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EX-23.2 - EXHIBIT 23.2 - THERMOENERGY CORPv332124_ex23-2.htm

 

As filed with the Securities and Exchange Commission on January 18, 2013

Registration No. 333-185487

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

  

Amendment No. 2

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

  

ThermoEnergy Corporation

(Exact name of registrant as specified in its charter)

 


 

Delaware   4955   71-0659511

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

10 New Bond Street

Worcester, Massachusetts 01606

(508) 854-1628

(Address, including zip code, and telephone number,

including area code, of registrant's principal executive offices)

  

James F. Wood

ThermoEnergy Corporation

10 New Bond St.

Worcester, Massachusetts 01606

(508) 854-1628

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

 


   

Copies to:

  

William E. Kelly, Esq.

Nixon Peabody LLP

100 Summer Street

Boston, Massachusetts 02110

(617) 345-1195

 

Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.    Yes  x    No  ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     Yes  ¨    No  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     Yes  ¨    No  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     Yes  ¨    No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.


 

Large accelerated filer   ¨   Accelerated filer   ¨
             
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)   Smaller reporting company   x

 

CALCULATION OF REGISTRATION FEE  
   

Title of each class of securities

to be registered

 

Amount

to be

Registered (1)

   

Proposed

maximum

offering price

per share (2)

   

Proposed

maximum

aggregate

offering

price (2)

   

Amount of

registration

fee (2)

 
Common Stock, $0.001 par value (4)     63,856,250     $ 0.08     $ 5,108,500.00     $ 696.80 (3)
                                 

 

(1) Pursuant to Rule 416 under the Securities Act, the shares being registered hereunder include such indeterminate number of shares of Common Stock as may be issuable with respect to the shares being registered hereunder as a result of stock splits, stock dividends or similar transactions.

 

(2) Estimated pursuant to Rule 457(c) solely for purposes of calculating the registration fee based on the average of the high and low sales prices of the Common Stock on December 12, 2012, as reported on the Over-the-Counter Bulletin Board.
   
(3) Previously paid.

 

(4) Reflects shares of Common Stock being registered for resale by the selling stockholders set forth herein.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 
 

 

The information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED January 18, 2013

 

Preliminary Prospectus

 

63,856,250 Shares

 

THERMOENERGY CORPORATION

 

Common Stock

 

 

 

This prospectus relates to the resale of up to 63,856,250 shares of Common Stock, par value $0.001 per share, of ThermoEnergy Corporation that may be sold from time to time by the selling stockholders named in this prospectus on page 48. We will not receive any proceeds from the sale of the Common Stock by the selling stockholders.

 

The selling stockholders may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of Common Stock or interests in shares of Common Stock on any market or trading facility on which our shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. No underwriter or other person has been engaged to facilitate the sale of shares of our Common Stock in this offering. We are paying the cost of registering the shares covered by this prospectus as well as various related expenses. The selling stockholders are responsible for all discounts, selling commission and other costs related to the offer and sale of their shares.

 

Our Common Stock is currently traded on the Over-the-Counter Bulletin Board ("OTCBB") under the symbol "TMEN.OB." On January 11, 2013 the last reported sale price of our Common Stock on the OTCBB was $0.07 per share.

 

 

 

You should read this prospectus carefully before you invest. Investing in our Common Stock involves a high degree of risk. See the section entitled "Risk Factors" beginning on page 6 of this prospectus for risks and uncertainties you should consider before buying shares of our Common Stock.

 

None of the Securities and Exchange Commission, any state securities commission, nor any other governmental agency has approved or disapproved of these securities or determined that this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

The date of this prospectus is January 18, 2013

 

 
 

 

TABLE OF CONTENTS

 

    Page
     
ABOUT THIS PROSPECTUS   2
     
PROSPECTUS SUMMARY   2
     
RISK FACTORS   6
     
SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS   12
     
USE OF PROCEEDS   13
     
PRICE RANGE OF COMMON STOCK   13
     
DIVIDEND POLICY   14
     
BUSINESS   14
     
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   22
     
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND EXECUTIVE OFFICERS OF THERMOENERGY   33
     
MANAGEMENT   39
     
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS   46
     
SELLING STOCKHOLDERS   47
     
DESCRIPTION OF CAPITAL STOCK   49
     
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO NON-U.S. HOLDERS   53
     
PLAN OF DISTRIBUTION   57
     
LEGAL MATTERS   59
     
EXPERTS   59
     
WHERE YOU CAN FIND MORE INFORMATION   59
     
CONSOLIDATED FINANCIAL STATEMENTS   F-1

 

 
 

 

ABOUT THIS PROSPECTUS

 

You should rely only on the information contained in this prospectus and in the documents incorporated by reference herein or any amendment or supplement hereto or any free writing prospectus prepared by us or on our behalf. We have not authorized any other person to provide you with different information. We are not making an offer to sell our Common Stock in any jurisdiction in which the offer or sale is not permitted. The information contained in this prospectus, the documents incorporated by reference or any free writing prospectus is accurate only as of its date, regardless of the time of delivery of this prospectus or any free writing prospectus or of any sale of the Common Stock.

 

Unless the context indicates otherwise, all references in this prospectus to “the Company,” "ThermoEnergy," "we," "us," "our company" and "our" refer to ThermoEnergy Corporation and its consolidated subsidiaries.

  

PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus and may not contain all of the information that may be important to you. You should read this entire prospectus, as well as the information to which we refer you and the information incorporated by reference herein, before deciding whether to invest in our Common Stock. You should pay special attention to the "Risk Factors" section of this prospectus to determine whether an investment in our Common Stock is appropriate for you.

 

ThermoEnergy Corporation

 

Founded in 1988, ThermoEnergy is a diversified technologies company engaged in the worldwide development, sale and commercialization of patented and/or proprietary technologies for the recovery and recycling of wastewater, chemicals, metals, and nutrients from waste streams at oil & gas, biogas, powerplant, industrial, and municipal operations. In addition, we hold patents on pressurized oxycombustion technology for clean, coal-fired power generation.

 

Our wastewater treatment systems are based on our proprietary Controlled Atmosphere Separation Technology (“CAST”) platform.  Our CAST 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.  The CAST platform technology is owned by our subsidiary, CASTion Corporation (“CASTion”).

 

We are also the owner of a patented pressurized oxycombustion technology that converts fossil fuels (including coal, oil and natural gas) and biomass into electricity while producing near zero air emissions while removing and capturing carbon dioxide in liquid form for sequestration or beneficial reuse.  This technology is intended to be used to build new or to retrofit old fossil fuel power plants globally with near zero air emissions while capturing carbon dioxide as a liquid for ready sequestration far more economically than any other competing technology.  The technology is held in our subsidiary, ThermoEnergy Power Systems, LLC (“TEPS”) and will be developed and commercialized through our joint venture, Unity Power Alliance, with ITEA.   

 

For the years ended December 31, 2011 and 2010, we incurred net losses attributable to common stockholders of approximately $17.3 million and $16.8 million (as revised), respectively, and cash outflows from operations of approximately $6.1 million and $5.6 million, respectively. As of December 31, 2011 and 2010, ThermoEnergy had an accumulated deficit of approximately $113.5 million and $96.1 million (as revised), respectively. ThermoEnergy Corporation's independent registered public accounting firm included an emphasis of matter paragraph regarding the substantial doubt about the Company’s ability to continue as a going concern in their report on our consolidated financial statements as of December 31, 2011 and 2010.

 

Industry Background

 

Water availability and quality are significant issues in many parts of the world.  Water for oil and gas production and processing competes with agricultural, industrial and drinking water for limited resources.  These competing demands are increasing the use of non-potable water supplies and the recovery of process water for reuse as a water source.  Brine, saline and brackish water  need to be treated for organic substances and dissolved and suspended solids before it can be consumed as drinking or process water.  Process, flowback and produced wastewater must also be cleaned of chemicals used to manufacture goods or extract oil and gas before it can be recovered.

 

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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 programs are intended to improve existing water quality programs.  In order to comply with these regulations, industrial, agricultural and municipal wastewater treatment facilities are seeking more cost-effective methods of wastewater treatment and power generation.

 

Historically, industrial companies would "treat and dispose" of wastewater created in their manufacturing or operating processes. Given the increasing need to reduce operating costs to be competitive, industrial companies are implementing "treat and recover" technologies such as our CAST technology.  CAST technology is also used in the “treat and dispose” markets.

 

Notwithstanding the uncertainty created by these regulatory and economic initiatives, we believe that pressurized oxycombustion will provide an economical and environmentally friendly solution for building new power plants and retrofitting existing power plants once carbon pricing is in place in the United States.

 

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 pressurized oxycombustion 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, 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 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 near 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.

 

Our Key Advantages

 

We believe that the key advantages of our business include:

 

  · Technology Leadership: Our award winning wastewater treatment technology treats and disposes or treats and recovers feedstock and valuable resources depending on whether the need is driven by regulatory requirements or a return on investment.  We have a comprehensive portfolio of wastewater treatment technology based on our CAST platform. Our technology supports a wide range of applications. This allows us to provide our customers with a simple or a "one-stop shop" solution. Our power generation technology utilizes pressurized oxyfuel combustion technology capturing and sequestering nearly all forms of sulfur oxide, nitrogen oxide, mercury and carbon dioxide created in the power generation process. Our comprehensive experience and knowledge of supporting technologies allows us to expand our product offerings.
     
  · Large domestic and global markets: We estimate the industrial and municipal tertiary wastewater removal and recovery market in the USA into which our CAST wastewater technologies are sold to be approximately $12 billion over the next five years and growing.  We estimate the market for our pressurized oxycombustion power generation technology to be a $1 trillion segment of the global market opportunity once fully commercialized.
     
  · Proven Solution Provider: We have over 70 CAST wastewater treatment systems deployed worldwide. We sell systems to both large and small businesses, as well as to municipalities.
     
  · Superior Performance: Our performance advantage is derived from the physical-chemical nature of our controlled atmosphere separation technology resulting in the lowest cost of operations versus biological and other solutions. Our cost of capital and operating costs are lower, we have a smaller footprint, we are not temperature dependent, we take less than an hour to reach equilibrium, produce no sludge, and no odor.

 

3
 

 

Our Strategy

 

Our objective is to become a significant force within the global municipal and industrial wastewater and power generation industries.

 

Our business model is based on 1) new construction or retrofitting of existing wastewater treatment plants for industrial clients and federal, state and municipal governments, as well as power generation plants for public and/or merchant utilities worldwide, and 2) privatization contracts where we will build and operate, or build, own and operate municipal and/or industrial wastewater treatment and power plants.  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.

 

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.

  

Our business is subject to numerous risks that are highlighted in the section entitled "Risk Factors" immediately following this prospectus summary. These risks, among others, represent challenges to the successful implementation of our strategy and to the growth and future profitability of our business. Some of these risks are:

 

  · We will require additional capital to continue to fund our operations.
     
  · We face intense competition and expect competition to increase in the future.
     
  · Our future growth will suffer if we do not achieve sufficient market acceptance of our products.
     
  · There may be a limited public market for our shares and the ability of our stockholders to dispose of their shares of Common Stock may be limited.

 

Corporate History

 

The Company was incorporated in Arkansas on January 19, 1988, under the name Innotek Corporation, at the direction of the Board of Directors of American Fuel and Power Corporation ("AFP").  In exchange for the contribution by AFP of certain technologies, including an exclusive sublicense of rights under a license from Batelle Memorial Institute (“Battelle”), 70% of the Company's initial Common Stock was issued to AFP and subsequently distributed to AFP shareholders.  The Company subsequently entered directly into a license agreement with Battelle which supersedes the previous agreement between Battelle and AFP.  On December 12, 1996 the Company changed its name from Innotek Corporation to ThermoEnergy Corporation.

 

On June 20, 2007, the Company changed its jurisdiction of incorporation from Arkansas to Delaware by effecting a merger of the Company with and into its wholly-owned Delaware subsidiary, ThermoEnergy Corporation, in a transaction in which the Delaware corporation was the surviving entity.

 

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Corporate Information

 

Our principal executive offices are located at 10 New Bond Street, Worcester, Massachusetts 01606 and our telephone number is (508) 854-1628. Our Internet address is www.thermoenergy.com. Information contained on our website does not constitute part of this prospectus.

 

The names "ThermoEnergy Corporation," "CAST," and "CASTion" are our registered trademarks. All other trademarks and trade names appearing in this prospectus are the property of their respective owners.

 

5
 

 

Summary of the Offering

 

Common Stock offered   63,856,250 shares of Common Stock, $0.001 par value per share, offered by the selling stockholders.
     
Common Stock outstanding after the offering (1)   154,942,075 shares
     
Use of proceeds   We will not receive any of the proceeds from the sale of the Common Stock by the selling stockholders.
     
Over-the-Counter Bulletin Board Symbol   TMEN.OB
     
Risk factors   Investing in our Common Stock involves a number of risks. Before investing, you should carefully consider the information set forth under “Risk Factors” beginning on page 6 of this prospectus, for a discussion of the risks related to an investment in our Common Stock.

 

   (1) The number of shares of Common Stock outstanding after this offering includes 120,454,575 shares outstanding as of January 11, 2013, plus 34,487,500 shares of Common Stock issuable upon exercise of warrants held by the selling stockholders, but does not include:
     
  · 36,576,826 shares reserved for issuance upon exercise of stock options with a weighted-average exercise price of $0.23 per share, which have been granted and remain outstanding;
     
  · 14,576,539 shares issuable under our stock option plan;
     
  · 65,382,613 shares underlying currently outstanding warrants held by persons other than the selling stockholders;
     
  · 3,888,029 shares issuable upon conversion of convertible debt; and
     
  · 116,858,264 shares issuable upon conversion of convertible preferred stock.
         

RISK FACTORS

 

Investing in our Common Stock involves risk.  In deciding whether to invest in our Common Stock, you should carefully consider the following risks, which should be read together with our other disclosures in this prospectus and in the documents we incorporate by reference.  These risks could materially affect our business, results of operations or financial condition and cause the trading price of our Common Stock to decline.  If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected.  In that case, the value of our Common Stock could decline and you could lose part or all of your investment.

 

Risks Related to Our Company

 

We have incurred substantial operating losses in the past and we may not be able to achieve profitability in the future.

 

We have incurred negative cash flows from operations since inception. For the years ended December 31, 2011 and 2010, we incurred net losses of $17,386,000 and $14,856,000 (as revised), respectively, and cash outflows from operations of $6,101,000 and $5,628,000, respectively. For the nine-month period ended September 30, 2012, we incurred net losses of $5,945,000 and cash outflows from operations of $5,087,000. As of December 31, 2011 and 2010, we had an accumulated deficit of $113,510,000 and $96,124,000 (as revised), respectively, and we had an accumulated deficit of $119,455,000 as of September 30, 2012. We expect development, sales and other operating expenses to increase in the future as we expand our business. If our revenue does not grow to offset these expected increased expenses, we may not be profitable. In fact, in future quarters we may not have any revenue growth and our revenues could decline. Furthermore, if our operating expenses exceed expectations, financial performance will be adversely affected and we may continue to incur significant losses in the future.

 

6
 

 

We will require additional capital to continue to fund our operations. If we need but do not obtain additional capital, we may be required to substantially limit operations.

 

We may not generate sufficient cash needed to finance our anticipated operations for the foreseeable future from such operations. Accordingly, we may seek funding through public or private financings, including equity financings, and through other arrangements including collaborations. Such financing may be unavailable when needed or may not be available on acceptable terms. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our current stockholders will be reduced, and these securities may have rights superior to those of our Common Stock. If adequate funds are not available to satisfy either short-term or long-term capital requirements, or if planned revenues are not generated, we may be required to limit our operations substantially. These limitations of operations may include a possible sale or shutdown of portions of our business, reductions in capital expenditures and reductions in staff and discretionary costs.

 

There is substantial doubt about our ability to continue as a going concern.

 

We have incurred net losses since inception and require substantial capital to continue commercialization of our water and power technologies (together, the “Technologies”) and to fund our liabilities. For the years ended December 31, 2011 and 2010, we incurred net losses of $17,386,000 and $14,856,000 (as revised), respectively, and cash outflows from operations of $6,101,000 and $5,628,000, respectively. For the nine-month period ended September 30, 2012, we incurred net losses of $5,945,000 and cash outflows from operations of $5,087,000. As of December 31, 2011 and 2010, we had an accumulated deficit of $113,510,000 and $96,124,000 (as revised), respectively. As of September 30, 2012, we had a cash balance of $528,000 and current liabilities of approximately $8.8 million, which consisted primarily of accounts payable of approximately $2.2 million, billings in excess of costs of approximately $3.3 million, convertible debt of $1.25 million, derivative liabilities of $41,000 and other current liabilities of approximately $1.9 million.  Our ability to continue as a going concern is dependent on many events outside of our direct control, including, among other things, obtaining additional financing either privately or through public markets and customers’ purchasing our products in substantially higher volumes. Further, our independent registered public accounting firm, in its report for the fiscal years ended December 31, 2011 and 2010, included an emphasis of matter paragraph regarding the substantial doubt about our ability to continue as a going concern.

  

Our largest customer recently terminated its contractual relationship with us.

  

On November 13, 2012, the City of New York Department of Environmental Protection (the “NYCDEP”), which was our largest customer during the fiscal years ended December 31, 2011 and 2010 and the nine months ended September 30, 2012, representing approximately 80%, 48% and 81% of our total revenues, respectively, during such periods, gave us notice of termination of the contract to install our ARP system at the 26th Ward wastewater treatment facility, which was our only contract with the NYCDEP. The loss of anticipated revenues from the NYCDEP will require us to reduce costs and to identify and transition to new sources of business and new business strategies. There can be no certainty that we will be able to identify, secure and manage such new business opportunities effectively. 

 

Our indebtedness could affect our business adversely and limit our ability to plan for or respond to changes in our business, and we may be unable to generate sufficient cash flows to satisfy our liquidity needs.

 

As of December 31, 2011, the carrying value of our indebtedness was $2,821,000, and our working capital (defined as current assets less current liabilities) was in a deficit position. Our indebtedness could have important consequences, including:

 

  limiting our ability to obtain additional financing to fund future working capital or capital expenditures;
     
  exposing us to interest rate risk with respect to the portion of our indebtedness that bears interest at a variable rate;
     
  limiting our ability to pay dividends on our Common Stock or make payments in connection with our other obligations;
     
  requiring that a portion of our cash flows from operations be dedicated to the payment of the principal of and interest on our debt, thereby reducing funds available for future operations, acquisitions, dividends on our Common Stock or capital expenditures;
     
  limiting our ability to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions; and
     
  placing us at a competitive disadvantage compared to those of our competitors that have less debt.

 

7
 

 

Material weaknesses in our internal controls over financial reporting and in our disclosure controls and procedures existed during 2011 and 2010 which led us to restate our 2011 interim financial results, as reflected in our 2011 Annual Report on Form 10-K. If we fail to maintain effective internal control over financial reporting, we may not be able to report our financial results accurately or on a timely basis. Any inability to report and file our financial results in an accurate and timely manner could harm our business and adversely impact the trading price of our Common Stock.

 

As a public company, we are required to comply with the Sarbanes-Oxley Act and other rules and regulations that govern public companies. In particular, we are required to certify our compliance with Section 404 of the Sarbanes-Oxley Act as of the end of each fiscal year, which requires us to perform system and process evaluation and testing of our internal control over financial reporting to allow management and our registered public accounting firm to report on the effectiveness of our internal control over financial reporting.  Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”).

 

In connection with the preparation of our consolidated financial statements as of December 31, 2009, we and our independent registered public accountants identified a number of material weaknesses in our internal controls over financial reporting and in our disclosure controls and procedures.  Specifically, we 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) there was a lack of segregation of duties in our significant accounting functions, (iii) our period-end reporting process did not provide sufficiently timely and accurate financial statements and required disclosures, (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.  The above-referenced material weaknesses were discovered by Kemp & Company (“Kemp”), at the time our independent registered public accounting firm.  During their audit for the year ended December 31, 2007, Kemp brought to the attention of our Audit Committee the failure to allocate adequate resources to the implementation of internal controls, the failure to provide timely and accurate financial statements and disclosures, and deficiencies in our contract administration and accounting procedures.  During their audit for the year ended December 31, 2008, Kemp advised the Audit Committee of the lack of segregation of duties in accounting functions and the misconduct of our former CFO.

 

We began our efforts to remediate those areas of material weakness with the appointment of a new Chief Financial Officer in the fourth quarter of 2009. During the first quarter of 2010, we engaged additional finance personnel with expertise and knowledge of the accounting and financial reporting obligations of public companies. With the assistance of the new personnel and under the guidance of our new Chief Financial Officer and our Audit Committee, during the first quarter of 2010 we implemented new reporting processes to assure that our financial statements and required disclosures were timely and accurate. In the third quarter of 2010, we developed and implemented processes and procedures related to the accounting for contract administration.

 

However, we have determined that our internal controls over financial reporting and our disclosure controls and procedures as of December 31, 2011 were deficient due to (i) our failure to adequately allocate proper and sufficient amount of resources to ensure that necessary internal controls were implemented and followed, specifically, but not limited, to the accounting and valuation of complex debt and equity transactions; and (ii) a lack of segregation of duties in our significant accounting functions to ensure that internal controls were designed and operating effectively.  Management has discussed its conclusions with the Audit Committee and with our  independent registered public accounting firm. Management expected to hire additional qualified personnel in the financial and accounting area in order to remediate these material weaknesses by December 31, 2012. Given our financial condition and other business priorities during the year, management has delayed the hiring and remediation plan to the year ending December 31, 2013. We cannot provide assurance that we have eliminated all, or that we will not in the future have additional, material weaknesses, any of which may subject us to additional regulatory scrutiny and cause future delays or errors in filing our financial statements and periodic reports with the SEC. Any such delays in the filing of our financial statements and periodic reports may result in a loss of public confidence in the reliability of our financial statements and sanctions could be imposed on us by the SEC. We believe that any such misstatements or delays could negatively impact our liquidity, access to capital markets, financial condition and the market value of our Common Stock.

 

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We face intense competition and expect competition to increase in the future, which could have an adverse effect on our revenue, revenue growth rate, if any, and market share.

 

We compete in different target markets to various degrees on the basis of a number of principal competitive factors, including our products’ performance, features and functionality, size, ease of system design, customer support, products, reputation, reliability and price, as well as on the basis of our customer support, the quality of our product and our reputation.

 

Our competitors range from large, international companies offering a wide range of products to smaller companies specializing in narrow markets and internal engineering groups, some of which may be our customers.  We expect competition in the markets in which we participate to increase in the future as existing competitors improve or expand their product offerings. In addition, we believe that a number of other public and private companies may in the future develop competing products.

 

Our ability to compete successfully depends on elements both within and outside of our control, including industry and general economic trends.  Many of our competitors have substantially greater financial and other resources with which to withstand adverse economic or market conditions in the future. Moreover, increased competition could result in price pressure, reduced profitability and loss of market share, any of which could materially and adversely affect our business, revenue, revenue growth rates and operating results.

 

If we fail to develop and introduce new or enhanced products on a timely basis, our ability to attract and retain customers could be impaired and our competitive position could be harmed.

 

We operate in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. To compete successfully, we must design, develop, market and sell new or enhanced products that provide increasingly higher levels of performance and reliability and meet the cost expectations of our customers. The introduction of new products by our competitors, the market acceptance of products based on new or alternative technologies, or the emergence of new industry standards could render our existing or future products obsolete. Our failure to anticipate or timely develop new or enhanced products or technologies in response to technological shifts could result in decreased revenue. In particular, we may experience difficulties with product design, manufacturing, marketing or certification that could delay or prevent our development, introduction or marketing of new or enhanced products. If we fail to introduce new or enhanced products that meet the needs of our customers or penetrate new markets in a timely fashion, we will lose market share and our operating results will be adversely affected.

  

Due to our limited operating history, we may have difficulty accurately predicting our future revenue and appropriately budgeting our expenses.

 

We have only a limited operating history from which to predict future revenue. This limited operating experience, combined with the rapidly evolving nature of the markets in which we sell our products, substantial uncertainty concerning how these markets may develop and other factors beyond our control, reduces our ability to accurately forecast quarterly or annual revenue.

