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EXCEL - IDEA: XBRL DOCUMENT - COMVERGE, INC.Financial_Report.xls
EX-31.2 - SECTION 302 CFO CERTIFICATION - COMVERGE, INC.ex312-2011630.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - COMVERGE, INC.ex322-2011630.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - COMVERGE, INC.ex321-2011630.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - COMVERGE, INC.ex311-2011630.htm
EX-10.1 - EMPLOYMENT AGREEMENT - COMVERGE, INC.ex1012011630.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2011
 
or
¨
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:  001-33399
 
Comverge, Inc.
(Exact name of Registrant as specified in its charter)
  
Delaware
 
22-3543611
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
 
5390 Triangle Parkway, Suite 300
Norcross, Georgia
 
30092
(Address of principal executive offices)
 
(Zip Code)
 
(678) 392-4954
(Registrant’s telephone number including area code)
 
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  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý       No ¨
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):
 
Large accelerated filer    ¨    Accelerated filer   ý    Non-accelerated filer   ¨    (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ¨     No  ý
 
There were 25,486,474 shares of the Registrant’s common stock, $0.001 par value per share, outstanding on July 27, 2011. 

Comverge, Inc.
Index to Form 10-Q
 
 
 
 
 
 
  
Page
Part I - Financial Information
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
Part II - Other Information
  
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
 
 


 





COMVERGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited) 
 
June 30,
2011
 
December 31,
2010
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
21,405

 
$
7,800

Restricted cash
3,519

 
1,736

Marketable securities

 
27,792

Billed accounts receivable, net
20,124

 
14,433

Unbilled accounts receivable
7,576

 
17,992

Inventory, net
9,635

 
9,181

Deferred costs
4,503

 
1,712

Other current assets
1,680

 
2,056

Total current assets
68,442

 
82,702

Restricted cash
835

 
3,733

Property and equipment, net
25,068

 
22,480

Intangible assets, net
3,646

 
3,816

Goodwill
499

 
499

Other assets
421

 
927

Total assets
$
98,911

 
$
114,157

Liabilities and Shareholders' Equity
 

 
 

Current liabilities
 

 
 

Accounts payable
$
7,790

 
$
8,455

Accrued expenses
13,314

 
17,375

Deferred revenue
12,733

 
5,821

Current portion of long-term debt
3,000

 
3,000

Other current liabilities
7,726

 
7,962

Total current liabilities
44,563

 
42,613

Long-term liabilities
 

 
 

Deferred revenue
912

 
1,662

Long-term debt
20,250

 
21,750

Other liabilities
1,751

 
2,074

Total long-term liabilities
22,913

 
25,486

Shareholders' equity
 

 
 

Common stock, $0.001 par value per share, authorized 150,000,000
shares;  issued 25,522,608 and outstanding 25,486,474, shares as of
June 30, 2011 and issued 25,355,223 and outstanding 25,329,118
shares as of December 31, 2010
25

 
25

Additional paid-in capital
264,495

 
262,226

Common stock held in treasury, at cost, 36,134 and 26,105 shares as of
June 30, 2011 and December 31, 2010, respectively
(306
)
 
(257
)
Accumulated deficit
(232,779
)
 
(215,947
)
Accumulated other comprehensive income

 
11

Total shareholders' equity
31,435

 
46,058

Total liabilities and shareholders' equity
$
98,911

 
$
114,157

 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1


COMVERGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
Revenue
 
 
 
 
 
 
 
Product
$
7,663

 
$
5,294

 
$
12,354

 
$
10,755

Service
24,792

 
11,753

 
38,726

 
19,673

Total revenue
32,455

 
17,047

 
51,080

 
30,428

Cost of revenue
 

 
 

 
 

 
 
Product
6,355

 
4,382

 
9,817

 
8,006

Service
14,759

 
7,308

 
22,155

 
12,350

Total cost of revenue
21,114

 
11,690

 
31,972

 
20,356

Gross profit
11,341

 
5,357

 
19,108

 
10,072

Operating expenses
 
 
 
 
 

 
 
General and administrative expenses
11,159

 
9,214

 
21,393

 
17,312

Marketing and selling expenses
5,199

 
4,066

 
10,288

 
8,844

Research and development expenses
1,052

 
1,543

 
2,101

 
2,908

Amortization of intangible assets
236

 
536

 
473

 
1,072

Operating loss
(6,305
)
 
(10,002
)
 
(15,147
)
 
(20,064
)
Interest and other expense, net
723

 
291

 
1,652

 
353

Loss before income taxes
(7,028
)
 
(10,293
)
 
(16,799
)
 
(20,417
)
Provision for income taxes
18

 
55

 
33

 
115

Net loss
$
(7,046
)
 
$
(10,348
)
 
$
(16,832
)
 
$
(20,532
)
Net loss per share (basic and diluted)
$
(0.28
)
 
$
(0.42
)
 
$
(0.68
)
 
$
(0.83
)
Weighted average shares used in computation
24,877,264

 
24,618,730

 
24,834,065

 
24,598,205

 
 
 
 
 
 

 

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.





2


COMVERGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended
 
June 30,
 
2011
 
2010
Cash flows from operating activities
 
 
 
Net loss
$
(16,832
)
 
$
(20,532
)
Adjustments to reconcile net loss to net cash from operating activities:
 

 
 

Depreciation
1,103

 
576

Amortization of intangible assets and capitalized software
820

 
1,412

Stock-based compensation
2,158

 
1,325

Other
928

 
501

Changes in operating assets and liabilities:
 

 
 
Billed and unbilled accounts receivable, net
4,716

 
(500
)
Inventory, net
(1,004
)
 
(1,720
)
Deferred costs and other assets
(776
)
 
(3,007
)
Accounts payable
(665
)
 
1,678

Accrued expenses and other liabilities
(4,404
)
 
(4,580
)
Deferred revenue
6,162

 
14,603

Net cash used in operating activities
(7,794
)
 
(10,244
)
Cash flows from investing activities
 

 
 

Changes in restricted cash
1,115

 
1,214

Purchases of marketable securities

 
(9,110
)
Maturities/sales of marketable securities
27,724

 
18,165

Purchases of property and equipment
(6,002
)
 
(3,916
)
Net cash provided by investing activities
22,837

 
6,353

Cash flows from financing activities
 

 
 

Borrowings under debt facility
8,000

 
18,000

Repayment of debt facility
(9,500
)
 
(19,500
)
Other
62

 
(246
)
Net cash used in financing activities
(1,438
)
 
(1,746
)
Net change in cash and cash equivalents
13,605

 
(5,637
)
Cash and cash equivalents at beginning of period
7,800

 
16,069

Cash and cash equivalents at end of period
$
21,405

 
$
10,432

Cash paid for interest
$
603

 
$
315

Supplemental disclosure of noncash investing and financing activities
 

 
 

Recording of asset retirement obligation
$
(235
)
 
$
(320
)

 
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
 


3


COMVERGE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)


1.
Description of Business and Basis of Presentation

Description of Business

Comverge, Inc., a Delaware corporation, and its subsidiaries (collectively, the “Company”), provide intelligent energy management solutions that enable energy providers and consumers to optimize their power usage and meet peak demand.  The Company delivers its intelligent energy management solutions through a portfolio of hardware, software and services.  The Company has two operating segments: the Residential Business segment and the Commercial & Industrial, or C&I, Business segment. 

Basis of Presentation 

The condensed consolidated financial statements of the Company include the accounts of its subsidiaries. These unaudited condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair statement of the Company’s financial position as of
June 30, 2011 and the results of operations for the three and six months ended June 30, 2011 and 2010, and cash flows for the six months ended June 30, 2011 and 2010, consisting only of normal and recurring adjustments. All significant intercompany transactions have been eliminated in consolidation. Operating results for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011. The interim condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the Company’s consolidated financial statements and footnotes thereto for the year ended December 31, 2010 on Form 10-K filed on March 9, 2011.

The condensed consolidated balance sheet as of
December 31, 2010 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States.

Liquidity

The Company has incurred losses since inception, resulting in an accumulated deficit of $232,779 and stockholders' equity of $31,435 as of June 30, 2011. Working capital as of June 30, 2011 was $23,879, consisting of $68,442 in current assets and $44,563 in current liabilities, including $3,000 of long-term debt due within one year.   The total long-term debt as of June 30, 2011 was $20,250, excluding the $3,000 included in current liabilities. Further, the Company anticipates spending approximately $4,000 to $7,000 on capital expenditures during the second half of fiscal 2011.

The Company has aggregate available borrowing capacity under its Silicon Valley Bank, or SVB, loan agreement of $5,118 as of June 30, 2011; however, to the extent that it does not maintain at least $20,000 of unrestricted cash at all times, then this additional capacity is not available to the Company and could cause other potential defaults in its borrowing arrangements such that all outstanding debt could become due.  Even with its anticipated revenue growth or cash expenditure reductions, it is possible that the Company's cash balance may fall below $20,000. Should the Company's unrestricted cash balance fall below $20,000 and the Company's borrowing capacity be consequently reduced, any amounts the Company owes to SVB in excess of the Company's reduced borrowing capacity will become immediately due and payable under its SVB loan agreement. Further, if the Company does not achieve certain year to date revenue growth targets (i.e. $99,658 in revenue for the nine months ending September 30, 2011 and $139,838 in revenue for the year ending December 31, 2011), Partners for Growth III, L.P., or PFG, has the right, but not the obligation, to begin requiring quarterly repayments of the loan balance over the remaining term of the PFG loan. Such payments would be front-loaded, such that 45% of the loan balance (approximately $6,750 as of June 30, 2011) would be due over the first twelve months after PFG's election. If PFG exercises its Amortization Right (as defined in the loan agreement) and the Company subsequently complies with succeeding measurements periods, the Company may prospectively cease monthly amortization of the loan, provided however, PFG may again exercise its Amortization Right under the loan agreement if the Company fails to meet future minimum revenue targets. Also, any failure by the Company to pay any obligations that become due and payable may constitute an event of default under the SVB loan agreement or PFG loan. Such event of default could enable SVB or PFG to accelerate all amounts due under their respective loans or exercise other remedies

4


available to them under the respective loan agreements. Further, any payment of such immediately due and payable obligations under the SVB loan agreement may cause the Company to breach certain financial covenants of either the SVB or PFG loan agreements. Any such breach of financial covenants would constitute an event of default under such agreements, enabling SVB or PFG to exercise their remedies under their respective agreements, including acceleration of all amounts due thereunder.

