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.
The aggregate market value of the common
stock held by non−affiliates of the registrant computed by reference to the closing price of the common stock on June 30,
2012, the last trading day of the registrant’s most recently completed second fiscal quarter, was $6,734,650.
Indicate the number of shares outstanding
of each of the registrant’s classes of common stock, as of the latest practicable date.
This Annual Report on Form 10-K contains
statements that are considered forward-looking statements. Forward-looking statements give the current expectations of forecasts
of future events of ThermoEnergy Corporation (the “Company”). All statements other than statements of current or historical
fact contained in this Annual Report, including statements regarding the Company’s future financial position, business strategy,
budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. The words
“anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,”
“may,” “plan,” and similar expressions, as they relate to the Company, are intended to identify forward-looking
statements. These statements are based on the Company’s current plans, and the Company’s actual future activities
and results of operations may be materially different from those set forth in the forward-looking statements. These forward-looking
statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made.
These include, but are not limited to, the risks and uncertainties associated with statements relating to: (i) the ability of
the Company to fund its continued operations and development activities, primarily through the availability of debt and equity
financing on terms that are acceptable to the Company; (ii) the Company’s ability to commercialize its Technologies (as
defined in Item 1, below); (iii) changes in government policy and in legislation and regulation of the waste treatment industry
that adversely affect the Company’s business prospects; and (iv) general economic and market conditions.
Any or all of the forward-looking statements
in this Annual Report may turn out to be inaccurate. The Company has based these forward-looking statements largely on its current
expectations and projections about future events and financial trends that it believes may affect its financial condition, results
of operations, business strategy and financial needs. The forward-looking statements can be affected by inaccurate assumptions
or by known or unknown risks, uncertainties and assumptions.
The Company undertakes no obligation to
publicly revise these forward-looking statements occurring after the date hereof. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary
statements contained in this Annual Report.
The Company’s filings with the Securities
and Exchange Commission (the “Commission”), including its reports under the Securities and Exchange Act of 1934, as
amended (the “Exchange Act”), can be found through the Company’s website at
http://ir.stockpr.com/thermoenergy/sec-filings
.
The information contained in the websites of the Company and its subsidiaries is not deemed to be a part of this filing, and the
Company disclaims any incorporation by reference of such information herein.
PART III
ITEM 10. Directors, Executive
Officers and Corporate Governance
Directors and Executive Officers
The following biographical descriptions
set forth certain information with respect to our directors and our executive officers who are not directors:
Name
|
|
Position
|
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 M. Landegger
|
|
Executive Vice President and Chief Financial Officer
|
James F. Wood
, age 71, 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
India, 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.
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
67, 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 and CASTion Corporation. 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.
Arthur S. Reynolds
, age 69, 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. From May to September 2012, Mr. Landegger 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 led, 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
and J. Winder Hughes III (both of whom are designees of The Quercus Trust)
and Shawn R. Hughes (who is the designee of Robert S. Trump); one Series B Directorship is vacant. The Common Stock Directors
are James F. Wood, Cary G. Bullock and Arthur S. Reynolds. 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.
Committees of the Board of Directors
Compensation and Benefits Committee
.
The Compensation and Benefits Committee consists of Mr. Shawn Hughes, as Chairman, Dr. Agnihotri and Mr. Winder Hughes. Until
his death in March 2012, David Anthony served as a member and as Chairman of this committee. The Compensation and Benefits Committee
is governed by a written charter approved by the Board of Directors. The charter sets out the Compensation and Benefits Committee’s
membership requirements and responsibilities. A copy of the Compensation and Benefits Committee charter was provided to shareholders
as Appendix A to the Company’s Proxy Statement for our Special Meeting in lieu of the 2011 Annual Meeting. The Compensation
and Benefits Committee makes recommendations to the Board of Directors on compensation generally and acts on behalf of the Board
of Directors with respect to executive officer salaries, bonus awards, stock option grants, special awards and supplemental compensation.
The Compensation and Benefits Committee consults generally with management on matters concerning executive compensation and other
compensation issues where Board of Directors or shareholder action is contemplated. The Board has determined that the following
members of the Compensation and Benefits Committee are independent: Dr. Agnihotri and Mr. Winder Hughes. Although Mr. Shawn Hughes
does not satisfy the independence standards that we have adopted because he served as our President and Chief Operating Officer
until January 27, 2010 and, during the fiscal year ended December 31, 2010, received severance payments and other compensation
totaling $327,179, our Board of Directors believes that Mr. Hughes does not currently have a relationship that would interfere
with the exercise of independent judgment in carrying out the responsibilities of a director or a member of the Compensation and
Benefits Committee.
Audit Committee
. The Audit Committee
consists of Mr. Reynolds, as Chairman, Mr. Bartlett and Mr. Winder Hughes. David Anthony served on this committee until his death
in March 2012. This committee oversees the Company’s financial reporting process and internal controls. The Audit Committee
is governed by a written charter approved by the Board of Directors. The charter sets out the Audit Committee’s membership
requirements and responsibilities. A copy of the Audit Committee charter was provided to shareholders as Annex A to the Company’s
Proxy Statement for our Special Meeting in lieu of the 2010 Annual Meeting. As part of its duties, the Audit Committee consults
with management and the Company’s independent registered public accounting firm during the year on matters related to the
annual audit, internal controls, the published financial statements and the accounting principles and auditing procedures being
applied. The Audit Committee selects the Company’s independent registered public accounting firm, reviews the independent
registered public accounting firm’s audit fees, discusses relationships with the auditor, and reviews and approves in advance
non-audit services to ensure no compromise of independence. The Board has determined that all of the members of the Audit Committee
are “audit committee financial experts” (as defined in Item 407(d)(5)(ii) of Regulation S-K) and independent.
Nominating Committee
. The directors
elected by the holders of our Common Stock and our Series A Convertible Preferred Stock (Messrs. Bullock, Reynolds and Wood) serve
as the Nominating Committee, with Mr. Reynolds serving as Chairman. The Nominating Committee identifies the individuals to be
nominated for election to the Board of Directors by the holders of our Common Stock and our Series A Convertible Preferred Stock.
In considering candidates, the Nominating Committee seeks to assure that the Board of Directors will include persons with a variety
of skills and experience, including at least one director with expertise in the areas of science and technology in which the Company
operates and at least one director who qualifies as an audit committee financial expert. The Nominating Committee does not have
a charter. The Nominating Committee will consider director candidates recommended by the shareholders if a nominating shareholder
complies with the following requirements. If a shareholder wishes to recommend a candidate to the Nominating Committee for consideration
as a candidate for election to the Board of Directors, the shareholder must submit in writing to the Nominating Committee the
nominee’s name and a brief resume setting forth the nominee’s business and educational background and qualifications
for service, and a notarized consent signed by the recommended candidate stating the recommended candidate’s willingness
to be nominated and to serve. This information must be delivered to the Chairman of the Nominating Committee at the following
address: ThermoEnergy Corporation, 10 New Bond Street, Worcester, MA 01606 and must be received no later than March 31 in any
year to be considered as a potential director nominee at the Annual Meeting of Shareholders for such year. The Nominating Committee
may request additional information if it determines a potential candidate may be an appropriate nominee.
Audit Committee Report
The Audit Committee reviews the financial
reporting process of ThermoEnergy Corporation (the “Company”) on behalf of the Board of Directors. Management has the
primary responsibility for the financial statements and the reporting process, including the system of internal controls. The Company’s
independent public accountants are responsible for performing an independent audit of the Company’s consolidated financial
statements in accordance with generally accepted auditing standards and to issue a report thereon. The Audit Committee monitors
these processes.
With respect to the fiscal year ended
December 31, 2012, the Audit Committee met frequently and held extensive discussions with management and with representatives
of Grant Thornton LLP (“Grant Thornton”), the Company’s independent registered public accounting firm. Management
represented to us that the Company’s consolidated financial statements for the fiscal year ended December 31, 2012 were prepared
in accordance with generally accepted accounting principles, and the Audit Committee has reviewed and discussed the audited financial
statements and related disclosures with management and with representatives of Grant Thornton, including a review of the significant
management judgments underlying the financial statements and disclosures. The Audit Committee also discussed with representatives
of Grant Thornton the matters required to be discussed with the independent public accountants by Statement on Auditing Standards
No. 61 (Codification of Statements on Auditing Standards, AU 380), as amended.
In addition, the Audit Committee discussed
with representatives of Grant Thornton that firm’s independence from the Company and its management, and also considered
whether the non-audit services performed during fiscal year 2012 by the independent public accountants were compatible with maintaining
the accountants’ independence. Grant Thornton have provided to the Committee the written disclosures and letter required
by the Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees).
The Audit Committee discussed with representatives
of Grant Thornton the overall scope and plans for its audit. At the end of each fiscal quarter, the Committee met with representatives
of Grant Thornton, on each occasion with and without management present, to discuss the results of its examinations, the evaluations
of the Company’s internal controls, and the overall quality of the Company’s financial reporting.
Based on the reviews and discussions
referred to above, the Audit Committee recommended to the Company’s Board of Directors, and the Board approved, that the
audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2012, for filing with the Securities and Exchange Commission.
March 18, 2013
|
Audit Committee
|
|
|
|
Arthur S. Reynolds, Chairman
|
|
Joseph P. Bartlett
|
|
J. Winder Hughes III
|
Shareholder Communications
The Board of Directors does not have a
formal policy for shareholder communications to the Board of Directors. The small size of the Board of Directors and the
simple administrative structure of the Company permits shareholders to have easy access to our management and its directors for
any communications, including those pertaining to director nominations as set forth above. Shareholder inquiries, suggestions
and other communications may be directed to the Chairman of our Board of Directors at ThermoEnergy Corporation, 10 New Bond Street,
Worcester, MA 01606.
Code of Ethics
The Company’s Code of Business Conduct
and Ethics, including provisions that apply to our Chief Executive Officer and our Chief Financial Officer, is posted on our corporate
website at
http://ir.stockpr.com/thermoenergy
.
Board Leadership Structure
James F. Wood currently combines the roles of the Company’s
Chairman and Chief Executive Officer. The Board of Directors believes that the interests of the Company and its stockholders are
currently best served by having the same individual serve as Chairman and Chief Executive Officer. The Board of Directors believes
that mandating a split in the roles of the Chairman and Chief Executive Officer would at the present time be counterproductive
by depriving the Board of Directors of the ability to select the most qualified and appropriate individual to lead the Board as
Chairman. The Board of Directors believes that it should have the flexibility to make these determinations at any given point in
time in the way that it considers best to provide appropriate leadership for the Company at that time. Having the Chief Executive
Officer as Chairman at the current time has a number of benefits, including promoting a cohesive vision and strategy for the Company,
clear and direct communication to the Board of Directors of any key enterprise risks and the ability of the Company to respond
nimbly in a dynamic industry. The Board also believes that Board independence and oversight of management are effectively maintained
through the Board’s current composition and the presence of independent directors.
Arthur S. Reynolds has been designated by the Board of Directors
as independent lead director.
The Role of the Board in Risk Oversight
Our Board of Directors is responsible for understanding the
risks faced by the Company, the level of risk that is appropriate for the Company, in light of its size, stage and industry, the
steps that management is taking to manage risks and assessing the effectiveness of those steps. The role of our Board of Directors
role in risk oversight includes receiving regular reports from members of senior management on areas of material risk to the Company,
such as the status of pending litigation and the ongoing review of our internal controls. In addition to the Board of Directors,
the Audit Committee plays an integral part in fulfilling its oversight responsibilities in certain areas of risk, specifically
financial and enterprise risk, including internal controls. The Audit Committee reviews and discusses with management our major
financial risk exposures, including risks related to fraud and regulatory compliance, our policies with respect to risk assessment
and risk management, and the steps management has taken to monitor and control such exposures. Each of our directors has access
to our Chief Financial Officer and any other members of our management to discuss and monitor potential risks.
