Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x
|
Annual
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
|
For
the fiscal year ended December 31, 2009
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)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each Class
|
Name
of Exchange on Which Registered
|
Common
stock, par value $0.001
|
Nasdaq
Global Market
|
Securities
registered pursuant to Section 12(g) of the Act:
Title
of Each Class
Not
Applicable
Indicate
by check mark if the Registrant is a well-known seasoned issuer as defined in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No x
Indicate
by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes x No ¨
|
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 ¨
No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ¨
|
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
|
Large
accelerated filer ¨ Accelerated
filer x 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 x
The
aggregate market value of shares of the Registrant’s common stock, par
value $0.001 per share, held by non-affiliates of the Registrant on
June 30, 2009, the last business day of the Registrant’s most
recently completed second fiscal quarter, was $254,836,515 (based on the
closing sales price of the Registrant’s common stock on the Nasdaq Global
Market on such date).
|
At
March 3, 2010, there were 25,068,842 shares of the Registrant’s common
stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s Proxy Statement for the 2010 Annual Meeting of Stockholders
are incorporated herein by reference in Part III of this Annual Report on Form
10-K to the extent stated herein. Such Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days of the Registrant’s fiscal
year ended December 31, 2009.
Comverge,
Inc.
Form
10-K for the Year Ended December 31, 2009
Index
Page
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Part
I
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1
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11
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22
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23
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23
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Item 4. | Reserved |
23
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Part
II
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23
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25
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27
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48
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49
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81
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81
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81
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Part III
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82
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82
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82
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82
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82
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Part
IV
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83
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DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K and the documents incorporated into this Annual
Report on Form 10-K 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, including our
projections related to our revenues in 2010. 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” 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 Securities and Exchange Commission,
including Quarterly Reports on Form 10-Q to be filed in 2010. 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.
Part
I
Business
|
Business
Overview
We are a
clean energy company providing technologically advanced demand management
solutions and load capacity which improve the evolving Smart Grid. We
provide our solutions to electric utilities, grid operators and associated
electricity markets. As an alternative to the traditional method of
providing capacity by building a new power plant, we deliver our solutions
through demand management products, services and systems that decrease energy
consumption. Our demand management solutions utilize state-of-the-art
advancements in hardware, software, and services—the solutions are designed,
built and operated for the benefit of our customers, which serve residential,
commercial and industrial consumers. We provide capacity to our
customers either through long-term contracts or through open markets where we
actively manage electrical demand or by selling demand management solutions to
utilities that operate such solutions. The capacity we deliver is
more environmentally friendly and less expensive than conventional alternatives
and has the benefit of increasing overall system reliability.
We
believe we are the largest demand management service provider servicing all
classes of energy consumers: residential, commercial and
industrial. As of the date of this filing, we had 1,015 megawatts
under long-term capacity contracts which we expect to contribute to contracted
future revenues of $498 million. Of these amounts, 117 megawatts of
capacity under long-term contracts representing an expected $32 million in
contracted future revenues, are still awaiting regulatory
approval. Furthermore, we have been awarded 683 megawatts of capacity
in the 2012- 2013 PJM Economic Load Response Program, or ELRP. If we
receive all necessary regulatory approvals and we secure enough load to fully
meet our obligations under the 2012-2013 PJM ELRP, our total megawatts managed
will exceed 3,300.
We
provide our clean energy solutions through our three reporting segments: the
Utility Products & Services segment, the Residential Business segment, and
the Commercial & Industrial, or C&I, Business segment. The
Utility Products & Services segment sells solutions comprising hardware, our
Apollo® software and services, such as installation, marketing, IT integration
and project management, to utilities that elect to own and operate demand
management networks for their own benefit. The Residential Business
segment sells electric capacity to utilities under long-term contracts, either
through demand response or energy efficiency, primarily through marketing and
installing our devices on residential and small commercial end-use
participants. The Residential Business segment also provides
marketing services. The C&I Business segment provides demand
response and energy management services to utilities and associated electricity
markets that enable commercial and industrial customers to reduce energy
consumption and total costs, improve energy infrastructure reliability and make
informed decisions on energy and renewable energy purchases and
programs.
The
Comverge Solution
Our clean
energy solutions enable our electric utility industry customers and open market
operators to address issues they confront on a daily basis, such as rising
demand, decreasing supply, fluctuating commodity prices, reducing greenhouse
gases and emerging mandates to use energy efficiency solutions to address these
issues. Our solutions consist of energy efficiency and demand
response offerings. Our energy efficiency offerings allow utilities
to reduce base load capacity which helps to improve system
reliability. Our demand response offerings enable our customers to
reduce demand for electricity during peak hours, when strain on the system is
greatest.
1
More
specifically, our solutions yield the following benefits to our commercial and
industrial customers, electric utility industry customers and open market
operators:
Improve the Developing Smart Grid
through Advanced, Multi-functioning Solution Sets. We offer
our customers demand management solutions to match their needs for improving and
advancing a smarter electrical grid. Our state-of-the-art Apollo
software system provides demand management functionality, enabling control of
various end-use devices and systems, integration into the utilities back office
operational systems, and interoperability with Advanced Metering Infrastructure,
or AMI. In conjunction with our software, our solution set includes
multiple service offerings, including engineering and energy audits, project
management, installation, marketing, measurement and verification, among
others. These services allow our utility customers to tailor their
programs to achieve better marketing penetration rates, lower installation
costs, and real time verification of the functionality of their
system. Our hardware products complete our solution set through
offering technologically advanced functionality for various residential and
C&I demand management devices. Through providing a solution to
our customers’ issues, we are able to offer our own individual products and
services, or integrate other companies’ products into our solution – ultimately
improving the developing Smart Grid.
Provide an Alternative to Building
Expensive New Plants and Associated Transmission and Distribution
Infrastructure. We reduce our customers’ capital expenditures
and costs for electric transmission and distribution. Our solutions
can be directly substituted for new power generation facilities that would
otherwise be built to satisfy either peak periods of electricity demand or the
expected increase in base load demand. Our demand management systems
require significantly lower short-term capital expenditures than a natural
gas-fired power plant, and our pay-for-performance capacity solutions require no
capital expenditures on the part of electric utilities. By avoiding
the build-out of new generation, utilities can also avoid building the
incremental new transmission and distribution assets needed to bring power from
the location where it is generated to where it is consumed, thereby further
reducing required capital expenditures.
Improve System Reliability and
Operational Flexibility. Our clean energy solutions enhance
the reliability of the electric grid by providing the ability to reduce power
consumption in specific distribution areas during times of peak energy demand
and emergency conditions, thereby relieving strain on the aging grid
infrastructure. With our demand management systems, our customers
gain the benefit of more reliable infrastructure and lower operating costs
associated with fewer emergency maintenance and customer care
issues. In addition to improving system reliability, our targeted
approach focuses on specific distribution areas which may also reduce or delay
the need for new capital investment in transmission and distribution
infrastructure. For example, once deployed, our Virtual Peaking
Capacity®, or VPC, and our turnkey programs become operational, or ramp up, much
more rapidly than natural gas-fired power plants. Our clean energy
solutions typically require less than five minutes to reduce and to shift the
amount of energy consumption. In addition, our technology enables
devices to be controlled both individually and in clusters, thereby allowing
those devices to be operated at the time and location (i.e. at a substation,
circuit or feeder) required to manage localized constraints and/or emergency
conditions. We are also a curtailment service provider in demand
capacity markets in certain service territories across the United States.
Several major grid operators, including PJM Interconnection, New York
Independent System Operator, New England Power Pool and Electric Reliability
Council of Texas, have active demand capacity markets in which our commercial
and industrial consumers participate through our demand response
solutions. We first identify available demand response capacity and
then register and facilitate the sale of that capacity in the open market on
behalf of our commercial and industrial participants.
Save Costs for Electricity
Consumers. Certain of our solutions enable residential,
commercial and industrial consumers to receive time-of-use electricity price
signals, thereby allowing them to match electricity use with the costs to
purchase such electricity. Consumers who deploy our solutions can
realize cost savings on their electric bills by using less energy, particularly
during peak periods when prices are the highest, or shifting their usage to
times when electricity is less expensive.
Conserve and Create a Positive
Environmental Impact. Our demand management solutions allow
electric utilities to reduce both peak and permanent load through our demand
response and energy efficiency programs, respectively. Our demand
response programs provide electric utilities with similar functionality to the
peaking capacity typically provided by natural gas-fired power plants while also
providing clean alternative energy. By reducing electricity demand
during peak times, our demand response programs also have the potential to
displace older, inefficient peaking power plants and can reduce the operating
time of intermediate plants. By substituting our programs for new
natural gas-fired power generation facilities, utilities are able to conserve
electricity and reduce greenhouse gases and pollutants.
2
Enable Electric Utilities to Meet
Regulatory Mandates. Federal and state legislation over the
past five years has stimulated the developing Smart Grid and has mandated that
the Federal Energy Regulatory Commission and the Department of Energy provide
detailed assessments and recommendations for demand response
initiatives. We work closely with federal and state regulators and
electric utilities to formulate and coordinate effective demand response
solutions in light of these regulatory developments/mandates. This
legislation also calls for advanced technologies for demand response, energy
efficiency, smart metering, and distributed generation, including digital
information capabilities to implement these technologies. This
includes a Smart Grid policy using a national task-force, modernization through
deployment of “smart” technologies, a new communications and an
inter-operability framework, research and development, and removal of the
barriers to Smart Grid roll-out. Federal grants and matching funds
are being deployed to spur Smart Grid investments.
Comverge
Strategy
We intend
to continue to grow and expand our position in the clean energy sector by
pursuing the following strategic objectives:
Increase Market
Penetration. We intend to further penetrate the clean energy
sector by:
•
|
identifying
the needs of and providing additional solutions to new and existing
customers;
|
•
|
securing
additional long-term contracts as a growing proportion of our
revenues;
|
•
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effectively
matching product innovations with the future needs of our customers,
including AMI rollouts designed to migrate North America to a smart
electricity grid; and
|
•
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expanding
both our sales force and the scope of our commercial and industrial demand
response offerings, conservation, energy efficiency solutions and other
clean energy alternatives throughout North
America.
|
Expand the Market for our Clean
Energy Solutions. We intend to continue demonstrating the
effectiveness of our capacity programs in order to secure additional long-term
contracts with existing and future customers by:
•
|
marketing
to and educating existing and prospective customers, consumer advocates,
consultants and industry experts about the benefits of demand response,
energy efficiency and capacity programs;
and
|
•
|
working
with utilities, state regulators and local, state and federal governmental
agencies, such as the Department of Energy, the Environmental Protection
Agency and the Federal Energy Regulatory Commission, to explain the
benefits of demand management and obtain rate treatment similar to
supply-side resources, such that electric utilities are allowed to earn a
rate of return on the capital invested in demand response
resources.
|
Develop New Distribution Channels
Through Strategic Alliances. We are focused on expanding our
current strategic alliances and identifying new strategic
relationships. We intend to leverage these relationships to achieve
greater adoption of our products and services by, and bring new offerings to
market for, our electric utility customers through bundled
offerings.
Continue to be an Innovative Leader
in our Markets. From 2006 to 2009, we invested approximately
$7.8 million in research and development alone. We intend to continue
such activity, in addition to capturing operational and technical knowledge
gained from the AMI, Smart Grid offerings. This will enable us to
develop new and innovative solutions to better serve our existing electric
utility customer base, large C&I customers, and to appeal to new
customers. We believe that this investment will allow us to realize
new revenue opportunities and decrease our operating costs, thereby enabling us
to remain competitive and to maintain our leading market position.
Pursue Targeted Strategic
Opportunities. We intend to pursue strategic relationships and
opportunities to strengthen our competitive position in the clean energy
sector. This sector is comprised of a number of companies with niche
offerings or customer relationships, which provide attractive opportunities,
whether through acquisition, partnering, or joint alliances. In
addition, we will continue to evaluate international opportunities as they
present themselves.
3
Segments
As of
December 31, 2009, we reported our results of operations in three operating
segments: our Utility Products & Services segment, our Residential Business
segment and our Commercial & Industrial Business segment. We evaluate the
megawatts of capacity that we own, manage or provide to the electric utility
industry according to operating segment. Megawatts owned or managed
generate recurring revenue while megawatts provided through product sales
generate revenue at the point of sale. The following table summarizes
megawatts owned, managed or provided through product sales as of December 31,
2009.
As
of December 31, 2009
|
|||||||
Commercial
&
|
|||||||
Utility
Products
|
Residential
|
Industrial
|
Total
|
||||
&
Services
|
Business
|
Business
|
Comverge
|
||||
Megawatts
owned under long-term capacity contracts (1) (2)
|
-
|
628
|
270
|
898
|
|||
Megawatts
owned for sale in open market programs
|
-
|
40
|
1,154
|
1,194
|
|||
Megawatts
owned under turnkey contracts
|
370
|
-
|
-
|
370
|
|||
Megawatts
managed for a fee on a pay-for-performance basis
|
-
|
-
|
437
|
437
|
|||
Megawatts
owned or managed
|
370
|
668
|
1,861
|
2,899
|
|||
Megawatts
provided through product sales (3)
|
6,434
|
-
|
-
|
6,434
|
|||
Total
megawatts owned, managed or provided
|
6,804
|
668
|
1,861
|
9,333
|
(1)
|
Our
VPC contract with Nevada Energy for 143 megawatts of contracted capacity
expired on January 1, 2010. While we are working on extending
our relationship with Nevada Energy, we will remove the 143 megawatts from
our contracted capacity amount in the first quarter of 2010 if we do not
enter into a contractual relationship with Nevada Energy relating to those
megawatts.
|
(2)
|
Does
not include 117 megawatts of contracted capacity for the C&I VPC
contract with a major Virginia-based energy provider, which was executed
in July 2009, for which we are awaiting the receipt of regulatory
approval.
|
(3)
|
Determined
based on 1.3 kilowatts per load control device (based on each device
cycling, on average, between 50% and
100%).
|
Megawatts owned under long-term
capacity contracts. We directly develop, operate and manage
the entire demand management system for certain residential, commercial and
industrial customers. Our VPC programs offer us the distinct advantage of owning
and operating the underlying assets used in these programs. These programs,
reported under our Residential Business and Commercial & Industrial Business
segments, provide us with long-term revenue streams based on the capacity, or
megawatts, provided by our programs. We refer to the megawatts provided under
our VPC programs and megawatts provided under our energy efficiency programs as
megawatts owned under long-term capacity contracts.
Megawatts owned for sale in open
market programs. We own and manage megawatts in open market
programs with grid operators. In these programs, we aggregate megawatts from
consumer loads, provide them to the market and operate them based on the
specific parameters of the market and load suppliers. The contracts underlying
these open market programs range in length from one to three years, reflecting
the different grid operator markets. We refer to the megawatts these programs
provide as megawatts provided for sale in open market programs.
Megawatts owned under turnkey
contracts. The Utility Products & Services segment also offers load
control programs in which the utility maintains ownership of the underlying
asset but where we provide product, software and services. These
services may include without limitation installation, call center, project
management, IT integration, measurement and verification analysis, and/or
marketing. We refer to these megawatts as megawatts provided under
turnkey contracts.
Megawatts managed for a fee on a
pay-for-performance basis. We manage megawatts in open market
programs for certain utility customers. We are paid based on the
performance of those megawatts and do not own the underlying megawatts. We refer
to these megawatts as megawatts managed for a fee on a pay-for-performance
basis.
Megawatts provided through product
sales. We sell products, combined with software, which electric utilities
use to build their own demand response programs. We refer to these megawatts,
reported under the Utility Products & Services segment, as megawatts
provided through product sales.
4
Utility
Products & Services
Our
Utility Products & Services segment offers a broad range of products from
basic one-way load control switches to technologically sophisticated smart
thermostats, in-home displays, and comprehensive two-way data collection and
control systems. AMI involves using hardware and software products to enable
two-way communication between the utility and the home. Enabling two-way
communication offers the utility and homeowner real-time information on energy
usage, service disruption, and billing information. The typical sale involves
both hardware and software. We provide the hardware that is installed at a
utility consumer’s location on high-energy consumption equipment, such as
central air conditioning. Our software applications send wireless messages to
manage and control our hardware. Upon receiving the messages, our hardware, in
turn, reduces the length of time the equipment operates, thereby making electric
capacity available to the utility. Our advanced metering products consist of
hardware that is installed at a utility’s residential or business customer’s
electric meter. These devices collect information from the meter and transmit it
through a software application where it is then stored on servers. This
information is used by the utility to manage electricity consumption, analyze
usage trends and generate billing information.
Our
products address the entire range of the Smart Grid market because our products
include one and two-way devices and virtually every communication mode,
including wireless internet, VHF paging, telephone, broadband cable, cellular
and radio frequency communication. The sales arrangement is usually either an
upfront or multi-year sale of hardware and the grant of a software license,
coupled with a software maintenance and support agreement. The following
summarizes the products reported through our Utility Products & Services
segment:
|
•
|
Apollo Demand Response
Management System Software is a next-generation demand
response platform capable of integrating with legacy paging systems and
future AMI deployments, with the ability to provide
two-way,
|
|
real-time
communication between utilities and their customers of all classes,
including commercial and industrial customers, small business owners, and
residential customers. Apollo is based on an open-standards
approach and is designed
with four fundamental functional elements in mind that are required to
support the emerging Smart Grid transformation. These four fundamental
elements are (1) communication, (2) command and control, (3) data
management and (4) knowledge
applications.
|
|
•
|
Load Management
Solutions is offered by the utility to residential customers
who are typically on a fixed rate from the utility. Our load management
solutions include home energy management products such as the digital
control unit and SuperStat smart thermostat, and In-Home Display as well
as PowerCAMP load management software. These solutions offer the customer
a way to manage, operate and maintain the electrical
load.
|
|
•
|
Advanced Meter Reading
Systems is offered by the utility to residential and small
commercial customers that are on a time-of-use rate system and also used
for frequent meter reading by large commercial and industrial customers.
Our advanced meter reading systems include products such as Maingate Home
and Maingate Commercial and Industrial as well as PowerCAMP metering
software. These solutions offer the customer a way to collect, manage and
analyze the use of electrical load.
|
|
•
|
Virtual SCADA Systems
is offered to electric utilities to monitor and control distribution
equipment and systems such as substations, grid equipment and remote
generators. Our virtual SCADA systems include products such as digital
capacitor control and service reconnect/disconnect devices as well as
complementing PowerCAMP real-time
software.
|
Our
Utility Products & Services segment also offers load control programs, which
we refer to as turnkey programs. Our turnkey programs are targeted for utilities
that not only need to purchase capacity and/or services but also want to own the
underlying assets. Utilities can contract with us for load control program
design, build-out and operational services, such as marketing and program
management. These arrangements allow the utility to retain ownership of the
underlying assets while enhancing operational performance and decreasing the
need for the utility to pursue other solutions that would require large upfront
capital investment.
Residential
Business
Our
Residential Business offers solutions that address both peak and base load
demands for residential and small commercial end consumers. Peak load demand,
defined as the maximum capacity of electricity required over a specified time,
is dynamic in nature and places the greatest stress on the grid system due to
both the elevated levels and fluctuating duration of demand. In this operating
environment, our VPC technology and management program, as described below, is
utilized to alleviate system stress by providing additional timely capacity to
electric utilities. Base load is defined as the amount of electricity required
to meet average minimum demands. In this operating environment, we offer energy
efficiency solutions utilizing a comprehensive project approach that provides
permanent base load reduction. Our team develops and implements solutions
incorporating energy efficiency sector expertise in categories including, among
others, lighting, mechanical design, building automation, power quality, energy
consulting services and energy information retrieval and analysis.
5
Our
offerings described below provide enhanced reliability to our customers in light
of the complex and unique nature of these load environments.
Virtual
Peaking Capacity (VPC) Program
Our VPC
offerings compete in the peak capacity markets and provide a solution to
alleviate stress on the electric grid by aggregating and coordinating the
demands of load consuming equipment. The structure of our VPC programs is a
pay-for-performance basis whereby we provide additional capacity through
long-term contracts. Pay-for-performance means that we enter into long-term
contracts with utilities and are paid under each contract based on the amount of
verifiable kilowatts of capacity that we provide. Under our VPC programs, we own
and operate the entire load management system.
The
participants who elect to participate in our VPC programs agree to allow us to
install our products in their homes or business in order to decrease energy
usage of certain appliances, such as their central air conditioner, electric
water heater, irrigation pump or pool pump, during short periods of peak energy
demand. These devices are controlled remotely by using our digital control units
or SuperStats, coupled with a communication system and load management system
software. We, in return, receive payment for this capacity from the utility
under our existing contract with the utility.
We
operate our VPC programs through long-term, fixed price contracts with our
utility customers, which make periodic payments to us based on estimates of the
amount of electric capacity that we expect to make available to them during the
contract year. We refer to these payments as proxy payments and electric
capacity on which proxy payments are made as estimated capacity. During contract
negotiations or in the first contract year of a VPC program, estimated capacity
is negotiated and established by the contract. During each succeeding contract
year, estimated capacity is the available capacity from the previous year. A
contract year begins at the end of a utility’s seasonal peak energy demand for
electricity. We refer to this seasonal peak energy demand as the cooling season.
For example, the cooling season for one of our VPC contracts runs from
June 1st to
September 30th, and
the contract year for this agreement begins on October 1st and
ends on September 30th. We
and our utility customers analyze results of measurement and verification tests
that are performed during the cooling season of each contract year to
statistically determine the capacity that was available to the utility during
the cooling season. Measurement and verification tests are necessary because our
hardware installed at participant locations to control energy usage of selected
appliances are one-way devices that are programmed to receive and respond to a
wireless signal initiated by our software and transmitted over a public or
private network but does not send a confirmation. Therefore, there is no
verification that any certain device received a signal or properly executed its
command. Because thousands of devices are subject to control in typical
residential VPC programs, it is not economical to verify that each device is
functioning properly. For this reason, a methodology has been developed that
verifies the reduction of energy usage, measured in kilowatts, for a statistical
sample of devices with an accepted utility confidence level generally of 90% or
greater. This methodology is widely accepted in the industry. We refer to the
results of this measurement and verification process as our available
capacity.
Available
capacity varies with the electricity demand of high-use energy equipment, such
as central air conditioning compressors, at the time the measurement and
verification tests are conducted, which, in turn, depends on factors beyond our
control, such as temperature and humidity and the time of day and the day of the
week the measurement and verification tests are performed. The correct operation
of, and timely communication with, devices used to control equipment are also
important factors that affect available capacity. Any difference between our
available capacity and the estimated capacity on which proxy payments were
previously made will result in either a refund payment from us to our utility
customer or an additional payment to us by our customer. We refer to this
process that results in a final settlement as a true-up.
Base
Load Capacity Program
The
structure of our base load capacity program is a pay-for-performance model
whereby we provide permanent load reduction through equipment upgrades, energy
auditing and consulting, building automation, lighting retrofits and other
measures that reduce customers’ total energy consumption. We enter into
long-term contracts to provide the reduced capacity, maintain and operate the
improvements and ensure their utilization.
6
Commercial
& Industrial Business
Our
Commercial & Industrial Business segment provides energy-related services to
large commercial and industrial consumers by enabling them to reduce energy and
costs, improve reliability and maximize efficiency. Through our commercial and
industrial software and services, energy consumers are able to gain an
understanding of energy usage and the ability to utilize that information to
develop and implement effective demand response programs and scalable enterprise
energy management strategies. Our commercial and industrial team works with
commercial and industrial consumers and their utilities to evaluate energy use
within the commercial or industrial facility to develop a targeted
implementation of energy-related strategies that are technically-feasible and
cost-effective.
Our
commercial and industrial energy management services include the assessment of
market opportunities in deregulated and unregulated markets and the performance
of energy auditing and implementation strategies. The Commercial &
Industrial Business offers demand response services for its clients and has the
experience to provide commercial and industrial consumers with an avenue to
participate in the demand response programs offered in their area. In demand
capacity markets, grid operators and utilities seek bids from their commercial
and industrial consumer base to provide demand response capacity based on prices
offered in competitive bidding. These opportunities are generally characterized
by energy and capacity obligations with shorter contract periods and prices that
may vary by hour, by day, by month or by bidding period. Several major grid
operators, including PJM Interconnection, New York Independent System Operator,
New England Power Pool and Electric Reliability Council of Texas, have active
demand capacity markets in which our commercial and industrial consumers
participate through our demand response solutions. Our Commercial &
Industrial Business segment works with commercial and industrial clients by
first identifying available demand response capacity and then registering and
facilitating the sale of that capacity in the open market on behalf of those
clients. In these transactions, we receive revenue from grid operators and make
payments to commercial and industrial consumers for both contracting to reduce
electricity usage and actually doing so when called upon. The demand response
services offered include curtailment service provider registration, program
registration and enrollment, event notification, automated dispatch and control
during events, verification of load curtailment, pricing analysis, and ongoing
energy consultation with energy analysts.
Our
Commercial and Industrial Business segment also performs upgrades and
maintenance of power systems. These offerings include the implementation of
SCADA-based control systems, power system distribution analysis, testing,
replacement or repair, engineering design and consulting, meter and sub-meter
operations, maintenance and installation, and data management and
analysis.
See Item
8. Financial Statements and Supplementary Data, note 16 for presentation of
results of operations for the last three fiscal years by segment.
Recent
Developments
Appointment
of President and Chief Executive Officer
On
February 18, 2010, the board of directors of Comverge, Inc. appointed R. Blake
Young as President and Chief Executive Officer. Mr. Young has served
as a member of the Board since 2006 and will continue to serve as a
non-independent director, but will no longer serve on the Board’s presently
constituted committees. Mr. Young previously served as chairman of
the compensation committee and as a member of nominating and corporate
governance committee of the Board.
Appointment
to Board of Directors
On
February 18, 2010, the Board appointed Michael D. Picchi as a non-independent
director to the Board effectively immediately. Mr. Picchi currently
serves as Executive Vice President and Chief Financial Officer of the Company,
and prior to Mr. Young’s appointment served as Interim President and Chief
Executive Officer the Company.
Silicon
Valley Bank Amendment
On
February 5, 2010, Comverge, Inc. and its wholly owned subsidiaries entered into
a second amendment to its existing credit and term loan facility with Silicon
Valley Bank. The second amendment increased the revolver loan by an additional
$20 million bringing the total revolver loan to $30 million for borrowings to
fund general working capital and other corporate purposes and issuances of
letters of credit. The second amendment also added Alternative Energy
Resources, Inc., a wholly owned subsidiary of Comverge, as a borrower
and extended the term of the facility by one year to December
2012.
Pepco
Holdings, Inc. Contract Expansion
We
entered into an agreement with Pepco Holdings, Inc. (PHI) in January 2010 that
will expand our full support services to additional PHI territories. The
expanded 5-year agreement will include marketing, installation and call center
services and will be managed by our Apollo Demand Response Management System
(DRMS) software. The agreement also includes installation of more than 40,000
home energy management devices, making this program one of the largest
deployments of residential demand response in the nation.
7
Marketing
and Sales
Our North
American sales and development team consists of over 100 sales professionals
working together to sell our products and services.
The
strategic alliance and marketing role includes competitive analysis, promotion,
placement, pricing and product requirements. The marketing function is a bridge
between sales and engineering and is the primary representative on product
development teams. The marketing function also establishes a common message for
the direct sales force and manufacturer representatives. This team provides
pre-sales support, manages sales programs requiring ongoing technical expertise,
and is responsible for all proposal activity.
Customers
We have
an established customer base of over 500 utility and other energy service
providers, including municipal and cooperative electric utilities, located
across North America in both regulated and deregulated jurisdictions. For
example, our customers include large investor-owned utilities, independent
system operators and regional transmission organizations (which are regional
entities that monitor and control a regional electric grid), electric
cooperatives, municipalities, energy service companies and military bases,
including energy providers such as Austin Energy, Consolidated Edison Company of
New York, Inc., Duke Energy Corporation, FirstEnergy Corp., Georgia Power, Gulf
Power Company, Inc., E.ON U.S., Nevada Energy, PacifiCorp, Pepco Holdings, Inc.,
PJM Interconnection, PPL Corporation, Progress Energy, Inc., Public Service
Electric and Gas Company, and San Diego Gas & Electric Company. For the
year ended December 31, 2009, our top ten customers accounted for 67% of
our consolidated revenues. Of these customers, two customers accounted for more
than 10% of our revenue: PJM Interconnection LLC (20%) and Nevada Energy
(12%). For the year ended December 31, 2008, our top ten
customers accounted for 71% of our consolidated revenues. Of these customers,
three customers accounted for more than 10% of our revenue: PJM Interconnection
LLC (19%), Consolidated Edison Company of New York, Inc. (14%) and Nevada Energy
(12%). In 2007, our top ten customers accounted for 70% of our consolidated
revenues. Of these, two customers accounted for more than 10% of our
revenue: ISO New England Inc. (16%) and PJM Interconnection LLC
(10%).
Manufacturing
We
outsource all of our product manufacturing operations to contract manufacturers.
For our current production requirements, we utilize both a domestic manufacturer
and an additional manufacturer that has facilities offshore. This dual sourcing
complements our supply chain effort and helps support our plans for continual
cost reductions, quality improvement and diversification of supply
risk.
Standard
surface mount technologies are designed by our engineers and can be produced on
a wide variety of manufacturing equipment, thereby allowing competitive bidding
from contract manufacturers. We manage all bills of materials and approved
vendor lists and provide the contract manufacturers with design change
notices.
We have
dedicated test engineers who design all product test systems, write custom
software for product tests and monitor product quality and yields. Quality data
is collected electronically and utilized by our design engineers for continuous
product improvement and by the contract manufacturer for improvement of key
manufacturing processes. Quality control tests are performed on a statistically
significant portion of all outgoing orders to ensure compliance to
specifications and corrective action techniques are employed to permanently
resolve issues.
Competition
The clean
energy sector is highly competitive. We face competition from traditional clean
energy providers, advanced metering equipment and service providers, and
supply-side independent power producers. In addition, some traditional providers
of advanced meter reading products may add demand response products and services
to their existing business. We also compete against traditional supply-side
resources such as natural gas-fired peaking plants as well as independent power
producers. Electric utilities could also offer their own demand response
solutions, which would decrease our base of potential customers and could
decrease our revenues and profitability.
8
Trademarks
Comverge,
Inc. and its subsidiaries own the following pending and registered trademarks in
the United States: 6D, Apollo, Comverge, Coolibrium, Datapult, Enerwise, kw
Operation Kill-a-Watt, Maingate, Powerportal, Profit from Energy, Public Energy
Solutions, Sixth Dimension, SuperStat, The Energy to Go Green, The Energy To Go
Clean, The Energy To Be Clean, The Energy To Be Green, The Power of Energy
Information, TheWattSpot, Virtual Peaking Capacity and Wattspot.
History
and Development of the Business
Our
business began as divisions of Scientific Atlanta, Inc. and Lucent Technologies
Inc. in 1974 and 1991, respectively. In 1992, Acorn Energy, Inc. (formerly known
as Acorn Factor, Inc.), or AEI, created its Powercom Division to develop
advanced meter reading, electric utility data management and analysis, and load
management solutions. Comverge, Inc. was organized in 1997 as a Delaware
corporation by AEI. We evolved our operations through the acquisition of the
Utility Solutions Division of Lucent Technologies Inc. in 1997 and the
organization of Comverge Control Systems, Ltd. in 1998. In 1999, we acquired the
Controls System Division of Scientific Atlanta, Inc. We made the strategic
decision in 2002 to develop, own and operate load management systems on an
outsourced basis for the benefit of our utility customers. We named this
offering Virtual Peaking Capacity. In 2003, we acquired the intellectual
property, operating assets and customers of Sixth Dimension, Inc. In
April 2007, we completed an initial public offering. In July 2007, we acquired
Enerwise Global Technologies, Inc., reported as part of the Commercial &
Industrial Business segment. We acquired the four operating entities comprising
the business of Public Energy Solutions in September 2007, and include their
offerings as part of the Residential Business segment.
Acquisitions
On
July 23, 2007, we completed the acquisition of Enerwise Global
Technologies, Inc., or Enerwise, for $76.2 million. There were 191,183 shares of
our common stock issuable if Enerwise exceeded certain 2008 operating
performance results. The additional contingent consideration was not earned in
2008 and the 191,183 shares of our common stock were not issued.
On
September 29, 2007, we completed the acquisition of Public Energy
Solutions, LLC, Public Electric, Inc. and PES NY, LLC, collectively PES, for
$13.3 million. For 2007, additional contingent consideration based on the
achievement of certain operating performance results was earned resulting in
additional consideration of $0.9 million and 11,945 shares of our common stock.
For 2008, additional consideration was not earned based on the evaluation of
certain operating performance results.
Employees
We had
440 employees as of December 31, 2009. Our employees are not represented by any
labor unions, and we have not experienced any work stoppages. We consider our
relations with our employees to be good.
Prior to
2009 we had a client services agreement with Administaff Companies, II, L.P.,
pursuant to which Administaff provided us with certain personnel management
services with respect to most employees, such as payroll, medical and dental
insurance and the administration and access to a 401(k) plan. Under the
agreement, we and Administaff were intended to be co-employers of all of our
employees. As of January 1, 2009, we ended our arrangement with Administaff and
all employees became direct employees of Comverge.
Available
Information
Our web
site is located at http://www.comverge.com. Our investor relations website
is located at http://ir.comverge.com. The information on or accessible through
our web sites is not part of this Annual Report on Form 10-K. Our Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to such reports are available, free of charge, on our investor
relations website as soon as reasonably practicable after we electronically file
with or furnish such material to the SEC. Further, a copy of this Annual
Report on Form 10-K is located at the SEC’s Public Reference Room at
100 F Street, NE, Washington, D.C. 20549. Information on the operation
of the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330. The SEC maintains an internet site that contains reports,
proxy and information statements and other information regarding our filings at
http://www.sec.gov.
9
Executive
Officers of the Registrant
Our
executive officers as of March 3, 2010 are as follows:
Name
|
Age
|
Position
|
||
R.
Blake Young
|
51
|
President
and Chief Executive Officer
|
||
Michael D. Picchi
|
43
|
Executive
Vice President and Chief Financial Officer
|
||
Edward J. Myszka
|
47
|
Executive
Vice President of Delivery and Chief Operating Officer
|
||
Matthew H. Smith
|
35
|
Executive
Vice President, General Counsel and Secretary
|
||
Arthur
Vos IV
|
35
|
Executive
Vice President of Development and Chief Technology
Officer
|
||
John
A. Waterworth
|
32
|
Vice
President and Corporate Controller
|
R. Blake Young was appointed
as President and Chief Executive Officer of the Company on February 18,
2010. Mr. Young has served as a member of the Board since 2006 and
will continue to serve as a non-independent director, but will no longer serve
on the Board’s presently constituted committees. Mr. Young previously
served as chairman of the compensation committee and as a member of nominating
and corporate governance committee of the Board. Mr. Young was the
founder and Managing Partner of Cap2ity Consulting Group, a business, technology
and management consulting group from June 2009 to February
2010. Previously, he served as Senior Vice President, Global IT &
Technology for BG Group, a global energy company based in London from January
2007 to June 2009. Prior to that, Mr. Young held various senior
management positions with Dynegy Inc., including Executive Vice President and
Chief Administrative Officer as well as Executive Vice President & President
of Global Technology from 1998 to 2005. He also served as President
of Illinois Power Company, Dynegy's electric and gas transmission and
distribution company. Prior to his eight years at Dynegy, Mr. Young
served as Chief Information Officer of the US Grocery Division of Campbell Soup
Company. Before that, Mr. Young had a 14-year career with Tenneco
Energy, an integrated natural gas transporter and marketer, where he served in a
number of senior administrative and commercial management positions, including
Chief Information Officer and Executive Director of national
accounts. Mr. Young received a Bachelor of Science degree from
Louisiana State University.
Michael D. Picchi has served
as Executive Vice President and Chief Financial Officer since June 2006 and was
appointed as a non-independent director on February 18, 2010. From
June 2009 until February 2010, he also served as our Interim President and Chief
Executive Officer. He joined us in February 2006 as Senior Vice
President, Chief Accounting Officer responsible for all accounting functions.
From July 2004 to February 2006, Mr. Picchi was Senior Vice
President—Finance and Controller for publicly-traded PRG-Schultz International,
Inc., an audit recovery services firm. From February 2003 to July 2004,
Mr. Picchi served as Chief Accounting Officer—Corporate Controller for
Randstad North America, the U.S. operations of temporary staffing labor firm
Randstad Holding, B.V. From November 1999 to January 2003, Mr. Picchi
served as Vice President—Finance for publicly-traded AirGate PCS, Inc., a Sprint
PCS wireless affiliate. Mr. Picchi began his career at Coopers &
Lybrand LLP and is a certified public accountant and chartered financial
analyst. He obtained a B.S. in Accounting and an M.B.A. in Finance from Indiana
University.