 

Our customers often require our products to undergo a lengthy and expensive qualification process which may delay and does not assure product sales.

 

Prior to purchasing our products, our customers require that both our products and our third-party contractors undergo extensive qualification processes, which sometime involve rigorous reliability testing.  However, qualification of a product by a customer does not assure any sales of the product to that customer.

 

Winning business is subject to lengthy competitive selection processes that require us to incur significant expenditures. Even if we begin a product design, a customer may decide to cancel or change its  plans, which could cause us to generate no revenue from a product and adversely affect our results of operations.

 

The selection process for obtaining new business typically is lengthy and can require us to incur significant design and development expenditures and dedicate scarce engineering resources in pursuit of a single customer opportunity. We may not win the competitive selection process and may never generate any revenue despite incurring significant design and development expenditures.

 

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The delays inherent in these lengthy sales cycles increase the risk that a customer will decide to cancel, curtail, reduce or delay its product plans, causing us to lose anticipated sales. In addition, any delay or cancellation of a customer’s plans could materially and adversely affect our financial results, as we may have incurred significant expense and generated no revenue. Finally, our customers’ failure to successfully market and sell their products could reduce demand for our products and materially and adversely affect our business, financial condition and results of operations. If we were unable to generate revenue after incurring substantial expenses to develop any of our products, our business would suffer.

 

The failure to compete successfully could harm our business.

 

We face competitive pressures from a variety of companies in our target markets. We expect that domestic and international competition will increase in these markets, due in part to rapid technological advances, price erosion, changing customer preferences and evolving regulatory standards. Increased competition could result in significant price competition, reduced revenues or lower profit margins. Many of our competitors and potential competitors have or may have substantially greater research and product development capabilities, financial, scientific, marketing, and manufacturing and human resources, name recognition and experience than we do. As a result, these competitors may:

  

  •  succeed in developing products that are equal to or superior to our products or that will achieve greater market acceptance than our products;
     
  devote greater resources to developing, marketing or selling their products;
     
  respond more quickly to new or emerging technologies or scientific advances and changes in customer requirements, which could render our technologies or potential products obsolete;
     
  introduce products that make the continued development of our potential products uneconomical;
     
  obtain patents that block or otherwise inhibit our ability to develop and commercialize potential products;
     
  withstand price competition more successfully than us;
     
  establish cooperative relationships among themselves or with third parties that enhance their ability to address the needs of prospective customers better than us; and
     
  take advantage of acquisitions or other opportunities more readily than us.

 

Competitors may offer enhancements to existing products, or offer new products based on new technologies, industry standards or customer requirements that are available to customers on a more timely basis than comparable products from our company or that have the potential to replace or provide lower cost alternatives to our products. The introduction of enhancements or new products by competitors could render our existing and future products obsolete or unmarketable. Each of these factors could have a material adverse effect on our company’s business, financial condition and results of operations.

 

Our future growth will suffer if we do not achieve sufficient market acceptance of our products.

 

Our success depends, in part, upon our ability to maintain and gain market acceptance of our products. To be accepted, these products must meet the quality, technical performance and price requirements of our customers and potential customers. The wastewater treatment and power generation industries are currently fragmented with many competitors developing different technologies. Some of these technologies may not gain market acceptance.  In addition, even if we achieve some degree of market acceptance for our potential products in one industry, we may not achieve market acceptance in other industries for which we are developing products, which market acceptance is critical to meeting our financial targets.

 

Achieving market acceptance for our products will require marketing efforts and the expenditure of financial and other resources to create product awareness and demand by customers. It will also require the ability to provide excellent customer service. We may be unable to offer products that compete effectively due to our limited resources and operating history. Also, certain large corporations may be predisposed against doing business with a company of our limited size and operating history. Failure to achieve broad acceptance of our products by customers and to compete effectively would harm our operating results.

 

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Successful commercialization of current and future products will require us to maintain a high level of technical expertise.

 

To succeed in our target markets, we will have to establish and maintain a leadership position in the technology supporting those markets. Accordingly, our success will depend on our ability to:

 

  accurately predict the needs of target customers and develop, in a timely manner, the technology required to support those needs;
     
  provide products that are not only technologically sophisticated but are also available at a price acceptable to customers and competitive with comparable products;
     
  establish and effectively defend our intellectual property; and
     
  enter into relationships with other companies that have developed complementary technology into which our products may be integrated.

 

We cannot assure you that we will be able to achieve any of these objectives.

 

Risks Related to Our Common Shares

 

There may be a limited public market for our common shares, and the ability of our stockholders to dispose of their shares of Common Stock may be limited.

 

We cannot foresee the degree of liquidity that will be associated with our common shares. A holder of our common shares may not be able to liquidate his, her or its investment in a short time period or at the market prices that currently exist at the time the holder decides to sell. The market price for our Common Stock may fluctuate in the future, and such volatility may bear no relation to our performance.

 

The exercise of options and warrants, the conversion of preferred Stock and other issuances of shares of Common Stock or securities convertible into Common Stock will dilute your interest.

 

As of January 11, 2013, there were (i) outstanding options to purchase an aggregate of 36,576,826 shares of our Common Stock at a weighted-average exercise price of $0.23 per share, (ii) warrants outstanding to purchase 99,870,113 shares of our Common Stock at a weighted average exercise price of $0.41 per share, (iii) convertible promissory notes with an aggregate principal amount of $1,944,015 convertible into 3,888,029 shares of Common Stock, and (iv) shares of Preferred Stock convertible into 116,858,264 shares of Common Stock.   The exercise of options and warrants or the conversion of notes or Preferred Stock at prices below the market price of our Common Stock could adversely affect the price of shares of our Common Stock. Additional dilution may result from the issuance of shares of our capital stock in connection with acquisitions or in connection with financing efforts.

 

Any issuance of our Common Stock (other than issuances solely to then-existing stockholders proportionate to their interests, such as in the case of a stock dividend or stock split), will result in dilution to each stockholder by reducing his, her or its percentage ownership of the total outstanding shares. Moreover, if we issue options or warrants to purchase our Common Stock in the future and those options or warrants are exercised, or if we issue restricted stock, stockholders may experience further dilution.

 

Penny Stock Regulation

 

Broker−dealer practices in connection with transactions in “penny stocks” are regulated by penny stock rules adopted by the Commission. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker−dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker−dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker−dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock, the broker−dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. Since the Company’s securities are subject to the penny stock rules, investors in the Company may find it more difficult to sell their securities.

 

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The market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker−dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) boiler room practices involving high−pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid−ask differential and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker−dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market.

 

Although we do not expect to be in a position to dictate the behavior of the market or of broker−dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.

 

SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus and the documents incorporated herein by reference include "forward-looking statements" within the meaning and protections of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

 

All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as "may," "will," "anticipate," "assume," "should," "indicate," "would," "believe," "contemplate," "expect," "estimate," "continue," "plan," "project," "could," "intend," "target" and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:

 

  we are an early stage company and have a history of incurring losses;
     
  our ability to remain competitive in the markets we serve;
     
  the effects of future economic, business and market conditions;
     
  general economic and capital market conditions and our ability to obtain additional funding;
     
  our ability to continue to develop, manufacture and market innovative products and services that meet customer requirements for performance and reliability;
     
  our ability to establish effective internal controls over our financial reporting;
     
  risks relating to the transaction of business internationally;
     
  our failure to realize anticipated benefits from acquisitions or the possibility that such acquisitions could adversely affect us, and risks relating to the prospects for future acquisitions;

 

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  the loss of key employees and the ability to retain and attract key personnel, including technical and managerial personnel;
     
  quarterly and annual fluctuations;
     
  investments in research and development;
     
  protection and enforcement or our intellectual property rights and proprietary technologies;
     
  costs associated with potential intellectual property infringement claims asserted by third parties;
     
  the loss of one or more of our significant customers, or the diminished demand for our products;
     
  our dependence on contract manufacturing and outsourced supply chain, as well as the costs of materials;
     
  the effects of war, terrorism, natural disasters or other catastrophic events;
     
  our success at managing the risks involved in the foregoing items; and
     
  other risks and uncertainties, including those listed under the heading "Risk Factors" in this prospectus.

 

The forward-looking statements are based upon management's beliefs and assumptions and are made as of the date of this prospectus. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this prospectus or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise, except to the extent required by federal securities laws. Any investor should consider all risks and uncertainties disclosed in our filings with the Securities and Exchange Commission, or the SEC, described below under the heading "Where You Can Find More Information," all of which is accessible on the SEC's website at www.sec.gov.

 

USE OF PROCEEDS

 

We will not receive any proceeds from the sale of the Common Stock by the selling stockholders.

 

PRICE RANGE OF COMMON STOCK

 

Our Common Stock is currently traded on the Over-the-Counter Bulletin Board under the symbol "TMEN.OB."  From January 1, 2010 through October 27, 2010, our Common Stock was traded in the over-the-counter market on pink sheets under the symbol “TMEN.PK”.  The table below sets forth the high and low prices per share of our Common Stock for the periods specified.  As of January 11, 2013, we had 120,454,575 shares of Common Stock outstanding, held by approximately 1,190 record holders.

 

      Sale Price Per Share
of Common Stock
 
      High       Low  
2010                
First Quarter   $ 0.59     $ 0.22  
Second Quarter   $ 0.56     $ 0.28  
Third Quarter   $ 0.44     $ 0.265  
Fourth Quarter   $ 0.48     $ 0.20  
                 
2011                
First Quarter   $ 0.35     $ 0.16  
Second Quarter   $ 0.32     $ 0.11  
Third Quarter   $ 0.25     $ 0.15  
Fourth Quarter   $ 0.28     $ 0.11  
                 
2012                
First Quarter   $ 0.28     $ 0.16  
Second Quarter   $ 0.19     $ 0.09  
Third Quarter   $ 0.14     $ 0.08  
Fourth Quarter   $ 0.11     $ 0.05  
                 
2013                
First Quarter (through January 11, 2013)   $ 0.10     $ 0.07  

 

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DIVIDEND POLICY

 

We have never declared or paid any dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance our operations and to expand our business.

 

BUSINESS

 

Overview

 

We are a diversified technologies company engaged in the worldwide commercialization of advanced wastewater treatment systems and carbon reducing power generation technologies.

 

Our wastewater treatment systems are based on our proprietary Controlled Atmosphere Separation Technology (“CAST”) platform.  Our CAST 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.  The CAST platform technology is owned by our subsidiary, CASTion Corporation (“CASTion”).

 

We are also the owner of a patented pressurized oxycombustion technology that converts fossil fuels (including coal, oil and natural gas) and biomass into electricity while producing near zero air emissions while removing and capturing carbon dioxide in liquid form for sequestration or beneficial reuse.  This technology is intended to be used to build new or to retrofit old fossil fuel power plants globally with near zero air emissions while capturing carbon dioxide as a liquid for ready sequestration far more economically than any other competing technology.  The technology is held in our subsidiary, ThermoEnergy Power Systems, LLC (“TEPS”) and will be developed and commercialized through our joint venture, Unity Power Alliance, formed with Itea.   

 

Our pressurized oxycombustion technology and the water technologies are collectively referred to as the “Technologies.”  The economic and environmental benefits of our technologies represent a significant advancement in these key infrastructure industries.  Additional information can be found on our website at www.thermoenergy.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 is traded on the OTC Bulletin Board under the stock symbol TMEN.OB.

 

Industry Background

 

Water availability and quality are significant issues in many parts of the world.  Water for oil and gas production and processing competes with agricultural, industrial and drinking water for limited resources.  These competing demands are increasing the use of non-potable water supplies and the recovery of process water for reuse as a water source.  Brine, saline and brackish water  need to be treated for organic substances and dissolved and suspended solids before it can be consumed as drinking or process water.  Process, flowback and produced waste water must also be cleaned of chemicals used to manufacture goods or extract oil and gas before it can be recovered.

 

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 programs are intended to improve existing water quality programs.  In order to comply with these regulations, industrial, agricultural and municipal wastewater treatment facilities are seeking more cost-effective methods of wastewater treatment and power generation.

 

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Historically, industrial companies would "treat and dispose" of wastewater created in their manufacturing or operating processes. Given the increasing need to reduce operating costs to be competitive, industrial companies are implementing "treat and recover" technologies such as our CAST technology.  CAST technology is also used in the “treat and dispose” markets.

 

Notwithstanding the uncertainty created by these regulatory and economic initiatives, we believe that pressurized oxycombustion will provide an economical and environmentally friendly solution for building new power plants and retrofitting existing power plants without any new government legislation.

 

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 pressurized oxycombustion 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, 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 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 near 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.

 

Growth 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, and 2) privatization contracts where we will build and operate, or build, own and operate municipal and/or industrial wastewater treatment and power plants.  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 believe many of these markets represent suitable opportunities for us to implement our business model of design, build, own and operate ("DBOO") wastewater facilities over a contracted period (anticipated to be a 5-20 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.)

 

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.

 

Technology and Research and Development

 

We own or license all of our Technologies, including the Technologies discussed previously and below in this document. Our product engineering and research and development expenses were $299,000 and $643,000 for the fiscal years ended December 31, 2011 and 2010, respectively, and $160,000 for the nine months ended September 30, 2012.

  

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Products

 

Water Technologies

 

The Company has spent nearly two decades developing sustainable water treatment and recovery systems that help industry and municipalities operate more efficiently, save money, reduce their carbon footprint and meet their sustainability goals.

 

Award-Winning Technology

 

We believe our TurboFrac system provides versatile and cost effective solutions to recover and recycle clean, usable water from contaminated produce water created by the hydraulic fracturing of oil and gas wells. Our FracGen systems create hydrofracking-grade water from briny water in local aquifers located in arid areas. FracGen reduces demand on local potable water supplies and reduces the cost of transporting fresh water from other geographic locations.

 

Our versatile, award-winning CAST® (Controlled Atmospheric Separation Technology), RCAST®, and high-flow TurboCAST systems can be utilized as an effective stand-alone wastewater, chemical, metal or nutrient recovery system, or as part of an integrated recovery solution. These state-of-the-art vacuum assisted distillation units offer significant advantages over other evaporative technologies such as thin film and nucleate boiling. They are specially designed for high-strength wastewaters with high Total Dissolved Solids and Total Suspended Solids typically found in industrial, municipal and agricultural recovery processes.

 

In industrial applications, our Zero-Liquid-Discharge (ZLD) Systems can recover nearly 100% of valuable chemical resources or wastewater for immediate reuse or recycling with no liquid leaving the facility. CAST concentrates mixed hazardous waste down to as little as 5% of its original volume for economical disposal or reclaim. This patented technology is designed and constructed to exceed the demands of harsh chemical environments.

 

Fast Return on Customer Investment

 

We believe our wastewater recovery systems reduce costs by recovering process chemicals, metals, and clean water for reuse or recycling and eliminating most of the costly disposal of hazardous waste or process effluent. These solutions offer a solid return on our customers’ investments and a quick payback with continued savings and efficiency for many years.

 

Our wastewater treatment systems not only meet local, state and federal environmental regulations, but typically provide a rapid rate of return on investment by recovering and reusing expensive feedstocks, reducing contaminated wastewater discharge and recovering and reusing wastewater used in process operations. Our systems utilize proven technology to cost effectively process and treat brackish, flowback and produced water in the hydraulic fracturing (“fracking”) process in the oil and gas industries. Our wastewater treatment systems also have global applications in aerospace, food and beverage processing, metal finishing, pulp & paper, petrochemical, refining, microchip and circuit board manufacturing, heavy manufacturing and municipal wastewater.

 

Specific wastewater solutions include:

 

  • Creating new supplies of usable water and recycling wastewater in the oil and gas industry
  • Recovering ammonia and creating fertilizer from anaerobic digesters
  • Recovering and recycling ammonia in industrial and municipal operations
  • Recovering chemicals or metals from industrial wastewater
  • Recovering and recycling glycol

CASTion’s CAST, R-CAST and Proprietary Water Technologies

 

Our proprietary 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 reduces and/or 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 disposal, 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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  · Water Sourcing Systems – designed to treat brackish and natural water sources for use in societal and industrial processes;
     
  · Primary Recovery Systems – designed to treat the majority of an operation’s wastewater for reuse and concentrate the contaminants;
     
  · Final Recovery Systems – designed to treat the remaining concentrate contaminants for disposal or additional processing to achieve zero liquid discharge; and
     
  ·

Compliance Systems – designed to meet strict local and federal regulatory mandates.

 

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.

 

Turbo CAST

 

Turbo CAST is specifically designed for use in areas where energy costs are high and in applications where there are high wastewater flows. Turbo CAST incorporates the latest in heat recuperation technology that allows for the recovery of up to 90% of the thermal energy used in the system. Turbo CAST opens up opportunities in several high flow industrial markets where previously we didn't have a competitive solution. By combining vapor recompression technology with a vacuum assisted flash distillation process, this solution offers a highly energy efficient, very simple to operate system that reduces operating costs. Turbo CAST can be retrofitted to our existing CAST systems improving  energy performance significantly.

 

Our technology is mobile and deployable in a completely self-contained wastewater processing system that uses our CAST® platform technology. The Mobile CAST systems can be deployed on-site for a range of applications, including:  metals recovery, airport deicing fluid dewatering and recovery, antifreeze dewatering and recovery, biological oxygen demand (BOD) reduction, and ammonia (nitrogen) recovery. The size of our units also facilitates on-site pilot testing that accelerates our sales cycle.

 

ARP

 

Our patented Ammonia Recovery Process (“ARP”) captures ammonia from dilute waste streams and converts it into ammonium sulfate, a commercial grade fertilizer, which can be utilized in agricultural markets worldwide.  The ARP technology has been proven in more than 150 pilot tests.

 

ARP is a 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 separates ammonia out of wastewater discharge streams from municipal, industrial and agricultural waste via RCAST and converts it into standard, commercial-grade, ammonium sulfate fertilizer.  We are 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.

 

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Thermo ARP™

 

We recently developed a new, high-efficiency process for recovering nutrients from wastewater called Thermo ARP™.  Thermo ARP™ is specifically designed for use with industrial, agricultural and municipal anaerobic digesters where the wastewater stream requires a simpler treatment strategy.  Based on our proprietary CAST technology platform, Thermo ARP™ uniquely combines heat and flash vacuum distillation to deliver the lowest cost per pound of nitrogen removed when compared with any digestate treatment technology on the market today.  For industrial, agricultural and municipal high rate anaerobic digesters, Thermo ARP™ has a treatment cost per pound of nitrogen removed that is materially less than that of the most efficient competing technologies.  Both ARP and Thermo ARP™ have the economic and environmental advantage of recovering nitrogen as a fertilizer.  Users of this technology can generate revenue from the sale of fertilizer and combine that revenue with nutrient credits now offered in several states to reduce the cost of operating the system and can accelerate payback on the equipment investment.

 

Other water 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.  TFP provides a cost-effective solution for biosolids disposal for municipal wastewater treatment.  TFP 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 United States Environmental Protection Agency (“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 the event of 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.  TFP is covered in the same license as Enhanced Biogas.

 

TFP 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.  In the lower temperature phase (around 90-100ºF) waste solids already reduced in the first phase are more completely broken down to generate additional biogas at lower energy costs.

 

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The Enhanced Biogas Production process is currently protected by patents that we license exclusively.  Under the terms of the license agreement, (the “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.

 

Power Generation Technologies

 

In addition to our Water Technologies, we are developing a new, advanced power plant design, that offers a cost-effective and environmentally responsible solution to both carbon capture and global warming.  The power technology is described below.

 

Pressurized Oxycombustion

 

We are also the owner of a patented pressurized oxycombustion technology that converts fossil fuels (including coal, oil and natural gas) and biomass into electricity while producing near zero air emissions, and at the same time removing and capturing carbon dioxide in liquid form for sequestration or beneficial reuse. This technology can be used to build new or retrofit old fossil fuel power plants around the world that produce near zero air emissions while capturing carbon dioxide as a liquid for ready sequestration far more economically than any other competing technology. The technology is held by our subsidiary, ThermoEnergy Power Systems, LLC (“TEPS”) and will be developed and commercialized through our new joint venture, Unity Power Alliance (UPA). 

 

On June 20, 2012, we entered into an Agreement with Itea S.p.A. (“ITEA”) for the development of pressurized oxycombustion in North America. The two parties, through UPA, will utilize their patented technologies to advance, develop and promote the use of the coal application of pressurized oxycombustion, construct a pilot plant utilizing the technology, and subsequently construct a demonstration facility based on the technology as implemented in the pilot plant. ITEA was granted the option to acquire a 50% ownership interest in UPA for nominal consideration. On July 16, 2012, ITEA exercised its option and acquired the 50% ownership interest in UPA. As of September 30, 2012, the financial results of UPA are accounted for as a joint venture under the equity method of accounting and are not consolidated in our financial statements as a variable interest entity as defined by ASC 810.

 

In September 2012, Unity Power Alliance was awarded a $1 million Phase 1 grant from the U.S. Department of Energy to help fund a project under a special DOE program to advance technologies for efficient, clean coal power and carbon capture. After successful completion of the first phase of the program, it is anticipated that a much larger Phase 2 will occur, with DOE awards in the $10-20 million range applied toward the construction of a pilot scale plant. As part of UPA's project, in October 2012, we received a $900,000 contract from UPA to build a bench-scale “flameless” combustion reactor under the grant.

 

Pressurized oxycombustion 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 all forms or sulfur oxide, nitrogen oxide, mercury, particulates and carbon dioxide, which can then be used for sequestration or beneficial reuse.  The key element that differentiates pressurized oxycombustion from conventional oxy-fuel designs is that combustion shifts the temperatures at which water, carbon dioxide, mercury and acid gases condense.  Gas-to-liquid nucleate condensation physics is then used to collect and remove the pollutants, while carbon dioxide is recovered as a liquid through direct condensation to reduce harmful air emissions of acid gases, mercury, soot and carbon dioxide.  Pressurized oxycombustion 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 pressurized oxycombustion 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 pressurized oxycombustion.  Some of the industries in which pressurized oxycombustion 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 Nos. 6,196,000 and 6,918,253 for the pressurized oxycombustion process.  We also received patents relating to the pressurized oxycombustion process in Australia, China, India, Mexico, Poland, Romania, the Russian Federation and South Africa.  Foreign patent applications have also been filed in Canada and the European Patent Office.

 

Customers

 

We have over 70 CAST wastewater treatment systems deployed worldwide, mostly in the United States. We sell our systems to both small and large businesses, as well as to municipalities. Historically, companies in the Fortune 1000 rankings have accounted for approximately 28% of units sold; these customers include Valero, Proctor & Gamble, General Electric and Caterpillar. Historically, municipalities, including the New York City Department of Environmental Protection, have accounted for approximately 2% of units sold. The remaining 70% of units were sold to mid- and smaller-sized companies. All of our revenues in 2011 and 2010 came from the U.S. and the bulk of revenues in each year were generated by a single customer.

 

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The City of New York Department of Environmental Protection (the “NYCDEP”) was our largest customer during the fiscal years ended December 31, 2011 and 2010 and the nine months ended September 30, 2012, representing approximately 80%, 48% and 81% of our total revenues, respectively. On November 13, 2012, the NYCDEP gave us notice of termination of the contract to install our ARP system at the 26th Ward wastewater treatment facility, the contract under which substantially all of our revenues from the NYCDEP had been earned.

  

Manufacturing

 

We design, manufacture, and service our products from our 48,000 square foot facility at 10 New Bond Street, Worcester, Massachusetts. We utilize custom designed proprietary vessels supported by commercially available or off-the-shelf parts such as pumps and heat exchangers to produce our proprietary solutions for our customers. No single vendor holds a sole source contract nor represents a significant portion of our standard supply chain. We believe we could find alternative suppliers at competitive cost should any of our current suppliers be unable to fulfill our needs.

 

Sales, Marketing and Technical Support

 

We primarily sell our products through our direct sales force supported by a network of manufacturer representatives in the U.S. and internationally. Our sales force works closely with our field application engineers, business development and marketing teams in an integrated approach to address a customer's current and future needs. The support provided by our field application engineers is critical in the product qualification stage. Many customers have custom requirements to consider.

