FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
[X ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM OCTOBER 1, 1998 TO DECEMBER 31, 1998
COMMISSION FILE NUMBER 33-46104-FW
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THERMOENERGY CORPORATION
------------------------
(EXACT NAME OF REGISTRATION AS SPECIFIED IN ITS CHARTER)
Arkansas 71-00659511
--------------------------------- ----------------------
(State or other jurisdiction of (I.R.S.Employer
of incorporation or organization) Identification Number)
323 Center Street, Suite 1300, Little Rock, Arkansas 72201
-----------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(501) 376-6477
----------------------------------------------------
(Registrant's telephone number, including area code)
Fiscal Year End September 30, 1998
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
3,402,968 shares of Common Stock, par value $.001 per share
<PAGE>
THERMOENERGY CORPORATIO
FORM 10-Q
FEBRUARY 12, 1999
Table of Contents
PART 1 - FINANCIAL INFORMATION
Balance Sheets .....................................................3
Statements of Operations............................................4
Statement of Changes in Stockholders' Equity .......................5
Statements of Cash Flows............................................9
Notes to Financial Statements .....................................10
Management's Discussion and Analysis of Financial Condition
and Results of Operations .........................................14
PART 2 OTHER INFORMATION .................................................20
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
---- ----
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Cash - Total Current Assets $ 113,220 $ 242,486
Advances to officers 423,015 381,015
Accrued interest receivable - officers 58,247 49,567
Property and equipment, at cost:
Equipment 14,818 14,818
Furniture and fixtures 4,991 4,991
Less accumulated depreciation (19,809) 19,809)
--------- ---------
- -
--------- ---------
$ 594,482 $ 673,068
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 564,183 $ 590,903
Accrued interest payable - related parties 299,130 246,671
Deferred compensation 1,282,114 1,192,779
Notes payable to stockholders (Note 5) 932,900 932,900
----------- -----------
Total Current Liabilities 3,078,327 2,963,253
Convertible Debentures (Notes 2 and 4) 956,000 906,000
----------- -----------
Total Liabilities 4,034,327 3,869,253
Stockholders' equity (deficit) (Notes 3, 4 and 6):
Preferred stock, non-voting, $1 par value:
Authorized - 10,000,000 shares; none issued
Common Stock, $.001 par value:
Series A Common Stock; Authorized - 10,000,000
shares; no shares issued and
outstanding; Series B Common Stock; Authorized - 65,000,000
shares; issued - 3,486,797 shares; outstanding -
3,402,968 shares 3,487 3,487
Additional paid-in capital 4,334,864 4,334,864
Deficit accumulated during the development stage (7,778,196) (7,534,536)
----------- -----------
(3,439,845) (3,196,185)
----------- -----------
$ 594,482 $ 673,068
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Cumulative
During
Development
Stage Through Three Months Ended
December 31, December 31,
1998 1998 1997
---- ---- ----
(Unaudited) (Unaudited)
Operating Expenses:
General and administrative $ 5,742,714 $171,773 $120,526
Payments under licenses 677,266
Travel and entertainment 1,036,525 27,446 29,024
--------- -------- --------
7,456,505 199,219 149,550
---------- --------- --------
Loss From Operations (7,456,505) (199,219) (149,550)
------------ --------- ---------
Other Income (Expense)
Interest income 115,046 10,018 5,855
Interest expense (436,737) (54,459) (23,371)
---------- ---------- --------
(321,691) (44,441) (17,516)
---------- ---------- --------
Net Loss $(7,778,196) $(243,660) $(167,066)
============ ========= =========
Basic and Diluted
Per Common Share (Note 4)
Loss From Operations $ (1.99) $ (0.05) $ (0.04)
Net Loss $ (2.07) $ (0.06) $ (0.04)
See notes to financial statements.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Periods Ended September 30, 1988 Through September 30, 1998 and the
Three Months Ended December 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development
Stock Capital Stage Total
------- -------- --------- ------
<S> <C> <C> <C> <C>
Issuance of stock, January 1988,
(2,205,762 shares at $.08
per share) $ 2,206 $ 178,094 $ $ 180,300
Net loss (290,483) (290,483)
--------- --------- --------- ---------
Balance (deficit),
September 30, 1988 2,206 178,094 (290,483) (110,183)
Conversion of $412,000 of
debentures and accrued
interest, September 1989
(306,335 shares) 306 456,695 457,001
Net loss (338,985) (338,985)
--------- --------- --------- ---------
Balance (deficit),
September 30, 1989 2,512 634,789 (629,468) 7,833
Net loss (255,036) (255,036)
--------- --------- --------- ---------
Balance (deficit),
September 30, 1990 2,512 634,789 (884,504) (247,203)
Conversion of $63,000 of
unsecured debentures and
accrued interest at 10%,
March 1991, (44,286 shares) 44 70,813 70,857
Issuance of stock, May - June 1991, (387,880 shares:
366,630 at $1.60 per share;
21,250 shares at $.80 per
share) 388 603,219 603,607