Edward J. Myszka has served
as Executive Vice President of Operations and Chief Operating Officer since
September 2009. Prior to that, he served as Chief Operating Officer of our Clean
Energy Solutions Group since October 2008 and as President and Chief Operating
Officer of our Smart Grid Solutions Group from April 2005 to September 2008.
Prior to joining Comverge, he spent 17 years at Motorola, Inc., a global
communications company, where he held numerous positions of increasing
responsibility in business management, strategic planning and technology
development for the semiconductor, telecommunications, automotive and energy
industries. Since 2000, he was head of the OEM Energy Systems Division where he
held profit and loss responsibility with operations in Asia, Europe and the U.S.
From 1984 to 1988, Mr. Myszka led engineering and manufacturing efforts for
Lytel, Inc., an early-stage company pioneering optoelectronic and semiconductor
laser solutions for the telecommunications industry. Mr. Myszka obtained a B.S.
degree from New York University (formerly Polytechnic Institute of New York) and
a M.S. in Metallurgical and Material Engineering and an M.B.A. from the Illinois
Institute of Technology.
Matthew H. Smith has served
as our Executive Vice President, General Counsel and Secretary since September
2009. Prior to that, he served as our Vice
President, General Counsel and Secretary from January 1, 2008 to September
2009. Mr. Smith joined us in January 2005 as Senior Counsel responsible for
contract negotiations, intellectual property, litigation and corporate
governance matters. Prior to joining us, Mr. Smith worked for the law firm
King & Spalding LLP from 2002 to January 2005 concentrating primarily
on intellectual property and litigation matters. Mr. Smith began his legal
career as a federal appellate court clerk for Judge H. Emory Widener, Jr. on the
U.S. Court of Appeals for the Fourth Circuit. Mr. Smith obtained a B.A. in
History and Psychology and a J.D. from the University of North Carolina, Chapel
Hill.
Arthur Vos IV has served as
our Executive Vice President of Development and Chief Technology Officer since
November 2009. From September 2007 to November 2009, he served as our
Vice President, Marketing and Strategy. Mr. Vos was named Vice
President, Marketing, Products and Strategy in 2004. Mr. Vos joined
us in April 2003 as our Vice President of Development for our 6DiNET Group after
the acquisition of Sixth Dimension, Inc. Over a 12 year history in the
electric power industry, Mr. Vos has led and architected numerous demand
response and energy monitoring solutions. As the Chief Technology Officer
of Comverge, Mr.Vos now leads our entire development effort which includes an
advanced SmartGrid software suite, intelligent communicating in-home devices and
distributed energy management solutions. Mr. Vos obtained B.S. and
M.S. degrees from Colorado State University with an emphasis in artificial
intelligence, distributed control systems, manufacturing systems and embedded
system design.
John A. Waterworth has served
as our Vice President and Corporate Controller of the Company since March
2009. Prior to that, Mr. Waterworth served as Controller of the Company
from July 2006 to February 2009. Prior to joining the Company, Mr.
Waterworth was a member of the audit services group of KPMG, LLP. As Vice
President and Corporate Controller, Mr. Waterworth is responsible for the
Company’s financial reporting and internal controls. Mr. Waterworth is a
certified public accountant and earned his Bachelor’s and Master’s degrees in
accounting from the University of Georgia.
10
Risk
Factors
|
An
investment in our common stock involves a high degree of risk. Before making an
investment in our common stock, you should carefully consider the following
risks, as well as the other information contained in this annual report,
including our financial statements and the notes thereto and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” The
risks described below are those that we believe are the material risks that we
face. Any of the risk factors described below could significantly and adversely
affect our business, prospects, financial condition and results of operations.
As a result, the trading price of our common stock could decline, and you may
lose a part or all of your investment.
Risks
Related to Our Business
We
have incurred annual net losses since our inception, and we may continue to
incur annual net losses in the future.
Our
annual net loss in 2009, 2008 and 2007 was $31.7 million, $94.1 million and $6.6
million, respectively. Our accumulated deficit from inception
through December 31, 2009, was $184.6 million. Initially, our net
losses were driven principally by start-up costs and the costs of developing our
technology. More recently, our net losses have been driven
principally by general and administrative, marketing, operating and depreciation
expenses relating to capital expenditures for equipment required to support our
capacity programs as well as non-cash impairment charges. To grow our
revenues and customer base, we plan to continue emphasizing the expansion and
development of our capacity programs, which will include increased marketing and
operating expenses, in addition to growing our turnkey business. In
the short-term, our success in operating our capacity contracts will have a
negative effect on earnings because of the consumer acquisition costs we incur
during the installation phase of the contract. These increased costs
may cause us to incur net losses in the foreseeable future, and there can be no
assurance that we will be able to grow our revenues and expand our client base
to become profitable. Furthermore, these expenses are not the only
factors that may contribute to our net losses. For example, interest
expense on our currently outstanding debt and any debt we incur in the future
will contribute to our net losses. As a result, even if we
significantly reduce our marketing or operating expenses, we may continue to
incur net losses in the future.
We
may not receive the payments anticipated by our long-term contracts and
recognize revenues or the anticipated margins from our backlog, and comparisons
of period-to-period estimates are not necessarily meaningful and may not be
indicative of actual payments.
Payments
from long-term contracts represent our estimate of the total payments that our
contracts allow us to receive over the course of the contract
term. Our estimated payments from these long-term contracts are based
on a number of assumptions. The expectations regarding our annual and
multi-year contracts include assumptions relating to purchase orders received,
contractual minimum order volumes and purchase orders that we expect to receive
under a contract if it is extended based on amounts and timing of historical
purchases. We also assume that we will be able to meet our
obligations under these contracts on a timely basis. The expectations
regarding the build-out of our capacity contracts are based on our experience to
date in building out the load management systems as well as future expectations
for continuing to enroll participants in each contract’s service
territory. In some instances, we may not build out to our contracted
capacity due to enrollment rates varying from our expectations. We
have also included assumptions for how we believe the programs will perform
during the measurement and verification tests. If we are not able to
meet this build-out schedule, we have higher than expected withdrawal by
consumers from our programs or if the measurement and verification results are
lower than expected, we may not be able to receive the full amount of estimated
payments from long-term contracts. While we have historically
recorded a $0.3 million penalty per megawatt in liquidated damages for each
megawatt that we believed we would not fulfill for our base load contracts, we
have not reduced our anticipated payments from long-term contracts for any
penalties. As of December 31, 2009, we anticipated a potential payment of $0.8
million in liquidated damages for our base load contracts based on our estimated
future build-out rate for the 2010 program year. We have also assumed
that no contracts will be terminated for convenience or other reasons by our
customers and that the rate of replacement of participant terminations under our
capacity contracts will remain consistent with our historical
average. Changes in our estimates or any of these assumptions, the
number of load control devices installed, changes in our measurement and
verification test results and payments, contracts being rescheduled, cancelled
or renewed, disputes as to actual capacity provided, or new contracts being
signed before existing contracts are completed, and other factors, may result in
actual payments from long-term contracts being significantly lower than
estimated payments from long-term contracts. A comparison of
estimated payments from long-term contracts from period to period is not
necessarily meaningful and may not be indicative of actual
payments.
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 12 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 December 31, 2009, we
had contractual backlog of $68 million through December 31, 2010.
11
We
operate in highly competitive markets; if we are unable to compete successfully,
we could lose market share, revenues and profit.
We face
strong competition from traditional clean energy providers, both larger and
smaller than us, from advanced metering infrastructure equipment and from energy
service providers. In addition, we may face competition from large
internet and/or software based companies. Advanced metering
infrastructure systems generally include advanced meter reading with a demand
response component, including a communications infrastructure. Energy
service providers typically provide expertise to utilities and end-use consumers
relating to energy audits, demand reduction or energy efficiency
measures. We also compete against traditional supply-side resources
such as natural gas-fired power plants and independent power
producers. In addition, some providers of advanced meter reading
products may add demand response products or energy services to their existing
business, and other such providers may elect to add similar offerings in the
future. Further, energy service providers may add their own demand
response solutions, which could decrease our base of potential customers and
could decrease our revenues and profitability.
Certain
energy service and advanced metering infrastructure providers are substantially
larger and better capitalized than us and have the ability to combine (1)
advanced meter reading or commodity sales and (2) demand response products into
an integrated offering to a large existing customer base. Because
many of our target customers already purchase either advanced meter reading,
energy efficiency products or services, demand response products or services, or
commodities from one or more of our competitors, our success depends on our
ability to attract target customers away from their existing providers or to
partner with one or more of these entities to distribute our
products. In addition, the target market for our capacity programs
has been composed largely of “early adopters,” or customers who have sought out
new technologies and services. Because the number of early adopters
is limited, our continued growth will depend on our success in marketing and
selling our capacity programs to mainstream customers in our target
markets. Larger competitors could focus their substantial financial
resources to develop a competing business model that may be more attractive to
potential customers than what we offer. Competitors who also
provide advanced metering infrastructure or energy services may offer such
services at prices below cost or even for free in order to improve their
competitive positions. In addition, because of the other services
that our competitors provide, they may choose to offer clean energy services as
part of a bundle that includes other products, such as residential advanced
meter reading and automated invoicing, which we do not offer. Any of
these competitive factors could make it more difficult for us to attract and
retain customers, cause us to lower our prices in order to compete and reduce
our market share and revenues.
Some of
our strategic alliances are not exclusive, and accordingly, the companies with
whom we have strategic alliances may in the future elect to compete with us by
developing and selling competing products and services. In addition,
these companies have similar, and often more established, relationships with our
customers, and may recommend other products and services to their customers
instead of our products and services.
The
significant competition in our industry has resulted in increasingly aggressive
pricing, and we anticipate that prices may continue to decrease. We
believe that in some instances our prices are currently higher than those of our
competitors for similar solutions. Users of our solutions may switch
to another clean energy provider based on price, particularly if they perceive
the quality of our competitors’ products to be equal to or better than that of
our products. Continued price decreases by our competitors could
result in a loss of customers or a decrease in the growth of our business, or it
may require us to lower our prices to remain competitive, which would result in
reduced revenues and lower profit margins and may adversely affect our results
of operations and financial position and delay or prevent our future
profitability.
We
could be required to make substantial refunds or pay damages to power pools or
our utility customers if the actual amount of electric capacity we provide under
our capacity programs is materially less than estimated under the applicable
agreements.
We
typically operate our capacity programs through long-term, fixed price contracts
with our utility customers. Under our base load contracts, our
utility customers make periodic payments based on verified load reduction after
inspecting and confirming the capacity reduced through energy efficiency
measures. While the base load is able to be permanently reduced once
the energy efficiency devices are installed and verified, the utility often
retains the right to conduct follow up inspections for subsequent
years. If the energy consumer removes the installed devices, shuts
down operations or vacates the physical premises, there is the potential that
any subsequent inspection by our utility customer would result in a lower amount
of base load reduced capacity than originally verified, which may consequently
obligate us to pay a penalty. In addition, our base load contracts
require building out a specified amount of capacity (megawatts) at
pre-determined dates throughout the contract life. Due to our
potential participants’ limited capital spending, we are experiencing challenges
in meeting certain contractual build-out milestones in a timely manner stemming
from the general economic downturn in the New York City metro
area. If we fail to fulfill the required contracted capacity by the
dates specified in our contracts, we would be obligated to pay penalties of up
to $0.3 million per megawatt that we fail to obtain in 2011 and
2012. As of December 31, 2009, we have recorded potential liquidated
damages for capacity fulfillment delays related to certain 2010 contractual
milestones.
12
Under our
power pool auction contracts, which typically have a term of one to three years,
we sell capacity that we obtain through our programs to power
pools. Under these contracts, the power pool makes periodic payments
to us based on estimates of the amount of electric capacity that we expect to
make available to them during the contract year. We refer to these
payments as proxy payments and electric capacity on which proxy payments are
made as estimated capacity. A contract year generally begins on June
1st and ends May 31st of the following year. We and the power pool
analyze results of the metering data collected during the capacity events or
test events to determine the capacity that was available to the power pool
during the actual event. Any discrepancy between our analysis of the
metering data and the analysis from the power pool could result in lower than
expected revenues or potential damages payable by us. In addition,
the PJM Interconnection power pool (PJM) has amended rules which create
potential penalties if the projected megawatts do not perform. To the
extent PJM does not call an event, test events will be initiated before
September 30 of each year to test the potential capacity. If we do
not provide the required capacity during an event or test event, we may be
subject to penalties. PJM has recently eliminated the Interruptible
Load for Reliability (ILR) program effective 2012. Customers that
currently participate as ILR resources must be moved into other power pool
programs by 2012 in order to avoid loss of revenue. This change also
(i) requires additional capital support for both planned and new megawatts under
the three-year Base Residual Auction and (ii) has increased the potential
penalties for non-compliance. As a result of the elimination of the
ILR program and the changing power pool, we may incur significantly higher
penalties in the future than we have in the past.
Under our
VPC contracts, which typically have a term of five to ten years, our utility
customers make periodic payments to us based on estimates of the amount of
electric capacity we expect to make available to them during the contract
year. We refer to these payments as proxy payments and electric
capacity on which proxy payments are made as estimated
capacity. During contract negotiations or the first contract year of
a VPC program, estimated capacity is negotiated and established by the
contract. A contract year generally begins at the end of the summer
months, after a utility’s seasonal peak energy demand for
electricity. We refer to this seasonal peak energy demand as the
cooling season. For example, the cooling season for one of our VPC
contracts runs from June 1st to September 30th and the contract year for this
agreement begins on October 1st and ends on September 30th. We and
our utility customers analyze results of measurement and verification tests that
are performed during the cooling season of each contract year to statistically
determine the capacity that was available to the utility during the cooling
season. We refer to measured and verified capacity as our available
capacity. This available capacity also establishes the estimated
capacity per device, which we generally refer to as our M&V factor, for that
contract year. During each succeeding contract year, we generally
receive proxy payments based on the prior year’s M&V factor and installed
devices in the applicable service territory. Available capacity
varies with the electricity demand of high-use energy equipment, such as central
air conditioning compressors, at the time measurement and verification tests are
conducted, which, in turn, depends on factors beyond our control such as
fluctuations in temperature and humidity. Although our contracts
often contain restrictions regarding the time of day and, in some cases, the day
of the week the measurement and verification tests are performed, the actual
time within the agreed testing period that the tests are performed is beyond our
control. If the measurement and verification tests are performed
during a period of generally lower electricity usage, then the capacity made
available through our system could be lower than estimated capacity for the
particular contract being tested. The correct operation of, and
timely communication with, devices used to control equipment are also important
factors that affect available capacity under our VPC contracts. Any
difference between our available capacity and the estimated capacity on which
proxy payments were previously made will result in either a refund payment from
us to our utility customer or an additional payment to us by our
customer. We refer to this process that results in a final settlement
as a true-up. While we are still working toward final settlement in
certain VPC programs, we estimate that the contract year 2009 will result in a
negative settlement of $0.6 million in the aggregate. For the
contract year 2008, we paid an aggregate of $0.2 million as a result of final
settlement. For the contract year 2007, we paid an aggregate refund
payment of $2.3 million.
Any
refund payments that we may be required to make (1) as a result of a subsequent
inspection or failure to meet initial minimum capacity under our base load
contracts, (2) to the power pool under our auction contracts, or (3) pursuant to
a true-up settlement determination under our VPC contracts could be substantial
and could adversely affect our liquidity. In addition, because
measurement and verification test results for each VPC contract establishes
estimated capacity on which proxy payments will be made for the following
contract year, a downward adjustment in estimated capacity for a particular VPC
contract would decrease the dollar amount of proxy payments for the following
contract year and could significantly decrease our estimated backlog and
estimated payments from long-term contracts. In addition, such
adjustment could result in significant year-to-year variations in our quarterly
and annual revenues.
13
Failure
of key third parties to manufacture quality products or failure to provide
reliable services or proper installation of our products by Comverge or third
parties could cause malfunctions of our products, potential recalls or
replacements or delays in the delivery of our products or services, which could
damage our reputation, cause us to lose customers and negatively impact our
growth.
Our
success depends on our ability to provide quality products and reliable services
in a timely manner, which in part depends on the proper functioning of
facilities and equipment owned and operated by third parties upon which we
depend. For example, our reliance on third parties
includes:
•
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outsourcing
cellular and paging wireless communications that are used to execute
instructions to our (1) devices under our VPC programs and (2) clients in
power pools;
|
•
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utilizing
components that they manufacture in our
products;
|
•
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utilizing
products that they manufacture for our various capacity programs or power
pool program;
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•
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outsourcing
certain installation, maintenance, data collection and call center
operations to third-party providers;
and
|
•
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buying
capacity from third parties who have contracted with electricity consumers
to participate in our VPC programs.
|
Any
delays, malfunctions, inefficiencies or interruptions in these products,
services or operations could adversely affect the reliability or operation of
our products or services, which could cause us to experience difficulty
retaining current customers and attracting new customers. In
addition, our brand, reputation and growth could be negatively
impacted. For example, we recently experienced customer concerns
relating to the functionality of certain features in our
thermostat. We are currently investigating the thermostat issues and
have retained third-party experts to do the same. Also, in three
separate circumstances prior to 2006, battery failures, microprocessor failures
and cracks in plastic enclosures in certain of our Utility Product &
Services segment’s products resulted in significant product
replacements. The costs of remedying these component failures were
only partially refundable by third-party suppliers. In each case, we
believe that the replacements resulted in reduced customer
satisfaction. Furthermore, we are wholly dependent upon third parties
for the manufacture and delivery of our products. In the event of a
significant interruption in the manufacturing or delivery of our products by
these vendors or in defects from the manufacturers, considerable time, effort
and expense could be required to establish alternate production lines at other
facilities and our operations could be materially disrupted, which would cause
us to not meet production deadlines and lose customers. In addition,
we often are required to install such products, using Comverge employees or
third party installers. To the extent such installations are faulty
or inadequate, considerable time, effort and expense may be incurred to remedy
the situation and restore customer satisfaction.
A
significant portion of our revenues are generated from contracts with a small
number of electric utility customers, the postponement, modification or
termination of which could significantly reduce our revenues.
Our
revenues historically have been generated from a small number of electric
utility customers. In 2009, 2008 and 2007, our top ten electric
utility customers accounted for approximately 67%, 71% and 70% of our
consolidated revenues, respectively. In 2009, two customers
accounted for more than 10% of our revenues: PJM Interconnection LLC (20%) and
Nevada Energy (12%). In 2008, three customers accounted for more than
10% of our revenues: PJM Interconnection LLC (19%), Consolidated Edison Company
of New York, Inc. (14%), and Nevada Energy (12%). In 2007, two
customers accounted for more than 10% of our total revenues: ISO New England
Inc. (16%) and PJM Interconnection (10%). Our contracts with ISO New
England, Inc. lapsed on October 1, 2007, per the original contractual
terms. Our capacity contracts are multi-year contracts that are
subject to postponement, modification or termination by our utility
customers. Such action by a customer with respect to one or more of
our significant contracts would significantly reduce our revenues.
Our
failure to meet product development and commercialization milestones may result
in customer dissatisfaction, cancellation of existing customer orders or our
failure to successfully compete in new markets.
In the
past, we have not met all of our product development and commercialization
milestones. For example, we were behind schedule in developing a
next-generation demand response product for a major customer. This
delay has resulted in a deferral of sales and gross profit associated with
contracted delivery schedules for our products. In addition, we are
behind schedule in developing a next-generation load management product,
resulting in a delay in the planned commercialization of this
product.
We
establish milestones to monitor our progress toward developing commercially
feasible products or to meet contractual delivery requirements of our
customers. In meeting these milestones, we often depend on
third-party contractors in the U.S. and other countries for much of our hardware
manufacturing and software development. Internal delays or delays by
third-party contractors could cause us to miss product development or delivery
deadlines. In addition, internal development delays could result in
the loss of commercially available hardware and software products, as we are
unable to rely on outside vendors to provide such products when contractual
rights for the supply or license of such products expire. As an
example, we are required to develop certain new products with certain milestones
for our Pepco Holdings, Inc. agreement, announced on January 23,
2009. In addition, we are developing and enhancing our new software
platform, Apollo. Delays in either development schedule could
negatively affect our business. We may not successfully achieve our
milestones in the future, which could distract our employees, harm our
relationships with our existing and potential customers, and result in cancelled
orders, deferred or lost revenues and/or margin compression and our inability to
successfully compete in new markets.
14
We
depend on the electric utility industry and associated power pool markets for
revenues, and as a result, our operating results have experienced, and may
continue to experience, significant variability due to volatility in electric
utility capital spending or the power pool markets, and other factors affecting
the electric utility industry.
We derive
substantially all of our revenues from the sale of solutions, products and
services, directly or indirectly, to the electric utility industry and power
pool markets. In relation to our electric utility customers,
purchases of our solutions, products or services by electric utilities may be
deferred or cancelled as a result of many factors, including consolidation among
electric utilities, changing governmental or grid operator regulations, weather
conditions, rising interest rates, reduced electric utility capital spending and
general economic downturns. In addition, a significant amount of
revenue is dependent on long-term relationships with our utility customers,
which are not always supported by long-term contracts. This revenue
is particularly susceptible to variability based on changes in the spending
patterns of our utility customers.
The power
pool markets in which we participate could be materially altered in ways that
negatively affect our ability to participate and, in turn, decrease
revenues. For example, these markets typically utilize short-term
contracts and often have price volatility. Prices in these markets
typically fall whenever capacity providers place excessive amounts of capacity
for auction in these markets. If prices decline below the point at
which customers who typically participate in these programs recognize a benefit
from participating or if they decide to participate with another provider, we
would no longer be able to enroll these customers, which could result in us
recognizing lower than expected revenues.
We have
experienced, and may in the future experience, significant variability in our
revenues, on both an annual and a quarterly basis, as a result of these
factors. Pronounced variability in the power pool markets or an
extended period of reduction in spending by electric utilities could negatively
impact our business and make it difficult for us to accurately forecast our
future sales, which could lead to increased spending by us that is not matched
with equivalent or better revenues.
Changes
in the availability and regulation of radio spectrum or paging providers
limiting paging services may cause us to lose utility customers.
A
significant number of our products use radio spectrum, which is subject to
regulation in the United States by the Federal Communications
Commission. Licenses for radio frequencies must be obtained and
periodically renewed. Licenses granted to us or our customers may not
be renewed on acceptable terms, if at all. The Federal Communications
Commission may adopt changes to the rules for our licensed and unlicensed
frequency bands that are incompatible with our business. These
changes in frequency allocation may result in the termination of demand response
programs by our utility customers or the replacement of our systems with ones
owned by our competitors. This would erode our competitive advantage
with respect to those utility customers and would force us to compete with other
providers for their business. In addition, paging providers may
discontinue providing paging services, which may result in no coverage or an
increase in our cost in seeking alternative providers.
We
may be subject to damaging and disruptive intellectual property litigation
related to allegations that our products or services infringe on intellectual
property held by others, which could result in the loss of use of the product or
service.
Third-party
patent applications and patents may be applicable to our products. As
a result, third-parties have made and may in the future make infringement and
other allegations that could subject us to intellectual property litigation
relating to our products and services, which litigation is time-consuming and
expensive, divert attention and resources away from our daily business, impede
or prevent delivery of our products and services, and require us to pay
significant royalties, licensing fees and damages. In addition,
parties making infringement and other claims may be able to obtain injunctive or
other equitable relief that could effectively block our ability to provide our
services and could cause us to pay substantial damages. In the event
of a successful claim of infringement, we may need to obtain one or more
licenses from third parties, which may not be available at a reasonable cost, or
at all.
The
expiration of our capacity contracts without obtaining a renewal or replacement
capacity contract, or finding another revenue source for the capacity our
operating assets can provide, could materially affect our business.
Although
we have entered into additional long-term contracts in different geographic
regions and are regularly in discussions with our customers to extend our
existing contracts or enter into new contracts with these existing customers,
there can be no assurance that any of these contracts will be extended or that
we will enter into new contracts on favorable terms. If these
contracts are not extended or replaced, we would expect to enroll the capacity
that we make available under such contracts in another demand response capacity
program, although there is no assurance we would be able to do
so. For example, our capacity contract with Nevada Energy expired on
January 1, 2010. Nevada Energy accounted for 12% of our
total revenue in both 2009 and 2008. While we
are working with Nevada Energy to renew and expand our contract, we cannot
guarantee that this will be successful.
15
Our
revenue growth in 2008 was negatively affected by PJM Interconnection LLC’s
economic rule change. If additional rule changes are made by PJM in
the future, or if other major grid operators make similar rule changes, our
revenues may continue to be adversely affected.
During
2008, PJM Interconnection LLC, or PJM, announced a rule change for economic
demand response programs in the PJM open market. The rule change
reduced the price we receive under our economic or voluntary demand response
programs for commercial and industrial consumers. Because such
programs are voluntary, the lower price and operating rule changes in 2008 made
it less compelling for our commercial and industrial consumers to participate in
the demand response programs. We rely on our demand response programs
to generate revenue and, although we are not aware of any plans for further
material rule changes, we cannot guarantee that PJM or any other major grid
operator will not reduce incentives to consumers or make other economic rule
changes in the future that would have a negative impact on our
business.
If
we have material weaknesses in our internal control over financial reporting,
the accuracy and timing of our financial reporting may be adversely
affected.
There
were no material weaknesses identified by management or our independent
registered public accounting firm during the audit of our consolidated financial
statements for the years ended December 31, 2009 and 2008. A material
weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis. However, there is no
assurance that we will not discover material weaknesses in internal controls in
the future.
As part
of our business strategy, we may pursue the acquisition of complementary
businesses. To the extent we acquire a new business, we must
integrate the accounting system for the business with our own, and we may
experience challenges in our internal control over financial reporting as a
result. Any such difficulty we encounter could increase the risk of a
material weakness. The existence of one or more material weaknesses
in any period would preclude a conclusion that we maintain effective internal
control over financial reporting. Such conclusion would be required
to be disclosed in our future Annual Reports on Form 10-K and may impact the
accuracy and timing of our financial reporting.
Any
internal or external security breaches involving our products could harm our
reputation, and even the perception of security risks, whether or not valid,
could inhibit market acceptance of our products and cause us to lose
customers.
Our
customers use our products to compile and analyze sensitive and confidential
information. The occurrence or perception of security breaches in our
products or services could harm our reputation, financial condition and results
of operations. In addition, we may come into contact with sensitive
consumer information or data when we perform operational, support or maintenance
functions for our utility customers. A failure to handle this
information properly, or a compromise of our security systems that results in
customer personal information being obtained by unauthorized persons could
adversely affect our reputation with our customers and others, as well as our
operations, results of operations, financial condition and liquidity, and could
result in litigation against us or the imposition of penalties. In
addition, a security breach could require that we expend significant additional
resources related to our information security systems and could result in a
disruption of our operations. This risk is enhanced through the
distribution of our new Apollo software system and integration work with the
utilities back office, as we anticipate our system and solutions will be
utilized on a larger scale.
Our
loan and security agreement contains financial and operating restrictions that
may limit our access to credit. If we fail to comply with covenants
in our loan and security agreement, we may be required to repay our indebtedness
thereunder, which may have an adverse effect on our liquidity.
Our loan
and security agreement contains covenants that may limit our ability to operate
our business, invest, sell assets, create liens or make distributions or other
payments to our investors and creditors. All of these restrictions
may limit our ability to take advantage of potential business opportunities as
they arise.
16
For
instance, provisions in our loan and security agreement with Silicon Valley Bank
impose restrictions on our ability to, among other things:
•
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incur
more debt;
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•
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pay
dividends and make distributions;
|
•
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make
certain investments;
|
•
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redeem
or repurchase capital stock;
|
•
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create
liens;
|
•
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enter
into transactions with affiliates;
and
|
•
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merge
or consolidate.
|
This
agreement also contains other customary covenants, including covenants which
require us to meet specified financial ratios and financial tests. We
may not be able to comply with these covenants in the future. Our
failure to comply with these covenants may result in the declaration of an event
of default and cause us to be unable to borrow under our loan and security
agreement with Silicon Valley Bank. In addition to preventing
additional borrowings under this agreement, an event of default, if not cured or
waived, may result in the acceleration of the maturity of indebtedness
outstanding under these agreements, which would require us to pay all amounts
outstanding. If an event of default occurs, we may not be able to
cure it within any applicable cure period, if at all. If the maturity
of our indebtedness is accelerated, we may not have sufficient funds available
for repayment or we may not have the ability to borrow or obtain sufficient
funds to replace the accelerated indebtedness on terms acceptable to us or at
all.
We
will require significant capital to pursue our growth strategy, but we may not
be able to obtain additional financing on acceptable terms or at
all.
The
growth of our business will depend on significant amounts of capital for
marketing and product development of our capacity programs and Smart Grid
products. In addition, we will consider both international expansion
and strategic acquisitions of complementary businesses or technologies to grow
our business, which could require significant capital and could increase our
capital expenditures related to future operation of the acquired business or
technology. We may not be able to obtain additional capital on
acceptable terms or at all. Because of our losses, we do not fit
traditional credit lending criteria, which, in particular, could make it
difficult for us to obtain loans or to access the capital
markets. Moreover, our loan and security agreement contains
restrictions on our ability to incur additional indebtedness, which, if not
waived, could prevent us from obtaining needed capital. There can be
no assurance that we will be able to obtain such financing and a failure to
obtain additional financing when needed could adversely affect our ability to
maintain and grow our business.
Our ability to provide bid bonds,
performance bonds or letters of credit is limited and could negatively affect
our ability to bid on or enter into significant long-term
agreements.
We are
occasionally required to provide letters of credit, bid bonds or performance
bonds to secure our performance under customer contracts or open market
programs. Our ability to obtain such bonds primarily depends upon our
capitalization, working capital, past performance, management expertise and
reputation and external factors beyond our control, including the overall
capacity of the surety market. Surety companies consider those
factors in relation to the amount of our tangible net worth and other
underwriting standards that may change from time to time. Events that
affect surety markets generally may result in bonding becoming more difficult to
obtain in the future, or being available only at a significantly greater
cost. In addition, some of our customers also require collateral in
the form of letters of credit to secure performance or to fund possible damages
as the result of an event of default under our contracts with
them. Our ability to obtain letters of credit under our loan and
security agreement with Silicon Valley Bank is limited to $30.0 million in the
aggregate. As of December 31, 2009, we had $4.6 million of letters of
credit outstanding from the facility. If we enter into significant
long-term agreements or increase our bidding in certain open market power pools
and either of which require the issuance of letters of credit, our liquidity
could be negatively impacted. Our inability to obtain adequate
bonding or letters of credit and, as a result, to bid or enter into significant
long-term agreements, could have a material adverse effect on our future
revenues and business prospects.
17
If
we lose key personnel upon whom we are dependent, we may not be able to manage
our operations and meet our strategic objectives.
Many key
responsibilities of our business have been assigned to a relatively small number
of individuals. Our future success depends to a considerable degree
on the vision, skills, experience and effort of our senior management team,
including R. Blake Young, our President and Chief Executive Officer; Michael D.
Picchi, our Executive Vice President and Chief Financial Officer; Edward J.
Myszka, our Executive Vice President of Operations and Chief Operating Officer;
Arthur Vos IV, our Executive Vice President and Chief Technology Officer; and
Matt Smith, our Executive Vice President, General Counsel and
Secretary. We do not maintain key-person insurance on any of these
individuals. Any loss or interruption of the services of any of our
key employees could significantly reduce our ability to effectively manage our
operations and implement our strategy.
If we are unable to protect our
intellectual property, our business and results of operations could be
negatively affected.
Our
ability to compete effectively depends in part upon the maintenance and
protection of the intellectual property related to our capacity programs and the
solutions, hardware, firmware and software that we have acquired or developed
internally. Patent protection is unavailable for certain aspects of
the technology that is important to our business. In addition, one or
more of our pending patent applications may not be issued. To date,
we have attempted to rely on copyright, trademark and trade secrecy laws, as
well as confidentiality agreements and licensing arrangements, to establish and
protect our rights to this technology. However, we have not obtained
confidentiality agreements from all of our customers and vendors, some of our
licensing or confidentiality agreements are not in writing, and some customers
are subject to laws and regulations that require them to disclose information
that we would otherwise seek to keep confidential. Policing
unauthorized use of our technology is difficult and expensive, as is enforcing
our rights against unauthorized use. The steps that we have taken or
may take may not prevent misappropriation of the technology on which we
rely. In addition, effective protection may be unavailable or limited
if we expand to other jurisdictions outside the United States, as the
intellectual property laws of foreign countries sometimes offer less protection
or have onerous filing requirements. Any litigation could be
unsuccessful, cause us to incur substantial costs and divert resources away from
our daily business.
We
may not be able to maintain quality customer care during periods of growth or in
connection with the addition of new and complex products or services, which
could adversely affect our ability to acquire and retain utility customers and
participants in our capacity programs.
In the
past, during periods of growth, we have not been able to expand our customer
care operations quickly enough to meet the needs of our increased customer base,
and the quality of our customer care has suffered. As we add new and
complex products and services, we will face challenges in increasing and
training our customer care staff. If we are unable to hire, train and
retain sufficient personnel to provide adequate customer care in a timely
manner, we may experience customer dissatisfaction and increased participant
terminations. The risk is enhanced through selling solution based
systems, contingent upon our Apollo software, as the software and potential
integration are complex and often times outside of our control (i.e. to the
extent we are required to integrate with an AMI provider’s meter
software).
Electric
utility industry sales cycles can be lengthy and unpredictable and require
significant employee time and financial resources with no assurances that we
will realize revenues.
Sales
cycles with our customers can generally be long and
unpredictable. Our customers include electric utilities and large
commercial and industrial energy consumers that generally have extended
budgeting, procurement and regulatory approval processes. In
addition, electric utilities tend to be risk averse and tend to follow industry
trends rather than be the first to purchase new products or services, which can
extend the lead time for or prevent acceptance of new products or services such
as our capacity programs or advanced metering
initiatives. Accordingly, our potential customers may take longer to
reach a decision to purchase products. This extended sales process
requires the dedication of significant time by our personnel and our use of
significant financial resources, with no certainty of success or recovery of our
related expenses. It is not unusual for an electric utility or
commercial and industrial energy consumer to go through the entire sales process
and not accept any proposal or quote. In addition, pilot test
programs, which are often conducted and analyzed before a sale becomes final,
generally result in operating losses to us due to the lack of scalability,
start-up costs, development expenditures and other factors.
If
we are unable to expand the distribution of our products through strategic
alliances, we may not be able to grow our business.
Part of
our ability to grow our business depends on our success in continuing to
increase the number of customers we serve through a variety of strategic
marketing alliances or channel partnerships with metering companies,
communications providers, advanced meter reading providers, installation
companies and other large multinational companies. Revenues from
strategic alliances have not historically accounted for a significant portion of
our total revenues, although we plan to increasingly rely on such alliances to
grow our business in the future. We may not be able to maintain
productive relationships with the companies with which we have strategic
alliances, and we may not be able to establish similar relationships with
additional companies on a timely and economic basis, if at all.
18
An
increased rate of terminations of residential, commercial and industrial energy
consumers, or the use of more efficient products by such consumers, who are
enrolled in our VPC, power pool, or turnkey programs, or who would enroll in
such program, would negatively impact our business by reducing our revenues and
requiring us to spend more money to maintain and grow our participant
base.
Our
ability to provide electric capacity under our capacity contracts depends on the
number of residential, commercial and industrial energy consumers who enroll and
participate in our programs. The average annual rate of participant
terminations for our VPC programs from inception through December 31, 2009 was
approximately 6%. As a result, we will need to acquire new
participants on an ongoing basis to maintain available capacity provided to our
utility customers. In addition, to the extent existing or future
participants install high efficiency air conditioning units which could minimize
the effectiveness of our solution as to that participant, we may face lower
measurement and verification results. If we are unable to recruit and
retain participants for our capacity or turnkey programs, we will face
difficulties acquiring capacity to sell through such programs or the power pool
markets. Furthermore, the increased competition and the length of
contracts for commercial and industrial capacity consumers may result in an
increase of such consumers not re-enrolling when their contract ends or
terminating their contract for a more lucrative offer, which could further
restrict our ability to acquire capacity to sell into such
programs. If participant termination rates increase, we will need to
acquire more participants in order to maintain our revenues and more
participants than estimated to grow our business. This loss of
revenues resulting from participant terminations can be significant, and
limiting terminations is an important factor in our ability to achieve future
profitability. If we are unsuccessful in controlling participant
terminations, we may be unable to acquire a sufficient number of new
participants or we may incur significant costs to replace participants, which
could cause our revenues to decrease, and we might not become
profitable.
The
success of our businesses depends in part on our ability to develop new products
and services and increase the functionality of our current
products.