 

We have actively communicated our solutions and brands through participation at trade shows and industry conferences, publication of research papers, byline articles in trade media, in interactive media, interactions with industry press and analysts, press releases, our company website, as well as through print and electronic sales material.

 

Competition

 

Our Technologies enable the wastewater treatment and power generation industries to comply with state and federal clean water and clean air regulatory requirements while reducing their cost of operations.  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 a 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.

 

We believe the principal competitive factors impacting our solutions are:

 

  · product performance;
     
  · price to performance characteristics;
     
  · delivery performance and lead times;
     
  · time to market;
     
  · breadth of product solutions;
     
  · sales, technical and post-sales service and support;
     
  · technical partnerships in early stages of product development;
     
  · sales channels; and
     
  · ability to drive standards and comply with new industry regulations.

 

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Patents and Other Intellectual Property Rights

 

We own or license all of our Technologies, including the Technologies discussed previously in this document.

 

We rely on patent, trademark, copyright and trade secret laws and internal controls and procedures to protect our technology. We believe that a robust technology portfolio that is assessed and refreshed periodically is an essential element of our business strategy. We believe that our success will depend in part on our ability to:

 

  · obtain patent and other proprietary protection for the technology and processes that we develop;
     
  · enforce and defend patents and other rights in technology, once obtained;
     
  · operate without infringing the patent and proprietary rights of third parties; and
     
  · preserve our trade secrets.

 

We presently have been issued approximately twelve patents and nine patent applications are pending. Patents have been issued in various countries with the main concentration in the United States. Our existing significant U.S. patents will expire between 2021 and 2027.

 

We take extensive measures to protect our intellectual property rights and information. For example, every employee enters into a confidential information, non-competition and invention assignment agreement with us when they join and are reminded of their responsibilities when they leave. We also enter into and enforce a confidential information and invention assignment agreement with contractors.

 

We own or license patents and pending patents covering technologies relating to:

 

  · ARP - Ammonia removal from a stream;
     
  · Pressurized Oxycombustion - Thermodynamic efficiency and pollution control; and
     
  · Enhanced biogas recovery and production.

 

Although we believe our patent portfolio is a valuable asset, the discoveries or technologies covered by the patents, patent applications or licenses may not have commercial value. Issued patents may not provide commercially meaningful protection against competitors. Other parties may be able to design around our issued patents or independently develop technology having effects similar or identical to our patented technology.

 

We periodically evaluate our patent portfolio based on our assessment of the value of the patents and the cost of maintaining such patents, and may choose from time to time to let various patents lapse, terminate or be sold.

 

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Employees

 

As of  December 31, 2012, we had 26 employees, including 5 in manufacturing, 7 in engineering, 9 in sales and marketing, and 5 in general and administrative.  All of our employees were full-time employees, located primarily in our Worcester, Massachusetts fabrication facility.  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.

 

Facilities

 

Our principal executive offices are located at 10 New Bond Street, Worcester, Massachusetts 01606, where we lease approximately 48,000 square feet of space from an unaffiliated third party. In the event we require further space, we believe that we can find appropriate facilities in the same geographic area at lease rates comparable to those we currently pay.  We do not own any real property.

 

Environmental

 

Our operations involve the use, generation and disposal of hazardous substances and are regulated under federal, state, and local laws governing health and safety and the environment.  Our compliance costs were less than $100,000 in the years ended December 31, 2011 and 2010, and less than $50,000 for the nine month period ended September 30, 2012. We believe that our products and operations at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated.

 

Legal Proceedings

 

On July 16, 2012, Andrew T. Melton, our former Executive Vice President and Chief Financial Officer (“Melton”), filed a Complaint in the United States District Court, Eastern District of Arkansas alleging that his employment had been terminated in breach of his employment agreement and claiming damages in the aggregate amount of approximately $2.2 million, including unpaid salary, reimbursement of expenses, and other payments under his employment agreement. We are currently in the discovery process and intend to vigorously defend this litigation.

 

From time to time, we may become subject to various legal proceedings that are incidental to the ordinary conduct of our business. We are not currently party to any material legal proceedings other than those listed above.

 

Government Regulations

 

We are subject to federal, state and local laws and regulations relating to the generation, handling, treatment, storage and disposal of certain toxic or hazardous materials and waste products that we use or generate in our operations.  We regularly assess our compliance with environmental laws and management of environmental matters.  We believe that our products and operations at our facilities comply in all material respects with applicable environmental laws.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

You should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes for the year ended December 31, 2011 and for the nine month period ended September 30, 2012, which are included in this prospectus.  This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions.  Actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors," "Special Cautionary Note Regarding Forward-Looking Statements" and elsewhere in this prospectus.

 

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Overview

 

Founded in 1988, we are a diversified technologies company engaged in the worldwide development, sale and commercialization of patented and/or proprietary technologies for the recovery and recycling of wastewater, chemicals, metals, and nutrients from waste streams at oil & gas, biogas, power plant, industrial, and municipal operations. In addition, we hold patents on pressurized oxy-combustion technology for clean, coal-fired power generation.

 

Wastewater Solutions

 

We have spent nearly two decades developing sustainable water treatment and recovery systems that help industry and municipalities operate more efficiently, save money, reduce their carbon footprint and meet their sustainability goals.

 

Award-Winning Technology

 

We believe our TurboFrac system provides versatile and cost effective solutions to recover and recycle clean, usable water from contaminated produce water created by the hydraulic fracturing of oil and gas wells. Our FracGen systems create hydrofracking-grade water from briny water in local aquifers located in arid areas. FracGen reduces demand on local potable water supplies and reduces the cost of transporting fresh water from other geographic locations.

 

Our versatile, award-winning CAST® (Controlled Atmospheric Separation Technology), RCAST®, and high-flow TurboCAST systems can be utilized as an effective stand-alone wastewater, chemical, metal or nutrient recovery system, or as part of an integrated recovery solution. These state-of-the-art vacuum assisted distillation units offer significant advantages over other evaporative technologies such as thin film and nucleate boiling. They are specially designed for high-strength wastewaters with high Total Dissolved Solids and Total Suspended Solids typically found in industrial, municipal and agricultural recovery processes.

 

In industrial applications, our Zero-Liquid-Discharge (ZLD) Systems can recover nearly 100% of valuable chemical resources or wastewater for immediate reuse or recycling with no liquid leaving the facility. CAST concentrates mixed hazardous waste down to as little as 5% of its original volume for economical disposal or reclaim. This patented technology is designed and constructed to exceed the demands of harsh chemical environments.

 

Fast Return on Customer Investment

 

We believe our wastewater recovery systems reduce costs by recovering process chemicals, metals, and clean water for reuse or recycling and eliminating most of the costly disposal of hazardous waste or process effluent. These solutions offer a solid return on our customers’ investments and a quick payback with continued savings and efficiency for many years.

 

Our wastewater treatment systems not only meet local, state and federal environmental regulations, but typically provide a rapid rate of return on investment by recovering and reusing expensive feedstocks, reducing contaminated wastewater discharge and recovering and reusing wastewater used in process operations. Our systems utilize proven technology to cost effectively process and treat brackish, flowback and produced water in the hydraulic fracturing (“fracking”) process in the oil and gas industries. Our wastewater treatment systems also have global applications in aerospace, food and beverage processing, metal finishing, pulp & paper, petrochemical, refining, microchip and circuit board manufacturing, heavy manufacturing and municipal wastewater.

 

Specific wastewater solutions include:

 

·Creating new supplies of usable water and recycling wastewater in the oil and gas industry
·Recovering ammonia and creating fertilizer from anaerobic digesters
·Recovering and recycling ammonia in industrial and municipal operations
·Recovering chemicals or metals from industrial wastewater
·Recovering and recycling glycol

 

Power Generation Technologies

 

We are also the owner of a patented pressurized oxycombustion technology that converts fossil fuels (including coal, oil and natural gas) and biomass into electricity while producing near zero air emissions, and at the same time removing and capturing carbon dioxide in liquid form for sequestration or beneficial reuse. This technology can be used to build new or retrofit old fossil fuel power plants around the world that produce near zero air emissions while capturing carbon dioxide as a liquid for ready sequestration far more economically than any other competing technology. The technology is held by our subsidiary, ThermoEnergy Power Systems, LLC (“TEPS”) and will be developed and commercialized through our new joint venture, Unity Power Alliance (UPA). 

 

On June 20, 2012, we entered into an Agreement with Itea S.p.A. (“ITEA”) for the development of pressurized oxycombustion in North America. The two parties, through UPA, will utilize their patented technologies to advance, develop and promote the use of the coal application of pressurized oxycombustion, construct a pilot plant utilizing the technology, and subsequently construct a demonstration facility based on the technology as implemented in the pilot plant. ITEA was granted the option to acquire a 50% ownership interest in UPA for nominal consideration. On July 16, 2012, ITEA exercised its option and acquired the 50% ownership interest in UPA. As of September 30, 2012, the financial results of UPA are accounted for as a joint venture under the equity method of accounting and are not consolidated in our financial statements as a variable interest entity as defined by ASC 810.

 

In September 2012, Unity Power Alliance was awarded a $1 million Phase 1 grant from the U.S. Department of Energy to help fund a project under a special DOE program to advance technologies for efficient, clean coal power and carbon capture. After successful completion of the first phase of the program, it is anticipated that a much larger Phase 2 will occur, with DOE awards in the $10-20 million range applied toward the construction of a pilot scale plant. As part of UPA's project, in October 2012, we received a $900,000 contract from UPA to build a bench-scale “flameless” combustion reactor under the grant.

 

We currently generate revenues from the sale and development of wastewater treatment systems. We enter into contracts with our customers to provide a wastewater treatment solution that meets the customer’s present and future needs. Our revenues are tied to the size and scale of the wastewater treatment system required by the customer, as well as the progress made on each customer contract.

 

Historically we marketed and sold our products primarily in North America. In 2011, we began marketing and selling our products in Asia and Europe. These marketing and sales activities are performed by our direct sales force and authorized independent sales representatives.

 

On August 22, 2012, the New York City Department of Environmental Regulation (“NYCDEP”) issued a stop work order to us relative to our contract to install an Ammonia Removal Process (“ARP”) system at the NYCDEP’s wastewater treatment facility in the 26th Ward.  On November 13, 2012, the NYCDEP notified us that it is terminating the contract, effective November 29, 2012.

 

We suspended all work on this contract as of August 22, 2012 and have halted all work with our major vendors. We have accordingly ceased recognition of revenues as of August 22, 2012 and have recorded all incremental costs as period costs on its Consolidated Statement of Operations.

 

Because of this contract termination, our revenues, expenses, and income will be adversely affected in future periods, as this contract represented approximately 80% of our revenues for the year ended December 31, 2011 and approximately 63% and 81% of our revenues for the three and nine-month periods ended September 30, 2012, respectively. We have yet to begin discussions with the NYCDEP about the termination, and accordingly, we cannot determine a final outcome at this time.

 

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We have made significant progress over the past year in resolving our past legal and financial issues, strengthening our balance sheet, hiring key management personnel and building our business for future growth. However, we have incurred net losses and negative cash flows from operations since inception. We incurred net losses of $5.9 million for the nine-month period ended September 30, 2012 and $17.4 million for the year ended December 31, 2011. Cash outflows from operations totaled $5.1 million for the nine-month period ended September 30, 2012 and $6.1 million for the year ended December 31, 2011. As a result, we will require additional capital to continue to fund our operations.

 

Research and Development

 

We own or license all of the technologies that we use in our business.

 

We conduct research and development of water/wastewater treatment products and services in a number of areas including testing various waste streams for potential clients and other third parties, Chemcad and Aspen modeling for the pressurized oxycombustion process, centrate testing related to our New York project and Ammonia Recovery Process (“ARP”) flow modifications.   

 

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. 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 consolidated financial statements 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.

 

Principles of consolidation and basis of presentation

 

The consolidated financial statements include the accounts of ThermoEnergy and our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

 

The 15% third party ownership interest in TEPS is recorded as a noncontrolling interest in the consolidated financial statements. As of  December 31, 2011, the noncontrolling interest in TEPS was immaterial to the consolidated financial statements taken as a whole.

 

Revenue recognition

 

We recognize revenues using the percentage of completion method. Under this approach, revenue is earned in proportion to total costs incurred in relation to total costs expected to be incurred. Contract costs include all direct material and labor costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation.

 

Recognition of revenue and profit is dependent upon a number of factors, including the accuracy of a variety of estimates made at the balance sheet date such as engineering progress, materials quantities, the achievement of milestones, penalty provisions, labor productivity and cost estimates made. Due to uncertainties inherent in the estimation process, actual completion costs may vary from estimates. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and income and are recognized beginning in the period in which they become known.  Provisions for estimated losses on uncompleted contracts are made in the period in which the estimated loss first becomes known.

 

Certain long-term contracts include a number of different services to be provided to the customer. We record separately revenues, costs and gross profit related to each of these services if they meet the contract segmenting criteria in ASC 605-35. This policy may result in different interim rates of profitability for each segment than if we had recognized revenues using the percentage-of-completion method based on the project’s estimated total costs.

 

Variable interest entities

 

The Company assesses whether its involvement with another related entity constitutes a variable interest entity (“VIE”) through either direct or indirect variable interest in that entity. If an entity is deemed to be a VIE, the Company must determine if it is the primary beneficiary (i.e. the party that consolidates the VIE), in accordance with the accounting standard for the consolidation of variable interest entities. VIEs are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses and/or the right to receive the residual returns of the entity. The Company qualitatively evaluates if it is the primary beneficiary of the VIE’s based on whether the Company has (i) the power to direct those matters that most significantly impacted the activities of the VIE; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE.

 

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Accounts receivable, net

 

Accounts receivable are recorded at their estimated net realizable value. Receivables related to the Company’s contracts have realization and liquidation periods of less than one year and are therefore classified as current.

 

The Company maintains allowances for specific doubtful accounts based on estimates of losses resulting from the inability of customers to make required payments and record these allowances as a charge to general and administrative expense. The Company’s method for estimating its allowance for doubtful accounts is based on judgmental factors, including known and inherent risks in the underlying balances, adverse situations that may affect the customer’s ability to pay and current economic conditions. Amounts considered uncollectible are written off based on the specific customer balance outstanding.

 

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 undiscounted cash flows or fair values of the asset, whichever is more readily determinable.

 

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 payroll tax and other accrued expenses 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 liability 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”) Topic 718, “Compensation – Stock Compensation”.  These topics require 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 the financial reporting and tax basis of assets and liabilities and are measured using enacted rates and laws that will be in effect when the deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance for deferred tax assets is provided if it is more likely than not that all or a portion of the deferred tax assets will not be realized. We recognize interest and penalties related to underpayments of income taxes as a component of interest and other expenses on our Consolidated Statements of Operations.

 

We estimate contingent income tax liabilities based on the guidance for accounting for uncertain tax positions as prescribed in ASC Topic 740, “Income Taxes.” We use a two-step process to assess each income tax position.  We first determine whether it is more likely than not that the income tax position will be sustained, based on technical merits, upon examination by the taxing authorities.  If the income tax position is expected to meet the more likely than not criteria, we then record the benefit in the financial statements that equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement.

 

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We are subject to taxation in the U.S. and various states. As of December 31, 2011 our tax years for 2008, 2009 and 2010 are subject to examination by the tax authorities. With few exceptions, as of December 31, 2011, we are no longer subject to U.S. federal, state or local examinations by tax authorities for years before 2008.

 

Series B Convertible Preferred Stock

 

We determine the initial value of the Series B Convertible Preferred Stock and investor warrants using valuation models we consider to be appropriate.  Because the Series B Convertible Preferred Stock has an indefinite life, it is classified within the stockholders’ deficiency section of our consolidated balance sheets.  The value of beneficial conversion features are considered a “deemed dividend” and are added as a component of net loss attributable to common stockholders on our consolidated statements of operations.

 

Recent Accounting Pronouncements

 

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS,” which converges fair value measurement and disclosure guidance in U.S. GAAP with fair value measurement and disclosure guidance issued by the International Accounting Standards Board (“IASB”). The amendments in the authoritative guidance do not modify the requirements for when fair value measurements apply. The amendments generally represent clarifications on how to measure and disclose fair value under ASC 820, “Fair Value Measurement.” The authoritative guidance is effective prospectively for interim and annual periods beginning after December 15, 2011. Early adoption of the authoritative guidance is not permitted. The adoption of the provisions of ASU 2011-04 did not have a material impact on our financial statements or disclosures.

 

Restatement of Financial Statements

 

In connection with the preparation and audit of our consolidated financial statements as of, and for the year ended, December 31, 2011, we reviewed the accounting treatment of our debt and equity transactions during such year. During this review we uncovered errors that impacted our previously issued unaudited 2011 interim consolidated financial statements for the quarterly periods ended March 31, 2011, June 30, 2011 and September 30, 2011 (collectively, the “2011 Interim Consolidated Financial Statements”).

 

We have concluded that we incorrectly accounted for a series of related transactions effected pursuant to certain Note Amendment and Forbearance Agreements, effective as of January 4, 2011 (the “Note Amendment and Forbearance Agreements”), with the holders of our Convertible Promissory Notes due May 31, 2010 (the “Old Notes”), including the partial repayment of the Old Notes, the conversion of a portion of the Old Notes into shares of our Series B Convertible Preferred Stock, the issuance to the holders of the Old Notes of warrants for the purchase of shares of our Common Stock and the issuance to the holders of the Old Notes, upon cancellation of the Old Notes, of Amended and Restated Promissory Notes due February 29, 2012 (the “Restated Notes”) by treating such transactions as debt modifications rather than debt extinguishment. Our management also concluded that, due to deficiencies in the methodology we had used to calculate our derivative warrant liabilities, we had overstated the quarterly valuation of such liabilities.

 

Upon discovering these errors, we re-examined our accounting for similar transactions and the calculation of our derivative warrant liabilities in prior years and, although similar errors occurred in accounting for certain transactions in prior periods, the effect of such errors were not material.

 

In our Annual Report on Form 10-K as of and for the year ended December 31, 2011, we restated in Item 8, “Financial Statements and Supplementary Data,” our consolidated balance sheets and consolidated statements of operations for the first three quarters of 2011. This restatement is more fully described in Note 3, “Restatement and Condensed Quarterly Financial Information (Unaudited)” to our audited consolidated financial statements for the year ended December 31, 2011. We do not intend to restate separately our Quarterly Reports on Form 10-Q for the first three quarters of 2011. The financial statements included in such reports should not be relied on.

 

None of the errors related to our cash position, revenues or loss from operations for any of the periods in which such errors occurred. The net effect of these errors is (i) a $4.7 million understatement of our net loss to common stockholders in the quarter ended March 31, 2011, (ii) a $1.5 million overstatement of our net loss to common stockholders in the quarter ended June 30, 2011 and (iii) a $3.9 million overstatement of our net loss to common stockholders in the quarter ended September 30, 2011. The net effect is that our net loss to common stockholders for the nine-month period ended September 30, 2011 was overstated by approximately $0.7 million.

 

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Results of Operations

 

Comparison of Years Ended December 31, 2011 and 2010 (as restated)

 

Revenues for 2011 were $5,583,000 compared to $2,874,000 in 2010. In 2010, we substantially completed production on two large industrial contracts in the first half of 2010 and started engineering and design work on our $27.9 million contract with NYCDEP in the third quarter of 2010.  In 2011, we completed engineering and design work on our NYCDEP contract and started system construction activities, which resulted in significantly higher revenues from the NYCDEP contract in 2011 compared to 2010. This contract, along with other new contracts, is expected to generate further increases in revenues in 2012.

 

Gross profit increased to $404,000 or 7.2% of revenues in 2011 compared to gross profit of $75,000 or 2.6% in 2010. The increase is mainly due to higher gross margins realized on the NYCDEP contract in 2011 as we completed engineering and design work and shifted toward higher margin system construction activities in the third quarter of 2011.

 

General and administrative expenses totaled $4,807,000 in 2011, a decrease of $993,000 compared to 2010.  The decrease is attributable to lower non-cash stock option expense in 2011 as certain tranches of stock options for our executive officers vested ratably at the end of 2010 and ended in early 2011.

 

Engineering, research and development expenses totaled $299,000 in 2011, a decrease of $344,000 compared to 2010. Our engineering group was fully utilized in the first three quarters of 2011 performing design and system fabrication work related to our NYCDEP contract. Our engineering group was not fully utilized until the third quarter of 2010. As a result, we charged $679,000 of engineering costs to costs of revenues in 2011 compared to $324,000 in 2010.

 

Selling expenses totaled $2,448,000 in 2011, an increase of $1,167,000 compared to 2010. The increase is due to increased sales headcount in 2011, as we focused on building our sales force to generate new business, as well as increased marketing and business development activity in 2011, as we began to market our product offerings in Europe and Asia.

 

Because of our various financing transactions, including the amendment of existing debt issuances and the extinguishment of convertible debt in 2011 and 2010, we recognized losses on the extinguishment of debt of $12,551,000 and $5,620,000 in 2011 and 2010, respectively. Losses recognized in 2011 relate to the restructuring of our CASTion Notes and our 2010 Bridge Notes in the first quarter of 2011 and the extinguishment of these issuances in the third quarter of 2011; losses in 2010 relate primarily to the writeoff of unamortized debt discounts for beneficial conversion features and warrants issued with the various debt issuances.

 

We did not incur any warrant-related expenses in 2011. Warrant totaling $107,000 expense in 2010 related to the issuance of warrants to our investment advisor in partial consideration for its services in connection with our private placement of shares of our Series B Convertible Preferred Stock in August 2010.

 

In 2011, we recorded income of $3,936,000 related to the net change in fair value on our derivative instruments. We recorded an expense on these derivative instruments totaling $293,000 in 2010.

 

We did not recognize any additional gains on payroll tax settlement in 2011 as a result of the IRS accepting our Offer in Compromise in March 2011. We recorded a gain on payroll tax settlement of approximately $2.3 million in 2010 related to this Offer in Compromise.

 

In 2011, we recorded losses in our joint venture with Babcock Power, Inc. totaling $389,000, an increase of $315,000 compared to 2010. The joint venture performed significant development work related to our pressurized oxycombustion technology in 2011; losses in 2010 related primarily to start-up related costs.

 

Interest and other expense in 2011 totaled $1,232,000 in 2011, a decrease of approximately $2.1 million compared to 2010. This decrease is due to reduced amortization of debt discount in 2011 and our repaying and converting all of our secured debt by August 2011.

 

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Comparison of Quarters Ended September 30, 2012 and 2011 (as restated)

 

Revenues totaled $2,032,000 for the third quarter of 2012, an increase of 70% compared to $1,193,000 for the third quarter of 2011. Revenues in the third quarter of 2012 were primarily driven by revenues from our New York City Department of Environmental Protection ("NYCDEP") contract as well as our first sale of a mobile FracGen water production system to the oil and gas industry. In the third quarter of 2011, we substantially completed production on one industrial contract and were in the later stages of engineering and design work on the NYCDEP contract.

 

Gross profit for the third quarter of 2012 was $1,000 compared to gross profit of $120,000 in the third quarter of 2011. The decrease in gross profit is attributable to lower margins on our first mobile FracGen water production system due to higher than expected production costs on the first unit as well as a stop work order issued in August 2012 on the NYCDEP contract. Due to the stop work order, we incurred ongoing production related costs that could not be charged to the project in the quarter. The contract was terminated in November, which will result in fourth quarter and early 2013 revenues and gross margin to be adversely affected. However, given our focus on the oil & gas and biogas industries, we expect the short-term effect of the termination of the NYCDEP contract will be offset by implementing our long-term strategy. Gross profit in the third quarter of 2011 related to work performed on NYCDEP and a completed industrial project, which generated higher margins.

 

General and administrative expenses for the third quarter of 2012 was $1,035,000 compared to $897,000 for the third quarter of 2011. The increase in expenses were primarily due to increased legal costs attributable to our third quarter financings and patent applications.

