##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-QSB x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 OR o
    
    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 Small Business Issuer as Specified in Its Charter)
 ARKANSAS
    
    71-00659511(State or Other Jurisdiction
    
    (IRS Employer Identification No.)of Incorporation or Organization)
 323 CENTER STREET, SUITE 1300, LITTLE ROCK, ARKANSAS 72201
(Address of Principal Executive Offices) (501) 376-6477
(Issuers Telephone Number, Including Area Code)    Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 o APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be
filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes o No o APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: 22,402,249 shares of common
stock as of November 10, 2004. Transitional Small Business Disclosure Format (Check one): Yes o No x




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TABLE OF CONTENTS  PART 1  FINANCIAL INFORMATIONBALANCE SHEETSSTATEMENTS OF OPERATIONSSTATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)STATEMENTS OF CASH FLOWSNOTES TO FINANCIAL STATEMENTS (Unaudited)PART II  OTHER INFORMATIONSIGNATUREEx-31.1  Section 302 Certification of the CEO & PFOEx-32.1  Section 302 Certification of the CEO & PFO    Table of Contents  
 PART 1  FINANCIAL INFORMATION Item 1. Financial Statements. THERMOENERGY CORPORATION
(A Development Stage Company) 
 BALANCE SHEETS
 September 30,
    
    December 31,2004
    
    2003(Unaudited)
    
    (Note 1)ASSETSCash  Total Current Assets
    
    $
    46,043
    
    
    $
    62,303Property and equipment, at cost:Equipment, furniture and fixtures
    
    
    19,809
    
    
    
    19,809Less accumulated depreciation
    
    
    (19,809
    )
    
    
    (19,809
    )
    
    
    
    $
    46,043
    
    
    $
    62,303LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Accounts payable
    
    $
    746,872
    
    
    $
    763,410Deferred compensation
    
    
    385,848
    
    
    
    101,923Total Current Liabilities
    
    
    1,132,720
    
    
    
    865,333Deferred compensation retirement plan for officer
    
    
    3,245,000
    
    
    
    3,245,000Total Liabilities
    
    
    4,377,720
    
    
    
    4,110,333Stockholders equity (deficit) (Notes 3 and 5):Preferred stock, non-voting, $1 par value:Authorized - 10,000,000 shares; none issuedCommon Stock, $.001 par value: authorized  75,000,000 shares;
September 30, 2004: issued  21,295,199 shares; outstanding -
21,211,370 shares; December 31, 2003: issued  17,781,073
shares; outstanding  17,697,244 shares
    
    
    21,296
    
    
    
    17,781Additional paid-in capital
    
    
    21,099,250
    
    
    
    19,949,589Deficit accumulated during the development stage
    
    
    (25,452,223
    )
    
    
    (24,015,400
    )(4,331,677
    )
    
    
    (4,048,030
    )$
    46,043
    
    
    $
    62,303
 See notes to financial statements. 2




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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company) 
 STATEMENTS OF OPERATIONS CumulativeDuringDevelopment
    
    Nine Months Ended
    
    Three Months EndedStage Through
    
    September 30,
    
    September 30,September 30,2004
    
    2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)
    
    (Unaudited)Operating Expenses:General and administrative
    
    $
    16,581,297
    
    
    $
    1,248,351
    
    
    $
    1,098,683
    
    
    $
    210,663
    
    
    $
    577,049Payments under licenses
    
    
    1,262,266
    
    
    
    75,000
    
    
    
    75,000
    
    
    
    25,000
    
    
    
    25,000Travel and entertainment
    
    
    2,229,018
    
    
    
    115,079
    
    
    
    89,054
    
    
    
    23,169
    
    
    
    13,24520,072,581
    
    
    
    1,438,430
    
    
    
    1,262,737
    
    
    
    258,832
    
    
    
    615,294Loss From Operations
    
    
    (20,072,581
    )
    
    
    (1,438,430
    )
    
    
    (1,262,737
    )
    
    
    (258,832
    )
    
    
    (615,294
    )Other Income (Expense)Interest income
    
    
    238,881
    
    
    
    1,607
    
    
    
    134
    
    
    
    164
    
    
    
    19Gain on settlement of lawsuit
    
    
    317,423Other
    
    
    59,574Interest expense
    
    
    (4,217,488
    )
    
    
    
    
    
    
    (984,471
    )
    
    
    
    
    
    
    (398,732
    )(3,601,610
    )
    
    
    1,607
    
    
    
    (984,337
    )
    
    
    164
    
    
    
    (398,713
    )Net Loss
    
    $
    (23,674,191
    )
    
    $
    (1,436,823
    )
    
    $
    (2,247,074
    )
    