Issuance of stock for interest,
June 1991, (1,375 shares at
$1.60 per share) 1 2,199 2,200
</TABLE>
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through September 30, 1998 and the
Three Months Ended December 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development
Stock Capital Stage Total
<S> <C> <C> <C> <C>
Issuance of stock for
expenses incurred by
stockholders, July 1991
(5,081 shares at $1.60 per share) $ 5 $ 8,124 $ $ 8,129
Net loss (670,179) (670,179)
----------- ----------- ----------- -----------
Balance (deficit), September 30,
1991 2,950 1,319,144 (1,554,683) (232,589)
Issuance of stock, October -
December 1991 (150,925
shares at $1.60 per share) 151 241,329 241,480
Shares purchased in rescission
offer (10,562 shares) (11) (16,888) (16,899)
Issuance of stock, public
offering, August - September
1992 (344 shares at $16.00 per
share) 1 5,499 5,500
Net loss (562,751) (562,751)
----------- ----------- ----------- -----------
Balance (deficit), September 30,
1992 3,091 1,549,084 (2,117,434) (565,259)
Issuance of stock, public offering
October 1992 - September 1993
(92,785 shares at $16.00 per
share) 93 1,484,457 1,484,550
Issuance of stock for exercise
of stock options, May 1993
(2,500 shares at $1.60 per share) 3 3,997 4,000
</TABLE>
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through September 30, 1998 and the
Three Months Ended December 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development
Stock Capital Stage Total
<S> <C> <C> <C> <C>
Issuance of warrants to
stockholder $ $ 6,333 $ $ 6,333
Conversion of $103,000 of
notes payable to stockholders
and accrued interest, December
1992 (6,438 shares) 6 102,994 103,000
Issuance of stock for
consulting services, June
1993 (9,375 shares at
$16.00 per share) 9 149,991 150,000
Net loss (1,207,921) (1,207,921)
----------- ----------- ----------- -----------
Balance (deficit), September 30,
1993 3,202 3,296,856 (3,325,355) (25,297)
Issuance of warrants to
stockholders 226,000 226,000
Issuance of stock for exercise
of stock options, March 1994
(3,750 shares at $1.60 per share) 4 5,996 6,000
Issuance of stock for exercise
of warrants by stockholder,
August 1994 (3,677 shares at
$13.60 per share) 4 49,997 50,001
Net loss (767,427) (767,427)
----------- ----------- ----------- -----------
Balance (deficit), September 30,
1994 3,210 3,578,849 (4,092,782) (510,723)
</TABLE>
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through September 30, 1998 and the
Three Months ended December 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development
Stock Capital Stage Total
<S> <C> <C> <C> <C>
Issuance of warrants to stockholders $ $ 9,760 $ $ 9,760
Issuance of stock, May 1995
(6,250 shares at $8.00 per share) 6 49,994 50,000
Issuance of stock for
exercise of warrants by
stockholder, June 1995
(6,250 shares at $8.00 per share) 6 49,994 50,000
Issuance of stock for expenses,
July 1995 (18,750 shares
at $8.00 per share) 19 149,981 150,000
Net loss (896,998) (896,998)
------------ ----------------- ------------- -------------
Balance (deficit), September 30, 1995 3,241 3,838,578 (4,989,780) (1,147,961)
Issuance of warrants to stockholders 5,340 5,340
Net loss (551,621) (551,621)
------------ ------------- ------------- -------------
Balance (deficit), September 30, 1996 3,241 3,843,918 (5,541,401) (1,694,242)
Issuance of stock, July 1997 (50,000
shares at $2.00 per share 50 99,950 100,000
Conversion of $338,100 of notes payable
to stockholders and accrued interest,
July 1997 (195,596 shares) 196 390,996 391,192
Net loss (1,196,036) (1,196,036)
------------ ------------ ------------- ------------
Balance (deficit), September 30, 1997 3,487 4,334,864 (6,737,437) (2,399,086)
Net loss (797,099) (797,099)
------------- -------------- ------------- -------------
Balance (deficit), September 30, 1998 3,487 4,334,864 (7,534,536) (3,196,185)
Net loss (243,660) (243,660)
------------- -------------- ------------- -------------
Balance (deficit), December 31, 1998 $ 3,487 $4,334,864 $(7,778,196) $(3,439,845)
======= ========== ============ ===========
</TABLE>
See notes to financial statements
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
During
Development
Stage Through Three Months Ended December 31,
December 31, 1998 1998 1997
----------------- ---- ----
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Operating activities:
Net loss $(7,778,196) $(243,660) $(167,066)
Items not requiring
(providing) cash:
Depreciation 19,809 708
Expenses funded by Common
Stock issuance 596,279
Other 3,341
Changes in:
Advances to officers (621,998) (42,000) (10,000)
Other receivables (58,247) (8,680) (5,699)
Accounts payable 564,183 (26,720) 41,319
Accrued expenses 299,130 52,459 81,355
Deferred compensation 1,481,096 89,335 5,003
------------ ------------ ------------
Net cash used in
operating activities (5,494,603) (179,266) (54,380)
----------- ---------- ----------
Investing activities:
Purchase of fixed assets (19,808)
Other (3,341)
----------- ----------- -----------
Net cash used in
investing activities (23,149)
----------- ----------- ----------
Financing activities:
Proceeds from issuance of
Common Stock and warrants 2,720,562