 

Engineering, research and development expenses for the third quarter of 2012 was $160,000 compared to $132,000 for the third quarter of 2011. The increase is attributable to reduced utilization of our engineering team in the third quarter of 2012 compared to 2011. Engineering costs directly related to our projects are charged to Cost of Sales.

 

Sales and marketing expenses for the third quarter of 2012 was $598,000 compared to $561,000 in the third quarter of 2011. The Company's sales and marketing efforts in the third quarter of 2012 were redirected and increased to focus on the oil & gas and biogas industries over the municipal and other traditional markets in the prior year.

   

Changes in the fair value of our derivative warrant liabilities resulted in the recognition of derivative mark-to-market income of $574,000 in the third quarter of 2012 compared to $440,000 in the third quarter of 2011. Income in the third quarter of 2012 and 2011 relate primarily to the passage of time and the decrease in our stock price and an increase in warrants that are classified as derivative liabilities.

 

Other derivative expense of $565,000 in the third quarter of 2012 represents the amounts by which the initial valuation of derivative liabilities created in conjunction with our financing transactions in July and August of 2012 exceeded the amounts raised by these financing transactions. We had no such expenses in the third quarter of 2011.

 

There was no loss on extinguishment of debt in the third quarter of 2012 in comparison to a loss of $5,159,000 in the third quarter of 2011. The loss on extinguishment of debt in the third quarter of 2011 relates to the conversion of our CASTion Notes, 2010 Bridge Notes and 2011 Bridge Notes into shares of our Series B Convertible Preferred Stock.

 

Interest and other expense decreased during the third quarter of 2012 compared to 2011 by $111,000, due mainly to lower debt levels in 2012.

 

We recognized income related to our joint ventures totaling $24,000 in the third quarter of 2012 compared to losses of $117,000 in the third quarter of 2011. Income in the third quarter of 2012 is attributable to Itea assuming certain expenses of UPA in the third quarter of 2012.

   

Liquidity and Capital Resources

 

Cash and cash flow data for the periods presented were as follows (in thousands of dollars):

 

   Year Ended December 31,   Nine Months Ended September 30, 
   2011   2010   2012   2011 
               (as restated) 
Cash  $3,056   $4,299   $528   $1,807 
                     
Net cash used in operating activities   (6,101)   (5,628)   (5,087)   (3,672)
Net cash used in investing activities   (535)   (432)   (235)   (527)
Net cash provided by (used in) financing activities   5,393    9,250    2,794    1,707 

 

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Since the beginning of 2011, we have continued to make significant progress in resolving our past legal and financial issues, strengthening our balance sheet and building our business for future growth. In the past year, we have:

 

  Raised $8.2 million in additional funding in 2011 and $3.1 million in 2012;
  Made debt service payments totaling $2.8 million and converted all outstanding secured debt and accrued interest totaling $10.1 million into Series B Convertible Preferred Stock;
  Paid all amounts due to the Internal Revenue Service under the Offer in Compromise that was accepted in March 2011; and
  Settled a lawsuit related to a former officer’s employment agreement.

 

However, 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 2011 and 2010, we funded our operations primarily from the sale of convertible debt, short-term borrowings, preferred stock and common stock, generally from stockholders and other parties who are sophisticated investors in clean technology. Although we will require substantial additional funding to continue existing operations, we believe that we will be able to obtain additional equity or debt financing on reasonable terms; however, there is no certainty that we will be able to do so.

 

Cash used in operations amounted to $6,101,000 and $5,628,000 for the years ended December 31, 2011 and 2010, respectively. The increase in cash used in operations in 2011 is primarily due to higher operating expenses attributed to building our sales and marketing functions throughout 2011. Cash used in investing activities included purchases of property and equipment of $135,000 for the year ended December 31, 2011 and investments in our joint venture with Babcock Power (subsequently dissolved) of $400,000 and $61,000 for the years ended December 31, 2011 and 2010, respectively.

 

At September 30, 2012, we did not have sufficient working capital to satisfy our anticipated operating expenses for the next 12 months. As of September 30, 2012, we had a cash balance of $528,000 and current liabilities of approximately $8.8 million, which consisted primarily of accounts payable of approximately $2.2 million, billings in excess of costs of approximately $3.3 million, convertible debt of $1.25 million, derivative liabilities of $41,000 and other current liabilities of approximately $1.9 million.

  

The following financing transactions provided our sources of funding for 2010, 2011 and 2012:

  

On March 10, 2010, we entered into a Bridge Loan Agreement (the “2010 Bridge Loan Agreement”), effective as of March 1, 2010, with six of our principal investors (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) (collectively, the “Investors”) pursuant to which the Investors agreed to make bridge loans to us in the following amounts:

 

Lender  Commitment 
The Quercus Trust  $1,200,000 
Robert S. Trump  $600,000 
Focus Fund L.P.  $200,000 
Empire Capital Partners, LP  $233,333 
Empire Capital Partners, Ltd  $233,333 
Empire Capital Partners Enhanced Master Fund Ltd  $233,333 

 

We issued 3% Secured Convertible Promissory Notes in the principal amount of each Investor’s funding commitment (the “2010 Bridge Notes”).  The 2010 Bridge Notes bore interest at the rate of 3% per annum and were originally due and payable on February 28, 2011.  The entire unpaid principal amount, together with all interest then accrued and unpaid under each 2010 Bridge Note, was convertible, at the election of the holder, into shares of our Common Stock at a conversion price of $0.24 per share.  The 2010 Bridge Notes were secured by a lien on all of our assets except for the shares of our subsidiary, CASTion Corporation.

 

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On June 30, 2010 we amended the 2010 Bridge Loan Agreement to provide for $2 million of additional funding from the following investors:

 

Lender  Commitment 
The Quercus Trust  $980,000 
Robert S. Trump  $620,000 
Empire Capital Partners, LP  $133,333 
Empire Capital Partners, Ltd  $133,333 
Empire Capital Partners Enhanced Master Fund Ltd  $133,334 

 

The new loans made under the amended 2010 Bridge Loan Agreement were on terms identical to the original loans under the 2010 Bridge Loan Agreement. We received $4.6 million in proceeds under the Bridge Loan Agreement.

 

On July 8, 2010, upon our receipt of an Order to Commence under our contract with the New York City Department of Environmental Protection which triggered a purchase obligation on the part of the Investors under the Securities Purchase Agreement dated as of November 19, 2009 between us and the Investors, the Investors surrendered an aggregate of $1.9 million of principal and accrued interest under the 2010 Bridge Notes as payment for an aggregate of 791,668 shares of Series B Convertible Preferred Stock and warrants to purchase approximately 8.3 million shares of stock at $0.24 per share.

 

On February 25, 2011 we entered into Note Extension and Amendment Agreements with the Investors holding our 2010 Bridge Notes, further amending the terms of the remaining balance of the 2010 Bridge Notes.  As amended,  the 2010 Bridge Notes bore interest at the rate of 10% per annum with a maturity date of February 29, 2012.  The 2010 Bridge Notes were convertible into shares of our  Series B Convertible Preferred Stock at the rate of $2.40 per share at any time at the election of the holders.  Pursuant to the Note Extension and Amendment Agreements,  on August 11, 2011 following the retirement of certain notes issued to former stockholders in our subsidiary, CASTion Corporation, (the “CASTion Notes”) the entire outstanding balance of principal and interest due under the 2010 Bridge Notes ($2,932,107.65 in the aggregate) was converted into shares of our Series B Convertible Preferred Stock at the rate of $2.40 per share.

  

On July 1, 2011 we repaid 50% of the balance of the CASTion Notes and, in accordance with the terms of the CASTion Notes, the remaining balance automatically converted into shares of our Series B Convertible Preferred Stock at the rate of $2.40 per share.  On August 11, 2011 we elected to convert the balance of the 2010 Bridge Notes into shares of our Series B Convertible Preferred Stock at the rate of $2.40 per share.

 

On August 9, 2010, we entered into a Securities Purchase Agreement with the following investors, all of which are affiliates of Security Investors, LLC and which are the selling stockholders in the offering to which this Prospectus relates:  Security Equity Fund, Mid Cap Value Fund;  SBL Fund, Series V (Mid Cap Value);  Security Equity Fund, Mid Cap Value Institutional Fund;  SBL Fund, Series Q (Small Cap Value); and  Security Equity Fund, Small Cap Value Fund (collectively, the “Security Investors”).  Pursuant to the Securities Purchase Agreement, we issued to the Security Investors an aggregate of 2,083,334 shares of our Series B Convertible Preferred Stock at a purchase price of $2.40 per share and Common Stock Purchase Warrants (the “Warrants”) entitling the holders to purchase up to an aggregate of 33,333,344 shares of our Common Stock, at an exercise price of $0.30 per share, as follows:

 

Investor   Purchase Price   Series B Shares   Warrant Shares
Security Equity Fund, Mid Cap Value Fund   $ 2,060,001.60   858,334 shares   13,733,344 shares
SBL Fund, Series V (Mid Cap Value)   $ 739,999.20   308,333 shares   4,933,328 shares
Security Equity Fund, Mid Cap Value Institutional Fund   $ 1,905,000.00   793,750 shares   12,700,000 shares
SBL Fund, Series Q (Small Cap Value)   $ 280,000.80   116,667 shares   1,866,672 shares
Security Equity Fund, Small Cap Value Fund   $ 15,000.00   6,250 shares   100,000 shares
Total   $ 5,000,001.60   2,083,334 shares   33,333,344 shares

 

On January 7, 2011 we entered into Note Amendment and Forbearance Agreements (the “Agreements”) with the following holders of the CASTion Notes which had come due on May 31, 2010 but remained outstanding: Spencer Trask Specialty Group LLC; Massachusetts Technology Development Corporation; BCLF Ventures I, LLC; Essex Regional Retirement Board; and BancBoston Ventures Inc.  Pursuant to the Agreements, (i) we made an aggregate of $1,144,336 in payments against the outstanding balances of the CASTion Notes; (ii) the Noteholders converted an aggregate of $902,710 in principal and accrued interest under the CASTion Notes into shares of our Series B Convertible Preferred Stock at a conversion price of $2.40 per share; (iii) we issued to the Noteholders restated promissory notes (the “Restated CASTion Notes”) for an aggregate of $11,300,309 representing the remaining balance due under the CASTion Notes, (iv) we issued to the Noteholders warrants for the purchase of an aggregate of 17,585,127 shares of our Common Stock at an exercise price of $0.40 per share and an aggregate of 6,018,065 shares of our Common Stock at an exercise price of $0.30 per share; and (v) the Noteholders agreed to forbear until February 29, 2012 from exercising their rights and remedies under the Restated CASTion Notes.

 

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The original principal amount of each CASTion Noteholder’s Restated CASTion Note, the number of shares of our Series B Convertible Preferred Stock issued to each CASTion Noteholder, and the number of shares of our Common Stock issuable upon exercise of the Warrants issued to each are as follows:

 

Investor   Restated Note   Series B Shares   $0.30 Warrant Shares   $0.40 Warrant Shares  
BancBoston Ventures Inc.   $ 28,839.73   3,469 shares   55,502 shares   152,710 shares  
BCLF Ventures I, LLC   $ 476,989.34   57,372 shares   917,957 shares   2,525,718 shares  
Essex Regional Retirement Board   $ 14,420.34   1,743 shares   27,752 shares   76,357 shares  
Massachusetts Technology Development Corporation   $ 874,791.74   105,220 shares   1,683,521 shares   4,632,132 shares  
Spencer Trask Specialty Group, LLC   $ 2,032,067.98   208,333 shares   3,333,333 shares   10,198,210 shares  

  

Prior to the Agreements and the issuance of the Restated CASTion Notes, we had been in default of our obligations under the original CASTion Notes since January 2008 as a result of our failure to apply to payment of the CASTion Notes a portion of the proceeds from our equity and convertible debt financings, as required by the CASTion Notes.  Further, our failure to pay the entire outstanding balance of principal and interest due of the CASTion Notes at maturity (May 31, 2010) constituted a separate event of default under the CASTion Notes.  As part of the Agreements in January 2011, the holders of the CASTion Notes waived these defaults.

 

The Restated CASTion Notes bore interest at the rate of 10% per annum (with penalty interest at the rate of 18% per annum following maturity or an event of default).  Installment payments (based on a 10-year amortization schedule) were due on the last day of each month beginning January 31, 2011 and continuing through February 29, 2012, at which time the entire unpaid principal amount of, and accrued interest on, the Restated Notes would be due and payable.  The Restated CASTion Notes were convertible, in whole or in part, at any time at the election of the Noteholders, into shares of our Series B Convertible Preferred Stock at the rate of $2.40 per share.  The Agreements and the Restated CASTion Notes provided that, in the event we made any payments of principal or accrued interest on the Restated CASTion Notes on or before July 5, 2011, then simultaneously with the making of each such payment a portion of the remaining principal and accrued and unpaid interest on the Restated Notes in an amount equal to the amount of such payment would automatically convert into shares of our Series B Convertible Preferred Stock at the rate of $2.40 per share.

 

On the last business day of each month from January 31, 2011 through and including May 31, 2011, we made payments of principal and interest on the CASTion Notes in the aggregate amount of $45,290 (totaling $226,448 over the course of the 5-month period). Simultaneously with each payment, an additional aggregate amount of $45,283 (totaling $226,416 over the course of the 5-month period) of principal and accrued interest on the CASTion Notes was converted into shares of our Series B Convertible Preferred Stock at the rate of $2.40 per share.

 

On July 1, 2011 we made payments totaling $1,568,267 to the holders of the Restated CASTion Notes, which represented 50% of the outstanding principal and accrued interest balance.  In accordance with the terms of the Restated CASTion Notes, the remaining balance of the CASTion Notes automatically converted into shares of our Series B Convertible Preferred Stock.

 

On June 17, 2011, we entered into a Bridge Loan and Warrant Amendment Agreement (the “2011 Bridge and Warrant Agreement”) with Robert S. Trump; Focus Fund L.P.; Hughes Capital; Scott A. Fine; Peter J. Richards, Empire Capital Partners, LP; Empire Capital Partners, Ltd; and Empire Capital Partners Enhanced Master Fund, Ltd (collectively, the “Bridge Investors”), who held warrants for the purchase, in the aggregate, of 22,379,232 shares of our Common Stock (collectively, the “Warrants”).

 

Pursuant to the 2011 Bridge and Warrant Agreement, the Bridge Investors made loans to us in the respective principal amounts set forth below opposite the name of each Bridge Investor, against our issuance to each Bridge Investor of our Promissory Note (collectively, the “2011 Bridge Notes”) in such amount:

 

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Noteholder  Principal Amount of Note 
Robert S. Trump  $1,522,443.00 
Focus Fund L.P.  $390,000.00 
Hughes Capital  $20,000.00 
Scott A. Fine  $65,000.00 
Peter J. Richards  $65,000.00 
Empire Capital Partners, L.P.   $ 285,728.69  
Empire Capital Partners, Ltd  $284,584.43 
Empire Capital Partners Enhanced Master Fund, Ltd  $276,543.54 

 

Pursuant to the 2011 Bridge and Warrant Agreement, we agreed, subject to the satisfaction of certain conditions, to amend the Warrants (i) to provide that they would be exercisable for the purchase of shares of our Series B Convertible Preferred Stock (the “Series B Stock”) instead of Common Stock (with the number of shares of the Series B Stock determined by dividing by ten (10) the number of shares of Common Stock for which the Warrants were previously exercisable) and (ii) to change the exercise prices of all Warrants (which ranged from $0.30 to $1.82 per share of Common Stock) to $1.30 per share of Series B Stock (the equivalent of $0.13 per share of Common Stock).  The Bridge Investors agreed, subject to the satisfaction of certain conditions, to exercise all of the Warrants.  The principal amount of the 2011 Bridge Notes was equal to the aggregate exercise price of the Warrants (after they were amended as described above).

 

The 2011 Bridge Notes were payable on demand at any time on or after February 29, 2012 (the “Maturity Date”).  They did not bear interest until the Maturity Date and would bear interest at the rate of 10% per annum from and after the Maturity Date. 

 

On July 12, 2011, we amended the 2011 Bridge and Warrant Agreement to provide for the extension to us by Mr. Trump and the Empire Capital funds of additional bridge loans in the following amounts:

 

Noteholder  Principal Amount of Note 
Robert S. Trump  $855,422.10 
Empire Capital Partners, L.P.   $ 248,493.70  
Empire Capital Partners, Ltd  $248,493.70 
Empire Capital Partners Enhanced Master Fund, Ltd  $248,493.70 

 

The new loans made under the amended 2011 Bridge Loan Agreement were made on terms identical to the original loans under the 2011 Bridge Loan Agreement.

 

On August 11, 2011, upon satisfaction of all of the conditions set forth in the 2011 Bridge and Warrant Agreement, the Bridge Investors exercised all of the Warrants in accordance with the 2011 Bridge and Warrant Agreement and surrendered all of the 2011 Bridge Notes in payment of the exercise price for the purchase under the Warrants of an aggregate of 3,469,387 shares of our Series B Convertible Preferred Stock at a price of $1.30 per share.

 

On December 2, 2011 we entered into a Bridge Loan Agreement with the following investors, pursuant to which the investors made bridge loans (the “December 2011 Bridge Loans”) to us in the following amounts in anticipation of an equity investment in a new series of our Preferred Stock (the “New Preferred Stock”), subject to the satisfaction of certain conditions which have not yet been satisfied:

 

Lender   Principal Amount of Bridge Loan  
Robert S. Trump   $ 750,000  
Empire Capital Partners, L.P.   $ 255,500  
Empire Capital Partners, Ltd   $ 130,000  
Empire Capital Partners Enhanced Master Fund Ltd   $ 114,500  

 

The December 2011 Bridge Loans (which total $1.25 million) accrue interest at the rate of 12.5% per annum.

 

On December 30, 2011, we entered into Warrant Amendment Agreements (the “Agreements”) with 21 individuals and entities who acquired warrants from five funds affiliated with Security Investors, LLC for the purchase of an aggregate of 27.7 million shares of our Common Stock (collectively, the “Warrants”). Pursuant to the Agreements, we amended the Warrants to change the exercise prices from $0.30 per share to $0.095 per share, and the Investors agreed to exercise all of the Warrants immediately for cash. We received proceeds totaling $2,436,000, net of issuance costs, from the exercise of the Warrants.

  

On January 10, 2012, we entered into additional Warrant Amendment Agreements (the “Agreements”) with 6 individuals who acquired warrants from five funds affiliated with Security Investors, LLC for the purchase of an aggregate of 5,633,344 shares of our Common Stock. Pursuant to the Agreements, we amended the Warrants to change the exercise prices from $0.30 per share to $0.095 per share, and the Investors agreed to exercise all of the Warrants immediately for cash. We received proceeds totaling $498,000, net of issuance costs, from the exercise of the Warrants.

 

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On July 11, 2012, we issued 17,316,250 shares of our Common Stock and warrants for the purchase of an additional 17,316,250 shares at an exercise price of $0.15 per share for an aggregate purchase price of $1,731,625.

 

On August 9, 2012, we issued 8,287,500 shares of our Common Stock and warrants for the purchase of an additional 8,287,500 shares at an exercise price of $0.15 per share for an aggregate purchase price of $828,750.

 

On October 4, 2012, we and our subsidiaries, CASTion Corporation and ThermoEnergy Power Systems, LLC, entered into a Loan Agreement (the “Loan Agreement”) with C13 Thermo LLC (the “Lender”) pursuant to which the Lender established a credit facility allowing us to borrow up to $700,000 (the “Credit Facility”) to finance the fabrication and testing of an Ammonia Reduction Process system utilizing our proprietary technology (the “Project”). We may draw against the Credit Facility from time to time to pay expenses incurred under the budget for the Project. As evidence of our obligation to repay all amounts that may be borrowed under the Credit Facility, on October 4, 2012 we and our subsidiaries that are parties to the Loan Agreement issued to the Lender a promissory note in the principal amount of $700,000.

 

On October 9, 2012 we issued 3,765,000 shares of our Common Stock and warrants for the purchase of an additional 3,765,000 shares at an exercise price of $0.15 per share for an aggregate purchase price of $376,500.

 

On November 30, 2012, we entered into a Bridge Loan Agreement with a group of investors, all of whom are holders of our Series B Convertible Preferred Stock, pursuant to which such investors made loans to us in the aggregate principal amount of $3,700,000 in anticipation of our designation, offer and issuance of a new series of Preferred Stock to be designated as Series C Convertible Preferred Stock.

 

During the period from January 1, 2011 through November 30, 2012, pursuant to the financing transactions described above, we raised an aggregate of $10,078,229 in equity. During such period, an aggregate of $6,295,045 of debt (over and above bridge loans reflected in the $10,078,229 of equity financing) was converted into shares of our Series B Convertible Preferred Stock at the rate of $2.40 per share and we repaid in cash an additional aggregate amount of $2,939,051 of outstanding debt.

 

As of  September 30, 2012, we had outstanding convertible debt of approximately $3,194,000 (exclusive of debt discounts).  Of this amount, debt totaling $1,944,000 is convertible into shares of our Common Stock at the rate of $0.50 per share.

 

Although our financial condition has improved, there can be no assurance that we will be able to obtain the funding necessary to continue our operations and development activities.

  

Off-Balance Sheet Arrangements

 

We do not use off-balance-sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off-balance-sheet arrangements such as special purpose entities and research and development arrangements. Accordingly, we are not exposed to any financing or other risks that could arise if we had such relationships.

 

SECURITY OWNERSHIP OF CERTAIN

BENEFICIAL OWNERS, DIRECTORS AND EXECUTIVE OFFICERS OF THERMOENERGY

 

Common Stock

 

The following table sets forth certain information as of January 11, 2013 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.

 

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Beneficial Owners  

Amount and Nature

of Beneficial

Ownership (1)

   

Percent of

Class (2)

 
             
Directors and Officers                
                 
Dileep Agnihotri                
13711 Immanuel Road, Suite 100                
Pflugeville, Texas 78660     30,000 (3)     *  
                 
Joseph P. Bartlett                
1900 Avenue of the Stars, 20th Floor                
Los Angeles, California 90067     30,000 (3)     *  
                 
Cary G. Bullock                
170 Arlington Street                
Acton, Massachusetts  01720     7,369,549 (4)     5.8 %
                 
J. Winder Hughes III                
PO Box 389                
Ponte Vedra, Florida  32004     14,339,688 (5)     11.0 %
                 
Shawn R. Hughes                
717 South Edison Avenue                
Tampa, Florida 33606     1,012,500 (6)     *  
                 
Gregory M. Landegger                
10 New Bond Street                
Worcester, Massachusetts  01606     587,500 (3)     *
                 
Arthur S. Reynolds                
230 Park Avenue, Suite 1000                
New York, New York 10169     811,103 (7)     *  
                 
James F. Wood                
10 New Bond Street                
Worcester, Massachusetts 01606     0       *  
                 
All executive officers and directors as a group
(8 persons)
    24,180,340 (8)     17.4 %
                 
Other 5%  Beneficial Owners                
                 
David Gelbaum and Monica Chavez Gelbaum                
The Quercus Trust                
1835 Newport Blvd.                
A109-PMC 467                
Costa Mesa, California  92627     52,409,857 (9)     31.8 %
                 
Security Investors, LLC                
One Security Benefit Place                
Topeka, Kansas 66636     24,441,140 (10)     17.3 %
                 
Robert S. Trump                
89 10th Street                
Garden City, New York 11530     39,511,798 (11)     26.0 %
                 
The Focus Fund                
PO Box 389                
Ponte Vedra, Florida  32004     11,595,838 (12)     9.0 %
                 
Empire Capital Management and Affiliates                
One Gorham Island, Suite 201                
Westport, Connecticut 06880     26,202,181 (13)     4.99 %(14)
                 
Kevin B. Kimberlin
c/o Spencer Trask
               
535 Madison Avenue                
New York, NY  10022     28,875,225 (14)     19.7 %
                 
Massachusetts Technology Development Corp.                
40 Broad St. Suite 230                
Boston, MA 02109     14,908,233 (15)     11.1 %
                 
BCLF Ventures I, LLC                
56 Warren St.                
Boston, MA 02119     8,403,041 (16)     6.5 %
                 
Francis Howard                
376 Victoria Place                
London, United Kingdom  SW1V 1AA     8,500,000 (17)     7.0 %
                 

 

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*  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, January 11, 2013 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 120,454,575 shares of Common Stock issued and outstanding on January 11, 2013 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, January 11, 2013.
   