    $
    (258,668
    )
    
    $
    (1,014,007
    )Basic and Diluted
per Common Share (Note 2)Loss From Operations
    
    $
    (3.65
    )
    
    $
    (0.07
    )
    
    $
    (0.15
    )
    
    $
    (0.01
    )
    
    $
    (0.05
    )Net Loss
    
    $
    (4.31
    )
    
    $
    (0.07
    )
    
    $
    (0.27
    )
    
    $
    (0.01
    )
    
    $
    (0.08
    )
 See notes to financial statements. 3




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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company) 
 STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
 Periods Ended September 30, 1988 Through December 31, 2003 and the Nine Months Ended
September 30, 2004 (Unaudited)
 DeficitAccumulatedAdditional
    
    During theCommon
    
    Paid-in
    
    DevelopmentStock
    
    Capital
    
    Stage
    
    TotalIssuance of stock, January 1988,
(2,205,762 shares at $.08
per share)
    
    $
    2,206
    
    
    $
    178,094
    
    
    $
    
    
    
    $
    180,300Net 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
    
    
    
    
    
    
    
    457,001Net loss
    
    
    
    
    
    
    
    
    
    
    (338,985
    )
    
    
    (338,985
    )Balance (deficit),
September 30, 1989
    
    
    2,512
    
    
    
    634,789
    
    
    
    (629,468
    )
    
    
    7,833Net 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
    
    
    
    
    
    
    
    70,857Issuance 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
    
    
    
    
    
    
    
    603,607Issuance of stock for interest,
June 1991, (1,375 shares at
$1.60 per share)
    
    
    1
    
    
    
    2,199
    
    
    
    
    
    
    
    2,200Issuance of stock for
expenses incurred by
stockholders, July 1991
(5,081 shares at $1.60 per share)
    
    
    5
    
    
    
    8,124
    
    
    
    
    
    
    
    8,129Net loss
    
    
    
    
    
    
    
    
    
    
    (670,179
    )
    
    
    (670,179
    )Balance (deficit), September 30,
1991
    
    
    2,950
    
    
    
    1,319,144
    
    
    
    (1,554,683
    )
    
    
    (232,589
    )
 4




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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through December 31, 2003 and the Nine Months Ended
September 30, 2004 (Unaudited) DeficitAccumulatedAdditional
    
    During theCommon
    
    Paid-in
    
    DevelopmentStock
    
    Capital
    
    Stage
    
    TotalIssuance of stock, October -
December 1991 (150,925
shares at $1.60 per share)
    
    $
    151
    
    
    $
    241,329
    
    
    $
    
    
    
    $
    241,480Shares 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
    
    
    
    
    
    
    
    5,500Net 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
    
    
    
    
    
    
    
    1,484,550Issuance of stock for exercise
of stock options, May 1993
(2,500 shares at $1.60 per share)
    
    
    3
    
    
    
    3,997
    
    
    
    
    
    
    
    4,000Issuance of warrants to
stockholder
    
    
    
    
    
    
    6,333
    
    
    
    
    
    
    
    6,333Conversion of $103,000 of notes
payable to stockholders and accrued
interest, December 1992 (6,438 shares
at $16.00 per share)
    
    
    6
    
    
    
    102,994
    
    
    
    
    
    
    
    103,000Issuance of stock for
consulting services, June
1993 (9,375 shares at
$16.00 per share)
    
    
    9
    
    
    
    149,991
    
    
    
    
    
    
    
    150,000Net loss
    
    
    
    
    
    
    
    
    
    
    (1,207,921
    )
    
    
    (1,207,921
    )Balance (deficit), September 30,
1993
    
    
    3,202
    
    
    
    3,296,856
    
    
    
    (3,325,355
    )
    
    
    (25,297
    )
 5




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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through December 31, 2003 and the Nine Months Ended
September 30, 2004 (Unaudited) DeficitAccumulatedAdditional
    
    During theCommon
    
    Paid-in
    
    DevelopmentStock
    
    Capital
    
    Stage
    
    TotalIssuance of warrants to stockholders
    
    $
    
    
    
    $
    226,000
    
    
    $
    
    
    
    $
    226,000Issuance of stock for exercise
of stock options, March 1994
(3,750 shares at $1.60 per share)
    
    
    4
    
    
    
    5,996
    
    
    
    
    
    
    
    6,000Issuance of stock for exercise
of warrants by stockholder,
August 1994 (3,677 shares at
$13.60 per share)
    
    
    4
    
    
    
    49,997
    
    
    
    
    
    
    
    50,001Net 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
    
    
    
    
    
    
    
    9,760Issuance of stock, May 1995
(6,250 shares at $8.00 per share)
    