From 2001
and through December 31, 2009, we have invested over $14.0 million in
research and development costs associated with our current Smart Grid
products. From time to time, our customers have expressed a need for
increased functionality in our products and software. In response,
and as part of our strategy to enhance our solutions and grow our business, we
plan to continue to make substantial investments in the research and development
of new technologies. Our future success will depend in part on our
ability to continue to design and manufacture new competitive products and
software, to enhance our existing products and to provide new value-added
services. Product development initiatives will require continued
investment, and we may experience unforeseen problems in the performance of our
technologies or products, including new technologies that we develop and
deploy. Furthermore, we may not achieve market acceptance of our new
products, solutions and software. For example, in the past we
incurred significant costs to develop a specific product for large commercial
and industrial customers that has found limited market acceptance. If
we are unable to develop new products and services, or if the market does not
accept such products and services, our business and results of operations will
be adversely affected. In addition, if we are unable to maintain low
costs for established products supplied under fixed fee contracts, our business
and results of operations will be adversely affected.
Current
market developments may adversely affect our business, results of operations and
access to capital.
On
October 3, 2008, former President George W. Bush signed into law the Emergency
Economic Stabilization Act of 2008 in response to the financial crises affecting
the U.S. banking system, housing and financial markets. Over the past
year, dramatic declines in the housing market, including increasing foreclosures
have resulted in concern about the stability of the financial markets
generally. Many lenders and institutional investors have ceased to
provide funding. The resulting lack of available credit and lack of
confidence in the financial markets could materially and adversely affect our
results of operations and financial conditions and our access to
capital. In particular, we may face the following risks in connection
with these events:
•
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continuing
foreclosures in the housing market may cause a decline in participation in
our demand response programs;
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•
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our
ability to assess the creditworthiness of our customers may be impaired
due to slow payment, receivership or bankruptcy of our customers;
and
|
•
|
our
ability to borrow, or our customer’s availability to borrow, from other
financial institutions could be adversely affected by further disruptions
in the capital markets or other events, including actions by credit rating
agencies and investor expectations.
|
We
face risks if we are unable to participate in the funding benefits of the
Stimulus Bill.
On
February 17, 2009, President Obama signed into law the American Reinvestment and
Recovery Act of 2009, or the Stimulus Bill, in response to the financial crises
affecting the U.S. economy. The Stimulus Bill provides for funding
for various energy and electrical projects, including Smart Grid
funding. While we anticipate positive benefits from the Stimulus
Bill, to the extent we are unable to benefit and/or our competitors benefit from
this bill, our business may be adversely affected.
19
We
may not be able to identify suitable acquisition candidates or complete
acquisitions successfully, which may inhibit our rate of growth, and we may not
be successful in integrating any acquired businesses and acquisitions that we
complete which may expose us to a number of unanticipated operational or
financial risks.
In
addition to organic growth, we have pursued, and to the extent we continue to
pursue, growth through the acquisition of companies or assets, we may enlarge
our geographic markets, add experienced management and increase our product and
service offerings. However, we may be unable to implement this growth
strategy if we cannot identify suitable acquisition candidates or reach
agreement on potential acquisitions on acceptable terms or for other
reasons. Moreover, our acquisition efforts involve certain risks,
including:
•
|
difficulty
integrating operations and systems;
|
•
|
the
potential for key personnel and customers of the acquired company
terminating their relationships with the acquired company as a result of
the acquisition;
|
•
|
additional
financial and accounting challenges and complexities in areas such as tax
planning and financial reporting;
|
•
|
additional
risks and liabilities (including for environmental-related costs) as a
result of our acquisitions, some of which we may not discover during our
due diligence;
|
•
|
disruption
of our ongoing business or insufficient management attention to our
ongoing business; and
|
•
|
realizing
cost savings or other financial benefits we
anticipated.
|
The rapid
growth of the clean energy sector may cause us to experience more competition
for acquisition opportunities, which could result in higher valuations for
acquisition candidates. As a result, we may be required to pay more
for acquisitions we believe are beneficial, which could, in turn, require us to
recognize additional goodwill in connection with such
acquisitions. To the extent that any acquisition results in
additional goodwill, it will reduce our tangible net worth, which might have an
adverse effect on our credit. In addition, in the event that we issue
shares of our common stock as part or all of the purchase price, an acquisition
will dilute the ownership of our then-current stockholders. Once
integrated, acquired operations may not achieve levels of revenues, synergies or
productivity comparable to those achieved by our existing operations, or
otherwise perform as expected. For example, we did not experience the
anticipated revenue growth during 2009 and 2008 from our acquisitions of
Enerwise and PES, which was due in part to PES not reaching its anticipated
build-out and in part to the regulatory rule change in 2008 that affected
Enerwise’s economic program in PJM. In addition, future acquisitions
could result in the incurrence of additional indebtedness and other
expenses. There can be no assurance that our acquisition strategy
will not have a material adverse effect on our business, financial condition and
results of operations.
We
face risks related to potential expansion into international
markets.
We may
expand our addressable market by pursuing opportunities to provide demand
response and energy management solutions in international markets. We have had
little experience operating large programs in markets outside of the United
States. Accordingly, new markets may require us to respond to new and
unanticipated regulatory, marketing, sales and other challenges. There can be no
assurance that we will be successful in responding to these and other challenges
we may face as we enter and attempt to expand in international markets.
International operations also entail a variety of other risks,
including:
•
|
unexpected
changes in legislative or regulatory requirements of foreign
countries;
|
•
|
currency
exchange fluctuations;
|
•
|
longer
payment cycles and greater difficulty in accounts receivable collection;
and
|
•
|
significant
taxes or other burdens of complying with a variety of foreign
laws.
|
International
operations are also subject to general geopolitical risks, such as political,
social and economic instability and changes in diplomatic and trade relations.
One or more of these factors could adversely affect any international operations
and result in lower revenue than we expect and could significantly affect our
profitability.
20
Our
business may become subject to modified or new government regulation, which may
negatively impact our ability to market our products.
Our
products and services are not subject to existing federal and state regulations
in the U.S. governing the electric utility industry. However, our
products and their installation are subject to government oversight and
regulation under state and local ordinances relating to building codes, public
safety regulations pertaining to electrical connections and local and state
licensing requirements. In the future, federal, state or local
governmental entities or competitors may seek to change existing regulations,
impose additional regulations or apply current regulations to cover our
products and services. If any of these things occur, as applicable to
our products or services, whether at the federal, state or local level, they may
negatively impact the installation, servicing and marketing of our products and
increase our costs and the price of our products and services. We are
currently evaluating various state regulations regarding installation work for
one of our programs. While we do not know the outcome of our
evaluation or the potential for any state regulatory board to address such work,
there is the potential that we could suffer a loss of significant installation
revenue, if not all installation revenue, for this contract.
We
are exposed to fluctuations in the market values of our portfolio investments
and interest rates; impairment of our investments could harm our
earnings.
We
maintain an investment portfolio of various holdings, types, and
maturities. These securities are generally classified as
available-for-sale and, consequently, are recorded on our consolidated balance
sheets at fair value with unrealized gains or losses reported as a separate
component of accumulated other comprehensive income (loss), net of
tax. For information regarding the sensitivity of and risks
associated with the market value of portfolio investments and interest rates,
see “Item 7A - Quantitative and Qualitative Disclosure About Market
Risk.”
The
reorganization of our business may cause disruptions in our operations, customer
relationships, employee turnover, or other business failure.
We have
announced and have implemented organizational changes as part of our strategic
initiatives to better and more efficiently manage our business. The
reorganization may not prove effective and may create initial or permanent
disruption in our business, including failed operations within our demand
response systems and IT departments. The reorganization may result in
additional employee turnover or loss of certain customer relationships if we
fail to adequately perform. In addition, we recently made additional
organizational changes in an attempt to better streamline our development,
sales, and operations. Implementing these organizational changes
requires significant time and resource commitments from our senior
management. In the event that we are unable to effectively implement
these organizational changes, we are unable to recruit, maintain the caliber of,
or retain key employees as a result of these initiatives or these initiatives do
not yield the anticipated benefits, our business may be adversely
affected.
We
may be required to record a significant charge to earnings if our goodwill or
intangible assets become impaired.
We are
required under generally accepted accounting principles to review our
amortizable intangible assets for impairment when events or changes in
circumstances indicate the carrying value may not be
recoverable. Factors that may be considered a change in circumstances
indicating that the carrying value of our amortizable intangible assets may not
be recoverable include a decline in stock price and market capitalization, and
slower growth rates in our industry. Goodwill and indefinite lived
assets are required to be tested for impairment at least
annually. During the year ended December 31, 2008, we recorded a
significant charge to earnings in our consolidated financial statements as a
result of our determination that certain goodwill and intangible assets were
impaired. We will continue to evaluate our remaining goodwill and
indefinite lived assets as required under generally accepted accounting
principles and those results could adversely impact our results of operations in
the future.
If
we fail to hire and train additional personnel and improve our controls and
procedures to respond to the growth of our business, the quality of our products
and services could materially suffer and cause us to lose
customers.
Our
business and operations have expanded rapidly since our
inception. For example, from January 2003 through December 31, 2009,
the number of our employees increased more than 529%, growing from 70 to
440. To continue expanding our customer base effectively and to meet
our growth objectives for the future, we are currently working to fill multiple
positions within our company, including without limitation an Executive Vice
President of Sales and Marketing and a Vice President of Regulatory
Affairs. In addition, we must continue to successfully train,
motivate and retain our existing and future employees. In order to
manage our expanding operations, we will also need to continue to improve our
management, operational and financial controls and our reporting systems and
procedures. All of these measures will require significant
expenditures and will demand the attention of management. If we are
not able to hire, train and retain the necessary personnel, or if these
operational and reporting improvements are not implemented successfully, the
quality of our products and services could materially suffer as a result and
cause us to lose customers.
Our
business may be subject to additional obligations to collect and remit sales,
use or other tax and, any successful action by state, foreign or other
authorities to collect additional sales, use or other tax could adversely harm
our business.
We file
sales and/or use tax returns in certain states within the U.S. as required by
law and certain client contracts for a portion of the hardware, software and
services that we provide. We do not collect sales or other similar
taxes in other states and many of the states do not apply sales or similar taxes
to the vast majority of the services that we provide. However, one or
more states could seek to impose additional sales or use tax collection and
record-keeping obligations on us. Any successful action by state,
foreign or other authorities to compel us to collect and remit sales or use tax,
either retroactively, prospectively or both, could adversely affect our results
of operations and business.
21
Risks
Related to Our Common Stock
Shares
eligible for future sale may cause the market price for our common stock to
decline even if our business is doing well.
Sales of
substantial amounts of our common stock in the public market, or the perception
that these sales may occur, could cause the market price of our common stock to
decline. This could also impair our ability to raise additional
capital in the future through the sale of our equity
securities. Under our fifth amended and restated certificate of
incorporation, we are authorized to issue up to 150,000,000 shares of common
stock, of which 25,067,102 shares of common stock were outstanding as of
December 31, 2009. We cannot predict the size of future issuances of
our common stock or the effect, if any, that future sales and issuances of
shares of our common stock, or the perception of such sales or issuances, would
have on the market price of our common stock.
We
do not intend to pay dividends on our common stock.
We have
not declared or paid any dividends on our common stock to date, and we do not
anticipate paying any dividends on our common stock in the foreseeable
future. We intend to reinvest all future earnings in the development
and growth of our business. In addition, our senior loan agreement
prohibits us from paying dividends and future loan agreements may also prohibit
the payment of dividends. Any future determination relating to our
dividend policy will be at the discretion of our board of directors and will
depend on our results of operations, financial condition, capital requirements,
business opportunities, contractual restrictions and other factors deemed
relevant. To the extent we do not pay dividends on our common stock,
investors must look solely to stock appreciation for a return on their
investment in our common stock.
Our
fifth amended and restated certificate of incorporation, second amended and
restated bylaws and Delaware law contain provisions that could discourage
acquisition bids or merger proposals, which may adversely affect the market
price of our common stock.
Provisions
in our fifth amended and restated certificate of incorporation, our second
amended and restated bylaws and applicable provisions of the General Corporation
Law of the State of Delaware may make it more difficult or expensive for a third
party to acquire control of us even if a change of control would be beneficial
to the interests of our stockholders. These provisions could
discourage potential takeover attempts and could adversely affect the market
price of our common stock. Our fifth amended and restated certificate
of incorporation and our second amended and restated bylaws:
•
|
provide
for a classified board of directors, could discourage potential
acquisition proposals and could delay or prevent a change of
control;
|
•
|
authorize
the issuance of blank check preferred stock that could be issued by our
board of directors during a takeover
attempt;
|
•
|
prohibit
cumulative voting in the election of directors, which would otherwise
allow holders of less than a majority of stock to elect some
directors;
|
•
|
require
super-majority voting to effect amendments to certain provisions of our
fifth amended and restated certificate of incorporation and to effect
amendments to our second amended and restated bylaws concerning the number
of directors;
|
•
|
limit
who may call special meetings;
|
•
|
prohibit
stockholder action by written consent, requiring all actions to be taken
at a meeting of the stockholders;
|
•
|
establish
advance notice requirements for nominating candidates for election to the
board of directors or for proposing matters that can be acted upon by
stockholders at a stockholders meeting;
and
|
•
|
require
that vacancies on the board of directors, including newly-created
directorships, be filled only by a majority vote of directors then in
office.
|
In
addition, Delaware law prohibits us from engaging in any business combination
with any “interested stockholder,” meaning generally that a stockholder who
beneficially owns more than 15% of our common stock cannot acquire us for a
period of three years from the date this person became an interested
stockholder, unless various conditions are met, such as approval of the
transaction by our board of directors.
Unresolved
Staff Comments
|
None.
22
Properties
|
In
Norcross, Georgia, we lease approximately 25,700 square feet of office space for
our Utility Products & Services segment and our executive and administrative
support functions. In East Hanover, New Jersey, we lease
approximately 14,250 square feet of office space for our Residential Business
segment. We also lease 7,800 square feet of leased office and warehouse space in
Englewood, New Jersey for our Residential Business segment. In Kennett
Square, Pennsylvania, we lease 19,737 square feet of office space for our
Commercial & Industrial Business segment. In Newark, California and
Broomfield, Colorado, we lease approximately 6,260 square feet of office space
for software development and southwest U.S. operations. We also lease properties
in certain cities as branch offices. The above facilities are in good condition,
and we believe that our properties will be sufficient to support our operations
for the foreseeable future. We do not own any properties.
Legal
Proceedings
|
In the
ordinary conduct of our business, we are subject to periodic lawsuits,
investigations and claims. Although we cannot predict with certainty the
ultimate resolution of lawsuits, investigations and claims asserted against us,
we do not believe that any currently pending legal proceeding or proceedings to
which we are a party or of which any of our property is subject will have a
material adverse effect on our business, results of operations, cash flows or
financial condition. Our policy is to assess 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. A
liability is recorded and charged to operating expense when we determine that a
loss is probable and the amount can be reasonably estimated. Additionally, we
disclose contingencies for which a material loss is reasonably possible, but not
probable. As of December 31, 2009, there were no material contingencies
requiring accrual or disclosure.
As
previously disclosed in our Quarterly Report on Form 10-Q for the period ended
March 31, 2009, in January 2009, IP Co. LLC, d/b/a Intus IQ, filed a complaint
in the U.S. District Court for the Eastern District of Texas against Comverge,
Inc., Oncor Electric Delivery Company LLC, Reliant Energy, Inc., Datamatic,
LTD., EKA Systems, Inc., Sensus Metering Systems Inc., Tantalus Systems Corp.,
Tendril Networks, Inc., Trilliant Incorporated, and Trilliant Networks, Inc.,
alleging infringement of two patents owned by IP Co. LLC. The complaint alleged
that the U.S. patents, concerning wireless mesh networking systems, are being
infringed by the defendants. Comverge and Intus IQ settled the litigation on
July 17, 2009 and the complaint has been dismissed with prejudice. The
settlement did not have a material adverse effect on our financial condition or
results of operations.
Reserved
|
Part
II
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Price
Range of Common Stock
Our
common stock has been listed on the Nasdaq Global Market under the symbol “COMV”
since April 12, 2007. Prior to that time, there was no public market for
our common stock. The following table sets forth the range of high and low sales
prices per share as reported on the Nasdaq Global Market for each quarterly
period in 2009 and 2008.
2009
|
2008
|
|||||||||||||||||||||||||||||||
Comverge
Inc.
|
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||||||||||||||
Price
per Share
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||||||||||||||||||||||||
High
|
$ | 7.52 | $ | 13.23 | $ | 13.87 | $ | 13.10 | $ | 32.34 | $ | 14.50 | $ | 15.74 | $ | 6.00 | ||||||||||||||||
Low
|
$ | 3.76 | $ | 6.25 | $ | 9.46 | $ | 9.92 | $ | 10.19 | $ | 10.20 | $ | 4.20 | $ | 2.35 |
The
closing sales price of our common stock on the Nasdaq Global Market was $10.30
per share on March 3, 2010. As of March 3, 2010, there were
25,068,842 shares of our common stock outstanding, which were held by
approximately 405 holders of record. Such number of stockholders does
not reflect the number of individuals or institutional investors holding stock
in nominee name through banks, brokerage firms and others.
Dividend
Policy
We have
never paid any cash dividends on our common stock. For the foreseeable future,
we intend to retain and reinvest any earnings in our business, and we do not
anticipate paying any cash dividends. Whether or not we declare any dividends
will be at the discretion of our board of directors, considering then-existing
conditions, including our financial condition and results of operations, capital
requirements, contractual restrictions (including those under our loan
agreement), business opportunities and other factors that our board of directors
deems relevant.
23
Use
of Proceeds from Public Offerings
During
2007, we completed public offerings of our common stock on April 18, 2007
(Registration Nos. 333-137813 and 333-142082) and December 12, 2007
(Registration No. 333-146837). Net proceeds to us from both offerings were $110
million. We utilized $34 million for our two acquisitions completed during 2007,
$5 million as cash collateral for certain performance guarantees, $1 million to
pay the then outstanding balance on our senior loan agreement, $3 million for
payment of employee taxes due to net settlement of stock option exercises, $1
million for non-financed capital expenditures, and $15 million to fund the
operations of our business and for general corporate purposes. Additionally, we
utilized $4 million to pay a portion of our subordinated convertible promissory
notes during 2008.
During
2009, we completed a public offering of our common stock on November 10, 2009
(Registration No. 333-161400). Net proceeds to us were $27 million.
We utilized $23 million to repay the then outstanding balance on our credit
agreement with General Electric Capital Corporation.
We plan
to use the remaining proceeds from the offerings discussed above to finance
capital requirements of our current long-term contracts, to finance research and
development, to fund the cash consideration of potential future acquisitions,
and for other general corporate purposes. We have invested a portion of the
remaining proceeds in marketable securities, pending their use.
Stock
Price Performance Graph
The
following graph shows the total stockholder return of an investment of $100 in
cash on April 12, 2007, the date we priced our stock pursuant to our
initial public offering, through December 31, 2009, for (1) our common
stock, (2) the S&P 500 Index, (3) the Nasdaq Composite Index, and
(4) the Nasdaq Clean Edge U.S. Liquid Series Index. After April 12,
2007, measurement points are the last trading day prior to the end of each of
our quarters. Returns are based on historical results and are not intended to
suggest future performance. Data for the S&P 500 Index, the Nasdaq Composite
Index, and the Nasdaq Clean Edge U.S. Liquid Series Index assume reinvestment of
dividends, if dividends were paid. We have never paid dividends on our common
stock and have no present plans to do so.
24
March
31,
|
June
30,
|
September
30,
|
December
31,
|
|||||||||||||
2009
|
2009
|
2009
|
2009
|
|||||||||||||
Comverge,
Inc.
|
$ | 38.61 | $ | 67.22 | $ | 67.83 | $ | 62.44 | ||||||||
S&P
500
|
$ | 61.92 | $ | 78.21 | $ | 97.75 | $ | 108.76 | ||||||||
Nasdaq
Composite Index
|
$ | 61.63 | $ | 73.98 | $ | 85.57 | $ | 91.49 | ||||||||
Nasdaq
Clean Edge U.S. Liquid Series Index
|
$ | 49.84 | $ | 65.18 | $ | 72.49 | $ | 75.87 |
March
31,
|
June
30,
|
September
30,
|
December
31,
|
|||||||||||||
2008
|
2008
|
2008
|
2008
|
|||||||||||||
Comverge,
Inc.
|
$ | 57.39 | $ | 77.67 | $ | 25.56 | $ | 27.22 | ||||||||
S&P
500
|
$ | 92.18 | $ | 89.20 | $ | 81.17 | $ | 62.95 | ||||||||
Nasdaq
Composite Index
|
$ | 91.89 | $ | 92.45 | $ | 84.34 | $ | 63.58 | ||||||||
Nasdaq
Clean Edge U.S. Liquid Series Index
|
$ | 107.79 | $ | 116.12 | $ | 89.21 | $ | 52.71 |
April
12,
|
June
30,
|
September
30,
|
December
31,
|
|||||||||||||
2007
|
2007
|
2007
|
2007
|
|||||||||||||
Comverge,
Inc.
|
$ | 100.00 | $ | 172.28 | $ | 182.56 | $ | 174.94 | ||||||||
S&P
500
|
$ | 100.00 | $ | 104.30 | $ | 106.40 | $ | 102.33 | ||||||||
Nasdaq
Composite Index
|
$ | 100.00 | $ | 104.96 | $ | 108.92 | $ | 106.93 | ||||||||
Nasdaq
Clean Edge U.S. Liquid Series Index
|
$ | 100.00 | $ | 110.06 | $ | 117.70 | $ | 144.79 |
As of
March 3, 2010, the total value of an investment of $100 in cash on
April 12, 2007 through March 3, 2010 would be $57.22, $114.75, $91.96
and $69.72 for our common stock, the S&P 500 Index, the Nasdaq Composite
Index, and the Nasdaq Clean Edge U.S. Liquid Series Index,
respectively.
The
stock price performance data included in the above graph and table is not
intended to be indicative of future stock price performance.
Purchases
of Equity Securities by the Issuer and Affiliate Purchases
The
following table discloses purchases of shares of our common stock made by us or
on our behalf for the periods shown below.
Total
Number of
|
Average
Price
|
|||||||
Period
|
Shares
Purchased (1)
|
Paid
per Share
|
||||||
October
1 - October 31, 2009
|
161 | $ | 11.46 | |||||
November
1 - November 30, 2009
|
1,903 | $ | 10.85 | |||||
December
1 - December 31, 2009
|
3,598 | $ | 11.12 |
|
(1)
|
Represents shares surrendered by
employees to exercise stock options and to satisfy tax withholding
obligations on vested restricted stock and stock option exercises pursuant
to the Amended and Restated 2006 Long-Term Incentive
Plan.
|
Selected
Consolidated Financial Data
|
The
following tables set forth our selected historical financial data for the
periods indicated. The selected statement of operations data for the years ended
December 31, 2009, 2008 and 2007, and the selected balance sheet data as of
December 31, 2009 and 2008, have been derived from our audited financial
statements and related notes thereto included elsewhere in this annual report.
The selected statement of operations data for the years ended December 31,
2006 and 2005, and the selected balance sheet data as of December 31, 2007,
2006, and 2005, have been derived from our audited financial statements and
related notes thereto not included in this annual report.
The
information presented below should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the financial statements and the notes thereto included elsewhere in this annual
report.
25
Year
Ended December 31,
|
||||||||||||||||||||
2009
(1)
|
2008
(1)
|
2007
|
2006
|
2005
(2)
|
||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
Statement
of Operations Data:
|
||||||||||||||||||||
Total
revenue
|
$ | 98,844 | $ | 77,238 | $ | 55,162 | $ | 33,873 | $ | 23,351 | ||||||||||
Total
cost of revenue
|
65,648 | 43,335 | 28,818 | 16,897 | 11,889 | |||||||||||||||
Gross
profit
|
33,196 | 33,903 | 26,344 | 16,976 | 11,462 | |||||||||||||||
Operating
expenses
|
||||||||||||||||||||
General
and administrative expenses
|
37,781 | 34,463 | 22,072 | 13,910 | 11,319 | |||||||||||||||
Marketing
and selling expenses
|
17,737 | 15,738 | 9,831 | 7,912 | 6,927 | |||||||||||||||
Research
and development expenses
|
4,878 | 1,137 | 997 | 790 | 1,094 | |||||||||||||||
Amortization
of intangible assets
|
2,209 | 2,439 | 973 | 24 | 49 | |||||||||||||||
Impairment
charges
|
- | 75,432 | - | - | - | |||||||||||||||
Operating
loss
|
(29,409 | ) | (95,306 | ) | (7,529 | ) | (5,660 | ) | (7,927 | ) | ||||||||||
Interest
and other expense (income), net
|
2,038 | (299 | ) | (1,072 | ) | 454 | 54 | |||||||||||||
Loss
before income taxes
|
(31,447 | ) | (95,007 | ) | (6,457 | ) | (6,114 | ) | (7,981 | ) | ||||||||||
Provision
(benefit) for income taxes
|
219 | (901 | ) | 147 | 46 | - | ||||||||||||||
Net
loss
|
$ | (31,666 | ) | $ | (94,106 | ) | $ | (6,604 | ) | $ | (6,160 | ) | $ | (7,981 | ) | |||||
Net
loss per share
|
||||||||||||||||||||
Basic
and diluted
|
$ | (1.45 | ) | $ | (4.45 | ) | $ | (0.46 | ) | $ | (1.89 | ) | $ | (2.63 | ) |
As
of December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(in thousands) | ||||||||||||||||||||
Balance
Sheet Data:
|
||||||||||||||||||||
Cash
and cash equivalents and marketable securities
|
$ | 50,478 | $ | 47,847 | $ | 72,929 | $ | 3,774 | $ | 2,606 | ||||||||||
Goodwill
and intangible assets
|
16,958 | 18,430 | 93,197 | 694 | 677 | |||||||||||||||
Total
assets
|
120,897 | 125,157 | 203,145 | 28,836 | 24,555 | |||||||||||||||
Total
long-term liabilities
|
13,867 | 29,499 | 30,496 | 5,000 | 4,000 | |||||||||||||||
Shareholders'
equity
|
74,044 | 67,660 | 152,631 | 8,399 | 8,250 |
|
(1)
|
The
results of operations for the years ended December 31, 2009 and 2008 will
not be comparable to the results of operations for the year ended December
31, 2007 due to the Enerwise and PES acquisitions completed in the second
half of 2007. The year ended December 31, 2007 includes results from the
date of acquisitions to the end of the year. The years ended December 31,
2009 and 2008 include a full year of operating results for the
consolidated company, including the acquired
entities.
|
|
(2)
|
The
results of operations for the year ended 2005 do not include stock based
compensation expense as the current stock-based compensation guidance was
adopted on January 1, 2006 utilizing the prospective
method.
|
26
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
You
should read the following discussion together with the financial statements and
the notes thereto included elsewhere in this annual report. This discussion
contains forward-looking statements that are based on management’s current
expectations, estimates and projections about our business and operations. The
cautionary statements made in this annual report should be read as applying to
all related forward-looking statements wherever they appear in this annual
report. Our actual results may differ materially from those currently
anticipated and expressed in such forward-looking statements as a result of a
number of factors, including those we discuss under “Risk Factors” and elsewhere
in this annual report.
Overview
We are a
clean energy company providing technologically advanced demand management
solutions and load capacity which improve the evolving Smart Grid. We
provide our solutions to electric utilities, grid operators and associated
electricity markets. As an alternative to the traditional method of
providing capacity by building a new power plant, we deliver our solutions
through demand management products, services and systems that decrease energy
consumption. Our demand management solutions utilize state-of-the-art
advancements in hardware, software, and services—the solutions are designed,
built and operated for the benefit of our customers, which serve residential,
commercial and industrial consumers. We provide capacity to our
customers either through long-term contracts or through open markets where we
actively manage electrical demand or by selling demand management solutions to
utilities that operate them. The capacity we deliver is more
environmentally friendly and less expensive than conventional alternatives and
has the benefit of increasing overall system reliability.
We
provide our clean energy solutions through our three reporting segments: the
Utility Products & Services segment, the Residential Business segment, and
the Commercial & Industrial, or C&I, Business segment. The
Utility Products & Services segment sells solutions comprising hardware, our
Apollo software and services, such as installation, marketing, IT integration
and project management, to utilities that elect to own and operate demand
management networks for their own benefit. The Residential Business
segment sells electric capacity to utilities under long-term contracts, either
through demand response or energy efficiency, primarily through marketing and
installing our devices on residential and small commercial end-use
participants. The Residential Business segment also provides
marketing services. The C&I Business segment provides demand
response and energy management services to utilities and associated electricity
markets that enable commercial and industrial customers to reduce energy
consumption and total costs, improve energy infrastructure reliability and make
informed decisions on energy and renewable energy purchases and
programs.
As of
December 31, 2009, we owned or managed 2,899 megawatts, as summarized in the
table below. We include megawatts as owned or managed if there is a
contract in place that requires us to either sell capacity to the utility or
open market; sell turnkey services or maintenance of a program to a utility; or
manage megawatts for a fee.
As
of December 31, 2009
|
|||||||
Commercial
&
|
|||||||
Utility
Products
|
Residential
|
Industrial
|
Total
|
||||
&
Services
|
Business
|
Business
|
Comverge
|
||||
Megawatts
owned under long-term capacity contracts (1) (2)
|
-
|
628
|
270
|
898
|
|||
Megawatts
owned for sale in open market programs
|
-
|
40
|
1,154
|
1,194
|
|||
Megawatts
owned under turnkey contracts
|
370
|
-
|
-
|
370
|
|||
Megawatts
managed for a fee on a pay-for-performance basis
|
-
|
-
|
437
|
437
|
|||
Megawatts
owned or managed
|
370
|
668
|
1,861
|
2,899
|
(1)
|
Our
VPC contract with Nevada Energy for 143 megawatts of contracted capacity
expired on January 1, 2010. While we are working on extending
our relationship with Nevada Energy, we will remove the 143 megawatts from
our contracted capacity amount in the first quarter of 2010 if we do not
enter into a contractual relationship with Nevada Energy relating to those
megawatts.
|
(2)
|
Does
not include megawatts of contracted capacity for Virtual Peaking Capacity,
or VPC, contracts that have not received final regulatory approval.
Specifically, the table does not include 117 megawatts of contracted
capacity for the C&I VPC contract with a major Virginia-based energy
provider, which was executed in July
2009.
|
As of
December 31, 2009, we owned 898 megawatts of contracted capacity from long-term
contracts. Our existing VPC contracts represented contracted capacity of 805
megawatts and our base load capacity represented contracted capacity of 93
megawatts. The table below presents the activity in megawatts of contracted
capacity from long-term capacity contracts.
27
Megawatts
Owned
|
|
under
Long-Term
|
|
Capacity
Contracts (1) (2)
|
|
As
of December 31, 2006
|
220
|
New
VPC megawatts awarded during the year ended December 31,
2007:
|
|
Nevada
Energy VPC contract
|
123
|
Pacific
Gas & Electric Company VPC contract
|
57
|
Public
Service Company of New Mexico VPC contract
|
62
|
Expansion
of VPC programs
|
30
|
Total
new VPC megawatts awarded
|
272
|
Expiration
of ISO New England, Inc. VPC contracts
|
(60)
|
Consolidated
Edison base load capacity contracts acquired
|
47
|
As
of December 31, 2007
|
479
|
New
VPC megawatts awarded during the year ended December 31,
2008:
|
|
Southern
Maryland Electric Cooperative VPC contract
|
75
|
Expansion
of VPC programs
|
80
|
Total
new VPC megawatts awarded
|
155
|
New
base load capacity program megawatts
|
67
|
As
of December 31, 2008
|
701
|
New
VPC megawatts awarded during the year ended December 31,
2009:
|
|
Arizona
VPC program
|
125
|
Maryland
VPC programs awarded
|
48
|
Southern
California VPC program
|
40
|
Expansion
of current VPC program
|
5
|
Total
new VPC megawatts awarded
|
218
|
Consolidated
Edison base load capacity contract amendments
|
(21)
|
As
of December 31, 2009
|
898
|
(1)
|
Our
VPC contract with Nevada Energy for 143 megawatts of contracted capacity
expired on January 1, 2010. While we are working on extending
our relationship with Nevada Energy, we will remove the 143 megawatts from
our contracted capacity amount in the first quarter of 2010 if we do not
enter into a contractual relationship with Nevada Energy relating to those
megawatts.
|
(2)
|
Does
not include megawatts of contracted capacity for Virtual Peaking Capacity,
or VPC, contracts that have not received final regulatory approval.
Specifically, the table does not include 117 megawatts of contracted
capacity for the C&I VPC contract with a major Virginia-based energy
provider, which was executed in July
2009.
|
Cumulatively,
we have installed capacity of 462 megawatts under our long-term capacity
contracts as of December 31, 2009 compared to 319 megawatts as of December 31,
2008, an increase of 143 megawatts. The main components of the change are an
increase of 6 megawatts from the base load capacity program during the year
ended December 31, 2009 and an increase of 137 megawatts installed during the
year ended December 31, 2009 in our existing VPC programs. The table below
presents contracted capacity, installed capacity and available capacity as of
December 31, 2009 and 2008, respectively.
(Megawatts)
|
December
31, 2009
|
December
31, 2008
|
|
Contracted
capacity
|
898
|
701
|
|
Installed
capacity (1)
|
462
|
319
|
|
Available
capacity (2)
|
421
|
279
|
|
(1)
|
Installed
capacity generally refers to the number of devices installed multiplied by
the historically highest demonstrated available capacity provided per
device for the applicable service territory for residential programs. For
commercial and industrial programs, installed capacity generally refers to
the megawatts that our end users have committed to
shed.
|
|
(2)
|
Available
capacity represents the amount of electric capacity that we have made
available to our customers during each contract year based on the results
of our measurement and verification process. We have used the most
recently settled measurement and verification results to present available
capacity for each period. For residential VPC programs, available capacity
is typically measured during the fourth quarter of each
year.
|
28
Reporting
Segments
We report
through three segments: the Utility Products & Services segment, the
Residential Business segment, and the Commercial & Industrial, or C&I,
Business segment. The Utility Products & Services segment sells solutions
comprising hardware, our Apollo software and services, such as installation,
marketing, IT integration and project management, to utilities that elect to own
and operate demand management networks for their own benefit. The
Residential Business segment sells electric capacity to utilities under
long-term contracts, either through demand response or energy efficiency,
primarily through marketing and installing our devices on residential and small
commercial end-use participants. The Residential Business segment
also provides marketing services. The C&I Business segment
provides demand response and energy management services to utilities and
associated electricity markets that enable commercial and industrial customers
to reduce energy consumption and total costs, improve energy infrastructure
reliability and make informed decisions on energy and renewable energy purchases
and programs.
Utility
Products & Services
Our
Utility Products & Services segment offers a broad range of products from
basic one-way load control switches to smart thermostats to comprehensive
two-way data collection and control systems. The most widely-deployed products
offered by our Utility Products & Services segment are our digital control
unit, an intelligent, microprocessor-driven solution for load management
control, which is installed on large energy-consuming devices and controls the
cycling and operation of the device, and our SuperStat smart thermostat, an
advanced, programmable thermostat solution with embedded communications to
control air conditioning and heating loads. Our Utility Products & Services
segment operates turnkey programs in which we design, build-out and operate a
load control program, with the utility retaining ownership of the underlying
asset.
Residential
Business
Our
Residential Business primarily offers residential VPC programs and our base load
energy efficiency programs to electric utilities pursuant to which we provide
capacity, on a pay-for-performance basis, through long-term
contracts. Under our VPC programs, we develop, operate and manage the
entire load management system which is designed to alleviate stress on the
system during peak demand. As of December 31, 2009, we operated five
residential and small commercial VPC programs in our Residential Business
segment. Once we secure a VPC contract with a utility customer, our Residential
Business segment incurs significant marketing costs to identify and enroll
participants in our VPC programs. These participant acquisition costs are
expensed as incurred. Once a participant enrolls in one of our VPC programs, we
install a digital control unit or thermostat at the participant’s location. The
cost of the installation and the hardware are capitalized and depreciated over
the remaining term of the contract with the utility, which is shorter than the
operating life of the equipment. The participant acquisition costs typically
result in lower operating margins and greater losses in the early years of a VPC
contract. Our base load reduction contracts are similar to the VPC contracts in
that we have to recruit and enroll participants into the program. The
participant acquisition costs are expensed as incurred. Unlike certain VPC
programs, we do not own the underlying asset. The Residential Business segment
also provides utilities marketing services.
Commercial
& Industrial Business
Our
Commercial & Industrial Business segment offers commercial and industrial
demand management and energy management services. The demand response services
provide commercial and industrial consumers with an ability to participate in
demand response programs offered in their area by grid operators such as PJM
Interconnection LLC. The energy management services include the assessment of
market opportunities in deregulated and unregulated markets and the performance
of energy auditing and implementation strategies. The energy management services
may also include the upgrade and maintenance of power systems such as the
implementation of power system distribution analysis, testing, maintenance,
replacement or repair, engineering design and consulting, meter and sub-meter
operations, and data management and analysis.