 (3) All shares are issuable upon exercise of options.
   
(4) Includes 625,000 shares issuable upon the exercise of warrants and 6,119,549 shares issuable upon exercise of options.
   
(5) Includes 3,357,500 shares owned by The Focus Fund. Also includes 8,238,338 shares issuable to The Focus Fund and 153,850 shares issuable to Hughes Capital upon the exercise of warrants or conversion of shares of Series B Convertible Preferred Stock.  Mr. Hughes is the Managing Director of both funds and may be deemed to be the beneficial owner of the securities held by such funds; he disclaims beneficial ownership of such securities except to the extent of his pecuniary interest therein. Includes 1,250,000 shares, and 1,250,000 shares issuable upon exercise of warrants, held by the John Winder Hughes Revocable Trust, of which Mr. Hughes is trustee. Also includes 90,000 shares issuable upon exercise of options.
   
(6) Includes 910,000 shares issuable upon exercise of options and warrants.
   
(7) Includes 630,000 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 and conversion of shares of Series B Convertible Preferred Stock, as detailed in notes (3) through (7) above.
   
(9) This beneficial ownership information  is based, in part, on information contained in Amendment No. 8 to the Statement on Schedule 13D filed by The Quercus Trust and Mr. and Mrs. Gelbaum as its trustees on August 13, 2010.  Includes 23,987,090 shares issuable upon conversion of shares of Series B Convertible Preferred Stock and 20,411,423 shares issuable upon the exercise of warrants.
   
(10) This beneficial ownership information is based, in part, on information contained in Amendment No. 4 to the Statement on  Schedule 13G filed by Security Investors, LLC on May 10, 2012.  Includes 20,833,340 shares issuable upon conversion of shares of Series B Convertible Preferred Stock. Security Investors, LLC is the investment adviser to the following funds (the “Funds”): (i) Security Equity Fund, Mid Cap Value Fund, (ii) SBL Fund Series V (Mid Cap Value), (iii) Security Equity Fund, Mid Cap Value Institutional Fund, (iv) SBL Fund, Series Q (Small Cap Value) and (v) Security Equity Fund, Small Cap Value Fund.  Each of the Funds is an investment company registered under the Investment Company Act of 1940, as amended.  The securities owned by each Fund are as follows:

 

35
 

 

Fund  Shares of Common Stock   Shares of Common Stock Issuable upon Conversion of Shares of Series B Preferred Stock 
Security Equity Fund, Mid Cap Value Fund   2,701,839    8,583,340 
SBL Fund, Series V (Mid Cap Value)   905,961    3,083,330 
Security Equity Fund, Mid Cap Value Institutional Fund   -    7,937,500 
SBL Fund, Series Q (Small Cap Value)   -    1,166,670 
Security Equity Fund, Small Cap Value Fund   -    62,500 

 

As investment adviser to the Funds, Security Investors, LLC may be deemed to be the beneficial owner of such securities.

 

(11) Includes 31,773,770 shares issuable upon conversion of shares of Series B Convertible Preferred Stock.
   
(12) Includes 6,093,840 shares issuable upon conversion of shares of Series B Convertible Preferred Stock and 2,144,498 shares issuable upon the exercise of warrants.
   
(13) This beneficial ownership information is based, in part, on information contained in Amendment No. 6 to the Statement on Schedule 13G filed by the group consisting of Empire Capital Management LLC and its affiliates on February 14, 2012.  Includes 23,198,610 shares issuable upon conversion of  outstanding shares of Series B Convertible Preferred Stock. The shares of Series B Convertible Preferred Stock over which Empire Capital Management and its affiliates have shared voting and dispositive power (the "Blocker Securities") are subject to a 4.99% "blocker" provision.  The percentage set forth in the column under the heading “Percent of Class” gives effect to such blocker; however, the number of shares of Common Stock set forth in the column under the heading “Amount and Nature of Beneficial Ownership” includes all shares that would be issuable upon full conversion of the Blocker Securities without giving effect to such blocker.  
     
(14) Includes 5,517,250 shares issuable upon conversion of shares of Series B Convertible Preferred Stock and 20,922,108 shares issuable upon the exercise of warrants.  
     
(15) Includes 3,146,130 shares issuable upon conversion of shares of Series B Convertible Preferred Stock and 10,754,832 shares issuable upon the exercise of warrants.  
     
(16) Includes 1,799,670 shares issuable upon conversion of shares of Series B Convertible Preferred Stock and 6,025,098 shares issuable upon the exercise of warrants.  
     
(17) This beneficial ownership information is based, in part, on information contained on Schedule 13G filed by Mr. Howard on March 14, 2012.  Includes 1,250,000 shares issuable upon the exercise of warrants.  

 

 

Series A Convertible Preferred Stock

 

As of January 11, 2013, there were 208,334 shares of Series A Convertible Preferred Stock issued and outstanding, all of which were held by Mr. Gregg Frankel.  Shares of Series A Convertible Preferred Stock are convertible into shares of Common Stock on a 1-for-1 basis.  The shares of Series A Convertible Preferred Stock held by Mr. Frankel represent a beneficial ownership of less than 1% of our issued and outstanding Common Stock.  None of our directors or executive officers owns any shares of Series A Convertible Preferred Stock.

 

Series B Convertible Preferred Stock

 

As of January 11, 2013, there were 11,664,993 shares of Series B Convertible Preferred Stock issued and outstanding.  The following table sets forth certain information as of January 11, 2013 with respect to beneficial ownership of our Series B Convertible Preferred Stock by each shareholder known by the Company to be the beneficial owner of more than 5% of our Series B Convertible Preferred 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.  Shares of Series B Convertible Preferred Stock are convertible into shares of Common Stock on a 10-for-1 basis.

 

36
 

 

Beneficial Owners  

Amount and Nature

of Beneficial

Ownership (1)

   

Percent of

Class (2)

 
             
Directors and Officers                
                 
Dileep Agnihotri                
13711 Immanuel Road, Suite 100                
Pflugeville, Texas 78660     0       *  
                 
Joseph P. Bartlett                
1900 Avenue of the Stars, 20th Floor                
Los Angeles, California 90067     0       *  
                 
Cary G. Bullock                
170 Arlington Street                
Acton, Massachusetts  01720     0       *  
                 
J. Winder Hughes III                
PO Box 389                
Ponte Vedra, Florida  32004     624,769 (3)     5.4 %
                 
Shawn R. Hughes                
717 South Edison Avenue                
Tampa, Florida 33606     0       *  
                 
Gregory M. Landegger                
10 New Bond Street                
Worcester, Massachusetts  01606     0       *  
                 
Arthur S. Reynolds                
230 Park Avenue, Suite 1000                
New York, New York 10169     0       *  
                 
James F. Wood                
10 New Bond Street                
Worcester, Massachusetts 01606     0       *  
                 
All executive officers and directors as a group (8 persons)     624,769 (3)     5.4 %
                 
Other 5%  Beneficial Owners                
                 
David Gelbaum and Monica Chavez Gelbaum                
The Quercus Trust                
1835 Newport Blvd.                
A109-PMC 467                
Costa Mesa, California  92627     2,398,709       20.6 %
                 
Security Investors, LLC                
One Security Benefit Place                
Topeka, Kansas 66636     2,083,334 (4)     17.9 %
                 
Robert S. Trump                
89 10th Street                
Garden City, New York 11530     3,177,377       27.2 %
                 
The Focus Fund                
PO Box 389                
Ponte Vedra, Florida  32004     609,384       5.2 %
                 
Empire Capital Management and Affiliates                
One Gorham Island, Suite 201                
Westport, Connecticut 06880     2,319,861       19.9 %

 

37
 

 

* 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.
   
 (2) Based on 11,664,993 shares of Series B Convertible Preferred Stock issued and outstanding on January 11, 2013.
   
 (3) Includes 609,384 shares owned by The Focus Fund and 15,385 shares owned by Hughes Capital.  Mr. Hughes is the Managing Director of both funds and may be deemed to be the beneficial owner of the securities held by such funds; he disclaims beneficial ownership of such securities except to the extent of his pecuniary interest therein.
   
 (4) Security Investors, LLC may be deemed to be the beneficial owner of these shares because it is the investment adviser to the following funds (the “Funds”) which own shares of Series B Convertible Preferred Stock: (i) Security Equity Fund, Mid Cap Value Fund, (ii) SBL Fund Series V (Mid Cap Value), (iii) Security Equity Fund, Mid Cap Value Institutional Fund, (iv) SBL Fund, Series Q (Small Cap Value) and (v) Security Equity Fund, Small Cap Value Fund.  Each of the Funds is an investment company registered under the Investment Company Act of 1940, as amended.  The shares of Series B Convertible Preferred Stock owned by each Fund are as follows:
   

 

Fund  Shares of Series B Convertible Preferred Stock 
Security Equity Fund, Mid Cap Value Fund   858,334 
SBL Fund, Series V (Mid Cap Value)   308,333 
Security Equity Fund, Mid Cap Value Institutional Fund   793,750 
SBL Fund, Series Q (Small Cap Value)   116,667 
Security Equity Fund, Small Cap Value Fund   6,250 
      

  

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, 2012:

 

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     12,006,794     $ 0.24       7,993,206  
                         
Equity Compensation plans not approved by security holders                        
                         
Stock options     12,859,884     $ 0.39       0  
                         
Warrants     1,281,103     $ 0.35       0  
                         
Total     26,147,781     $ 0.32       7,993,206  

 

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MANAGEMENT

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
James F. Wood   Director, Chairman of the Board, President and Chief Executive Officer
Dileep Agnihotri   Director
Joseph P. Bartlett   Director
Cary G. Bullock   Director
J. Winder Hughes III   Director
Shawn R. Hughes   Director
Arthur S. Reynolds   Director
Gregory Landegger   Chief Operating Officer and Interim Chief Financial Officer

 

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James F. Wood , age 70, has served since January 2013 as our President, Chief Executive Officer and Chairman of our Board of Directors. Mr. Wood is also a member of the Board of Directors and Chief Executive Officer of our subsidiary, ThermoEnergy Power Systems LLC, and a member of the Board of Directors and President of our subsidiary, CASTion Corporation. From October 2009 to December 2012, Mr. Wood served as Deputy Assistant Secretary for Clean Coal in the United States Department of Energy. In that position, he was responsible for the management and direction of the Department of Energy’s Office of Fossil Energy's clean coal research and development programs. Chief among these was the Carbon Capture, Utilization and Storage program, the Clean Coal Power Initiative, and the Office of Fossil Energy’s $3.4 billion portfolio of Recovery Act projects. Prior to joining the government, he was, from November 2001 to September 2009, President and CEO of Babcock Power Inc., a designer and manufacturer of environmental, pressure part, heat exchanger, combustion equipment and after-market services for the power generation industry with whom we were engaged in a joint venture known as Babcock-Thermo Clean Carbon LLC. From 1996 to 2001, Mr. Wood was President of Babcock & Wilcox Co., an integrated world-wide provider of boiler-systems and after-market services to the power industry. Earlier in his career, Mr. Wood worked in various positions for Babcock & Wilcox and for Wheelabrator Environmental Systems Inc. He has resided abroad for significant periods of time, including in Italy, India, Belgium, Colombia, and Ecuador, and was responsible for Babcock & Wilcox’s foreign subsidiaries and ventures in China, Turkey, Egypt and Indonesia. While in the private sector, Mr. Wood served on two federal advisory councils: the National Coal Council and the US-Egypt President's Council. Mr. Wood is Fellow of the American Society of Mechanical Engineers and a Trustee of Clarkson University. He holds a B.S. in Chemical Engineering from Clarkson and an MBA with a focus on international economics from Kent State University. Mr. Wood brings to the Board over 30 years of leadership experience in the power industry and an in-depth understanding of federal, state and international initiatives in clean coal research and development.

 

Dr. Dileep Agnihotri, age 43, has been a director of the Company since January 2012. He is CEO, President, and a member of the Board of Directors of Advanced Hydro Inc., a privately held company commercializing novel membranes technology and turn-key systems for treatment of waste-water in the oil and gas industry, including hydraulic fracturing wastewater recycling applications. He is also serving as acting CEO and a member of the Board of Directors of Graphene Energy, Inc. also a privately held company.  Dr. Agnihotri has been a principal at 21 Ventures, LLC, a venture capital management firm providing seed, growth and bridge capital for technology ventures, since 2008.  Prior to 21 Ventures and Advanced Hydro, he spent 8 years, from 2001 to 2008, as director and world-wide manager of Jordan Valley Semiconductors Inc., an Israeli private company in the thin-film metrology market, where he managed technology development, applications development and strategic, technical and product marketing.   Dr. Agnihotri holds a PhD in Nuclear Chemistry and an MS in Physical Chemistry from the University of Rochester.  He also has an MS degree in Physics from Agra University. He has published more than 30 articles and holds more than half a dozen patents. Dr. Agnihotri brings to the Board expertise in new and disruptive technologies, their market potential and commercialization aspects.

 

Joseph P. Bartlett, age 54, has been a director of the Company since May 2012. He previously served as a member of our Board of Directors from October 2009 until December 2009.  Mr. Bartlett is an attorney in private practice in Los Angeles, California and is counsel to The Quercus Trust. He has practiced corporate and securities law since 1985. From September 2004 until August 2008 he was a partner at Greenberg Glusker LLP and from September 2000 until September 2004 he was a partner at Spolin Silverman Cohen and Bartlett LLP. Mr. Bartlett graduated, magna cum laude, from the University of California, Hastings College of Law in 1985, and received an AB in English literature from the University of California at Berkeley in 1980. He brings to our Board of Directors expertise in corporate finance, corporate governance and the oversight of smaller reporting companies.

  

Cary G. Bullock , age 66, has been a member of our Board of Directors since January 2010.  Mr. Bullock also serves as a member of the Boards of Directors of our subsidiaries, ThermoEnergy Power Systems LLC, CASTion Corporation, and Unity Power Alliance LLC.  From January 2010 to December 2012, Mr. Bullock was our President and Chief Executive Officer, and from August 2011 to December 2012, he also served as Chairman of our Board of Directors. 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.

 

J. Winder Hughes III, age 54, 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 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 52, 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.

 

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Arthur S. Reynolds, age 68, has been a director of the Company since October 2008.  He also serves as a member of the Boards of Directors of our subsidiaries, CASTion Corporation and Unity Power Alliance LLC.  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.  From July 30 to November 30, 2011, Mr. Reynolds was the Chief Executive Officer of Clean Power Technologies.  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.

 

Gregory M. Landegger, age 41, was appointed as our Vice President and Chief Operating Officer on September 4, 2012 and as our Interim Chief Financial Officer on December 17, 2012. Since May 2012, Mr. Landegger has served us as a management consultant on a variety of initiatives, including our efforts to introduce our proprietary water recovery technology for application in the oil, gas and power industries. Prior to joining us, Mr. Landegger lead, from May 2007 to January 2011, operational turnarounds in the private equity portfolio of W.R. Huff Asset Management Co., LLC and, from January 2011 to May 2012, was actively involved in identifying investment opportunities in the small cap market, with a focus on the packaging, industrial and water technology sectors. Mr. Landegger is a member of the Advisory Board of Tipa Corp., an early-stage compostable packaging company. He received a BSFS degree from Georgetown University.

 

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 Dileep Agnihotri, Joseph P. Bartlett and J. Winder Hughes III (all of whom are designees of The Quercus Trust) and Shawn R. Hughes (who is the designee of Robert S. Trump).  The Common Stock Directors are Cary G. Bullock, Arthur S. Reynolds and James F. Wood.  All directors serve terms of one year.

    

The Executive Employment Agreement of our President and Chief Executive Officer, James F. Wood, provides that, during the term of his employment, Mr.Wood 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.

    

41
 

 

Executive Officer and Director Compensation

 

Executive Officer Compensation

 

The table set forth below summarizes the compensation earned by our named executive officers in 2012 and 2011.

 

Executive Compensation (1)

 

Name and Principal Position   Year     Salary
($)
    Bonus
($)
   

Option

Awards

($) (2)

    Medical and
Insurance
Reimbursement
($)
    Total
($)
 
                                     
Cary G. Bullock     2012     $ 202,033     $ 0     $ 0     $ 61,516     $ 263,549  
Chairman, President and CEO     2011     $ 200,349     $ 0     $ 0     $ 60,237     $ 260,586  
                                                 
Teodor Klowan, Jr.     2012     $ 193,135     $ 0     $ 0     $ 10,898     $ 204,033  
Executive Vice President and CFO (3)     2011     $ 175,000     $ 0     $ 0     $ 0     $ 175,000  
                                                 
Gregory M. Landegger     2012     $ 51,762     $ 0     $ 291,479     $ 8,762     $ 352,003  
Chief Operating Officer (4)     2011     $ 0     $ 0     $ 0     $ 0     $ 0  
                                                 
Robert F. Marrs     2012     $ 181,697     $ 20,000     $ 86,343     $ 19,121     $ 307,161  
Vice President, International Business Development (5)     2011     $ 132,231     $ 0     $ 99,409 (6)   $ 11,876     $ 243,516  

 

  (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 2012 or 2011.
     
  (2) Amounts in the column “Option Awards” reflect the grant date fair value of stock options awarded in accordance with FASB ASC Topic 718. The fair value of options granted during 2012 and 2011 were estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions:

 

    2012     2011  
Risk-free interest rate     0.83% - 1.05%        2.0% - 3.5%   
Expected option life (years)     6.25 - 10.0       10.0  
Expected volatility     91% - 92%        91% - 92%    
Expected dividend rate     0%       0%  

  

(3) Mr. Klowan's employment terminated on December 17, 2012.

 

(4) Mr. Landegger was hired on July 30, 2012 and was promoted to Chief Operating Officer on September 4, 2012.

 

(5) Mr. Marrs was hired on April 1, 2011.

 

(6) The option award to Mr. Marrs in 2011 reflects the grant date value based on the probable outcome of performance conditions as set forth in the option agreement. If the highest level of performance conditions were achieved in 2011, the value of this option award would be $397,465.

 

42
 

 

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.

 

Executive Compensation Process

 

We have a written employment agreement with only one of our executive officers, our Chairman and Chief Executive Officer, James F. Wood.  This agreement provides for payment of base compensation at a rate negotiated at the time of the agreement, with eligibility for bonuses from time to time (either in cash or through the grant of equity incentives) upon achievement of certain performance goals to be established through discussions with the Compensation and Benefits Committee of our Board of Directors.

 

In negotiating the employment terms of our executive officers and establishing their base compensation, 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 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.

 

43
 

 

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.

 

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 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 to increase the number of shares of our common stock available for grant under such Plan from 10,000,000 to 20,000,000 and to remove the limit on the number of shares with respect to which stock options may be granted to any individual. At the Special Meeting in lieu of the 2010 Annual Meeting in November 2010, the shareholders ratified the amendments to the 2008 Incentive Stock Plan.  In November 2012, our Board of Directors further amended the 2008 Incentive Stock Plan to increase the number of shares of our common stock available for grant under such Plan to 40,000,000, subject to ratification by the shareholders. The amendment has not yet been presented to our shareholders for ratification.

 

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.

  

44
 

 

Outstanding Equity Awards at Fiscal Year-End (2012)

 

The following table summarizes information concerning outstanding equity awards held by the named executive officers at December 31, 2012.  No named executive officer exercised options in the fiscal year ended December 31, 2012.

  

    Stock Option Awards  
    Securities Underlying     Option     Option  
    Unexercised Options (#)     Exercise     Expiration  
Name   Exercisable     Unexercisable     Price     Date  
                   
Cary G. Bullock     6,119,547       2,039,854     $ 0.30       01/27/2020  
      625,000       0     $ 0.15       07/11/2017  
                                 
Teodor Klowan, Jr.     937,500       0     $ 0.32       03/17/2013  
      937,500       0     $ 0.32       11/02/2019  
      1,184,777       0     $ 0.30       01/27/2020  
                                 
Gregory M. Landegger     343,750       3,656,250     $ 0.097       09/04/2022  
                                 
Robert F. Marrs     187,500       1,812,500     $ 0.26       04/01/2021  
      75,000       325,000     $ 0.268       01/17/2022  
      625,000       0     $ 0.15       07/11/2017  

 

Employment Arrangement with Named Executive Officers

 

We do not have written employment agreement with any of our executive officers other than our Chairman and Chief Executive Officer, James F. Wood. Pursuant to our Executive Employment Agreement with Mr. Wood, dated as of December 10, 2012, we have agreed to pay him a base salary of $230,000, with eligibility for performance bonuses, from time to time, in accordance with incentive compensation arrangements to be established by the Benefits and Compensation Committee of our Board of Directors. Mr. Wood’s employment is terminable by either party upon 30 days’ written notice; provided that we may terminate Mr. Wood’s employment immediately for “Cause” (as such term is defined in the Executive Employment Agreement) and Mr. Wood may terminate his employment immediately for “Good Reason” (as such term is defined in the Executive Employment Agreement). If Mr. Wood’s employment is terminated for any reason other than (i) by us for Cause or (ii) voluntarily by Mr. Wood without Good Reason, Mr. Wood will be entitled to receive severance payments of $19,167 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. Wood and his family at the time of termination. Mr. Wood’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. Wood, 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. Pursuant to Mr. Wood’s Executive Employment Agreement, on January 2, 2013, we awarded Mr. Wood a stock option for the purchase of 13,750,000 shares of our Common Stock at an exercise price of $0.089 per share, with a provision for net surrender cashless exercise. The option has a term of ten years, subject to Mr. Wood’s continued employment with us, and vests in quarterly installments through December 31, 2016; provided, however, that if, prior to December 31, 2016, Mr. Wood’s employment is terminated for any reason other than (i) by us for Cause or (ii) voluntarily by Mr. Wood without Good Reasons, within 90 days after a “Change of Control” (as such term is defined in the Executive Employment Agreement), the option will immediately vest with respect to 50% of the shares that were unvested on the date of the Change of Control.

 

We had written employment agreements with two persons who were named executive officers in 2012: Cary G. Bullock (our former Chairman and Chief Executive Officer whose employment terminated on January 2, 2013) and Teodor Klowan, Jr. (our former Chief Financial Officer whose employment terminated on December 17, 2012). Under the terms of those agreements, we are obligated to make severance payments to the former executive officers for a period of six months following the termination of their employment at a rate equal to their respective base salaries at the time of termination, and to keep in force the health insurance benefits provided to them at the time of termination.

 

45
 

 

Director Compensation

 

Directors do not receive cash compensation for serving on the Board or its committees unless otherwise approved by the Compensation and Benefits Committee and ratified unanimously by the disinterested members of the Board of Directors.  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, 2012 to our directors who were not also named executive officers at the time they received compensation as directors:

 

Director Compensation (1)

 

Name   Fees Earned or
Paid in Cash
   

Option

Awards

($) (2)

    Other
Compensation
($)
    Total ($)  
Dileep Agnihotri     None     $ 4,957 (3)     None     $ 4,957  
Joseph P. Bartlett     None     $ 3,408 (4)     None     $ 3,408  
Shawn R. Hughes     None       None       None       None  
J. Winder Hughes III     None       None       None       None  
Arthur S. Reynolds   $ 60,000 (5)     None     $ 6,900 (6)   $ 66,900  

 

  (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 directors required to be reported in such columns during 2011.
     
  (2)

The amounts in the column “Options Award” reflect the dollar amount recognized for financial statement reporting purposes in accordance with ASC 710.  Assumptions used in the calculation of these amounts are as follows:

 

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 $0.23 per share was granted to Dr. Agnihotri on January 14, 2012 upon joining our Board of Directors; these options vest on the date of our 2012 Annual Meeting of Stockholders and expire on January 14, 2022.
     