Attendance at the Annual Meeting and
at Board and Committee Meetings
Although we do not have a requirement
that all members of the Board of Directors attend the Annual Meeting of Shareholders, such attendance is strongly encouraged.
All of the directors other than David Anthony attended the Special Meeting in lieu of our 2011 Annual Meeting of Shareholders.
During the fiscal year ended December 31, 2012, the Board of Directors held 22 meetings and every director attended at least 75%
of those meetings. During 2012, the Audit Committee held four meetings, the Compensation and Benefits Committee held three meetings,
and the Nominating Committee held no meetings. All members of the Committees attended at least 75% of the meetings of their respective
Committees. The Board of Directors and its Committees took a number of actions by unanimous written consent without meetings during
2012.
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of the Securities Exchange
Act of 1934, as amended requires our executive officers and directors and persons who own more than 10% of our Common Stock to
file reports of ownership and changes in ownership with the SEC. Such executive officers, directors and shareholders are also
required by SEC rules to furnish us with copies of all Section 16(a) forms they file. Based on information supplied to us and
filings made with the SEC, during the fiscal year ended December 31, 2012 all of our executive officers and directors made all
required Section 16(a) filings on a timely basis.
ITEM 11. Executive Compensation
Summary Compensation Table
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 Chief Financial
Officer
(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 and Interim Chief
Financial 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
|
|
|
2011
|
|
|
$
|
132,231
|
|
|
$
|
0
|
|
|
$
|
99,409
|
(5)
|
|
$
|
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 or 2011 were estimated at the date of grant using a Black-Scholes option pricing
model with the following assumptions:
|
|
|
2012
|
|
2011
|
|
Risk-free interest rate
|
|
0.83% - 2.23%
|
|
2.0% - 3.5%
|
|
Expected option life (years)
|
|
6.25 - 10.0
|
|
10.0
|
|
Expected volatility
|
|
90% - 92%
|
|
91% - 92%
|
|
Expected dividend rate
|
|
0%
|
|
0%
|
|
|
(3)
|
Mr. Klowan’s employment was terminated
on December 17, 2012.
|
|
(4)
|
Mr. Landegger was hired on July 30,
2012 and was promoted to Chief Operating Officer of September 4, 2012. Mr. Landegger was named Interim Chief Financial
Officer upon the departure of Mr. Klowan on December 17, 2012.
|
|
(5)
|
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 $397,465.
|
Compensation of the Board
Directors do not receive cash compensation
for serving on the Board or its committees. Non-employee directors are awarded annual grants of non-qualified stock options.
All directors are reimbursed for their reasonable expenses incurred in attending all board meetings. We maintain directors
and officers liability insurance.
The following table shows compensation
for the fiscal year ended December 31, 2012 to our directors who were not also named executive officers at the time they
received compensation as directors:
Director Compensation
(1)
|
|
Fees Earned or
Paid in Cash
|
|
|
Option
Awards
($)
(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 2012.
|
|
(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.
|
|
(6)
|
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.
|
Outstanding Equity Awards at December
31, 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 Contracts and Agreements
We have written employment agreements
with each of our senior executives. Set forth below are descriptions of the agreements with each of our current executive officers
and with each person who was an executive officer during the fiscal year ended December 31, 2012.
James F. Wood:
Pursuant to our Executive
Employment Agreement with James F. Wood, our Chairman and Chief Executive Officer, 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 equal to the closing price of our Common Stock in the over-the-counter
market on December 31, 2012 (the trading day immediately preceding the effective date of his employment), 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.
Cary G. Bullock:
During
the service of Cary G. Bullock as our Chairman and Chief Executive Officer (prior to his resignation and retirement in January
2013), we had an Executive Employment Agreement with Mr. Bullock, pursuant to which we paid him a base salary of $200,000, with
eligibility for performance bonuses, from time to time, in accordance with incentive compensation arrangements established by the
Benefits and Compensation Committee of our Board of Directors. During Mr. Bullock’s tenure, he did not receive any
performance bonuses. Following Mr. Bullock’s resignation, we have agreed to make payments to him in the amount of $16,667
per month for six months and we will keep in force for such six-month period all health insurance benefits afforded to Mr. Bullock
and his family at the time of termination. Mr. Bullock’s Executive Employment Agreement contains other conventional
terms, including covenants relating to the confidentiality and non-use of our proprietary information, and a provision prohibiting
Mr. Bullock from competing against us or soliciting our customers or employees.
Teodor Klowan, Jr.:
During the service
of Teodor Klowan, Jr. as our Executive Vice President and Chief Financial Officer (prior to the termination of his employment in
December 2012), we had an Executive Employment Agreement with Mr. Klowan, pursuant to which we paid him a base salary of $175,000,
with eligibility for performance bonuses, from time to time, in accordance with incentive compensation arrangements established
by the Benefits and Compensation Committee of our Board of Directors. During Mr. Klowan’s tenure, he did not receive
any cash performance bonuses. Following termination of Mr. Klowan’s employment, we are obligated under his Executive Employment
Agreement to make payments to him in the amount of $14,583 per month for six months and we will keep in force for such six-month
period all health insurance benefits afforded to Mr. Bullock and his family at the time of termination. Mr. Klowan’s
Executive Employment Agreement contains other conventional terms, including covenants relating to the confidentiality and non-use
of our proprietary information, and a provision prohibiting Mr. Klowan from competing against us or soliciting our customers or
employees.
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.
|
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. The shareholders ratified this amendment at the Special Meeting in lieu of the 2012
Annual Meeting of Shareholders on March 20, 2013.
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.
Compensation and Benefits Committee Report
The Compensation and Benefits Committee
of the Board of Directors of ThermoEnergy Corporation has reviewed and discussed with management the Compensation Discussion and
Analysis contained in this Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and, based on such review
and discussion, the Compensation and Benefits Committee recommended to the Board of Directors that the Compensation Discussion
and Analysis be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 for
filing with the Securities and Exchange Commission.
January 30, 2013
|
Compensation and Benefits Committee
|
|
Shawn R. Hughes, Chairman
|
|
Dileep Agnihotri
|
|
J. Winder Hughes III
|
ITEM 12. Security Ownership
by Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain
information as of March 19, 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.
|
|
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, 20
th
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
|
|
|
831,250
|
(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
|
|
|
859,375
|
(3)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All executive officers and directors as a group
(8 persons)
|
|
|
25,283,465
|
(8)
|
|
|
18.0
|
%
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
Guggenheim Capital, LLC
|
|
|
|
|
|
|
|
|
227 West Monroe Street
|
|
|
|
|
|
|
|
|
Chicago, Illinois 60606
|
|
|
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
|
%
(13)
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
Francis Howard
|
|
|
|
|
|
|
|
|
376 Victoria Place
|
|
|
|
|
|
|
|
|
London, United Kingdom SW1V 1AA
|
|
|
8,500,000
|
(17)
|
|
|
7.0
|
%
|
(1)
|
Includes shares as to which the identified
person or entity directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has
or shares voting power and/or investment power, as these terms are defined in Rule 13d-3(a) of the Exchange Act. Shares of
Common Stock underlying options to purchase shares of Common Stock and securities convertible into shares of Common Stock,
which were exercisable or convertible on, or become exercisable or convertible within 60 days after, March 19, 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 March 19, 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, March 19, 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 a 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. 5 to the Statement on Schedule 13G filed by Guggenheim Capital,
LLC and certain of its affiliates on February 14, 2013. 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:
|
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 direct 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 March 19, 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 March 19, 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 March 19, 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.
|
|
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, 20
th
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
|
%
|
|
|
|
|
|
|
|
|
|
Guggenheim Capital, LLC
|
|
|
|
|
|
|
|
|
227 West Monroe Street
|
|
|
|
|
|
|
|
|
Chicago, Illinois 60606
|
|
|
2,083,334
|
(4)
|
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
Robert S. Trump
|
|
|
|
|
|
|
|
|
89 10
th
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
|
%
|
*
|
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 March 19, 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 direct 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
|
|
|
12,889,884
|
|
|
$
|
0.39
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
1,281,103
|
|
|
$
|
0.35
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
26,177,781
|
|
|
$
|
0.32
|
|
|
|
7,993,206
|
|
ITEM 13. Certain Relationships
and Related Transactions, and Director Independence
Certain Relationships and Related
Transactions
We are a party to a license agreement
with Alexander G. Fassbender, who until March 3, 2010 was our Executive Vice President and Chief Technology Officer, under
which Mr. Fassbender has granted to us an exclusive license in the patents and patent applications for ThermoFuel and Enhanced
Biogas Production in the United States and certain foreign countries. We are required to pay to Mr. Fassbender a royalty
of 1% of net sales after the cumulative sales of all licensed products exceed $20,000,000. In December 2007, Mr. Fassbender
waived certain termination rights under the license agreement, agreed that we can assign or transfer the license without his consent
in connection with a merger or a sale of all or a portion of our business and assets, and agreed that he would not transfer his
interest in the license agreement without our consent.
We are members, along with Mr. Fassbender
and Mr. Fassbender’s ex-wife, of a limited liability company, ThermoEnergy Power Systems, LLC (“TEPS”), which
owns the pressurized oxycombustion technology. We hold an 85% ownership interest in TEPS, and Mr. Fassbender
and his ex-wife each owns 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. In addition to our employment arrangements with our executive
officers and the compensation of our directors, as disclosed elsewhere in this Annual Report on Form 10-K, during the fiscal year
ended December 31, 2012, we engaged in the following transactions with the following affiliates, officers, directors,
principal shareholders and their affiliates, each of which was approved in accordance with the foregoing policy:
|
(i)
|
On July 11, 2012, we issued and
sold in a private placement to 26 accredited investors an aggregate of 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. Among the investors were four of our affiliates: Cary G. Bullock, a member of our Board of Directors
who was then our Chairman and CEO (who purchased 625,000 shares and warrants for an additional 625,000 shares for a purchase
price of $62,500); Robert F. Marrs, who was then our Vice President – Business Development (who purchased 625,000
shares and warrants for an additional 625,000 shares for a purchase price of $62,500); John Winder Hughes
Revocable Trust, whose trustee, J. Winder Hughes III, is a member of our Board of Directors (which purchased
1,250,000 shares and warrants for an additional 1,250,000 shares for a purchase price of $125,000); and
The Quercus Trust, which is the beneficial owner of more than 10% of our Common Stock (which purchased
650,000 shares and warrants for an additional 650,000 shares for a purchase price of $65,000). In
addition, Carl C. Landegger, who is not our affiliate but whose son, Gregory M. Landegger, is our Chief
Operating Officer and Interim Chief Financial Officer, purchased
625,000
shares and warrants for an additional 625,000 shares for a purchase price of $62,500.