Proceeds from notes payable 1,665,609 20,000
Proceeds from convertible debentures 1,291,000 50,000
Payments on notes payable (154,609)
---------- ---------- ---------
Other 108,410
Net cash provided by
financing activities 5,630,972 50,000 20,000
----------- ---------- ----------
Increase (decrease) in cash 113,220 (129,266) (34,380)
Cash, beginning of period 0 242,486 65,046
----------- --------- -----------
Cash, end of period $ 113,220 $ 113,220 $ 30,666
=========== ========= ==========
</TABLE>
See notes to financial statements.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
UNAUDITED
NOTE 1: FINANCIAL STATEMENTS
The balance sheet as of December 31, 1998, the statements of operations and cash
flows cumulative during development stage through December 31, 1998, the
statements of operations for the three months ended December 31, 1998 and 1997
and the statements of changes in stockholders' equity (deficit) and cash flows
for the three months ended December 31, 1998 and 1997, have been prepared by
ThermoEnergy Corporation (the "Company") without audit. In the opinion of
management, all adjustments (consisting only of normal recurring items)
necessary to present fairly the financial position, results of operations and
cash flows at December 31, 1998 and for all periods presented have been made.
Operating results for the three months ended December 31, 1998 are not
necessarily indicative of the results that may be expected for the entire year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted in accordance with Article 10 of Regulation S-X. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's September 30, 1998 Form 10-K.
On September 21, 1998, the Board of Directors approved a change in the Company's
fiscal year end from September 30 to December 31. This report on Form 10-Q is
the Company's transition report for the period October 1, 1998 to December 31,
1998, required by the Securities and Exchange Commission in connection with the
change in fiscal year end.
NOTE 2: CONVERTIBLE DEBENTURES
During November 1998, the Company's Board of Directors approved the issuance of
up to $1,500,000 (an increase of $500,000 from the amount previously authorized)
of the Series 98, 15% Convertible Debentures, due January 15, 2003. The Company
issued $50,000 of such Debentures during the quarter ended December 31, 1998.
NOTE 3: COMMON STOCK
During 1994 and 1996, the Company's stockholders approved four-to-one reverse
stock splits of the Company's Common Stock. These reverse stock splits were
implemented on March 5, 1997. All numbers of Common Stock shares and per share
data have been restated to reflect the reverse stock splits.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
UNAUDITED
NOTE 4: LOSS PER COMMON SHARE
Loss per common share is computed by dividing the net loss for the period by the
weighted average number of shares outstanding during the period, adjusted for
stock options and warrants issued within twelve months of the Company's initial
public offering filing date (February 27, 1992) which are treated as outstanding
for all periods presented in accordance with SAB Topic 4D, after giving effect
to the reverse stock splits described in Note 3.
The adjusted weighted average number of common shares used in the basic and
diluted loss per share computations were 3,751,814 shares for the period
cumulative since inception through December 31, 1998, and 4,045,557 shares for
the three month periods ended December 31, 1998 and 1997, respectively.
Warrants to purchase approximately 799,000 shares Series B Common Stock, and
stock options under the 1997 Stock Option Plan, which provides for the issuance
of up to 750,000 shares of Series B Common Stock, were not included in the
computation of diluted loss per share since the effect would be antidilutive. At
December 31, 1998, the Company had issued $956,000 of 15% Convertible
Debentures, due January 15, 2003. The holders of the Debentures can convert the
principal amount and accrued interest into shares of Series B Common Stock at
the conversion price of $2.00 per share at any time prior to the maturity date.
NOTE 5: MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS
The Company has incurred net losses since inception and, is in default on a
$200,000 note payable (10% note payable) to a stockholder and has $287,165 of
the 6.63% notes payable to stockholders maturing during 1999. Additionally,
substantial capital will likely be required to continue commercialization of the
Technologies (as defined in Item 2). The financial statements have been prepared
assuming the Company will continue as a going concern, realizing assets and
liquidating liabilities in the ordinary course of business and do not reflect
any adjustments that might result from the outcome of the aforementioned
uncertainties. Management is considering several alternatives for mitigating
these conditions during the next year. The Company is authorized to issue an
additional $544,000 of Series 98 Convertible Debentures. The sale of stock
pursuant to private placement or public offerings and fees from projects
involving the Technologies are other alternatives management is pursuing.
