Equity

6 Months Ended

Jun. 30, 2013

Stockholders' Equity Note [Abstract]

Stockholders' Equity Note Disclosure [Text Block]

Note 8: Equity

On March 20, 2013, the Company’s shareholders approved an amendment to the Certificate of Incorporation for the following purposes:

⋅

To increase the number of authorized shares of Common Stock to 800,000,000 and to increase the number of authorized shares of Preferred Stock to 50,000,000;

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To reduce the number of shares of Preferred Stock designated as “Series B Convertible Preferred Stock” from 12,000,000 to 1,000,000 and to re-designate the remaining 11,000,000 shares heretofore designated as “Series B Convertible Preferred Stock” as “Series B-1 Convertible Preferred Stock”, with the shares in each sub-series having identical voting powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations and restrictions except that the shares of Series B-1 Convertible Preferred Stock shall have priority in liquidation; and

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To designate 15,000,000 shares of the previously authorized but undesignated shares of Preferred Stock as “Series C Convertible Preferred Stock”.

Shares of Series B-1 Convertible Preferred Stock are convertible, at any time at the discretion of the holder, into ten shares of the Company’s Common Stock. Series B-1 Convertible Preferred Stock is identical to the Company’s Series B Convertible Preferred Stock in every respect except that holders of the Series B-1 Convertible Preferred Stock shall receive a liquidation preference equal to the Stated Value of their shares ($2.40 per share) plus all declared and unpaid dividends with respect thereto prior to any distribution to the holders of shares of Series B Convertible Preferred Stock.

Shares of Series C Convertible Preferred Stock are convertible, at any time at the discretion of the holder, into ten shares of the Company’s Common Stock, subject to conventional weighted-average anti-dilution adjustment in the event the Company issues or is deemed to have issued shares of Common Stock at a price less than $0.076 per share. The Series C Convertible Preferred Stock will be redeemable, at a price equal to $0.76 per share, plus all accrued and unpaid dividends thereon, at the election of the holders of 66-⅔% of the then-outstanding shares, in three equal annual installments on or after December 31, 2017.

Because the Company’s Series C Convertible Preferred Stock has a redemption feature, this class of preferred stock is recorded at its issuance date fair value and is classified as temporary equity on the Company’s Unaudited Consolidated Balance Sheet at June 30, 2013.

The Company’s Board of Directors consists of seven members, four of whom are elected by holders of the Company’s Series B Convertible Preferred Stock, Series B-1 Convertible Preferred Stock and Series C Convertible Preferred Stock, and three who are elected by the holders of the Company’s Common Stock.

The amendment to the Certificate of Incorporation became effective on April 5, 2013.

Common Stock

In 2011, the Company requested certain holders of Common Stock Purchase Warrants to exercise such warrants or to surrender such warrants in exchange for shares of Common Stock. On April 5, 2013, the Company issued an aggregate of 6,031,577 shares of Common Stock as consideration for the surrender of Warrants for the purchase of an aggregate of 39,205,234 shares.

Also, on April 5, 2013, the Company converted its December 2011 Bridge Notes and November 2012 Bridge Notes into shares of the Company’s Series C Convertible Preferred Stock. Because the effective issuance price of the Series C Convertible Preferred Stock was less than $0.10 per equivalent share of Common Stock, the Company issued to investors who purchased shares of the Company’s Common Stock and Warrants at closings on July 11, 2012, August 9, 2012 and October 9, 2012 (the “PIPE”), for no additional consideration, a sufficient number of additional shares of Common Stock so that the effective price per share of Common Stock paid by the PIPE Investors equals the effective issuance price of the shares of Series C Convertible Preferred Stock on an as-converted basis ($0.076 per share). Accordingly, on April 5, 2013, the Company issued a total of 9,274,364 shares of Common Stock to the PIPE Investors.

At June 30, 2013, approximately 426 million shares of Common Stock were reserved for future issuance under convertible debt and warrant agreements, stock option arrangements and other commitments.

Preferred Stock

As detailed in Notes 6 and 7, on April 5, 2013, holders of the Company’s December 2011 Bridge Notes and the Company’s November 2012 Bridge Notes exchanged such notes with an aggregate principal amount of $4,950,000 plus accrued interest totaling $314,177 for a total of 6,926,553 shares of the Company’s Series C Convertible Preferred Stock and Warrants for the purchase of a total of 69,265,530 shares of Common Stock.

The effective price of the Series C Convertible Preferred Stock was $0.76 per share (or $0.076 per equivalent share of Common Stock). The Warrants entitle the holders to purchase, at any time on or before April 5, 2018, shares of Common Stock at an exercise price of $0.114 per share. The Warrants contain other conventional terms, including provisions for adjustment in the Exercise Price and/or the securities issuable upon exercise in the event of certain specified extraordinary corporate events, such as stock splits, combinations, and stock dividends.