Management believes that there are various options available for effective and reasonable capitalization of the Company that will allow for sufficient cash on hand to continue operations for the next 12 months. Management will continue to actively explore all such financing options, including restructuring of our current credit facilities in the near term. Our ability to secure additional capital, modify our existing debt terms to meet our projected revenue growth or cash expenditure reductions cannot be assured, and in such event, this could have a material adverse impact on our liquidity, financial position and results of operations.

2.    Significant Accounting Policies and Recent Accounting Pronouncements

Revenue Recognition - Residential Business
 
The Company sells intelligent energy management solutions directly to utilities for use and deployment by the utility. The Company recognizes revenue for such sales when delivery has occurred or services have been rendered and the following criteria have been met: persuasive evidence of an arrangement exists, the price is fixed or determinable, delivery has occurred and collection is probable.  
 
The Company has certain contracts which are multiple element arrangements and provide for several deliverables to the customer that may include hardware, software and services, such as installation of the hardware, marketing, program management and hosting. The Company evaluates each deliverable to determine whether it represents a separate unit of accounting.   A deliverable constitutes a separate unit of accounting when it has stand-alone value and there are no customer-negotiated refunds or return rights for the delivered elements.  The separate deliverables in these arrangements meet the separation criteria.  The contract consideration for these multiple element arrangements is allocated to the units of accounting based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy of Vendor Specific Objective Evidence (VSOE), Third Party Evidence (TPE) or Estimated Selling Price (ESP).  VSOE of fair value is based on the price charged when the element is sold separately.  TPE of selling price is established by evaluating largely interchangeable competitor products or services in stand-alone sales to similarly situated customers. ESP is established considering multiple factors including, but not limited to list price, gross margin analysis and internal costs.  Allocation of the consideration is determined at arrangement inception on the basis of each unit’s relative selling price.  Once an allocated fair value is established for each unit of accounting, the contract deliverables are scoped into the appropriate accounting guidance for revenue recognition.    

The Company enters into long-term contracts with utilities in which the Company typically owns the underlying intelligent

5


energy management network and provides its customer with electric capacity during the peak season. The Company defers revenue and the associated cost of revenue related to these Virtual Peaking Capacity, or VPC, contracts until such time as the annual contract payment is fixed or determinable. The Company invoices VPC customers on a monthly or quarterly basis throughout the contract year. The VPC contracts require the Company to provide electric capacity through demand reduction to utility customers, and require a measurement and verification of such capacity on an annual basis. Contract years typically begin at the end of a control season (generally, at the end of a utility’s summer cooling season that correlates to the end of the utility’s peak demand for electricity) and continue for twelve months thereafter.  Once a utility’s customer, or program participant, enrolls in one of the Company’s VPC programs, the Company installs hardware at the participant’s location. The cost of the installation and the hardware are capitalized and depreciated as cost of revenue over the remaining term of the contract with the utility, which is shorter than the operating life of the equipment.  The Company also records telecommunications costs related to the network as cost of revenue.  The cost of revenue is recognized contemporaneously with revenue.
 
The current deferred revenue and deferred cost of revenue as of June 30, 2011 and December 31, 2010 are provided below:  
 
 
June 30,
2011
 
December 31,
2010
Deferred revenue:
 
 
 
VPC contract related
$
8,256

 
$
2,502

Other
4,477

 
3,319

Current deferred revenue
$
12,733

 
$
5,821

Deferred cost of revenue:
 

 
 

VPC contract related
$
3,339

 
$
1,041

Other
1,164

 
671

Current deferred cost of revenue
$
4,503

 
$
1,712



Revenue Recognition - Commercial & Industrial Business
 
The Company enters into agreements to provide demand response services. The demand response programs require the Company to provide electric capacity through demand reduction when the utility or independent system operator calls a demand response event to curtail electrical usage. Demand response revenues are earned based on the Company’s ability to deliver capacity. In order to provide capacity, the Company manages a portfolio of commercial and industrial end users’ electric loads. Capacity amounts are verified through the results of an actual demand response event or a demand response test.  The Company recognizes revenue and associated cost of revenue in its demand response services at such time as the capacity amount is fixed or determinable. 
 
The Company records revenue from capacity programs with independent system operators. The capacity year for its primary capacity program spans from June 1st to May 31st annually. For participation, the Company receives cash payments on a monthly basis in the capacity year. Participation in the capacity program requires the Company to respond to requests from the system operator to curtail energy usage during the mandatory performance period of June through September, which is the peak demand season. The annual payments for a capacity year are recognized during each month of the performance period, once the revenue is fixed or determinable.
 
The Company enters into agreements to provide base load reduction. Energy efficiency revenues are earned based on the Company’s ability to achieve committed capacity through base load reduction. In order to provide this reduction, the Company delivers and installs energy efficiency management solutions. The base load capacity contracts require the Company to provide electric capacity to utility customers, and include a measurement and verification of such capacity in order to determine contract consideration. The Company defers revenue and associated cost of revenue until such time as the capacity amount, and therefore the related revenue, is fixed or determinable. Once the reduction amount has been verified, the revenue is recognized. If the revenue is subject to penalty, refund or an ongoing obligation, the revenue is deferred until the contingency is resolved and/or the Company has met its performance obligation. Certain contracts contain multiple deliverables, or elements, which require the Company to assess whether the different elements qualify for separate accounting. The separate deliverables in these arrangements meet the separation criteria.
 
Revenue from time-and-materials service contracts and other services are recognized as services are provided. Revenue from certain fixed price contracts are recognized on a percentage-of-completion basis, which involves the use of estimates. If the

6


Company does not have a sufficient basis to measure the progress towards completion, revenue is recognized when the project is completed or when final acceptance is received from the customer. The Company also enters into agreements to provide hosting services that allow customers to monitor and analyze their electrical usage. Revenue from hosting contracts is recognized as the services are provided, generally on a recurring monthly basis.
 
Comprehensive Loss
 
The Company reports total changes in equity resulting from revenues, expenses, and gains and losses, including those that do not affect the accumulated deficit. Accordingly, other comprehensive loss includes those amounts relating to unrealized gains and losses on investment securities classified as available for sale.
 
The components of comprehensive loss are as follows:
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
Net loss
$
(7,046
)
 
$
(10,348
)
 
$
(16,832
)
 
$
(20,532
)
Unrealized loss on marketable securities

 
(1
)
 

 
(10
)
Comprehensive loss
$
(7,046
)
 
$
(10,349
)
 
$
(16,832
)
 
$
(20,542
)
 
 
Concentration of Credit Risk

The Company derives a significant portion of its revenue from products and services that it supplies to electricity providers, such as utilities and independent service operators. Changes in economic conditions and unforeseen events could occur and could have the effect of reducing use of electricity by our customers’ consumers. The Company’s business success depends in part on its relationships with a limited number of large customers.  During the three months ended June 30, 2011, the Company had three customers which accounted for 19%, 19% and 12% of the Company’s revenue. During the six months ended June 30, 2011, the Company had three customers which accounted for 21%, 14% and 14% of the Company's revenue. The total billed and unbilled accounts receivable from these customers was $12,329, in the aggregate, as of June 30, 2011. The total billed and unbilled accounts receivable from these customers was $19,352, in the aggregate, as of December 31, 2010. During the three and six months ended June 30, 2010, the Company had one customer which accounted for 24% and 21%, respectively, of the Company’s revenue.  No other customer accounted for more than 10% of the Company’s total revenue during the three and six months ended June 30, 2011 and 2010.
 
The Company is subject to concentrations of credit risk from its cash and cash equivalents and short term investments. The Company limits its exposure to credit risk associated with cash and cash equivalents and short term investments by placing its cash and cash equivalents with a number of domestic financial institutions and by investing in investment grade securities.
 
Recent Accounting Pronouncements
 
In October 2009, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (ASU 2009-13). ASU 2009-13 changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. Concurrently with issuing ASU 2009-13, the FASB also issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements” (ASU 2009-14). ASU 2009-14 excludes software that is contained on a tangible product from the scope of software revenue guidance if the software component and the non-software component function together to deliver the tangible products’ essential functionality.  The Company adopted these standards on a prospective basis for new and materially modified arrangements originating after December 31, 2010.  The adoption of these amendments did not have a material effect on the Company’s financial statements.

In June 2011, the FASB issued authoritative guidance related to comprehensive income. The guidance eliminates the option to present other comprehensive income in the Statement of Shareholders' Equity but instead allows companies to elect to present net income and other comprehensive income in one continuous statement (Statement of Comprehensive Income) or in two consecutive statements. This guidance does not change any of the components of net income or other comprehensive income and earnings per share will still be calculated based on net income. The Company will adopt this guidance on January 1, 2012.


7




3.
Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed using the weighted average number of common shares outstanding and, when dilutive, potential common shares from options and warrants using the treasury stock method and from convertible securities using the if-converted method. Because the Company reported a net loss for the six months ended June 30, 2011 and 2010, all potential common shares have been excluded from the computation of the dilutive net loss per share for all periods presented because the effect would have been anti-dilutive. Such potential common shares consist of the following:
 
 
Six Months Ended
 
June 30,
 
2011
 
2010
Subordinated debt convertible to common stock
2,747,252

 

Unvested restricted stock awards
592,588

 
559,179

Outstanding options
2,833,248

 
2,489,984

Total
6,173,088

 
3,049,163

 
4.
Marketable Securities
    
The amortized cost and fair value of marketable securities, with gross unrealized gains and losses, as well as the balance sheet classification as of June 30, 2011 and December 31, 2010 is presented below.
 