Additional funds may be necessary in the event the Company takes on other
projects, is unable to obtain extensions on the 10% notes to stockholders which
are not in default at December 31, 1998, or makes an acquisition of another
company to facilitate the Company's commercial demonstration of the
Technologies. If the Company is unable to enter into commercially attractive
collaborative working arrangements for one or more commercial or industrial
projects, the Company may sub-license the Technologies to third parties.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
UNAUDITED
NOTE 5: MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS (CONTINUED)
The overall goal of the Company is to successfully complete a demonstration
project for STORS, NitRem and/or ARP. Management plans to utilize any
demonstration facilities to expand the visibility of the Company in municipal,
industrial, Department of Defense and Department of Energy markets. A successful
demonstration project is the single most important business factor in
implementation of the Company's plan of operations. Management has determined
that the financial success of the Company may be largely dependent upon the
ability and financial resources of established third parties collaborating with
the Company with respect to projects involving the Technologies. The Company has
entered into agreements with third parties in order to pursue this business
strategy.
NOTE 6: COMMITMENTS AND CONTINGENCIES . During October 1998, the Company filed a
lawsuit seeking compensatory and punitive damages from the broker-dealer
involved in the Company's 1997 failed public offering. During November 1998, the
Company entered into a consulting agreement with a third party in connection
with the City of New York demonstration project. The agreement specifies
compensation at an hourly rate plus expenses for services rendered. In the event
the Company sells an ARP unit to or operates an ARP unit for the City of New
York under a privatized agreement, the agreement provides for additional cash
compensation based upon a percentage of the overall capital cost of the ARP
demonstration facility and for the issuance of warrants to purchase 62,500
shares of Series B Common Stock of the Company at an exercise price of $4.00 per
share, exercisable within two years from the date of issuance of the warrants.
During November 1998, the Company entered into an employment agreement with an
individual to serve as the Company's Executive Vice President and Senior Vice
President of Corporate Technology. In order to assist the Company in conserving
cash, an amendment to the agreement was executed which provides the executive
with a half-time position for a period not to exceed twelve months. The
employment agreement provides for, among other things, basic, incentive and
other compensation.
<PAGE>
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
UNAUDITED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
ThermoEnergy Corporation ("Company") is a development stage company involved in
the marketing and development of certain environmental technologies primarily
used for solving waste water problems. These technologies include three chemical
processes known as the Sludge-To-Oil Reactor System (STORS), Nitrogen Removal
(NitRem) and the Ammonia Recovery Process ("ARP"). The fourth technology, a
dual-shell pressure balance vessel, known as the Dual-Shell Reactor ("DSR"), is
the unique reactor equipment in which the STORS and NitRem chemistries are
conducted (STORS, NitRem, ARP and DSR are referred to collectively as the
"Technologies"). The Company's application of STORS and NitRem through the use
of a STORS-DSR, NitRem-DSR, or a combination of both types of equipment, are
designed to eliminate damaging organic and nitrogenous contaminants,
respectively, from municipal and industrial waste streams. The Company's ARP
process is designed to recover ammonia from fluid waste streams resulting in the
manufacture of various by-products such as ammonium sulfate fertilizer, when
sulfuric acid is added to the highly concentrated ammonia stream that is
recovered.
The Company is the exclusive worldwide licensee for the Technologies (except for
STORS in Japan) which were developed by Battelle Memorial Institute
("Battelle"), an independent research and development organization. The Company
intends to sell equipment (i.e. STORS-DSR, NitRem-DSR, or ARP) and services to
government and industrial users, sublicense the Technologies to industrial users
or third parties, or build, own and operate municipal and/or industrial waste
water treatment facilities. The Company's business strategy is based upon
entering into collaborative working relationships with established engineering
and environmental companies, or formal joint venture agreements relative to the
application of the technologies for specified industries or markets. The Company
does not currently possess the technical, operational or financial resources
necessary to construct or operate STORS , NitRem or ARP facilities at either a
demonstration or commercial facility level and has relied on U.S. Government
grants and funding from its strategic partners to fund its demonstration
projects.
The Radford Army Ammunition Plant and the New York City demonstration projects
were funded by theU.S. Army and Foster Wheeler Corportion, respectively. The
Colton STORS Project will be funded by the U.S. EPA. ( See summary below)
Consequently, the Company's operations continue to depend upon its ability to
attract adequate capital, so that it may in turn acquire the technical and
operational expertise and services required for the commercialization of the
STORS, NitRem and ARP technologies. With regard to STORS, no facilities have yet
been built, outside Japan, on a commercial basis.