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 utility customers. The
information presented below with respect to payments from long-term contracts
includes payments related to our VPC contracts, base load contracts, and open
market bidding programs. As of December 31, 2009, we estimated that our
total payments to be received through 2024 were approximately $466 million. We
have excluded any estimated payments from our contract with a major
Virginia-based energy provider, as previously announced, which is awaiting final
regulatory approval.
29
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
annual report 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 receive
the payments anticipated by our long-term contracts and recognize revenues or
the anticipated margins from our backlog, and comparisons of period-to-period
estimates are not necessarily meaningful and may not be indicative of actual
payments.” 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
Contracts:
•
|
Our
existing VPC contracts with regulatory approval as of December 31, 2009
represented contracted capacity of 805 megawatts. In calculating an
estimated $252 million of payments from our VPC contracts as of December
31, 2009, we have included expectations
regarding build-out based on our experience to date in building out the
load management systems as well as future expectations for continuing to
enroll participants in each contract’s service territory. In some instances,
we may not build out to our contracted capacity due to enrollment rates
varying from our
expectations.
|
•
|
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 based upon 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.
|
•
|
Payments
from long-term contracts include $21.8 million that we expect to recognize
as revenue over the next year, which we include in backlog. Payments from
long-term contracts exclude $1.0 million of payments which we have
already received but have been deferred in accordance with our revenue
recognition policy. We expect to also recognize these payments as revenue
over the course of the next twelve
months.
|
Base
Load Capacity Contracts:
•
|
Our
existing energy efficiency contracts as of December 31, 2009 represent
potential base load contracted capacity of 93 megawatts. In calculating
the estimated $55 million in payments from these contracts, we have
assumed we will complete full build-out of the entire remaining megawatts
under contract by the end of 2012. 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 Bidding Programs:
•
|
As
of December 31, 2009 we had up to 683 megawatts bid into various capacity
open market bidding programs with PJM Interconnection, LLC. We currently
expect to receive approximately $42 million in long term payments through
the year 2013. In estimating the long term payments, we have assumed that
we will have limited churn among 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.
|
30
Turnkey
Contracts:
•
|
Our
turnkey contracts as of December 31, 2009 represent $97 million in
payments expected to be received over the next four years with four
utility customers to provide products, software, and services, including
program management, installation, and/or marketing. This is based on
estimated contractual minimum order volumes and current payments
attributable to installation and other services applied over the term of
the contract.
|
Other
Contracts:
•
|
An
estimated $20 million in payments expected to be received over the next
five years pursuant to contracts for our Smart Grid
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 2009, 2008
and 2007 was $31.7 million, $94.1 million and $6.6 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.”
Although
we currently intend to release quarterly updates of future revisions that we may
make to our estimated payments from long-term contracts, 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 annual report.
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 12 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 December 31, 2009, we
had contractual backlog of $68 million through December 31, 2010.
Results
of Operations
Year
Ended December 31, 2009 Compared to Year Ended December 31,
2008
Revenue
The
following table summarizes our revenue for the years ended December 31,
2009 and 2008 (dollars in thousands):
Year
Ended December 31,
|
||||||||||||
Percent
|
||||||||||||
2009
|
2008
|
Change
|
||||||||||
Segment
Revenue:
|
||||||||||||
Utility
Products & Services (1)
|
$ | 31,415 | $ | 22,458 | 40 | % | ||||||
Residential
Business
|
39,585 | 34,652 | 14 | |||||||||
Commercial
& Industrial Business (1)
|
27,844 | 20,128 | 38 | |||||||||
Total
|
$ | 98,844 | $ | 77,238 | 28 | % |
(1)
Program administration services for the tracking and verification of renewable
certificates are included in the Utility Products & Services segment’s
results for the year ended December 31, 2009. The services were reported in the
Commercial & Industrial Business segment in prior years. Accordingly,
revenue of $1.0 million related to these services for the year ended December
31, 2008 has been reclassified.
Utility
Products & Services Revenue
Our
Utility Products & Services segment had revenue of $31.4 million for the
year ended December 31, 2009 compared to $22.5 million for the year ended
December 31, 2008, an increase of $8.9 million or 40%. The increase in revenue
is due to an increase of $2.8 million in product sales, primarily attributable
to an increase of $1.0 million in digital control unit revenue and an increase
of $2.3 million in SuperStat revenue partially offset by a $0.5 million decrease
in other product sales. Digital control unit and SuperStat shipments
to external customers were approximately 182,000 units for the year ended
December 31, 2009 compared to 141,000 units for the year ended December 31,
2008, an increase of 29%. In addition, service revenue increased by
$6.1 million, mainly due to revenue contributed from the operation of our
turnkey programs, which includes such services as installation, marketing and/or
program management.
31
Residential
Business Revenue
Our
Residential Business segment had revenue of $39.6 million for the year ended
December 31, 2009 compared to $34.7 million for the year ended December 31,
2008, an increase of $4.9 million or 14%. Our Residential Business segment
recognized $26.4 million from our VPC programs, $10.5 million of revenue from
our base load efficiency programs, and $2.7 million from our marketing and other
services during the year ended December 31, 2009 compared to $19.1 million from
our VPC programs, $12.1 million of revenue from our base load efficiency
programs, and $3.5 million from our marketing and other services during the year
ended December 31, 2008.
We
recognized $26.4 million of revenue from our VPC contracts in the Residential
Business segment for the year ended December 31, 2009 compared to $19.1 million
of revenue from VPC contracts for the year ended December 31, 2008, an increase
of $7.3 million. The increase in VPC contract revenue is due to the
increased available capacity provided to our customers as a result of increased
build-out in the customer’s service territory.
Our
Residential Business segment’s revenue for the year ended December 31, 2009
included $10.5 million in revenue from our base load energy efficiency programs
compared to $12.1 million in revenue for the year ended December 31, 2008, a
decrease of $1.6 million. The decrease in energy efficiency program
revenue is due to a decline in installations partially offset by an increase of
$1.4 million in non-recurring revenue benefits due to contractual amendments
during the year ended December 31, 2009 compared to 2008.
The
remaining $0.8 million decrease in our Residential Business segment’s revenue
compared to the prior year is due to the non-renewal of a marketing contract in
2009.
We defer
revenue and direct cost under our VPC contracts until such revenue can be made
fixed and determinable through a measurement and verification test, generally in
our fourth quarter. In the fourth quarters of the years ended December 31,
2009 and 2008, we recognized VPC contract revenue of $25.7 million and $18.8
million, respectively. Of the $3.4 million in VPC deferred revenue as
of December 31, 2009, $0.3 million relates to the 2009 contract year and will be
recognized during the first half of 2010 once the revenue becomes fixed and
determinable. Similarly, 2008 contract consideration of $0.7 million
was not fixed and determinable as of December 31, 2008 and was recognized in
2009.
Commercial
& Industrial Business Revenue
Our
Commercial & Industrial Business segment had revenue of $27.8 million for
the year ended December 31, 2009 compared to $20.1 million for the year ended
December 31, 2008, an increase of $7.7 million or 38%. For the year ended
December 31, 2009, revenue is comprised of $25.1 million from demand response
services and $2.7 million from energy management services. For the year ended
December 31, 2008, revenue is comprised of $15.0 million from demand response
services and $5.1 million from energy management services.
We
recognized $22.0 million from open market programs during the year ended
December 31, 2009 compared to $14.3 million during the year ended December 31,
2008, an increase of $7.7 million. The increase in revenue is mainly due to the
increase in megawatts included in the open market programs as compared to the
prior year. Across all C&I open market programs in which we
participate, we have added 300 megawatts during 2009.
We
recognized $3.1 million of revenue from our VPC contracts in the Commercial
& Industrial Business segment for the year ended December 31, 2009 compared
to $0.7 million of revenue from VPC contracts for the year ended December 31,
2008, an increase of $2.4 million. The increase in VPC contract
revenue is due to the increased available capacity as a result of additional
enrollments of commercial and industrial end users.
The
increase in revenue from our open market programs and VPC contracts was
partially offset by a decrease of $2.4 million in energy management revenue is
due to the decline in our engineering projects during the year ended December
31, 2009 as a result of the general decline in expenditures by our customer in
the current economic environment.
32
Gross
Profit and Margin
The
following table summarizes our gross profit and gross margin for the years ended
December 31, 2009 and 2008 (dollars in thousands):
Year
Ended December 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Gross
|
Gross
|
Gross
|
Gross
|
|||||||||||||
Profit
|
Margin
|
Profit
|
Margin
|
|||||||||||||
Segment
Gross Profit and Margin:
|
||||||||||||||||
Utility
Products & Services (1)
|
$ | 12,387 | 39 | % | $ | 9,561 | 43 | % | ||||||||
Residential
Business
|
13,923 | 35 | 19,738 | 57 | ||||||||||||
Commercial
& Industrial Business (1)
|
6,886 | 25 | 4,604 | 23 | ||||||||||||
Total
|
$ | 33,196 | 34 | % | $ | 33,903 | 44 | % |
(1)
Program administration services for the tracking and verification of renewable
certificates are included in the Utility Products & Services segment’s
results for the year ended December 31, 2009. The services were reported in the
Commercial & Industrial Business segment in prior years. Accordingly, gross
profit of $0.7 million related to these services for the year ended December 31,
2008 has been reclassified.
Utility
Products & Services Gross Profit and Margin
Gross
profit for our Utility Products & Services segment was $12.4 million for the
year ended December 31, 2009 compared to $9.6 million for the year ended
December 31, 2008, an increase of $2.8 million or 29%. The increase in
gross profit is due to an increase in units sold as well as the gross profit
contributed from the operation of our turnkey programs. During the year ended
December 31, 2009, we shipped approximately 41,000 more digital control units
and SuperStats compared to the year ended December 31, 2008. Gross margin
decreased by four percentage points to 39% for the year ended December 31,
2009 from 43% for the year ended December 31, 2008. Service sales
contributed to the decrease in gross margin for the segment due to the turnkey
programs.
Residential
Business Gross Profit and Margin
Gross
profit for our Residential Business segment was $13.9 million for the year ended
December 31, 2009 compared to $19.7 million for the year ended
December 31, 2008, a decrease of $5.8 million or 29%. Gross
profit from our VPC contracts contributed $7.8 million, our base load efficiency
programs contributed $4.3 million and our marketing and other services
contributed the remaining $1.8 million in gross profit during the year ended
December 31, 2009. Gross profit included $13.4 from our VPC contracts, $4.4
million from our base load efficiency programs and $1.9 million from our
marketing and other services during the year ended December 31, 2008. Gross
margin for the year ended December 31, 2009 was 35% compared to a gross margin
of 57% for the year ended December 31, 2008, a decrease of 22 percentage
points.
The gross
margin for our VPC contracts was 30% in the year ended December 31, 2009
compared to 71% for the year ended December 31, 2008. In our VPC programs, the
cost of the hardware and installing that hardware are capitalized and
depreciated over the remaining term of the contract with the utility, which is
shorter than the operating life of the equipment. As previously
disclosed, our largest VPC contract expired on January 1, 2010. Therefore, all
capital deployed in 2009 under that one VPC contract was fully expensed in 2009
resulting in a lower gross margin for that VPC contract and the Residential
Business segment as a whole.
The
Residential Business segment’s gross profit for the year ended December 31, 2009
included $4.3 million in gross profit from our base load energy efficiency
programs compared to $4.4 million in gross profit for the year ended December
31, 2008, a decrease of $0.1 million. Gross margin attributable to the base load
energy efficiency contracts was 41% and 36% for the years ended December 31,
2009 and 2008, respectively. The gross profit for 2009 and 2008
includes non-recurring revenue benefits due to contractual amendments of $2.3
million and $0.9 million, respectively. When
excluding the non-recurring benefits as well as incremental liquidated damages
recorded during both years, gross margin decreased by six percentage points for
the year ended December 31, 2009 compared to 2008 due to the mix of rates we
received in certain geographical areas of the Manhattan metropolitan
area.
The
remaining decrease of $0.1 million in the Residential Business segment’s gross
profit compared to the prior year is a result of our marketing and other
services provided.
33
Commercial
& Industrial Business Gross Profit and Margin
Gross
profit for our Commercial & Industrial Business segment was $6.9 million for
the year ended December 31, 2009 compared to $4.6 million for the year ended
December 31, 2008, an increase of $2.3 million or 50%. Gross profit
from our demand response services contributed $5.2 million and our energy
management services contributed $1.7 million during the year ended December 31,
2009. Gross profit from our demand response services contributed $2.8
million and our energy management services contributed $1.8 million during the
year ended December 31, 2008. Gross margin for the year ended December 31, 2009
was 25% compared to gross margin of 23% for the year ended December 31, 2008,
due to the higher margin realized in the PJM capacity demand response
program.
Operating
Expenses
The
following table summarizes our operating expenses for the years ended
December 31, 2009 and 2008 (dollars in thousands):
Year
Ended December 31,
|
||||||||||||
Percent
|
||||||||||||
2009
|
2008
|
Change
|
||||||||||
Operating
Expenses:
|
||||||||||||
General
and administrative expenses
|
$ | 37,781 | $ | 34,463 | 10 | % | ||||||
Marketing
and selling expenses
|
17,737 | 15,738 | 13 | |||||||||
Research
and development expenses
|
4,878 | 1,137 | 329 | |||||||||
Amortization
of intangible assets
|
2,209 | 2,439 | (9 | ) | ||||||||
Impairment
charges
|
- | 75,432 | * | |||||||||
Total
|
$ | 62,605 | $ | 129,209 | (52 | )% |
* - Not
meaningful.
General
and Administrative Expenses
General
and administrative expenses were $37.8 million for the year ended December 31,
2009 compared to $34.5 million for the year ended December 31, 2008, an increase
of $3.3 million or 10%. The increase in general and administrative
expenses is attributable to $5.7 million of non-recurring charges recorded
during 2009 comprised of $2.8 million in stock based compensation related to the
acceleration of equity awards and $1.5 million in retirement and consulting
payments pursuant to the retirement agreement of Mr. Robert M. Chiste, our
former Chairman of the Board of Directors, President and Chief Executive
Officer, and $1.4 million in stock based compensation related to the
acceleration of non-executive stock options with a strike price of $14.10 or
higher. Net of these non-recurring charges, general and
administrative expenses decreased by $2.4 million mainly due to cost containment
and reduction measures implemented during 2009.
Marketing
and Selling Expenses
Marketing
and selling expenses were $17.7 million for the year ended December 31,
2009 compared to $15.7 million for the year ended December 31, 2008, an
increase of $2.0 million, or 13%. We recorded $1.0 million in stock based
compensation related to the acceleration of non-executive stock options with a
strike price of $14.10 or higher, which was partially offset by a decrease in
other stock based compensation, excluding the acceleration, of $0.1
million. The remaining increase in marketing and selling expenses was
comprised of a $1.6 million increase in commission expense and a $0.5 million
increase in marketing and advertising partially offset by a $1.0 million
decrease in consulting expense.
We
expense customer acquisition costs as incurred. VPC customer acquisition costs
were $6.3 million and $4.6 million for the years ended December 31, 2009 and
2008, respectively, an increase of $1.7 million.
As a
result of a recent review of our sales and marketing efforts, we plan to improve
our sales and marketing structure by increasing our sales force with solutions
experienced professionals over
the next twelve months. We expect the increase in our sales
force will increase marketing and selling expenses by approximately $1
million.
Research and Development
Expenses
Research
and development expenses are incurred primarily in connection with the
identification, testing and development of new products and software,
specifically the development of products to support utility Advanced Metering
Infrastructure, or AMI. Research and development expenses were $4.9 million for
the year ended December 31, 2009 and $1.1 million for the year ended December
31, 2008, an increase of $3.8 million or 329%. The increase in research and
development expenses is mainly due to an increase and re-deployment in headcount
and an increase in contractors to develop new AMI-enabled hardware products and
our Apollo® software.
34
Amortization of Intangible
Assets
Amortization
of intangible assets was $2.2 million for the year ended December 31, 2009
compared to $2.4 million for the year ended December 31, 2008, a decrease of
$0.2 million or 9%. The decrease in amortization expense is due to the decrease
in finite-lived intangible assets as a result of our impairment assessment
during 2008 partially offset by the amortization of non-compete
agreements.
In
addition to the amortization presented in operating expenses, we also recorded
$0.6 million in amortization expense for the year ended December 31, 2009 in our
cost of revenue compared to $0.2 million for the year ended December 31,
2008.
Impairment
Charges
We
performed our annual impairment test as of December 31, 2009 and the results of
the test indicated no impairment. Other than our annual impairment
test, no other impairment tests during the year were necessary as no events or
changes in circumstances occurred during 2009. See “Results of
Operations - Year Ended December 31, 2008 Compared to Year Ended
December 31, 2007” for a complete discussion of the impairment charges
recorded for the year ended December 31, 2008.
Interest
Expense, Net
We
recorded net interest expense of $2.1 million for year ended December 31, 2009
compared to net interest expense of $22,000 for the year ended December 31,
2008. The increase of $2.1 million in net interest expense during each period
was mainly a result of less investment income and increased interest expense as
a result of our outstanding debt facilities as well as a $0.8 million charge
recorded to interest expense to write-off unamortized debt issuance costs
related to our termination of the General Electric Capital Corporation credit
agreement.
Other
Income, Net
Net other
income decreased to $0.1 million for the year ended December 31, 2009 compared
to net other income of $0.3 million for the year ended December 31,
2008. In the year ended December 31, 2008, we recorded a $0.3 million
gain on extinguishment of debt as a result of our prepayment to certain note
holders at a 2% discount of their then outstanding balance. No such gain was
recorded in the year ended December 31, 2009.
Income
Taxes
A
provision of $0.2 million was recorded during the year ended December 31, 2009
related to a deferred tax liability. A tax benefit of $0.9 million
was recorded during the year ended December 31, 2008. As a result of the $2.8
million trade name intangible asset impairment, the related deferred tax
liability of $1.0 million was removed from the Company’s consolidated balance
sheet as of December 31, 2008, and is reflected as a tax benefit in the
Company’s consolidated statements of operations for the year ended December 31,
2008.
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
December 31, 2009 and 2008.
35
Year
Ended December 31, 2008 Compared to Year Ended December 31,
2007
The
results of operations for the year ended December 31, 2008 will not be
comparable to the results of operations for the year ended December 31, 2007 due
to the Enerwise and PES acquisitions completed in the second half of 2007. The
year ended December 31, 2007 includes results from the date of acquisitions to
the end of the year. The year ended December 31, 2008 includes a full year of
operating results for the consolidated company, including the acquired
entities.
Revenue
The
following table summarizes our revenue for the years ended December 31,
2008 and 2007 (dollars in thousands):
Year
Ended December 31,
|
||||||||||||
Percent
|
||||||||||||
2008
|
2007
|
Change
|
||||||||||
Segment
Revenue:
|
||||||||||||
Utility
Products & Services (1)
|
$ | 22,458 | $ | 18,767 | 20 | % | ||||||
Residential
Business
|
34,652 | 27,651 | 25 | |||||||||
Commercial
& Industrial Business (1)
|
20,128 | 8,744 | 130 | |||||||||
Total
|
$ | 77,238 | $ | 55,162 | 40 | % |
(1)
Program administration services for the tracking and verification of renewable
certificates are included in the Utility Products & Services segment’s
results for the year ended December 31, 2009. The services were reported in the
Commercial & Industrial Business segment in prior years. Accordingly,
revenue of $1.0 million and $0.3 million, respectively, related to these
services for the years ended December 31, 2008 and 2007 has been
reclassified.
Utility
Products & Services Revenue
Our
Utility Products & Services segment had revenue of $22.5 million for the
year ended December 31, 2008 compared to $18.8 million for the year ended
December 31, 2007, an increase of $3.7 million, or 20%. The increase in
revenue is due to a $1.7 million increase in digital control unit revenue and a
$1.4 million increase in SuperStat revenue. Digital control unit and SuperStat
shipments to external customers were approximately 141,000 units for the year
ended December 31, 2008 compared to 120,000 units for the year ended
December 31, 2007, an increase of 18%. The remaining increase of $0.6
million is due to service revenue.
Residential
Business Revenue
Our
Residential Business segment had revenue of $34.7 million for the year ended
December 31, 2008 compared to $27.7 million for the year ended
December 31, 2007, an increase of $7.0 million, or 25%. We recognized $19.1
million of revenue from our VPC contracts, $12.1 million from our base load
energy efficiency programs and $3.5 million from our marketing and other
services during the year ended December 31, 2008. We recognized $20.2
million of revenue from our VPC contracts, $4.8 million from our base load
energy efficiency programs and $2.7 million from our marketing and other during
the year ended December 31, 2007.
We
recognized $19.1 million of revenue from our VPC contracts in the Residential
Business segment for the year ended December 31, 2008 compared to $20.2 million
of revenue from VPC contracts for the year ended December 31, 2007, a $1.1
million decrease. During the year ended December 31, 2007, our VPC contract with
ISO New England, Inc. expired according to its terms, which previously provided
$8.6 million of revenue in the year ended December 31, 2007. In 2008, the
Residential Business segment partially offset the lost revenue from the ISO New
England, Inc. contract by continuing to expand build-out in our remaining and
new VPC programs.
Our
Residential Business segment’s revenue for the year ended December 31, 2008
included $12.1 million in revenue from our base load energy efficiency programs
compared to $4.8 million in revenue for the year ended December 31, 2007, an
increase of $7.3 million. The base load energy efficiency contracts were
acquired as part of the Public Energy Solutions, or PES, acquisition in
September 2007. The operating results were included in the consolidated
financial statements beginning on the date of acquisition.
The
remaining $0.8 million increase in our Residential Business segment’s revenue
compared to the prior year is a result of our marketing and other
services. Specifically, a portion of assets from our now expired ISO
New England Inc. VPC contract has been deployed in the independent system
operator forward capacity market. We recognized $1.3 million in revenue during
the year ended December 31, 2008 from managing these megawatts.
36
We defer
revenue and direct cost under our VPC contracts until such revenue can be made
fixed and determinable through a measurement and verification test, generally in
our fourth fiscal quarter. For the fourth quarters ended December 31, 2008
and 2007, we recognized VPC contract revenue of $18.8 million and $19.8 million,
respectively. Because 2008 contract year consideration of $0.8 million related
to our VPC contracts was not fixed and determinable as of December 31, 2008,
this amount will be recognized as revenue during 2009. Similarly, 2007 contract
year consideration of $0.3 million was not fixed and determinable as of December
31, 2007 and was recognized as revenue in the first half of 2008.
Commercial & Industrial Business
Revenue
Our
Commercial & Industrial Business segment was essentially formed with our
acquisition of Enerwise Global Technologies, Inc., or Enerwise, in July 2007.
During the year ended December 31, 2008 and 2007, the Commercial &
Industrial Business segment had revenue of $20.1 million and $8.7 million,
respectively. For the year ended December 31, 2008, revenue is comprised of
$15.0 million from demand response services and $5.1 million from energy
management services. For the year ended December 31, 2007, revenue is comprised
of $6.1 million from demand response services and $2.6 million from energy
management services.
Revenue
from economic demand response programs was $0.3 million in the year ended
December 31, 2008. The current year economic program revenue was significantly
less than revenue for the prior year. In the prior year, economic demand
response program revenue was $2.2 million from the date we acquired Enerwise on
July 23, 2007 to December 31, 2007. The decrease in demand response service
revenue is directly related to the PJM rule change effected in 2008 that reduced
the price we receive under our economic or voluntary demand response programs
for commercial and industrial consumers. Because such programs are voluntary,
the lower price and operating rule changes in 2008 made it less compelling for
our commercial and industrial consumers to participate. The majority of managed
megawatts are enrolled in economic demand response programs, which are weather
dependent. Warmer temperatures generally result in higher electricity prices in
the PJM service territory. These higher prices tend to make it economically
attractive for our commercial and industrial consumers to shed load which we
then sell to PJM. The rule changes to these programs in 2008 had the effect of
reducing the spot market price by the average retail rate paid by the commercial
and industrial customer, resulting in a lower price received by us, and
ultimately the end consumer.
For the
year ended December 31, 2008, we recognized $12.8 million in revenue for the
Commercial & Industrial Business segment’s capacity demand
response programs. In the prior year, capacity demand response program
revenue was $3.5 million from the date we acquired Enerwise on July 23, 2007 to
December 31, 2007. The $12.8 million in revenue during 2008 was comprised of
revenue for two capacity years: one capacity year beginning June 1, 2007 and
ending May 31, 2008 and one capacity year beginning June 1, 2008 and ending May
31, 2009. Of the $12.8 million in capacity revenue recognized for the year ended
December 31, 2008, $2.2 million related to the capacity year ending May 31, 2008
and the remaining $10.6 million related to the capacity year beginning June 1,
2008 and ending May 31, 2009. During the capacity year ended May 31, 2008, we
recognized revenue as monthly payments were received over the course of the full
contract year. Following a clarification of the program rules by PJM,
we revised the attribution period for revenue related to the capacity
program. Based on this clarification, revenue is recognized when it becomes
fixed and determinable at the end of the mandatory performance period. For the
capacity year ending May 31, 2009, we recognized revenue at the end of the
September as we had completed the mandatory performance period during the months
of June to September.
Gross
Profit and Margin
The
following table summarizes our gross profit and gross margin percentages for the
years ended December 31, 2008 and 2007 (dollars in thousands):
Year
Ended December 31,
|
||||||||||||||||
2008
|
2007
|
|||||||||||||||
Gross
|
Gross
|
Gross
|
Gross
|
|||||||||||||
Profit
|
Margin
|
Profit
|
Margin
|
|||||||||||||
Segment
Gross Profit and Margin:
|
||||||||||||||||
Utility
Products & Services (1)
|
$ | 9,561 | 43 | % | $ | 7,735 | 41 | % | ||||||||
Residential
Business
|
19,738 | 57 | 16,285 | 59 | ||||||||||||
Commercial
& Industrial Business (1)
|
4,604 | 23 | 2,324 | 27 | ||||||||||||
Total
|
$ | 33,903 | 44 | % | $ | 26,344 | 48 | % |
(1)
Program administration services for the tracking and verification of renewable
certificates are included in the Utility Products & Services segment’s
results for the year ended December 31, 2009. The services were reported in the
Commercial & Industrial Business segment in prior years. Accordingly, gross
profit of $0.7 million and $0.2 million, respectively, related to these services
for the years ended December 31, 2008 and 2007 has been
reclassified.
37
Utility Products & Services
Gross Profit and Margin
Gross
profit for our Utility Products & Services segment was $9.6 million for the
year ended December 31, 2008 compared to $7.7 million for the year ended
December 31, 2007, an increase of $1.9 million, or 25%. An increased gross
profit resulted from the increase in revenue. Specifically, we shipped 21,000
more digital control units and SuperStats to external customers in 2008 as
compared to 2007.
Residential
Business Gross Profit and Margin
Gross
profit for our Residential Business segment was $19.7 million for the year ended
December 31, 2008 compared to $16.3 million for the year ended
December 31, 2007, an increase of $3.5 million, or 21%. The gross margin
for VPC contracts was 71% in the year ended December 31, 2008 as compared to 66%
for the year ended December 31, 2007. The gross margin of our VPC contracts
varies due to the period in which we depreciate our VPC program capital
equipment. We depreciate our VPC program capital equipment over the remaining
contract life, which is shorter than the economic life of such equipment. As a result, the annual
depreciation charge per new kilowatt of capacity installed will increase over
the term of a VPC contract, while the revenue per kilowatt of capacity for any
contract year will be determined by other factors that bear no relation to the
depreciation.
The
Residential Business segment’s gross profit for the year ended December 31, 2008
included $4.4 million in gross profit from our base load energy efficiency
programs compared to $2.0 million in gross profit for the year ended December
31, 2007, an increase of $2.4 million. Gross margin attributable to the base
load energy efficiency contracts was approximately 40% for both years ended
December 31, 2008 and 2007.
The
remaining $0.8 million increase in Residential Business segment’s gross profit
compared to the prior year is a result of our marketing and other services. The
majority of the increase in gross profit was due to the megawatts registered in
the forward capacity market that were historically part of our ISO New England,
Inc. VPC contract.
Commercial
& Industrial Business Gross Profit and Margin
During
the year ended December 31, 2008 and 2007, the Commercial & Industrial
Business segment had gross profit of $4.6 million and $2.3 million,
respectively. For the year ended December 31, 2008, gross profit is comprised of
$2.8 million from demand response services and $1.8 million from energy
management services. For the year ended December 31, 2007, gross profit is
comprised of $1.3 million from demand response services and $1.0 million from
energy management services. The gross margin for both years ended December 31,
2008 and 2007 remained consistent at approximately 25% due to the mix of demand
response gross margin of approximately 20% and energy management services gross
margin of approximately 40%.
Operating
Expenses
The following table
summarizes our operating expenses for the years ended December 31, 2008 and
2007 (dollars in thousands):
Year
Ended December 31,
|
||||||||||||
Percent
|
||||||||||||
2008
|
2007
|
Change
|
||||||||||
Operating
Expenses:
|
||||||||||||
General
and administrative expenses
|
$ | 34,463 | $ | 22,072 | 56 | % | ||||||
Marketing
and selling expenses
|
15,738 | 9,831 | 60 | |||||||||
Research
and development expenses
|
1,137 | 997 | 14 | |||||||||
Amortization
of intangible assets
|
2,439 | 973 | 151 | |||||||||
Impairment
charges
|
75,432 | - | * | |||||||||
Total
|
$ | 129,209 | $ | 33,873 | 281 | % |
* Not
meaningful.
General
and Administrative Expenses
General
and administrative expenses were $34.5 million for the year ended
December 31, 2008 compared to $22.1 million for the year ended
December 31, 2007, an increase of $12.4 million, or 56%. The increase in
general and administrative expenses was comprised of an increase of $3.7 million
in expenses arising from the operations of our prior year acquisitions for a
full year as well as an increase of $2.8 million in non-cash stock based
compensation due to additional award grants as well as a full year of expense
for those awards granted during 2007 and an increase of $1.4 million in salaries
and benefits, both excluding the increases associated with the acquisitions. In
addition, there was an increase of $2.1 million in administration expenses
related to the build-out of our VPC programs and $1.2 million in professional
fees. The remaining $1.2 million increase is due to occupancy, insurance, and
other expenses such as travel and entertainment.
38
Marketing
and Selling Expenses
Marketing
and selling expenses were $15.7 million for the year ended December 31,
2008 compared to $9.8 million for the year ended December 31, 2007, an
increase of $5.9 million, or 60%. Of the increase, $2.5 million was due to an
increase in expenses arising from the operations of our prior year acquisitions
for a full year. In addition, there were increases of $0.6 million in non-cash
stock based compensation due to an increased number of award grants as well as a
full year of expense for those awards granted during 2007 and $1.0 million in
salaries and benefits, both excluding the increases associated with the
acquisitions. There was also an increase of $1.8 million in VPC related
marketing expense.
We
expense customer acquisition costs as incurred. VPC customer acquisition costs
were $4.6 million and $2.3 million for the years ended December 31, 2008 and
2007, respectively, an increase of $2.3 million.
Research
and Development Expenses
Research
and development expenses are incurred primarily in connection with the
identification, testing and development of new products and software,
specifically the development of products to support utility Advanced Metering
Infrastructure. Research and development expenses were $1.1 million and $1.0
million for the years ended December 31, 2008 and 2007,
respectively.
Amortization
of Intangible Assets
Amortization
of intangible assets increased to $2.4 million for the year ended December 31,
2008 from $1.0 million for the year ended December 31, 2007 due to the
definite-lived intangible assets recorded as a result of the acquisitions of
Enerwise and PES during the second half of 2007.
Impairment
Charges
In the
Commercial & Industrial Business segment, a rule change for economic demand
response programs in the PJM market during the third quarter of 2008 caused a
decline in the projected operating results for the remainder of 2008 and future
periods. Based on the reduction of projected operating results in current and
future periods, we determined that an interim impairment test of goodwill was
required. The valuation for the goodwill was performed using a discounted cash
flow income approach to valuing the business using a 19.5% discount rate. The
valuation resulted in a non-cash impairment of goodwill related to the
Commercial & Industrial Business segment of $67.7 million to reflect the
carrying value in excess of the fair value.
As a part
of the reorganization announced on September 12, 2008, we made the decision to
no longer use the Enerwise trade name. Accordingly, we recorded a $2.8 million
non-cash impairment charge related to the Enerwise trade name.
Contemporaneous
with our interim goodwill impairment test, we also performed an analysis of the
potential impairment and reassessed other identified intangible assets within
the Commercial & Industrial Business segment. The impairment analysis for
the customer relationships was performed using an excess earnings income
approach to valuing the asset using a 19.5% discount rate. As a result, we
recorded a non-cash impairment charge of $4.9 million to reduce the carrying
value to the calculated fair value.
Total
noncash impairment charges for the year ended December 31, 2008 were $75.4
million. For the year ended December 31, 2008, the impairment charge, net of tax
benefit, per share, was $3.52.
There
were no such impairment charges in the year ended December 31,
2007.
Interest
Expense, Net
Net
interest expense increased to $22,000 for the year ended December 31, 2008 from
$1.1 million of interest income for the year ended December 31, 2007. The
increase in expense was mainly due to the interest expense related to the
subordinated convertible promissory notes issued in connection with our
acquisitions in the second half of 2007.
39
Other
Income, Net
Net
other income increased to $0.3 million for the year ended December 31, 2008 from
an expense of $0.1 million for the year ended December 31, 2007. The
increase is primarily due to the $0.3 million gain on extinguishment of debt
that we recorded as a result of our prepayment to certain note holders at a 2%
discount of their then outstanding balance.
Income
Taxes
A
tax benefit of $0.9 million was recorded for the year ended December 31, 2008,
compared to tax expense of $0.1 million for the year ended December 31, 2007.
The decrease in the provision for income taxes is primarily due to the Enerwise
trade name impairment during 2008, which resulted in the removal of the related
deferred tax liability from our consolidated balance sheet as of December 31,
2008. 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
December 31, 2008 or 2007.
Liquidity
and Capital Resources
Overview
Prior to
our initial public offering in April 2007, we funded our operations primarily
through the issuance of an aggregate of $40.9 million in preferred stock, $4.0
million in subordinated convertible debt and borrowings under our then senior
loan agreement and General Electric Capital Corporation credit facility. We used
these proceeds to fund our operations and to invest in our VPC programs, both in
the form of capital expenditures to build out the capacity under our VPC
contracts and participant acquisition expenses such as advertising and
participant incentive payments, which were expensed as incurred. In April 2007,
we completed an initial public offering of 5,300,000 shares of our common stock.
Aggregate proceeds to us from the offering were $86.0 million, after deducting
underwriting discounts and commissions and offering expenses. In conjunction
with the completion of our initial public offering, the holder of our then only
outstanding subordinated convertible debt converted $1.0 million of the
principal balance into 138,121 shares of common stock. In December 2007, we
completed a secondary public offering of 4,000,000 shares of our common stock.
Of the 4,000,000 shares, 920,000 were newly issued and the remaining shares were
sold by selling stockholders. Aggregate proceeds to us from the offering were
$24.0 million, after deducting underwriting discounts and commissions and
offering expenses. In conjunction with the completion of our secondary offering,
the holder of our subordinated convertible debt converted an additional $1.1
million of the principal balance into 151,933 shares of common stock. In
November 2009, we completed a third public offering of 2,760,000 shares of
common stock. Aggregate proceeds to us from the offering were $27.0
million, after deducting underwriting discounts and commissions and offering
expenses. In November 2008, we entered into a security and loan
agreement with Silicon Valley Bank. The security and loan agreement was amended
in February 2010 to increase the revolver loan from $10 million to $30 million
for borrowings to fund general working capital and other corporate purposes and
issuances of letters of credit.
Management believes that
available cash and cash equivalents, marketable securities and borrowings
available under our loan facility will be sufficient to meet our capital needs
for at least the next 12 months. Future available sources of
working capital, including cash, cash equivalents, and marketable securities,
short-term or long-term financing, equity offerings or any combination of these
sources, should allow us to meet our long-term liquidity needs.