 
June 30, 2011
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Cash and
Equivalents
 
Restricted
Cash
 
Marketable
Securities
Money market funds
$
10,952

 
$

 
$

 
$
10,952

 
$
10,952

 
$

 
$

Corporate debentures/bonds
351

 

 

 
351

 
351

 

 

Total marketable securities
11,303

 

 

 
11,303

 
11,303

 

 

Cash in operating accounts
14,456

 

 

 
14,456

 
10,102

 
4,354

 

Total
$
25,759

 
$

 
$

 
$
25,759

 
$
21,405

 
$
4,354

 
$

 
 
December 31, 2010
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Cash and
Equivalents
 
Restricted
Cash
 
Marketable
Securities
Money market funds
$
1,657

 
$

 
$

 
$
1,657

 
$
1,657

 
$

 
$

Commercial paper
9,395

 

 

 
9,395

 
3,598

 

 
5,797

Corporate debentures/bonds
23,982

 
24

 
(13
)
 
23,993

 
1,998

 

 
21,995

Total marketable securities
35,034

 
24

 
(13
)
 
35,045

 
7,253

 

 
27,792

Cash in operating accounts
6,016

 

 

 
6,016

 
547

 
5,469

 

Total
$
41,050

 
$
24

 
$
(13
)
 
$
41,061

 
$
7,800

 
$
5,469

 
$
27,792

 
Realized gains and losses to date have not been material. Interest income for the six months ended June 30, 2011 and 2010 was $107 and $510, respectively.

The Company applies a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the

8


inputs to valuation techniques used to measure fair value in the following categories:
 
Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions market participants would use in pricing the asset or liability.

The Company’s assets that are measured at fair value on a recurring basis are generally classified within Level 1 or Level 2 of the fair value hierarchy. The types of instruments valued based on quoted market prices in active markets include most money market securities, U.S. Treasury securities and equity investments. Such instruments are generally classified within Level 1 of the fair value hierarchy. The Company invests in money market funds that are traded daily and does not adjust the quoted price for such instruments.

The types of instruments valued based on quoted prices in less active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include the Company’s U.S. Agency securities, Commercial Paper, U.S. Corporate Bonds and certificates of deposit. Such instruments are generally classified within Level 2 of the fair value hierarchy. The Company uses consensus pricing, which is based on multiple pricing sources, to value its fixed income investments.

The table below presents marketable securities, grouped by fair value levels, as of June 30, 2011 and December 31, 2010.
 
 
 
 
Fair Value Measurements at Reporting Date Using
 
June 30, 2011
 
Quoted Prices 
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
 Observable
Inputs
(Level 2)
 
 Significant
 Unobservable
Inputs
(Level 3)
Money market funds
$
10,952

 
$
10,952

 
$

 
$

Corporate debentures/bonds
351

 

 
351

 

Total
$
11,303

 
$
10,952

 
$
351

 
$

 
 
 
 
Fair Value Measurements at Reporting Date Using
 
December 31,
2010
 
Quoted Prices 
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
 Observable
Inputs
(Level 2)
 
 Significant
 Unobservable
Inputs
(Level 3)
Money market funds
$
1,657

 
$
1,657

 
$

 
$

Commercial paper
9,395

 

 
9,395

 

Corporate debentures/bonds
23,993

 

 
23,993

 

Total
$
35,045

 
$
1,657

 
$
33,388

 
$

 
5.
Long-Term Debt

The Company entered into Modification No. 1 of the subordinated convertible loan agreement with Partners for Growth III, L.P., or PFG, effective March 31, 2011.  The original agreement, dated November 5, 2010, sets forth quarterly revenue targets to be maintained by the Company on a consolidated basis.  The modification revised these revenue targets for fiscal year 2011.   If the revenue targets are not maintained, the lender has the right, but not the obligation, to begin requiring repayments of the loan balance over the remaining term of the loan.  Such payments would be front-loaded, such that 45% of the loan balance would be due over the first twelve months after the lender’s election.  If PFG exercises its Amortization Right (as

9


defined in the loan agreement) and the Company subsequently complies with succeeding measurements periods, the Company may prospectively cease monthly amortization of the loan, provided however, PFG may again exercise its Amortization Right under the loan agreement if the Company fails to meet future minimum revenue targets. Any failure by the Company to maintain such minimum revenues does not, by itself, constitute an event of default.  The modification of the subordinated convertible loan agreement also revised the price at which the note may be converted into the Company’s common stock to $5.46 per share of common stock.  As a result of the modification, the Company recognized a charge of $523 in interest expense to write off the debt issuance costs related to the original agreement during the six months ended June 30, 2011. Modification No. 1 is included as Exhibit 10.1 with the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 2011 filed with the SEC on May 5, 2011.

Long-term debt as of June 30, 2011 and December 31, 2010 consisted of the following:
 
 
June 30,
2011
 
December 31,
2010
Security and loan agreement with a U.S. bank, collateralized by all assets of Comverge, Inc. and its subsidiaries, maturing in December 2013, interest payable at a variable rate (3.19% as of June 30, 2011 and 3.26% as of December 31, 2010)
$
8,250

 
$
9,750

Subordinated assets of Comverge, Inc. and its subsidiaries, maturing in November 2015, assets of Comverge, Inc. and its subsidiaries, maturing in November 2015, interest payable at a variable rate (6.50% as of June 30, 2011 and 5.75% December 31, 2010)
15,000

 
15,000

Total debt
23,250

 
24,750

Less: Current portion of long-term debt
(3,000
)
 
(3,000
)
Total long-term debt
$
20,250

 
$
21,750



6.
Legal Proceedings

The Company assesses the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses.  A determination of the amount of the liability required, if any, for these contingencies is made after an analysis of each known issue.  In accordance with applicable accounting guidance, a liability is recorded when the Company determines that a loss is probable and the amount can be reasonably estimated.  Additionally, the Company discloses contingencies for which a material loss is reasonably possible, but not probable. As a litigation or regulatory matter develops, the Company monitors the matter for further developments that could affect the amount previously accrued, if any, and updates such amount accrued or disclosures previously provided as appropriate. As of June 30, 2011, there were no material contingencies requiring accrual.
 
On October 12, 2010, a civil action complaint was filed against the Company in the United States District Court for the Western District of Kentucky (Case No. 3:10-CV-00638) by Louisville Gas & Electric Company and Kentucky Utilities Company (“Plaintiffs”).  The Plaintiffs alleged a breach of warranty claim relating to certain thermostats manufactured by White-Rodgers that they claim are defective.  The relief sought by Plaintiffs included an unspecified amount of damages, pre and post judgment interest and costs. On July 25, 2011, the Parties settled the lawsuit. The settlement will not have a material impact on our results of operations or financial condition.
 
On November 22, 2010, a civil action complaint was filed against the Company in the United States District Court for the Eastern District of Kentucky (Case No. 5:10-CV-00398) by East Kentucky Power Cooperative, Inc. (“EKPC”).  EKPC alleged a breach of warranty claim relating to certain thermostats manufactured by White-Rodgers that it claims are defective.  The relief sought by EKPC includes an unspecified amount of damages, pre and post judgment interest and costs.  The Company intends to defend this claim vigorously.

On May 9, 2011, a civil action complaint was filed against the Company and White-Rodgers, a division of Emerson Electric, in the Ontario Superior Court of Justice (Case No. CV-11-16275) by Enwin Utilities Ltd.  Enwin alleged breach of contract and tort claims for approximately 2,000 thermostats, manufactured by White-Rodgers, and purchased from Comverge.  The relief sought by Enwin includes $1,000,000 in damages plus costs.  The Company intends to defend this claim vigorously. 
 
At this time, the Company's management cannot estimate with reasonable certainty the ultimate disposition of any of the above lawsuits and, while the Company does not believe it will sustain material liability in relation to any of the three disputes above, there can be no assurance that the Company will not sustain material liability as a result of, or related to, these lawsuits.

On December 1, 2010, NV Energy initiated a claim against the Company with the American Arbitration Association for a contract dispute arising out of the Company's delivered demand response program and in relation to the White-Rodgers thermostat in Nevada.  The relief sought by NV Energy includes compensatory damages, attorney's fees, costs and interest. NV

10


Energy also filed a lawsuit in the U.S. District Court of Nevada (2:10-cv-02094-GMN-RJJ) against the Company seeking a declaration that NV Energy did not violate a Non-Disclosure Agreement with the Company by disclosing confidential and/or trade secret information in connection with the Company's work on NV Energy's Advanced Service Delivery (ASD) project.  NV Energy further contends that it does not owe the Company for service performed on the ASD project.  The Company has counter-sued in the proceedings to recover damages stemming from NV Energy's tortious conduct breach of contract, conversion, and misappropriation of trade secrets, among other claims.  The Parties are attempting to resolve these disputes.  The Company cannot predict with reasonable certainty the ultimate disposition of these matters and while the Company does not have reason to believe at this time it will sustain material liability in relation to any dispute with NV Energy, there can be no assurance that the Company will not sustain material liability as a result of such matters. 