STORS Project
In May of 1996, ThermoEnergy and Battelle representatives met with officials at
San Bernardino Valley Water District ("SBVWD") to discuss siting of a full-scale
STORS demonstration project in the San Bernardino area. Subsequently, the United
States House and Senate approved, in PL 104-204, September 26, 1996, a
$3,000,000 federal grant to the SBVWD for the design, construction and operation
of a large-scale STORS Waste Water Treatment Demonstration Facility. The General
Accounting Office has authorized the EPA's San Francisco office, to disburse the
funds accordingly and to administer this grant for the SBVWD project. In March,
1998, the SBVWD selected the City of Colton, California to host the STORS
demonstration project. The Company will not be required to make capital
contributions to this project and the Company will not receive any revenues or
earnings but will be reimbursed for administrative and operating costs for this
project. The design plans for the STORS project have been completed. The Company
anticipates subcontracting with Foster Wheeler Environmental Company (FWEC) (See
Strategic Corporate Relationships) to fabricate, install and operate the STORS
demonstration unit. Once in operation, the Colton STORS facility will have a
larger processing capacity than 70% of the existing municipal wastewater plants
in the U.S. The demonstration project is scheduled to begin in the second
quarter of 1999.
The EPA continues to maintain discretionary control over the disbursement of the
$3,000,000 federal grant discussed above. While it is currently the EPA's
intention to disburse the funds for the SBVWD project, it is possible that the
EPA, in its sole discretion, may redirect these funds for use on a full-scale
STORS demonstration project in another EPA region.
United States Department of the Army Program
ThermoEnergy and Sam Houston State University, doing business as the Texas
Regional Institute for Environmental Studies ("TRIES") signed an agreement in
October 1994 allowing ThermoEnergy to demonstrate its NitRem technology to
evaluate the nitrogen removal process and its ability to economically and safely
treat TNT redwater, DNT contaminated wastewater and various other RCRA waste
streams within the Department of Defense ("DoD") industrial base and DoD
commercial facilities. ThermoEnergy is the lead subcontractor on this project.
The first NitRem commercial scale DSR unit was demonstrated at the Radford Army
Ammunition Plant, in Radford, Virginia. The $5,000,000 NitRem demonstration
project has been completed and been approved by the Army Armament Research
Development Command ("ARDEC"). Pursuant to a purchase order issued by ARDEC,
ThermoEnergy engaged Glitsch Process System Inc. (a wholly-owned subsidiary of
Foster Wheeler Corporation) to fabricate the NitRem unit. The demonstration unit
was delivered to Radford on June 16, 1997 and began testing and processing DoD
waste streams July 21, 1997. Under the Company's supervision, this demonstration
facility was used to process a number of different hazardous waste streams
resulting from the manufacture of explosives, including TNT, DNT, HMX and RDX.
This NitRem system has been designed as a mobile system in order to process
additional waste streams from other Department of Defense sites.
Testing and processing of the of the DoD RAPP test material was concluded on
September 5, 1997. The final results and report from TRIES indicates that the
NitRem DSR reduces DNT in contaminated wastewater to a level which could be
discharged without further wastewater treatment. Based on these preliminary
results, the Company anticipates marketing NitRem to the DoD and to private
industry.
New York City Project
The second commercial scale nitrogen removal demonstration project is a team
effort between ThermoEnergy, Foster Wheeler Environmental Corporation and the
City of New York to test the Company's capability to cost-effectively eliminate
the concentrated ammonia discharge, or centrate, from eight of New York City's
fourteen waste water treatment facilities. The City of New York currently
produces over three million gallons of centrate daily, which the City projects
will reach five million gallons daily by 2001. This concentrated ammonia waste
stream is a leading cause of eutrophication in the Long Island Sound. Laboratory
tests conducted on actual samples of New York City centrate in May of 1996, and
June of 1997, by Battelle successfully resulted in eliminating the ammonia
present in the centrate. The City of New York and the Company signed a No Cost
Test Agreement in July 1996 which allows the Company to demonstrate, on site,
the Company's nitrogen removal processes, including NitRem and other such
nitrogen removal processes as the Company may acquire, to wit: ARP. The Company
has decided to demonstrate the capabilities of its newly acquired ARP technology
at New York City's Staten Island wastewater treatment facility. On August 4,
1998, the Company signed an agreement with FWEC to provide up to $500,000
funding necessary to demonstrate ARP and to design, fabricate and operate the
ARP pilot plant. (See Strategic Corporate Relationships). The New York ARP
demonstration was successfully completed on December 18, 1998. Based on the data
generated during the demonstration and computer modeling for large-scale
commercial systems, the economics of the CAR process are excellent when compared
to alternative sources such as steam stripping, hot air stripping and biological
nitrogen reduction technologies. On a privatized basis, and depending on the
throughput of the commercial system, the cost to the client (municipality) to
treat ammonia laden wastes at the concentrations found in the centrate, would be
between 2 cents and 4 cents per gallon, including capital equipment recovery
overhead.