    
    6
    
    
    
    49,994
    
    
    
    
    
    
    
    50,000Issuance of stock for
exercise of warrants by
stockholder, June 1995
(6,250 shares at $8.00 per share)
    
    
    6
    
    
    
    49,994
    
    
    
    
    
    
    
    50,000Issuance of stock for expenses, July 1995
(18,750 shares at $8.00 per share)
    
    
    19
    
    
    
    149,981
    
    
    
    
    
    
    
    150,000Net 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
    
    
    
    
    
    
    
    5,340Net 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
    
    
    
    
    
    
    
    100,000Conversion of $338,100 of notes payable
to stockholders and accrued interest, July
1997 (195,596 shares at $2.00 per share)
    
    
    196
    
    
    
    390,996
    
    
    
    
    
    
    
    391,192Net 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
    )
 6




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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through December 31, 2003 and the Nine Months Ended
September 30, 2004 (Unaudited) DeficitAccumulatedAdditional
    
    During theCommon
    
    Paid-in
    
    DevelopmentStock
    
    Capital
    
    Stage
    
    TotalBalance (deficit), September 30, 1998
    
    $
    3,487
    
    
    $
    4,334,864
    
    
    $
    (7,534,536
    )
    
    $
    (3,196,185
    )Net loss (three months)
    
    
    
    
    
    
    
    
    
    
    (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
    )Conversion of $238,165 of notes payable to
stockholders and accrued interest, various months
during 1999 (147,602 shares at $2.00 per share)
    
    
    148
    
    
    
    295,056
    
    
    
    
    
    
    
    295,204Issuance of stock for exercise of warrants by
stockholders, August 1999 (181,619 shares
at $.16 per share)
    
    
    182
    
    
    
    28,877
    
    
    
    
    
    
    
    29,059Net loss
    
    
    
    
    
    
    
    
    
    
    (1,200,792
    )
    
    
    (1,200,792
    )Balance (deficit), December 31, 1999
    
    
    3,884
    
    
    
    4,658,797
    
    
    
    (8,979,055
    )
    
    
    (4,316,374
    )Issuance of stock for exercise of warrants
by stockholders, various months during
2000 (130,000 shares at $2.00 per share)
    
    
    130
    
    
    
    259,870
    
    
    
    
    
    
    
    260,000Conversion of $158,735 of notes payable to
stockholders and accrued interest, various
months during 2000 (110,206 shares at
$2.00 per share)
    
    
    110
    
    
    
    220,302
    
    
    
    
    
    
    
    220,412Issuance of compensatory stock options
    
    
    
    
    
    
    190,536
    
    
    
    
    
    
    
    190,536Net loss
    
    
    
    
    
    
    
    
    
    
    (2,021,863
    )
    
    
    (2,021,863
    )Balance (deficit), December 31, 2000
    
    
    4,124
    
    
    
    5,329,505
    
    
    
    (11,000,918
    )
    
    
    (5,667,289
    )Issuance of stock for exercise of warrants
by stockholders, various months during
2001 (496,250 shares at $2.00 per share
and 338,637 shares at $.16 per share)
    
    
    834
    
    
    
    1,045,848
    
    
    
    
    
    
    
    1,046,682Conversion of $117,377 of Convertible
Debentures plus accrued interest, various
months during 2001 (82,808 shares at $2.00
per share)
    
    
    83
    
    
    
    165,533
    
    
    
    
    
    
    
    165,616Net loss
    
    
    
    
    
    
    
    
    
    
    (2,567,968
    )
    
    
    (2,567,968
    )Balance (deficit), December 31, 2001
    
    
    5,041
    
    
    
    6,540,886
    
    
    
    (13,568,886
    )
    
    
    (7,022,959
    )
 7




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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through December 31, 2003 and the Nine Months Ended
September 30, 2004 (Unaudited) DeficitAccumulatedAdditional
    
    During theCommon
    
    Paid-in
    
    DevelopmentStock
    
    Capital
    
    Stage
    
    TotalIssuance of stock, various months 2002
(282,358 shares at $2.00 per share)
    
    $
    283
    
    
    $
    564,433
    
    
    $
    
    
    
    $
    564,716Conversion of $100,000 of Convertible
Debentures plus accrued interest, various
months 2002 (55,000 shares at $2.00 per
share)
    
    
    55
    
    
    
    109,945
    
    
    
    
    
    
    
    110,000Issuance of stock in satisfaction of deferred
compensation balances with officers, various
months 2002, (82,793 shares at $2.00 per share)
    
    
    83
    
    
    
    165,503
    
    
    
    
    
    
    
    165,586Issuance of stock for 10% stock dividend,
June 2002, (522,931 shares at $3.40 per share)
    