The terms on which our
affiliates and Mr. Landegger made their investments were identical to the terms that applied
to other investors.
|
|
(ii)
|
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”), an entity owned by members of the family of Gregory M. Landegger, our Chief Operating Officer and
Interim Chief Financial Officer. Pursuant to the Loan Agreement 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”) and issued to the Lender a promissory note
in the principal amount of $700,000 (the
“Note”). Amounts borrowed under the Credit
Facility will not bear interest
(except in the case of an event of default, in which case all amounts borrowed, together with all fees, expenses and other
amounts due, shall bear interest at the default rate of 8% per annum). Upon maturity of the Note, we will be charged a
commitment fee equal to 10% of the aggregate principal amount borrowed under the Credit Facility. The Credit
Facility expires, and all amounts due under the Note, together with all commitment fees incurred under the Loan Agreement,
will become due and payable, on the earlier of (i) April 5, 2013 or (ii) one business day following the date on which we
first draw against
an irrevocable
documentary letter of credit that has been issued
for our benefit in connection with the Project. We may repay
the Note in whole or in part at any time without premium or penalty. Our obligations under the Loan Agreement and Note are
secured by a first-priority security interest in substantially all of our assets.
|
|
(iii)
|
On November 30, 2012, we entered into
a Bridge Loan Agreement with the following investors (the “Investors”), pursuant to which the Investors made bridge
loans (the “Loans”) to us in the following amounts in anticipation of an equity investment in a new series of
our Preferred Stock:
|
Lender
|
|
Principal
Amount of
Bridge Loan
|
|
Robert S. Trump
|
|
$
|
1,500,000
|
|
Empire Capital Partners, L.P.
|
|
$
|
500,000
|
|
Empire Capital Partners, Ltd
|
|
$
|
500,000
|
|
Empire Capital Partners Enhanced Master Fund Ltd
|
|
$
|
500,000
|
|
The Focus Fund
|
|
$
|
450,000
|
|
The Quercus Trust
|
|
$
|
250,000
|
|
As
evidence of our obligation to repay the Loans, we issued to the Investors Promissory Notes due April 15, 2013 (the “Notes”).
The Notes bear interest at the rate of 8% per annum and
may not be prepaid, in whole or in part, without the prior written
consent of the Investors. Upon satisfaction of the conditions to the issuance and sale of the Series C Convertible Preferred Stock,
the Investors have agreed to surrender the entire principal amount of, and all accrued interest on, the Notes for conversion into
shares of Series C Convertible Preferred Stock. Each of the Investors (with the Empire Capital entities and their affiliates considered
as a single Investor) is the beneficial owner of greater than 5% of our issued and outstanding Common Stock. J. Winder Hughes
III, the Managing Director of The Focus Fund, is a member of our Board of Directors.
|
(iv)
|
Beginning in August 2012, we engaged
Rexon Limited, a consulting firm controlled by Arthur S. Reynolds, a member of our Board of Directors, to advise our management
on matters relating to our subsidiary, Unity Power Alliance LLC, at the rate of $150 per hour, subject to the condition that
Mr. Reynolds shall not render more than 10 hours of service in any single calendar month without the prior express approval
of the Chairman and Chief Executive Officer.
|
Board Determination of Independence
Our securities are not listed on a national
securities exchange or on an inter-dealer quotation system which has requirements that a majority of the board of directors be
independent. In determining which directors and which members of committees are “independent,” our Board of Directors
has voluntarily adopted the independence standards set forth in the Listing Rules of the Nasdaq Stock Market. Our Board of Directors
has determined that, in accordance with these standards, the following members are “independent directors”: Messrs.
Agnihotri, Bartlett, Winder Hughes, and Reynolds.
ITEM 14. Principal Accountant
Fees and Services.
Policy on Audit Committee Pre-Approval
of Audit and Permissible Non-Audit Services of Independent Public Accountants
The Audit Committee of our Board of Directors
reviews and approves in advance any audit and permitted non-audit services to be provided by our principal independent registered
public accountants. The Audit Committee has the sole authority to make these approvals.
The following describes the current policies
and procedures of the Audit Committee with respect to pre-approval of audit and permissible non-audit services:
Audit Services.
All audit
services must be pre-approved by the Audit Committee. The Audit Committee approves the annual audit services engagement
and, if necessary, any changes in terms, conditions, and fees resulting from changes in audit scope, company structure, or other
matters. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service
or category of services and is generally subject to a specific budget. The Audit Committee may also grant pre-approval for other
audit services, which are those services that only the independent public accountant reasonably can provide.
Non-Audit Services.
The Audit
Committee’s policy is to pre-approve all permissible non-audit services provided by the independent registered public accountants.
These services may include audit-related services, tax services and other services. The independent registered public accountants
and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent
registered public accountants in accordance with this pre-approval, and the fees for the services performed to date. The
Audit Committee may also pre-approve particular services on a case-by-case basis.
Fees billed to us by Grant Thornton LLP
and CCR LLP, our independent registered public accountants for fiscal years 2012 and 2011, respectively, were comprised of the
following:
Audit Fees
. Fees related to the
audit of our annual financial statements, review of the financial statements included in our quarterly reports on Forms 10-Q,
audits of statutory filings, comfort letter procedures and review of other regulatory filings totaled $445,218 in 2012 and $156,359
in 2011.
Audit Related Fees
. No fees were
billed to us for audit related services in 2012 or 2011.
Tax Fees.
Fees for tax services
provided to us, including tax compliance, tax advice and planning, totaled $22,770 in 2012 and $25,521 in 2011.
All Other Fees.
No other fees were
billed to us in 2012 or 2011 for “other services.”
In accordance with the Audit Committee’s
pre-approval policy, all audit services performed by CCR LLP and Grant Thornton LLP during 2012 and 2011 were approved at the
time such firm was engaged to serve as our independent registered public accounts for such fiscal years. The Audit Committee
reviewed and approved, as consistent with our policies and procedures, the tax services performed for us in 2012 and 2011 by CCR
LLP and Grant Thornton LLP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
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. Financial results for Unity Power Alliance (“UPA”) have been
consolidated for the period from inception until the date it became a Joint Venture. Financial results for UPA as a Joint Venture are accounted for under the equity method, as discussed in Note 4.
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. Significant estimates affecting amounts reported in the consolidated financial statements relate to revenue
recognition using the percentage-of-completion method.
The 15% third party ownership interest
in TEPS is recorded as a noncontrolling interest in the consolidated financial statements.
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.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
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. The Company recorded two contracts which
represented 8% of its revenues for the year ended December 31, 2012 and one contract which represented approximately 5% of its
revenues for the year ended December 31, 2011 utilizing the percentage-of-completion method based on a zero profit margin.
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. The Company qualitatively evaluates if it is the primary beneficiary of the
VIE’s based on whether the Company has (i) the power to direct those matters that most significantly impacted the
activities of the VIE; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE. See Note 4 for
further discussion of UPA as a variable interest entity.
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 Company did not have any activity
in its allowance for doubtful accounts for the year ended December 31, 2012. The following is a summary of the Company’s
allowance for doubtful accounts activity for the year ended December 31, 2011:
Allowance for doubtful accounts, beginning of year
|
|
$
|
9
|
|
Bad debt expense
|
|
|
1
|
|
Write-offs
|
|
|
(10
|
)
|
Allowance for doubtful accounts, end of year
|
|
$
|
—
|
|
One customer accounted for 53% and 96%
of the Company’s gross accounts receivable balance at December 31, 2012 and 2011, respectively. For the year ended December
31, 2012, one customer accounted for 73% of the Company’s revenues. 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.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
Inventories
Inventories are stated at the lower of
cost or net realizable value using the first-in, first-out method and consist primarily of raw materials and supplies.
The Company evaluates its
inventory for excess quantities and obsolescence on a periodic basis. In preparing our evaluation, the Company
looks at the expected demand for its products for the next three to twelve months. Based on this evaluation, the
Company records provisions to ensure 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 $131,000
in 2012 related to the disposal of a system previously used for pre-sales testing. This loss is included in sales and marketing
expense on its Consolidated Statement of Operations for the year ended December 31, 2012. In 2011, the Company recorded a loss
of $62,000 on the disposal of property and equipment in conjunction with relocating its corporate headquarters. This loss is included
in general and administrative expense on its Consolidated Statement of Operations for the year ended December 31, 2011.
Contingencies
The Company accrues for costs relating
to litigation, including litigation defense costs, claims and other contingent matters, including liquidated damage liabilities,
when such liabilities become probable and reasonably estimable. Such estimates may be based on advice from third parties or on
management’s judgment, as appropriate. Revisions to 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.” The Company uses a two-step process to assess each income tax position. The Company first determines 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, the Company then records
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, 2012 and 2011, there are no uncertain tax positions that require accrual.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
The Company is subject to taxation in
the U.S. and various states. As of December 31, 2012 the Company’s tax years for 2009, 2010 and 2011 are subject to examination
by the tax authorities. With few exceptions, as of December 31, 2012, the Company is no longer subject to U.S. federal, state
or local examinations by tax authorities for years before 2009. Tax year 2008 was open as of December 31, 2011.
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 $1,838,000 and $1,571,000 at December 31, 2012 and 2011, respectively, and approximates
the fair value of these instruments, as the interest rate on this debt approximates the interest rate on the
Company’s recent borrowings. The Company’s derivative 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.
Series B Convertible Preferred Stock
The Company determined the initial
value of the Series B Convertible Preferred Stock using the monte carlo simulation valuation model. 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.
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. The computations of diluted net
loss per share do not include 392,326 and 420,004 options and warrants which were outstanding as of the years ended December 31,
2012 and 2011, respectively, as the inclusion of these securities would have been anti-dilutive.
Concentration of Credit Risk and Major
Customers
Financial instruments which
potentially expose the Company to concentrations of credit risk include cash equivalents, investments in treasury bills,
certificates of deposits and commercial paper, trade accounts receivable, accounts payable and accrued liabilities. We
restrict our cash equivalents and investments in marketable securities to repurchase agreements with major banks and U.S.
government and corporate securities which are subject to minimal credit and market risk.
Recent accounting pronouncements
In May 2011,
the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements
in U.S. GAAP and IFRS,” which converges fair value measurement and disclosure guidance in U.S. GAAP with fair value measurement
and disclosure guidance issued by the International Accounting Standards Board (“IASB”). The amendments in the authoritative
guidance do not modify the requirements for when fair value measurements apply. The amendments generally represent clarifications
on how to measure and disclose fair value under ASC 820, “Fair Value Measurement.” The authoritative guidance is effective
prospectively for interim and annual periods beginning after December 15, 2011. Early adoption of the authoritative guidance
is not permitted.
The Company has adopted the provisions of ASU 2011-04 in the Company’s fiscal year beginning January
1, 2012, and the provisions of this guidance did not have a material impact on its financial statements or disclosures.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
There were no other accounting standards
recently issued that had or are expected to have a material impact on our consolidated financial statements and associated disclosures.
Note 2: Management's consideration
of going concern matters
The accompanying financial statements
have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate
continuation of the Company as a going concern. However, the Company has sustained substantial losses from operations in recent
years, and such losses have continued through the year ended December 31, 2012.
At December 31, 2012, the Company had
cash of approximately $4.7 million. The Company has incurred
net losses since inception, including a net loss of approximately $7.4 million during the year ended December 31, 2012 and had
an accumulated deficit of approximately $120.9 million at December 31, 2012.
In view of the matters described in
the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the company, which in turn is dependent upon the company’s ability to
meet its financing requirements on a continuing basis, to maintain present financing, and to succeed in its future
operations.
The financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or amounts and classification of liabilities that might be necessary should the company be unable
to continue in existence. Management is considering several alternatives for mitigating these conditions.
These uncertainties raise substantial
doubt about the Company's ability to continue as a going concern. The financial statements included in this Form 10-K have been
prepared on a going concern basis and as such do not include any adjustments that might result from the outcome of this uncertainty.
Management is actively seeking to raise
substantial funding through additional equity or debt financing that will allow the Company to operate until it becomes cash flow
positive from operations. Management is also actively pursuing commercial contracts to generate operating revenue. Management
has determined that the financial success of the Company is largely dependent upon the Company’s ability to collaborate
with financially sound third parties to pursue projects involving the Technologies.
