FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 33-46104-FW
-----------
THERMOENERGY CORPORATION
------------------------
(EXACT NAME OF 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)
Innotek Corporation
----------------------------------------------------
(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
------- -------
The number of shares outstanding of each of the issuer's classes
of common stock, as of March 31, 1999:
3,470,568 shares of Common Stock, par value $.001 per share
<PAGE>
ITEM 1. FINANCIAL STATEMENTS.
THERMOENERGY CORPORATION
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
---- ----
(Unaudited) (Note 1)
ASSETS
<S> <C> <C>
Cash - Total Current Assets $ 23,801 $ 242,486
Advances to officers 465,015 381,015
Accrued interest receivable - officers 66,785 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)
----------- ------------
- -
----------- ------------
Total Assets $ 555,601 $ 673,068
=========== ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Accounts payable $ 546,542 $ 590,903
Accrued interest payable - related parties 363,526 246,671
Deferred compensation 1,374,705 1,192,779
Notes payable to stockholders (Notes 2 and 5) 932,900 932,900
------------ -------------
Total Current Liabilities 3,217,673 2,963,253
Convertible Debentures (Notes 2 and 4) 1,091,000 906,000
---------- -------------
Total Liabilities 4,308,673 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; March 31, 1999: issued - 3,554,397 shares; outstanding -
3,470,568 shares; September 30, 1998: issued - 3,486,797
shares; outstanding - 3,402,968 shares 3,554 3,487
Additional paid-in capital 4,334,864 4,334,864
Deficit accumulated during the development stage (8,091,490) (7,534,536)
----------- -----------
(3,753,072) (3,196,185)
----------- -----------
$ 555,601 $ 673,068
=========== ============
</TABLE>
See notes to financial statements.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
During Development
Stage Through Three Months Ended
March 31, March 31,
1999 1999 1998
---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Operating Expenses:
General and administrat 5,921,885 179,171 41,321
Payments under licenses 35,000
712,266
Travel and entertainment
1,079,941 43,416 25,603
---------- --------- --------
7,714,092 257,587 66,924
---------- --------- --------
Loss From Operations
(7,714,092) (257,587) (66,924)
----------- --------- --------
Other Income (Expense)
Interest income
123,802 8,756 6,461
Interest expense
(501,133) (64,396) (33,891)
--------- --------- --------
(377,331) (55,640) (27,430)
--------- --------- --------
Net Loss $ (8,091,423) $(313,227) $ (94,354)
=========== ========== ========
Basic and Diluted
Per Common Share (Note 4)
Loss From Operations $ (2.05) $ (0.06) $ (0.02)
Net Loss $ (2.15) $ (0.08) $ (0.02)
</TABLE>
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
Six Months Ended March 31, 1999 (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
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)
</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
Six Months Ended March 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development
Stock Capital Stage Total
------ --------- ------------ -----
<S> <C> <C> <C> <C>
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
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
</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
Six Months Ended March 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development
Stock Capital Stage Total
------ ---------- ----------- -------
<S> <C> <C> <C> <C>
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
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)
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)
---------- ------------- ----------- ----------
</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
Six Months ended March 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development
Stock Capital Stage Total
------ --------- ------------ -------
<S> <C> <C> <C> <C>
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)
Issuance of stock in connection with 10%
notes payable to stockholders, January
1999 (67,600 shares at par value) 67 (67)
Net loss (313,227) (313,227)
----------- ---------- ----------- -----------
Balance (deficit), March 31, 1999 $ 3,554 $4,334,864 $(8,091,490) $(3,753,072)
=========== ========== ============ ===========
</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 March 31,
March 31, 1999 1999 1998
---------------- ---- ----
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Operating activities:
Net loss $(8,091,423) $(313,227) $ (94,354)
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 (663,998) (42,000) (35,000)
Other receivables (66,785) (8,538) (5,988)
Accounts payable 546,542 (17,641) (51,021)
Accrued expenses 363,526 64,396 82,767
Deferred compensation 1,573,687 92,591 5,000
----------- --------- --------
Net cash used in
operating activities (5,719,022) (224,419) (97,888)
----------- --------- --------
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
Proceeds from convertible debentures 1,426,000 135,000 316,000
Payments on notes payable (154,609)
Other 108,410
Net cash provided by
financing activities 5,765,972 135,000 316,000
----------- --------- ---------
Increase (decrease) in cash 23,801 (89,419) 218,112
Cash, beginning of period 0 113,220 30,666
----------- --------- --------
Cash, end of period $ 23,801 $ 23,801 $ 248,778
============ ========= =========
</TABLE>
See notes to financial statements.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
March 31, 1999
NOTE 1: BASIS OF PRESENTATION
On September 21, 1998, the Board of Directors of ThermoEnergy Corporation
(the "Company") approved a change in the Company's fiscal year end from
September 30 to December 31. A transition report on Form 10-Q for the three
months ended December 31, 1998 was filed with the Securities and Exchange
Commission in connection with the change in fiscal year end.
The accompanying unaudited financial statements statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
The balance sheet at September 30, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
September 30, 1998.
NOTE 2: NOTES PAYABLE TO STOCKHOLDERS AND 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 three months ended
December 31, 1998 and $135,000 during the quarter ended March 31, 1999.
During the quarter ended March 31, 1999, a total of $71,540 of the
Company's 6.63% notes payable to stockholders matured. The Company's Board of
Directors approved the issuance of Series B Common Stock at $2.00 per share in
lieu of cash payment of the notes and related accrued interest and the extension
of the warrant agreements executed in connection with the note agreements for an
additional two-year period (see Note 3). An additional $215,625 of such notes
mature during the period April 1, 1999 through December 31, 1999.