7.
Stock-Based Compensation

The Company’s Amended and Restated 2006 Long-Term Incentive Plan  (“2006 LTIP”) was approved by the Company’s stockholders in May 2010 and provides for the granting of stock-based incentive awards to eligible Company employees and directors and to other non-employee service providers, including options to purchase the Company’s common stock and restricted stock awards at not less than the fair value of the Company’s common stock on the grant date and for a term of not greater than seven years. Awards are granted with service vesting requirements, performance vesting conditions, market vesting conditions, or a combination thereof. Subject to adjustment as defined in the 2006 LTIP, the aggregate number of shares available for issuance is 7,556,036. Stock-based incentive awards expire between five and seven years from the date of grant and generally vest over a one to four-year period from the date of grant.  As of June 30, 2011, 1,345,909 shares were available for grant under the 2006 LTIP. The expense related to stock-based incentive awards recognized for the three months ended June 30, 2011 and 2010 was $1,022 and $843, respectively. The expense related to stock-based incentive awards recognized for the six months ended June 30, 2011 and 2010 was $2,158 and $1,325, respectively.
 
A summary of the Company’s stock option activity for the six months ended June 30, 2011 is presented below:
 
 
June 30, 2011
 
Number of
Options
(in Shares)
 
Weighted
Average
Exercise
Price
 
Range of
Exercise Prices
Outstanding at beginning of period
2,533,947

 
$
11.82

 
$0.58-$34.23
Granted
493,423

 
5.18

 
$3.50-$6.20
Exercised
(80,796
)
 
1.38

 
$0.58-$4.30
Cancelled
(79,650
)
 
16.35

 
$0.58-$34.23
Forfeited
(33,676
)
 
8.70

 
$4.30-$13.90
Outstanding at end of period
2,833,248

 
$
10.87

 
$0.58-$34.23
Exercisable at end of period
1,482,730

 
$
13.63

 
$0.58-$34.23

 

11


 
 
Outstanding as of June 30, 2011
 
Exercisable as of June 30, 2011
Exercise Prices

 
Number Outstanding
 
Average
Remaining
Contractual Life
 
Weighted
Average
Exercise
Price per Share
 
Number Exercisable
 
Average
Remaining
Contractual Life
 
Weighted
Average
Exercise
Price per Share
 
 
(In Shares)
 
(In Years)
 
 
 
(In Shares)
 
(In Years)
 
 
$0.58 - $0.82

 
125,680

 
0.9

 
$
0.73

 
125,680

 
0.9

 
$
0.73

$2.40 - $3.99

 
111,474

 
6.2

 
3.47

 
12,474

 
1.0

 
2.87

$4.00 - $7.99

 
681,841

 
5.8

 
5.28

 
175,141

 
4.3

 
4.58

$8.00-$10.33

 
794,983

 
5.5

 
9.66

 
260,295

 
5.2

 
9.73

$10.34 - $14.09

 
550,137

 
4.1

 
11.49

 
340,812

 
3.3

 
11.85

$14.10 - $17.99

 
1,875

 
0.7

 
14.10

 
1,875

 
0.7

 
14.10

$18.00 - $23.53

 
389,210

 
2.4

 
18.05

 
388,405

 
2.4

 
18.05

23.54

 
14,547

 
2.7

 
23.54

 
14,547

 
2.7

 
23.54

$23.55 - $36.00

 
163,501

 
2.4

 
32.64

 
163,501

 
2.4

 
32.64

 

 
2,833,248

 
4.5

 
$
10.87

 
1,482,730

 
3.2

 
$
13.63

 
 
For awards with performance and/or service conditions only, the Company utilized the Black-Scholes option pricing model to estimate fair value of options issued, with the following assumptions (weighted averages based on grants during the period):

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
Risk-free interest rate
2.29
%
 
2.12
%
 
2.21
%
 
2.12
%
Expected term of options, in years
4.6

 
4.6

 
4.5

 
4.6

Expected annual volatility
70
%
 
70
%
 
70
%
 
70
%
Expected dividend yield
%
 
%
 
%
 
%
 
The weighted average grant-date fair value of options granted during the six months ended June 30, 2011 and 2010 was $2.96 and $5.68, respectively.

A summary of the Company’s restricted stock award activity for the six months ended June 30, 2011 is presented below:
 
 
June 30, 2011
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
Per Share
Unvested at beginning of year
557,776

 
$
8.91

Granted
255,917

 
4.31

Vested
(51,777
)
 
13.24

Forfeited
(169,328
)
 
8.63

Unvested at end of year
592,588

 
$
6.63


8.
Segment Information

As of June 30, 2011, the Company had two reportable segments: the Residential Business segment and the Commercial & Industrial, or C&I, Business segment. The Residential Business segment sells intelligent energy management solutions to utility customers for use in programs with residential and small commercial end-use participants.  These solutions include intelligent hardware, our IntelliSOURCE software and services, such as installation, customer acquisition marketing and program

12


management.  If the customer elects to own the intelligent energy management system, the Company refers to the program as a turnkey program.  If the Company enters into a fully-outsourced pay-for-performance agreement providing capacity or energy, in which it typically owns the intelligent energy management system, the Company refers to the program as a VPC program.  The VPC programs are pay-for-performance in that the Company is only paid for capacity that it provides as determined by a measurement and verification process with its customers.  The C&I Business segment provides intelligent energy management solutions to utilities and independent system operators that are managing programs or auctions for large C&I consumers.  These solutions are delivered through the management of C&I megawatts in open markets and VPC programs as well as through the completion of energy efficiency projects.  
 
Management has three primary measures of segment performance: revenue, gross profit and operating income. Substantially all of our revenues are generated with domestic customers. For VPC programs in the Residential Business segment, cost of revenue is based on operating costs of the demand response system, primarily telecommunications costs related to the system and depreciation of the assets capitalized in building the demand response system. For turnkey programs and other sales, product and service cost of revenue includes materials, labor and overhead.  In the C&I Business segment, cost of revenue includes participant payments for the VPC and open market programs as well as materials, labor and overhead for the energy efficiency programs.  Operating expenses directly associated with each operating segment include sales, marketing, product development, amortization of intangible assets and certain administrative expenses. 
 
The Company does not allocate assets and liabilities to its operating segments. Operating expenses not directly associated with an operating segment are classified as “Corporate Unallocated Costs.” Corporate Unallocated Costs include support group compensation, travel, professional fees and marketing activities. All inter-operating segment revenues were eliminated in consolidation.
 
For the three and six months ended June 30, 2010, the Company previously reported the results of operations in three segments: the Utility Products & Services segment, the Residential Business segment and the C&I Business segment. For the three and six months ended June 30, 2011, the former Utility Products & Services segment is presented as part of the Residential Business segment. The results of our energy efficiency programs were previously reported in the Residential Business segment. For the three and six months ended June 30, 2011, the energy efficiency programs are reported as part of the C&I Business segment.  Accordingly, the results of operations have been reclassified for the three and six months ended June 30, 2010 to conform to the presentation for the three and six months ended June 30, 2011.
 
The following tables show operating results for each of the Company’s operating segments:

 
Three Months Ended
June 30, 2011
 
Residential
Business
 
C&I
Business
 
Corporate
Unallocated
Costs
 
Total
Revenue
 
 
 
 
 
 
 
Product
$
7,663

 
$

 
$

 
$
7,663

Service
11,165

 
13,627

 

 
24,792

Total revenue
18,828

 
13,627

 

 
32,455

Cost of revenue
 

 
 

 
 

 
 

Product
6,355

 

 

 
6,355

Service
5,738

 
9,021

 

 
14,759

Total cost of revenue
12,093

 
9,021

 

 
21,114

Gross profit
6,735

 
4,606

 

 
11,341

Operating expenses
 

 
 

 
 

 
 

General and administrative expenses
3,766

 
1,393

 
6,000

 
11,159

Marketing and selling expenses
2,016

 
1,945

 
1,238

 
5,199

Research and development expenses
1,052

 

 

 
1,052

Amortization of intangible assets

 
234

 
2

 
236

Operating income (loss)
(99
)
 
1,034

 
(7,240
)
 
(6,305
)
Interest and other expense (income), net
4

 
(10
)
 
729

 
723

Income (loss) before income taxes
$
(103
)
 
$
1,044

 
$
(7,969
)
 
$
(7,028
)


13



 
Three Months Ended
June 30, 2010
 
Residential
Business
 
C&I
Business
 
Corporate
Unallocated
Costs
 
Total
Revenue
 
 
 
 
 
 
 
Product
$
5,294

 
$

 
$

 
$
5,294

Service
6,535

 
5,218

 

 
11,753

Total revenue
11,829

 
5,218

 

 
17,047

Cost of revenue
 

 
 

 
 

 
 

Product
4,382

 

 

 
4,382

Service
3,900

 
3,408

 

 
7,308

Total cost of revenue
8,282

 
3,408

 

 
11,690

Gross profit
3,547

 
1,810

 

 
5,357

Operating expenses
 

 
 

 
 

 
 

General and administrative expenses
4,119

 
1,233

 
3,862

 
9,214

Marketing and selling expenses
1,670

 
1,717

 
679

 
4,066

Research and development expenses
1,543

 

 

 
1,543

Amortization of intangible assets

 
532

 
4

 
536

Operating loss
(3,785
)
 
(1,672
)
 
(4,545
)
 
(10,002
)
Interest and other expense, net
3

 

 
288

 
291

Loss before income taxes
$
(3,788
)
 
$
(1,672
)
 
$
(4,833
)
 
$
(10,293
)

 
Six Months Ended
June 30, 2011
 
Residential
Business

 
C&I
Business
 
Corporate
Unallocated
Costs
 
Total
Revenue
 
 
 
 
 
 
 
Product
$
12,354

 
$

 
$

 
$
12,354

Service
21,732

 
16,994

 

 
38,726

Total revenue
34,086

 
16,994

 

 
51,080

Cost of revenue
 
 


 


 
 

Product
9,817

 

 

 
9,817

Service
10,719

 
11,436

 

 
22,155

Total cost of revenue
20,536

 
11,436

 

 
31,972

Gross profit
13,550

 
5,558

 

 
19,108

Operating expenses
 
 
 
 


 
 

General and administrative expenses
7,413

 
2,383

 
11,597

 
21,393

Marketing and selling expenses
3,786

 
3,810

 
2,692

 
10,288

Research and development expenses
2,101

 