As more fully
described in Note 7, the Company initiated the following equity financing transactions during 2012:
On January
10, 2012,
the Company received proceeds totaling approximately $498,000, net of issuance costs,
from the exercise of an aggregate of 5,633,344 warrants at an exercise price of $0.095 per share.
On July 11,
2012, the Company received proceeds totaling approximately $1,566,000, net of issuance costs, from the issuance of 17,316,250
shares of the Company’s Common Stock, warrants for the purchase of an additional 18,670,375 shares at an exercise price
of $0.15 per share and warrants for the purchase of an additional 1,354,125 shares at an exercise price of $0.10 per
share.
On August
9, 2012, the Company received proceeds totaling approximately $729,000, net of issuance costs, from the issuance of 8,287,500
shares of the Company’s Common Stock, warrants for the purchase of an additional 9,116,250 shares at an exercise price
of $0.15 per share and warrants for the purchase of an additional 828,750 shares at an exercise price of $0.10 per share.
On October
9, 2012 the Company received proceeds of approximately $331,000, net of issuance costs, from the issuance of 3,765,000 shares
of the Company’s Common Stock, warrants for the purchase of an additional 4,141,500 shares at an exercise price of
$0.15 per share and warrants for the purchase of an additional 376,500 shares at an exercise price of $0.10 per share.
Also, as more fully described in Note
5, on November 30, 2012 the Company entered into a Bridge Loan Agreement with certain investors on November 30, 2012 pursuant
to which the Company received proceeds totaling $3.7 million.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
Note 3: Risks and Uncertainties
On August 22, 2012, the NYCDEP issued
a stop work order to the Company relative to its contract to install an Ammonia Removal Process (“ARP”) system at
the NYCDEP’s wastewater treatment facility in the 26
th
Ward. On November 13, 2012, the NYCDEP notified the Company
that it is terminating the contract, effective November 29, 2012.
The Company suspended all work on this
contract as of August 22, 2012 and suspended all work with its major vendors. Upon notification of the contract termination, the
Company cancelled all orders from its major vendors. The Company ceased recognition of revenues as of November 29, 2012 and has
recorded all incremental costs as period costs on its Consolidated Statement of Operations.
The Company has billed approximately
$15.5 million to the NYCDEP related to this contract as of December 31, 2012, of which approximately $14.8 million has been
paid and approximately $662,000 was outstanding. The outstanding amounts were paid by the NYCDEP in January 2013. The Company
has accounts receivable of approximately $662,000, deposits of approximately $1.4 million, accrued contract costs of
approximately $1.4 million and billings in excess of costs of approximately $4.5 million related to this contract as
of December 31, 2012. The Company is working through the termination process directly with the NYCDEP. There may be
additional billings or adjustments related to this termination process. Accordingly, the Company cannot determine a final
outcome at this time; however, the Company does not believe its exposure extends beyond the amounts reported on its
Consolidated Balance Sheet at December 31, 2012.
Because of this contract termination,
the Company's revenues, expenses, and income will be adversely affected in future periods, as this contract represented approximately
73% and 80% of the Company's revenues for the years ended December 31, 2012 and 2011, respectively.
Note 4: Joint Ventures
Babcock-Thermo Clean Combustion LLC
On February 25, 2009, the Company’s
subsidiary, TEPS, and Babcock Power Development, LLC (“BPD”), a subsidiary of Babcock Power, Inc., entered
into a Limited Liability Company Agreement (the “LLC Agreement”) establishing Babcock-Thermo Carbon Capture LLC, a
Delaware limited liability company (the “Joint Venture”) for the purpose of developing its proprietary pressurized
oxycombustion technology. In 2011, the joint venture changed its name to Babcock-Thermo Clean Combustion LLC.
TEPS entered into a license agreement
with the Joint Venture and BPD, pursuant to which it has granted to the Joint Venture an exclusive, irrevocable (except as otherwise
provided therein), world-wide and royalty-free license to TEPS’ intellectual property related to or necessary to practice
the pressurized oxycombustion technology (the “License”). In the LLC Agreement, BPD has agreed to
develop, at its own expense, intellectual property in connection with three critical subsystems relating to the pressurized oxycombustion
technology: a combustor subsystem, a steam generating heating surface subsystem, and a condensing heat exchangers subsystem (collectively,
the “Subsystems”) and BPD has entered into a license agreement with the Joint Venture and TEPS pursuant
to which it has granted the Joint Venture an exclusive, irrevocable (except as otherwise provided therein), world-wide, fully
paid up and royalty-free license to BPD’s know-how and other proprietary intellectual property related to or necessary to
practice the Subsystems.
Pursuant to the LLC Agreement, each of
ThermoEnergy Power Systems and BPD owned a 50% membership interest in the Joint Venture. The LLC Agreement provides
that each member may be required, from time to time, to make capital contributions to the Joint Venture to fund its operations. The
Company made capital contributions of $400,000 in 2011.
The Company accounted for the Joint
Venture using the equity method of accounting. Accordingly, the Company reduced the value of its investment in the Joint
Venture by $26,000 in 2012 and $389,000 in 2011 to account for its share of net losses incurred by the
Joint Venture. The carrying value of the Company’s investment in the Joint Venture is $10,000 and $32,000 as of
December 31, 2012 and 2011, respectively, and is classified as Other Assets on the Company’s Consolidated Balance
Sheets.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
On March 2, 2012, TEPS entered into a
Dissolution Agreement with BPD to terminate the Limited Liability Company Agreement and dissolve the Joint Venture. The BTCC Board
of Managers is supervising the wind down and dissolution process.
Unity Power Alliance LLC
On March 8, 2012, the Company announced
the formation of Unity Power Alliance LLC (“UPA”). UPA was formed with the intention to work with partners and stakeholders
to develop and commercialize its pressurized oxycombustion technology.
On June 20, 2012, the Company entered
into an agreement with Itea S.p.A. (“Itea”) for the development of pressurized oxycombustion in North America. The
two parties, through UPA, will utilize the two parties’ propriety technology to advance, develop and promote the use of
the coal application of pressurized oxycombustion, construct a pilot plant utilizing the technology, and subsequently construct
a demonstration facility based on the technology as implemented in the pilot plant. Itea was granted the option to acquire a 50%
ownership interest in UPA for $1,250. On July 16, 2012, Itea exercised its option and acquired the 50% ownership interest in UPA.
UPA is governed by a Board of Directors,
with half of the directors nominated by each of the Company and Itea. Administrative expenses of UPA are borne jointly by the
Company and Itea, and financing for development expenses will be obtained from third parties.
Also on June 20, 2012 the Company and
Itea entered into a License Agreement whereby the Company and the Company’s majority-owned subsidiary, TEPS, and Itea granted
a non-exclusive, non-transferable royalty-free license to UPA to use their intellectual property relating to pressurized oxycombustion.
The licenses to UPA became effective upon Itea’s acquisition of its ownership interest in UPA. The License Agreement further
provides that, if UPA successfully obtains funding and project support to construct the pilot plant, the parties may grant licenses
of their respective intellectual property and know-how to each other or to third parties for the operation of power plants based
on such intellectual property and know-how, and royalties will be shared as defined in the License Agreement.
In September 2012, UPA was awarded a
$1 million Phase 1 grant from the U.S. Department of Energy to help fund a project under a special DOE program to advance
technologies for efficient, clean coal power and carbon capture. As of December 31, 2012, UPA has not received any funding
and has not recorded any revenues related to this grant. As part of UPA's project, in October 2012, the Company received a
$900,000 contract from UPA to build a bench-scale “flameless” combustion reactor under the grant. The Company has
not commenced work on this contract as of December 31, 2012.
In October 2012, the Company and Itea
entered into a Loan Agreement with UPA through which funds required to maintain the operations of the joint venture would be loaned
in the form of notes receivable. The notes bear interest at the three-month LIBOR rate plus 2% per year, with interest calculated
monthly and added to the balance of the notes. Each of the Company and Itea loaned $100,000 to UPA in October 2012 in conjunction
with this Loan Agreement.
In accordance with ASC 810,
Consolidation
,
the Company determined that it held a variable interest in UPA and that UPA was a variable-interest entity. However, the Company
has concluded that it is not required to consolidate the financial statements of UPA for the year ended December 31, 2012. The
Company reviewed the most significant activities of UPA and determined that because the Company shares the power to direct the
activities of UPA with Itea, it is not the primary beneficiary of UPA. Accordingly, the financial results of UPA are accounted
for under the equity method of accounting.
Financial results for UPA have been consolidated
for the period from inception until July 16, 2012, when Itea acquired its 50% ownership interest in UPA. Accordingly, the Company
included $129,000 of sales and marketing expense related to UPA on its Consolidated Statement of Operations for the year ended
December 31, 2012. The Company accounted for UPA using the equity method of accounting after Itea acquired its ownership interest.
The Company increased the value of its investment in the Joint Venture by $18,000 in 2012 to account for its share of net income.
The carrying value of the Company’s investment in the Joint Venture is a shortfall of $104,000 as of December 31, 2012 and
is classified as Other Long Term Liabilities on the Company’s Consolidated Balance Sheets.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
Note 5: Short term borrowings
Short term borrowings consisted of the
following at December 31, 2012 (in thousands):
Project financing line of credit
|
|
$
|
491
|
|
November 2012 Bridge Notes, 8%, due April 15,
2013
|
|
|
3,700
|
|
|
|
$
|
4,191
|
|
Project Financing Line of Credit
On October 4, 2012, the Company
entered into a Loan Agreement (the “Loan Agreement”) with C13 Thermo LLC (the “Lender”), a related
party whose owners are related to an officer of the Company. Under this Loan Agreement, the Lender established a credit
facility allowing the Company to borrow up to $700,000 (the “Credit Facility”) to finance the fabrication and
testing of an Ammonia Reduction Process system utilizing the Company’s proprietary technology (the
“Project”). The Company issued to the Lender a promissory note in the principal amount of $700,000 (the
“Note”). As of December 31, 2012 the Company borrowed approximately $491,000 against this Credit Facility.
Amounts borrowed under the Credit Facility
will not bear interest (except in the case of an event of default, in which case all amounts borrowed, together with all fees,
expenses and other amounts due, shall bear interest at the default rate of 8% per annum). Upon maturity of the Note, the Company
will be charged a commitment fee equal to 10% of the aggregate principal amount borrowed under the Credit Facility. The Credit
Facility originally expired, and all amounts due under the Note, together with all commitment fees incurred under the Loan Agreement,
will become due and payable, on the earlier of (i) March 4, 2013 or (ii) the date on which the Company first draws against an
irrevocable documentary letter of credit that has been issued for the Company’s benefit in connection with the Project.
The Credit Facility was amended in March 2013 to extend the expiration date to the earlier of (i) April 5, 2013 or (ii) one business
day following the date the Company first draws against the irrevocable documentary letter of credit. The Company may repay the
Note in whole or in part at any time without premium or penalty. The Credit Facility is secured by all of the Company’s
assets. The Credit Facility contains certain non-financial covenants, and the Company believes it is in compliance with these
covenants at December 31, 2012.
November 2012 Bridge Note Financing
On November 30, 2012 the Company entered
into Bridge Loan Agreements with six of its principal investors pursuant to which the Investors agreed to make bridge loans to
the Company of $3.7 million in exchange for 8% Promissory Notes (the “November 2012 Bridge Notes”). The
November 2012 Bridge Notes bear interest at the rate of 8% per year and are due and payable on April 15, 2013.
The November 2012 Bridge Notes
contain other conventional terms, including representations and warranties regarding our business and assets and our
authority to enter into such agreements, and provisions for acceleration of our obligations upon the occurrence of certain
specified events of default.