  (4) An option to purchase 30,000 shares of Common Stock at an exercise price of $0.15 per share was granted to Mr. Bartlett on May 15, 2012 upon joining our Board of Directors; these options vest on the date of our 2012 Annual Meeting of Stockholders and expire on May 15, 2022.
     
  (5) We paid a one-time fee of $40,000 in January 2012 and quarterly fees of $5,000 to Mr. Reynolds for his role as Chairman of the Audit Committee of the Board of Directors.  These fees were approved by the Compensation Committee of the Board of Directors.
     
  (5) Consulting fees of $6,900 were paid to Mr. Reynolds in 2012 related to work performed on our joint venture, Unity Power Alliance LLC, on our behalf.

 

As of December 31, 2012, each director held option and warrant awards as follows:

 

Name   Aggregate Number of
Shares Underlying
Stock Options
(#)
    Aggregate Number of
Shares Underlying
Warrants
(#)
 
Dileep Agnihotri     30,000       none  
Joseph P. Bartlett     30,000       none  
Shawn R. Hughes     310,000       600,000  
J. Winder Hughes III     90,000       none  
Arthur S. Reynolds     130,000       681,103  

  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Director 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 Listing Rules of the Nasdaq Stock Market.  Our Board of Directors has determined that, in accordance with these standards, Dr. Agnihotri and Messrs. Bartlett, Winder Hughes and Reynolds are “independent directors.”   

 

46
 

 

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 pressurized oxycombustion technology. We hold an 85% ownership interest in TEPS, and Mr. Fassbender and his ex-wife each own a 7.5% membership interest.  

 

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.

 

SELLING STOCKHOLDERS

 

We are registering for resale shares of our Common Stock. We are registering the shares to permit the selling stockholders and their pledgees, donees, transferees and other successors-in-interest that receive their shares from a selling stockholder as a gift, partnership distribution or other non-sale related transfer after the date of this prospectus to resell the shares when and as they deem appropriate in the manner described in the "Plan of Distribution." The information included below is based on information that has been provided to us by or on behalf of the selling stockholders. The information assumes all of the shares covered hereby are sold or otherwise disposed of by the selling stockholders pursuant to this prospectus. However, we do not know whether the selling stockholders will in fact sell or otherwise dispose of the shares of Common Stock listed next to their names below.

 

The shares of our Common Stock offered hereby include shares issuable upon exercise of Common Stock Purchase Warrants (“Warrants”) held by the selling stockholders.  None of the Warrants is being registered for resale.

 

We are filing the registration statement of which this Prospectus is a part in satisfaction of a contractual obligation under the Securities Purchase Agreement dated as of June 11, 2012 between us and each of the selling stockholders (other than Dawson James Securities, Inc. (“Dawson James”)). Pursuant to the Securities Purchase Agreement, we issued and sold to such selling stockholders an aggregate of 29,368,750 shares of our Common Stock and Warrants for the purchase of an aggregate of an additional 29,368,750 shares of our Common Stock in consideration of cash payments by such selling stockholders to us in the aggregate amount of $2,936,875 at closings on July 11, 2012, August 9, 2012 and October 9, 2012.

 

Dawson James, a registered broker-dealer, served as placement agent in our offer, sale and issuance of shares of Common Stock and Warrants pursuant to the Securities Purchase Agreement. In addition to paying Dawson James cash commissions for its services, we issued to it Warrants for the purchase of an aggregate of 5,118,750 shares of our Common Stock. The registration statement of which this Prospectus forms a part includes the shares of Common Stock underlying these Warrants. Because Dawson James is a registered broker-dealer it may be deemed an underwriter with respect to the shares of our Common Stock being sold by it hereunder.

 

In the Securities Purchase Agreement we agreed to bear all expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications of the shares of Common Stock offered by the selling stockholders, including, without limitation, all registration, listing, and qualifications fees, printing and engraving fees, accounting fees, and the fees and disbursements of counsel for the Company, and (with respect to the preparation and filing of the registration statement of which this prospectus is a part) the reasonable fees of one firm of legal counsel for the selling stockholders.

 

47
 

 

In the Securities Purchase Agreement we also agreed to indemnify and hold harmless each selling stockholder and each underwriter, if any, which facilitates the disposition of the shares of Common Stock offered hereby, and each of their respective officers and directors and each person who controls such selling stockholder or underwriter (each, an Indemnified Person) from and against any losses, claims, damages or liabilities, joint or several, to which such Indemnified Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any registration statement or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, not misleading, or arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any prospectus or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and we agreed to reimburse such Indemnified Person for all reasonable legal and other expenses incurred by them in connection with investigating or defending any such action or claim as and when such expenses are incurred; provided, however, that we shall not be liable to any such Indemnified Person in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon (i) an untrue statement or alleged untrue statement made in, or an omission or alleged omission from, such registration statement or prospectus in reliance upon and in conformity with written information furnished to the Company by such Indemnified Person expressly for use therein or (ii)  the use by the Indemnified Person of an outdated or defective prospectus after we have provided to such Indemnified Person an updated prospectus correcting the untrue statement or alleged untrue statement or omission or alleged omission giving rise to such loss, claim, damage or liability.

 

Other than the issuance and sale of shares of Common Stock and Warrants to the selling stockholders pursuant to the Securities Purchase Agreement, we have not engaged in any  material transactions with any of the selling stockholders or any of their affiliates at any time since January 1, 2010 except that:

 

(i) Cary G. Bullock is a member of our Board of Directors. Until December 2012, he was the Chairman of our Board of Directors and our President and Chief Executive Officer; our compensation arrangements with Mr. Bullock are described on page 45 and details of his compensation are set forth in the charts on pages 42 and 45;

 

(ii)J. Winder Hughes III, the Trustee of the John Winder Hughes Revocable Trust, is a member of our Board of Directors; Focus Fund LP, an investment partnership of which he is the Managing Director has, since January 1, 2010, purchased shares of our Series B Convertible Preferred Stock for an aggregate purchase price of $537,925 and made a bridge loan of $450,000 in anticipation of a further equity investment;

 

(iii)In October 2012, an entity affiliated with Carl Landegger provided us with a $700,000 project financing credit facility;

 

(iv)Since January 1, 2010, The Quercus Trust has purchased shares of our Series B Convertible Preferred Stock for an aggregate purchase price of $2,256,000 and made a bridge loan of $250,000 in anticipation of a further equity investment;

 

(v)Robert Foy Marrs is our Vice President – International Business Development; details of his compensation are set forth in the charts on pages 42 and 45;

 

(vi)As compensation for its services as placement agent in connection with the Securities Purchase Agreement, we paid Dawson James a cash commission of $255,938 and a non-accountable expense reimbursement of $51,187 and issued to it Warrants for the purchase of an aggregate of 5,118,750 shares of Common Stock (which shares are included in the shares being offered hereby); in connection with a secondary sale, and subsequent exercise of, Common Stock Purchase Warrants in December 2011 and January 2012, we paid Dawson James a cash commission of $221,667; since September 2011, we have paid Dawson James an aggregate of $178,195 in cash fees and issued to it an aggregate of 600,000 shares of Common Stock as consideration for business advisory services;

 

(vii)In December 2011 and January 2012, we issued to the following selling stockholders the following number of shares of our Common Stock upon exercise of Common Stock Purchase Warrants, at an exercise price of $0.095 per share:

 

Stockholder Number of Shares
Scott E. Douglass 1,000,000
Steven Etra 1,000,000
Francis Howard 3,000,000
Bruce M. Robinson 2,000,000
John J. Shaw 1,700,000
Robert Stanger 1,000,000

 

The following table sets forth:

 

  the names of the selling stockholders,
     
  the number and percentage of shares of our Common Stock that the selling stockholders beneficially owned prior to the offering for resale of the shares under this prospectus and the percentage of the class represented by such shares,
     
  the maximum number of shares of our Common Stock that may be offered for resale for the accounts of the selling stockholders under this prospectus, and
     
  the number and percentage of shares of our Common Stock to be beneficially owned by the selling stockholders after the offering of the shares (assuming all of the offered shares are sold by the selling stockholders).

 

Name of Selling Stockholder   Shares of Common Stock Beneficially Owned Prior to Offering (1)   Percentage Ownership Prior to Offering (2)   Maximum Number of Shares to be Sold   Shares of Common Stock Beneficially Owned After Offering (1)   Percentage Ownership After Offering (2)
George M. Abraham   2,500,000    1.6%   2,500,000     *
Ines Bahl, IRRL   1,000,000    *   1,000,000     *
Cary G. Bullock (3)   7,369,549    4.6%   1,250,000   6,119,549    3.8%
Jeffrey Burt IRA   1,850,000    1.2%   1,850,000     *
Dawson James Securities, Inc.(4)   5,718,750    3.7%   5,118,750   600,000    *
Eduardo Diaz   1,000,000    *   1,000,000     *
Scott E. Douglass   4,000,000    2.6%   2,500,000   1,500,000      1.0%
Terence Edgar   5,000,000    3.2%   5,000,000     *
Steven Etra   5,000,000    3.2%   5,000,000     *
Brenda Forwood   500,000    *   500,000     *
Frank J. Garofalo   2,500,000    1.6%   2,500,000     *
Michael E. Greene IRA   320,000    *   320,000     *
Jim Guistolisi   1,250,000    *   1,250,000     *
Subhash C. Gulati   312,500    *   312,500     *
Constantine Hagepanos   290,000    *   290,000     *
Constantine Hagepanos IRA   430,000    *   430,000     *
Gregory A. Harrison   1,250,000    *   1,250,000     *
David Hawks   300,000    *   300,000     *
Ryan Michael Hogan   625,000    *   625,000     *
Barry Honig   3,125,000    2.0%   3,125,000     *
Francis Howard   8,500,000    5.5%   2,500,000   6,000,000    3.9%
John Winder Hughes Revocable Trust (5)   2,500,000    1.6%   2,500,000     *
IVM Productions, Inc.(6)   3,750,000    2.4%   3,750,000     *
Carl C. Landegger   1,250,000    *   1,250,000     *
Gilbert E. Ludwig IRA   500,000    *   500,000     *
Cecelia Maben IRA   500,000    *   500,000     *
Manor Plumbing Limited (7)   1,250,000   *   1,250,000   0   *
Robert Foy Marrs (8)   1,568,750    1.0%   1,250,000   318,750    *
Charles McElheney IRA   1,032,500    *   1,032,500     *
Fred Militello Roth IRA   1,000,000    *   1,000,000     *
Owen Family Trust (9)   1,250,000    *   1,250,000     *
Jason Paulley IRA   1,000,000    *   1,000,000     *
The Quercus Trust (10)   52,409,857    26.4%   1,300,000   51,109,857    25.7%
Bruce M. Robinson   3,000,000    1.9%   3,000,000     *
John R. Rogers   625,000    *   625,000     *
John R. Rogers SCP IRA   625,000    *   625,000     *
Vincent Rose, Jr. IRA   1,290,000    *   1,290,000     *
David Sack   312,500    *   312,500     *
John J. Shaw   1,250,000    *   1,250,000     *
Robert Stanger   650,000    *   650,000     *
John and Yvonne Weatherorf   500,000    *   500,000     *
James Andrew Williams IRA   400,000    *   400,000     *

  

* 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, January 11, 2013 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 120,454,575 shares of Common Stock issued and outstanding on January 11, 2013 plus 34,487,500 shares of Common Stock issuable upon exercise of Warrants held by the selling stockholders 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 other 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, January 11, 2013.
(3) Includes 6,119,549 shares issuable upon exercise of options.
(4) Thomas W. Hands, President, exercises voting and investment control over the shares held by Dawson James Securities, Inc.
(5) J. Winder Hughes III, the Trustee of the John Winder Hughes Revocable Trust, exercises voting and investment control over the shares held by such trust.  Does not include 3,357,500 shares owned by The Focus Fund, of which Mr. Hughes is the Managing Director. Also does not include an aggregate of 8,392,188 shares issuable upon the exercise of warrants or conversion of shares of Series B Convertible Preferred Stock held by two entities of which Mr. Hughes is the Managing Director: The Focus Fund and Hughes Capital.  Also does not include 90,000 shares issuable upon exercise of options held by Mr. Hughes. Mr. Hughes disclaims beneficial ownership of the securities held by the John Winder Hughes Revocable Trust, The Focus Fund and Hughes Capital, except to the extent of his pecuniary interest therein.  
(6) Aleks Rosenberg exercises voting and investment control over the shares held by IVM Productions, Inc.
(7) Timothy Stewart Clarke, President, exercises voting and investment control over the shares held by Manor Plumbing Limited.
(8) Includes 318,750 shares issuable upon exercise of options.
(9) Timothy J. Owen is the Trustee of the Owen Family Trust and exercises voting and investment control over the shares held by such trust.
(10) David Gelbaum and Monica Chavez Gelbaum, the Trustees of The Quercus Trust, exercise voting and investment control over the shares held by such trust. Includes 23,987,090 shares issuable upon conversion of shares of Series B Convertible Preferred Stock, and 19,761,423 shares issuable upon the exercise of warrants other than the Warrants the shares issuable upon the exercise of which are being registered for sale hereunder.

 

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DESCRIPTION OF CAPITAL STOCK

 

The following is a summary of the material terms of our capital stock under our certificate of incorporation and by-laws.

 

Authorized and Outstanding Capital Stock

 

We are authorized to issue 425,000,000 shares of Common Stock, par value $0.001 per share, and 30,000,000 shares of Preferred Stock, par value $0.01 per share.  Of our authorized Preferred Stock, 208,334 shares have been designated “Series A Convertible Preferred Stock”, 12,000,000 shares have been designated “Series B Convertible Preferred Stock” and 17,791,666 shares remain undesignated.  As of  January 11, 2013, 120,454,575 shares of Common Stock were issued and outstanding, 133,797 shares of Common Stock were held as treasury shares, 208,334 shares of Series A Convertible Preferred Stock were issued and outstanding and 11,664,993 shares of Series B Convertible Preferred Stock were issued and outstanding.

 

Description of Common Stock

 

Voting Rights

 

Each holder of shares of our Common Stock is entitled to attend all special and annual meetings of our stockholders. In addition, each such holder is entitled, together with the holders of all other classes of capital stock entitled to attend special and annual stockholder meetings (subject to the provisions of any resolutions of the board of directors granting any holders of Preferred Stock exclusive or special voting powers with respect to any matter), to cast one vote for each outstanding share of our Common Stock held upon any matter, including the election of directors, which is properly considered and acted upon by the stockholders. Except as otherwise required by law, holders of the our Common Stock, as such, are not entitled to vote on any amendment to our Amended and Restated Certificate of Incorporation (including the Certificate of Designation of any series of our Preferred Stock) that relates solely to the terms of one or more outstanding series of our Preferred Stock if the holders of the affected series are entitled, either voting separately or together with the holders of one or more other affected series, to vote on such amendment under the Certificate of Incorporation (including the Certificate of Designation of any series of our Preferred Stock) or pursuant to the Delaware General Corporation Law (the “DGCL”).

 

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Liquidation Rights

 

The holders of our Common Stock and the holders of any class or series of stock entitled to participate with the holders of our Common Stock as to the distribution of assets in the event of any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, will become entitled to participate in the distribution of any of our assets remaining after we have paid, or provided for the payment of, all of its debts and liabilities and after we have paid, or set aside for payment, to the holders of any class or series of Preferred Stock having preference over our Common Stock in the event of liquidation, dissolution or winding-up, the full preferential amounts, if any, to which the holders of such class or series are entitled.

 

Dividends

 

Dividends may be paid on our Common Stock and on any class or series of Preferred Stock entitled to participate with our Common Stock as to dividends on an equal per-share basis, but only when, as and if declared by the Board of Directors. Holders of our Common Stock will be entitled to receive any such dividends out of any assets legally available for the payment of dividends only after the provisions with respect to preferential dividends on any outstanding series of Preferred Stock have been satisfied and after we have complied with all the requirements, if any, with respect to redemption of, or the setting aside of sums as sinking funds or redemption or purchase accounts with respect to, any outstanding series of our Preferred Stock.

 

Other Rights

 

Holders of our Common Stock do not have any preemptive, cumulative voting, subscription, conversion, redemption or sinking fund rights.

 

Description of Series A Convertible Preferred Stock

 

Voting Rights

 

In addition to any other voting rights under law or as described below, the holders of Series A Convertible Preferred Stock are entitled to vote or consent, together with the holders of Common Stock, as a single class on all matters submitted to the vote of Common Stock holders. Each share of Series A Convertible Preferred Stock is entitled to the number of votes equal to the nearest number of whole shares of Common Stock into which it is convertible on the record date.  The separate vote or consent of 66 2/3% of the Series A Convertible Preferred Stock is required for any of the following:

 

  (i) directly or indirectly altering the rights, preferences, privileges, powers or restrictions of the Series A Convertible Preferred Stock;
     
  (ii) creating, or issuing securities of, any class or series having an equal or senior preference or priority to the Series A Convertible Preferred Stock; or
     
  (iii) amending our Articles of Incorporation in a way that adversely affects the rights, preferences or privileges of the holders of the Series A Convertible Preferred Stock.

 

Liquidation Rights

 

Upon a liquidation, dissolution or winding up of the Company, the holder of each share of Series A Convertible Preferred Stock is entitled to a preference payment in an amount equal to the greater of (i) $1.20 plus all declared and unpaid dividends on such share or (ii) the amount that would be payable to such holder if all shares of Series A Convertible Preferred Stock had been converted to the liquidation event.  A consolidation or merger or a sale of all or substantially all of our assets (except for a transaction in which our shareholders prior to the transaction hold 50% or more of the voting securities of the surviving or purchasing entity) shall be regarded as a dissolution, liquidation or winding up unless the holders of 66 2/3% of the then outstanding shares of Series A Convertible Preferred Stock determine otherwise.

 

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Conversion

 

Each share of Series A Convertible Preferred Stock is convertible into one share of our Common Stock. The conversion ratio is adjusted to reflect any stock dividend, distribution or stock split or combination or consolidation. Conversion rights are also adjusted to reflect any change in the Common Stock by way of reorganization, recapitalization, reclassification, consolidation or merger. Fractional shares of Common Stock will not be issued upon conversion of Series A Convertible Preferred Stock and we will make a cash payment to the holder in lieu of any fractional share. Shares of Series A Convertible Preferred Stock may be converted at any time at the election of the holder thereof. All outstanding shares of the Series A Convertible Preferred Stock will be automatically converted into Common Stock when the market price for our Common Stock exceeds $3.00 (adjusted to reflect stock splits, stock dividends, combinations or consolidations) for 30 consecutive trading days. All outstanding shares of the Series A Convertible Preferred Stock will also be automatically converted into Common Stock at the election of the holders of 66 2/3% of the then outstanding Series A Convertible Preferred Stock.

 

Dividends

 

The Series A Convertible Preferred Stock is entitled to participate, on a priority basis, in all dividends declared and paid on the Common Stock.

 

Other Rights

 

Holders of our Series A Convertible Preferred Stock do not have any preemptive, cumulative voting, subscription, conversion, redemption or sinking fund rights.

 

Description of Series B Convertible Preferred Stock

 

Voting Rights

 

Except with respect to the election of members of our Board of Directors, the holders of our Series B Convertible Preferred Stock are entitled to vote together with the holders of our Common Stock, as a single class, on all matters submitted to the holders of our Common Stock for a vote.  Each share of our Series B Convertible Preferred Stock entitles the holder thereof to a number of votes equal to the nearest number of whole shares of our Common Stock into which such share of Series B Convertible Preferred Stock is convertible.

 

The holders of our Series B Convertible Preferred Stock our 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 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 Convertible 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 Convertible 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 Convertible Preferred Stock (voting or consenting together as a single class) or (ii) the unanimous vote or consent of the remaining Common Stock Directors.

 

The consent of the holders of at least 66⅔% of the then-outstanding shares of our Series B Convertible Preferred Stock for certain corporate actions, including any amendment of our Certificate of Incorporation or By-laws or any recapitalization which would adversely alter or changes the rights, preferences or privileges of our Series B Convertible Preferred Stock, any increase or decrease the number of authorized shares of our Series B Convertible Preferred Stock, the creation of a class or series of shares having preference or priority equal or senior to our Series B Convertible Preferred Stock, the declaration or payment of a dividend on our Common Stock, the redemption of any shares of our Common Stock (subject to certain specified exceptions), any merger or consolidation with another entity in a transaction immediately following which our shareholders would hold less than a majority of the voting power of the outstanding stock of the surviving corporation, the sale of all or substantially all of our assets, our liquidation or dissolution, or any increase or decrease in the size of our Board of Directors.

 

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Liquidation Rights

 

The shares of our Series B Convertible Preferred Stock have a stated value of $2.40 per share (subject to adjustment for stock dividends, combinations or splits).  In the event of our voluntary or involuntary liquidation, dissolution or winding-up, after satisfaction of the claims of creditors and payment or distribution of assets is made on any securities which, by their terms rank senior to our Series B Convertible Preferred Stock, but before any payment or distribution of assets and any surplus funds is made on any securities that do not expressly provide that they rank senior to our Series B Convertible Preferred Stock, including, without limitation, our Common Stock, the holders of our Series B Convertible Preferred Stock shall receive a liquidation preference equal to the Stated Value of their shares plus an amount equal to all declared and unpaid dividends with respect to their shares.  Thereafter, each holder of our Common Stock shall be paid an amount per share equal to the amount per share paid to each holder of our Series B Convertible Preferred Stock, and any remaining assets will be distributed on a pro rata basis to the holders of our Common Stock and our Series B Convertible Preferred Stock.

 

Conversion

 

Each share of our Series B Convertible Preferred Stock may be converted at any time, at the option of the holder thereof, into that number of shares of our Common Stock determined by dividing (i) the stated value of such shares of our Series B Convertible Preferred Stock ($2.40) by (ii) the conversion price thereof (initially, $0.24).  Initially, the conversion rate of our Series B Convertible Preferred Stock is ten-for-one.  The conversion price of our Series B Convertible Preferred Stock is subject to conventional weighted-average formula adjustment in the event we issue shares of our common stock or securities convertible into shares of our Common Stock at a price per share less than the conversion price then in effect, subject to certain conventional exclusions including, without limitation, shares issued or issuable to employees, directors or consultants pursuant to a stock option plan or a restricted stock plan approved by our Board of Directors, shares issued or issuable in connection with an acquisition transaction and shares issued or issuable to financial institutions or lessors in connection with commercial credit arrangements, equipment financing or similar transactions.

 

Dividends

 

The Series B Convertible Preferred Stock is entitled to participate, on a priority basis, in all dividends declared and paid on the Common Stock.

 

Other Rights

 

Holders of our Series B Convertible Preferred Stock do not have any preemptive, cumulative voting, subscription, conversion, redemption or sinking fund rights.

 

Description of Undesignated Preferred Stock

 

Our Certificate of Incorporation authorizes our Board of Directors from time to time and without further stockholder action to provide for the issuance of shares of our unauthorized but previously unissued Preferred Stock in one or more series, and to fix the voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations, and restrictions of each such series, including, but not limited to, dividend rights, liquidation preferences, conversion privileges and redemption rights. Our Board of Directors will have broad discretion with respect to the creation and issuance of Preferred Stock without stockholder approval, subject to any applicable rights of holders of any shares of Preferred Stock outstanding from time to time.

 

The rights and privileges of holders of the Common Stock may be adversely affected by the rights, privileges and preferences of holders of shares of any series of Preferred Stock that the Board of Directors may designate and we may issue from time to time. Among other things, by authorizing the issuance of shares of Preferred Stock with particular voting, conversion or other rights, the Board of Directors could adversely affect the voting power of the holders of the Common Stock and could discourage any attempt to effect a change in control of our Company, even if such a transaction would be beneficial to the interests of our stockholders.

 

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Anti-Takeover Effects of Provisions of Certificate of Incorporation and Bylaws

 

Our Certificate of Incorporation and Bylaws contain provisions that could have the effect of delaying or deferring a change in control of the Company. These provisions, among other matters:

 

  limit the number of directors constituting the entire board of directors to a maximum of 7 directors;
     
  grant the holders of our Series B Convertible Preferred Stock the exclusive right to elect 4 directors and thereby to control the Board of Directors;
     
  limit the types of persons who may call a special meeting of stockholders; and
     
  establish advance notice procedures for stockholders to make nominations of candidates for election as directors or to present any other business for consideration at any annual or special stockholder meetings.