 

 
2,101

Amortization of intangible assets

 
467

 
6

 
473

Operating income (loss)
250

 
(1,102
)
 
(14,295
)
 
(15,147
)
Interest and other expense (income), net
5

 
(9
)
 
1,656

 
1,652

Income (loss) before income taxes
$
245

 
$
(1,093
)
 
$
(15,951
)
 
$
(16,799
)



14


 
Six Months Ended
June 30, 2010
 
Residential
Business

 
C&I
Business
 
Corporate
Unallocated
Costs
 
Total
Revenue
 
 
 
 
 
 
 
Product
$
10,755

 
$

 
$

 
$
10,755

Service
11,181

 
8,492

 

 
19,673

Total revenue
21,936

 
8,492

 

 
30,428

Cost of revenue


 


 


 
 

Product
8,006

 

 

 
8,006

Service
6,499

 
5,851

 

 
12,350

Total cost of revenue
14,505

 
5,851

 

 
20,356

Gross profit
7,431

 
2,641

 

 
10,072

Operating expenses
 
 
 
 


 
 

General and administrative expenses
8,022

 
2,407

 
6,883

 
17,312

Marketing and selling expenses
3,533

 
3,872

 
1,439

 
8,844

Research and development expenses
2,908

 

 

 
2,908

Amortization of intangible assets

 
1,064

 
8

 
1,072

Operating loss
(7,032
)
 
(4,702
)
 
(8,330
)
 
(20,064
)
Interest and other expense (income), net
5

 
(5
)
 
353

 
353

Loss before income taxes
$
(7,037
)
 
$
(4,697
)
 
$
(8,683
)
 
$
(20,417
)
 

15



Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q and the documents incorporated into this Quarterly Report on Form 10-Q by reference contain forward-looking statements. These forward-looking statements include statements with respect to our financial condition, results of operations and business. The words “assumes,” “believes,” “expects,” “budgets,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or similar terminology identify forward-looking statements. These forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized, cause actual results to differ materially from our forward-looking statements and/or otherwise materially affect our financial condition, results of operations and cash flows. Please see the section below entitled “Risk Factors,” the section entitled “Risk Factors” in our Annual Report on Form 10-K (File No. 001-33399) filed with the Securities and Exchange Commission, or SEC, on March 9, 2011, and elsewhere in this filing for a discussion of examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. You should carefully review the risks described herein and in other documents we file from time to time with the SEC, including our other Quarterly Reports on Form 10-Q filed and to be filed in 2011. We caution readers not to place undue reliance on any forward-looking statements, which only speak as of the date hereof. Except as provided by law, we undertake no obligation to update any forward-looking statement based on changing circumstances or otherwise.
 
You should read the following discussion together with management’s discussion and analysis, financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 9, 2011 and the financials statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
 
Overview
 
Comverge is a leading provider of intelligent energy management, or IEM, solutions that empower utilities, commercial and industrial customers, and residential consumers to use energy in a more effective and efficient manner.  IEM solutions build upon demand response, enabling two-way communication between providers and consumers, giving all customer classes the insight and control needed to optimize energy usage and meet peak demand.  Beyond reducing the energy load, this new approach reduces cost for the utility or grid operator, integrates other systems and allows for the informed decision-making that will power the smart grid.
 
We provide our IEM solutions through our two reportable segments: the Residential Business segment and the Commercial & Industrial, or C&I, Business segment.  The Residential Business segment sells IEM solutions to utility customers for use in programs with residential and small commercial end-use participants.  These solutions include hardware, our IntelliSOURCE software and services, such as installation, customer acquisition marketing and program management.  If the utility customer elects to own the IEM system, we refer to the program as a turnkey program. If we provide capacity through fully-outsourced programs, in which we typically own the underlying system, we refer to the program as a Virtual Peaking Capacity, or VPC, program.  Our VPC programs are pay-for-performance in that we are only paid for capacity that we provide as determined by a measurement and verification process with our customers.  The C&I Business segment provides IEM solutions to utilities and independent system operators that are managing programs or auctions for large C&I consumers.  These solutions are delivered through the management of C&I megawatts in open markets and VPC programs as well as through the completion of energy efficiency projects.

Recent Developments

New Initiative Focused on Expense Reduction

On July 25, 2011, we announced a new initiative, which is focused on streamlining and simplifying operations to assist in accelerating our path to profitability. This initiative is expected to reduce annual expenses by $4.0 million to $4.5 million, which will result in a reduction in headcount and efficiencies gained from improved management of our supply chain, warehousing and corporate procurement functions. The cost of this initiative is anticipated to be approximately $1.0 million to $1.5 million and is expected to be primarily incurred during the third quarter of 2011. Under the initiative, we also expect to focus on reducing capital expenditures.


16


Annual Guidance
We will again begin providing updated annual guidance on a quarterly basis and will provide full year 2012 guidance when we report our fourth quarter and full year 2011 results. We expect 2011 annual revenues to range from $136 to $141 million.
Megawatts
 
We evaluate the megawatts of capacity that we own, manage or provide to the electric utility industry according to operating segment.  For capacity and turnkey contracts, we include the maximum contracted capacity as megawatts owned or managed at contract inception and present a comparison of contracted capacity to installed and available capacity in the discussion below. For open market programs, we include megawatts as megawatts owned or managed when we have enrolled a participant to fulfill the megawatt awarded to us in the open market program.  Megawatts owned under long-term capacity contracts or in open market programs generate recurring revenue while megawatts provided under turnkey contracts generate revenue at the point of sale. The following table summarizes megawatts owned, managed or provided as of June 30, 2011.
 
 
As of June 30, 2011
 
Residential
Business
 
C&I
Business
 
Total
Comverge
Megawatts owned/managed under capacity contracts
442

 
294

 
736

Megawatts owned for sale in open market programs
13

 
1,902

 
1,915

Megawatts managed under turnkey contracts
658

 
32

 
690

Megawatts managed for a fee on a pay-for-performance basis

 
437

 
437

Megawatts owned or managed
1,113

 
2,665

 
3,778

 
The table below presents the activity in megawatts owned or managed during the six months ended June 30, 2011.
 
 
 
Megawatts Owned or Managed
As of December 31, 2010
 
3,732

Capacity contracts (1)
 
(155
)
Open market programs
 
201

Turnkey contracts
 
-

As of June 30, 2011
 
3,778

 
(1)
Our VPC contract with NV Energy for 155 megawatts of contracted capacity is no longer in effect for 2011.

Payments from Long-Term Contracts

Payments from long-term contracts represent our estimate of total payments that we expect to receive under long-term agreements with our customers. The information presented below with respect to payments from long-term contracts includes payments related to our VPC contracts, energy efficiency contracts, turnkey contracts and open market programs. As of June 30, 2011, we estimated that our total payments to be received through 2024 were approximately $574 million. The long-term contracts that relate to these anticipated payments provide for payments as follows: $93 million in the second half of 2011 (a portion of which has already been reflected in revenue for the period ended June 30, 2011), $128 million in 2012, $145 million in 2013, $89 million in 2014 and the remaining $119 million thereafter.
 
These estimates of payments from long-term contracts are forward-looking statements based on the contractual terms and conditions. In management’s view, such information was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and, to management’s knowledge and belief, presents the assumptions and considerations on which we base our belief that we can receive such payments. However, this information should not be relied upon as being necessarily indicative of actual future results, and readers of this filing should not place undue reliance on this information. Any differences among these assumptions, other factors and our actual experiences may result in actual payments in future periods significantly differing from management’s current estimates of payments allowed under the long-term contracts and our actual experiences may result in actual payments collected being significantly lower than current estimates. See “Risk Factors—We may not

17


receive the payments anticipated by our long-term contracts and recognize revenues or the anticipated margins from our backlog or expected business, and comparisons of period-to-period estimates are not necessarily meaningful and may not be indicative of actual payments” in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 9, 2011.  The information in this section is designed to summarize the financial terms of our long-term contracts and is not intended to provide guidance on our future operating results, including revenue or profitability.
 
Our estimated payments from long-term contracts have been prepared by management based on the following assumptions:
 
VPC Programs
 
In calculating an estimated $227 million of payments from our VPC contracts, we have included expectations regarding build-out based on our historical experience as well as future expectations of participant enrollment in each contract’s service territory.  We have assumed that once our build-out phase is completed, we will operate our VPC contracts at the capacity achieved during build-out, which generally will be the contracted capacity.
 
The amount our utility customers pay to us at the end of each contract year may vary due to the results of measurement and verification tests performed each contract year based on the electric capacity that we made available to the utility during the contract year. The payments from VPC contracts reflect our most reasonable currently available estimates and judgments regarding the capacity that we believe we will provide our utility customer.
 
The amount of available capacity we are able to provide, and therefore the amount of payments we receive, is dependent upon the number of participants in our VPC programs. For purposes of estimating our payments under long-term contracts, we have assumed the rate of replacement of participant terminations under our VPC contracts will remain consistent with our historical average.

Energy Efficiency Programs
 
Our existing energy efficiency contracts as of June 30, 2011 represent potential remaining contracted capacity of 16 megawatts. In calculating an estimated $8 million in payments from these contracts, we have included expectations for build-out through contract end based on our historical experience. We have assumed that once our build-out is complete, the permanent base load reduction will remain installed and will continue to provide the installed capacity for the remainder of the contract term.
 
Open Market Programs
 
As of June 30, 2011, we had up to 1,213 megawatts bid into various capacity open market programs with PJM Interconnection, LLC. We currently expect to receive $188 million in long-term payments through the year 2015.  In estimating the long-term payments, we have assumed that we will retain our commercial and industrial participants that we have currently enrolled in the auctions and that we will be able to fulfill incremental capacity in certain programs with new enrollments.
 