Cash
Flows
The
following table summarizes our cash flows for the years ended December 31,
2009, 2008 and 2007 (dollars in thousands):
Year
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Operating
activities
|
$ | 7,779 | $ | (13,833 | ) | $ | (1,506 | ) | ||||
Investing
activities
|
(24,234 | ) | (9,964 | ) | (73,924 | ) | ||||||
Financing
activities
|
12,953 | 3,613 | 111,411 | |||||||||
Net
change in cash and cash equivalents
|
$ | (3,502 | ) | $ | (20,184 | ) | $ | 35,981 |
40
Cash
Flows Provided by (Used in) Operating Activities
Cash
provided by operating activities was $7.8 million for the year ended
December 31, 2009 and cash used in operating activities was $13.8 million
and $1.5 million for the years ended December 31, 2008 and 2007,
respectively. Cash flows provided by (used in) operating activities consisted of
the following:
|
•
|
our
net loss of $31.7 million, $94.1 million, and $6.6 million for
the years ended December 31, 2009, 2008 and 2007,
respectively;
|
|
•
|
depreciation
and amortization of $20.5 million, $7.6 million, and $5.5
million for the years ended December 31, 2009, 2008 and 2007,
respectively;
|
|
•
|
stock-based
compensation expense of $10.0 million, $6.9 million and $2.6 million for
the years ended December 31, 2009, 2008 and
2007;
|
|
•
|
impairment
charges of $75.4 million for the year ended December 31,
2007,
|
|
•
|
other
adjustments to net loss of $2.2 million, $0.5 million, and $23,000 for the
years ended December 31, 2009, 2008 and 2007, respectively;
and
|
|
•
|
a
change in working capital of $6.7 million, $9.2 million and $2.9 million
for the years ended December 31, 2009, 2008 and 2007,
respectively.
|
Cash
Flows Used in Investing Activities
Cash used
in investing activities was $24.2 million, $10.0 million and
$73.9 million for the years ended December 31, 2009, 2008 and 2007,
respectively. Cash flows used in investing activities consisted of the
following:
|
•
|
capital
expenditures of $14.9 million, $11.6 million and $5.5 million for the
years ended December 31, 2009, 2008 and 2007,
respectively;
|
|
•
|
purchases
of licensed technologies of $1.3 million and $1.7 million for the years
ended December 31, 2009 and 2008;
|
|
•
|
purchases
of marketable securities of $39.2 million, $34.6 million and $80.9 million
for the years ended December 31, 2009, 2008 and 2007 and maturities of
marketable securities of $32.8 million, $39.7 million and $48.3 million
for the years ended December 31, 2009, 2008 and
2007;
|
|
•
|
cash
paid for the acquisitions of Enerwise and PES, net of cash acquired, of
$33.7 million for the year ended December 31, 2007;
and
|
|
•
|
change
in restricted cash balance during the year ended December 31, 2009,
2008 and 2007 of $1.6 million, $1.7 million and $2.1 million,
respectively, related to certain cash collateralized letters of
credit.
|
Our
capital expenditures are mainly for purchases of equipment and installation
services used to build out and expand our VPC programs. Installation services
represent the installation of the demand response hardware at participants’
locations (primarily residential).
Cash
Flows Provided by Financing Activities
Cash
flows provided by financing activities were $13.0 million,
$3.6 million and $111.4 million for the years ended December 31,
2009, 2008 and 2007, respectively. Cash flows provided by financing activities
consisted of the following:
|
•
|
cash
of $1.1 million, $0.4 million and $1.3 million from exercise of
stock-based awards during the years ended December 31, 2009, 2008 and
2007, respectively;
|
|
•
|
cash
of $0.1 million, $0.1 million and $3.1 million paid for employee taxes due
to net settlement of stock option exercises during the year ended
December 31, 2009, 2008 and
2007;
|
|
•
|
cash
of $4.2 million and $3.4 million from our debt facilities during the
years ended December 31, 2008 and December 31, 2007,
respectively;
|
|
•
|
payment
of $15.4 million of borrowings under our debt facilities during the year
ended December 31, 2009;
|
|
•
|
cash
of $27.4 and $111.1 million from proceeds from the issuance of common
stock, net of offering costs, for the years ended December 31, 2009
and 2007; and
|
|
•
|
cash
paid of $0.3 million and $1.3 million for debt issuance costs during the
year ended December 31, 2008 and 2007,
respectively.
|
41
Working
Capital
Working
capital as of December 31, 2009 was $49.7 million, consisting of $82.7
million in current assets and $33.0 million in current liabilities. Working
capital as of December 31, 2008 was $55.0 million, consisting of $83.0
million in current assets and $28.0 million in current
liabilities.
In
addition, we had aggregate available borrowing capacity under our loan agreement
of $5.4 million as of December 31, 2009 and $35.9 million as of
December 31, 2008.
Indebtedness
Loan Agreement. On February
5, 2010, Comverge, Inc. and all of its wholly-owned
subsidiaries entered into a second amendment to its existing credit and term
loan facility with Silicon Valley Bank. The second amendment
increased the revolver loan by an additional $20 million bringing the total
revolver loan to $30 million for borrowings to fund general working capital and
other corporate purposes and issuances of letters of credit. The
second amendment also added Alternative Energy Resources, Inc., a wholly owned
subsidiary of Comverge, as a borrower and extended the term of the facility by
one year to December 2012. In connection with the extension of the
term of the credit facility, a commitment fee of $100,000 was paid on February
5, 2010, and additional commitment fees of $75,000 are payable on each of
February 5, 2011 and February 5, 2012. The amended facility provides
a $30 million revolver for borrowings to fund working capital and other
corporate purposes and a $15 million term loan used to repay maturing
convertible notes. The term loan is no longer available for
additional borrowings and our outstanding balance as of December 31, 2009 was
$12.8 million.
The
interest on revolving loans under the amended facility accrues at either (a) a
rate per annum equal to the greater of the Prime Rate or 4% plus the Prime Rate
Advance Margin, or (b) a rate per annum equal to the LIBOR Advance Rate plus the
LIBOR Rate Advance Margin, as such terms are defined in the amended facility
agreement. The second amendment also sets forth certain financial
ratios to be maintained by the borrowers on a consolidated basis. The
obligations under the amended facility are secured by all assets of Comverge and
its other borrower subsidiaries, including Alternative Energy
Resources. The revolver terminates and all amounts outstanding
thereunder are due and payable in full on December 31, 2012, and the term loan
becomes payable over 57 months beginning April 1, 2009 and matures on December
31, 2013. The facility contains customary terms and conditions for credit
facilities of this type, including restrictions on our ability to incur
additional indebtedness, create liens, enter into transactions with affiliates,
transfer assets, pay dividends or make distributions on, or repurchase, our
stock, consolidate or merge with other entities, or suffer a change
in control. In addition, we are required to meet certain financial covenants
customary with this type of agreement, including maintaining a minimum specified
tangible net worth and a minimum specified ratio of current assets to current
liabilities. The facility contains customary events of default, including for
payment defaults, breaches of representations, breaches of affirmative or
negative covenants, cross defaults to other material indebtedness, bankruptcy
and failure to discharge certain judgments. If a default occurs and is not cured
within any applicable cure period or is not waived, our obligations under the
facility may be accelerated.
Credit Agreement. In
January 2007, Alternative Energy Resources, Inc., or AER, entered into a credit
agreement with General Electric Capital Corporation, or GECC, to provide AER
with up to $40 million of borrowings to fund capital expenditures related to VPC
contracts. The GECC credit agreement would expire in 2014, at which time all
outstanding borrowings would become due and payable. Subject to the limitations
described below, this credit agreement had a term loan facility up to $37
million and a letter of credit sublimit of $3 million for total availability of
$40 million. Borrowings under the GECC credit agreement bore interest at either
prime plus 1.5% or LIBOR plus 2.75% per annum, at our election. Borrowings
under this credit agreement were collateralized by all of AER’s assets,
including its intellectual property and could be requested, from time to time
during the first three years of the agreement, for up to 90% of capital
expenditures incurred under a VPC contract. The GECC credit agreement contained
customary financial and restrictive covenants, including maintenance of a
minimum fixed charge coverage ratio, a minimum interest coverage ratio, a
maximum senior leverage ratio and a prohibition on the payment of dividends. On
December 1, 2009, we repaid all outstanding indebtedness under the credit
agreement and terminated the facility. The repayment amount of $24.7
million included: 1) the entire $23.0 million of the then outstanding
borrowings, 2) approximately $1.5 million in cash collateral to be held by the
lender’s agent for purposes of reimbursement of draws under, and satisfying
AER’s obligations relating to, outstanding letters of credit, 3) a $50,000
prepayment fee, and 4) approximately $150,000 for one month’s accrued interest
and unused facility fees. As a result of the termination, we recognized
$0.8 million of interest expense during the year ended December 31, 2009 due to
the write-off of the unamortized debt issuance costs.
42
Subordinated Convertible Loan
Agreement. On June 10, 2005, we entered into a $4.0 million
subordinated convertible debt agreement with a U.S.-based lender with a maturity
date of June 2010. The convertible debt bore interest at three percent plus the
three-month LIBOR rate. On April 4, 2007, we amended the
agreement to allow the holder of the convertible debt to convert a portion of
the principal, or the principal as originally provided in the agreement, into
our common stock at a price of $7.24 per share at any time during its term.
Subsequent to the amendment, the holder of the convertible debt converted a
principal balance of $2.1 million to 290,054 shares during 2007. In the event of
a prepayment of the principal amount, the lender had been provided a
non-detachable warrant to purchase shares of common stock calculated by dividing
the outstanding principal balance by a price per share of $7.24, or 262,430
shares as of December 31, 2007. In conjunction with the entering into the
GECC credit agreement, we entered into an amendment whereby the lender of the
convertible debt agreed to subordinate its liens against AER assets to the liens
of the GECC credit agreement. On March 14, 2008, the holder of the
then-outstanding subordinated convertible debt converted the remaining $1.9
million outstanding balance of subordinated convertible debt for 262,430 shares
of common stock and terminated the loan and security agreement. The
non-detachable warrant related thereto terminated pursuant to its
terms.
Subordinated Convertible Promissory
Notes. In connection with the acquisition of Enerwise, we issued a series
of subordinated convertible promissory notes in the aggregate principal amount
of $17.0 million. The notes bore interest at a rate of 5.5% per annum and
matured on April 1, 2009. Interest payments on the notes were made
quarterly. The notes were convertible into shares of common stock at the option
of the holders thereof beginning one year from the date issued at a price per
share of $33.44 which represents 125% of the average closing price of our common
stock for the 20 trading days immediately prior to the execution of the Enerwise
purchase agreement. During the year ended December 31, 2008, we offered the note
holders a prepayment at 98% of their then outstanding balance. As of December
31, 2008, we paid $16.1 million in cash to those note holders who agreed to
early extinguishment and recognized a gain on extinguishment of debt of $0.3
million. The Company paid the remaining $0.6 million to note holders during the
year ended December 31, 2009.
In
connection with the acquisition of PES, we issued a series of subordinated
convertible promissory notes in the aggregate principal amount of $3.0 million.
The notes bore interest at a rate of 5.5% per annum and matured on
March 29, 2009. Interest payments on the notes were made quarterly. The
notes were convertible into 74,386 shares of common stock at the option of the
holders thereof beginning one year from the date of issuance at a price per
share of $40.33, which was equal to 125% of the average closing price of common
stock for the trading days commencing September 18, 2007, and ending
October 12, 2007. On November 7, 2008, we paid the remaining principal to
the holders of the subordinated convertible promissory notes issued with the
acquisition of PES. There was no outstanding balance as of December 31, 2009 or
2008.
Letters
of Credit
After the
amendment in February 2010, our facility with Silicon Valley Bank provides for
the issuance of up to $30.0 million of letters of credit. As of
December 31, 2009, we had $4.6 million face value of irrevocable letters of
credit outstanding from the facility. Additionally, we have $3.4
million of cash collateralized letters of credit outstanding, which are
presented as a portion of the restricted cash in our financial
statements.
Capital
Spending
As of
December 31, 2009, our VPC programs had estimated installed capacity of 427
megawatts. Our existing VPC contracts as of December 31, 2009 provided for
a potential capacity of 805 megawatts. Our residential VPC programs require a
significant amount of capital spending to build out our demand response
networks. We expect to incur approximately $17.0 million in capital
expenditures, primarily over the next three years, to continue building out our
existing VPC programs, of which $8.0 million is anticipated to be incurred
through December 31, 2010. If we are successful in being awarded additional
VPC contracts, we would incur additional amounts to build out these new VPC
programs.
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 (benefit), 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 annual report and our consolidated financial statements, including the
notes thereto, and the other financial information contained in this annual
report, 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. Our internal budgets are
based on EBITDA, and we use EBITDA as one of several criteria to determine
performance-based cash compensation.
43
We define
Adjusted EBITDA as EBITDA before stock-based compensation expense and impairment
charges. Management does not believe that stock-based compensation is indicative
of our core operating performance because the stock-based compensation is the
result of restricted stock and stock option grants which require a noncash
expense to be recorded in the financial statements. Management believes the
impairment charges related to the Enerwise reporting unit to be not indicative
of our core operating performance.
A
reconciliation of net loss, the most directly comparable GAAP measure, to EBITDA
and Adjusted EBITDA for each of the fiscal periods indicated is as follows
(dollars in thousands):
Year
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
loss
|
$ | (31,666 | ) | $ | (94,106 | ) | $ | (6,604 | ) | |||
Depreciation
and amortization
|
20,499 | 7,609 | 5,508 | |||||||||
Interest
expense (income), net
|
2,114 | 22 | (1,130 | ) | ||||||||
Provision
(benefit) for income taxes
|
219 | (901 | ) | 147 | ||||||||
EBITDA
|
(8,834 | ) | (87,376 | ) | (2,079 | ) | ||||||
Non-cash
stock compensation expense
|
10,038 | 6,876 | 2,552 | |||||||||
Non-cash
impairment charge
|
- | 75,432 | - | |||||||||
Adjusted
EBITDA
|
$ | 1,204 | $ | (5,068 | ) | $ | 473 |
Commitments
and Contingencies
In the
ordinary conduct of our business, we are subject to periodic lawsuits,
investigations and claims. Although we cannot predict with certainty the
ultimate resolution of lawsuits, investigations and claims asserted against us,
we do not believe that any currently pending legal proceeding or proceedings to
which we are a party or of which any of our property is subject will have a
material adverse effect on our business, results of operations, cash flows or
financial condition. Our policy is to assess 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. A liability
is recorded and charged to operating expense when we determine that a loss is
probable and the amount can be reasonably estimated. Additionally, we disclose
contingencies for which a material loss is reasonably possible, but not
probable. As of December 31, 2009, there were no material contingencies
requiring accrual or disclosure.
As
previously disclosed in our Quarterly Report on Form 10-Q for the period ended
March 31, 2009, in January 2009, IP Co. LLC, d/b/a Intus IQ, filed a complaint
in the U.S. District Court for the Eastern District of Texas against Comverge,
Inc., Oncor Electric Delivery Company LLC, Reliant Energy, Inc., Datamatic,
LTD., EKA Systems, Inc., Sensus Metering Systems Inc., Tantalus Systems Corp.,
Tendril Networks, Inc., Trilliant Incorporated, and Trilliant Networks, Inc.,
alleging infringement of two patents owned by IP Co. LLC. The complaint alleged
that the U.S. patents, concerning wireless mesh networking systems, are being
infringed by the defendants. Comverge and Intus IQ settled the litigation on
July 17, 2009 and the complaint has been dismissed with prejudice. The
settlement did not have a material adverse effect on our financial condition or
results of operations.
Contractual
Obligations
Information
regarding our known contractual obligations of the types described below as of
December 31, 2009 is set forth in the following table (dollars in
thousands):
Payments
Due by Period
|
||||||||||||||||||||
Less
Than
|
More
Than
|
|||||||||||||||||||
Contractual
Obligations
|
Total
|
1
Year
|
1
- 3 Years
|
3
- 5 Years
|
5
Years
|
|||||||||||||||
Bank
debt obligations
|
$ | 12,750 | $ | 3,000 | $ | 6,000 | $ | 3,750 | $ | - | ||||||||||
Cash
interest payments on debt
|
906 | 373 | 451 | 82 | - | |||||||||||||||
Operating
lease obligations
|
6,258 | 1,711 | 2,459 | 972 | 1,116 | |||||||||||||||
Severance
& retirement obligations
|
1,517 | 895 | 345 | 183 | 94 | |||||||||||||||
Total
|
$ | 21,431 | $ | 5,979 | $ | 9,255 | $ | 4,987 | $ | 1,210 |
Licensing
Agreement
As part
of our contractual obligations under an exclusive licensing agreement for
certain product technology, we have the option to maintain licensing exclusivity
on an annual basis by making payments ranging from $2.0 million to $5.0 million
over the next two years. We are also obligated to pay royalties to the licensor
for each unit sold that incorporates the licensed technology. Such royalties are
reduced by the amount of optional exclusivity payments described above. These
payments have been excluded from the table above.
44
Guarantees
We
typically grant customers a limited warranty that guarantees that our products
will substantially conform to current specifications for 90 days related to
software products and one year related to hardware products from the delivery
date. We also indemnify our customers from third-party claims relating to the
intended use of our products. Standard software license agreements contain
indemnification clauses. Pursuant to these clauses, we indemnify and agree to
pay any judgment or settlement relating to a claim. There were no
liabilities recorded for these agreements as of December 31, 2009 and
2008.
We have
guaranteed the electrical capacity we have committed to deliver pursuant to
certain long-term contracts. Such guarantees may be secured by cash, letters of
credit, performance bonds or third-party guarantees. Performance guarantees
during the year ended December 31, 2009 and 2008 were $7.5 million and $3.7
million, respectively.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
certain estimates and judgments that affect our reported assets, liabilities,
revenue and expenses, and our related disclosure of contingent assets and
liabilities. On an on-going basis, we re-evaluate our estimates, including those
related to revenue recognition, impairment of long-lived assets, and stock-based
compensation. We base our estimates on historical experience and on various
assumptions that we believe to be reasonable under the circumstances. Actual
results may differ from these estimates. A summary of our critical accounting
policies is set forth below.
Revenue
Recognition – Utility Products & Services
We sell
hardware products and services directly to utilities for use and deployment by
the utility. We recognize revenue for such sales when delivery has occurred or
services have been rendered and the following criteria have been met: delivery
has occurred, the price is fixed and determinable, collection is probable, and
persuasive evidence of an arrangement exists.
We have
certain contracts which are multiple element arrangements and provide for
several deliverables to the customer that may include installation services,
marketing services, program management services, right to use software, hardware
and hosting services. These contracts require no significant production,
modification or customization of the software and the software is incidental to
the products and services as a whole. We evaluate each deliverable to determine
whether it represents a separate unit of accounting. If objective and reliable
evidence of fair value exists for all units of accounting in the arrangement,
revenue is allocated to each unit of accounting based on relative fair values.
Each unit of accounting is then accounted for under the applicable revenue
recognition guidance. In situations in which there is objective and reliable
evidence of fair value for all undelivered elements but not for delivered
elements, the residual method is used to allocate the arrangement’s
consideration.
Revenue
Recognition - Residential Business
We defer
revenue and the associated cost of revenue related to certain long-term VPC
contracts until such time as the annual contract payment is fixed and
determinable. We invoice VPC customers on a monthly or quarterly
basis throughout the contract year. The VPC contracts require us to provide
electric capacity through demand reduction to utility customers, and require a
measurement and verification of such capacity on an annual basis in order to
determine final contract consideration for a given contract year. 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 we secure a VPC contract with a utility customer,
our Residential Business segment incurs significant marketing costs to identify
and enroll participants in our VPC programs. These participant acquisition costs
are expensed as incurred. Once a participant enrolls in one of our VPC programs,
we install a digital control unit or thermostat at the participant’s location.
The cost of the installation and the hardware are capitalized and depreciated
over the remaining term of the contract with the utility, which is shorter than
the operating life of the equipment. The depreciation is recognized
contemporaneously with revenue.
45
We enter
into agreements to provide base load capacity. Base load capacity revenues are
earned based on our ability to achieve committed capacity through load
reduction. In order to provide capacity, we deliver and install demand side
management measures. The base load capacity contracts require us to provide
electric capacity to utility customers, and include a measurement and
verification of such capacity in order to determine contract consideration. We
defer revenue and associated cost of revenue in our electric load reduction
services until such time as the capacity amount, and therefore the related
revenue, is fixed and determinable. Once the capacity 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 we have met our performance obligation. Certain contracts contain
multiple deliverables, or elements, which require us to assess whether the
different elements qualify for separate accounting. The separate deliverables in
these arrangements meet the separation criteria. Accordingly, revenue is
recognized for each element by applying the residual method, since there is
objective evidence of fair value of only the undelivered item. The amount
allocated to the delivered item is limited to the amount that is not contingent
upon delivery of the additional element.
Revenue
Recognition - Commercial & Industrial Business
We enter
into agreements to provide demand response services. The demand response
programs require us to provide electric capacity through demand reduction to
utility end customers when the utility or independent system operator calls a
demand response event to curtail electrical usage. Demand response revenues are
earned based on our ability to deliver capacity. In order to provide capacity,
we manage 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 customer initiated demand response test. We recognize
revenue and associated cost of revenue in its demand response services at such
time as the capacity amount is fixed and determinable.
We record
revenue from capacity programs with independent system operators. The capacity
year for our primary capacity program spans from June 1st to May 31st annually. For participation,
we receive cash payments on a monthly basis in the capacity year. Participation
in the capacity program requires us 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 at the end of the mandatory performance period,
once the revenue is fixed and determinable.
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 we
do 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. We also enter 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. Revenue from maintenance contracts is
recognized on a straight-line basis over the life of the contract.
Goodwill
and Intangibles, net
Goodwill
represents the excess of cost over the fair value of the net tangible assets and
identified intangible assets of businesses acquired in purchase transactions.
Goodwill is not being amortized. Intangibles are recorded at their
fair value at acquisition date. We amortize finite-lived intangibles over their
estimated useful lives using the straight-line method, which approximates the
projected utility of such assets based upon the information available. We
currently amortize acquired intangible assets with finite lives over periods
ranging from three to fourteen years. Goodwill and other indefinite-lived
intangible assets are tested for impairment on at least an annual basis, on
December 31 of each year, as well as on an as-needed basis determined by
events or changes in circumstances.
An
impairment test of goodwill and certain intangible assets was performed during
the third quarter of 2008. The interim impairment assessment was triggered by a
rule change in a certain market effected in 2008 that reduced the price we
receive under our economic, or voluntary, demand response programs for
commercial and industrial consumers in the PJM service
territory. Based on this evaluation, we recorded a non-cash
impairment charge. See “Results of Operations - Year Ended
December 31, 2008 Compared to Year Ended December 31, 2007” for a
complete discussion on the methodology and assumptions applied.
We
performed our annual impairment test as of December 31st and the results of the
tests performed on December 31, 2009, 2008 and 2007 indicated no additional
impairment. Goodwill is allocated among and evaluated for impairment
at the reporting unit level, which is defined as an operating segment or one
level below an operating segment. Goodwill was tested for impairment using the
two-step approach. Step 1 of the goodwill impairment test, used to
identify potential impairment, compares the fair value of the reporting unit
with its carrying amount, including goodwill. If the fair value of
the reporting unit exceeds its carrying amount, goodwill of the reporting unit
is considered not impaired and the second step of the impairment test is not
required. If the carrying amount of a reporting unit exceeds its fair
value, the second step of the goodwill impairment test would be performed to
measure the amount of impairment, if any.
46
Impairment
of Long-Lived Assets
We
evaluate the recoverability of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount should be assessed by comparing
their carrying value to the undiscounted estimated future net operating cash
flows expected to be derived from such assets. If such evaluation indicates a
potential impairment, a discounted cash flow analysis is used to measure fair
value in determining the amount of these assets that should be written
off.
Stock-Based
Compensation
Stock-based
compensation expense recognized for the years ended December 31, 2009, 2008
and 2007 were $10.0 million, $6.9 million and $2.6 million, respectively, before
income taxes. For awards with service conditions and graded-vesting, a one-time
election was made to recognize stock-based compensation expense on a
straight-line basis over the requisite service period for the entire award. For
options with performance and/or service conditions only, we utilized the
Black-Scholes option pricing model to estimate fair value of options issued. For
restricted stock awards with service conditions, we utilized the intrinsic value
method. For awards with market conditions, we utilized a lattice model to
estimate the award fair value and the derived service
period. Determining the fair value of stock options at the grant date
requires judgment including estimates for the risk-free interest rate,
volatility, annual forfeiture rate, and expected term. Performance-based
unvested awards require management to make assumptions regarding the likelihood
of achieving company or personal performance goals. If any of these
assumptions differ significantly from actual, stock-based compensation expense
could be impacted. We will recognize $5.1 million of additional
expense related to unvested awards as of December 31, 2009 over a weighted
average period of 1.7 years.
On
November 6, 2009, our board of directors approved the acceleration of the
vesting of 192,053 time-based stock options with exercise prices equal to or
greater than $14.10 for certain of its employees. Restricted stock,
stock options with vesting based on performance, and stock options held by
executive officers and directors were not accelerated. As a result of the
acceleration, an aggregate of 192,053 unvested stock options with exercise
prices ranging from $14.10 to $34.23 became immediately
exercisable. The weighted average exercise price of the options that
were accelerated was approximately $23.85. The accelerated options
would have vested from time to time through February 4, 2012. All
other terms and conditions applicable to the accelerated stock option grants,
including the exercise price, number of shares, and term, remain
unchanged. The incremental noncash stock based compensation expense
recognized in the fourth quarter of 2009 as a result of the acceleration was
$2.7 million.
Mr.
Robert M. Chiste retired from the Company as Chairman of the Board of Directors,
President and Chief Executive Officer, effective June 19, 2009, and resigned
from the Company’s Board, effective June 20, 2009. In connection with his
retirement, Mr. Chiste and the Company entered into a retirement agreement dated
July 17, 2009, pursuant to which, related to equity awards, all unvested options
held by Mr. Chiste as of June 19, 2009 vest and became exercisable in full and
remain exercisable for the lesser of their remaining terms or until March 31,
2013 and all restricted stock grants and any other equity-based awards held by
Mr. Chiste as of June 19, 2009 vest and became exercisable in full. As a
result, the Company recorded an expense of $2.8 million in non-cash stock-based
compensation expense during the third quarter of 2009.
Recent
Accounting Pronouncements
In April
2009, the Financial Accounting Standards Board (“FASB”) issued a staff position
that amends and clarifies the new business combination standard, to address
application issues on initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and liabilities arising
from contingencies in a business combination. The Company does not expect the
adoption of this staff position to have a material impact on its financial
condition and results of operations, although its effects in future periods will
depend on the nature and significance of potential business combinations subject
to this statement.
In April
2009, the FASB issued a staff position requiring disclosures about fair value of
financial instruments for interim reporting periods as well as in annual
financial statements. This staff position also requires those disclosures in
summarized financial information at interim reporting periods. The Company
adopted this staff position in its second quarter ended June 30, 2009. The
adoption did not have a material impact on the Company’s financial position,
results of operations or cash flows.
47
In April
2009, the FASB issued a staff position which amends the other-than-temporary
impairment guidance for debt securities to make the guidance more operational
and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements. The
Company adopted this staff position in its second quarter ended June 30, 2009.
The adoption did not have a material impact on the Company’s financial position,
results of operations or cash flows.
In April
2009, the FASB issued a staff position which provides additional guidance for
estimating fair value in accordance with the new business combination standard
when the volume and level of activity for the asset or liability have
significantly decreased. This staff position also includes guidance on
identifying circumstances that indicate a transaction is not orderly. The
Company does not expect the adoption of this staff position to have a material
impact on its financial condition and results of operations, although its
effects in future periods will depend on the nature and significance of
potential business combinations subject to this statement.
In
May 2009, the FASB issued new guidance on subsequent events which
established general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. It requires the disclosure of the date through which
an entity has evaluated subsequent events and the basis for that date—that is,
whether that date represents the date the financial statements were issued or
were available to be issued. The Company adopted the guidance in the quarter
ended June 30, 2009 and the statement did not have a material impact on our
consolidated results of operation and financial
position.
In June
2009, the FASB issued the standard that established the FASB Accounting
Standards Codification (the “Codification”). The Codification will
become the source of authoritative United States generally accepted accounting
principles (“GAAP”) recognized by the FASB to be applied by nongovernmental
entities. All other non-grandfathered, non-SEC accounting literature not
included in the Codification will become non-authoritative. The
Company adopted the standard in the quarter ended September 30,
2009. Other than the manner in which accounting guidance is
referenced in its financial reporting, the adoption of the Codification had no
impact on the Company’s financial position, results of operations or cash
flows.
In August
2009, the FASB issued guidance which provides clarification for the fair value
measurement of liabilities in circumstances in which a quoted price in an active
market for an identical liability is not available. This guidance is effective
for interim periods beginning after August 28, 2009. The Company adopted
this guidance in the quarter ended September 30, 2009. The adoption
did not have a material impact on the Company’s financial position, results of
operations or cash flows.
In
October 2009, the FASB issued amendments to the accounting and disclosure for
revenue recognition. These amendments, effective for fiscal years beginning on
or after June 15, 2010 (early adoption is permitted), modify the criteria for
recognizing revenue in multiple element arrangements and the scope of what
constitutes a non-software deliverable. The Company is currently assessing the
impact of the adoption on its consolidated financial position and results of
operations.
Item 7A. Quantitative
and Qualitative Disclosures about Market Risk
Foreign
Exchange Risk
We face
minimal exposure to adverse movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material impact on our financial position and results of operations. We do not
utilize any foreign currency exchange transactions to hedge our exposure.
Foreign currency gains for the years ended December 31, 2009, 2008 and 2007
were immaterial.
Interest
Rate Risk
As of
December 31, 2009, $12.8 million of outstanding debt was at floating
interest rates. Based on outstanding floating rate debt of $12.8 million as of
December 31, 2009, an increase of 1.0% in the prime rate would result in an
increase in our interest expense of approximately $128,000 per
year.
Market
Value of Portfolio Investments
We
maintain an investment portfolio of various holdings, types, and maturities. As
of December 31, 2009, we had $48.0 million of investments in money market
funds, commercial paper and corporate debentures/bonds recorded at fair value on
our balance sheet. While our investments are made in highly rated securities and
in compliance with our investment policy, these investments are exposed to
fluctuations in market values and could have a material impact on our financial
position and results of operations.
48
Financial
Statements and Supplementary Data
|
Comverge,
Inc.
Index
to Consolidated Financial Statements
Page
|
|
50
|
|
51
|
|
52
|
|
53
|
|
54
|
|
55
|
|
80
|
49
To the
Board of Directors and Stockholders of Comverge, Inc.
In our
opinion, the consolidated balance sheets and the related consolidated statements
of operations, changes in stockholders' equity and comprehensive loss and cash
flows present fairly, in all material respects, the financial position of
Comverge, Inc. and its subsidiaries at December 31, 2009 and 2008, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Company's internal
control over financial reporting based on our audits (which were integrated
audits in 2009 and 2008). We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers
LLP
Atlanta,
Georgia
March 8,
2010
50
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share and per share data)
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 16,069 | $ | 19,571 | ||||
Restricted
cash
|
3,000 | 1,968 | ||||||
Marketable
securities
|
34,409 | 28,276 | ||||||
Billed
accounts receivable, net
|
8,119 | 18,877 | ||||||
Unbilled
accounts receivable
|
11,873 | 5,908 | ||||||
Inventory,
net
|
6,605 | 4,960 | ||||||
Deferred
costs
|
1,715 | 2,197 | ||||||
Other
current assets
|
938 | 1,273 | ||||||
Total
current assets
|
82,728 | 83,030 | ||||||
Restricted
cash
|
2,636 | 2,089 | ||||||
Property
and equipment, net
|
18,340 | 20,572 | ||||||
Intangible
assets, net
|
8,779 | 10,251 | ||||||
Goodwill
|
8,179 | 8,179 | ||||||
Other
assets
|
235 | 1,036 | ||||||
Total
assets
|
$ | 120,897 | $ | 125,157 | ||||
Liabilities
and Shareholders' Equity
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 6,874 | $ | 7,672 | ||||
Accrued
expenses
|
11,574 | 8,006 | ||||||
Deferred
revenue
|
5,890 | 6,694 | ||||||
Current
portion of long-term debt
|
3,000 | 3,226 | ||||||
Other
current liabilities
|
5,648 | 2,400 | ||||||
Total
current liabilities
|
32,986 | 27,998 | ||||||
Long-term
liabilities
|
||||||||
Deferred
revenue
|
1,203 | 2,220 | ||||||
Long-term
debt
|
9,750 | 24,888 | ||||||
Other
liabilities
|
2,914 | 2,391 | ||||||
Total
long-term liabilities
|
13,867 | 29,499 | ||||||
Commitments
and contingencies (Note 13)
|
||||||||
Shareholders'
equity
|
||||||||
Preferred
stock, $0.001 par value per share, authorized 15,000,000
|
- | - | ||||||
shares;
no shares issued and outstanding as of December 31, 2009
|
||||||||
and
December 31, 2008
|
||||||||
Common
stock, $0.001 par value per share, authorized 150,000,000
|
25 | 22 | ||||||
shares; issued
25,072,764 and outstanding 25,067,102 shares as of
|
||||||||
December
31, 2009 and issued 21,926,660 and outstanding 21,908,121
|
||||||||
shares
as of December 31, 2008
|
||||||||
Additional
paid-in capital
|
258,660 | 220,638 | ||||||
Common
stock held in treasury, at cost, 5,662 and 18,539 shares as
of
|
(63 | ) | (119 | ) | ||||
December
31, 2009 and December 31, 2008, respectively
|
||||||||
Accumulated
deficit
|
(184,596 | ) | (152,930 | ) | ||||
Accumulated
other comprehensive income
|
18 | 49 | ||||||
Total
shareholders' equity
|
74,044 | 67,660 | ||||||
Total
liabilities and shareholders' equity
|
$ | 120,897 | $ | 125,157 |
The
accompanying notes are an integral part of these consolidated financial
statements.
51
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except share and per share data)
Year
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Revenue
|
||||||||||||
Product
|
$ | 20,732 | $ | 17,890 | $ | 14,812 | ||||||
Service
|
78,112 | 59,348 | 40,350 | |||||||||
Total
revenue
|
98,844 | 77,238 | 55,162 | |||||||||
Cost
of revenue
|
||||||||||||
Product
|
12,912 | 11,087 | 9,450 | |||||||||
Service
|
52,736 | 32,248 | 19,368 | |||||||||
Total
cost of revenue
|
65,648 | 43,335 | 28,818 | |||||||||
Gross
profit
|
33,196 | 33,903 | 26,344 | |||||||||
Operating
expenses
|
||||||||||||
General
and administrative expenses
|
37,781 | 34,463 | 22,072 | |||||||||
Marketing
and selling expenses
|
17,737 | 15,738 | 9,831 | |||||||||
Research
and development expenses
|
4,878 | 1,137 | 997 | |||||||||
Amortization
of intangible assets
|
2,209 | 2,439 | 973 | |||||||||
Impairment
charges
|
- | 75,432 | - | |||||||||
Operating
loss
|
(29,409 | ) | (95,306 | ) | (7,529 | ) | ||||||
Interest
expense (income), net
|
2,114 | 22 | (1,130 | ) | ||||||||
Other
expense (income), net
|
(76 | ) | (321 | ) | 58 | |||||||
Loss
before income taxes
|
(31,447 | ) | (95,007 | ) | (6,457 | ) | ||||||
Provision
(benefit) for income taxes
|
219 | (901 | ) | 147 | ||||||||
Net
loss
|
$ | (31,666 | ) | $ | (94,106 | ) | $ | (6,604 | ) | |||
Net
loss per share (basic and diluted)
|
$ | (1.45 | ) | $ | (4.45 | ) | $ | (0.46 | ) | |||
Weighted
average shares used
|
||||||||||||
in
computation
|
21,786,978 | 21,160,979 | 14,490,619 |
The accompanying notes are an
integral part of these consolidated financial statements.
