuant to this plan leaving 7,400,000 Shares
reserved). The
plan provides for the granting of both incentive stock options
and non-
qualified stock options to purchase Common Shares at prices not
less than the
fair market value at the date of grant as determined by the
Compensation and
Stock Option Committee of the Board of Directors. The period
for the exercise
of each option granted is five years from the date of grant of
an incentive
stock option and ten years from the date of the grant of a non-
qualified stock
option. Options to purchase 1,000,000 and 150,000 Common Shares
were forfeited
in 1992 and 1989.
In 1990 the Company granted an option to purchase 100,000
Common Shares
at $.065 per share to an employee who subsequently terminated
employment, in
exchange for future services to be rendered relating to technology
transfer.
In 1994 and 1995, the Company granted an option to purchase shares
at $.03 per
share, in exchange for assistance relating to financial,
administrative,
stockholder and marketing services as follows:
Mr. Lawrence O'Donnell 200,000 shares
Mr. William Jankowski 200,000 shares
Mrs. Virginia Paul 200,000 shares
Mrs. Bernice King 100,000 shares
Mrs. Debbie Smith 100,000 shares
Mr. Richard Andersen 200,000 shares
In 1995 the Board of Directors reestablished the option price to
$0.005 for
the 1,000,000 shares outlined.
Note 8. Income Taxes and Net Operating Losses
The Company has unexpired net operating loss carry-forwards
of approx-
imately $642,000 as of December 31, 2004, available to reduce
future federal
taxable income. The carry-forwards are shown in the following
tabulation:
Loss carry-forward amount Year of expiration
Annual Year
Amount
$226,000 2004
$105,000 2006
$114,000 2007
$18,000 2009
$69,000 2010
$84,000 2011
$22,000 2012
$4,000 2013
In December 1987, the Financial Accounting Standards Board
issued State-
ment of Financial Accounting Standards (SFAS) No. 96, "Accounting
for Income
Taxes". Because the Company has significant net operating loss
carry-forwards
F-8
and no material differences between book income and taxable income,
implemen-
tation of SFAS No. 96 is not expected to have a material effect on
the
Company's reported financial position and results of operations.
Note 9. Commitments and Contingencies
The Company has no other undisclosed commitments or contingencies.
Note 10. Equipment Warranties and Claims
There is a lawsuit against the company that is currently being
defended
against that is discussed in the sections above.
Note 11. Going Concern
As shown in the accompanying financial statements, as of
December 31,
2003 the Company's current liabilities exceeded its current assets
by $744,342.
Those factors create an uncertainty about the Company's ability to
continue as
a going concern. The ability of the Company to continue as a
going concern is
dependent on its success in obtaining working capital and
increasing revenues.
The Company plans on obtaining working capital through performance
on con-
tracts and potential merger with a company with complementary
products. The
financial statements do not include any adjustment that might be
necessary if
the Company is unable to continue as a going concern.
F-9
THERMAL ENERGY STORAGE, INC.
6362 Ferris Square, Suite C
San Diego, CA 92121
December 31, 2011
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
Pursuant to the requirements of the Securities Exchange
] Act of 1934, we are
transmitting herewith the attached Form 10-K.
Sincerely,
THERMAL ENERGY STORAGE, INC.
/s/ Richard A. McCormack
______________________________________
Richard A. McCormack, President