    
    523
    
    
    
    1,777,442
    
    
    
    (1,777,965
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (2,565,483
    )
    
    
    (2,565,483
    )Balance (deficit), December 31, 2002
    
    
    5,985
    
    
    
    9,158,209
    
    
    
    (17,912,334
    )
    
    
    (8,748,140
    )Issuance of stock in exchange for outstanding
warrants held by stockholder, January 2003 (50,000 shares at $2.00 per share)
    
    
    50
    
    
    
    (50
    )Conversion of $15,000 of Convertible
Debentures plus accrued interest, April 2003
(26,597shares at $1.05 per share)
    
    
    26
    
    
    
    27,901
    
    
    
    
    
    
    
    27,927Issuance of stock for compensatory awards
to non-officer members of the Board of Directors,
July 2003 (15,000 shares at $1.00 per share)
    
    
    15
    
    
    
    14,985
    
    
    
    
    
    
    
    15,000Conversion of all outstanding Convertible
Debentures plus accrued interest, July and
August 2003 (9,647,759 shares at $1.05 per
share)
    
    
    9,648
    
    
    
    10,120,499
    
    
    
    
    
    
    
    10,130,147Issuance of stock for consulting services, various
months 2003 (54,493 shares at an average price
of $.54 per share)
    
    
    55
    
    
    
    29,260
    
    
    
    
    
    
    
    29,315Issuance of stock in partial satisfaction of deferred
compensation balances with officers, November
2003, (1,006,287 shares at $.30 per share)
    
    
    1,006
    
    
    
    300,880
    
    
    
    
    
    
    
    301,886Issuance of stock, various months 2003
(996,336 shares at $.30 per share)
    
    
    996
    
    
    
    297,905
    
    
    
    
    
    
    
    298,901Net loss
    
    
    
    
    
    
    
    
    
    
    (6,103,066
    )
    
    
    (6,103,066
    )Balance (deficit), December 31, 2003
    
    
    17,781
    
    
    
    19,949,589
    
    
    
    (24,015,400
    )
    
    
    (4,048,030
    )
 8




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##### Table of Contents



THERMOENERGY CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) CONTINUED
Periods Ended September 30, 1988 Through December 31, 2003 and the Nine Months Ended
September 30, 2004 (Unaudited) DeficitAccumulatedAdditional
    
    During theCommon
    
    Paid-in
    
    DevelopmentStock
    
    Capital
    
    Stage
    
    TotalIssuance of stock for accounts payable balances,
various months 2004 (370,611 shares at an
average price of $.566958 per share)
    
    $
    371
    
    
    $
    209,750
    
    
    $
    
    
    
    $
    210,121Issuance of stock, various months 2004
(3,018,515 shares at $.30 per share)
    
    
    3,019
    
    
    
    902,536
    
    
    
    
    
    
    
    905,555Issuance of stock in partial satisfaction of
deferred compensation balance with an
officer, May 2004 (125,000 shares at $.30
per share
    
    
    125
    
    
    
    37,375
    
    
    
    
    
    
    
    37,500Net loss
    
    
    
    
    
    
    
    
    
    
    (1,436,823
    )
    
    
    (1,436,823
    )Balance (deficit), September 30, 2004
    
    $
    21,296
    
    
    $
    21,099,250
    
    
    $
    (25,452,223
    )
    
    $
    (4,331,677
    )
 See notes to financial statements. 9




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THERMOENERGY CORPORATION
(A Development Stage Company) 
 STATEMENTS OF CASH FLOWS
 CumulativeDuringDevelopmentStage Through
    
    Nine Months Ended September 30,September 30, 2004
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)
    
    (Unaudited)Operating activities:Net loss
    
    $
    (23,674,191
    )
    
    $
    (1,436,823
    )
    
    $
    (2,247,074
    )Items not requiring
(providing) cash:Depreciation
    
    
    19,809Expenses funded by Common
Stock issuance
    
    
    737,653Other
    
    
    (123,546
    )
    
    
    
    
    
    
    6,492Changes in:Advances to officers
    
    
    (1,437,516
    )Other receivables
    
    
    (142,468
    )Accounts payable
    
    
    1,732,079
    
    
    
    193,583
    
    
    
    175,096Accrued expenses
    
    
    4,314,117
    
    
    
    
    
    
    
    1,197,853Deferred compensation
    
    
    3,900,006
    
    
    
    321,425
    
    
    
    480,287Deferred compensation retirement plan
    
    
    3,245,000
    
    
    
    
    
    
    
    Net cash used in
operating activities
    
    
    (11,429,057
    )
    
    
    (921,815
    )
    