52
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
(in
thousands, except share data)
Accumulated
|
|
|||||||||||||||||||||||||||||||||||||||
Preferred
Stock
|
Common
Stock
|
Additional
|
Treasury
Stock
|
Other
|
Total
|
|||||||||||||||||||||||||||||||||||
Number
of
|
Number
of
|
Paid-in
|
Number
of
|
Accumulated
|
Comprehensive
|
Shareholders'
|
||||||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Shares
|
Amount
|
Deficit
|
Income
|
Equity
|
|||||||||||||||||||||||||||||||
Balance
at December 31, 2006
|
8,589,050 | $ | 40,517 | 3,489,922 | $ | 3 | $ | 20,099 | - | $ | - | $ | (52,220 | ) | $ | - | $ | 8,399 | ||||||||||||||||||||||
Common
stock issued in public offerings, net of offering costs
|
- | - | 6,220,000 | 6 | 109,979 | - | - | - | - | 109,985 | ||||||||||||||||||||||||||||||
Conversion
of preferred stock into common stock
|
(8,589,050 | ) | (40,517 | ) | 8,589,050 | 9 | 40,508 | - | - | - | - | - | ||||||||||||||||||||||||||||
Common
stock issued upon conversion of convertible debt
|
- | - | 290,054 | 1 | 2,099 | - | - | - | - | 2,100 | ||||||||||||||||||||||||||||||
Common
stock issued in business acquisitions
|
- | - | 1,313,674 | 1 | 37,996 | - | - | - | - | 37,997 | ||||||||||||||||||||||||||||||
Issuance
of common stock upon exercises of stock options
|
- | - | 1,022,738 | 1 | 1,318 | - | - | - | - | 1,319 | ||||||||||||||||||||||||||||||
Stock
received to settle stock option employee taxes
|
- | - | (130,007 | ) | - | (3,148 | ) | - | - | - | - | (3,148 | ) | |||||||||||||||||||||||||||
Stock-based
compensation
|
- | - | - | - | 2,552 | - | - | - | - | 2,552 | ||||||||||||||||||||||||||||||
Issuance
of restricted stock, net of forfeitures
|
- | - | 97,905 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Components
of comprehensive loss:
|
||||||||||||||||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | (6,604 | ) | - | (6,604 | ) | ||||||||||||||||||||||||||||
Changes
in unrealized gain on marketable securities
|
- | - | - | - | - | - | - | - | 31 | 31 | ||||||||||||||||||||||||||||||
Total
comprehensive loss
|
- | - | - | - | - | - | - | - | - | (6,573 | ) | |||||||||||||||||||||||||||||
Balance
at December 31, 2007
|
- | - | 20,893,336 | 21 | 211,403 | - | - | (58,824 | ) | 31 | 152,631 | |||||||||||||||||||||||||||||
Common
stock issued upon conversion of convertible debt
|
- | - | 262,430 | - | 1,900 | - | - | - | - | 1,900 | ||||||||||||||||||||||||||||||
Issuance
of common stock upon exercises of stock options
|
- | - | 271,732 | 1 | 423 | - | - | - | - | 424 | ||||||||||||||||||||||||||||||
Stock-based
compensation
|
- | - | - | - | 6,876 | - | - | - | - | 6,876 | ||||||||||||||||||||||||||||||
Issuance
of restricted stock, net of forfeitures
|
- | - | 499,162 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Common
stock held in treasury
|
- | - | - | - | - | (18,539 | ) | (119 | ) | - | - | (119 | ) | |||||||||||||||||||||||||||
Payment
of offering costs
|
- | - | - | - | 36 | - | - | - | - | 36 | ||||||||||||||||||||||||||||||
Components
of comprehensive loss:
|
||||||||||||||||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | (94,106 | ) | - | (94,106 | ) | ||||||||||||||||||||||||||||
Changes
in unrealized gain on marketable securities
|
- | - | - | - | - | - | - | - | 18 | 18 | ||||||||||||||||||||||||||||||
Total
comprehensive loss
|
- | - | - | - | - | - | - | - | - | (94,088 | ) | |||||||||||||||||||||||||||||
Balance
at December 31, 2008
|
- | - | 21,926,660 | 22 | 220,638 | (18,539 | ) | (119 | ) | (152,930 | ) | 49 | 67,660 | |||||||||||||||||||||||||||
Common
stock issued in public offering, net of offering cost
|
2,760,000 | 3 | 27,033 | - | - | - | - | 27,036 | ||||||||||||||||||||||||||||||||
Issuance
of common stock upon exercises of stock options
|
- | - | 310,447 | - | 1,126 | - | - | - | - | 1,126 | ||||||||||||||||||||||||||||||
Stock-based
compensation
|
- | - | - | - | 10,038 | - | - | - | - | 10,038 | ||||||||||||||||||||||||||||||
Issuance
of restricted stock, net of forfeitures
|
- | - | 94,279 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Common
stock held in treasury
|
- | - | - | - | - | (17,690 | ) | (155 | ) | - | - | (155 | ) | |||||||||||||||||||||||||||
Retirement
of shares from treasury
|
- | - | (30,567 | ) | - | (211 | ) | 30,567 | 211 | - | - | - | ||||||||||||||||||||||||||||
Issuance
of shares related to prior year acquisition
|
- | - | 11,945 | - | 36 | - | - | - | - | 36 | ||||||||||||||||||||||||||||||
Components
of comprehensive loss:
|
||||||||||||||||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | (31,666 | ) | - | (31,666 | ) | ||||||||||||||||||||||||||||
Changes
in unrealized gain on marketable securities
|
- | - | - | - | - | - | - | - | (31 | ) | (31 | ) | ||||||||||||||||||||||||||||
Total
comprehensive loss
|
- | - | - | - | - | - | - | - | - | (31,697 | ) | |||||||||||||||||||||||||||||
Balance
at December 31, 2009
|
- | $ | - | 25,072,764 | $ | 25 | $ | 258,660 | (5,662 | ) | $ | (63 | ) | $ | (184,596 | ) | $ | 18 | $ | 74,044 |
The
accompanying notes are an integral part of these consolidated financial
statements.
53
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
Year
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
flows from operating activities
|
||||||||||||
Net
loss
|
$ | (31,666 | ) | $ | (94,106 | ) | $ | (6,604 | ) | |||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities
|
||||||||||||
Depreciation
|
17,689 | 5,004 | 4,535 | |||||||||
Amortization
of intangible assets
|
2,810 | 2,605 | 973 | |||||||||
Stock-based
compensation
|
10,038 | 6,876 | 2,552 | |||||||||
Impairment
charges
|
- | 75,432 | - | |||||||||
Gain
on extinguishment of debt
|
- | (328 | ) | - | ||||||||
Write-off
of debt issuance costs
|
754 | - | - | |||||||||
Amortization
of debt issuance costs
|
258 | 217 | 226 | |||||||||
Amortization
(accretion) of marketable securities
|
252 | (175 | ) | (559 | ) | |||||||
Loss
on disposal of property and equipment
|
670 | 353 | 256 | |||||||||
Allowance
for inventory obsolescence
|
(10 | ) | 65 | (135 | ) | |||||||
Allowance
for doubtful accounts
|
66 | 213 | 125 | |||||||||
Deferred
income taxes
|
220 | (815 | ) | 64 | ||||||||
Changes
in operating assets and liabilities
|
||||||||||||
Billed
and unbilled accounts receivable, net
|
4,727 | (12,804 | ) | (3,517 | ) | |||||||
Inventory,
net
|
(2,059 | ) | (2,037 | ) | (1,195 | ) | ||||||
Deferred
costs and other assets
|
806 | (708 | ) | 2,410 | ||||||||
Accounts
payable
|
(958 | ) | 3,101 | (1,741 | ) | |||||||
Accrued
expenses and other liabilities
|
6,003 | 397 | 2,692 | |||||||||
Deferred
revenue
|
(1,821 | ) | 2,877 | (1,588 | ) | |||||||
Net
cash provided by (used in) operating activities
|
7,779 | (13,833 | ) | (1,506 | ) | |||||||
Cash
flows from investing activities
|
||||||||||||
Changes
in restricted cash
|
(1,579 | ) | (1,692 | ) | (2,088 | ) | ||||||
Cash
paid for acquisitions, net of cash acquired
|
- | (48 | ) | (33,739 | ) | |||||||
Purchases
of marketable securities
|
(39,166 | ) | (34,635 | ) | (80,884 | ) | ||||||
Maturities
of marketable securities
|
32,750 | 39,726 | 48,300 | |||||||||
Purchases
of property and equipment
|
(14,901 | ) | (11,615 | ) | (5,500 | ) | ||||||
Purchases
of technology licenses
|
(1,338 | ) | (1,700 | ) | - | |||||||
Funding
of termination benefits
|
- | - | (13 | ) | ||||||||
Net
cash used in investing activities
|
(24,234 | ) | (9,964 | ) | (73,924 | ) | ||||||
Cash
flows from financing activities
|
||||||||||||
Proceeds
from exercises of stock options
|
1,067 | 359 | 1,319 | |||||||||
Payment
of employee taxes due to net settlement stock option
exercises
|
(96 | ) | (54 | ) | (3,148 | ) | ||||||
Borrowings
under credit agreement
|
10,900 | 8,087 | 4,437 | |||||||||
Repayment
of credit agreement
|
(23,424 | ) | - | - | ||||||||
Borrowings
under loan facility
|
- | 15,000 | - | |||||||||
Repayment
of loan facility
|
(2,250 | ) | - | - | ||||||||
Repayment
of subordinated convertible promissory notes
|
(590 | ) | (18,860 | ) | - | |||||||
Repayment
of senior loan agreement
|
- | - | (1,000 | ) | ||||||||
Net
proceeds (payments) from issuance of common stock
|
27,371 | (614 | ) | 111,138 | ||||||||
Payment
of debt issuance costs
|
(25 | ) | (305 | ) | (1,335 | ) | ||||||
Net
cash provided by financing activities
|
12,953 | 3,613 | 111,411 | |||||||||
Net
change in cash and cash equivalents
|
(3,502 | ) | (20,184 | ) | 35,981 | |||||||
Cash
and cash equivalents at beginning of period
|
19,571 | 39,755 | 3,774 | |||||||||
Cash
and cash equivalents at end of period
|
$ | 16,069 | $ | 19,571 | $ | 39,755 | ||||||
Cash
paid for interest
|
$ | 1,629 | $ | 1,688 | $ | 1,153 | ||||||
Supplemental
disclosure of noncash investing and financing activities
|
||||||||||||
Recording
of asset retirement obligation
|
$ | 399 | $ | 427 | $ | 120 | ||||||
Subordinated
convertible notes issued in connection with
|
||||||||||||
business
acquisitions
|
$ | - | $ | - | $ | 20,000 | ||||||
Common
stock issued as consideration in business acquisitions
|
$ | 36 | $ | - | $ | 37,997 | ||||||
Common
stock issued on conversion of convertible debt
|
$ | - | $ | 1,900 | $ | 2,100 |
The
accompanying notes are an integral part of these consolidated financial
statements.
54
NOTES
TO 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 demand management solutions to electric utilities, grid
operators and associated electricity markets in the form of peaking and base
load capacity. The Company provides capacity to its customers either through
long-term contracts or through open markets in which it actively manages
electrical demand or by selling its demand response systems to customers for
their operation. The Company has three operating segments: the Utility Products
& Services segment, the Residential Business segment, and the Commercial
& Industrial Business segment.
Basis
of Presentation
The
consolidated financial statements of the Company include the accounts of its
subsidiaries. The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America. The consolidated financial statements presented reflect entries
necessary for the fair presentation of the Consolidated Statements of Operations
for the years ended December 31, 2009, 2008 and 2007, Consolidated Balance
Sheets as of December 31, 2009 and 2008 and Consolidated Statements of Cash
Flows for the years ended December 31, 2009, 2008 and 2007. All entries
required for the fair presentation of the financial statements are of a normal
recurring nature. Intercompany transactions and balances are eliminated upon
consolidation.
A
reclassification has been made to the consolidated statements of cash flows for
the years ended December 31, 2008 and 2007 to conform to the presentation for
the year ended December 31, 2009. In prior periods, the Company classified
deployment of capital assets as noncash investing activities when the asset was
deployed through inventory. In the consolidated statements of cash flows
presented, the Company classified the cash used for these asset deployments as
cash used in investing activities. The Company believes the current presentation
to represent more fairly its cash outflow due to capital
expenditures.
During
2007, the Company completed two business acquisitions, which are discussed in
note 4. The results of operations and cash flows of these acquired businesses
are included in our consolidated statements of operations and cash flows from
their respective dates of acquisition.
Reverse
Stock Split
On
April 18, 2007, the Company effected a 1-for-2 reverse stock split of its
common stock in connection with the closing of its initial public offering. All
common shares and per share amounts have been retroactively restated in the
accompanying consolidated financial statements and notes for all periods
effected.
Liquidity
The
Company reported annual net losses in 2009, 2008 and 2007 of $31,666, $94,106
and $6,604, respectively. The Company’s cash and cash equivalents and marketable
securities as of December 31, 2009 were $50,478. As of December 31, 2009, the
Company had $12,750 of debt outstanding and $5,386 of borrowing availability
from its debt facility.
2.
|
Significant
Accounting Policies and Recent Accounting
Pronouncements
|
Use
of Estimates in Preparation of Financial Statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of the
date of the financial statements, and the reported amounts of revenue and
expense during the reporting periods. Significant estimates include management’s
estimate of provisions required for non-collectible accounts receivable,
obsolete or slow-moving inventory, and potential product warranty liability as
well as management’s estimates related to revenue recognition using the
percentage-of-completion method. Actual results could differ from those
estimates.
55
Cash
and Cash Equivalents and Restricted Cash
The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash and cash equivalents consist
of cash and demand deposits in banks and short-term investments.
The
Company maintains cash balances to secure its performance or to fund possible
damages as the result of an event of default related to certain service
contracts. These amounts have been classified as restricted cash on the balance
sheet and are classified as current or noncurrent based on the underlying
restriction.
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts is based on specific identification of accounts
considered to be doubtful of collection as well as historical experience. As of
December 31, 2009 and 2008, there were $369 and $494, respectively,
identified as doubtful of collection.
Inventory,
net
Inventories
are stated at the lower of cost or market. Inventory cost is determined on the
basis of specific identification based on acquisition cost and due provision is
made to reduce all slow-moving, obsolete, or unusable inventories to their
estimated useful or scrap values. As of December 31, 2009 and 2008, there
were provisions of $188 and $198, respectively, for inventory identified as
slow-moving, obsolete or unusable.
Property
and Equipment, net
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
depreciable assets. In the case of installed assets that are part of long-term
contracts, the assets are depreciated over the shorter of the useful life or the
term of the contract. Leasehold improvements are depreciated over the shorter of
the lease term or useful life. Improvements are capitalized while repairs and
maintenance are expensed as incurred. Gains or losses realized on the disposal
or retirement of property and equipment are recognized in the consolidated
statement of operations.
The
Company recognizes the fair value of liabilities for asset retirement
obligations in the period in which they are incurred if a reasonable estimate of
fair value can be made. The Residential Business segment installs hardware at
residences of select utility customers. At the request of the homeowner, the
Company is obligated to remove this hardware. Any associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset and
recognized as depreciation expense over the asset’s life. The Company’s estimate
is based on the historical data for the ratio of cumulative assets removed to
the cumulative number of assets installed. Accordingly, in the years ended
December 31, 2009, 2008 and 2007, the Company recognized an asset
retirement obligation liability and an associated adjustment in the cost of
long-lived assets of $399, $427 and $120, respectively.
Goodwill
and Intangibles, net
Goodwill
represents the excess of cost over the fair value of the net tangible assets and
identified intangible assets of businesses acquired in purchase transactions.
Goodwill is not being amortized. Intangibles are recorded at their
fair value at acquisition date. The Company amortizes finite-lived intangibles
over their estimated useful lives, ranging from three to fourteen years, using
the straight-line method, which approximates the projected utility of such
assets based upon the information available. Goodwill and other
indefinite-lived intangible assets are tested for impairment on at least an
annual basis, on December 31 of each year, as well as on an as-needed basis
determined by events or changes in circumstances.
An
impairment test of goodwill and certain intangible assets was performed during
the third quarter of 2008. The interim impairment assessment was triggered by a
rule change in a certain market effected in 2008 that reduced the price the
Company receives under its economic, or voluntary, demand response programs for
commercial and industrial consumers. Based on this evaluation, the
Company recorded a non-cash impairment charge. A complete discussion
on the methodology and assumptions applied is included in note 8.
The
Company performed its annual impairment test as of December 31st and the results
of the tests performed on December 31, 2009, 2008 and 2007 indicated no
additional impairment. Goodwill is allocated among and evaluated for
impairment at the reporting unit level, which is defined as an operating segment
or one level below an operating segment. Goodwill was tested for impairment
using the two-step approach. Step 1 of the goodwill impairment test,
used to identify potential impairment, compares the fair value of the reporting
unit with its carrying amount, including goodwill. If the fair value
of the reporting unit exceeds its carrying amount, goodwill of the reporting
unit is considered not impaired and the second step of the impairment test is
not required. If the carrying amount of a reporting unit exceeds its
fair value, the second step of the goodwill impairment test would be performed
to measure the amount of impairment, if any.
56
Impairment
of Long-Lived Assets
The
Company evaluates the recoverability of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount should be assessed by
comparing their carrying value to the undiscounted estimated future net
operating cash flows expected to be derived from such assets. If such evaluation
indicates a potential impairment, a discounted cash flow analysis is used to
measure fair value in determining the amount of these assets that should be
written off.
Debt
Issuance Costs
Debt
issuance costs are amortized over the term of the corresponding debt instrument
using the straight-line method, which approximates the effective interest
method. Amortization of debt issuance costs was $258, $217 and $226 for the
years ended December 31, 2009, 2008 and 2007, respectively. The Company
recorded a $754 write-off of debt issuance costs during the year ended December
31, 2009 as a result of the payment and termination of the Company’s credit
agreement.
Debt issuance costs are included in
Other current assets and Other assets and consisted of the following as of
December 31, 2009 and 2008:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Debt
issuance costs at beginning of year
|
$ | 1,221 | $ | 1,132 | ||||
Addition
of debt issuance costs
|
25 | 306 | ||||||
Write-off
of debt issuance costs
|
(754 | ) | - | |||||
Amortization
of debt issuance costs
|
(258 | ) | (217 | ) | ||||
Debt
issuance costs at end of year
|
$ | 234 | $ | 1,221 |
Warranty
Provision
The
Company generally warrants its products against certain manufacturing and other
defects. These product warranties are provided for specific periods of time
and/or usage of the product depending on the nature of the product, the
geographic location of its sale and other factors. The warranty provision
included in Other current liabilities is set forth below.
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Warranty
provision at beginning of year
|
$ | 101 | $ | 111 | ||||
Accruals
for warranties issued during the year
|
19 | 9 | ||||||
Warranty
settlements during the year
|
(38 | ) | (19 | ) | ||||
Warranty
provision at the end of year
|
$ | 82 | $ | 101 |
Fair Value of Financial
Instruments
The
Company uses financial instruments in the normal course of business, including
cash and cash equivalents, investment securities, accounts receivable, accounts
payable, accrued expenses, and debt obligations. The carrying values of accounts
receivable, accounts payable, and accrued expenses approximated their respective
fair values at each balance sheet date due to the short-term maturity of these
assets and liabilities. The carrying value of the debt obligations approximated
its fair value given the market rates of interest and maturity
schedules.
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 reduce consumers’ use of electricity. The Company’s business success
depends in part on its relationships with a limited number of large customers.
During the year ended December 31, 2009, the Company had two customers
which accounted for 20%, and 12% of the Company’s total revenue. The revenue
from these customers was reported in the Commercial and Industrial Business
segment and the Residential Business segment, respectively, for the year ended
December 31, 2009. The total accounts receivable from these customers
were $8,649 and $572, respectively, as of December 31,
2009. During the year ended December 31, 2008, the
Company had three customers which accounted for 19%, 14%, and 12% of the
Company’s total revenue. The total accounts receivable from these customers were
$5,339, $2,304, and $5,228, respectively, as of December 31, 2008. During
the year ended December 31, 2007, the Company had two customers which
accounted for 16% and 10% of the Company’s total revenue.
No other
customer accounted for more than 10% of the Company’s total revenue in 2009,
2008 and 2007.
The
Company is subject to concentrations of credit risk from its cash and cash
equivalents, short-term investments and accounts receivable. 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 and short-term
investments with multiple domestic financial institutions and adhering to the
Company’s investment policy.
57
Revenue
Recognition – Utility Products & Services
The
Company sells hardware products and services 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: delivery has occurred, the price is fixed and determinable,
collection is probable, and persuasive evidence of an arrangement
exists. The Company reports shipping and handling revenue and their
associated costs in revenue and cost of revenue, respectively.
The
Company has certain contracts which are multiple element arrangements and
provide for several deliverables to the customer that may include installation
services, marketing services, program management services, right to use
software, hardware and hosting services. These contracts require no significant
production, modification or customization of the software and the software is
incidental to the products and services as a whole. The Company evaluates each
deliverable to determine whether it represents a separate unit of accounting. If
objective and reliable evidence of fair value exists for all units of accounting
in the arrangement, revenue is allocated to each unit of accounting based on
relative fair values. Each unit of accounting is then accounted for under the
applicable revenue recognition guidance. In situations in which there is
objective and reliable evidence of fair value for all undelivered elements but
not for delivered elements, the residual method is used to allocate the
arrangement’s consideration.
Revenue Recognition - Residential
Business
The
Company defers revenue and the associated cost of revenue related to certain
long-term Virtual Peaking Capacity® (“VPC”) contracts until such time as the
annual contract payment is fixed and 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 in order to determine final contract
consideration for a given contract year. 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 participant enrolls
in one of the Company’s VPC programs, the Company installs a digital control
unit or thermostat 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 incentive
payments made to participants in its VPC programs and 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 December 31, 2009
and December 31, 2008 are provided below:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Deferred
revenue:
|
||||||||
VPC
contract related
|
$ | 3,443 | $ | 4,271 | ||||
Other
|
2,447 | 2,423 | ||||||
Current
deferred revenue
|
$ | 5,890 | $ | 6,694 | ||||
Deferred
cost of revenue:
|
||||||||
VPC
contract related
|
$ | 1,072 | $ | 791 | ||||
Other
|
643 | 1,406 | ||||||
Current
deferred cost of revenue
|
$ | 1,715 | $ | 2,197 |
The
Company enters into agreements to provide base load capacity. Base load capacity
revenues are earned based on the Company’s ability to achieve committed capacity
through load reduction. In order to provide capacity, the Company delivers and
installs demand side management measures. 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 in its electric load reduction services until such time as the capacity
amount, and therefore the related revenue, is fixed and determinable. Once the
capacity 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. Accordingly, revenue is recognized for each element by
applying the residual method, since there is objective evidence of fair value of
only the undelivered item. The amount allocated to the delivered item is limited
to the amount that is not contingent upon delivery of the additional
element.
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 to utility end customers 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 customer initiated 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 and determinable.
58
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 at the end of the
mandatory performance period, once the revenue is fixed and
determinable.
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
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. Revenue from
maintenance contracts is recognized on a straight-line basis over the life of
the contract.
Foreign
Currency Transactions
The
currency of the primary economic environment in which the operations of the
Company are conducted is the United States Dollar (“dollar”). Accordingly, the
Company and its subsidiaries use the dollar as their functional currency. All
exchange gains and losses denominated in non-dollar currencies are presented on
a net basis in operating expense in the consolidated statement of operations
when they arise. Foreign currency gains for the years ended December 31,
2009, 2008 and 2007 were immaterial.
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 in the consolidated statement of changes in shareholders’ equity and
comprehensive loss.
Marketable
Securities
The
Company classifies all of its marketable securities as available-for-sale. The
Company considers all highly liquid interest-earning securities with a maturity
of three months or less at the date of purchase to be cash equivalents.
Securities with maturities beyond three months are classified as short-term
based on their highly liquid nature and because such marketable securities
represent the investment of cash that is available for current operations. These
securities are recorded at market value using the specific identification
method; unrealized gains and losses (excluding other-than-temporary impairments)
are reflected in accumulated other comprehensive loss in the financial
statements.
The
amortized cost and fair value of marketable securities, with gross unrealized
gains and losses, as of December 31, 2009 and 2008 were as
follows:
December
31, 2009
|
||||||||||||||||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
Cash
and
|
Restricted
|
Marketable
|
||||||||||||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
Equivalents
|
Cash
|
Securities
|
||||||||||||||||||||||
Money
market funds
|
$ | 15,622 | $ | - | $ | - | $ | 15,622 | $ | 10,406 | $ | 2,216 | $ | 3,000 | ||||||||||||||
Commercial
paper
|
6,142 | - | - | 6,142 | - | - | 6,142 | |||||||||||||||||||||
Corporate
debentures/bonds
|
26,249 | 45 | (27 | ) | 26,267 | 1,000 | - | 25,267 | ||||||||||||||||||||
Total
|
$ | 48,013 | $ | 45 | $ | (27 | ) | $ | 48,031 | $ | 11,406 | $ | 2,216 | $ | 34,409 |
December
31, 2008
|
||||||||||||||||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
Cash
and
|
Restricted
|
Marketable
|
||||||||||||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
Equivalents
|
Cash
|
Securities
|
||||||||||||||||||||||
Money
market funds
|
$ | 18,026 | $ | - | $ | - | $ | 18,026 | $ | 15,467 | $ | 1,209 | $ | 1,350 | ||||||||||||||
Commercial
paper
|
3,882 | 8 | - | 3,890 | - | - | 3,890 | |||||||||||||||||||||
Corporate
debentures/bonds
|
22,995 | 76 | (35 | ) | 23,036 | - | - | 23,036 | ||||||||||||||||||||
Total
|
$ | 44,903 | $ | 84 | $ | (35 | ) | $ | 44,952 | $ | 15,467 | $ | 1,209 | $ | 28,276 |
Realized
gains and losses to date have not been material. Interest income for the years
ended December 31, 2009, 2008 and 2007 was $515, $1,583 and $2,535,
respectively.
59
The
Company applies a fair value hierarchy that requires the use of observable
market data, when available, and prioritizes the 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 its own 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.
60
The
following tables set forth by level, within the fair value hierarchy, the
Company’s marketable securities accounted for at fair value as of December 31,
2009 and 2008. Assets and liabilities are classified in their entirety based on
the lowest level of input that is significant to the fair value
measurement.
Fair
Value Measurements at Reporting Date Using
|
||||||||||||||||
Quoted
Prices
|
|
|
||||||||||||||
in Active | Significant Other | Significant | ||||||||||||||
Markets
for Identical
|
Observable
|
Unobservable
|
||||||||||||||
December
31,
|
Assets
|
Inputs
|
Inputs
|
|||||||||||||
2009
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
Money
market funds
|
$ | 15,622 | $ | 12,622 | $ | 3,000 | $ | - | ||||||||
Commercial
paper
|
6,142 | - | 6,142 | - | ||||||||||||
Corporate
debentures/bonds
|
26,267 | - | 26,267 | - | ||||||||||||
Total
|
$ | 48,031 | $ | 12,622 | $ | 35,409 | $ | - |
Fair
Value Measurements at Reporting Date Using
|
||||||||||||||||
Quoted
Prices
|
|
|
||||||||||||||
in Active | Significant Other | Significant | ||||||||||||||
Markets
for Identical
|
Observable
|
Unobservable
|
||||||||||||||
December
31,
|
Assets
|
Inputs
|
Inputs
|
|||||||||||||
2008
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
Money
market funds
|
$ | 18,026 | $ | 16,676 | $ | 1,350 | $ | - | ||||||||
Commercial
paper
|
3,890 | - | 3,890 | - | ||||||||||||
Corporate
debentures/bonds
|
23,036 | - | 23,036 | - | ||||||||||||
Total
|
$ | 44,952 | $ | 16,676 | $ | 28,276 | $ | - |
Advertising
Expenses
Advertising
costs are expensed as incurred. Advertising expense was $4,114, $3,889 and
$2,656 for the years ended December 31, 2009, 2008 and 2007, respectively.
Substantially all advertising costs were incurred to promote the Company’s VPC
and open market programs to participants in an effort to acquire electric
capacity in fulfillment of certain long-term capacity contracts with utility
customers of the Company’s Residential Business segment and Commercial &
Industrial Business segment.
Software
Development Costs for Internal Use
Software
costs for internal use of $176, $516 and $189 were capitalized in 2009, 2008 and
2007, respectively. These costs will be amortized over a three-year expected
life in accordance with Company policy. During the year ended December 31,
2009, 2008 and 2007, $209, $87 and $51 was recorded as depreciation expense for
internal use software.
Software
Development Costs to be Sold, Leased or Otherwise Marketed
The
capitalization of software development costs begins upon the establishment of
technological feasibility and ends when the software is generally available.
Based upon the Company’s product development process, technological feasibility
is established upon the completion of a working model or detailed program
design. To date, the period between achieving technological feasibility and the
general availability of the related products has been short and software
development costs qualifying for capitalization have not been material.
Accordingly, the Company has not capitalized any software development costs. All
software development costs are a component of research and development
expense.
Research
and Development Expenses
All
research and development costs are expensed as incurred and consist primarily of
salaries and benefits.
Stock-Based
Compensation
Stock-based
compensation expense recognized for the years December 31, 2009, 2008 and
2007 was $10,038, $6,876 and $2,552, respectively, before income
taxes.
61
Segment
Reporting
As
of December 31, 2009, the Company reports through three operating segments: the
Utility Products & Services segment, the Residential Business segment, and
the Commercial & Industrial Business segment. Operating segments are
components of an enterprise for which separate financial information is
available and is evaluated regularly by the Company in deciding how to allocate
resources and in assessing performance. The Company’s chief operating decision
maker assesses the Company’s performance and allocates the Company’s resources
based on these segments. These segments constitute the Company’s three
reportable segments.
Income
Taxes
The
Company utilizes the asset and liability method of accounting for income taxes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating
loss, capital loss and tax credit carryforwards. Deferred tax assets and
liabilities are classified as current or noncurrent based on the classification
of the related assets or liabilities for financial reporting, or according to
the expected reversal dates of the specific temporary differences, if not
related to an asset or liability for financial reporting. Valuation allowances
are established against deferred tax assets if it is more likely than not that
they will not be realized. The Company recognizes interest and
penalties related to uncertain tax positions in income tax expense. As of
December 31, 2009 and 2008, there were no accrued interest and penalties
related to uncertain tax positions.
Recent
Accounting Pronouncements
In April
2009, the Financial Accounting Standards Board (“FASB”) issued a staff position
that amends and clarifies the new business combination standard, to address
application issues on initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and liabilities arising
from contingencies in a business combination. The Company does not expect the
adoption of this staff position to have a material impact on its financial
condition and results of operations, although its effects in future periods will
depend on the nature and significance of potential business combinations subject
to this statement.
In April
2009, the FASB issued a staff position requiring disclosures about fair value of
financial instruments for interim reporting periods as well as in annual
financial statements. This staff position also requires those disclosures in
summarized financial information at interim reporting periods. The Company
adopted this staff position in its second quarter ended June 30, 2009. The
adoption did not have a material impact on the Company’s financial position,
results of operations or cash flows.
In April
2009, the FASB issued a staff position which amends the other-than-temporary
impairment guidance for debt securities to make the guidance more operational
and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements. The
Company adopted this staff position in its second quarter ended June 30, 2009.
The adoption did not have a material impact on the Company’s financial position,
results of operations or cash flows.
In April
2009, the FASB issued a staff position which provides additional guidance for
estimating fair value in accordance with the new business combination standard
when the volume and level of activity for the asset or liability have
significantly decreased. This staff position also includes guidance on
identifying circumstances that indicate a transaction is not orderly. The
Company does not expect the adoption of this staff position to have a material
impact on its financial condition and results of operations, although its
effects in future periods will depend on the nature and significance of
potential business combinations subject to this statement.
In
May 2009, the FASB issued new guidance on subsequent events which
established general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. It requires the disclosure of the date through which
an entity has evaluated subsequent events and the basis for that date—that is,
whether that date represents the date the financial statements were issued or
were available to be issued. The Company adopted the guidance in the quarter
ended June 30, 2009 and the statement did not have a material impact on our
consolidated results of operation and financial
position.
In June
2009, the FASB issued the standard that established the FASB Accounting
Standards Codification (the “Codification”). The Codification will
become the source of authoritative United States generally accepted accounting
principles (“GAAP”) recognized by the FASB to be applied by nongovernmental
entities. All other non-grandfathered, non-SEC accounting literature not
included in the Codification will become non-authoritative. The
Company adopted the standard in the quarter ended September 30,
2009. Other than the manner in which accounting guidance is
referenced in its financial reporting, the adoption of the Codification had no
impact on the Company’s financial position, results of operations or cash
flows.
In August
2009, the FASB issued guidance which provides clarification for the fair value
measurement of liabilities in circumstances in which a quoted price in an active
market for an identical liability is not available. This guidance is effective
for interim periods beginning after August 28, 2009. The Company adopted
this guidance in the quarter ended September 30, 2009. The adoption
did not have a material impact on the Company’s financial position, results of
operations or cash flows.
In
October 2009, the FASB issued amendments to the accounting and disclosure for
revenue recognition. These amendments, effective for fiscal years beginning on
or after June 15, 2010 (early adoption is permitted), modify the criteria for
recognizing revenue in multiple element arrangements and the scope of what
constitutes a non-software deliverable. The Company is currently assessing the
impact of the adoption on its consolidated financial position and results of
operations.
62
|
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, restricted stock 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 years
ended December 31, 2009, 2008 and 2007, 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 antidilutive. Such
potential common shares consist of the following:
Year
Ended December 31,
|
||||||
2009
|
2008
|
2007
|
||||
Subordinated
debt convertible to common stock
|
-
|
17,646
|
845,189
|
|||
Contingently
issuable shares
|
-
|
11,945
|
11,945
|
|||
Unvested
restricted stock awards
|
496,589
|
548,511
|
96,666
|
|||
Outstanding
options
|
1,988,400
|
1,810,656
|
1,779,852
|
|||
Outstanding
warrant
|
-
|
-
|
250,000
|
|||
Total
|
2,484,989
|
2,388,758
|
2,983,652
|
4.
|
Acquisitions
|
On
July 23, 2007, Comverge completed the acquisition of Enerwise Global
Technologies, Inc. (“Enerwise”) for $76.2 million in consideration, comprised of
$22.3 million in cash, net of cash acquired; $17.0 million in subordinated
convertible promissory notes payable to Enerwise stockholders; and 1,279,545
shares of Comverge common stock, valued at $36.9 million. The fair value of
Comverge common stock to be issued was determined using an average price of
$28.82, which was the average closing price of Comverge common stock for a few
days before and after the terms of the merger agreement were agreed to and
announced.
In
addition, 191,183 shares of Comverge stock were issuable if Enerwise exceeded
certain 2008 operating performance results. The additional contingent
consideration was not earned in 2008 and the 191,183 shares will not be
issued.
On
September 29, 2007, Comverge completed the acquisition of Public Energy
Solutions, LLC, Public Electric, Inc. and PES NY, LLC (collectively, “PES”) for
$13.3 million in consideration, comprised of $9.0 million in cash, net of cash
acquired; 3.0 million in subordinated convertible promissory notes payable
to PES capital members; and 46,074 shares of Comverge common stock, valued at
$1.3 million, of which 34,129 shares were issued upon closing and 11,945 shares
were issued as additional consideration by the Company as certain 2007 operating
performance results were achieved. The fair value of Comverge common stock
issued upon closing was determined using a price of $32.86.
For 2007,
contingent consideration based on the achievement of certain operating
performance results was earned resulting in issuing consideration of $0.9
million and 11,945 shares of the Company’s common stock. For 2008, additional
consideration of up to $2.2 million and 192,832 shares of our common stock were
not issuable as certain operating performance results were not
attained.
These
acquisitions were completed primarily to allow the Company to expand its demand
management services. The Company allocated the purchase prices of the
acquisitions to the tangible assets, liabilities and intangible assets acquired
based on their estimated fair values. The excesses of the purchase prices over
the fair values were recorded as goodwill. Management believes the goodwill
resulting from the PES acquisition will be deductible for tax purposes. The fair
values assigned to intangible assets acquired were based on estimates and
assumptions determined by management. Purchased intangibles with finite lives
are amortized on a straight-line basis over their respective useful lives, which
represents the most discernible pattern of economic use. The results of
operations of each acquisition are included in the results of operations from
the closing date of the acquisition. The allocations of the purchase prices were
as follows:
63
Enerwise
|
PES
|
|||||||
Current
assets
|
$ | 3,894 | $ | 2,211 | ||||
Goodwill
|
66,944 | 6,926 | ||||||
Intangible
assets:
|
||||||||
Acquired
technology
|
2,735 | - | ||||||
Trade
names and trademarks
|
2,758 | - | ||||||
Customer
relationships and contracts
|
8,061 | 5,585 | ||||||
Non-compete
agreements
|
- | 456 | ||||||
Other
assets
|
245 | 162 | ||||||
Total
assets acquired
|
84,637 | 15,340 | ||||||
Liabilities
assumed
|
(7,501 | ) | (1,631 | ) | ||||
Net
assets acquired
|
$ | 77,136 | $ | 13,709 |
The trade
names and trademarks as well as non-compete agreements were deemed to be
indefinite lived. At the time of their acquisition, the acquired technology and
customer relationships and contracts had useful lives of four to ten years, with
a weighted average useful life of approximately seven years. During the year
ended December 31, 2008, the trade names and trademarks were fully impaired, as
discussed in note 8. The non-compete agreements began to amortize when certain
employees resigned from the Company.
Goodwill
recorded from the PES acquisition was assigned to the Residential Business
segment. Goodwill recorded from the Enerwise acquisition was assigned to the
Commercial & Industrial Business segment. During the year ended December 31,
2008, the Enerwise goodwill was fully impaired, as discussed in note
8.
The
unaudited financial information in the table below summarizes the combined
results of operations of Comverge, Enerwise and PES, on a pro forma basis, as
though the companies had been combined as of the beginning of the fiscal
year. This pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the results of operations
that would have been achieved had the acquisition taken place at the beginning
of the year presented.