Note 6: Convertible debt
Convertible debt consisted of the following
at December 31, 2012 and 2011 (in thousands):
|
|
2012
|
|
|
2011
|
|
Roenigk 2007 Convertible Promissory
Note, 5%, due March 21, 2013, less discount of $78 at December 31, 2011
|
|
$
|
—
|
|
|
$
|
860
|
|
Roenigk 2008 Convertible Promissory Note, 5%, due
March 7, 2013, less discount of $181 at December 31, 2011
|
|
|
—
|
|
|
|
711
|
|
December 2011 Convertible Promissory Notes, 12.5%,
due on demand on or after January 31, 2013
|
|
|
1,250
|
|
|
|
1,250
|
|
Roenigk 2012 Convertible
Promissory Note, 8%, due March 31, 2014, less discount of $106 at December 31, 2012
|
|
|
1,838
|
|
|
|
—
|
|
|
|
|
3,088
|
|
|
|
2,821
|
|
Less: Current portion
|
|
|
(1,250
|
)
|
|
|
(1,250
|
)
|
|
|
$
|
1,838
|
|
|
$
|
1,571
|
|
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
March 21, 2007 Financing
On March 21, 2007 the Company issued
to Mr. Martin A. Roenigk, a member of the Company’s Board of Directors as of that date, a 5% Convertible Promissory
Note due March 21, 2013 in the principal amount of $750,000. The principal amount and accrued interest on the Note was
convertible into shares of common stock at a conversion price of $0.50 per share at any time at the election of the
holder. As further consideration, the Company issued a warrant to purchase 750,000 shares of common stock at an
exercise price equal to the daily volume weighted average price per share of the common stock for the 365-day period
immediately preceding the date on which the warrant is exercised, subject to a minimum exercise price of $0.50 per share and
a maximum exercise price of $1.00 per share. The warrant expires on March 21, 2013.
Interest on the Note was payable
semi-annually. The Company could, at its discretion, defer any scheduled interest payment until the maturity date of the Note
upon payment of a $2,500 deferral fee. The Company added $213,000 and $188,000 of accrued interest to the
principal balance of the Note as of June 20, 2012 and December 31, 2011, respectively.
On June 20, 2012, the Noteholder tendered
this Note, together with the 2008 Convertible Promissory Note discussed below, as consideration for the issuance of the 2012 Convertible
Promissory Note, as discussed below.
March 7, 2008 Financing
On March 7, 2008, Mr. Roenigk exercised
his option to make an additional $750,000 investment in the Company under the terms of the Securities Purchase Agreement between
the Company and Mr. Roenigk dated March 21, 2007. The Company issued to Mr. Roenigk a 5% Convertible Promissory Note due March
7, 2013 in the principal amount of $750,000. The principal amount and accrued interest on the Note was convertible into shares
of common stock at a conversion price of $0.50 per share at any time at the election of the holder. As further consideration,
the Company issued a warrant to purchase 750,000 shares of common stock at an exercise price equal to the daily volume weighted
average price per share of the Company’s common stock for the 365-day period immediately preceding the date on which the
warrant is exercised, subject to a minimum exercise price of $0.50 per share and a maximum exercise price of $1.00 per share.
The warrant expires on March 7, 2014.
Interest on the Note was payable semi-annually.
The Company could, at its discretion, defer any scheduled interest payment until the maturity date of the Note upon payment of a
$2,500 deferral fee. The Company added $165,000 and $142,000 of accrued interest to the principal balance of the Note
as of June 20, 2012 and December 31, 2011, respectively.
On June 20, 2012, the Noteholder tendered
this Note, together with the 2007 Convertible Promissory Note discussed above, as consideration for the issuance of the 2012 Convertible
Promissory Note, as discussed below.
CASTion Acquisition Financing
On July 2, 2007, the Company issued
Convertible Promissory Notes in the aggregate principal amount of $3,353,127 as part of the consideration for the acquisition
of CASTion. The outstanding principal and accrued interest were convertible into shares of the Company’s Common Stock
at a conversion price of $0.50 per share at any time at the holders’ discretion. The Notes contained conventional
weighted-average anti-dilution provisions for the adjustment of the conversion price of the Notes in the event the Company
issued additional shares of Common Stock (or securities convertible into Common Stock) at a price less than the
then-effective exercise price or conversion price. The Notes originally matured on May 31, 2010, and were in default, as the
Company had not made required prepayments from a private placement of equity that closed on December 18, 2007.
Interest on the Notes was payable semi-annually,
and the Company had the option of deferring interest payments and rolling the deferred amount into the principal amount of the
Notes.
On January 7, 2011 the Company entered
into Note Amendment and Forbearance Agreements (the “Agreements”) with the holders of the CASTion Notes (the “CASTion
Noteholders”). Pursuant to the Agreements, the Company (i) made payments totaling $1,144,336 against the outstanding balances
of the CASTion Notes; (ii) converted an aggregate of $902,710 in principal and accrued interest on the CASTion Notes into a total
of 376,129 shares of the Company’s Series B Convertible Preferred Stock; (iii) issued to the CASTion Noteholders warrants
for the purchase of an aggregate of 17,585,127 shares of its Common Stock at an exercise price of $0.40 per share and an aggregate
of 6,018,065 shares of its Common Stock at an exercise price of $0.30 per share ; (iv) made additional cash payments to the CASTion
Noteholders totaling $37,914; and (v) the CASTion Notes were amended and restated.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
The amended and restated CASTion Notes
bore interest at the rate of 10% per annum, and the maturity date on the CASTion Notes was extended to February 29, 2012. Installment
payments (based on a 10-year amortization schedule) were due on the last day of each month beginning January 31, 2011. The restated
CASTion Notes were convertible, in whole or in part, at any time at the election of the CASTion Noteholders, into shares of the
Company’s Series B Convertible Preferred Stock at the rate of $2.40 per share. The restated CASTion Notes provided that,
in the event, on or before July 5, 2011, the Company made any payments of principal or accrued interest, then simultaneously with
the making of such payment a portion of the remaining principal and accrued and unpaid interest on the restated CASTion Notes
in an amount equal to the amount of such payment automatically converted into shares of the Company’s Series B Convertible
Preferred Stock at the rate of $2.40 per share. The restated CASTion Notes also provided that, in the event that (i) the closing
price of the Company’s Common Stock equaled or exceeded $0.72 per share for 20 consecutive trading days and (ii) the daily
average trading volume of the Company’s Common Stock exceeded 30,000 shares for 20 consecutive trading days, then the entire
principal amount, plus all accrued and unpaid interest thereon, would automatically convert into shares of the Company’s
Series B Convertible Preferred Stock at the rate of $2.40 per share.
The Company accounted for the restated
CASTion Notes as a debt extinguishment, as the present value of cash flows of the restated CASTion Notes was substantially different
than the present value under the original terms. The restructuring of the CASTion Notes resulted in the Company recording a loss
on extinguishment of debt of $7,361,000 in the first quarter of 2011.
On July 1, 2011, the Company exercised
its right to prepay a portion of the outstanding principal balance and accrued and unpaid interest on the restated CASTion Notes
by making payments in the aggregate amount of $1,568,267. These payments represent slightly in excess of 50% of the balance of
principal and accrued interest balance on the restated CASTion Notes. Accordingly, on July 1, 2011, the Company issued 653,439
shares of its Series B Convertible Preferred Stock and Warrants for the purchase of 10,455,024 shares of its Common Stock per
the terms of the restated CASTion Notes. As a result, the restated CASTion Notes are repaid in full.
The Company accounted for the repayment
and conversion of the restated CASTion Notes as a debt extinguishment, as the fair value of the instruments tendered was substantially
different than the carrying value of the restated CASTion Notes. The extinguishment of the CASTion Notes resulted in the Company
recording a loss on extinguishment of debt of $952,000 in the third quarter of 2011.
2010 Bridge Note Financing
On March 10, 2010, the Company
entered into a Bridge Loan Agreement with six of its principal investors (“the Investors”), all related parties,
pursuant to which the Investors agreed to make bridge loans to the Company of $2.6 million in exchange for 3% Secured
Convertible Promissory Notes (the “Bridge Notes”). The Bridge Notes bear interest at the rate of 3%
per year and were due and payable on February 28, 2011. The entire unpaid principal amount, together with all interest then
accrued and unpaid under each Bridge Note, was convertible, at the election of the holder, into shares of Common Stock at a
conversion price of $0.24 per share. On June 30, 2010, the parties amended the Bridge Loan Agreement pursuant to which the
Investors agreed to increase by $2 million the amount of the bridge loans as provided under the Bridge Loan Agreement.
The Bridge Notes contained other conventional
provisions, including the acceleration of repayment obligations upon the occurrence of certain specified Events of Default. The
Bridge Notes were secured by all of the Company’s assets except for the shares of the Company’s subsidiary, CASTion
Corporation (in which no security interest has been granted).
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
On February 25, 2011 the Company and
the Investors entered into Note Extension and Amendment Agreements amending the terms of the 2010 Bridge Notes. As amended,
the “Amended 2010 Bridge Notes” bore interest at the rate of 10% per annum and matured on February 29, 2012. The
Amended 2010 Bridge Notes were convertible into shares of the Company’s Series B Convertible Preferred Stock at the
rate of $2.40 per share at any time at the election of the holders. In the event, prior to the maturity date of the Amended
2010 Bridge Notes, the Company paid in full the restated CASTion Notes as detailed above, then the Amended 2010 Bridge Notes
would convert, at the Company’s election, into shares of the Company’s Series B Convertible Preferred Stock
at the rate of $2.40 per share. In the event that (i) the closing price of the Company’s Common Stock equaled or exceeded
$0.72 per share for 20 consecutive trading days and (ii) the daily average trading volume of the Company’s Common Stock
exceeded 30,000 shares for 20 consecutive trading days, then the entire principal amount of the Amended 2010 Bridge Notes,
plus all accrued and unpaid interest, would automatically convert into shares of the Company’s Series B Convertible
Preferred Stock at the rate of $2.40 per share. Upon conversion of all or any portion of the Amended 2010 Bridge Notes, the
Company would issue five-year warrants for the purchase, at an exercise price of $0.30 per share, of that number of shares of
the Company’s Common Stock determined by dividing (i) 200% of the amount of principal and interest so converted by (ii)
$0.30 (the “Warrants”). The Amended 2010 Bridge Notes contained other conventional terms, including events of
default upon the occurrence of which the Amended 2010 Bridge Notes become immediately due and payable.
The Company accounted for the amendment
of the 2010 Bridge Notes as a debt extinguishment, as the change in fair value of the embedded and beneficial conversion features
of the Amended 2010 Bridge Notes was substantially different than the fair value under the original terms. The amendment of the
2010 Bridge Notes resulted in the Company recording a gain on extinguishment of debt of $327,000 in the first quarter of 2011.
As stated above, on July 1, 2011 the Company
repaid the entire principal balance of the restated CASTion Notes by making payments totaling $1,568,267 and converting the remaining
balance into shares of Series B Convertible Preferred Stock. Per the terms of the amended 2010 Bridge Loan Agreement, as described
above, the repayment of the CASTion Notes triggered the Company’s right to convert the entire outstanding balance of principal
and interest on the Amended 2010 Bridge Notes (approximately $4.5 million) into shares of Series B Convertible Preferred Stock
and five-year warrants for the purchase, at an exercise price of $0.30 per share, of that number of shares of the Company’s
Common Stock determined by dividing (i) 200% of the amount of principal and interest so converted by (ii) $0.30 (the “Warrants”).