    
    (387,346
    )Investing activities:Purchase of fixed assets
    
    
    (19,808
    )Other
    
    
    314,082Net cash provided by
investing activities
    
    
    294,274Financing activities:Proceeds from issuance of
Common Stock and warrants
    
    
    5,713,416
    
    
    
    905,555Proceeds from notes payable and
advances from officers
    
    
    1,803,609
    
    
    
    
    
    
    
    138,000Proceeds from Convertible Debentures
    
    
    3,798,000
    
    
    
    
    
    
    
    73,000Payments on notes payable and advances
from officers
    
    
    (242,609
    )
    
    
    
    
    
    
    (30,000
    )Other
    
    
    108,410Net cash provided by
financing activities
    
    
    11,180,826
    
    
    
    905,555
    
    
    
    181,000Increase (decrease) in cash
    
    
    46,043
    
    
    
    (16,260
    )
    
    
    (206,346
    )Cash, beginning of period
    
    
    0
    
    
    
    62,303
    
    
    
    211,329Cash, end of period
    
    $
    46,043
    
    
    $
    46,043
    
    
    $
    4,983
 See notes to financial statements. 10




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THERMOENERGY CORPORATION
(A Development Stage Company) 
 NOTES TO FINANCIAL STATEMENTS (Unaudited)
 September 30, 2004
 NOTE 1: BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of
Regulation S-B. 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 and nine-month
periods ended September 30, 2004 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2004. The balance sheet at December 31, 2003 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-KSB for the year
ended December 31, 2003. NOTE 2: 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 after
giving effect, where appropriate, to stock dividends, stock splits and nominal
issuances of Common Stock, warrants and stock options which occurred within
twelve months of the initial public offering filing date (February 27, 1992).
Stock options and warrants issued after the one year period referred to above,
and the dilutive effect of convertible debentures were not included in the
computation of diluted loss per share since the effect would be antidilutive.
The adjusted weighted average number of common shares used in the basic and
diluted loss per share computations were 5,496,340 shares for the period
cumulative since inception through September 30, 2004, and 20,538,214 and
8,475,364 shares for the nine-month periods ended September 30, 2004 and 2003,
respectively, and 21,195,426 and 13,427,593 shares for the three-month periods
ended September 30, 2004 and 2003, respectively. NOTE 3: COMMON STOCK During the nine months ended September 30, 2004, the Company issued 370,611
shares of Common Stock to settle accounts payable balances aggregating $210,121
and 3,018,515 shares for cash at $.30 per share. During February 2004, the Board of Directors granted stock options to a member
of the Board of Directors for the purchase of 50,000 shares of the Companys
Common Stock at $.50 per share. 11




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THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
September 30, 2004 NOTE 3: COMMON STOCK (continued) On March 23, 2004, the Board of Directors approved a rescission offer to
stockholders who purchased the Companys Common Stock during the fourth quarter
of 2003 and the first quarter of 2004 due to the determination that an
exemption from the registration requirements of the Securities Act of 1933, as
amended (the Securities Act) was not available. The purchasers did not
require the Company to repurchase any of the shares pursuant to this offer. During May 2004, the Company issued 125,000 shares at $.30 per share in partial
satisfaction of a deferred compensation balance with an officer. During September 2004, the Companys Board of Directors approved the issuance
of a warrant to a stockholder for the purchase of 1,400,000 shares of the
Companys Common Stock at $.30 per share in consideration for the funding
provided to the Company by the shareholder over the years. The warrant expires
in five years. During September 2004, the Board of Directors granted stock options to the
non-officer members of the Board of Directors for the purchase of 200,000
shares of the Companys Common Stock at $.90 per share. The stock options
expire in five years. NOTE 4: MANAGEMENTS CONSIDERATION OF GOING CONCERN MATTERS The Company has incurred net losses since inception and will likely require
substantial capital 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. Management is actively pursuing commercial contracts to produce fees from
projects involving the Technologies. The sale of stock pursuant to private
placement or public offerings is another alternative under consideration by
management. NOTE 5: COMMITMENTS AND CONTINGENCIES At September 30, 2004, the Company was committed to issue approximately 225,000
shares of Common Stock in payment of accounts payable balances. 12