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
March 31, 1999
NOTE 3: COMMON STOCK
In January 1999, the Company issued 67,600 shares of Series B Common Stock
to the holders of the 10% notes payable to stockholders in accordance with the
related note agreements. In April 1999, the Company issued 39,910 shares of
Series B Common Stock to the holders of 6.63% notes payable to stockholders in
the aggregate amount of $79,815, including $18,075 of accrued interest.
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. The adjusted weighted average number of
common shares used in the basic and diluted loss per share computations were
3,759,659 shares for the period cumulative since inception through March 31,
1999, and 4,107,148 and 4,045,557 shares for the three-month periods ended March
31, 1999 and 1998, respectively.
Warrants to purchase approximately 799,000 shares of 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 March 31, 1999, the Company had issued $1,091,000 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 $215,625 of
the 6.63% notes payable to stockholders maturing during 1999. Additionally,
substantial capital will likely be required to continue commercialization of the
Technologies. 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 $409,000 of Series 98
Convertible Debentures and to issue Series B Common Stock to the holders of the
6.63% notes payable to stockholders upon maturity. 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%
<PAGE>
THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
March 31, 1999
NOTE 5: MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS (CONTINUED)
notes to stockholders which are not in default at March 31, 1999 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. 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>
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. On
September 11, 1998, the Company agreed to form ThermoEnergy Environmental
Corporation ("TENC") with Foster Wheeler Environmental Corporation ("FWENC") of
Lvingston, New Jersey to pursue clean water projects worldwide. The new company
will combine 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 also has joint marketing arrangements with Roy F.
Weston, Inc., Dan Cowart Inc., and Mitusi & Co. (U.S.A.) and plans to enter
project specific working arrangements when such projects are identified and
funding is obtained. (See strategic corporate alliances ). 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 the U.S. Army and Foster Wheeler Corporation,
respectively. The Colton STORS Project is funded by a federal grant administered
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 the ARP technologies. With regard
to STORS, no facilities have yet been built, outside Japan, on a commercial
basis.
<PAGE>
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 has contracted with Foster Wheeler
Environmental Company ( See strategic 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 third quarter of 1999.
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 results, the
Company is actively marketing NitRem to the DoD and to private industry.
<PAGE>
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 4.5 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 allowed 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 decided to demonstrate the capabilities of its 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 Centrate Ammonia Recovery or (ARP) process are
excellent when compared to alternative sources such as steam stripping, hot air
stripping and biological nitrogen reduction technologies. Depending on the
throughput of the commercial system, on a privatized basis, the cost to the
client (municipality) to treat ammoni laden wastes with ARP at the
concentrations found in the centrtate, would be between 3 cents and 4 cents per
gallon, including capital equipment recovery overhead. Based upon the
demonstrations results, the Company is actively seeking a privatized contract to
process all of New York City's centrate through it's joint venture with FWENC.
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 with Foster Wheeler Environmental Corporation of
Livingston, New Jersey to pursue clean water projects worldwide. The new company
will combine 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 agreeing to form 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.
<PAGE>
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 and required DCI to produce a contract for
a project by March 28, 1998 to retain exclusivity. Thereafter, the contract can
be terminated by either party upon one month's written notice and 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.
Currently, no specific projects are being negotiated.
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.
<PAGE>
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 joint venture (TENC) working arrangement with Foster
Wheeler Environmental Corporation will enable the Company to identify and fund
future projects 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 NitRem
plants 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 it's 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 included in the Company's annual report of 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 of a $200,000 note failed to renew the note for which the Company
is now in default with interest accruing at 18% per annum or the maximum allowed
under state law (see Part II, Item 3). Additionally, $ 215,625 of the Company's
6.63% notes payable to stockholders mature in 1999 and $109,735 mature in 2000.
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
will combine 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. The Company will own 49.9%
of TENC. The main purpose of the joint venture, among other things, will be 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 third 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.
<PAGE>
Results of Operations
For the three months ended March 31, 1999, the Company incurred a net loss
of $313,227 as compared to $94,354 for the three months ended March 31, 1998.
General and administrative expenses and travel expenses increased during
the three month period ended March 31, 1999, compared to March 31 1998, due to
the Company's efforts regarding the projects discussed above. Payments under
licenses increased by $35,000 during the quarter ended March 31, 1999 due to
payments to Battelle of $25,000 for a license fee and $10,000 for Royalties.
Interest expense increased significantly between the same two periods primarily
due to the issuance of the 15% Convertible Debentures.
Liquidity and Capital Resources
During the period ended March 31, 1999, the Company used $224,419 of cash
in operations compared to $97,888, in the comparable period of 1998. 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 Series B Common Stock. As
previously discussed, the Company's proposed 1997 public offering did not occur.
During 1999, 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 Colton
STORS demonstration projects.
Recent Pronouncements of the Financial Accounting Standards Board.
During 1997, the Financial Accounting Standards Board issued Statement No.
131, effective during the year ending September 30, 1999, which 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 o 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 obligations. 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 500 basis points over the discount
rate. Accordingly, as of May 12, 1999, the amount due and owing is $247,507.
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) See Exhibit Index.
(b) No other reports on Form 8-K have been filed during the quarter ending
March 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 1999
THERMOENERGY CORPORATION
BY: /s/ P. L. Montesi
--------------------------------
P. L. MONTESI
President, Treasurer and
Principal Financial Officer
<PAGE>
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