The Company effected this conversion on August 11, 2011, and as a result, the Amended 2010 Bridge Notes are repaid in full.
The Company accounted for the conversion
of the Amended 2010 Bridge Notes as a debt extinguishment, as the fair value of the instruments tendered was substantially different
than the carrying value of the Amended 2010 Bridge Notes. The extinguishment of the CASTion Notes resulted in the Company recording
a loss on extinguishment of debt of $2,618,000 in the third quarter of 2011.
June 2011 Bridge Note Financing
On June 17, 2011 the Company entered into
a Bridge Loan and Warrant Amendment Agreement (the “June 2011 Bridge Loan Agreement”) with six of its principal investors
(“the 2011 Investors”), pursuant to which the Company issued Promissory Notes (the “June 2011 Bridge Notes”)
in exchange for proceeds of approximately $2.9 million. This Agreement was amended on July 12, 2011 to provide for an additional
$1.6 million of funding to the Company and the issuance of additional June 2011 Bridge Notes in such principal amount. The Company
used approximately $1.6 million of the proceeds from the issuance of the June 2011 Bridge Notes to pay down the principal balance
of the restated CASTion Notes as described above.
The June 2011 Bridge Notes were originally
payable on demand at any time on or after February 29, 2012 (the “Maturity Date”). They did not bear interest
until the Maturity Date and bore interest at the rate of 10% per annum from and after the Maturity Date. The 2011 Bridge
Notes may not be prepaid, in whole or in part, without the prior written consent of the 2011 Investors. The 2011 Investors
agreed to surrender the June 2011 Bridge Notes in payment of the exercise price for warrants held by or issuable to them
(the “Warrants”) if and when the conditions to their amendment and exercise were satisfied.
Pursuant to the June 2011 Bridge Loan
Agreement, the Company agreed, subject to the satisfaction of certain conditions, to amend the Warrants (i) to provide that they
will be exercisable for the purchase of shares of the Company’s Series B Convertible Preferred Stock (the “Series
B Stock”) instead of Common Stock (with the number of shares of the Series B Stock determined by dividing by ten (10) the
number of shares of Common Stock for which the Warrants are currently exercisable) and (ii) to change the exercise prices of all
Warrants (which currently range from $0.30 to $1.82 per share of Common Stock) to $1.30 per share of Series B Stock (the equivalent
of $0.13 per Common-equivalent share). The Investors agreed, subject to the satisfaction of certain conditions, to
exercise all of the Warrants. The principal amount of the June 2011 Bridge Notes was equal to the aggregate exercise
price of the Warrants (after they are amended as described above).
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
Because the June 2011 Bridge Notes did
not bear interest, the Company calculated the present value of the June 2011 Bridge Notes using an imputed interest rate of 10%
and recorded imputed interest of $60,000 as a debt discount. The debt discount was amortized to interest expense.
On August 11, 2011, upon satisfaction
of all of the conditions set forth in the 2011 Bridge Note and Warrant Amendment Agreement, the Company reduced the exercise price
of the Warrants, and the holders of the June 2011 Bridge Notes exercised all of the Warrants and tendered all of the June 2011
Bridge Notes for the purchase of an aggregate of 3,469,387 shares of Series B Convertible Preferred Stock at a price of $1.30
per share. As a result, the June 2011 Bridge Notes were repaid in full. As a result of the tender of the June 2011 Bridge Notes,
the Company recorded a loss on extinguishment of debt of $1,799,000 in the third quarter of 2011.
December 2011 Bridge Note Financing
On December 2, 2011 the Company entered
into Bridge Loan Agreements with four of its principal investors pursuant to which the Investors agreed to make bridge loans to
the Company of $1.25 million in exchange for 12.5% Promissory Notes (the “December 2011 Bridge Notes”). The
December 2011 Bridge Notes bear interest at the rate of 12.5% per year and were due and payable on December 31, 2012. The entire
unpaid principal amount, together with all interest then accrued and unpaid under each December 2011 Bridge Note, is convertible
into shares of a future series of Preferred Stock.
The December 2011 Bridge Notes contain
other conventional provisions, including the acceleration of repayment obligations upon the occurrence of certain specified Events
of Default.
On November 30, 2012, in conjunction with
the issuance of the November 2012 Bridge Notes (see Note 5), the investors who participated in the December 2011 Bridge Note financing
agreed to extend the maturity date such that the December 2011 Bridge Notes are due on demand on or after January
31, 2013. The company accounted for this amendment as a debt modification.
Roenigk 2012 Convertible Promissory
Note
On June 20, 2012, the Company issued a
Convertible Promissory Note dated April 1, 2012 in the principal amount of $1,877,217 to the Roenigk Family Trust in exchange
for the 2007 Convertible Promissory Note and the 2008 Convertible Promissory Note discussed above (the “Old Notes”).
The Note bears interest at the rate of 5% per annum from April 1, 2012 through May 31, 2012, then bears interest at the rate of
8% per annum until the maturity date, March 31, 2014. The principal amount and accrued interest on the Note is convertible into
shares of Common Stock at a conversion price of $0.50 per share at any time at the election of the holder. Interest on the Note
is payable semi-annually. The Company may, at its discretion, defer any scheduled interest payment until the maturity date of
the Note upon payment of a $5,000 deferral fee. The Company added $67,000 of accrued interest to the principal balance of the
Note during the year ended December 31, 2012.
The exchange of the Old Notes for this
Note has been accounted for as a troubled debt restructuring. The Company was granted a one year extension of the maturity date
of the Old Notes, and the interest rate was increased from 5% to 8% per annum. The Company evaluated the anticipated future cash
flows of this Note and determined that they exceed the carrying value (and accrued interest thereon) of the Old Notes. As a result,
the Company did not record a loss or gain on this transaction.
Note 7: Equity
On July 11, 2011 the Company received
written consents from stockholders representing 71.3% in voting power of the Company’s capital stock authorizing an amendment
of the Company’s Certificate of Incorporation for the following purposes:
|
·
|
to increase the total number of authorized
shares of stock to 455,000,000 shares, of which 425,000,000 shares shall be Common Stock and 30,000,000 shares shall be Preferred
Stock, with 208,334 shares of the Preferred Stock designated “Series A Convertible Preferred Stock”, 12,000,000
shares of the Preferred Stock designated “Series B Convertible Preferred Stock” and the remaining shares undesignated;
and
|
|
|
|
|
·
|
to modify the definition of “Additional
Stock” (as set forth in Section 6(g)(ii) of the Description of Series B Convertible Preferred Stock attached as Exhibit
A to the Certificate of Designation, Preferences and Rights filed in the Office of the Secretary of State of the State of
Delaware on November 18, 2009 (the “Series B Terms”)) to exclude any shares of Common Stock issued or deemed issued
in a transaction or series of related transactions approved by the holders of a majority of the then-outstanding Series B
Convertible Preferred Stock.
|
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
The Company filed a Certificate of Amendment
to its Certificate of Incorporation to effect the amendment on August 11, 2011.
Common Stock
The Company issued 419,180 shares of Common
Stock valued at $88,000 and 600,000 shares of Common Stock valued at $114,000 during 2012 and 2011, respectively, for services.
In March 2011, an investor of the Company
converted 100,000 shares of Series B Convertible Preferred Stock into 1 million shares of the Company’s Common Stock. In
May 2011, an investor of the Company converted 18,518 shares of Series B Convertible Preferred Stock into 185,180 shares of the
Company’s Common Stock.
On December 30,
2011,
the Company entered into Warrant Amendment Agreements (the “Agreements”) with 21
individuals and entities who acquired warrants from five funds affiliated with Security Investors, LLC for the purchase of an
aggregate of 27.7 million shares of the Company’s Common Stock (collectively, the “Warrants”). Pursuant to the
Agreements, the Company amended the Warrants to change the exercise prices from $0.30 per share to $0.095 per share, and the Investors
agreed to exercise all of the Warrants immediately for cash. The Company received proceeds totaling $2,436,000, net of issuance
costs, from the exercise of the Warrants.
On January 10,
2012,
the Company entered into Warrant Amendment Agreements with six individuals who acquired warrants
from five funds affiliated with Security Investors, LLC for the purchase of an aggregate of 5,633,344 shares of the Company’s
Common Stock (collectively, the “Warrants”). Pursuant to the Warrant Amendment Agreements, the Company amended the
Warrants to change the exercise prices from $0.30 per share to $0.095 per share, and the Investors agreed to exercise all of the
Warrants immediately for cash. The Company received proceeds totaling $498,000, net of issuance costs, from the exercise of the
Warrants.
On February 10, 2012, the Company issued
419,180 shares of Common Stock to ARC Capital (BVI) Limited. (“ARC”) in partial consideration for financial advisory
and other consulting services performed by ARC pursuant to a Financial Advisory and Consulting Agreement dated as of November
7, 2011. The value of this Common Stock was recorded as a component of general and administrative expense on the Company’s
Consolidated Statement of Operations in the fourth quarter of 2011.
On July 11, 2012, the Company entered
into Securities Purchase Agreements (the “Agreements”) with twenty-four individuals and entities (the “Investors”)
pursuant to which the Company issued an aggregate of 17,316,250 shares of Common Stock, Warrants for the purchase of an additional
18,670,375 shares of Common Stock at an exercise price of $0.15 per share and Warrants for the purchase of an additional 1,354,125
shares of Common Stock at an exercise price of $0.10 per share. The aggregate purchase price for the Shares and Warrants was $1,731,625,
and the Company received proceeds of $1,565,908, net of issuance costs. The Warrants entitle the holders thereof to purchase shares
of Common Stock at any time on or prior to July 11, 2017.
On August 9, 2012, the Company entered
into Securities Purchase Agreements (the “Agreements”) with eleven additional individuals and entities (the “Investors”)
pursuant to which the Company issued an aggregate of 8,287,500 shares of Common Stock, Warrants for the purchase of an additional
9,116,250 shares of Common Stock at an exercise price of $0.15 per share and Warrants for the purchase of an additional 828,750
shares of Common Stock at an exercise price of $0.10 per share. The aggregate purchase price for the Shares and Warrants was $828,750,
and the Company received proceeds of $729,068, net of issuance costs. The Warrants entitle the holders thereof to purchase shares
of Common Stock at any time on or prior to July 11, 2017.
On October 9, 2012, the Company entered
into Securities Purchase Agreements (the “Agreements”) with nine additional individuals (the “Investors”)
pursuant to which the Company issued an aggregate of 3,765,000 shares of Common Stock, Warrants for the purchase of an additional
4,141,500 shares of Common Stock at an exercise price of $0.15 per share and Warrants for the purchase of an additional 376,500
shares of Common Stock at an exercise price of $0.10 per share. The aggregate purchase price for the Shares and Warrants was $376,500,
and the Company received proceeds of $331,196, net of issuance costs. The Warrants entitle the holders thereof to purchase shares
of Common Stock at any time on or prior to July 11, 2017.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
The July, August and October Agreements
described above include a price protection provision pursuant to which, at any time on or before January 11, 2014, the Company
issues and sells any shares of Common Stock or securities convertible into Common Stock (“Convertible Securities”)
at a price less than $0.10 per share (a “Dilutive Transaction”), the purchase price for the Shares shall automatically
be reduced to a price equal to the price at which such shares were issued and sold (the “Reduced Price”) and the Company
will issue to the Investors, for no additional consideration, a sufficient number of additional Shares so that the effective price
per Share equals the Reduced Price. The Warrants include a similar price protection provision pursuant to which, upon a Dilutive
Transaction, the exercise price of the Warrants shall automatically be reduced to a price equal to 150% of the Reduced Price.