Strategic Corporate Relationships
In September 1994, the Company and Foster Wheeler USA Corporation executed a
non-binding Worldwide Marketing Agreement whereby both companies have agreed to
jointly market, develop and commercialize the Technologies on a non-exclusive
basis. The companies have agreed in principle to work together to develop
marketing strategies, identify potential projects and develop joint proposals.
The agreement contemplates that when a potential project is identified, the
Company will provide Foster Wheeler USA Corporation with the necessary process
and design information, and Foster Wheeler USA Corporation will design, procure
and construct the required processing facilities for any contracts awarded.
Under the agreement, each party is subject to confidentiality obligations. The
initial term of the agreement is ten years and the agreement will be
automatically extended in three-year periods thereafter. The agreement may be
terminated by the mutual agreement of the parties. The Company and Foster
Wheeler USA Corporation are working on a marketing strategy for private sector
business, initially targeting the pharmaceutical, pulp and paper and
petrochemical industries in the U.S. and Europe. In addition, the Company and
Foster Wheeler USA Corporation have begun a joint marketing effort within the
Department of Navy Surface Systems Command.
On September 11, 1998, the Company agreed to form ThermoEnergy Environmental
Corporation ("TENC") with Foster Wheeler Environmental Corporation of
Livingston, New Jersey to pursue clean water projects worldwide. The new company
combines the Company's state-of-the-art clean water technologies with FWENC's
engineering expertise and global presence to pursue industrial and municipal
water/wastewater projects around the world and is the Company's first joint
venture. The Company will own 49.9% of TENC. The main purpose of the joint
venture, among other things, is to develop, market and utilize the ARP
technology. Concurrently with forming TENC, the Company entered into a
Shareholders agreement by an among FWENC, the Company and TENC and a worldwide
sublicense of the ARP technology to TENC for municipal and agricultural
livestock production facilities.
In March 1996, the Company entered into a Marketing Agreement with the Atlanta
based Dan Cowart, Inc. ("DCI") to market, develop and commercialize the
Technologies in Georgia and Florida. DCI is a multi-discipline construction and
development firm for large scale real estate projects. Under the agreement, the
Company has granted DCI the exclusive right to exploit any and all applications
of the Technologies for municipal, local governmental and real estate
development markets in Georgia and Florida, and the nonexclusive right to
exploit any and all applications of NitRem for industrial markets in Georgia and
Florida. The agreement contemplates the formation of a joint venture between the
companies to construct and operate future projects. The Company will provide
technical and administrative support to assist DCI in its efforts to obtain such
projects. The Company will derive revenue upon the sale of a STORS DSR or NitRem
DSR unit to an end-user, and fees associated with the operation of such
projects. DCI is to be paid a one time success fee of 62,500 warrants
convertible into 62,500 shares of ThermoEnergy Series B Common Stock,
exercisable within ten years from the date of granting the warrants at a price
of $2.00 per share, within 90 days upon the signing of an agreement with a
target customer to purchase or utilize any of one of the Technologies. The
agreement is for a term of ten years. If no project contracts have been signed
by March 28, 1998, the exclusivity of the contract can be terminated by either
party upon one month's written notice and, thereafter, DCI's rights to the
Technologies in Georgia and Florida would become nonexclusive. The Company in
conjunction with Battelle, is developing a comprehensive audio-visual
presentation to be used by DCI in its marketing efforts. In addition, DCI has
engaged the services of a regional engineering firm to work directly with the
Company and Battelle to work on scheduling meetings with municipal and state
waste water authorities in Georgia and Florida. Currently, no specific projects
are being negotiated.
In April 1996, the Company entered into a non-binding Memorandum of
Understanding with Roy F. Weston, Inc. ("Weston") of West Chester, Pennsylvania,
which may be terminated by either company upon written notice to the other.
Weston is an engineering firm which participates in the development of large
scale civil engineering projects. The purpose of the memorandum is to provide a
preliminary framework for the joint pursuit by the companies of business
opportunities for the application of the Technologies. The memorandum
contemplates that Weston will provide engineering, construction management,
installation, operations and maintenance services in connection with such
projects, while the Company will provide the Technologies at a reasonable fee no
greater than the Company's most favored licensees. The memorandum incorporates
by reference a Proprietary Information Agreement dated August 22, 1995,
previously signed by the parties pursuant to which each company has agreed to
maintain in confidence all proprietary information furnished by the other.
