Attached files
file | filename |
---|---|
EX-10.2 - MATERIAL AGREEMENT - COMVERGE, INC. | exhibit10_2.htm |
EX-10.3 - MATERIAL AGREEMENT - COMVERGE, INC. | exhibit10_3.htm |
EX-10.1 - MATERIAL AGREEMENT - COMVERGE, INC. | exhibit10_1.htm |
EX-31.1 - SECTION 302 CEO CERTIFICATION - COMVERGE, INC. | exhibit31_1.htm |
EX-10.5 - EMPLOYMENT AGREEMENT - COMVERGE, INC. | exhibit10_5.htm |
EX-10.4 - EMPLOYMENT AGREEMENT - COMVERGE, INC. | exhibit10_4.htm |
EX-32.2 - SECTION 906 CFO CERTIFICATION - COMVERGE, INC. | exhibit32_2.htm |
EX-31.2 - SECTION 302 CFO CERTIFICATION - COMVERGE, INC. | exhibit31_2.htm |
EX-32.1 - SECTION 906 CEO CERTIFICATION - COMVERGE, INC. | exhibit32_1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-Q
(Mark
One)
x
|
Quarterly
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
|
For
the quarterly period ended June 30, 2010
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
(Exact name of
Registrant as specified in its charter)
Delaware
|
22-3543611
|
|
(State or
other jurisdiction of
incorporation
or organization)
|
(IRS
Employer
Identification
No.)
|
|
5390
Triangle Parkway, Suite 300
Norcross,
Georgia
|
30092
|
|
(Address of
principal executive offices)
|
(Zip
Code)
|
(678)
392-4954
(Registrant’s
telephone number including area code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes 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 whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check
one):
Large
accelerated filer ¨ Accelerated
filer 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
There
were 25,267,835 shares of the Registrant’s common stock, $0.001 par value per
share, outstanding on July 23, 2010.
INDEX
TO FORM 10-Q
Page
|
|||||
Part I -
Financial Information
|
|||||
Item 1.
|
|||||
1
|
|||||
2
|
|||||
3
|
|||||
4
|
|||||
Item 2.
|
15
|
||||
Item 3.
|
28
|
||||
Item 4.
|
28
|
||||
Part II -
Other Information
|
|
||||
Item 1.
|
29
|
||||
Item 1A.
|
29
|
||||
Item 2.
|
30
|
||||
Item 6.
|
31
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share data)
(Unaudited)
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 10,432 | $ | 16,069 | ||||
Restricted
cash
|
1,584 | 3,000 | ||||||
Marketable
securities
|
24,953 | 34,409 | ||||||
Billed
accounts receivable, net
|
13,544 | 8,119 | ||||||
Unbilled
accounts receivable
|
7,064 | 11,873 | ||||||
Inventory,
net
|
8,167 | 6,605 | ||||||
Deferred
costs
|
6,102 | 1,715 | ||||||
Other
current assets
|
1,484 | 938 | ||||||
Total
current assets
|
73,330 | 82,728 | ||||||
Restricted
cash
|
2,838 | 2,636 | ||||||
Property
and equipment, net
|
19,575 | 18,340 | ||||||
Intangible
assets, net
|
7,352 | 8,779 | ||||||
Goodwill
|
8,179 | 8,179 | ||||||
Other
assets
|
270 | 235 | ||||||
Total
assets
|
$ | 111,544 | $ | 120,897 | ||||
Liabilities
and Shareholders' Equity
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 8,392 | $ | 6,874 | ||||
Accrued
expenses
|
6,159 | 11,574 | ||||||
Deferred
revenue
|
19,785 | 5,890 | ||||||
Current
portion of long-term debt
|
3,000 | 3,000 | ||||||
Other
current liabilities
|
6,579 | 5,648 | ||||||
Total
current liabilities
|
43,915 | 32,986 | ||||||
Long-term
liabilities
|
||||||||
Deferred
revenue
|
1,911 | 1,203 | ||||||
Long-term
debt
|
8,250 | 9,750 | ||||||
Other
liabilities
|
2,613 | 2,914 | ||||||
Total
long-term liabilities
|
12,774 | 13,867 | ||||||
Shareholders'
equity
|
||||||||
Common
stock, $0.001 par value per share, authorized 150,000,000 shares; issued
25,286,220 and outstanding 25,267,835 shares as of
June
30, 2010 and issued 25,072,764 and outstanding 25,067,102 shares
as of December 31, 2009
|
25 | 25 | ||||||
Additional
paid-in capital
|
260,153 | 258,660 | ||||||
Common
stock held in treasury, at cost, 18,385 and 5,662 shares as of June
30, 2010 and December 31, 2009, respectively