Turnkey Programs
 
Our turnkey contracts as of June 30, 2011 represent $129 million in payments expected to be received through the year 2014 with seven utility customers to provide products, software, and services, including program management, installation, and/or marketing.  Payments from turnkey contracts are based on contractual minimum order volumes, forecasted installations and other services applied over the term of the contract.
 
Other Contracts
 
We expect to receive an estimated $22 million in payments through 2014 pursuant to currently executed contracts for our IEM solutions.
 
In addition to the foregoing assumptions, our estimated payments from long-term contracts assume that we will be able to meet on a timely basis all of our obligations under these contracts and that our customers will not terminate the contracts for convenience or other reasons. Our annual net loss in 2010, 2009 and 2008 was $31.4 million, $31.7 million and $94.1 million, respectively. We may continue to generate annual net losses in the future, including through the term of our long-term contracts. See “Risk Factors—We have incurred annual net losses since our inception, and we may continue to incur annual net losses in the future” in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 9, 2011.
 

18


We do not undertake any obligation to release the results of any future revisions that we may make to these estimated payments from long-term contracts to reflect events or circumstances occurring after the date of this filing.
 
Backlog
 
Our backlog represents our estimate of revenues from commitments, including purchase orders and long-term contracts, that we expect to recognize over the course of the next twelve months.  The inaccuracy of any of our estimates and other factors may result in actual results being significantly lower than estimated under our reported backlog.  Material delays, market conditions, cancellations or payment defaults could materially affect our financial condition, results of operation and cash flow.  Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of actual revenues.  As of June 30, 2011, we had contractual backlog of $125 million through June 30, 2012.

Results of Operations
 
Three and Six Months Ended June 30, 2011 Compared to Three and Six Months Ended June 30, 2010
 
Revenue
 
The following table summarizes our revenue for the three and six months ended June 30, 2011 and 2010 (dollars in thousands):
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2011
 
2010
 
Percent
Change
 
2011
 
2010
 
Percent
Change
Segment Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Business
 
$
18,828

 
$
11,829

 
59
%
 
$
34,086

 
$
21,936

 
55
%
C&I Business
 
13,627

 
5,218

 
161
%
 
16,994

 
8,492

 
100
%
Total
 
$
32,455

 
$
17,047

 
90
%
 
$
51,080

 
$
30,428

 
68
%

As of December 31, 2010, we reported the results of operations in two segments: our Residential Business segment and our C&I Business segment. In prior periods, including the three and six months ended June 30, 2010, we reported the results of operations in three segments: the Utility Products & Services segment, the Residential Business segment and the C&I Business segment.  For the three and six months ended June 30, 2011, the former Utility Products & Services segment is presented as part of the Residential Business segment.  Accordingly, revenue of $11.1 million and $20.2 million has been reclassified for the three and six months ended June 30, 2010, respectively, to reflect this change in reportable segments.  The results of our energy efficiency programs were previously reported in the Residential Business segment.  For the three and six months ended June 30, 2011, the energy efficiency programs are reported as part of the C&I Business segment.  Accordingly, revenue of $1.5 million and $2.6 million has been reclassified for the three and six months ended June 30, 2010, respectively, to reflect this change in reportable segments.
 
Residential Business
 
Our Residential Business segment had revenue of $18.8 million for the three months ended June 30, 2011 compared to $11.8 million for the three months ended June 30, 2010, an increase of $7.0 million or 59%. The increase in revenue is due to a $5.4 million increase from our turnkey programs as we continued to build out these programs during the three months ended June 30, 2011. We also recognized an increase of $2.1 million in revenue from two VPC programs. For our New Mexico program, the measurement and verification results completed in late 2010 are contractually applied to the current year. For our new Pennsylvania program, we recognized the contractual revenue earned based on our initial deployment.  We continue to defer the revenue and cost of revenue for our remaining three residential VPC programs.  The increase in revenue from turnkey and VPC programs was partially offset by a $0.5 million decrease in other products and services, mainly due to a decrease in stand-alone product sales.
 
During the three months ended June 30, 2011, we sold 86,000 units of digital control units and thermostats compared to 44,000 units of digital control units and thermostats during the three months ended June 30, 2010, an increase of 42,000 units mainly due to the build-out of digital control units in our turnkey programs.  For the three months ended June 30, 2011, our turnkey programs comprised 51% of total units sold compared to 45% during the three months ended June 30, 2010.


19


Our Residential Business segment had revenue of $34.1 million for the six months ended June 30, 2011 compared to $21.9 million for the six months ended June 30, 2010, an increase of $12.2 million or 55%. The increase in revenue is due to a $10.8 million increase from our turnkey programs as we continued to build out these programs during the six months ended June 30, 2011. We also recognized an increase of $3.4 million from two VPC programs. For our New Mexico program, the measurement and verification results completed in late 2010 are contractually applied to the current year. For our new Pennsylvania program, we recognized the contractual revenue earned based on our initial deployment.  We continue to defer the revenue and cost of revenue for our remaining three residential VPC programs. The increase in revenue from turnkey and VPC programs was partially offset by a $2.0 million decrease in other products and services, partially attributable to a decrease in stand-alone product sales.
 
During the six months ended June 30, 2011, we sold 146,000 units of digital control units and thermostats compared to 86,000 units of digital control units and thermostats during the six months ended June 30, 2010, an increase of 60,000 units mainly due to the build-out of digital control units in our turnkey programs.  For the six months ended June 30, 2011, our turnkey programs comprised 51% of total units sold compared to 37% during the six months ended June 30, 2010.

In August 2010, we were notified by the supplier of our thermostats, White-Rodgers, that White-Rodgers had filed with the Consumer Product Safety Commission, or CPSC, to address a product issue with the thermostats that White-Rodgers had shipped to Comverge.  White-Rodgers did not concede that the thermostats contained a defect or posed a substantial product hazard, but voluntarily proposed a corrective action plan to address thermostats in inventory and thermostats installed in the field.  In January 2011, the CPSC approved the corrective action plan.  White-Rodgers stated that it will provide compensation for our work in implementing the corrective action plan and, to date, we received a non-recurring payment during the first quarter of 2011 for a portion of our field work.  After the corrective action plan was approved and any needed remediation work was completed for our inventory, we resumed installing thermostats in our turnkey programs during the first quarter of 2011.  Please also see Part II, Item 1 “Legal Proceedings” of this report for additional information related to the White-Rodgers thermostats.
 
We defer revenue and direct costs under three of our residential VPC contracts until such revenue can be made fixed and determinable through a measurement and verification test, generally in our fourth quarter.  Deferred revenue and cost of revenue increased as of June 30, 2011 compared to December 31, 2010 due to our continued deployment and operation of the existing VPC programs. Deferred revenue and cost of revenue related to residential VPC contracts are presented below (dollars in thousands).
 
 
As of
 
 
 
June 30,
2011
 
December 31,
2010
 
Percent
Change
VPC Contract Related:
 
 
 
 
 
Deferred revenue
$
8,256

 
$
2,502

 
230
%
Deferred cost of revenue
$
3,339

 
$
1,041

 
221
%
 
C&I Business
 
Our C&I Business segment had revenue of $13.6 million for the three months ended June 30, 2011 compared to $5.2 million for the three months ended June 30, 2010, an increase of $8.4 million or 161%.  The increase in revenue is due to an increase of $6.4 million in open market program revenue, mainly from the recognition of $5.8 million in capacity revenue for the PJM program year beginning June 1, 2011 to May 31, 2012. We receive cash payments on a monthly basis in the capacity year and are required to curtail energy usage during the mandatory performance period of June through September, which is the peak demand season. In prior periods, we recognized the full program year revenue at the end of the mandatory performance period. In the current period, we have determined that we have sufficient historical data to recognize the capacity program revenue ratably over the mandatory performance period. Additionally, energy efficiency program revenue increased by $1.8 million due to the increase in annual payments that we received for maintaining the lighting upgrades originally installed as well as increased build-out compared to the three months ended June 30, 2010. The remaining increase of $0.2 million is due to other energy management services.

Our C&I Business segment had revenue of $17.0 million for the six months ended June 30, 2011 compared to $8.5 million for the six months ended June 30, 2010, an increase of $8.5 million or 100%.  The increase in revenue is due to an increase of $6.0 million in open market program revenue, mainly from the recognition of $5.8 million in capacity revenue for the PJM program year beginning June 1, 2011 to May 31, 2012 as discussed above. Additionally, energy efficiency program revenue increased

20


by $1.7 million due to the increase in annual payments that we received for maintaining the lighting upgrades originally installed as well as increased build-out compared to the six months ended June 30, 2010. The remaining increase of $0.8 million is due to other energy management services.
 
Gross Profit and Gross Margin
 
The following table summarizes our gross profit and gross margin for the three and six months ended June 30, 2011 and 2010 (dollars in thousands):

 
 
Three Months Ended
 
 
Six Months Ended
 
 
June 30,
 
 
June 30,
 
 
2011
 
2010
 
 
2011
 
2010
 
 
Gross
Profit
 
Gross
Margin
 
Gross
Profit
 
Gross
Margin
 
 
Gross
Profit
 
Gross
Margin
 
Gross
Profit
 
Gross
Margin
Segment Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Business
 
$
6,735

 
36
%
 
$
3,547

 
30
%
 
 
$
13,550

 
40
%
 
$
7,431

 
34
%
C&I Business
 
4,606

 
34
%
 
1,810

 
35
%
 
 
5,558

 
33
%
 
2,641

 
31
%
Total
 
$
11,341

 
35
%
 
$
5,357

 
31
%
 
 
$
19,108

 
37
%
 
$
10,072

 
33
%
 
As of December 31, 2010, we reported the results of operations in two segments: our Residential Business segment and our C&I Business segment. In prior periods, including the three and six months ended June 30, 2010, we reported the results of operations in three segments: the Utility Products & Services segment, the Residential Business segment and the C&I Business segment.  For the three and six months ended June 30, 2011, the former Utility Products & Services segment is presented as part of the Residential Business segment to reflect this change in reportable segments.  Accordingly, gross profit of $3.0 million and $6.1 million has been reclassified for the three and six months ended June 30, 2010, respectively.  The results of our energy efficiency programs were previously reported in the Residential Business segment.  For the three and six months ended June 30, 2011, the energy efficiency programs are reported as part of the C&I Business segment.  Accordingly, gross profit has been reclassified for the three and six months ended June 30, 2010 to reflect this change in reportable segments.
 