Upon such adjustment, the number of Warrant Shares issuable upon exercise of a Warrant shall automatically be adjusted by multiplying
the number of shares issuable upon exercise of such Warrant immediately prior to the Dilutive Issuance by a fraction, (i) the
numerator of which shall be the exercise price immediately prior to the Dilutive Issuance and (ii) the denominator of which shall
be the exercise price as adjusted.
See Note 8 for further discussion of the accounting treatment of
these price protection revisions.
At December 31, 2012, approximately 253
million shares of Common Stock were reserved for future issuance under convertible debt and warrant agreements, stock option arrangements
and other commitments.
Preferred Stock
As of December 31, 2012 and 2011, the
Company has 208,334 shares of Series A Convertible Preferred Stock outstanding, which is held by a single investor. Each share
of Series A Convertible Preferred Stock is convertible into one share of the Company’s Common Stock and has a liquidation
value of $1.20 per share.
The Company designated and began issuing
shares of its Series B Convertible Preferred Stock in 2009. Each share of the Company’s Series B Convertible Preferred Stock
is convertible, at any time at the discretion of the holder, into ten shares of the Company’s Common Stock. Except with
respect to the election of the Board of Directors, holders of Series B Convertible Preferred Stock will vote on an as-converted
basis together with the Common Stock holders on all matters. The Company’s Board of Directors consists of seven members,
four of whom are elected by holders of the Company’s Series B Convertible Preferred Stock (three to be designated by Quercus
and one by Robert S. Trump) and three by the holders of the Company’s Common Stock.
As stated in Note 6, on July 1, 2011 the
Company repaid the entire principal balance of the restated CASTion Notes by making payments totaling $1,568,267 and converting
the remaining balance into 653,439 shares of Series B Convertible Preferred Stock and warrants to purchase a total of 10,455,424
shares of the Company’s Common Stock.
Per the terms of the amended 2010 Bridge
Loan Agreement, as described in Note 6 above, the repayment of the CASTion Notes triggered the conversion of the entire outstanding
balance of principal and interest on the 2010 Bridge Notes. As a result, on August 11, 2011 the Company converted principal and
accrued interest totaling $2,932,108 into 1,221,707 shares of Series B Convertible Preferred Stock and warrants to purchase 19,547,385
shares of the Company’s Common Stock at an exercise price of $0.30 per share.
As stated in Note 6, on August 11, 2011,
upon satisfaction of all of the conditions set forth in the 2011 Bridge Note and Warrant Amendment Agreement, the holders of the
June 2011 Bridge Notes exercised all of the Warrants in accordance with the Agreement and surrendered all of the June 2011 Bridge
Notes for the purchase under the Warrants of an aggregate of 3,469,387 shares of Series B Convertible Preferred Stock at a price
of $1.30 per share.
Stock Options
The Company’s 1997 Stock Option
Plan (the “Plan”) provided for incentive and non-incentive stock options for an aggregate of 750,000 shares of Common
Stock for key employees and non-employee Directors of the Company. The Plan, which expired on December 31, 2007, provided that
the exercise price of each option must be at least equal to 100% of the fair market value of the Common Stock on the date of grant.
The Plan contained automatic grant provisions for non-employee Directors of the Company.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
The ThermoEnergy Corporation 2008
Incentive Stock Plan (the “2008 Plan”) provides for the granting of non-qualified stock options, restricted
stock, stock appreciation rights (“SAR”) and incentive stock options for officers, employees, non-employee
members of the Board of Directors, consultants and other service providers. Options may not be granted at an
exercise price less than the fair market value of the Company’s Common Stock on the date of grant and the term of the
options may not be in excess of ten years. The Company has reserved 20,000,000 shares of Common Stock for
issuance under the 2008 Plan. As discussed in Note 14, on March 20, 2013 the Company’s shareholders approved an
amendment to the 2008 Plan to increase the number of shares reserved to 40,000,000.
Although the granting of awards under
the 2008 Plan is generally at the discretion of the Compensation Committee of the Board of Directors, the 2008 Plan provides for
automatic grants of stock options to the non-employee members of the Board of Directors. Each non-employee Director who is elected
or appointed to the Board for the first time shall automatically be granted a non-qualified stock option to purchase 30,000 shares
of the Company’s Common Stock. Thereafter, at each subsequent Annual Meeting of Stockholders, each non-employee Director
who is re-elected to the Board of Directors or continues to serve a term that has not expired will receive a non-qualified
stock option grant to purchase an additional 30,000 shares. All options granted to non-employee Directors vest and become fully
exercisable on the date of the first Annual Meeting of Stockholders occurring after the end of the fiscal year of the Company
during which such option was granted and shall have a term of ten years. As discussed in Note 14, on March 20, 2013 the Company’s shareholders approved an amendment to the
2008 Plan to increase the number of shares granted to non-employee Directors to 100,000.
The following table presents non-cash
stock option expense included in expenses in the Company’s Consolidated Statements of Operations for the years ended December
31, 2012 and 2011 (in thousands):
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
4
|
|
|
$
|
23
|
|
General and administrative
|
|
|
548
|
|
|
|
769
|
|
Engineering, research and development
|
|
|
77
|
|
|
|
41
|
|
Sales and marketing
|
|
|
126
|
|
|
|
169
|
|
Option expense before tax
|
|
|
755
|
|
|
|
1,002
|
|
Income tax benefit
|
|
|
—
|
|
|
|
—
|
|
Net option expense
|
|
$
|
755
|
|
|
$
|
1,002
|
|
During 2012, the Board of Directors awarded
officers, employees, and various members of the Board of Directors a total of 7,560,000 stock options. The options
are exercisable at exercise prices ranging from $0.085 to $0.268 per share for a ten year period. The exercise price was equal
to or greater than the market price on the respective grant dates during the year.
During 2011, the Board of Directors awarded
officers, employees, and various members of the Board of Directors a total of 3,320,000 stock options. The options
are exercisable at exercise prices ranging from $0.15 to $0.30 per share for a ten year period. The exercise price was equal to
or greater than the market price on the respective grant dates during the year.
The fair value of options granted during
2012 and 2011 were estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:
|
|
|
2012
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.83%
- 2.23%
|
|
|
|
2.0%
- 3.5%
|
|
Expected option life (years)
|
|
|
6.25
– 10.0
|
|
|
|
10.0
|
|
Expected volatility
|
|
|
90%
- 92%
|
|
|
|
91%
- 92%
|
|
Expected dividend rate
|
|
|
0%
|
|
|
|
0%
|
|
The risk-free interest rate is based on
the U.S. Treasury yield curve in effect at the time of grant for periods over the expected life of the option. The expected option
life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to
vesting schedules and the Company’s historical exercise patterns. Expected volatility is based on the historical volatility
of the Company’s common stock over the expected life of the option granted.
Option expense for the year ended December
31, 2012 was calculated using an expected forfeiture rate of 5%. A forfeiture rate of 0% was used for the comparative period
of 2011.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
A summary of the Company’s stock
option activity and related information for the years ended December 31, 2012 and 2011 follows:
|
|
2012
|
|
|
2011
|
|
|
|
Number
of
Shares
|
|
|
Wtd. Avg.
Price per
Share
|
|
|
Number
of
Shares
|
|
|
Wtd.
Avg.
Price per
Share
|
|
Outstanding, beginning of year
|
|
|
19,674,102
|
|
|
$
|
0.38
|
|
|
|
22,065,402
|
|
|
$
|
0.57
|
|
Granted
|
|
|
7,560,000
|
|
|
$
|
0.16
|
|
|
|
3,320,000
|
|
|
$
|
0.27
|
|
Canceled and expired
|
|
|
(2,337,424
|
)
|
|
$
|
0.29
|
|
|
|
(5,711,300
|
)
|
|
$
|
0.99
|
|
Outstanding, end of year
|
|
|
24,896,678
|
|
|
$
|
0.32
|
|
|
|
19,674,102
|
|
|
$
|
0.38
|
|
Vested and exercisable, end of year
|
|
|
14,700,574
|
|
|
$
|
0.40
|
|
|
|
9,393,283
|
|
|
$
|
0.47
|
|
The weighted average grant date fair value
of options granted were $0.11 per share and $0.21 per share for the years ended December 31, 2012 and 2011, respectively. The
total fair value of options vested were approximately $1,137,000 and $958,000 as of December 31, 2012 and 2011, respectively.
Exercise prices for options outstanding
as of December 31, 2012 ranged from $0.085 to $1.50. The weighted average remaining contractual life of those options was approximately
7.4 years at December 31, 2012. The weighted average remaining contractual life of options vested and exercisable was approximately
6.5 years at December 31, 2012.
As of December 31, 2012, there was $514,000
of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s
stock option plans. That cost is expected to be recognized over a weighted-average period of 1.3 years. The
Company recognizes stock-based compensation on the graded-vesting method.
Warrants
At December 31, 2012, there were outstanding
warrants for the purchase of 99,870,113 shares of the Company’s Common Stock at prices ranging from $0.01 per share to $0.55
per share (weighted average exercise price was $0.28 per share). The expiration dates of outstanding warrants as of December 31,
2012 are as follows:
Expiration
|
|
Warrants
Outstanding
|
|
2013
|
|
|
8,896,554
|
|
2014
|
|
|
6,159,436
|
|
2015
|
|
|
6,188,879
|
|
2016
|
|
|
42,795,244
|
|
2017 and later
|
|
|
35,830,000
|
|
|
|
|
99,870,113
|
|
Note 8: Derivative Liabilities
The Company has periodically issued Common
Stock and Common Stock purchase warrants with anti-dilution provisions as additional consideration with certain debt instruments.
Additionally, certain debt instruments have been convertible into shares of the Company’s Series B Convertible Preferred
Stock, which are convertible into shares of the Company’s Common Stock and have anti-dilution provisions and liquidation
preferences. Because these instruments contain provisions that are not indexed to the Company’s stock, the Company is required
to record these as derivative instruments.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
Assets and liabilities measured at fair
value on a recurring basis as of December 31, 2012 are as follows: (in thousands)
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Description
|
|
Balance as of
December 31,
2012
|
|
|
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
|
|
$
|
20
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20
|
|
Derivative liability – long-term
portion
|
|
|
2,214
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,234
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,234
|
|
As part of the financing transactions
in July, August and October 2012 as discussed in Note 7, if the Company issues and sells any shares of Common Stock or securities
convertible into Common Stock (“Convertible Securities”) at a price less than $0.10 per share at any time on or before
January 11, 2014 (a “Dilutive Transaction”), the purchase price for the shares shall automatically be reduced to a
price equal to the price at which such shares were issued and sold (the “Reduced Price”), and the Company will issue
to the Investors, for no additional consideration, a sufficient number of additional shares so that the effective price per share
equals the Reduced Price.
The Warrants include a similar price protection
provision pursuant to which, upon a Dilutive Transaction, the exercise price of the Warrants shall automatically be reduced to
a price equal to 150% of the Reduced Price. Upon such adjustment, the number of shares issuable upon exercise shall automatically
be adjusted by multiplying the number of shares issuable upon exercise of such warrant immediately prior to the Dilutive Transaction
by a fraction, (i) the numerator of which shall be the exercise price immediately prior to the Dilutive Transaction and (ii) the
denominator of which shall be the exercise price as adjusted.
Because these provisions as described
above are not indexed to the Company’s Common Stock, the value of the anti-dilution features of the Common Stock and the
value of the Warrants must be bifurcated and treated as derivative liabilities. As a result, the Company initially recorded derivative
liabilities totaling $3,064,000 in the third and fourth quarters of 2012. Because the Company recorded derivative liabilities
that exceeded the proceeds received, the Company recorded a charge of approximately $567,000. This amount is recorded as other
derivative expense on the Company’s Consolidated Statement of Operations for the year ended September 30, 2012.