December
31,
|
||||
2007
|
||||
Revenue
|
$ | 68,683 | ||
Net
loss
|
$ | (10,336 | ) | |
Basic
and diluted net loss per share
|
$ | (0.68 | ) |
5.
|
Accounts Receivable,
net
|
Billed
accounts receivable as of December 31, 2009 and 2008 was $8,119 and $18,877,
respectively, net of the allowance for doubtful accounts. Billed
accounts receivable as of December 31, 2008 consisted of one past-due customer
account of $6,261, which was paid current as of December 31, 2009.
Unbilled
accounts receivable as of December 31, 2009 and 2008 was $11,873 and $5,908,
respectively. Unbilled accounts receivable mainly reflect amounts that the
Company will invoice in the next twelve months pursuant to the Company’s
contractual right to make future billings under the Residential Business
segment’s VPC contracts as well as amounts related to the primary capacity
program in which the Company receives monthly payments throughout the program
year.
6.
|
Inventory,
net
|
Inventory
as of December 31, 2009 and 2008 consisted of the following:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Raw
materials and supplies
|
$ | 689 | $ | 611 | ||||
Finished
goods
|
5,916 | 4,349 | ||||||
Total
inventory, net
|
$ | 6,605 | $ | 4,960 |
64
7.
|
Property and Equipment,
net
|
Property
and equipment as of December 31, 2009 and 2008 consisted of the
following:
Estimated
|
||||||||||||
Useful
Life
|
December
31,
|
December
31,
|
||||||||||
(in
years)
|
2009
|
2008
|
||||||||||
Load
control equipment
|
Contract
term
|
$ | 43,679 | $ | 31,086 | |||||||
Computer
hardware and software
|
3 | 3,625 | 2,790 | |||||||||
Office
furniture, automobiles and other equipment
|
5 - 7 | 2,259 | 1,896 | |||||||||
Leasehold
improvements
|
Lease
term
|
1,795 | 1,439 | |||||||||
Property
and equipment
|
51,358 | 37,211 | ||||||||||
Accumulated
depreciation
|
(33,018 | ) | (16,639 | ) | ||||||||
Property
and equipment, net
|
$ | 18,340 | $ | 20,572 |
Depreciation
expense in respect of property and equipment was $17,689, $5,004 and $4,535 for
the years ended December 31, 2009, 2008 and 2007, respectively. Of such
amounts, $16,550, $4,126 and $4,069 were included in cost of revenue and $1,139,
$878 and $466 were included in general and administrative expenses for the years
ended December 31, 2009, 2008 and 2007, respectively.
8.
|
Goodwill and Intangible
Assets, net
|
Changes
in the carrying amount of the Company’s consolidated goodwill during the years
ended December 31, 2009 and 2008 consisted of the following:
Utility
|
Commercial
&
|
|||||||||||||||
Products
&
|
Residential
|
Industrial
|
||||||||||||||
Services
|
Business
|
Business
|
Total
|
|||||||||||||
Balance
as of December 31, 2007:
|
||||||||||||||||
Goodwill
|
$ | 499 | $ | 6,926 | $ | 66,944 | $ | 74,369 | ||||||||
Accumulated
impairment losses
|
- | - | - | - | ||||||||||||
Goodwill,
net
|
499 | 6,926 | 66,944 | 74,369 | ||||||||||||
Additions
due to contingent settlements
|
- | 754 | 800 | 1,554 | ||||||||||||
Decrease
due to Enerwise impairment charge
|
- | - | (67,744 | ) | (67,744 | ) | ||||||||||
Balance
as of December 31, 2008:
|
||||||||||||||||
Goodwill
|
499 | 7,680 | 67,744 | 75,923 | ||||||||||||
Accumulated
impairment losses
|
- | - | (67,744 | ) | (67,744 | ) | ||||||||||
Goodwill,
net
|
499 | 7,680 | - | 8,179 | ||||||||||||
Balance
as of December 31, 2009:
|
||||||||||||||||
Goodwill
|
499 | 7,680 | 67,744 | 75,923 | ||||||||||||
Accumulated
impairment losses
|
- | - | (67,744 | ) | (67,744 | ) | ||||||||||
Goodwill,
net
|
$ | 499 | $ | 7,680 | $ | - | $ | 8,179 |
The Company’s consolidated intangible
assets, net as of December 31, 2009 and 2008 consisted of the
following:
Estimated
|
As
of December 31, 2009
|
|||||||||||||||
Useful
Life
|
Gross
|
Accumulated
|
Net
|
|||||||||||||
(in
years)
|
Amount
|
Amortization
|
Amount
|
|||||||||||||
Trade
names and trademarks
|
Indefinite
|
$ | 2,758 | $ | (2,758 | ) | $ | - | ||||||||
Non-compete
agreements
|
5 | 456 | (142 | ) | 314 | |||||||||||
Acquired
technology
|
3-8 | 5,685 | (2,436 | ) | 3,249 | |||||||||||
Patents
|
4-14 | 401 | (162 | ) | 239 | |||||||||||
Customer
relationships and contracts
|
5-10 | 13,646 | (8,669 | ) | 4,977 | |||||||||||
Total
|
$ | 22,946 | $ | (14,167 | ) | $ | 8,779 |
65
Estimated
|
As
of December 31, 2008
|
|||||||||||||||
Useful
Life
|
Gross
|
Accumulated
|
Net
|
|||||||||||||
(in
years)
|
Amount
|
Amortization
|
Amount
|
|||||||||||||
Trade
names and trademarks
|
Indefinite
|
$ | 2,758 | $ | (2,758 | ) | $ | - | ||||||||
Non-compete
agreements
|
Indefinite
|
456 | - | 456 | ||||||||||||
Acquired
technology
|
3-5 | 4,435 | (1,152 | ) | 3,283 | |||||||||||
Patents
|
4-14 | 313 | (143 | ) | 170 | |||||||||||
Customer
relationships and contracts
|
5-10 | 13,646 | (7,304 | ) | 6,342 | |||||||||||
Total
|
$ | 21,608 | $ | (11,357 | ) | $ | 10,251 |
The
non-compete agreements began to amortize when certain employees resigned from
the Company. Total estimated amortization expense for all intangible
assets for the next five years and thereafter is as follows:
Year
Ended December 31,
|
||||
2010
|
$
|
2,850
|
||
2011
|
|
2,433
|
||
2012
|
|
1,450
|
||
2013
|
|
506
|
||
2014
|
|
414
|
||
Thereafter
|
|
1,126
|
Impairment
Charges
During
the third quarter of 2008, the Company reassessed the outlook for the Commercial
& Industrial Business segment and evaluated the potential impairment of
the goodwill and other intangible assets of Enerwise. These interim impairment
assessments were triggered by a rule change in a certain market effected in 2008
that reduced the price the Company receives under its economic, or voluntary,
demand response programs for commercial and industrial consumers. The Company
performed valuations and reviewed the Enerwise trade name, customer relationship
and goodwill balances for impairment. Based on the results of these assessments,
the Company recorded $75,432 in non-cash impairment charges of goodwill and
certain intangible assets in the third quarter of 2008, as presented and
discussed below.
Impairment
|
||||
Charges
|
||||
Goodwill
|
$ | 67,744 | ||
Trade
name
|
2,758 | |||
Customer
relationships
|
4,930 | |||
Total
|
$ | 75,432 |
Goodwill
In the
Commercial & Industrial Business segment, a rule change for economic demand
response programs in a certain market during the third quarter caused a decline
in the projected operating results for the remainder of 2008 and future periods.
Based on the reduction of projected operating results in current and future
periods, the Company determined that an interim impairment test of goodwill was
required. The valuation for the goodwill was performed using a discounted cash
flow income approach to valuing the business using a 19.5% discount rate. The
valuation resulted in a non-cash impairment of goodwill related to the
Commercial & Industrial Business segment of $67,744 to reflect the carrying
value in excess of the fair value. This charge is included in the line item
“Impairment charges” of the Company’s consolidated statements of operations for
the year ended December 31, 2008. The Company performed its annual
impairment test as of December 31st and
the results of the tests performed on December 31, 2009 and 2008 indicated no
additional impairment of goodwill.
66
Indefinite-lived
intangible assets
As a part
of the reorganization announced on September 12, 2008, the Company made the
decision to no longer use the Enerwise trade name. Accordingly, the Company
fully impaired the Enerwise trade name by recording a $2,758 non-cash impairment
charge during the third quarter of 2008. This charge is included in the line
item “Impairment charges” of the Company’s consolidated statements of operations
for the year ended December 31, 2008.
As a
result of the impairment, the Company reversed a deferred tax liability of
$1,043 associated with the Enerwise trade name. The impact of the reversal
resulted in an income tax benefit recorded in the year ended December 31,
2008.
Other
intangible assets
Contemporaneous
with the Company’s 2008 interim goodwill impairment test, the Company also
performed an analysis of the potential impairment and reassessed other
identified intangible assets within the Commercial & Industrial Business
segment. The impairment analysis for the customer relationships was performed
using an excess earnings income approach to valuing the asset using a 19.5%
discount rate. As a result, the Company recorded a non-cash impairment charge of
$4,930 to reduce the customer relationship carrying value to the calculated fair
value. This charge is included in the line item “Impairment charges” of the
Company’s consolidated statements of operations for the year ended December 31,
2008.
9.
|
Accrued
Expenses
|
Accrued
expenses as of December 31, 2009 and 2008 consisted of the
following:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Professional
fees
|
$ | 917 | $ | 558 | ||||
Capacity
supply agreement
|
7,943 | 4,470 | ||||||
Other
|
2,714 | 2,978 | ||||||
Total
accrued expenses
|
$ | 11,574 | $ | 8,006 |
10.
|
Other
Current Liabilities
|
Other
current liabilities as of December 31, 2009 and 2008 consisted of the
following:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Payroll,
bonus and benefits
|
$ | 3,107 | $ | 1,463 | ||||
Severance
& retirement obligations
|
895 | - | ||||||
Liquidating
damages
|
765 | 196 | ||||||
Other
|
881 | 741 | ||||||
Total
other current liabilities
|
$ | 5,648 | $ | 2,400 |
11.
|
Long-Term
Debt
|
The
Company maintained a senior credit facility (“senior loan agreement”) with a
United States commercial bank. The senior loan agreement expired in March 2008.
The senior loan agreement had a revolving line of credit up to $4.0 million,
including letters of credit up to $3.0 million. The senior loan agreement was
collateralized by substantially all of the assets not related to Alternative
Energy Resources, Inc., including intellectual property. The Company did not
renew or extend the senior loan agreement and there were no borrowings under the
senior loan agreement at the time of its maturity.
On November 6, 2008, Comverge, Inc. and all its wholly-owned
subsidiaries, excluding Alternative Energy Resources, Inc., entered into a $25.0
million secured revolving credit and term loan facility (the “Facility”) with
Silicon Valley Bank (the “Lender”). The Facility provides a $10.0 million
revolver (the “Revolver Facility”) for borrowings to fund working capital and
other corporate purposes and a $15.0 million term loan (the “Term Loan
Facility”) to repay maturing convertible notes on or before April 1, 2009. The
interest on revolving loans under the Facility will accrue, at the Company’s
election, at either (i) the Lender’s prime rate plus 0.25% or (ii)
90-day LIBOR plus 2.75%. The interest on term advances under the Facility will
accrue, at the Company’s election, at either (i) the Lender’s prime rate
plus 0.50% or (ii) 90-day LIBOR plus 3.00%. The obligations under the
Facility are secured by all assets of Comverge, Inc. and its borrower
subsidiaries. The Revolver Facility terminates and all amounts outstanding
thereunder are due and payable in full on November 6, 2011, and the Term
Loan Facility becomes payable over 57 months
67
beginning
April 1, 2009 and matures on December 31, 2013. The Facility contains
customary terms and conditions for credit facilities of this type, including
restrictions on the Company’s ability to incur additional indebtedness, create
liens, enter into transactions with affiliates, transfer assets, pay dividends
or make distributions on, or repurchase, Comverge, Inc. stock, consolidate
or merge with other entities, or suffer a change in control. In addition, the
Company is required to meet certain financial covenants customary with this type
of agreement, including maintaining a minimum specified tangible net worth and a
minimum specified ratio of current assets to current liabilities. The Facility
contains customary events of default, including payment defaults, breaches of
representations, breaches of affirmative or negative covenants, cross defaults
to other material indebtedness, bankruptcy and failure to discharge certain
judgments. If a default occurs and is not cured within any applicable cure
period or is not waived, the Company’s obligations under the Facility may be
accelerated. As of December 31, 2009, there was $12.8 million of borrowings,
$4.6 million of letters of credit outstanding and $5.4 million of borrowing
availability under the agreement.
In
January 2007, AER entered into a credit agreement with General Electric Capital
Corporation (“GECC”) to provide it with up to $40 million of borrowings to fund
capital expenditures related to VPC contracts. The GECC credit agreement would
expire in 2014, at which time all outstanding borrowings would become due and
payable. Subject to the limitations described below, this credit agreement had a
term loan facility up to $37.0 million and a letter of credit sublimit of $3.0
million for total availability of $40 million. Borrowings under the GECC credit
agreement bore interest at either prime plus 1.5% or LIBOR plus 2.75% per
annum, at our election. Borrowings under this credit agreement were
collateralized by all of AER’s assets, including its intellectual property, and
could be requested, from time to time during the first three years of the
agreement, for up to 90% of capital expenditures incurred under a VPC contract.
The GECC credit agreement contained customary financial and restrictive
covenants, including maintenance of a minimum fixed charge coverage ratio, a
minimum interest coverage ratio, a maximum senior leverage ratio and a
prohibition on the payment of dividends. On December 1, 2009, the
Company repaid all outstanding indebtedness under the credit agreement and
terminated the facility. The repayment amount of $24.7 million
included: 1) the entire $23.0 million of then outstanding borrowings, 2)
approximately $1.5 million in cash collateral to be held by the lender’s agent
for purposes of reimbursement of draws under, and satisfying AER’s obligations
relating to, outstanding letters of credit, 3) a $50 prepayment fee, and 4)
approximately $150 for one month’s accrued interest and unused facility
fees. As a result of the termination, the Company recognized $754 of
interest expense during the year ended December 31, 2009 due to the write-off of
the remaining unamortized debt issuance costs.
In
connection with the acquisition of Enerwise, the Company issued a series of
subordinated convertible promissory notes in the aggregate principal amount of
$17.0 million. The notes bore interest at a rate of 5.5% per annum and
would mature on April 1, 2009. Interest payments on the notes were made
quarterly. The notes were convertible into shares of common stock at the option
of the holders thereof beginning one year from the date issued at a price per
share of $33.44 which represents 125% of the average closing price of common
stock for the 20 trading days immediately prior to the execution of the Enerwise
purchase agreement. During the year ended December 31, 2008, the Company offered
the note holders a prepayment at a 2% discount of their then outstanding
balance. As of December 31, 2008, the Company paid $16.1 million in cash to
those note holders who agreed to early payment and recognized a gain on
extinguishment of debt of $328. The Company paid the remaining $0.6 million to
note holders during the year ended December 31, 2009.
In
connection with the acquisition of PES, the Company issued a series of
subordinated convertible promissory notes in the aggregate principal amount of
$3.0 million. The notes bore interest at a rate of 5.5% per annum and would
have matured on March 29, 2009. Interest payments on the notes were made
quarterly. The notes were convertible into 74,386 shares of common stock at the
option of the holders thereof beginning one year from the date issued at a price
per share of $40.33, which is equal to 125% of the average closing price of
common stock for the trading days commencing September 18, 2007, and ending
October 12, 2007. On November 7, 2008, the Company paid the holders of the
subordinated convertible promissory notes issued with the acquisition of
PES.
Long-term
debt as of December 31, 2009 and 2008 consisted of the
following:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Security
and loan agreement with a U.S. bank, collateralized by
substantially
|
||||||||
all
of the Company's assets not related to Alternative Energy
Resources,
|
||||||||
Inc.,
maturing in November 2011, interest payable at a variable
rate
|
||||||||
(3.28%
and 4.43% at December 31, 2009 and 2008)
|
$ | 12,750 | $ | 15,000 | ||||
Credit
agreement with a U.S. Corporation, collateralized by all of
Alternative
|
||||||||
Energy
Resources, Inc.'s assets, interest payable
|
||||||||
at
a variable rate (4.18% as of December 31, 2008)
|
NA
|
12,524 | ||||||
Subordinated
convertible promissory notes, maturing in March and
|
||||||||
April
2009, interest payable quarterly at 5.5% per annum, issued
in
|
||||||||
connection
with the acquisitions of Enerwise Global Technologies,
Inc.
|
||||||||
and
Public Energy Solutions
|
NA
|
590 | ||||||
Total
debt
|
12,750 | 28,114 | ||||||
Less:
Current portion of long-term debt
|
(3,000 | ) | (3,226 | ) | ||||
Total
long-term debt
|
$ | 9,750 | $ | 24,888 |
68
12.
|
Income
Taxes
|
The
income tax provision (benefit) consists of the following:
Year
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Current:
|
||||||||||||
U.S.
Federal
|
$ | - | $ | - | $ | - | ||||||
State
and local
|
19 | (86 | ) | 83 | ||||||||
Total
|
19 | (86 | ) | 83 | ||||||||
Deferred:
|
||||||||||||
U.S.
Federal
|
187 | (741 | ) | 56 | ||||||||
State
and local
|
13 | (74 | ) | 8 | ||||||||
Total
|
200 | (815 | ) | 64 | ||||||||
Provision
for income taxes
|
$ | 219 | $ | (901 | ) | $ | 147 |
For the
year ended December 31, 2008, the Company recorded deferred tax benefit of $815
related to the impairment of intangible assets at Enerwise and amortization of
intangible assets.
A
reconciliation of income tax expense (benefit) at the statutory federal income
tax rate and income taxes as reflected in the consolidated financial statements
is as follows:
Year
Ended December 31,
|
|||||||
2009
|
2008
|
2007
|
|||||
Federal
income tax at statutory federal rate
|
34.0
|
%
|
34.0
|
%
|
34.0
|
%
|
|
State
income tax expense (benefit), net of federal benefit
|
(0.1)
|
%
|
0.1
|
%
|
(0.8)
|
%
|
|
Goodwill
impairment
|
-
|
%
|
(23.3)
|
%
|
-
|
%
|
|
Other
|
0.4
|
%
|
(0.5)
|
%
|
(1.6)
|
%
|
|
Valuation
allowance
|
(35.0)
|
%
|
(9.4)
|
%
|
(33.5)
|
%
|
|
Effective
tax rate
|
(0.7)
|
%
|
0.9
|
%
|
(1.9)
|
%
|
Deferred
tax assets (liabilities) consisted of the following:
Year
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Net
operating loss carryforwards
|
$ | 30,674 | $ | 27,842 | ||||
Other
|
12,839 | 5,416 | ||||||
Gross
deferred income tax assets
|
43,513 | 33,258 | ||||||
Less:
valuation allowance for deferred income tax assets
|
(43,415 | ) | (31,864 | ) | ||||
Net
deferred income tax assets
|
98 | 1,394 | ||||||
Deferred
tax liabilities:
|
||||||||
Intangible
amortization
|
(641 | ) | (1,063 | ) | ||||
Other
|
- | (674 | ) | |||||
Net
deferred income tax liabilities
|
$ | (543 | ) | $ | (343 | ) |
As of
December 31, 2009, the company had a net deferred tax liability of $543 related
to amortization of tax deductible goodwill.
Deferred
tax assets are required to be reduced by a valuation allowance if it is more
likely than not that some portion or all of a deferred tax asset will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences are deductible. In making this determination, the Company considers
all available positive and negative evidence affecting specific deferred tax
assets, including the Company’s past and anticipated future performance, the
reversal of deferred tax liabilities, the length of carry-back and carry-forward
periods and the implementation of tax planning strategies. Objective
positive evidence is necessary to support a conclusion that a valuation
allowance is not needed for all or a portion of deferred tax assets. For the
year ended December 31, 2009, the Company has determined that based on all
available evidence, a valuation allowance of $43,415 is
appropriate. The Company’s valuation allowance for the year ended
December 31, 2008 was $31,864. The Company’s cumulative losses in
recent years provided the significant negative evidence used in making the
determinations.
69
Deferred
tax assets relating to the tax benefits of employee stock option grants have
been reduced to reflect exercises through the year ended December 31,
2009. Certain exercises resulted in tax deductions in excess of previously
recorded tax benefits. The Company's net operating carryforwards referenced
below at December 31, 2009 include $18,941 of income tax deductions in excess of
previously recorded tax benefits. Although these additional tax
deductions are reflected in net operating loss carryforwards referenced below,
the tax benefit will not be recognized until they reduce taxes
payable. Accordingly, since the tax benefit does not reduce the
Company’s current taxes payable in 2009, these tax benefits are not reflected in
the Company’s deferred tax assets presented above. The tax benefit of
these excess deductions will be reflected as a credit to additional paid-in
capital when recognized.
The
Company has federal, state, and foreign net operating losses of approximately
$98,611, $74,933 and $3,849, respectively, as of December 31,
2009. The Federal net operating loss carryforwards begin expiring in
2019 and state net operating loss carryforwards began expiring in
2009. The foreign net operating losses do not expire. The above net
operating losses reflect a limitation set forth by section 382 of the Internal
Revenue Code due to prior ownership changes.
As of
December 31, 2009 and December 31, 2008, the Company had determined no
liabilities for uncertain tax positions should be recorded. The tax years ended
December 31, 2008, 2007, and 2006 remain open for audit based on the
statute of limitations.
13.
|
Commitments and
Contingencies
|
Operating
Leases
Rental
lease expenses for the years ended December 31, 2009, 2008 and 2007 were
$2,175, $1,603 and $1,014, respectively. The Company mainly incurs
rent expense due to office space leased for both operations and administrative
functions. These lease agreements range in length from one year to
eight years. Estimated future minimum rental payments and lease payments on
noncancelable operating leases as of December 31, 2009 were as
follows:
Year
Ended December 31,
|
||||
2010
|
$ | 1,711 | ||
2011
|
1,517 | |||
2012
|
942 | |||
2013
|
514 | |||
2014
|
458 | |||
Thereafter
|
1,116 |
Employee
Retirement Savings Plan
The
Company sponsors a tax deferred retirement savings plan that permits eligible
U.S. employees to contribute varying percentages of their compensation up to the
limit allowed by the Internal Revenue Service. This plan also provides for
discretionary Company contributions. No discretionary contributions were made
for the years ended December 31, 2009, 2008 or 2007.
Licensing
Agreement
The
Company is contractually obligated to make certain contingent payments of $1,250
under an exclusive licensing agreement for certain product technology.
Additionally, as part of its contractual obligations, the Company has the option
to maintain licensing exclusivity on an annual basis ranging from $2,000 to
$5,000 over the next two years. The Company is also obligated to pay royalties
to the licensor for each unit sold that incorporates the licensed technology.
Such royalties are reduced by the amount of optional exclusivity payments
described above. During the years ended December 31, 2009 and 2008, the Company
paid no royalties under the agreement.
Guarantees
The
Company typically grants customers a limited warranty that guarantees that its
products will substantially conform to current specifications for 90 days
related to software products and one year related to hardware products from the
delivery date. The Company also indemnifies its customers from third-party
claims relating to the intended use of its products. Standard software license
agreements contain indemnification clauses. Pursuant to these clauses, the
Company indemnifies and agrees to pay any judgment or settlement relating to a
claim. There were no liabilities recorded for these agreements as of
December 31, 2009 and 2008.
The
Company has guaranteed the electrical capacity it has committed to deliver
pursuant to certain long-term contracts. Such guarantees may be secured by cash,
letters of credit, performance bonds or third-party guarantees. Performance
guarantees during the year ended December 31, 2009 and 2008 were $7,512 and
$3,684, respectively.
70
14.
|
Stockholders’
Equity
|
Public
Offerings
In April
2007, the Company completed an initial public offering of 5,300,000 shares of
common stock. Aggregate proceeds from the offering were $86.0 million, after
deducting underwriting discounts and commissions and offering expenses. In
December 2007, the Company completed a second public offering of 4,000,000
shares of common stock. Of the 4,000,000 shares, 920,000 were newly issued and
the remaining shares were sold by existing stockholders. Aggregate proceeds from
the offering were $24.0 million, after deducting underwriting discounts and
commissions and offering expenses. In November 2009, the Company completed a
third public offering of 2,760,000 shares of common stock. Aggregate
proceeds from the offering were $27.0 million, after deducting underwriting
discounts and commissions and offering expenses.
Common
Stock
Holders
of the Company’s common stock are entitled to dividends if and when declared by
the Board of Directors. The holders of common stock are entitled to vote upon
all matters submitted to a vote of holders of common stock of the Company and
shall be entitled to one vote for each share of common stock held.
Treasury
Stock
Treasury
stock represents shares surrendered by employees to exercise stock options and
to satisfy tax withholding obligations on vested restricted stock and stock
option exercises pursuant to the 2006 Long-Term Incentive Plan, as amended.
Treasury stock is carried at the market value on the date of vesting or
exercise.
Preferred
Stock
The
Company is authorized to issue 15,000,000 shares of preferred stock. As of
December 31, 2009, no preferred stock was issued or outstanding. The rights,
preferences, and provisions would be determined, at the discretion of the Board
of Directors, at the time of issuance.
Convertible
Preferred Stock
Concurrent
with the closing of the initial public offering on April 18, 2007, all of
the Company’s then outstanding Series A preferred stock, Series B preferred
stock, Series C preferred stock and Series A-2 preferred stock (collectively,
the “Preferred Stock”) converted on a one share for one share basis to common
stock. The number of shares converted was 5,200,573, 2,820,439, 550,000 and
18,038 of Series A, Series B, Series C and Series A-2 preferred stock,
respectively.
Stock
Warrants
In June
2005, in conjunction with convertible debt financing, the Company issued a
warrant to the lender equal to the outstanding principal balance converted to
Series B Preferred based on a price of $7.24 per share. On March 14, 2008, the
holder of the then-outstanding subordinated convertible debt converted the
remaining outstanding balance of subordinated convertible debt for shares of
common stock and terminated the loan and security agreement. The non-detachable
warrant related thereto terminated pursuant to its terms.
71
15. 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 2008 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 6,156,036. Stock-based
incentive awards expire between five and ten years from the date of grant and
generally vest over a one to four-year period from the date of grant. As of
December 31, 2009, 1,537,217 shares were available for grant under the 2006
LTIP. The expense related to stock-based incentive awards recognized for the
years ended December 31, 2009, 2008 and 2007 was $10,038, $6,876 and
$2,552.
A summary
of the Company’s stock option activity for the year ended December 31, 2009,
2008 and 2007 is presented below:
2009
|
2008
|
2007
|
||||||||||||||||||||||||||
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||||||
Number
of
|
Average
|
Number
of
|
Average
|
Number
of
|
Average
|
|||||||||||||||||||||||
Options
|
Exercise
|
Range
of
|
Options
|
Exercise
|
Options
|
Exercise
|
||||||||||||||||||||||
(in
Shares)
|
Price
|
Exercise
Prices
|
(in
Shares)
|
Price
|
(in
Shares)
|
Price
|
||||||||||||||||||||||
Outstanding
at beg. of year
|
1,810,656 | $ | 14.23 | $ | 0.58-$34.23 | 1,799,852 | $ | 13.44 | 1,991,105 | $ | 2.10 | |||||||||||||||||
Granted
|
684,970 | 6.07 | $ | 3.76-$13.30 | 418,823 | 12.76 | 975,986 | 23.59 | ||||||||||||||||||||
Exercised
|
(310,447 | ) | 3.63 | $ | 0.58-$8.85 | (271,732 | ) | 1.43 | (1,022,738 | ) | 1.98 | |||||||||||||||||
Cancelled
|
(28,131 | ) | 22.33 | $ | 0.58-$34.23 | (1,925 | ) | 21.41 | (526 | ) | 4.66 | |||||||||||||||||
Forfeited
|
(168,648 | ) | 18.11 | $ | 0.82-$34.23 | (134,362 | ) | 24.90 | (143,975 | ) | 9.66 | |||||||||||||||||
Outstanding
at end of year
|
1,988,400 | $ | 12.63 | $ | 0.58-$34.23 | 1,810,656 | $ | 14.23 | 1,799,852 | $ | 13.44 | |||||||||||||||||
Exercisable
at end of year
|
1,408,782 | $ | 14.46 | $ | 0.58-$34.23 | 773,853 | $ | 12.45 | 439,297 | $ | 5.86 |
At
December 31, 2009 outstanding and exercisable options had no intrinsic
value, in the aggregate. The intrinsic value of outstanding options approximates
the intrinsic value of options expected to vest.
On
November 6, 2009, the Company’s board of directors approved the acceleration of
the vesting of 192,053 service-based stock options with exercise prices equal to
or greater than $14.10 for certain of its employees. Restricted
stock, stock options with vesting based on performance, and stock options held
by executive officers and directors were not accelerated. As a result of
the acceleration, an aggregate of 192,053 unvested stock options with exercise
prices ranging from $14.10 to $34.23 became immediately
exercisable. The weighted average exercise price of the options that
were accelerated was $23.85. The accelerated options would have
vested from time to time through February 4, 2012. All other terms
and conditions applicable to the accelerated stock option grants, including the
exercise price, number of shares, and term, remain unchanged. The
incremental noncash stock based compensation expense recognized in the fourth
quarter of 2009 as a result of the acceleration was $2,705.
Outstanding
as of December 31, 2009
|
Exercisable
as of December 31, 2009
|
|||||||||||||||||||||||||
Weighted
|
Weighted
|
|||||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||||
Remaining
|
Exercise
|
Remaining
|
Exercise
|
|||||||||||||||||||||||
Number
|
Contractual
|
Price
per
|
Number
|
Contractual
|
Price
per
|
|||||||||||||||||||||
Exercise
Prices
|
Outstanding
|
Life
|
Share
|
Exercisable
|
Life
|
Share
|
||||||||||||||||||||
(In
Shares)
|
(In
Years)
|
(In
Shares)
|
(In
Years)
|
|||||||||||||||||||||||
$0.58 - $0.82 | 278,293 | 2.4 | $ | 0.74 | 275,170 | 2.4 | $ | 0.73 | ||||||||||||||||||
$2.40 - $3.99 | 61,677 | 2.6 | $ | 2.96 | 49,574 | 1.9 | $ | 2.78 | ||||||||||||||||||
$4.00 - $7.99 | 355,007 | 5.9 | $ | 4.46 | 84,743 | 5.0 | $ | 4.21 | ||||||||||||||||||
$8.00-$10.33 | 159,619 | 6.0 | $ | 9.72 | 43,085 | 5.2 | $ | 9.09 | ||||||||||||||||||
$10.34 - $14.09 | 401,738 | 4.5 | $ | 12.43 | 236,715 | 3.7 | $ | 12.33 | ||||||||||||||||||
$14.10 - $17.99 | 11,875 | 1.4 | $ | 14.10 | 11,875 | 1.4 | $ | 14.10 | ||||||||||||||||||
$18.00 - $23.53 | 474,890 | 3.9 | $ | 18.08 | 462,320 | 3.8 | $ | 18.08 | ||||||||||||||||||
$23.54 | 20,245 | 3.4 | $ | 23.54 | 20,245 | 3.4 | $ | 23.54 | ||||||||||||||||||
$23.55 - $36.00 | 225,056 | 3.8 | $ | 32.73 | 225,055 | 3.8 | $ | 32.73 | ||||||||||||||||||
1,988,400 | 4.2 | $ | 12.63 | 1,408,782 | 3.5 | $ | 14.46 |
72
Of the
stock options outstanding as of December 31, 2009, 1,594,087 options were
held by employees, 100,879 options were held by members or former members of the
Board of Directors and 293,434 options were held by non-employee service
providers. During the year ended December 31, 2009, proceeds received from
the exercise of 310,447 options was $1,067. The intrinsic value of options
exercised during December 31, 2009 was approximately $2,398.
For
options with performance and/or service conditions only, the Company utilized
the Black-Scholes option pricing model to estimate fair value of options issued,
utilizing the following assumptions (weighted averages based on grants during
the period):
2009
|
2008
|
2007
|
|||||
Risk-free
interest rate
|
1.91
|
%
|
2.61
|
%
|
4.59
|
%
|
|
Expected
term of options, in years
|
4.6
|
4.5
|
4.5
|
||||
Expected
annual volatility
|
70
|
%
|
70
|
%
|
70
|
%
|
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
0
|
%
|
The
weighted average grant date fair value for option grants awarded during the year
was $3.66, $7.23 and $13.84 for the years ended December 31, 2009, 2008 and
2007, respectively. Volatility measures the amount that a stock price has
fluctuated or is expected to fluctuate during a period. The Company determines
volatility based on an analysis of comparable public companies. The risk-free
interest rate is the rate available as of the option date on zero-coupon U.S.
government issues with a remaining term equal to the expected life of the
option. Because it does not have a sufficient history to estimate the expected
term, the Company uses the simplified method for estimating expected term. The
simplified method is based on vesting-tranches and the contractual life of each
grant. The Company has not paid dividends in the past and does not plan to pay
any dividends in the foreseeable future. The Company estimates its forfeiture
rate of unvested stock awards based on historical experience.
A summary
of the Company’s restricted stock award activity for the years ended December
31, 2009, 2008 and 2007 is presented below:
2009
|
2008
|
2007
|
||||||||||||||||||||||
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
Average
|
Average
|
Average
|
||||||||||||||||||||||
Grant
Date
|
Grant
Date
|
Grant
Date
|
||||||||||||||||||||||
Number
of
|
Fair
Value
|
Number
of
|
Fair
Value
|
Number
of
|
Fair
Value
|
|||||||||||||||||||
Shares
|
Per
Share
|
Shares
|
Per
Share
|
Shares
|
Per
Share
|
|||||||||||||||||||
Unvested
at beginning of year
|
548,511 | $ | 10.80 | 96,022 | $ | 24.04 | 3,868 | $ | 9.35 | |||||||||||||||
Granted
|
164,505 | $ | 7.17 | 570,193 | $ | 9.87 | 100,135 | $ | 24.57 | |||||||||||||||
Vested
|
(146,201 | ) | $ | 12.01 | (46,673 | ) | $ | 20.93 | (6,069 | ) | $ | 19.34 | ||||||||||||
Cancelled
|
- |
NA
|
- |
NA
|
- |
NA
|
||||||||||||||||||
Forfeited
|
(70,226 | ) | $ | 10.04 | (71,031 | ) | $ | 15.34 | (1,912 | ) | $ | 23.54 | ||||||||||||
Unvested
at end of year
|
496,589 | $ | 9.28 | 548,511 | $ | 10.80 | 96,022 | $ | 24.04 |
During
the year ended December 31, 2009, the Company granted 164,505 restricted stock
awards. Of these awards, 8,667 shares were granted with performance
conditions based on achieving an EBITDA target for the year ended December 31,
2009.
During
the year ended December 31, 2008, the Company granted 570,193 restricted stock
awards. Of these awards, 525,000 shares were granted with service and market
conditions. For awards with market conditions, the Company utilized a lattice
model to estimate the award fair value and the derived service
period.
Each of
the grants with service and market conditions include three components: (a) a
performance incentive, representing 60% of the total value of each grant, that
measures the performance of Comverge’s stock against the performance of a peer
group over a three-year period; (b) a retention incentive, representing 20% of
the total value of each grant, to encourage recipients to continue their service
with Comverge; and (c) a stock price incentive, representing 20% of the total
value of each grant, tied to the Company’s stock price achieving certain target
prices over time (the “Price Grant”). The portion of a recipient’s grant
represented by the Price Grant will vest in equal increments upon Comverge
sustaining a stock price equal to or greater than $30, $35, $40 and $45 per
share, each for a separate continuous 30-day period prior to February 12,
2012.
During
the year ended December 31, 2007, the Company granted 100,135 shares of
restricted common stock to employees and members of the Board of Directors. The
awards vest over a three to four-year period, depending on the terms of the
award.
73
For
awards with service conditions, including graded vesting if such award is
granted to an employee, the Company recognizes stock-based compensation expense
on a straight-line basis over the requisite service period for the entire
award. For awards with market conditions, the Company recognizes
stock-based compensation over the derived service period. The
weighted average period in which the Company expects to recognize the
compensation expense for unvested awards is 1.7 years. The remaining
amount of $5,140 to be recognized as compensation expense for unvested awards as
of December 31, 2009 is presented below.
Year
Ended December 31,
|
||||
2010
|
$ | 2,425 | ||
2011
|
1,829 | |||
2012
|
689 | |||
2013
|
197 | |||
2014
|
- | |||
Thereafter
|
- |
Mr.