As additional consideration to the investors for their participation in the Bridge Note issuances mentioned above, for each $100 of principal and interest converted into Series C Convertible Preferred Stock and Warrants, each Investor exchanged 41.67 shares of Series B Convertible Preferred Stock held for 131.58 additional shares of Series C Convertible Preferred Stock (the number of shares of Series C Convertible Preferred Stock that would be purchased for $100 at a purchase price of $0.76 per share). Accordingly, the Company issued an aggregate of 6,926,553 additional shares of Series C Convertible Preferred Stock in exchange for an aggregate of 2,193,414 previously-outstanding shares of Series B Convertible Preferred Stock. The additional shares of Series C Convertible Preferred Stock were issued without warrant coverage. The shares of Series B Convertible Preferred Stock surrendered were cancelled and are no longer outstanding.

Additionally, as an inducement to effect the transactions on April 5, 2013 as detailed above, the Company agreed to allow such holders to exchange shares of Series B Convertible Preferred Stock for an equal number of shares of Series B-1 Convertible Preferred Stock. Accordingly, on April 5, 2013 the Company issued an aggregate of 8,839,500 shares of Series B-1 Convertible Preferred Stock in exchange for an equal number of shares of Series B Convertible Preferred Stock.

Stock Options

On March 20, 2013, the Company’s shareholders approved amendments to the 2008 Incentive Stock Plan (the “2008 Plan”) to increase the number of shares available for grant to 40,000,000 and to increase the number of shares with respect to which automatic stock options are granted to non-employee Directors to 100,000.

During the six-month period ended June 30, 2013, the Board of Directors awarded employees and an advisor to the Board of Directors a total of 14,450,000 stock options under the 2008 Plan. The options are exercisable at $0.0468 - $0.089 per share for a ten year period. The exercise price was equal to or greater than the market price on the respective grant dates. Options granted to non-employee directors vest on the date of the Company’s 2013 Annual Meeting of Stockholders; options granted to employees vest ratably over a four-year period.

The following table presents option expense included in expenses in the Company’s Unaudited Consolidated Statements of Operations for the six-month periods ended June 30, 2013 and 2012:

	2013		2012

Cost of revenue	$	—	$	6
General and administrative		187		442
Engineering, research and development		29		49
Sales and marketing		14		34
Option expense before tax		230		531
Benefit for income tax		—		—
Net option expense	$	230	$	531

The fair value of options granted during the six-month periods ended June 30, 2013 and 2012 were estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions:

	2013	2012
Risk-free interest rate	0.92% - 1.07%	1.1% - 1.2%
Expected option life (years)	6.25	6.25
Expected volatility	90% - 91%	92%
Expected dividend rate	0%	0%

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods over the expected life of the option. The expected option life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns. Expected volatility is based on the historical volatility of the Company’s common stock over the expected life of the option granted.

Option expense for the six-month periods ended June 30, 2013 and 2012 was calculated using an expected annual forfeiture rate of 5%.

A summary of the Company’s stock option activity and related information for the six-month periods ended June 30, 2013 and 2012 follows:

	2013				2012
	Number of Shares		Wtd. Avg. Exercise Price per Share		Number of Shares		Wtd. Avg. Exercise Price per Share
Outstanding, beginning of year		24,896,678	$	0.32		19,674,102	$	0.38
Granted		14,450,000	$	0.09		3,060,000	$	0.25
Canceled		(7,172,976)	$	0.28		(740,000)	$	0.31

Outstanding, end of period		32,173,702	$	0.23		21,994,102	$	0.36

Exercisable, end of period		15,142,140	$	0.37		12,557,554	$	0.46

The weighted average fair value of options granted was approximately $0.07 and $0.17 per share for the six-month periods ended June 30, 2013 and 2012, respectively. The weighted average fair value of options vested was approximately $269,000 and $678,000 for the six-month periods ended June 30, 2013 and 2012, respectively.

Exercise prices for options outstanding as of June 30, 2013 ranged from $0.0468 to $1.50. The weighted average remaining contractual life of those options was approximately 8.2 years at June 30, 2013. The weighted average remaining contractual life of options vested and exercisable was approximately 6.9 years at June 30, 2013.

At June 30, 2013, there was approximately $1.25 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s stock option plans. That cost is expected to be recognized over a weighted-average period of 1.4 years. The Company recognizes stock-based compensation on the graded-vesting method.

Warrants

At June 30, 2013, there were outstanding warrants for the purchase of 137,751,306 shares of the Company’s Common Stock at prices ranging from $0.01 per share to $0.55 per share (weighted average exercise price was $0.15 per share). The expiration dates of these warrants are as follows:

Year	Number of Warrants
2013		870,004
2014		781,103
2015		296,293
2016		20,625,815
2017		44,570,061
After 2017		70,608,030
		137,751,306

- Definition

The entire disclosure for shareholders' equity comprised of portions attributable to the parent entity and noncontrolling interest, including other comprehensive income. Includes, but is not limited to, balances of common stock, preferred stock, additional paid-in capital, other capital and retained earnings, accumulated balance for each classification of other comprehensive income and amount of comprehensive income.

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+ Details

THERMOENERGY CORP 10-Q