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THERMOENERGY CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
September 30, 2004 NOTE 5: COMMITMENTS AND CONTINGENCIES (continued) On September 8, 2004, the Company received a Notice of Termination from
Battelle Memorial Institute (BMI) that advised the Company that BMI was
terminating two license agreements between BMI and the Company for nonpayment
of the minimum royalties required under the agreements unless the Company cured
the defaults within sixty days. On November 2, 2004, BMI notified the Company
of a payment schedule necessary to cure the Notice of Termination. The payment
schedule included a $30,000 payment to be paid to BMI on or before November 8,
2004 and the remaining payment of $33,907 to be paid to BMI on or before
December 8. The Company paid the $30,000 installment payment to BMI on
November 2. In the event that the Company pays the final $33,907 installment
payment to BMI on or before December 8, 2004, the Notice of Termination will be
cured and fully rescinded. NOTE 6: SUBSEQUENT EVENTS During August, October and November 2004, the Company sold shares of its Common
Stock at a price of $0.60 per share in order to fund its immediate cash needs.
As of November 9, 2004, approximately 966,000 shares had been sold pursuant to
this offer. The Company is planning to issue up to an aggregate of 1,500,000
shares of its Common Stock at a price of $0.60. Item 2. Managements Discussion and Analysis or Plan of Operation. Forward-Looking Statements The following discussion should be read in conjunction with the financial
statements and the notes to the financial statements appearing elsewhere in
this quarterly report on Form 10-QSB. The following discussion and the
information contained elsewhere in this quarterly report contains statements
that are forward-looking statements as defined within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
give the Companys current expectations of forecasts of future events. All
statements other than statements of current or historical fact contained in
this quarterly report, including statements regarding the Companys future
financial position, business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-looking statements.
The words anticipate, believe, continue, estimate, expect, intend,
may, plan, will, and similar expressions, as they relate to the Company,
are intended to identify forward-looking statements. These statements are based
on the Companys current plans, and actual future activities and the Companys
results of operations may be materially different from those set forth in the
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from the statements made. These include, but are not limited to, the risks and
uncertainties associated with statements 13




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##### Table of Contents



relating to: (i) the ability of the Company to fund its continued operations
and development activities, primarily through the availability of debt and
equity financing on terms that are acceptable or otherwise to the Company; (ii)
the Companys ability to commercialize its Technologies (as defined below);
(iii) the Companys ability to function efficiently and effectively until it
can afford to hire a principal financial officer to replace the deceased P.L.
Montesi; (iv) changes in government policy and in legislation and regulation of
the waste treatment industry that adversely affect the Companys business
prospects; and (v) general economic and market conditions. Any or all of the forward-looking statements in this quarterly report may turn
out to be inaccurate. The Company has based these forward-looking statements
largely on its current expectations and projections about future events and
financial trends that it believes may affect its financial condition, results
of operations, business strategy and financial needs. The forward-looking
statements can be affected by inaccurate assumptions or by known or unknown
risks, uncertainties and assumptions. The Company undertakes no obligation to publicly revise these forward-looking
statements after the date of this quarterly report. All subsequent written and
oral forward-looking statements attributable to the Company or persons acting
on its behalf are expressly qualified in their entirety by the cautionary
statements contained in this report and in the Companys Form 10-KSB. The Companys filing with the Securities and Exchange Commission, including its
reports under the Securities and Exchange Act of 1934, as amended (the
Exchange Act), can be found through the Companys website at
http://www.thermoenergy.com/financial.htm. The information contained in the
Companys website is not deemed to be a part of this filing. General ThermoEnergy Corporation, an Arkansas corporation (the Company), was
incorporated in January 1988, for the purpose of developing and marketing
certain environmental technologies. The Company is the exclusive worldwide
licensee (except for STORS, as defined below, in Japan) for three clean water
process technologies developed by Battelle Memorial Institute (BMI): the
Sludge-To-Oil Reactor System (STORS), the Ammonia Recovery Process (ARP),
the Nitrogen Removal Process (NitRem). In addition, the Company owns the
rights to the ThermoFuel Process (ThermoFuel), a patent-pending renewable
energy process that represents an advancement of STORS, and also owns the
rights to Enhanced Biogas Production (Enhanced Biogas Production) under a
license agreement with Alexander G. Fassbender (Fassbender), the Companys
Executive Vice-President of Technology. The five chemical process technologies
(STORS, ThermoFuel, ARP, NitRem and Enhanced Biogas Production) are primarily
aimed at solving wastewater problems for broad-based municipal and industrial
markets. The Company also is the exclusive worldwide licensee for a hardware
technology developed by BMI known as the Dual-Shell Reactor System, in which
STORS and NitRem are conducted. These six technologies are collectively
referred to as the Water Technologies. 14