Robert M. Chiste retired from the Company as Chairman of the Board of Directors,
President and Chief Executive Officer, effective June 19, 2009, and resigned
from the Company’s Board, effective June 20, 2009. In connection with his
retirement, Mr. Chiste and the Company entered into a retirement agreement dated
July 17, 2009, pursuant to which, related to equity awards, all unvested options
held by Mr. Chiste as of June 19, 2009 vest and became exercisable in full and
remain exercisable for the lesser of their remaining terms or until March 31,
2013 and all restricted stock grants and any other equity-based awards held by
Mr. Chiste as of June 19, 2009 vest and became exercisable in full. As a
result, the Company recorded an expense of $2,786 in non-cash stock-based
compensation expense during the third quarter of 2009.
16.
|
Segment
Information
|
As of
December 31, 2009, the Company had three reportable segments: the Utility
Products & Services segment, the Residential Business segment, and the
Commercial & Industrial Business segment. The Utility Products &
Services segment sells hardware, software and services, such as installation
and/or marketing, to utilities that elect to own and operate demand management
networks for their own benefit. The Residential Business segment sells electric
capacity to utilities under long-term contracts, either through demand response
or energy efficiency. The Residential Business segment also provides marketing
services. The Commercial & Industrial Business segment provides demand
response and energy management services that enable commercial and industrial
customers to reduce energy consumption and total costs, improve energy
infrastructure reliability and make informed decisions on energy and renewable
energy purchases and programs.
Management
has three primary measures of segment performance: revenue, gross profit and
operating income. Substantially all of our revenues are generated with domestic
customers. The Utility Products & Services segment product and service cost
of revenue includes materials, labor and overhead. Within the Residential
Business segment, cost of revenue is based on operating costs of the demand
response networks, primarily telecommunications costs related to the network and
depreciation of the assets capitalized in building the demand response network,
and build-out costs of the base load efficiency networks, primarily lighting
costs and installation services related to energy efficiency upgrades. The
Commercial & Industrial Business segment’s cost of revenue includes
materials, labor and overhead for the energy management services as well as end
consumer participant payments for the demand response services. 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. Program
administration services for the tracking and verification of renewable
certificates are included in the Utility Products & Services segment’s
results for the year ended December 31, 2009. The services were reported in the
Commercial & Industrial Business segment in prior periods. Accordingly, the
results of operations for the years ended December 31, 2008 and 2007 have been
reclassified.
74
The
following tables show operating results for each of the Company’s operating
segments:
Year
Ended December 31, 2009
|
||||||||||||||||||||
Utility
|
Commercial
|
|||||||||||||||||||
Products
|
&
|
Corporate
|
||||||||||||||||||
&
|
Residential
|
Industrial
|
Unallocated
|
|||||||||||||||||
Services
|
Business
|
Business
|
Costs
|
Total
|
||||||||||||||||
Revenue
|
||||||||||||||||||||
Product
|
$ | 20,732 | $ | - | $ | - | $ | - | $ | 20,732 | ||||||||||
Service
|
10,683 | 39,585 | 27,844 | - | 78,112 | |||||||||||||||
Total
revenue
|
31,415 | 39,585 | 27,844 | - | 98,844 | |||||||||||||||
Cost
of revenue
|
||||||||||||||||||||
Product
|
12,912 | - | - | - | 12,912 | |||||||||||||||
Service
|
6,116 | 25,662 | 20,958 | - | 52,736 | |||||||||||||||
Total
cost of revenue
|
19,028 | 25,662 | 20,958 | - | 65,648 | |||||||||||||||
Gross
profit
|
12,387 | 13,923 | 6,886 | - | 33,196 | |||||||||||||||
Operating
expenses
|
||||||||||||||||||||
General
and administrative expenses
|
5,333 | 10,214 | 3,621 | 18,613 | 37,781 | |||||||||||||||
Marketing
and selling expenses
|
3,602 | 6,674 | 4,564 | 2,897 | 17,737 | |||||||||||||||
Research
and development expenses
|
4,878 | - | - | - | 4,878 | |||||||||||||||
Amortization
of intangible assets
|
- | 1,259 | 932 | 18 | 2,209 | |||||||||||||||
Operating
loss
|
(1,426 | ) | (4,224 | ) | (2,231 | ) | (21,528 | ) | (29,409 | ) | ||||||||||
Other/interest
expense (income), net
|
(12 | ) | 1,662 | - | 388 | 2,038 | ||||||||||||||
Loss
before income taxes
|
$ | (1,414 | ) | $ | (5,886 | ) | $ | (2,231 | ) | $ | (21,916 | ) | $ | (31,447 | ) |
75
Year
Ended December 31, 2008
|
||||||||||||||||||||
Utility
|
Commercial
|
|||||||||||||||||||
Products
|
&
|
Corporate
|
||||||||||||||||||
&
|
Residential
|
Industrial
|
Unallocated
|
|||||||||||||||||
Services
|
Business
|
Business
|
Costs
|
Total
|
||||||||||||||||
Revenue
|
||||||||||||||||||||
Product
|
$ | 17,890 | $ | - | $ | - | $ | - | $ | 17,890 | ||||||||||
Service
|
4,568 | 34,652 | 20,128 | - | 59,348 | |||||||||||||||
Total
revenue
|
22,458 | 34,652 | 20,128 | - | 77,238 | |||||||||||||||
Cost
of revenue
|
||||||||||||||||||||
Product
|
11,087 | - | - | - | 11,087 | |||||||||||||||
Service
|
1,810 | 14,914 | 15,524 | - | 32,248 | |||||||||||||||
Total
cost of revenue
|
12,897 | 14,914 | 15,524 | - | 43,335 | |||||||||||||||
Gross
profit
|
9,561 | 19,738 | 4,604 | - | 33,903 | |||||||||||||||
Operating
expenses
|
||||||||||||||||||||
General
and administrative expenses
|
5,925 | 12,745 | 3,992 | 11,801 | 34,463 | |||||||||||||||
Marketing
and selling expenses
|
2,474 | 6,957 | 3,503 | 2,804 | 15,738 | |||||||||||||||
Research
and development expenses
|
1,137 | - | - | - | 1,137 | |||||||||||||||
Amortization
of intangible assets
|
- | 1,117 | 1,304 | 18 | 2,439 | |||||||||||||||
Impairment
charges
|
- | - | 75,432 | - | 75,432 | |||||||||||||||
Operating
income (loss)
|
25 | (1,081 | ) | (79,627 | ) | (14,623 | ) | (95,306 | ) | |||||||||||
Other/interest
expense (income), net
|
- | 813 | (38 | ) | (1,074 | ) | (299 | ) | ||||||||||||
Income
(loss) before income taxes
|
$ | 25 | $ | (1,894 | ) | $ | (79,589 | ) | $ | (13,549 | ) | $ | (95,007 | ) |
(1)
|
In
the year ended December 31, 2008, the Utility Products & Services
segment recorded $2,089 in revenue, $1,467 in cost of revenue, and $622 in
gross profit from the sale of demand response hardware and software to the
Residential Business segment. These amounts were previously presented in
an Eliminations column. As of January 1, 2009, the Company no longer
recorded intercompany transactions. To conform to the presentation for the
year ended December 31, 2009, these amounts have been included in the
Utility Products & Services segment
column.
|
Year
Ended December 31, 2007
|
||||||||||||||||||||
Utility
|
Commercial
|
|||||||||||||||||||
Products
|
&
|
Corporate
|
||||||||||||||||||
&
|
Residential
|
Industrial
|
Unallocated
|
|||||||||||||||||
Services
|
Business
|
Business
|
Costs
|
Total
|
||||||||||||||||
Revenue
|
||||||||||||||||||||
Product
|
$ | 14,812 | $ | - | $ | - | $ | - | $ | 14,812 | ||||||||||
Service
|
3,955 | 27,651 | 8,744 | - | 40,350 | |||||||||||||||
Total
revenue
|
18,767 | 27,651 | 8,744 | - | 55,162 | |||||||||||||||
Cost
of revenue
|
||||||||||||||||||||
Product
|
9,450 | - | - | - | 9,450 | |||||||||||||||
Service
|
1,582 | 11,366 | 6,420 | - | 19,368 | |||||||||||||||
Total
cost of revenue
|
11,032 | 11,366 | 6,420 | - | 28,818 | |||||||||||||||
Gross
profit
|
7,735 | 16,285 | 2,324 | - | 26,344 | |||||||||||||||
Operating
expenses
|
||||||||||||||||||||
General
and administrative expenses
|
5,481 | 7,220 | 1,981 | 7,390 | 22,072 | |||||||||||||||
Marketing
and selling expenses
|
2,200 | 4,887 | 767 | 1,977 | 9,831 | |||||||||||||||
Research
and development expenses
|
997 | - | - | - | 997 | |||||||||||||||
Amortization
of intangible assets
|
- | 279 | 658 | 36 | 973 | |||||||||||||||
Operating
income (loss)
|
(943 | ) | 3,899 | (1,082 | ) | (9,403 | ) | (7,529 | ) | |||||||||||
Other/interest
expense (income), net
|
20 | 546 | (47 | ) | (1,591 | ) | (1,072 | ) | ||||||||||||
Income
(loss) before income taxes
|
$ | (963 | ) | $ | 3,353 | $ | (1,035 | ) | $ | (7,812 | ) | $ | (6,457 | ) |
(2)
|
In
the year ended December 31, 2007, the Utility Products & Services
segment recorded $2,213 in revenue, $1,669 in cost of revenue, and $544 in
gross profit from the sale of demand response hardware and software to the
Residential Business segment. These amounts were previously presented in
an Eliminations column. As of January 1, 2009, the Company no longer
recorded intercompany transactions. To conform to the presentation for the
year ended December 31, 2009, these amounts have been included in the
Utility Products & Services segment
column.
|
76
17. Related Party
Transactions
An
affiliate of AEI charged the Company’s Israeli subsidiary, Comverge Control
Systems Ltd., $75 in the year ended December 31, 2007 in consideration of
providing office space and certain accounting and administrative services, which
amounts are included in general and administrative expense. As of
December 31, 2007, the Company ceased operations of Comverge Control
Systems Ltd. and no such charges were recorded for the years ended December 31,
2009 and 2008.
The
Company entered into a restated communicating thermostat co-development and
supply agreement dated as of June 1, 2005 with a holder of the Company’s
Series A Preferred and Series B Preferred, or common stock subsequent to the
conversion of all outstanding preferred stock upon completion of the initial
public offering in April 2007. Pursuant to the agreement, such stockholder has
agreed to develop one or more customized thermostats to be combined with the
Company’s communication interfaces. The Company has agreed to pay such
stockholder a specified amount for co-development expenses with respect to each
customized thermostat model and a specified price for each unit produced. For
the years ended December 31, 2008, and 2007, the Company paid such
stockholder $3,037 and $2,561, respectively.
In
February 2006, a significant investor in the Series C Preferred entered into a
strategic marketing and development agreement with the Company (“Agreement”). As
part of the Agreement, the investor was given a warrant to purchase 250,000
shares of Series C Preferred for $15.00 per share. Effective with the close of
the initial public offering in April 2007, the warrant became exercisable for
shares of our common stock on a one share for one share basis. The warrant was
exercisable only if the investor met defined performance milestones as specified
in the warrant. The performance milestones were not met and the warrant expired
on August 12, 2008.
The
lender of the convertible debt became a shareholder of the Company in March 2006
by investing in the Series C Preferred. Effective with the closing of the
initial public offering in April 2007, all outstanding shares of preferred stock
were converted on a one share for one share basis to common stock. For the years
ended December 31, 2008 and 2007, the Company made interest payments on the
convertible debt of $44 and $290, respectively. On March 14, 2008, the holder of
the subordinated convertible debt converted the remaining outstanding balance
and terminated the loan and security agreement. The non-detachable warrant
related thereto terminated pursuant to its terms.
An
executive officer of the Company held approximately 4% of the subordinated
convertible promissory notes outstanding balance as of December 31, 2007.
The portion of the subordinated convertible promissory note held by the
executive officer was paid during the year ended December 31, 2008.
During
the year ended December 31, 2008, a former executive officer of the Company
served as a third-party consultant after his employment with the Company. The
Company paid the former executive officer serving as a third-party consultant
$61 during the months of October to December in 2008. The former executive
officer continued to vest in outstanding stock awards during the term of his
service agreement. The service agreement with the former executive officer
ended, pursuant to its terms, on December 31, 2008.
The
Company entered into a consulting agreement effective July 17, 2009 with Robert
Chiste, former Chairman of the Board, President and Chief Executive Officer of
the Company to provide certain consulting and advisory services to Comverge,
including assistance in the transition to a new Chief Executive Officer, for a
period of 12 months from his retirement date. In connection therewith, the
Company paid Mr. Chiste $125 during the period from July 17, 2009 to December
31, 2009 and anticipates paying an additional $125 in 2010 through July 17,
2010. In addition, pursuant to Mr. Chiste’s previous employment agreement,
Mr. Chiste’s unvested stock options awards were vested and became fully
exercisable and remain exercisable for the lesser of their remaining terms or
until March 31, 2013. All restricted stock grants and any other
equity-based awards held by Mr. Chiste as of June 19, 2009 were also
vested.
The
Company entered into a consulting agreement effective January 31, 2008 with
Scott Ungerer, a director of the Company, to provide strategic advice and other
assistance to the Company from time to time. Upon Mr. Ungerer’s rejoining the
Board of Directors in October 2009, the consulting agreement was terminated. No
cash payments were made to Mr. Ungerer under the agreement during the year ended
December 31, 2009.
During
the year ended December 31, 2009, Comverge and Tangent Energy Solutions, a
privately-held company, have a non-exclusive referral agreement whereby the
Company would provide demand response services to Tangent and its
customers. Mr. Scott Ungerer, a director of the Company also serves on the
board of directors of Tangent Energy Solutions and is the managing director of
EnerTech Capital Funds, a beneficial owner of Comverge common stock.
EnerTech currently is a majority owner of Tangent Energy Solutions. No
services were provided and no payments were made under the agreement during the
year ended December 31, 2009.
77
18. Quarterly
Financial Information (Unaudited)
The
following table illustrates selected unaudited consolidated quarterly statement
of operations data for the years ended December 31, 2009 and 2008. In our
opinion, this unaudited information has been prepared on substantially the same
basis as the consolidated financial statements appearing elsewhere in this
annual report on Form 10-K and includes all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the unaudited consolidated
quarterly data. The unaudited consolidated quarterly data should be read
together with the audited consolidated financial statements and notes thereto
appearing elsewhere in this annual report on Form 10-K. The results for any
quarter are not necessarily indicative of results for any future
period.
Quarter
ended in 2009
|
||||||||||||||||
March
31
|
June
30
|
September
30
|
December
31
|
|||||||||||||
Revenue
|
||||||||||||||||
Product
|
$ | 4,836 | $ | 5,077 | $ | 6,263 | $ | 4,556 | ||||||||
Service
|
6,744 | 8,188 | 26,932 | 36,248 | ||||||||||||
Total
revenue
|
11,580 | 13,265 | 33,195 | 40,804 | ||||||||||||
Cost
of revenue
|
||||||||||||||||
Product
|
3,104 | 2,982 | 3,793 | 3,033 | ||||||||||||
Service
|
4,058 | 4,445 | 19,948 | 24,285 | ||||||||||||
Total
cost of revenue
|
7,162 | 7,427 | 23,741 | 27,318 | ||||||||||||
Gross
profit
|
4,418 | 5,838 | 9,454 | 13,486 | ||||||||||||
Operating
expenses
|
||||||||||||||||
General
and administrative expenses
|
7,889 | 8,101 | 12,419 | 9,372 | ||||||||||||
Marketing
and selling expenses
|
3,759 | 4,683 | 4,340 | 4,955 | ||||||||||||
Research
and development expenses
|
1,116 | 1,209 | 1,158 | 1,395 | ||||||||||||
Amortization
of intangible assets
|
552 | 552 | 553 | 552 | ||||||||||||
Operating
loss
|
(8,898 | ) | (8,707 | ) | (9,016 | ) | (2,788 | ) | ||||||||
Interest
and other expense, net
|
195 | 369 | 376 | 1,098 | ||||||||||||
Loss
before income taxes
|
(9,093 | ) | (9,076 | ) | (9,392 | ) | (3,886 | ) | ||||||||
Provision
for income taxes
|
42 | 65 | 52 | 60 | ||||||||||||
Net
loss
|
$ | (9,135 | ) | $ | (9,141 | ) | $ | (9,444 | ) | $ | (3,946 | ) | ||||
Net
loss per share (basic and diluted)
|
$ | (0.43 | ) | $ | (0.43 | ) | $ | (0.44 | ) | $ | (0.17 | ) |
Net loss
for the fourth quarter of 2009 included one time expenses of $3,459, consisting
of $2,705 for the acceleration of the vesting of 192,053 service-based stock
options with exercise prices equal to or greater than $14.10 for certain of its
employees and $754 of interest expense for the write-off of the remaining
unamortized debt issuance costs related to the GECC debt.
78
Quarter
ended in 2008
|
||||||||||||||||
March
31
|
June
30
|
September
30
|
December
31
|
|||||||||||||
Revenue
|
||||||||||||||||
Product
|
$ | 3,202 | $ | 4,249 | $ | 4,796 | $ | 5,643 | ||||||||
Service
|
7,251 | 5,272 | 19,489 | 27,336 | ||||||||||||
Total
revenue
|
10,453 | 9,521 | 24,285 | 32,979 | ||||||||||||
Cost
of revenue
|
||||||||||||||||
Product
|
2,040 | 2,659 | 2,973 | 3,415 | ||||||||||||
Service
|
4,005 | 3,037 | 14,060 | 11,146 | ||||||||||||
Total
cost of revenue
|
6,045 | 5,696 | 17,033 | 14,561 | ||||||||||||
Gross
profit
|
4,408 | 3,825 | 7,252 | 18,418 | ||||||||||||
Operating
expenses
|
||||||||||||||||
General
and administrative expenses
|
8,326 | 8,615 | 9,507 | 8,015 | ||||||||||||
Marketing
and selling expenses
|
4,000 | 3,856 | 4,314 | 3,568 | ||||||||||||
Research
and development expenses
|
368 | 168 | 140 | 461 | ||||||||||||
Amortization
of intangible assets
|
656 | 656 | 610 | 517 | ||||||||||||
Impairment
charges
|
- | - | 75,432 | - | ||||||||||||
Operating
income (loss)
|
(8,942 | ) | (9,470 | ) | (82,751 | ) | 5,857 | |||||||||
Interest
and other expense (income), net
|
(211 | ) | 67 | 158 | (313 | ) | ||||||||||
Income
(loss) before income taxes
|
(8,731 | ) | (9,537 | ) | (82,909 | ) | 6,170 | |||||||||
Provision
(benefit) for income taxes
|
92 | 78 | (1,140 | ) | 69 | |||||||||||
Net
income (loss)
|
$ | (8,823 | ) | $ | (9,615 | ) | $ | (81,769 | ) | $ | 6,101 | |||||
Net
income (loss) per share (basic)
|
$ | (0.42 | ) | $ | (0.45 | ) | $ | (3.85 | ) | $ | 0.29 | |||||
Net
income (loss) per share (diluted)
|
$ | (0.42 | ) | $ | (0.45 | ) | $ | (3.85 | ) | $ | 0.28 |
19. Subsequent
Events
On
February 5, 2010, Comverge, Inc. and its wholly owned subsidiaries Enerwise
Global Technologies, Inc, Comverge Giants, LLC, Public Energy Solutions, LLC,
Public Energy Solutions NY, LLC, Clean Power Markets, Inc., and Alternative
Energy Resources, Inc., entered into a second amendment to its existing credit
and term loan facility with Silicon Valley Bank. The second amendment increased
the revolver loan by an additional $20 million bringing the total revolver loan
to $30 million for borrowings to fund general working capital and other
corporate purposes and issuances of letters of credit. The second
amendment also added Alternative Energy Resources, Inc., a wholly owned
subsidiary of Comverge, as a borrower and extended the term of the facility by
one year to December 2012. In connection with the extension of the
term of the credit facility, a commitment fee of $100 was paid on February 5,
2010, and additional commitment fees of $75 are payable on each of February 5,
2011 and February 5, 2012.
The
interest on revolving loans under the amended facility accrues at either (a) a
rate per annum equal to the greater of the Prime Rate or 4% plus the Prime Rate
Advance Margin, or (b) a rate per annum equal to the LIBOR Advance Rate plus the
LIBOR Rate Advance Margin, as such terms are defined in the amended facility
agreement. The second amendment also sets forth certain financial
ratios to be maintained by the borrowers on a consolidated basis. The
obligations under the amended facility are secured by all assets of Comverge and
its other borrower subsidiaries, including Alternative Energy Resources. All
other terms and conditions of the credit facility remain the same and in full
force and effect.
Subsequent
events have been evaluated through the filing date of this Annual Report on
Form 10-K for disclosure and recognition.
79
Valuation
and Qualifying Accounts
Balance
at
|
Additions
|
Additions
|
Balance
at
|
|||||||||||||||||
Beginning
|
Charged
to Costs
|
Charged
to
|
End
of
|
|||||||||||||||||
Description
|
of
Period
|
and
Expenses
|
Other
Accounts
|
Deductions
|
Period
|
|||||||||||||||
Deducted
from asset accounts
|
||||||||||||||||||||
Year
ended December 31, 2007
|
||||||||||||||||||||
Allowance
for doubtful accounts
|
$ | 113 | $ | 125 | $ | 86 | $ | - | $ | 324 | ||||||||||
Allowance
for inventory obsolescence
|
284 | (135 | ) | - | - | 149 | ||||||||||||||
Valuation
allowance on net deferred tax assets
|
13,169 | - | 8,318 | - | 21,487 | |||||||||||||||
Total
|
$ | 13,566 | $ | (10 | ) | $ | 8,404 | $ | - | $ | 21,960 | |||||||||
Deducted
from asset accounts
|
||||||||||||||||||||
Year
ended December 31, 2008
|
||||||||||||||||||||
Allowance
for doubtful accounts
|
$ | 324 | $ | 213 | $ | - | $ | (43 | ) | $ | 494 | |||||||||
Allowance
for inventory obsolescence
|
149 | 65 | - | (16 | ) | 198 | ||||||||||||||
Valuation
allowance on net deferred tax assets
|
21,487 | - | 10,377 | 31,864 | ||||||||||||||||
Total
|
$ | 21,960 | $ | 278 | $ | 10,377 | $ | (59 | ) | $ | 32,556 | |||||||||
Deducted
from asset accounts
|
||||||||||||||||||||
Year
ended December 31, 2009
|
||||||||||||||||||||
Allowance
for doubtful accounts
|
$ | 494 | $ | 66 | $ | - | $ | (191 | ) | $ | 369 | |||||||||
Allowance
for inventory obsolescence
|
198 | (10 | ) | - | - | 188 | ||||||||||||||
Valuation
allowance on net deferred tax assets
|
31,864 | - | 11,551 | - | 43,415 | |||||||||||||||
Total
|
$ | 32,556 | $ | 56 | $ | 11,551 | $ | (191 | ) | $ | 43,972 |
80
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
None.
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our principal executive officer and
principal financial officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the period covered by this
report. Based on such evaluation, our principal executive officer and principal
financial officer have concluded that, as of the end of such period, our
disclosure controls and procedures were effective.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rule 13a-15(f).
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Management conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that our
internal control over financial reporting was effective as of December 31,
2009. The effectiveness of our internal control over financial reporting as of
December 31, 2009 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report
which is included in Item 8 of this annual report on Form
10-K.
Changes
in Internal Control Over Financial Reporting
There
have not been any changes in our internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the our internal control over financial
reporting.
Other
Information
|
None.
81
Part
III
Directors
and Executive Officers of the
Registrant
|
For
information with respect to our executive officers, see “Executive Officers of
the Registrant” at the end of Part I, Item 1 of this Annual Report on Form
10-K. Except for the information set forth in “Executive Officers of the
Registrant” at the end of Part I, Item 1, the information required by this
item is incorporated by reference to Comverge’s Proxy Statement for its 2010
Annual Meeting of Stockholders to be filed with the SEC within 120 days
after the end of the fiscal year ended December 31, 2009.
Executive
Compensation
|
The
information required by this item is incorporated by reference to Comverge’s
Proxy Statement for its 2010 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of the fiscal year ended
December 31, 2009.
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The
information required by this item is incorporated by reference to Comverge’s
Proxy Statement for its 2010 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of the fiscal year ended
December 31, 2009.
Certain
Relationships and Related Transactions and Director
Independence
|
The
information required by this item is incorporated by reference to Comverge’s
Proxy Statement for its 2010 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of the fiscal year ended
December 31, 2009.
Principal
Accountant Fees and Services
|
The
information required by this item is incorporated by reference to Comverge’s
Proxy Statement for its 2010 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of the fiscal year ended
December 31, 2009.
82
Part
IV
Exhibits
and Financial Statement Schedules
|
(a)
|
The
following documents are filed as part of this
report:
|
|
1.
|
Consolidated Financial
Statements
|
Report of
Independent Registered Public Accounting Firm
Financial
Statements
Consolidated
Balance Sheets
Consolidated
Statements of Operations
Consolidated
Statement of Changes in Shareholders’ Equity and Comprehensive Loss
Consolidated
Statements of Cash Flows
Notes to
Consolidated Financial Statements
|
2.
|
Financial Statement
Schedules
|
Schedule
II—Valuation and Qualifying Accounts
|
3.
|
Exhibits
|
See the
Exhibit Index immediately following the signature page of this Annual Report on
Form 10-K.
83
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, on
March 8, 2010.
Comverge, Inc. | |
By:
|
/s/R.
Blake Young
|
R. Blake Young | |
Director, President and Chief Executive Officer |
POWER
OF ATTORNEY
KNOW ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints R. Blake Young, Michael D. Picchi and John A.
Waterworth, jointly and severally, his or her attorney-in-fact, with the power
of substitution, for him or her in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report
on Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
/s/R. Blake Young
|
Director,
President and Chief Executive Officer (Principal Executive
Officer)
|
March
8, 2010
|
||
R. Blake Young | ||||
/s/Michael D. Picchi
|
Director,
Executive Vice President and Chief Financial Officer (Principal Financial
Officer)
|
March
8, 2010
|
||
Michael D. Picchi | ||||
/s/John A. Waterworth
|
Vice
President and Corporate Controller (Principal Accounting
Officer)
|
March
8, 2010
|
||
John A. Waterworth | ||||
/s/Nora Mead Brownell
|
Director
|
March
8, 2010
|
||
Nora Mead Brownell | ||||
/s/Alec G.
Dreyer
|
Chairman
of the Board
|
March
8, 2010
|
||
Alec G. Dreyer | ||||
/s/A.
Laurence Jones
|
Director
|
March
8, 2010
|
||
A. Laurence Jones | ||||
/s/Joseph M.
O'Donnell
|
Director
|
March
8, 2010
|
||
Joseph M. O’Donnell | ||||
/s/Scott B.
Ungerer
|
Director
|
March
8, 2010
|
||
Scott B. Ungerer | ||||
84
Incorporated
by reference herein
|
||||
Exhibit
Number
|
Symbol
|
Description
|
Form
|
Date
|
2.1
|
Agreement
and Plan of Merger by and among the Company, Comverge Eagle Inc., Enerwise
Global Technologies, Inc. and Stockholders’ Representatives as defined
therein, dated June 27, 2007
|
Current
Report on Form 8-K (File No. 001-33399)
|
June
27, 2007
|
|
2.2
|
Equity
Purchase Agreement between Comverge, Inc., Comverge Giants, Inc., and
Keith and Lori Hartman, dated September 29, 2007
|
Current
Report on Form 8-K (File No. 001-33399)
|
October
4, 2007
|
|
3.1
|
Fifth
Amended & Restated Certificate
of Incorporation of the
Company
|
Current
Report on Form 8-K (File No. 001-33399)
|
April
18, 2007
|
|
3.2
|
Second
Amended & Restated Bylaws of the Company
|
Current
Report on Form 8-K (File No. 001-33399)
|
April
18, 2007
|
|
3.3
|
Amendment
No. 1 to Second Amended & Restated Bylaws of the
Company
|
Current
Report on Form 8-K (File No. 001-33399)
|
January
4, 2008
|
|
4.1
|
Specimen
Common Stock Certificate
|
Registration
Statement on Form S-1 (File No. 137813)
|
February
8, 2007
|
|
4.2
|
Third
Amended and Restated Investors’ Rights
Agreement, dated February 14, 2006
|
Registration
Statement on Form S-1 (File No. 333-137813)
|
October
5, 2006
|
|
4.5
|
Form
of Indenture
|
Registration
Statement on Form S-3 (File No. 333-161400)
|
August
17, 2009
|
|
10.1
|
†
|
Advanced
Energy Management Agreement between the Company and Gulf Power Company,
dated September 16, 1996
|
Registration
Statement on Form S-1 (File No. 333-146837)
|
October
5, 2006
|
10.2
|
†
|
Contract
between the Company and PacifiCorp dated March 26, 2003.
|
Registration
Statement on Form S-1 (File No. 333-146837)
|
October
5, 2006
|
10.3
|
†
|
Demand
Response Capacity Agreement between the Company and San Diego Gas &
Electric Company, dated October 6, 2003
|
Registration
Statement on Form S-1 (File No. 333-146837)
|
October
5, 2006
|
10.4
|
†
|
Agreement
for Supplemental Installed Capacity – Southwest Connecticut between the
Company and ISO New England, Inc., dated April 13, 2004
|
Registration
Statement on Form S-1 (File No. 333-146837)
|
October
5, 2006
|
10.5
|
†
|
Supply
Agreement between the Company and Telco Solutions III, LLC, effective
September 27, 2004
|
Registration
Statement on Form S-1 (File No. 333-146837)
|
October
5, 2006
|
10.6
|
†
|
Restated
Communicating Thermostat Co-Development and Supply Agreement between the
Company and White-Rodgers Division of Emerson Electric Co., effective
March 8, 2004.
|
Registration
Statement on Form S-1 (File No. 333-146837)
|
October
5, 2006
|
Incorporated
by reference herein
|
|||||
Exhibit
Number
|
Symbol
|
Description
|
Form
|
Date
|
|
10.7
|
&
|
Form
of Stock Option Agreement
|
Registration
Statement on Form S-1 (File No. 333-146837)
|
October
5, 2006
|
|
10.8
|
&
|
Form
of Notice of Stock Option Grant
|
Registration
Statement on Form S-1 (File No. 333-146837)
|
October
5, 2006
|
|
10.9
|
&
|
Form
of Stock Issuance Agreement
|
Registration
Statement on Form S-1 (File No. 333-146837)
|
October
5, 2006
|
|
10.10
|
&
|
Form
of Non-qualified Stock Option Agreement
|
Registration
Statement on Form S-1 (File No. 333-146837)
|
October
5, 2006
|
|
10.11
|
&
|
Form
of Restricted Stock Grant Agreement
|
Registration
Statement on Form S-1 (File No. 333-146837)
|
October
5, 2006
|
|
10.12
|
Form
of Indemnification Agreement
|
Registration
Statement on Form S-1 (File No. 333-146837)
|
October
5, 2006
|
||
10.13
|
Loan
and Security Agreement by and among Comverge, Inc., Enerwise Global
Technologies, Inc., Comverge Giants, Inc., Public Energy Solutions, LLC,
Public Energy Solutions NY, LLC and Clean Power Markets, Inc. and Silicon
Valley Bank, dated November 6, 2008
|
Quarterly
Report on Form 10-Q (File No. 001-33399)
|
November
12, 2008
|
||
10.14
|
2007
Non-employee Director Compensation Plan
|
Registration
Statement on Form S-1/A (File No. 333-137813)
|
February
8, 2007
|
||
10.15
|
Second
Amendment to Demand Response Capacity Delivery Agreement between the
Company and San Diego Gas & Electric Company, effective January 19,
2007
|
Registration
Statement on Form S-1/A (File No. 333-137813)
|
February
8, 2007
|
||
10.16
|
†
|
Demand
Response Capacity Delivery Agreement between the Company and Public
Service Company of New Mexico, dated January 31, 2007
|
Registration
Statement on Form S-1/A (File No. 333-137813)
|
April
5, 2007
|
|
10.17
|
†
|
Demand
Response Capacity Delivery Agreement between the Company and Pacific Gas
and Electric Company, dated February 25, 2007
|
Registration
Statement on Form S-1/A (File No. 333-137813)
|
March
5, 2007
|
|
10.18
|
†
|
Demand
Response Resource Purchase Agreement between Southern California Edison
and the Company’s subsidiary, Alternative Energy Resources, Inc., dated
October 16, 2007
|
Current
Report on Form 8-K (File No. 001-33399)
|
October
22,2007
|
|
10.19
|
&
|
Amended
and Restated Comverge, Inc. 2006 Long Term Incentive Plan, effective March
24, 2008
|
Definitive
14A Proxy Statement (File No. 001-33399)
|
April
7, 2008
|
Incorporated
by reference herein
|
||||
Exhibit
Number
|
Symbol
|
Description
|
Form
|
Date
|
10.20
|
Amended
and Restated Registration Rights Agreement, dated October 16,
2007
|
Registration
Statement on Form S-1 (File No. 001-33399)
|
October
22, 2007
|
|
10.21
|
†
|
Demand
Side Management Agreement by and between Consolidated Edison Company of
New York, Inc. and Public Energy Solutions, LLC, a wholly-subsidiary of
Comverge, dated February 6, 2008
|
Quarterly
Report on Form 10-Q (File No. 001-33399)
|
May
13, 2008
|
10.22
|
†
|
Commercial
and Industrial Load Management Agreement by and between Arizona Public
Service Company and Alternative Resources, Inc., a wholly-owned subsidiary
of the Company, dated September 12, 2008
|
Quarterly
Report on Form 10-Q (File No. 001-33399)
|
November
12, 2008
|
10.23
|
†
|
Direct
Load Control Solution Agreement by and between PEPCO Holdings, Inc. and
Comverge, Inc., dated January 21, 2009
|
Annual
Report on Form 10-K/A (Amendment No. 2) (File No.
001-33399)
|
November
10, 2009
|
10.24
|
Retirement
Agreement, Robert M. Chiste, dated July 17, 2009
|
Quarterly
Report on Form 10-Q (File No. 001-33399)
|
August
6, 2009
|
|
10.25
|
Consulting
Agreement, Robert M. Chiste, dated July 17, 2009
|
Quarterly
Report on Form 10-Q (File No. 001-33399)
|
August
6, 2009
|
|
10.26
|
&
|
Form
of Retention Bonus
|
Quarterly
Report on Form 10-Q (File No. 001-33399)
|
August
6, 2009
|
10.27
|
&
*
|
Executive
Employment Agreement, Michael Picchi, dated September 29,
2009
|
||
10.28
|
&
*
|
Executive
Employment Agreement, Edward Myszka, dated September 29,
2009
|
||
10.29
|
&
*
|
Executive
Employment Agreement, Matthew Smith, dated September 29,
2009
|
||
10.30
|
&
*
|
Executive
Employment Agreement, Arthur Vos, dated September 29, 2009
|
||
10.31
|
&
*
|
Executive
Employment Agreement, R. Blake Young, dated February 18,
2010
|
||
10.32
|
&
*
|
Executive
Employment Agreement, Frank A. Magnotti, dated September 30,
2009
|
||
10.33
|
&
*
|
Separation
Agreement and General Release, Frank A. Magnotti, dated December 31,
2009
|
||
10.34
|
*
|
Consulting
Agreement, Frank A. Magnotti, dated December 31, 2009
|
Incorporated
by reference herein
|
||||
Exhibit
Number
|
Symbol
|
Description
|
Form
|
Date
|
10.35
|
†
*
|
Amendment
to Demand Side Management Agreement by and between Consolidated Edison
Company of New York, Inc. and Public Energy Solutions, LLC, a
wholly-subsidiary of Comverge, dated October 30, 2009
|
||
10.36
|
Second
Amendment to Loan and Security Agreement by and among Comverge, Inc.,
Enerwise Global Technologies, Inc., Comverge Giants, Inc., Public Energy
Solutions, LLC, Public Energy Solutions NY, LLC and Clean Power Markets,
Inc., Alternative Energy Resources, Inc. and Silicon Valley Bank, dated
February 5, 2010
|
Current
Report on Form 8-K (File No. 001-33399)
|
February
12, 2010
|
|
21
|
*
|
List
of subsidiaries of the Company
|
|
|
23.1
|
*
|
Consent
of Independent Registered Public Accounting Firm
|
|
|
24.1
|
*
|
Powers
of Attorney (incorporated by reference to the signature page of the Annual
Report on Form 10-K)
|
||
31.1
|
*
|
Certification
of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002
|
||
31.2
|
*
|
Certification
of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002
|
||
32.1
|
‡
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes Oxley Act of 2002
|
||
32.2
|
‡
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes Oxley Act of 2002
|
&
|
Indicates
management compensatory plan, contract or arrangement.
|
†
|
Confidential
treatment has been requested for portions of this
exhibit.
|
*
|
Filed
herewith.
|
‡
|
Furnished
herewith.
|