The fair value of these derivative liabilities
as of December 31, 2012 was $2,234,000, of which derivative liabilities with an aggregate value of $20,000 expire in one year
or less and are classified as current liabilities on the Company’s Consolidated Balance Sheets. The Monte Carlo Simulation
lattice model was used to determine the fair values at December 31, 2012. The significant assumptions used were: exercise prices
between $0.10 and $0.36; the Company’s stock price on December 31, 2012, $0.09; expected volatility of 55% - 75%; risk free
interest rate between 0.16% and 0.72%; and a remaining contract term between 5 months and 55 months.
The risk-free interest rate is based on
the U.S. Treasury yield curve in effect at the time of issuance for periods over the expected life of the derivative. Expected
volatility is based on the historical volatility of the Company’s common stock over the expected term of the derivative.
The decrease in fair value of the Company’s
derivative liabilities resulted in income of $1,637,000 for the year ended December 31, 2012. The income results primarily from
the passage of time and decreases in the Company’s stock price.
The following table sets forth a reconciliation of changes
in the fair value of the Company’s derivative liabilities classified as Level 3 for the years ended December
31, 2012 and 2011 (in thousands):
|
|
2012
|
|
|
2011
|
|
Balance at beginning of year
|
|
$
|
807
|
|
|
$
|
2,852
|
|
Recognition of derivative liabilities
|
|
|
3,064
|
|
|
|
3,928
|
|
Change in fair value
|
|
|
(1,637
|
)
|
|
|
(3,936
|
)
|
Reclassification of derivative liabilities to equity
|
|
|
—
|
|
|
|
(2,037
|
)
|
|
|
$
|
1,838
|
|
|
$
|
807
|
|
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
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
|
|
During 2011, as part of the amendments
to its CASTion Notes and 2010 Bridge Notes as discussed in Note 6, the Notes were convertible into shares of the Company’s
Series B Convertible Preferred Stock at a rate of $2.40 per share at any time at the discretion of the Noteholder. As discussed
in Note 7, the Series B Convertible Preferred Stock is convertible into 10 shares of the Company’s Common Stock at any time.
The Series B Convertible Preferred Stock also contains anti-dilution provisions that allow for a reduction on the conversion price
in the event of a future financing at an exercise price lower than the conversion price of the Preferred Stock. The Series B Convertible
Preferred Stock also contains liquidation preferences to the holder. Because these provisions in the Series B Stock are not indexed
to the Company’s Common Stock, the value of these conversion features must be bifurcated and treated as derivative liabilities.
As a result, the Company recorded derivative liabilities totaling $4,306,000 in the first quarter of 2011.
The decrease in fair value of the Company’s
derivative liabilities resulted in income of $3,936,000 for the year ended December 31, 2011. The income results primarily from
the passage of time and decreases in the Company’s stock price.
Note 9: Related party transactions
The Company has an 85% ownership interest
in ThermoEnergy Power Systems, LLC, a Delaware limited liability company (“TEPS”) for the purpose of transferring
the Company’s rights and interests in its pressurized oxycombustion technology. Alexander Fassbender, former Executive Vice
President and Chief Technology Officer, as the inventor of the technology, has a 7.5% ownership interest, and the remaining 7.5%
is owned by an unrelated third party. Accordingly, the Company records the value of the noncontrolling interest on the Company’s Consolidated
Balance Sheets, which totaled $2,000 and $6,000 as of December 31, 2012 and 2011, respectively.
The Company has employment
agreements with certain of its senior officers that specify base compensation, minimum annual increases and lump sum
payment amounts in the event of a change in control of the Company.
See Notes 4, 5 and 6 for additional related
party transactions.
Note 10: Income taxes
A valuation allowance equal to the total
of the Company's net deferred tax assets has been recognized for financial reporting purposes. The net changes in the valuation
allowance were increases of approximately $3.1 million and decreases of $2.2 million during the years ended December 31, 2012
and 2011, respectively. The Company's deferred tax liabilities are not significant.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
Significant components of the Company's
deferred tax assets are as follows as of December 31, 2012 and 2011 (in thousands):
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
20,386
|
|
|
$
|
19,720
|
|
Contingent liability reserves
|
|
|
-
|
|
|
|
158
|
|
Derivative liabilities
|
|
|
849
|
|
|
|
-
|
|
Stock options and warrants
|
|
|
2,140
|
|
|
|
1,973
|
|
Billings in excess of costs
|
|
|
1,728
|
|
|
|
-
|
|
Valuation discount
|
|
|
(40
|
)
|
|
|
(99
|
)
|
Other
|
|
|
352
|
|
|
|
165
|
|
|
|
|
25,415
|
|
|
|
21,917
|
|
Valuation allowance – deferred tax assets
|
|
|
(25,415
|
)
|
|
|
(21,917
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation of income tax expense
(benefit) at the statutory rate to income tax expense at the Company's effective rate is shown below for the years ended December
31, 2012 and 2011 (in thousands):
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Computed at statutory rate (34%)
|
|
$
|
(2,510
|
)
|
|
$
|
(5,911
|
)
|
(Decrease) increase in valuation allowance for
deferred tax assets
|
|
|
3,130
|
|
|
|
(2,220
|
)
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
4,267
|
|
Stock and stock options
|
|
|
130
|
|
|
|
3,745
|
|
Derivative liabilities
|
|
|
(849
|
)
|
|
|
(1,338
|
)
|
Valuation discount
|
|
|
-
|
|
|
|
1,558
|
|
Non-deductible items and other
|
|
|
99
|
|
|
|
(101
|
)
|
Benefit for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2012, the Company has
net operating loss carryforwards, which expire in various amounts during 2013 through 2032, of approximately $58.5 million. The
Internal Revenue Code provides for limitations on the use of net operating loss carryforwards for acquired entities. The Company’s
annual limitation for the use of CASTion’s net operating loss carryforwards for periods prior to the date of acquisition
for income tax reporting purposes is approximately $300,000. As further discussed in Note 13,
the Company
has agreed, in conjunction with the Offer in Compromise accepted by the IRS in March 2011, that any net operating losses sustained
for the years ending December 31, 2010 through December 31, 2012 will not be claimed as deductions under the provisions of Section
172 of the Internal Revenue Code except to the extent that such net operating losses exceed the amount of interest and penalties
abated, which totaled $2,263,000.
Note 11: Employee benefit plans
The Company has adopted an Employee Stock
Ownership Plan. However, as of December 31, 2012, the Plan had not been funded nor submitted to the Internal Revenue Service for
approval. The Company has a 401(k) Plan, but no employer contributions have been made to date.
Note 12: Segments
Operating segments are identified as components
of an enterprise about which separate discrete financial information is available to the chief operating decision maker, or decision-making
group, in assessing performance and allocating resources. As stated in Note 1, the Company markets and develops advanced municipal
and industrial wastewater treatment and carbon reducing clean energy technologies. The Company currently generates all of its
revenues from the sale and application of its water treatment technologies. Revenues from its clean energy technologies have been
limited to grants received from governmental and other agencies for continued development. The Company’s efforts to develop
and commercialize its clean energy technologies are discussed in Note 4. Separate disclosure of financial information related
to the Company’s clean energy technologies is not required, as all operating activity is captured in the Company’s
joint venture. The financial information presented in these financial statements represents all the material financial information
related to the Company’s water treatment technologies as the sole reportable segment.
THERMOENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
The Company’s operations are currently
conducted solely in the United States. The Company will continue to evaluate how its business is managed and, as necessary, adjust
the segment reporting accordingly.
Note 13: Commitments and contingencies
The Company leases its primary facility
in Worcester, MA under an operating lease with an unaffiliated third party. The following table summarizes the Company’s
operating lease commitments on its primary facility at December 31, 2012: (in thousands)
Payments due in:
|
|
Amount
|
|
2013
|
|
$
|
173
|
|
2014
|
|
|
178
|
|
2015
|
|
|
183
|
|
2016
|
|
|
188
|
|
2017
|
|
|
16
|
|
|
|
$
|
738
|
|
On March 25, 2011, the Company was notified
by the U.S. Internal Revenue Service that it had accepted the Company’s Offer in Compromise with respect to its tax liabilities
relating to (i) employee tax withholding for all periods commencing with the quarter ended September 30, 2005 and continuing through
September 30, 2009 and (ii) federal unemployment taxes (FUTA) for the years 2005 through 2008 that were not paid by the Company’s
former Chief Financial Officer. Pursuant to the Offer in Compromise, it has agreed to satisfy its delinquent tax liabilities by
paying a total of $2,134,636 (representing the aggregate amount of tax due, without interest or penalties). The Company made its
final payment of $176,636 in January 2012. In connection with the Offer in Compromise, the Company has agreed that any net operating
losses sustained for the years ending December 31, 2010 through December 31, 2012 will not be claimed as deductions under the
provisions of Section 172 of the Internal Revenue Code except to the extent that such net operating losses exceed the amount of
interest and penalties abated. The IRS acceptance of the Offer in Compromise is conditioned, among other things, on the Company
filing and paying all required taxes for five tax years commencing on the date of the IRS acceptance.
Accrued payroll taxes, which includes
penalties and interest related to state taxing authorities, totaled $399,000 as of December 31, 2012. The Company continues to
work with the various state taxing authorities to settle its remaining payroll tax obligations.
On July 16, 2012, Andrew T. Melton, the
Company’s former Executive Vice President and Chief Financial Officer (“Melton”), filed a Complaint in the United
States District Court, Eastern District of Arkansas alleging 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. The Company is currently in the discovery process and intends to
vigorously defend this litigation.
The Company is involved from time to time
in litigation incidental to the conduct of its business. Judgments could be rendered or settlements entered that could adversely
affect the Company’s operating results or cash flows in a particular period. The Company routinely assesses all of its litigation
and threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate
loss in situations where it assesses the likelihood of loss as probable.
Note 14: Subsequent Events
As discussed in Note 5, on March 4, 2013
the Company amended its Loan Agreement with C13 Thermo LLC, a related party, to extend the expiration date to the earlier of (i)
April 5, 2013 or (ii) one business day following the date the Company first draws against the irrevocable documentary letter of
credit.
On March 20, 2013, the Company’s
shareholders approved an amendment to the Certificate of Incorporation to effect the following changes:
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To increase the
number of authorized shares of Common Stock to 800,000,000 and to increase the number of authorized shares of Preferred Stock to
50,000,000;
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To reduce the
number of shares of Preferred Stock designated as “Series B Convertible Preferred Stock” from 12,000,000 to
1,000,000 and to re-designate the remaining 11,000,000 shares heretofore designated as “Series B Convertible Preferred
Stock” as “Series B-1 Convertible Preferred Stock”, with the shares in each sub-series having identical
voting powers, designations, preferences and relative, participating, optional or other special rights, and qualifications,
limitations and restrictions except that the shares of Series B-1 Convertible Preferred Stock shall have priority in
liquidation; and
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To designate 15,000,000
shares of the previously authorized but undesignated shares of Preferred Stock as “Series C Convertible Preferred Stock”.
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The amendment to the Certificate of Incorporation
will become effective upon the filing of a Certificate of Amendment with the Secretary of State of the State of Delaware.
In addition, the Company’s shareholders
approved an amendment to its 2008 Incentive Stock Plan to effect the following changes:
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To increase the number of shares issuable
from 20,000,000 to 40,000,000; and
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To increase from 30,000 to 100,000 the
number of options automatically granted to non-employee directors upon their election or re-election to the Board of Directors.
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