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The Company received a Notice of Termination from Battelle Memorial Institute
(BMI) on September 8, 2004, stating BMI was terminating two license
agreements with the Company for nonpayment of the minimum royalties required
under the agreements unless the Company cured the defaults within sixty days.
The technologies affected by the Notice of Termination are the Dual-Shell
Reactor System, NitRem and STORS. On November 2, 2004, BMI notified the
Company of a payment schedule necessary to cure the Notice of Termination. The
payment schedule included a $30,000 payment to be paid to BMI on or before
November 8, 2004 (the First Installment) and the remaining payment of $33,907
to be paid to BMI on or before December 8, 2004 (the Second Installment).
The Company paid the First Installment on November 2. The Company is currently
planning to pay the Second Installment. In the event that the Company pays the
Second Installment, the Notice of Termination will be cured and fully
rescinded. However, if the Company does not pay the Second Installment, then
the Dual-Shell Reactor System, NitRem and STORS licenses will be terminated. The Company is also the owner, along with Fassbender, of a patented clean
energy technology known as the ThermoEnergy Integrated Power System (TIPS)
which converts fossil fuels (including coal, oil and natural gas) and biomass
into electricity without producing air emissions. TIPS and the Water
Technologies are collectively referred to as the Technologies. Management continues to search for a joint venture partner to pursue potential
business opportunities within the municipal and industrial wastewater treatment
markets utilizing the Companys ARP and ThermoFuel technologies. The Company
is seeking a partner with the financial resources, and engineering skills and
experience in designing, building and operating wastewater treatment plants,
and which has a presence in the target markets. Management also is looking for
a similar partner to join with the Company in developing and commercializing
the TIPS process. The Company has not been able to formalize a strategic
relationship with any party that has the resources to exploit the Technologies.
The Companys ability to continue seeking such strategic partners or such
strategic relationships is dependent on having the available cash to sustain
its activities. Plan of Operations The Company has historically lacked the financial and other resources necessary
to market the Technologies or to build demonstration projects. The following
summary sets forth the Companys plan of operations for the next 12 months. Current Cash Requirements; Need for Additional Funds The Company will require more cash to satisfy its anticipated operating
expenses for the next 12 months than it has available. As of September 30,
2004, the Company had a cash balance of $46,043 (compared to $4,983 available
cash as of September 30, 2003), while its current liabilities were $1,132,720.
During the quarter ended September 30, 2004, the Company used approximately
$78,000 of its cash in operating activities. The Company is seeking to sell up to 1,500,000 shares of unregistered Common
Stock at $0.60 per share to certain qualified purchasers. During August,
October and up to November 10, 2004, the Company has raised approximately
$580,000 through sales of approximately 966,000 shares 15




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##### Table of Contents



of unregistered Common Stock. The proceeds from the Common Stock sale have
been, and will be, used to meet the Companys immediate cash needs. Management continues to anticipate that its cash requirements during the next
12 months to implement the Companys marketing and development strategies will
range from $500,000 (assuming no commercialization of the Technologies) to
$1,000,000 (assuming there are expenses associated with one or more commercial
sales of the Technologies). Substantially all the anticipated cash
requirements will be for intellectual property rights, executive compensation
(including retirement plan payments to the estate of P.L. Montesi) and
marketing and development expense. Based upon the Companys available cash and
its current and possible requirements and obligations, the Company will be
required to raise additional working capital to fund its operations for the
third and fourth quarters of 2005. In addition, if the Company signs a
commercial contract, additional capital will be needed to carry out such a
project. The Company continues to work with Prospect Street Ventures (PSV), an
investment banking and financial advisory firm engaged by the Company in 2003
to assist in its capital raising activities, in seeking both short-term and
longer-term financing and considering various strategic alternatives to fund
the Companys operations and development activities. Management believes that
unless the Company secures a contract to commercialize the Technologies, it
will be difficult to raise the additional capital necessary to fund its
operations in the third and fourth quarter of 2005. See Item 5. Other
Information  for a discussion about current commercialization opportunities.
In the event that the Company cannot raise the necessary capital to fund the
Companys operations and development activities in the third and fourth quarter
of 2005, the Company will not be able to continue its operations. Research and Development During the Next 12 Months The Company will continue to conduct computer modeling with respect to the
Technologies. Due to the current financial condition of the Company, there are
no plans to conduct any product research and development activities in the next
12 months. In the event of a change in the financial condition and business
prospects of the Company, the Company may determine that it has the financial
ability to increase its research and development activities. Purchase of Plant or Significant Equipment The Company does not anticipate the purchase of any plant or equipment unless
it obtains a contract to commercialize the Technologies. Retirement Benefits Payable to Widow of P.L. Montesi Under the retirement plan for P.L. Montesi, the former President who died on
June 24, 2004, the Company is obligated to pay his estate for 20 years
following his death, an amount equal to 50% of his base salary. At the date of
his death, Mr. Montesis salary was $264,500 per annum. Since his death, the
Company has made no payments to his widow. The Companys Chief Executive
Officer is discussing with Mrs. Montesi various possibilities to restructure
the Companys obligation to her. 16