Residential Business
 
Gross profit for our Residential Business segment was $6.7 million for the three months ended June 30, 2011 compared to $3.5 million for the three months ended June 30, 2010, an increase of $3.2 million or 90%. The increase in gross profit is due to an increase of $1.6 million from our turnkey programs and $1.9 million from our New Mexico and Pennsylvania VPC programs partially offset by a decrease of $0.3 million from our other product and service sales.  The increase in gross profit from our turnkey programs is due to the increased revenue during the three months ended June 30, 2011. The increase in gross profit from our VPC programs is a result of the recognition of revenue and cost of revenue in the New Mexico program as the measurement and verification results completed in late 2010 are contractually applied to the current year as well as the initial deployment in our Pennsylvania program during 2011.  The gross profit from other product and service sales decreased, in part, due to the decrease in stand-alone product sales.
 
Gross margin for our Residential Business segment was 36% for the three months ended June 30, 2011 compared to 30% for the three months ended June 30, 2010. The increase of six percentage points is due to the higher gross margin contributed by the New Mexico and Pennsylvania VPC programs.

Gross profit for our Residential Business segment was $13.6 million for the six months ended June 30, 2011 compared to $7.4 million for the six months ended June 30, 2010, an increase of $6.1 million or 82%. The increase in gross profit is due to an increase of $3.7 million from our turnkey programs and $3.1 million from our New Mexico and Pennsylvania VPC programs partially offset by a decrease of $0.7 million from our other product and service sales.  The increase in gross profit from our turnkey programs is due to the increased revenue during the six months ended June 30, 2011. The increase in gross profit from our VPC programs is a result of the recognition of revenue and cost of revenue in the New Mexico program as the measurement and verification results completed in late 2010 are contractually applied to the current year as well as the initial deployment in our Pennsylvania program during 2011.  The gross profit from other product and service sales decreased, in part, due to the decrease in stand-alone product sales.
 
Gross margin for our Residential Business segment was 40% for the six months ended June 30, 2011 compared to 34% for the six months ended June 30, 2010. The increase of six percentage points is due to the higher gross margin contributed by the New

21


Mexico and Pennsylvania VPC programs as well as the non-recurring payment received from White-Rodgers during the first quarter of 2011 for a portion of our field work to implement the corrective action plan, as discussed previously.

 
C&I Business
 
Gross profit for our C&I Business segment was $4.6 million for the three months ended June 30, 2011 compared to $1.8 million for the three months ended June 30, 2010, an increase of $2.8 million or 154%. The increase in gross profit is due to an increase of $1.4 million from our open market programs, mainly from the change in recognition period of the PJM capacity program year beginning June 1, 2011 to May 31, 2012, as discussed above. Additionally, gross profit from energy efficiency programs increased by $1.6 million due to the increase in annual payments that we received for maintaining the lighting upgrades originally installed as well as increased build-out compared to the three months ended June 30, 2010. These increases were partially offset by a decrease of $0.2 million in our other energy management services.
 
Gross margin for the three months ended June 30, 2011 and 2010 was relatively consistent at 34% and 35%, respectively, due to higher margins from our energy efficiency programs offset by lower margins from our open market programs.  

Gross profit for our C&I Business segment was $5.6 million for the six months ended June 30, 2011 compared to $2.6 million for the six months ended June 30, 2010, an increase of $2.9 million or 110%. The increase in gross profit is due to an increase of $0.9 million from our open market programs, mainly from the change in recognition period of the PJM capacity program year beginning June 1, 2011 to May 31, 2012, as discussed above. Additionally, gross profit from our energy efficiency programs increased by $2.0 million due to the increase in annual payments that we received for maintaining the lighting upgrades originally installed as well as increased build-out compared to the six months ended June 30, 2010.
 
Gross margin for the six months ended June 30, 2011 and 2010 was 33% and 31%, respectively, an increase of two percentage points due to higher margins from our energy efficiency programs partially offset by lower margins from our open market programs.  
 
Operating Expenses
 
The following table summarizes our operating expenses for the three and six months ended June 30, 2011 and 2010 (dollars in thousands):

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2011
 
2010
 
Percent
Change
 
2011
 
2010
 
Percent
Change
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative expenses
 
$
11,159

 
$
9,214

 
21
 %
 
$
21,393

 
$
17,312

 
24
 %
Marketing and selling expenses
 
5,199

 
4,066

 
28
 %
 
10,288

 
8,844

 
16
 %
Research and development expenses
 
1,052

 
1,543

 
(32
)%
 
2,101

 
2,908

 
(28
)%
Amortization of intangible assets
 
236

 
536

 
(56
)%
 
473

 
1,072

 
(56
)%
Total
 
$
17,646

 
$
15,359

 
15
 %
 
$
34,255

 
$
30,136

 
14
 %
 
General and Administrative Expenses
 
General and administrative expenses were $11.2 million for the three months ended June 30, 2011 compared to $9.2 million for the three months ended June 30, 2010, an increase of $1.9 million or 21%. The increase in general and administrative expenses is due to an increase of $0.9 million in compensation and benefits as a result of increased headcount, $0.2 million in stock-based compensation, $0.3 million in professional and consulting fees, $0.2 million in depreciation expense and $0.3 million in other expenses.

General and administrative expenses were $21.4 million for the six months ended June 30, 2011 compared to $17.3 million million for the six months ended June 30, 2010, an increase of $4.1 million or 24%. The increase in general and administrative expenses is due to an increase of $1.8 million in compensation and benefits as a result of increased headcount, $0.8 million in stock-based compensation as we recorded a full six months of expense in 2011 for certain awards granted in mid to late 2010, $0.4 million in professional and consulting fees, $0.5 million in travel and entertainment, $0.3 million in depreciation expense

22


and $0.3 million in other expenses.
 

Marketing and Selling Expenses
 
Marketing and selling expenses were $5.2 million for the three months ended June 30, 2011 compared to $4.1 million for the three months ended June 30, 2010, an increase of $1.1 million or 28%. The increase in marketing and selling expenses was mainly due to an increase of $0.3 million in compensation and benefits, $0.5 million in commissions expense and $0.3 million in consulting expense.

Marketing and selling expenses were $10.3 million for the six months ended June 30, 2011 compared to $8.8 million for the six months ended June 30, 2010, an increase of $1.4 million or 16%. The increase in marketing and selling expenses was mainly due to an increase of $0.3 million in compensation and benefits, $0.7 million in commissions expense, $0.3 million in consulting expense and $0.1 million in other expenses.
 
Research and Development Expenses
 
Research and development expenses are incurred primarily in connection with the identification, testing and development of new products and software. Research and development expenses were $1.1 million for the three months ended June 30, 2011 and $1.5 million for the three months ended June 30, 2010, a decrease of $0.5 million or 32%. The decrease in research and development expenses is mainly due to our capitalization of certain labor costs related to the development of IntelliSOURCE version 2.0 and version 3.0 during the second quarter of 2011. The amortization of these capitalized software costs will be recorded to cost of revenue.

Research and development expenses were $2.1 million for the six months ended June 30, 2011 and $2.9 million for the six months ended June 30, 2010, a decrease of $0.8 million or 28%. The decrease in research and development expenses is mainly due to our capitalizing certain labor costs related to the development of IntelliSOURCE version 2.0 and version 3.0 during the first half of 2011.
 
Amortization of Intangible Assets
 
Amortization of intangible assets was $0.2 million for the three months ended June 30, 2011 compared to $0.5 million for the three months ended June 30, 2010, a decrease of $0.3 million or 56%. Amortization of intangible assets was $0.5 million for the six months ended June 30, 2011 compared to $1.1 million for the six months ended June 30, 2010, a decrease of $0.6 million or 56%. The decrease in amortization expense is due to the decrease in intangible assets as a result of our impairment assessment during the fourth quarter of 2010.  In addition to the amortization presented in operating expenses, we also recorded $0.2 million in amortization expense for each of the three months ended June 30, 2011 and 2010 and $0.4 million and $0.3 million for the six months ended June 30, 2011 and 2010, respectively, in cost of revenue.
 
Interest and Other Expense, Net
 
We recorded net interest and other expense of $0.7 million during the three months ended June 30, 2011 compared to $0.3 million during the three months ended June 30, 2010, an increase of $0.4 million. The increase in net interest and other expense is primarily due to the increased interest expense associated with our subordinated convertible loan agreement with Partners for Growth, or PFG, entered into on November 5, 2010 and amended effective March 31, 2011.

We recorded net interest and other expense of $1.7 million during the six months ended June 30, 2011 compared to $0.4 million during the six months ended June 30, 2010, an increase of $1.3 million. The increase in net interest and other expense is primarily due to the increased interest expense associated with our subordinated convertible loan agreement with PFG entered into on November 5, 2010 and amended effective March 31, 2011, as well as a $0.5 million charge to write off unamortized debt issuance costs during the first quarter of 2011 related to the modification of the PFG agreement.
 
Income Taxes
 
A provision of $18,000 and $55,000 was recorded for the three months ended June 30, 2011 and 2010, respectively, related to a deferred tax liability and current state tax payable. A provision of $33,000 and $115,000 was recorded for the six months ended June 30, 2011 and June 30, 2010, respectively, related to a deferred tax liability and current state tax payable. We provided a full valuation allowance for our deferred tax assets because the realization of any future tax benefits could not be sufficiently assured as of June 30, 2011 and 2010.