 

UNITED STATES FEDERAL INCOME TAX

CONSIDERATIONS APPLICABLE TO NON-U.S. HOLDERS

 

The following is a summary of material United States federal income tax considerations related to the purchase, ownership and disposition of our Common Stock that are applicable to a "non-U.S. holder" (defined below) of our Common Stock.

 

This summary:

 

  does not purport to be a complete analysis of all of the potential tax considerations that may be applicable to an investor as a result of the investor's particular tax situation;
     
  is based on the Internal Revenue Code of 1986, as amended (the "Code"), United States federal income tax regulations promulgated or proposed under the Code, which we refer to as the "Treasury Regulations," judicial authority and published rulings and administrative pronouncements, each as of the date hereof and each of which are subject to change at any time, possibly with retroactive effect;
     
  is applicable only to beneficial owners of common stock who hold their common stock as a "capital asset," within the meaning of section 1221 of the Code;
     
  does not address all aspects of United States federal income taxation that may be relevant to holders in light of their particular circumstances or who are subject to special treatment under United States federal income tax laws, including but not limited to:
     
  certain former citizens and long-term residents of the United States;
     
  "controlled foreign corporations" and "passive foreign investment companies"
     
  partnerships, other pass-through entities and investors in these entities; and
     
  investors that expect to receive dividends or realize gain in connection with the investors' conduct of a United States trade or business, permanent establishment or fixed base.
     
  pension plans;
     
  tax-exempt entities;
     
  banks, financial institutions and insurance companies;
     
  real estate investment trusts, regulated investment companies or grantor trusts;

 

53
 

 

  certain trusts;
     
  brokers and dealers in securities;
     
  holders of securities held as part of a "straddle," "hedge," "conversion transaction" or other risk–reduction or integrated transaction; and
     
  persons who hold or receive our common stock as compensation, such as that received pursuant to stock option plans and stock purchase plans.
     
  does not discuss any possible applicability of any United States state or local taxes, non-United States taxes or any United States federal tax other than the income tax, including, but not limited to, the federal gift tax and estate tax.

 

This discussion is based on current provisions of the Code, final, temporary and proposed U.S. Treasury regulations, judicial opinions, published positions of the U.S. Internal Revenue Service, or the IRS, and other applicable authorities, all as in effect on the date hereof and all of which are subject to differing interpretations or change, possibly with retroactive effect, which could materially affect the tax consequences described herein. We have not requested, nor will we request, a ruling from the IRS or an opinion of counsel with respect to the tax consequences discussed herein, and there can be no assurance that the IRS will not take a position contrary to the tax consequences discussed below or that any position taken by the IRS would not be sustained.

 

This summary of United States federal income tax considerations constitutes neither tax nor legal advice. Prospective investors are urged to consult their own tax advisors to determine the specific tax consequences and risks to them of purchasing, holding and disposing of our common stock, including the application to their particular situation of any United States federal estate and gift, United States state and local, non-United States and other tax laws and of any applicable income tax treaty.

 

Non-U.S. Holder Defined

 

For purposes of this discussion, a non-U.S. holder is a beneficial holder of our common stock that is neither a "United States person" nor a partnership or entity or arrangement treated as a partnership for United States federal income tax purposes. A "United States person" is:

 

  an individual citizen or resident of the United States;
     
  a corporation, or other entity treated as an association taxable as a corporation, that is organized in or under the laws of the United States, any state thereof or the District of Columbia;
     
  an estate the income of which is subject to United States federal income taxation regardless of its source; or
     
  a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust, or (2) has a valid election in effect under applicable the Treasury Regulations to be treated as a United States person for United States federal income tax purposes.

 

An individual may be treated, for U.S. federal income tax purposes, as a resident of the United States in any calendar year by being present in the United States on at least 31 days in that calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year. The 183-day test is determined by counting all of the days the individual is treated as being present in the current year, one-third of such days in the immediately preceding year and one-sixth of such days in the second preceding year. Residents are subject to U.S. federal income tax as if they were U.S. citizens.

 

54
 

 

If a partnership holds our Common Stock, then the United States federal income tax treatment of a partner in that partnership generally will depend on the status of the partner and the partnership's activities. Partners and partnerships should consult their own tax advisors with regard to the United States federal income tax treatment of an investment in our Common Stock.

 

Distributions

 

Distributions paid to a non-U.S. holder of our Common Stock will constitute a "dividend" for United States federal income tax purposes to the extent paid out of our current or accumulated earnings and profits, as determined for United States federal income tax purposes. Any distributions that exceed both our current and accumulated earnings and profits would first constitute a non-taxable return of capital, which would reduce the holder's basis in our Common Stock, but not below zero, and thereafter would be treated as gain from the sale of our Common Stock (see "Sale or Taxable Disposition of Common Stock" below).

 

Subject to the following paragraphs, dividends paid to a non-U.S. holder on our Common Stock generally will be subject to United States federal withholding tax at a 30% gross rate, subject to any exemption or lower rate as may be specified by an applicable income tax treaty. We may withhold up to 30% of either (i) the gross amount of the entire distribution, even if the amount of the distribution is greater than the amount constituting a dividend, as described above, or (ii) the amount of the distribution we project will be a dividend, based upon a reasonable estimate of both our current and our accumulated earnings and profits for the taxable year in which the distribution is made. If tax is withheld on the amount of a distribution in excess of the amount constituting a dividend, then you may obtain a refund of such excess amounts by timely filing a claim for refund with the Internal Revenue Service.

 

In order to claim the benefit of a reduced rate of or an exemption from withholding tax under an applicable income tax treaty, a non-U.S. holder will be required (a) to satisfy certain certification requirements, which may be made by providing us or our agent with a properly executed and completed Internal Revenue Service Form W-8BEN (or other applicable form) certifying, under penalty of perjury, that the holder qualifies for treaty benefits and is not a United States person or (b) if our common stock is held through certain non-United States intermediaries, to satisfy the relevant certification requirements of Treasury Regulations. Special certification and other requirements apply to certain non-U.S. holders that are pass-through entities.

 

Dividends that are effectively connected with the conduct of a trade or business by the non-U.S. holder within the United States (and, if required by an applicable income tax treaty, are attributable to a U.S. permanent establishment or, in the case of an individual non-U.S. holder, a fixed base) are not subject to the withholding tax, provided that, prior to the making of a distribution, the non-U.S. holder so certifies, under penalty of perjury, on a properly executed and delivered Internal Revenue Service Form W-8ECI (or other applicable form). Instead, such dividends would be subject to United States federal income tax on a net income basis in the same manner as if the non-U.S. holder were a United States person.

 

Corporate holders who receive effectively connected dividends may also be subject to an additional "branch profits tax" at a gross rate of 30% on their earnings and profits for the taxable year that are effectively connected with the holder's conduct of a trade or business within the United States, subject to any exemption or reduction provided by an applicable income tax treaty.

 

A non-U.S. holder who provides us with an Internal Revenue Service Form W-8BEN or W-8ECI will be required to periodically update such form.

 

Sale or Taxable Disposition of Common Stock

 

Any gain realized on the sale, exchange or other taxable disposition of our Common Stock generally will not be subject to United States federal income tax (including by way of withholding) unless:

 

  the gain is effectively connected with a trade or business of the non-U.S. holder in the United States (and, if required by an applicable income tax treaty, is attributable to a U.S. permanent establishment of the non-U.S. holder or, in the case of an individual, a fixed base);
     
  the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of that disposition, and certain other conditions are met; or
     
  we are or have been a "United States real property holding corporation" for United States federal income tax purposes at any time during the shorter of the five-year period preceding such disposition or the non-U.S. holder's holding period in the common stock.

 

55
 

 

A non-U.S. holder described in the first bullet point above generally will be subject to United States federal income tax on the net gain derived from the sale or disposition under regular graduated United States federal income tax rates, as if the holder were a United States person. If such non-U.S. holder is a corporation, then it may also, under certain circumstances, be subject to an additional "branch profits" tax at a gross rate of 30% on its earnings and profits for the taxable year that are effectively connected with its conduct of its United States trade or business, subject to exemption or reduction provided by any applicable income tax treaty.

 

An individual non-U.S. holder described in the second bullet point immediately above will be subject to a tax at a 30% gross rate, subject to any reduction or reduced rate under an applicable income tax treaty, on the net gain derived from the sale, which may be offset by U.S. source capital losses, even though the individual is not considered a resident of the United States.

 

We believe we are not, have not been and will not become a "United States real property holding corporation" for United States federal income tax purposes. In the event that we are or become a United States real property holding corporation at any time during the applicable period described in the third bullet point above, any gain recognized on a sale or other taxable disposition of our common stock may be subject to United States federal income tax, including any applicable withholding tax, if either (1) the non-U.S. holder beneficially owns, or has owned, more than 5% of the total fair value of our Common Stock at any time during the applicable period, or (2) our Common Stock ceases to be traded on an "established securities market" within the meaning of the Code. Non-U.S. holders who own or may own more than 5% of our Common Stock are encouraged to consult their tax advisors with respect to the United States tax consequences of a disposition of our Common Stock.

 

Information Reporting and Backup Withholding

 

We must report annually to the Internal Revenue Service and to each non-U.S. holder the amount of dividends paid to such holder, the name and address of such holder and the amount of tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder resides under the provisions of an applicable income tax treaty.

 

A non-U.S. holder will be subject to backup withholding, currently at a 28% rate, for dividends paid to such holder unless such holder certifies under penalty of perjury as to non-United States person status (and neither we nor the paying agent has actual knowledge or reason to know that such holder is a United States person), or such holder otherwise establishes an exemption.

 

Information reporting and, depending on the circumstances, backup withholding will apply to the proceeds of a sale of our Common Stock within the United States or conducted through certain U.S.-related financial intermediaries, unless the beneficial owner certifies under penalty of perjury as to non-United States person status (and neither the broker nor intermediary has actual knowledge or reason to know that the beneficial owner is a United States person), or such owner otherwise establishes an exemption.

 

Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a non-U.S. holder's United States federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.

 

Recent Legislative Developments

 

Recently proposed legislation is pending in both houses of congress providing for new withholding taxes to enforce new reporting requirements on specified foreign accounts owned by either specified United States persons or by foreign entities which are owned by United States persons. The provisions specifically establish rules for withholdable payments (including dividends) to foreign financial institutions and other foreign entities. The proposed legislation generally imposes a 30% withholding tax on payments of dividends made to a foreign financial institution, unless such institution enters into an agreement with the U.S. Treasury agreeing to meet certain information reporting and verification requirements regarding the U.S. accounts upon behalf of which it is acting. The proposed legislation imposes similar requirements (absent the need for agreements) on non-financial institutions. These rules are currently scheduled to be effective for payments made after December 31, 2010. It is unclear whether, or in what form, these proposals may be enacted. Non-U.S. holders are encouraged to consult with their tax advisers regarding the possible implications of the proposed legislation on their investment in respect of the Common Stock.

 

56
 

 

The foregoing discussion is only a summary of material U.S. federal income and estate tax consequences of the acquisition, ownership and disposition of our Common Stock by non–U.S. holders. You are urged to consult your own tax advisor with respect to the particular tax consequences to you of ownership and disposition of our Common Stock, including the effect of any U.S., state, local, non–U.S. or other tax laws and any applicable income or estate tax treaty.

 

PLAN OF DISTRIBUTION

 

The selling stockholders and any of their pledgees, donees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock being offered under this prospectus on any stock exchange, market or trading facility on which shares of our Common Stock are traded or in private transactions. These sales may be at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or negotiated prices. The selling stockholders will pay any brokerage commissions and similar selling expenses attributable to the sale of the shares. We will pay other expenses relating to the preparation, updating and filing of this registration statement. We will not receive any of the proceeds from the sale of the shares by the selling stockholders. The selling stockholders may use any one or more of the following methods when disposing of shares:

 

  ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
     
  block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
     
  purchases by a broker-dealer as principal and resales by the broker-dealer for its account;
     
  an exchange distribution in accordance with the rules of the applicable exchange;
     
  privately negotiated transactions;
     
  to cover short sales made after the effective date of the registration statement of which this prospectus is a part;
     
  broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;
     
  a combination of any of these methods of sale; and
     
  any other method permitted pursuant to applicable law.

 

The shares may also be sold under Rule 144 under the Securities Act, if available for a selling stockholder, rather than under this prospectus. There can be no assurance that any selling stockholder will sell any or all of the shares of common stock registered pursuant to the registration statement of which this prospectus is a part.

 

In connection with the sale of our Common Stock or interest therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales or our common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of our Common Stock short and deliver these securities to close out their short position, or loan or pledge our Common Stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transaction with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

 

Dawson James Securities, Inc., a selling stockholder and registered broker-dealer, is deemed to be an “underwriter” as that term is defined under the Securities Exchange Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated under such Acts, in connection with its sale of shares of Common Stock under this Prospectus.

 

Timothy J. Owen, the Trustee of the Owen Family Trust, one of the selling stockholders, is an associated person of Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer. The selling stockholder purchased the shares of our Common Stock being resold by it under this Prospectus in the ordinary course of business and, at the time of such purchase, had no agreements or understandings, directly or indirectly, with any person, to distribute such securities.

 

Under the securities laws of some states, the shares of Common Stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of Common Stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.

 

Broker-dealers engaged by the selling stockholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, which commissions as to a particular broker or dealer may be in excess of customary commissions to the extent permitted by applicable law.

 

57
 

 

The selling stockholders and any broker-dealers or agents that are involved in selling the shares offered under this prospectus may be deemed to be "underwriters" within the meaning of Section 2(a)(11) of the Securities Act in connection with these sales. Commissions received by these broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Selling stockholders who are deemed to be underwriters will be subject to the prospectus delivery requirements of the Securities Act.

 

The selling stockholders and any other persons participating in the sale or distribution of the shares offered under this prospectus will be subject to applicable provisions of the Exchange Act, and the rules and regulations under that act, including Regulation M. These provisions may restrict activities of, and limit the timing of purchases and sales of any of the shares by, the selling stockholders or any other person. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and other activities with respect to those securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. All of these limitations may affect the marketability of the shares.

 

If any of the shares of Common Stock offered for sale pursuant to this prospectus are transferred other than pursuant to a sale under this prospectus, then subsequent holders could not use this prospectus until a post-effective amendment or prospectus supplement is filed, naming such holders.

  

We have agreed to pay all fees and expenses we incur incident to the registration of the shares being offered under this prospectus. However, each selling stockholder and purchaser is responsible for paying any discounts, commissions and similar selling expenses they incur.  We have agreed to indemnify the selling stockholders against certain liabilities arising in connection with this prospectus, including certain liabilities under the Securities Act and state securities laws.  We may be indemnified by the selling stockholders against certain losses, damages and liabilities arising in connection with this prospectus, including liabilities under the Securities Act.

 

We have agreed with the selling stockholders to keep the registration statement of which this prospectus constitutes a part effective until the earlier of:  (1) such time as all of the shares of selling stockholders eligible to be covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement or (2) such shares are eligible for resale without restriction (including volume limitations) under Rule 144 of the Securities Act.

 

58
 

 

LEGAL MATTERS

 

The validity of the common stock has been passed upon for us by Nixon Peabody LLP, 100 Summer Street, Boston, Massachusetts 02110.

 

EXPERTS

 

The consolidated financial statements of ThermoEnergy Corporation as of December 31, 2011 and 2010 and for the years then ended included in this prospectus and elsewhere in the Registration Statement have been so included in reliance upon the report of Grant Thornton LLP, independent registered public accountants and successor to the practice of CCR LLP, upon the authority of said firm as experts in auditing and accounting in giving said report.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC.  Our SEC filings are available to the public over the Internet at the SEC's website at www.sec.gov and on the investor relations page of our website at http://ir.stockpr.com/thermoenergy/sec-filings. Information on, or accessible through, our website is not part of this prospectus.  You may also read and copy any document we file with the SEC at the SEC's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549.  You can also obtain copies of the documents upon the payment of a duplicating fee to the SEC.  Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room.

 

This prospectus omits some information contained in the registration statement in accordance with SEC rules and regulations.  You should review the information and exhibits included in the registration statement for further information about us and the securities we are offering. Statements in this prospectus concerning any document we filed as an exhibit to the registration statement or that we otherwise filed with the SEC are not intended to be comprehensive and are qualified by reference to these filings. You should review the complete document to evaluate these statements.

 

59
 

 

  

 

THERMOENERGY CORPORATION

 

CONSOLIDATED FINANCIAL STATEMENTS

 

As of and For the Years ended December 31, 2011 and 2010

 

With

 

Report of Independent Registered Public Accounting Firm

 

 

F-1
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

ThermoEnergy Corporation

 

We have audited the accompanying consolidated balance sheet of ThermoEnergy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2011, and the related consolidated statements of operations, stockholders’ deficiency, and cash flows for the year 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 audit. The consolidated financial statements of the Company as of December 31, 2010 and for the year then ended were audited by CCR LLP. We have since succeeded to the practice of such firm.

 

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. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 financial position of ThermoEnergy Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company incurred a net loss of $17,386,000 during the year ended December 31, 2011, and, as of that date, the Company’s current liabilities exceeded its current assets by $3,387,000 and its total liabilities exceeded its total assets by $4,603,000. These conditions, along with other matters as set forth in Note 2, 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 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ GRANT THORNTON LLP

 

Boston, Massachusetts

May 14, 2012

 

F-2
 

 

 

THERMOENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and par value amounts)

 

  

December 31,

2011

  

December 31,

2010

 
ASSETS          
Current Assets:          
Cash  $3,056   $4,299 
Accounts receivable, net   4,228    1,043 
Costs in excess of billings   132     
Inventories   167    65 
Other current assets   590    289 
Total Current Assets   8,173    5,696 
           
Property and equipment, net   544    560 
Other assets   72    61 
           
TOTAL ASSETS  $8,789   $6,317 
           
LIABILITIES AND STOCKHOLDERS' DEFICIENCY          
Current Liabilities:          
Accounts payable  $2,640   $722 
Convertible debt, current portion   1,250     
Accrued payroll taxes   599    1,470 
Billings in excess of costs   5,131    1,880 
Derivative liability, current portion   706     
Other current liabilities   1,234    1,995 
Total Current Liabilities   11,560    6,067 
           
Long Term Liabilities:          
Derivative liability   101    2,852 
Convertible debt, net   1,571    8,892 
Other long term liabilities   160    180 
Total Long Term Liabilities   1,832    11,924 
           
Total Liabilities   13,392    17,991 
           
Commitments and contingencies (Note 12)          
           
Stockholders' Deficiency:          
Preferred Stock, $0.01 par value: authorized: 30,000,000 shares at December 31, 2011 and 20,000,000 shares at December 31, 2010:          
Series A Convertible Preferred Stock, liquidation value of $1.20 per share: designated: 208,334 shares at December 31, 2011 and 10,000,000 shares at December 31, 2010; issued and outstanding: 208,334 shares at December 31, 2011 and 2010   2    2 
Series B Convertible Preferred Stock, liquidation preference of $2.40 per share: designated: 12,000,000 shares at December 31, 2011 and 6,454,621 shares at December 31, 2010; issued and outstanding: 11,664,993 shares at December 31, 2011 and 5,968,510 shares at December 31, 2010   117    60 
Common Stock, $.001 par value: authorized – 425,000,000 shares at December 31, 2011 and 300,000,000 shares at December 31, 2010; issued: 85,167,098 shares at December 31, 2011 and 55,681,918 shares at December 31, 2010; outstanding: 85,033,301 shares at December 31, 2011 and 55,548,121 shares at December 31, 2010   85    55 
Additional paid-in capital (Note 1)   108,727    84,351 
Accumulated deficit (Note 1)   (113,510)   (96,124)
Treasury stock, at cost: 133,797 shares at December 31, 2011 and 2010   (18)   (18)
Total ThermoEnergy Corporation Stockholders’ Deficiency   (4,597)   (11,674)
Noncontrolling interest   (6)    
Total Stockholders’ Deficiency   (4,603)   (11,674)
           
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY  $8,789   $6,317 

 

See notes to consolidated financial statements.

 

F-3
 

 

THERMOENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

 

   Year Ended December 31, 
   2011   2010 
         
Revenue  $5,583   $2,874 
Cost of revenue   5,179    2,799 
Gross profit   404    75 
           
Operating Expenses:          
General and administrative   4,807    5,800 
Engineering, research and development   299    643 
Sales and marketing   2,448    1,281 
Total operating expenses   7,554    7,724 
           
Loss from operations   (7,150)   (7,649)
           
Other income (expense):          
Warrant expense       (107)
Gain on payroll tax settlement       2,263 
Loss on extinguishment of debt (Note 1)   (12,551)   (5,620)
Derivative liability income (expense)   3,936    (293)
Equity in losses of joint venture   (389)   (74)
Interest and other expense, net   (1,232)   (3,376)
               Total other expense   (10,236)   (7,207)
           
Net loss   (17,386)   (14,856)
Net loss attributable to noncontrolling interest   57     
           
Net loss attributable to ThermoEnergy Corporation   (17,329)   (14,856)
Deemed dividend on Series B Convertible Preferred Stock (Note 1)       (1,894)
           
Net loss attributable to ThermoEnergy Corporation common stockholders  $(17,329)  $(16,750)
           
Loss per share attributable to ThermoEnergy Corporation common stockholders, basic and diluted  $(0.30)  $(0.31)
           
Weighted average shares used in computing loss per share, basic and diluted   56,819,885    54,041,586 

 

See notes to consolidated financial statements.

 

F-4
 

 

THERMOENERGY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(in thousands, except share and per share amounts)

Years Ended December 31, 2011 and 2010

 

   Series A
Convertible
Preferred
Stock
   Series B
Convertible
Preferred
Stock
   Common
Stock
   Additional
Paid-In
Capital
   Accumulated
Deficit
   Treasury
Stock
   Noncontrolling
Interest
   Total 
                                 
Balance at December 31, 2009  $2   $30   $54   $66,711   $(81,268)  $-   $-   $(14,471)
                                         
Stock options issued to officers, directors and employees                  2,066                   2,066 
Common Stock issued for services (200,000 shares)                  54                   54 
Convertible Notes and accrued interest converted to Common Stock (1,802,445 shares at $0.24 per share)             1    432                   433 
Convertible debt and accrued interest converted to Series B Convertible Preferred Stock (791,668 shares at $2.40 per share) (Note 1)        8         6,898                   6,906 
Series B Convertible Preferred Stock and warrants issued for cash, net of issuance costs of $375 (2,083,334 shares at $2.40 per share)        21         4,604                   4,625 
Series B Convertible Preferred Stock and warrants issued for settlement with Convertible note holders (55,554 shares at $2.40 per share)        1         533                   534 
Beneficial conversion features recognized upon issuance of short term borrowings                  3,053                   3,053 
Purchase of treasury stock (50,000 shares at $0.35 per share)                            (18)        (18)
Net Loss (Note 1)                       (14,856)             (14,856)
                                         
Balance at December 31, 2010   2    60    55    84,351    (96,124)   (18)   -    (11,674)
Stock options issued to officers, directors and employees                  1,002                   1,002 
Common Stock issued for services (600,000 shares)             1    113                   114 
Conversion of Series B Convertible Stock (118,518 shares) to Common Stock (1,185,180 shares)        (1)   1                         
Conversion and tender of convertible debt and accrued interest to Series B Convertible Preferred Stock and warrants        58         14,080                   14,138 
Exercise of Common Stock purchase warrants for cash, net of issuance costs of $196 (27,700,000 shares at $0.095 per share)             28    2,408                   2,436 
Issuance of Common Stock purchase warrants                  4,879                   4,879 
Derecognition of beneficial conversion features on extinguished debt                  (2,003)                  (2,003)
Repricing of warrants                  1,799                   1,799 
Reclassification of derivative liabilities to equity                  2,037                   2,037 
Debt discount recognized upon issuance of convertible debt                  61                   61 
Contributions to joint venture on behalf of noncontrolling interest                                 (63)   (63)
Net Loss                       (17,386)        57    (17,329)
                                         
Balance at December 31, 2011  $2   $117   $85   $108,727   $(113,510)  $(18)  $(6)  $(4,603)

 

 

 

See notes to consolidated financial statements.