In October 1996, the Company entered into a non-binding Memorandum of
Understanding ("MOU") with Foster Wheeler Environmental Corporation and Mitsui &
Co. (U.S.A.), Inc. ("Mitsui") regarding potential water and waste water projects
in Brazil, Mexico and Peru. The purpose of the MOU is to set forth the likely
roles of the companies in connection with any business involving the
Technologies. As contemplated by the MOU, ThermoEnergy Corporation would provide
the rights to use the Technologies for projects jointly developed in Brazil,
Mexico and Peru, Foster Wheeler Environmental Corporation would, on contract
awards, design, construct and, possibly, operate the Technologies at the
identified projects, and Mitsui would gather information regarding
opportunities, identify projects, and, possibly, seek to arrange financing for
various projects. The participants have held several meetings pursuant to the
MOU to discuss possible projects.
The Company has historically lacked the financial and other resources necessary
to market the Technologies or to build demonstration projects. The Company
believes that its working arrangement with Foster Wheeler Environmental
Corporation has enabled the Company to identify hosts and to fund these projects
as well. The Company believes that establishing such relationships is the most
efficient and effective way to commercialize the Technologies.
Management believes the STORS/NitRem combination facility goes further than
other technologies to solving the total waste problems faced by a waste water
facility. For example, the Company believes that STORS and NitRem offer POTWs a
more cost-effective basis for tertiary water treatment, allowing the recovery
and reuse of water processed through the waste water treatment plant with a
minimal amount of processing. STORS removes nitrogen, heavy metals, phosphorus,
many toxic compounds and produces a high energy fuel. Industrial wastewater
often poses the same issues as does municipal wastewater. In addition, there is
a large volume of toxic slurries and solutions which pose an even greater
problem for their generators than exists for municipalities. A review of the
regulatory and technical situation for industrial discharges was presented in
the industry journal "Chemical Engineering" in June of 1992: Part 1 - New
Environmental Regulations Pose Challenges for Industry, and Part 2 - A Guide to
Industrial Pretreatment. The review demonstrates the diversity of wastewater
issues faced by industrial facilities, and it is clear that the best solution
will vary by industry and even by facility. However, management believes that
there are many situations where either a robust technology, insensitive to
pollutant concentrations and solids content, or a high destruction efficiency
will be required. These situations will often become sales opportunities for the
Company. In addition, management believes by using smaller size STORS and
NitRemplants POTWs will be able to handle the same flow capacity with lower
capital and operating costs.
Since its formation in 1988, the Company has devoted substantially all of its
resources to funding the payments due under license agreements, searching for
opportunities to employ its technologies in demonstration facilities and seeking
capital necessary to sustain the Company's efforts. After a demonstration unit
has been successfully operated and the Technologies have been proven
commercially viable, the Company may still require additional investment capital
and/or debt financing to continue its operations.
Plan of Operations
The Company had planned to use the net proceeds of the proposed public offering
to fund its day-to-day the operations until such time as the Company either made
substantial equipment sales or secured a long-term privatized contract. All of
the Company's demonstration projects have been funded by grants or by its
strategic corporate partners. As discussed in Note 7, of the financial
statements in Form 10-K for the year ended September 30, 1998, the managing
underwriter of the proposed offering notified the Company in October of 1997
that it would be unable to complete the offering. The Company now plans to use
the proceeds from the sale of $1,500,000 of convertible debentures to satisfy
the cash requirements of its basic operation for the next year.
<PAGE>
The company raised $536,000 in interim financing from current shareholders to
fund the Company through the registration period. The notes were for original
terms of six months at 10%, renewable at the option of the holder. In July of
1998, a holder for $200,000 failed to renew his note for which the Company is
now in default with interest accruing at 18% per annum. All or part of the
remaining $336,000 six month notes may be in default if the holders fail or
refuse to renew their notes after December 31, 1998. Additionally, $287,165 of
the Company's 6.63 notes payable to stockholders mature during 1999. Additional
funds may be necessary in the event the company is unable to pay the notes as
they become due and as the Company takes on other projects or makes an
acquisition of another company to facilitate the commercialization of its
technologies.
On September 11, 1998, the Company agreed to form ThermoEnergy Environmental
Corporation with Foster Wheeler Environmental Corporation of Lvingston, New
Jersey to pursue clean water projects worldwide. The new company combines the
Company's state-of-the-art clean water technologies with FWENC's engineering
expertise and global presence to pursue industrial and municipal
water/wastewater projects around the world and is the Company's first joint
venture. The Company will own 49.9% of TENC. The main purpose of the joint
venture, among other things, is to develop, market and utilize the ARP
technology. Concurrently with forming TENC, the Company entered into a
Shareholders agreement by an among FWENC, the Company and TENC and a worldwide
sublicense of the ARP technology to TENC for municipal and agricultural
livestock production facilities. On August 4, 1998, the Company signed an
agreement FWEC to provide up to $500,000 funding necessary to demonstrate the
ARP technology and to design, fabricate and operate the ARP pilot plant. It is
thereafter anticipated that any commercial business derived from the successful
demonstration of ARP will be engaged through TENC. At the option of the Company,
projects utilizing NitRem, DSR and STORS may be engaged through TENC.