23



 Liquidity and Capital Resources
 
The Company has incurred losses since inception, resulting in an accumulated deficit of $232.8 million and stockholders' equity of $31.4 million as of June 30, 2011. Working capital as of June 30, 2011 was $23.9 million, consisting of $68.4 million in current assets and $44.6 million in current liabilities, including $3 million of long-term debt due within one year.   Our total long-term debt as of June 30, 2011 was $20.3 million, excluding the $3 million included in current liabilities. Further, we anticipate spending approximately $4 million to $7 million on capital expenditures during the second half of fiscal 2011.

We had aggregate available borrowing capacity under our Silicon Valley Bank, or SVB, loan agreement of $5.1 million as of June 30, 2011; however, to the extent that we do not maintain at least $20 million of unrestricted cash at all times, then this additional capacity is not available to us and could cause other potential defaults in our borrowing arrangements such that all outstanding debt could become due.  Even with our anticipated revenue growth or cash expenditure reductions, it is possible that the Company's cash balance may fall below $20 million. Should the Company's unrestricted cash balance fall below $20 million and the Company's borrowing capacity be consequently reduced, any amounts the Company owes to SVB in excess of the Company's reduced borrowing capacity will become immediately due and payable under our SVB loan agreement. Further, if we do not achieve certain revenue growth targets (i.e. $99.7 million in revenue for the nine months ending September 30, 2011 and $139.8 million in revenue for the year ending December 31, 2011), Partners for Growth III, L.P., or PFG, has the right, but not the obligation, to begin requiring quarterly repayments of the loan balance over the remaining term of the PFG loan. Such payments would be front-loaded, such that 45% of the loan balance (approximately $6.8 million as of June 30, 2011) would be due over the first twelve months after PFG's election. If PFG exercises its Amortization Right (as defined in the loan agreement) and the Company subsequently complies with succeeding measurements periods, the Company may prospectively cease monthly amortization of the loan, provided however, PFG may again exercise its Amortization Right under the loan agreement if the Company fails to meet future minimum revenue targets. Also, any failure by the Company to pay any obligations that become due and payable may constitute an event of default under the SVB loan agreement or PFG loan. Such event of default could enable SVB or PFG to accelerate all amounts due under their respective loans or exercise other remedies available to them under the respective loan agreements. Further, any payment of such immediately due and payable obligations under the SVB loan agreement may cause us to breach certain financial covenants of either the SVB or PFG loan agreements. Any such breach of financial covenants would constitute an event of default under such agreements, enabling SVB or PFG to exercise their remedies under their respective agreements, including acceleration of all amounts due thereunder.

Management believes that there are various options available for effective and reasonable capitalization of the Company that will allow for sufficient cash on hand to continue operations for the next 12 months. Management will continue to actively explore all such financing options, including restructuring of our current credit facilities in the near term. Our ability to secure additional capital, modify our existing debt terms to meet our projected revenue growth or cash expenditure reductions cannot be assured, and in such event, this could have a material adverse impact on our liquidity, financial position and results of operations.
 
The following table summarizes our cash flows for the six months ended June 30, 2011 and 2010 (dollars in thousands):
 
 
Six Months Ended
 
June 30,
 
2011
 
2010
Operating activities
$
(7,794
)
 
$
(10,244
)
Investing activities
22,837

 
6,353

Financing activities
(1,438
)
 
(1,746
)
Net change in cash and cash equivalents
$
13,605

 
$
(5,637
)
 
Cash Flows Used in Operating Activities
 
Cash used in operating activities was $7.8 million for the six months ended June 30, 2011 compared to $10.2 million for the six months ended June 30, 2010, a decrease of $2.5 million.  The change in cash flows from operating activities included a decrease in net loss of $4.9 million, after adjusting for non-cash items including depreciation, amortization and stock-based compensation.  The remaining change of $2.4 million in cash flows from operating activities was a result of the change in operating assets and liabilities, primarily an increase in the change in accounts receivable due to increased billings in our new turnkey programs as well as timing of cash receipts and a decrease in the change in deferred revenue due to the recognition of revenue from the New Mexico residential VPC program and the expiration of our Nevada VPC contract in 2010.

24


 
Cash Flows Provided by Investing Activities
 
Cash provided by investing activities was $22.8 million for the six months ended June 30, 2011 compared to cash provided by investing activities of $6.4 million during the six months ended June 30, 2010, an increase of $16.5 million.  The increase was due to a change in marketable securities of $18.7 million as we sold certain marketable securities and allowed others to mature in order to reinvest those funds in more liquid cash and cash equivalents.  Additionally, we incurred increased capital expenditures during the six months ended June 30, 2011 as we invested in our network operations and data center, capitalized certain software development costs, and continued to build out our IEM networks in existing VPC programs.
 
Cash Flows Used in Financing Activities
 
Cash flows used in financing activities were $1.4 million and $1.7 million for the six months ended June 30, 2011 and 2010, respectively, mainly consisting of $1.5 million in payments, net of borrowings, of our SVB debt facility during both periods.

 Indebtedness
 
As of June 30, 2011, $3.0 million of our outstanding debt was due within the next twelve months and $1.5 million of our outstanding debt is due during the second half of 2011.  As of June 30, 2011, we were in compliance with the financial and restrictive debt covenants of our outstanding debt facilities.
 
Letters of Credit
 
Our facility with SVB provides for the issuance of up to $30.0 million of letters of credit. As of June 30, 2011, we had $21.5 million face value of irrevocable letters of credit outstanding from the facility.  Additionally, we have $1.2 million of cash collateralized letters of credit outstanding, which are presented as a portion of the restricted cash in our financial statements.
 
Capital Spending
 
Our residential VPC programs require a significant amount of capital spending to build out our demand response systems. We expect to incur approximately $11 million in capital expenditures, primarily over the next three years, to continue building out our existing VPC programs, of which $2 million to $4 million is anticipated to be incurred through December 31, 2011. If we are successful in being awarded additional VPC contracts, we would incur additional amounts to build out these new VPC programs.
 
Over the last few months, we have significantly upgraded the technology infrastructure that supports our solutions, for the purpose of providing our clients with the reliability as well as increased flexibility to run the demand management solutions, including testing and deploying our IntelliSOURCE platform.  We expect to incur approximately $2 million to $3 million in additional capital expenditures through December 31, 2011 as we complete the upgrade to our infrastructure.
 
Non-GAAP Financial Measures
 
Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA, is defined as net loss before net interest expense, income tax expense, and depreciation and amortization. EBITDA is a non-GAAP financial measure and is not a substitute for other GAAP financial measures such as net loss, operating loss or cash flows from operating activities as calculated and presented in accordance with accounting principles generally accepted in the U.S., or GAAP. In addition, our calculation of EBITDA may or may not be consistent with that of other companies. We urge you to review the GAAP financial measures included in this filing and our consolidated financial statements, including the notes thereto, and the other financial information contained in this filing, and to not rely on any single financial measure to evaluate our business.
 
EBITDA is a common alternative measure of performance used by investors, financial analysts and rating agencies to assess operating performance for companies in our industry. Depreciation is a necessary element of our costs and our ability to generate revenue. We do not believe that this expense is indicative of our core operating performance because the depreciable lives of assets vary greatly depending on the maturity terms of our VPC contracts. The clean energy sector has experienced recent trends of increased growth and new company development, which have led to significant variations among companies with respect to capital structures and cost of capital (which affect interest expense). Management views interest expense as a by-product of capital structure decisions and, therefore, it is not indicative of our core operating performance.
 
We define Adjusted EBITDA as EBITDA before stock-based compensation expense. Management does not believe that stock-

25


based compensation is indicative of our core operating performance because the stock-based compensation is fixed at the grant date, then expensed over a period of several years after the grant date, and generally cannot be changed or influenced by management after the grant date.
 
A reconciliation of net loss, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA for each of the periods indicated is as follows (dollars in thousands):

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
Net loss
$
(7,046
)
 
$
(10,348
)
 
$
(16,832
)
 
$
(20,532
)
Depreciation and amortization
984

 
1,002

 
1,923

 
1,988

Interest expense, net
633

 
292

 
1,589

 
357

Provision for income taxes
18

 
55

 
33

 
115

EBITDA
(5,411
)
 
(8,999
)
 
(13,287
)
 
(18,072
)
Non-cash stock compensation expense
1,022

 
843

 
2,158

 
1,325

Adjusted EBITDA
$
(4,389
)
 
$
(8,156
)
 
$
(11,129
)
 
$
(16,747
)
 
Non-GAAP Net Loss and Net Loss per Share (Basic and Diluted)
 
We believe that the presentation of non-GAAP net loss, which is a measure that adjusts for the impact of stock-based compensation expense and amortization expense for acquisition-related assets, provides investors and financial analysts with a consistent basis for comparison across accounting periods and, therefore, is useful to investors and financial analysts in helping them to better understand our operating results and underlying operational trends.
 
Although stock-based compensation is an important aspect of the compensation of our employees and executives, stock-based compensation expense is generally fixed at the time of grant, then expensed over a period of several years after the grant of the stock-based award, and generally cannot be changed or influenced by management after the grant.

We do not acquire intangible assets on a predictable cycle.  Amortization costs are fixed at the time of an acquisition, are then amortized over a period of several years after the acquisition, and in some cases, the remaining value of acquired intangibles and goodwill is decreased due to impairment charges.  In addition to amortization expense, we record tax expense related to tax deductible goodwill, arising from certain prior acquisitions.  These expenses generally cannot be changed or influenced by management after the acquisition.
 
A reconciliation of net loss, the most directly comparable GAAP measure, to non-GAAP net loss for each of the fiscal periods indicated is as follows (dollars in thousands):


26


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
Net loss
$
(7,046
)
 
$
(10,348
)
 
$
(16,832
)
 
$