 

F-5
 

 

THERMOENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

   Year Ended December 31, 
   2011   2010 
Operating Activities:          
Net loss (Note 1)  $(17,386)  $(14,856)
Adjustment to reconcile net loss to net cash used in operating activities:          
Stock option expense   1,002    2,066 
Warrant expense       107 
Common stock issued for services   114    54 
Gain on payroll tax settlement       (2,263)
Loss on extinguishment of debt (Note 1)   12,513    5,620 
Loss on disposal of property, plant and equipment   62     
Equity in losses of joint venture   389    74 
Derivative liability (income) expense   (3,936)   293 
Non-cash interest added to debt   245    941 
Series B Preferred Convertible Stock and warrants issued for note holder settlement expenses       534 
Purchase of treasury stock       (18)
Depreciation   89    52 
Amortization of discount on convertible debt   687    2,243 
Increase (decrease) in cash arising from changes in assets and liabilities:          
Accounts receivable   (3,185)   (1,036)
Costs in excess of billings   (132)    
Inventories   (102)   9 
Other current assets   (307)   (84)
Accounts payable   1,918    (90)
Billings in excess of costs   3,251    1,482 
Other current liabilities   (1,303)   (707)
Other long-term liabilities   (20)   (49)
           
Net cash used in operating activities   (6,101)   (5,628)
           
Investing Activities:          
Investment in joint venture   (400)   (61)
Purchases of property and equipment   (135)   (371)
           
Net cash used in investing activities   (535)   (432)
           
Financing Activities:          
Proceeds from issuance of Series B Convertible Preferred Stock and warrants, net of issuance costs of $375       4,625 
Proceeds from issuance of common stock, net of issuance costs of $196   2,436     
Proceeds from issuance of convertible promissory notes   5,760    4,625 
Payments on convertible promissory notes   (2,803)    
           
Net cash provided by financing activities   5,393    9,250 
           
Net change in cash   (1,243)   3,190 
Cash, beginning of year   4,299    1,109 
Cash, end of year  $3,056   $4,299 
           
Supplemental schedule of non-cash financing activities:          
Conversion and tender of convertible debt and accrued interest to Series B Convertible Preferred Stock and warrants  $14,138   $1,900 
Conversion of convertible notes and accrued interest to common stock  $   $433 
Debt (premium) discount recognized on convertible debt  $(131)  $3,053 
Accrued interest added to debt  $153   $323 
           

 

See notes to consolidated financial statements.

 

F-6
 

 

THERMOENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

 

Note 1: Organization and summary of significant accounting policies

 

Nature of business

 

ThermoEnergy Corporation (“the Company”) was incorporated in January 1988 for the purpose of developing and marketing advanced municipal and industrial wastewater treatment and carbon reducing power generation technologies.

 

The Company’s wastewater treatment systems are based on its proprietary Controlled Atmosphere Separation Technology (“CAST”) platform.  The Company’s patented and proprietary platform technology is combined with off-the-shelf technologies to provide systems that are inexpensive, easy to operate and reliable. The Company’s wastewater treatment systems have global applications in aerospace, food and beverage processing, metal finishing, pulp & paper, petrochemical, refining, microchip and circuit board manufacturing, heavy manufacturing and municipal wastewater. The CAST platform technology is owned by its subsidiary, CASTion Corporation (“CASTion”).

 

The Company also owns a patented pressurized oxycombustion technology that converts fossil fuels (including coal, oil and natural gas) and biomass into electricity while producing near zero air emissions and removing and capturing carbon dioxide in liquid form for sequestration or beneficial reuse. This technology is intended to be used to build new or to retrofit old fossil fuel power plants globally with near zero air emissions while capturing carbon dioxide as a liquid for ready sequestration far more economically than any other competing technology. The pressurized oxycombustion technology is held in the Company’s subsidiary, ThermoEnergy Power Systems, LLC (“TEPS”).

 

Principles of consolidation and basis of presentation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to current year classifications.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

 

The 15% third party ownership interest in TEPS is recorded as a noncontrolling interest in the consolidated financial statements. As of December 31, 2010, the noncontrolling interest in TEPS was immaterial to the consolidated financial statements taken as a whole.

 

Revenue recognition

 

The Company recognizes revenues using the percentage of completion method. Under this approach, revenue is earned in proportion to total costs incurred in relation to total costs expected to be incurred. Contract costs include all direct material and labor costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation.

 

Recognition of revenue and profit is dependent upon a number of factors, including the accuracy of a variety of estimates made at the balance sheet date such as engineering progress, materials quantities, the achievement of milestones, penalty provisions, labor productivity and cost estimates made. Due to uncertainties inherent in the estimation process, actual completion costs may vary from estimates. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and income and are recognized beginning in the period in which they become known.  Provisions for estimated losses on uncompleted contracts are made in the period in which the estimated loss first becomes known.

 

Certain long-term contracts include a number of different services to be provided to the customer. The Company records separately revenues, costs and gross profit related to each of these services if they meet the contract segmenting criteria in ASC 605-35. This policy may result in different interim rates of profitability for each segment than if the Company had recognized revenues using the percentage-of-completion method based on the project’s estimated total costs.

 

In circumstances when the Company cannot estimate the final outcome of a contract, or when the Company cannot reasonably estimate revenue, the Company utilizes the percentage-of-completion method based on a zero profit margin until more precise estimates can be made. If and when the Company can make more precise estimates, revenues will be adjusted accordingly and recorded as a change in an accounting estimate. For the years ended December 31, 2011 and 2010, the Company has recorded one contract which represented approximately 5% and 35% of its revenues, respectively, utilizing the percentage-of-completion method based on a zero profit margin.

 

F-7
 

 

THERMOENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

 

Cash

 

The Company places its cash in highly rated financial institutions, which are continually reviewed by senior management for financial stability. Effective December 31, 2010, extending through December 31, 2012, all “noninterest-bearing transaction accounts” are fully insured, regardless of the balance of the account. Generally the Company’s cash in interest-bearing accounts exceeds financial depository insurance limits. However, the Company has not experienced any losses in such accounts and believes that its cash is not exposed to significant credit risk.

 

Accounts receivable, net

 

Accounts receivable are recorded at their estimated net realizable value. Receivables related to the Company’s contracts have realization and liquidation periods of less than one year and are therefore classified as current.

 

The Company maintains allowances for specific doubtful accounts based on estimates of losses resulting from the inability of customers to make required payments and record these allowances as a charge to general and administrative expense. The Company’s method for estimating its allowance for doubtful accounts is based on judgmental factors, including known and inherent risks in the underlying balances, adverse situations that may affect the customer’s ability to pay and current economic conditions. Amounts considered uncollectible are written off based on the specific customer balance outstanding.

 

The following is a summary of the Company’s allowance for doubtful accounts activity for the years ended December 31, 2011 and 2010:

 

   Year Ended December 31, 
(in $000’s)  2011   2010 
         
Allowance for doubtful accounts, beginning of year  $9   $9 
Bad debt expense   1     
Write-offs   (10)    
Allowance for doubtful accounts, end of year       9 

 

At December 31, 2011, one customer accounted for 96% of the Company’s gross accounts receivable balance. For the year ended December 31, 2011, two customers each accounted for more than 10% of the Company’s revenues and collectively accounted for 92% of total revenues. For the year ended December 31, 2010, three customers each accounted for more than 10% of the Company’s revenues and collectively accounted for 96% of total revenues.

 

Inventories

 

Inventories are stated at the lower of cost or market using the first-in, first-out method and consist primarily of raw materials and supplies.

 

The Company evaluates its inventory for excess quantities and obsolescence on an annual basis.  In preparing our evaluation, we look at the expected demand for our products for the next three to twelve months.  Based on this evaluation, we establish and maintain a reserve so that inventory is appropriately stated at the lower of cost or net realizable value.

 

Property and equipment

 

Property and equipment are stated at cost and are depreciated over the estimated useful life of each asset. Depreciation is computed using the straight-line method.  The Company evaluates long-lived assets based on estimated future undiscounted net cash flows or other fair value measures whenever significant events or changes in circumstances occur that indicate the carrying amount may not be recoverable. If that evaluation indicates that an impairment has occurred, a charge is recognized to the extent the carrying amount exceeds the undiscounted cash flows or fair values of the asset, whichever is more readily determinable.

 

The Company recorded a loss of $62,000 on the disposal of property and equipment during 2011 in conjunction with relocating its corporate headquarters.

 

F-8
 

 

THERMOENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

 

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 payroll tax and other accruals are reflected in income in the period in which different facts or information become known or circumstances change that affect the Company’s previous assumptions with respect to the likelihood or amount of loss. Amounts paid upon the ultimate resolution of contingent liabilities may be materially different from previous estimates and could require adjustments to the estimated liability to be recognized in the period such new information becomes known.

 

Stock options

 

The Company accounts for stock options in accordance with Accounting Standards Codification (“ASC”) Topic 718, “Compensation – Stock Compensation”. This topic requires that the cost of all share-based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their fair values on the measurement date, which is generally the date of grant.  Such cost is recognized over the vesting period of the awards.  The Company uses the Black-Scholes option pricing model to estimate the fair value of “plain vanilla” stock option awards.

 

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 the financial reporting and tax basis of assets and liabilities and are measured using enacted rates and laws that will be in effect when the deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance for deferred tax assets is provided if it is more likely than not that all or a portion of the deferred tax assets will not be realized. The Company recognizes interest and penalties related to underpayments of income taxes as a component of interest and other expense on its Consolidated Statement of Operations.

 

The Company estimates contingent income tax liabilities based on the guidance for accounting for uncertain tax positions as prescribed in ASC Topic 740, “Income Taxes.” We use a two-step process to assess each income tax position.  We first determine whether it is more likely than not that the income tax position will be sustained, based on technical merits, upon examination by the taxing authorities.  If the income tax position is expected to meet the more likely than not criteria, we then record the benefit in the financial statements that equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement.  At December 31, 2011 and 2010, there are no uncertain tax positions that require accrual.

 

The Company is subject to taxation in the U.S. and various states. As of December 31, 2011 the Company’s tax years for 2008, 2009 and 2010 are subject to examination by the tax authorities. With few exceptions, as of December 31, 2001, the Company is no longer subject to U.S. federal, state or local examinations by tax authorities for years before 2008. Tax year 2007 was open as of December 31, 2010.

 

Fair value of financial instruments and fair value measurements

 

The carrying amount of cash, accounts receivable, other current assets, accounts payable, short-term borrowings and other current liabilities in the consolidated financial statements approximate fair value because of the short-term nature of those instruments. The carrying amount of the Company’s convertible debt was $2,821,000 and $8,892,000 at December 31, 2011 and 2010, respectively, and approximates the fair value of these instruments. The Company’s warrant liabilities are recorded at fair value.

 

The Company's assets and liabilities carried at fair value are categorized using inputs from the three levels of fair value hierarchy, as follows:

Level 1:   Quoted prices in active markets for identical assets or liabilities.

Level 2:   Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3:   Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the liabilities.

 

F-9
 

 

THERMOENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

 

 

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 are as follows: (in thousands)

 

       Fair Value Measurements at Reporting Date Using 
Description  Balance as of
December 31,
2011
   Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Liabilities                    
Derivative liability – current portion  $706   $-   $-   $706 
Derivative liability – long-term portion   101    -    -    101 
                     
Total  $807   $-   $-   $807 

 

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 are as follows: (in thousands)

 

       Fair Value Measurements at Reporting Date Using 
Description  Balance as of
December 31,
2010
   Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Liabilities                
Derivative liability – long-term portion  $2,852   $-   $-   $2,852 
                     
Total  $2,852   $-   $-   $2,852 

 

The following table sets forth a reconciliation of changes in the fair value of the Company’s derivative liabilities classified as Level 3 (in thousands):

 

Balance at December 31, 2010  $2,852 
Issuance of warrants as derivative liabilities   3,928 
Change in fair value   (3,936)
Reclass of warrants to equity   (2,037)
Balance at December 31, 2011  $807 

 

Series B Convertible Preferred Stock

 

The Company determined the initial value of the Series B Convertible Preferred Stock and investor warrants using valuation models it considers to be appropriate. Because the Series B Convertible Preferred Stock has an indefinite life, it is classified within the stockholders’ deficiency section of the Company's Consolidated Balance Sheets. The value of beneficial conversion features are considered a “deemed dividend” and are accounted for as a component of net loss attributable to common stockholders on the Company’s Consolidated Statements of Operations.

 

Earnings (loss) per share

 

Basic earnings (loss) per share (“EPS”) is computed by dividing the net income (loss) attributable to the common stockholders (the numerator) by the weighted average number of shares of common stock outstanding (the denominator) during the reporting periods. Fully diluted earnings per share is computed by increasing the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible into common stock, such as stock options and warrants (using the “treasury stock” method), and convertible preferred stock and debt (using the “if-converted” method), unless the effect on net income per share is antidilutive. Under the “if-converted” method, convertible instruments are assumed to have been converted as of the beginning of the period or when issued, if later.

 

 

F-10
 

 

THERMOENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

 

 

Recent accounting pronouncements

 

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS,” which converges fair value measurement and disclosure guidance in U.S. GAAP with fair value measurement and disclosure guidance issued by the International Accounting Standards Board (“IASB”). The amendments in the authoritative guidance do not modify the requirements for when fair value measurements apply. The amendments generally represent clarifications on how to measure and disclose fair value under ASC 820, “Fair Value Measurement.” The authoritative guidance is effective prospectively for interim and annual periods beginning after December 15, 2011. Early adoption of the authoritative guidance is not permitted. The Company does not believe the adoption of the provisions of ASU 2011-04 in the Company’s fiscal year beginning January 1, 2012 will have a material impact on its financial statements or disclosures.

 

Revision of prior period financial statements

 

The Company identified prior period errors relating to the accounting for certain debt transactions. As part of the Company’s accounting for these transactions under extinguishment accounting, the fair value of certain warrants issued as partial consideration for the extinguishment of debt during the quarter ended September 30, 2010 was recorded as deemed dividends to preferred shareholders instead of being separately valued and included as a component of the loss recognized on debt extinguishment. These errors impacted the quarter ended September 30, 2010 and the year ended December 31, 2010.

 

In evaluating whether the Company’s previously issued consolidated financial statements were materially misstated, the Company considered the guidance in Accounting Standards Codification (ASC) Topic 250, “Accounting Changes and Error Corrections,” ASC Topic 250-10-S99-1, “Assessing Materiality,” and ASC Topic 250-10-S99-2, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” The Company concluded these errors were not material individually or in the aggregate to any of the prior reporting periods, and therefore, amendments of previously filed reports were not required. As such, the revisions for these corrections to the applicable prior periods are reflected in the financial information herein and will be reflected in future filings containing such financial information.

 

The prior period financial statements included in this filing have been revised to reflect the corrections of these errors, the effects of which have been provided in summarized format below:

 

Revised consolidated balance sheet amounts  December 31, 2010 
   As Previously
Reported
   Adjustment   As Revised 
Additional paid-in capital   79,345    5,006    84,351 
Accumulated deficit   (91,118)   (5,006)   (96,124)

 

 

Revised consolidated statement of operations amounts  For the Year Ended December 31, 2010 
   As Previously
Reported
   Adjustment   As Revised 
Loss on extinguishment of debt  $(614)  $(5,006)  $(5,620)
Total other expense   (2,201)   (5,006)   (7,207)
Net loss   (9,850)   (5,006)   (14,856)
Net loss attributable to ThermoEnergy Corporation   (9,850)   (5,006)   (14,856)
Deemed dividend on Series B Convertible Preferred Stock   (6,900)   5,006    (1,894)
Net loss attributable to ThermoEnergy Corporation common stockholders   (16,750)       (16,750)

 

F-11
 

 

THERMOENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

 

Revised consolidated statement of stockholders’ deficiency amounts  For the Year Ended December 31, 2010 
   As Previously
Reported
   Adjustment   As Revised 
Convertible debt and accrued interest converted to Series B Convertible
Preferred Stock (791,668 shares at $2.40 per share)
$1,900  $5,006  $6,906
Net loss   (9,850)   (5,006)   (14,856)

 

Revised consolidated statement of cash flows amounts  For the Year Ended December 31, 2010 
   As Previously
Reported
   Adjustment   As Revised 
Net loss  $(9,850)  $(5,006)  $(14,856)
                
Adjustment to reconcile net loss to net cash used in operating activities:               
Loss on extinguishment of debt   614    5,006    5,620 

 

Note 2: Management's consideration of going concern matters

 

The Company has incurred net losses since inception and will require substantial additional capital to continue commercialization of the Company’s power and water technologies (the “Technologies”) and to fund the Company’s liabilities, which included accounts payable of $2.64 million, convertible debt of approximately $2.8 million, accrued payroll taxes of $599,000 (see Note 12), derivative liabilities of $807,000 and approximately $1.4 million of other liabilities at December 31, 2011. In addition, the Company may be subject to tax liens if it cannot satisfactorily settle the outstanding payroll tax liabilities and may also face criminal and/or civil action with respect to the impact of the payroll tax matters (see Note 12).  The consolidated financial statements have been prepared assuming the Company will continue as a going concern, realizing assets and liquidating liabilities in the ordinary course of business and do not reflect any adjustments that might result from the outcome of the aforementioned uncertainties. Management is considering several alternatives for mitigating these conditions.

 

Management is actively seeking to raise substantial working capital through additional equity or debt financing that will allow the Company to operate until it becomes cash flow positive from operations. Management is also actively pursuing commercial contracts to generate operating revenue. Management has determined that the financial success of the Company is primarily dependent upon the Company’s ability to collaborate with financially sound third parties to pursue projects involving the Technologies.

 

Management has undertaken and successfully completed a program to reduce the Company’s outstanding debt as follows:

 

As more fully described in Note 5, the Company entered into Note Amendment and Forbearance Agreements in January 2011 with the holders of the CASTion Notes originally due May 31, 2010. As part of these agreements, the Company issued amended CASTion Notes that extended the maturity date until February 29, 2012.

 

As more fully described in Note 5, on February 25, 2011, the Company entered into a Note Extension and Amendment Agreement with the holders of the Company’s 2010 Bridge Notes. The Note Extension and Amendment Agreement extended the maturity date of the 2010 Bridge Notes to February 29, 2012 and increased the interest rate on these Notes from 3% per annum to 10%.

 

As more fully described in Note 5, the Company entered into a Bridge Loan and Warrant Amendment Agreement with certain investors on June 17, 2011 pursuant to which the Company received proceeds totaling approximately $2.9 million. The Bridge Loan and Warrant Amendment Agreement was amended on July 12, 2011 to provide for an additional $1.6 million of funding, bringing the total proceeds to approximately $4.5 million (the “2011 Bridge Loans”).

 

On July 1, 2011, the Company used approximately $1.6 million of these proceeds to pay down the principal balance of the CASTion Notes as described above. Per the terms of the CASTion Notes, as amended, in the event the Company makes any payments of principal or accrued interest on or before July 5, 2011, an equal amount of such payment shall automatically convert into shares of the Company’s Series B Convertible Preferred Stock at the rate of $2.40 per share and Warrants for the purchase of the Company’s Common Stock equal to that number of shares of the Company’s Common Stock determined by dividing 200% of the amount of principal and interest converted by $0.30. Accordingly, on July 1, 2011, the Company issued 653,439 shares of its Series B Convertible Preferred Stock and Warrants for the purchase of 10,455,024 shares of its Common Stock. As a result, the amended CASTion Notes were considered to be repaid in full.

 

Consequently, per the terms of the amended 2010 Bridge Loan Agreement, as described above, the repayment of the CASTion Notes triggered the Company’s right to convert the entire outstanding balance of principal and interest on the 2010 Bridge Notes (approximately $4.5 million) into shares of Series B Convertible Preferred Stock. The Company effected this conversion on August 11, 2011.

 

Also on August 11, 2011, upon satisfaction of all of the conditions set forth in the 2011 Bridge Loan and Warrant Amendment Agreement, the holders of the 2011 Bridge Loans exercised all of the Warrants in accordance with the 2011 Bridge Loan and Warrant Amendment Agreement and surrendered all of the 2011 Bridge Loans in payment of the exercise price for the purchase under the Warrants of an aggregate of 3,469,387 shares of Series B Convertible Preferred Stock at a price of $1.30 per share.

 

F-12
 

 

THERMOENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

 

As more fully described in Note 5, the Company entered into a Bridge Loan Agreement with certain investors on December 2, 2011 pursuant to which the Company received proceeds totaling $1.25 million.

 

As more fully described in Note 6, on December 30, 2011, the Company received proceeds totaling $2,436,000, net of issuance costs, from the exercise of an aggregate of 27.7 million warrants at an exercise price of $0.095 per share.

 

As more fully described in Note 6, on January 10, 2012, the Company received proceeds totaling $498,000, net of issuance costs, from the exercise of an aggregate of 5,633,344 warrants at an exercise price of $0.095 per share.

 

Note 3. Restatement and Condensed Quarterly Financial Information (Unaudited)

 

2011 Quarterly Restatement

 

The unaudited quarterly financial information for the quarterly periods ended March 31, 2011, June 30, 2011 and September 30, 2011 have been restated to correct errors in the valuation of the Company’s derivative liabilities and accounting for certain financing transactions in those periods. These errors in the Company’s financing transactions were caused by the Company incorrectly accounting for the amendment of its CASTion Notes and its 2010 Bridge Notes as a debt modification instead of a debt extinguishment in the first quarter of 2011 (see Note 5). The errors in the Company’s derivative liabilities were due to deficiencies in the Company’s valuation model and methodology used to calculate the fair value of such liabilities in the first three quarters of 2011. These errors did not have any impact on the Company’s consolidated financial statements as of and for the year ended December 31, 2010.

 

The impact of the errors on the Company’s consolidated statements of operations for the three and nine months ended September 30, 2011 is summarized below (in thousands):

 

   Three Months Ended
September 30, 2011
   Nine Months Ended
September 30, 2011
 
   (Unaudited)   (Unaudited)  
  

As Originally

Reported

   As Restated  

As Originally

Reported

   As Restated 
                 
Loss from operations  $(1,470)  $(1,470)  $(5,296)  $(5,296)
                     
Other income (expense):                    
Warrant expense   (1,799)       (1,799)    
Derivative liability income (loss)   (653)   440    403    3,963 
Loss on extinguishment of debt   (2,042)   (5,159)   (2,042)   (12,551)
Interest and other expense, net   (263)   (220)   (2,751)   (1,124)
Equity in losses of joint venture   (117)   (117)   (386)   (386)
                     
Net loss   (6,344)   (6,526)   (11,871)   (15,394)
Net loss attributable to noncontrolling interest   17    17    57    57 
                     
Net loss attributable to ThermoEnergy Corporation   (6,327)   (6,509)   (11,814)   (15,337)
Deemed dividend on Series B Convertible Preferred Stock   (4,045)       (4,271)    
                     
Net loss attributable to ThermoEnergy Corporation common stockholders  $(10,372)  $(6,509)  $(16,085)  $(15,337)
                     
Net loss per share attributable to ThermoEnergy Corporation common stockholders, basic and diluted  $(0.18)  $(0.11)  $(0.28)  $(0.27)
                     
Weighted average shares used in computing loss per share, basic and diluted   56,867,098    56,867,098    56,506,905    56,506,905 

 

F-13
 

 

THERMOENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

 

The impact of the errors on the Company’s consolidated statements of operations for the three and six months ended June 30, 2011 is summarized below (in thousands):

 

   Three Months Ended
June 30, 2011
(Unaudited)
   Six Months Ended
June 30, 2011
(Unaudited)
 
  

As Originally

Reported

   As Restated  

As Originally

Reported

   As Restated 
                 
Loss from operations  $(1,815)  $(1,815)  $(3,826)  $(3,826)