|
(203 | ) | (63 | ) | ||||
Accumulated
deficit
|
(205,128 | ) | (184,596 | ) | ||||
Accumulated
other comprehensive income
|
8 | 18 | ||||||
Total
shareholders' equity
|
54,855 | 74,044 | ||||||
Total
liabilities and shareholders' equity
|
$ | 111,544 | $ | 120,897 |
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except share and per share data)
(Unaudited)
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenue
|
||||||||||||||||
Product
|
$ | 5,294 | $ | 5,077 | $ | 10,755 | $ | 9,913 | ||||||||
Service
|
11,753 | 8,188 | 19,673 | 14,932 | ||||||||||||
Total
revenue
|
17,047 | 13,265 | 30,428 | 24,845 | ||||||||||||
Cost
of revenue
|
||||||||||||||||
Product
|
4,382 | 2,982 | 8,006 | 6,086 | ||||||||||||
Service
|
7,308 | 4,445 | 12,350 | 8,503 | ||||||||||||
Total
cost of revenue
|
11,690 | 7,427 | 20,356 | 14,589 | ||||||||||||
Gross
profit
|
5,357 | 5,838 | 10,072 | 10,256 | ||||||||||||
Operating
expenses
|
||||||||||||||||
General
and administrative expenses
|
9,214 | 8,101 | 17,312 | 15,990 | ||||||||||||
Marketing
and selling expenses
|
4,066 | 4,683 | 8,844 | 8,442 | ||||||||||||
Research
and development expenses
|
1,543 | 1,209 | 2,908 | 2,325 | ||||||||||||
Amortization
of intangible assets
|
536 | 552 | 1,072 | 1,104 | ||||||||||||
Operating
loss
|
(10,002 | ) | (8,707 | ) | (20,064 | ) | (17,605 | ) | ||||||||
Interest
and other expense, net
|
291 | 369 | 353 | 564 | ||||||||||||
Loss
before income taxes
|
(10,293 | ) | (9,076 | ) | (20,417 | ) | (18,169 | ) | ||||||||
Provision
for income taxes
|
55 | 65 | 115 | 107 | ||||||||||||
Net
loss
|
$ | (10,348 | ) | $ | (9,141 | ) | $ | (20,532 | ) | $ | (18,276 | ) | ||||
Net
loss per share (basic and diluted)
|
$ | (0.42 | ) | $ | (0.43 | ) | $ | (0.83 | ) | $ | (0.85 | ) | ||||
Weighted
average shares used in computation
|
24,618,730 | 21,403,508 | 24,598,205 | 21,385,061 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
Six
Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
loss
|
$ | (20,532 | ) | $ | (18,276 | ) | ||
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
||||||||
Depreciation
|
576 | 512 | ||||||
Amortization
of intangible assets
|
1,412 | 1,365 | ||||||
Stock-based
compensation
|
1,325 | 2,817 | ||||||
Other
|
501 | 644 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Billed
and unbilled accounts receivable, net
|
(500 | ) | 9,693 | |||||
Inventory,
net
|
(1,720 | ) | (340 | ) | ||||
Deferred
costs and other assets
|
(3,007 | ) | (991 | ) | ||||
Accounts
payable
|
1,678 | (634 | ) | |||||
Accrued
expenses and other liabilities
|
(4,580 | ) | (2,451 | ) | ||||
Deferred
revenue
|
14,603 | 17,071 | ||||||
Net
cash (used in) provided by operating activities
|
(10,244 | ) | 9,410 | |||||
Cash
flows from investing activities
|
||||||||
Changes
in restricted cash
|
1,214 | 889 | ||||||
Purchases
of marketable securities
|
(9,110 | ) | (14,481 | ) | ||||
Maturities
of marketable securities
|
18,165 | 21,250 | ||||||
Purchases
of property and equipment
|
(3,916 | ) | (8,586 | ) | ||||
Net
cash provided by (used in) investing activities
|
6,353 | (928 | ) | |||||
Cash
flows from financing activities
|
||||||||
Borrowings
under debt facility
|
18,000 | 7,218 | ||||||
Repayment
of debt facility
|
(19,500 | ) | (879 | ) | ||||
Payment
of subordinated convertible notes
|
- | (590 | ) | |||||
Other
|
(246 | ) | 3 | |||||
Net
cash (used in) provided by financing activities
|
(1,746 | ) | 5,752 | |||||
Net
change in cash and cash equivalents
|
(5,637 | ) | 14,234 | |||||
Cash
and cash equivalents at beginning of period
|
16,069 | 19,571 | ||||||
Cash
and cash equivalents at end of period
|
$ | 10,432 | $ | 33,805 | ||||
Cash
paid for interest
|
$ | 315 | $ | 707 | ||||
Supplemental
disclosure of noncash investing and financing activities