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##### Table of Contents



Payment of Current Obligations In light of the Companys historical limited available cash to fund its working
capital obligations, over the past 12 months the Board of Directors has from
time to time authorized the issuance of unregistered shares of Common Stock to
pay certain service providers. Between September 2003 and September 30, 2004,
an aggregate of approximately 1,556,000 shares of Common Stock were issued to
settle accounts payable and in partial satisfaction of deferred compensation
balances to management. Management has continued to make arrangements with certain service providers to
pay the Companys obligation to them, in whole or in part, in shares of Common
Stock. Under the current arrangements, the Company is committed to issue
approximately 225,000 shares of Common Stock to various lobbyists representing
the Companys interests at the federal, state and local level and to various
consultants. In addition, the Company is negotiating a settlement with PSV of
part of the Companys fee obligations to PSV whereby PSV would be issued
approximately 201,000 shares of Common Stock in lieu of cash payments. Until the Companys cash position improves, the Board of Directors intends to
continue to consider the use of issuing shares of unregistered Common Stock in
settlement of its current obligations. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements. Item 3. Controls and Procedures. The Company, under the direction of its Chief Executive Officer and Principal
Financial Officer, established disclosure controls and procedures that were
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act, is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms. The disclosure controls
and procedures are also intended to ensure that such information is accumulated
and communicated to the Companys management, consisting of the Chief Executive
and Principal Financial Officer, as appropriate to allow timely decisions
regarding required disclosures. Following the death of Mr. Montesi in June, 2004, the Chief Executive Officer
has continued to assume the additional responsibilities of Principal Financial
Officer. In these roles, the Chief Executive Officer has reviewed and
evaluated the Companys disclosure controls and procedures as of the end of the
period covered by this report. Based on, and as of the effective date of that
review and evaluation, the Chief Executive Officer has concluded that the
Companys disclosure controls and procedures are effectively serving the stated
purposes. No changes in the Companys internal control over financial reporting occurred
during the period covered by this report that materially affected, or are
reasonably likely to materially affect, the Companys internal controls over
financial reporting. 17




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PART II  OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Change in Securities and Small Business Issuer Purchases of Equity Securities. Unregistered Sales of Equity Securities and Use of Proceeds Cash Transactions During the period from August through November, the Company has sold shares of
its Common Stock that were not registered under the Securities Act for cash at
$0.60 per share. In August 2004, the Company sold 83,334 shares of Common
Stock to Evergreen Recycling, Inc. In October, the Company sold an aggregate
of 666,669 shares of Common Stock to Michael Girardi, Kenneth Petersen, Thomas
W. Savarese, Kenneth Zalk, Laurence Zalk, Newberger Berman, LLC and James E.
Marsh. Through November 10, 2004, the Company has sold an aggregate of 215,834
shares during November to C.A. Steger, Joseph Kern and Vernon Marquez. The
aggregate amounts for these transactions were 965,837 shares of Common Stock
for consideration of $579,500. These sales were made by officers of the
Company and there were no underwriters or placing agents and no underwriting
discounts or commissions were paid with respect to these transactions. The
Company issued and sold the shares of Common Stock pursuant to the exemptions
available under Rule 506 of Regulation D promulgated under the Securities Act.
The proceeds have been, and will be, used to fund the Companys operating
expenses, including payment of license royalties, compensation and trade
payables. Common Stock in Exchange for Services In October 2004, the Company authorized the issuance of approximately 225,000
shares of Common Stock to five persons in consideration for lobbying and
consulting services previously provided to the Company. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Securities Holders. None. Item 5. Other Information. The Company and New York City officials continue to negotiate for a 500,000
gallon per day ARP demonstration plant to be located at one of New York Citys
eight water pollution control 18




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##### Table of Contents



plant de-watering facilities although the definitive terms of a contract have
not been agreed upon and no contract has been executed. The Company believes
that it would be able to meet the operational requirements of any contract by
hiring subcontractors. No assurance can be given that any final agreement will
be reached, or that the Company will have the financial resources to implement
any agreement that might be executed. Item 6. Exhibits and Report on Form 8-K. (a) The following exhibits are filed as part of this report: ExhibitNumber
    
    Description of Exhibits31.1
    
    Certification of the Companys Chief Executive Officer and Principal
Financial Officer pursuant to Securities and Exchange Act Rules
13a-14 and 15d-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Companys Chief Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 (b) No reports on Form 8-K were filed during the quarterly period ended
September 30, 2004. 19




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SIGNATURE In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized. Date: November 15, 2004
    THERMOENERGY CORPORATION/s/ Dennis C. CosseyDennis C. Cossey, Chairman,Chief Executive Officer, Secretary and
Principal Executive Officer 20