The overall goal of the Company has been to successfully complete a full scale
demonstration of its technologies and to form strategic corporate alliances to
market the technologies discussed above. The company has successfully completed
demonstration of the NtiRem; DSR and ARP technologies and it scheduled to begin
a STORS NitRem project in the second quarter of 1999. Management plans to
utilize these demonstration projects and the TENC joint venture to expand the
visibility of the Company in the municipal, industrial, Department of Defense
and Department of Energy markets. These successful demonstration projects are
the single most important business factors in implementing the Company's plan of
operations.
Results of Operations
For the three months ended December 31 1998, the Company incurred a net loss of
$243,660 as compared to $167,066 for the three months ended December 31, 1997.
General and administrative expenses increased during the three month period
ended December 31, 1998, compared to December 31, 1997, due to the Company's
efforts regarding the projects discussed above. Interest expense increased
significantly between the same two periods due to the issuance of the 15%
Convertible Debentures during 1998.
Liquidity and Capital Resources
During the period ended December 31, 1998, the Company used $179,266 of cash in
operations compared to $54,380 in 1997. During 1992, the Company initiated a
public offering of 125,000 shares of Series B Common Stock at a price of $16.00
per share. The offering was conducted on a "best efforts" basis, primarily by
directors and officers of the Company. Effective January 5, 1994, the offering
was terminated. A total of 93,129 shares were sold at a price of $16.00 per
share and an additional 6,438 shares were issued at $16.00 per share in
satisfaction of notes payable and related accrued interest. Currently, there is
no public market for the Seriesf B Common Stock. As previously discussed, the
Company's proposed 1997 public offering did not occur.
During 1998, and 1997, the Company met its liquidity needs primarily from
borrowings from stockholders. As discussed under Plan of Operations, the Company
may require additional funds in 1999 to pay notes as they become due. Management
plans to meet the Company's liquidity needs during the year ending December 31,
1999 with proceeds from the sale of convertible debentures and public or private
placement offerings of Common Stock. Management plans to meet long-term
liquidity needs primarily from revenues derived from commercial contracts the
Company hopes to obtain subsequent to successful demonstrations of its
Technologies, such as the Radford NitRem, New York City NitRem and San
Bernardino STORS demonstration projects.
Recent Pronouncements of the Financial Accounting Standards Board.
During 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information". Statement
No. 131, which is effective during the year ending September 30, 1999, changes
the requirements for reporting segment information in annual and interim
financial statements. The industry segment approach under Statement No. 14 will
be replaced with a management approach of reporting financial and descriptive
information about operating segments.
Net Operating Losses
The Company had net operating loss carry forwards as of September 30, 1998, of
approximately $5,500,000 which expire in the years 2003 through 2018. The amount
of net operating loss carried forward that can be used in any one year will be
limited by the applicable tax laws which are in effect at the time such carry
forward can be utilized. A valuation allowance of approximately $2,095,000 has
been established to offset any benefit from the net operating loss carry
forwards as it cannot be determined when or if the Company will be able to
utilize the net operating losses.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On October 6, 1998, the Company filed an action in the United States District
Court, Eastern District of Arkansas, Western Division, case No. LR-C-98-657
against National Securities Corporation, a wholly owned subsidiary of Olympic
Cascade Financial Corporation and Steven A. Rothstein, Individually, and as
Chairman of National Securities in connection with purported efforts on the part
of the Defendants to underwrite a public offering of securities for the Company.
The Complaint alleges breach of contract, promissory estoppel, breach of
fiduciary duty and intentional or negligent misrepresentation and seeks
compensatory and punitive damages, jointly and severally, against the
Defendants.
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
On June 1, 1998, a $200,000 note bearing 10% interest per annum became due and
the Company failed to meet the obligation. Upon the default, the note began
accruing interest at 18% per annum or the maximum allowed by applicable state
law. Applicable law limits the interest to 10%. Accordingly, as of February 12,
1998, the amount due and owing is $244,566.
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Report on Form 8-K
(a) 27.1 Financial Data Schedule
(b) No other reports on Form 8-K have been filed during the quarter ending
December 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment report to be signed on its behalf of
the undersigned, thereunto duly authorized.
Date: February 12, 1998
THERMOENERGY CORPORATION
BY: /s/ P. L. Montesi
--------------------------------
P. L. MONTESI
President, Treasurer and
Principal Financial Officer
<PAGE>
<PAGE>
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