|
||||||||
Recording
of asset retirement obligation
|
$ | (320 | ) | $ | 110 |
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data)
1.
|
Description
of Business and Basis of
Presentation
|
Description
of Business
Comverge,
Inc., a Delaware corporation, and its subsidiaries (collectively, the
“Company”), provide 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 management 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
condensed consolidated financial statements of the Company include the accounts
of its subsidiaries. These unaudited condensed consolidated financial statements
have been prepared by management in accordance with accounting principles
generally accepted in the United States and with the instructions to Form 10-Q
and Article 10 of Regulation S-X.
In the
opinion of management, the unaudited condensed consolidated financial statements
reflect all adjustments considered necessary for a fair statement of the
Company’s financial position as of June 30, 2010 and the results of operations
for the three and six months ended June 30, 2010 and 2009, and cash flows for
the six months ended June 30, 2010 and 2009, consisting only of normal and
recurring adjustments. All significant intercompany transactions have been
eliminated in consolidation. Operating results for the three and six months
ended June, 2010 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2010. The interim condensed
consolidated financial statements do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. For further information, refer to the
Company’s consolidated financial statements and footnotes thereto for the year
ended December 31, 2009 on Form 10-K filed on March 8, 2010.
The
condensed consolidated balance sheet as of December 31, 2009 was derived from
audited financial statements but does not include all disclosures required by
accounting principles generally accepted in the United States.
2.
|
Significant
Accounting Policies and Recent Accounting
Pronouncements
|
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 its
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, or 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
telecommunications costs related to the network as cost of
revenue. The cost of revenue is recognized contemporaneously with
revenue.
The
current deferred revenue and deferred cost of revenue as of June 30, 2010 and
December 31, 2009 are provided below:
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Deferred
revenue:
|
||||||||
VPC
contract related
|
$ | 14,347 | $ | 3,443 | ||||
Other
|
5,438 | 2,447 | ||||||
Current
deferred revenue
|
$ | 19,785 | $ | 5,890 | ||||
Deferred
cost of revenue:
|
||||||||
VPC
contract related
|
$ | 3,452 | $ | 1,072 | ||||
Other
|
2,650 | 643 | ||||||
Current
deferred cost of revenue
|
$ | 6,102 | $ | 1,715 |
The
Company enters into agreements to provide base load capacity. Energy efficiency
revenues are earned based on the Company’s ability to achieve committed capacity
through base load reduction. In order to provide capacity, the Company delivers
and installs energy efficiency 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 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 commercial and industrial demand
response services. The demand response programs require the Company to provide
electric capacity through demand reduction when the utility or independent
system operator calls a demand response event to curtail electrical usage.
Demand response revenues are earned based on the Company’s ability to deliver
capacity. In order to provide capacity, the Company manages a portfolio of
commercial and industrial participants’ electric loads. Capacity amounts are
verified through the results of an actual demand response event or a demand
response test. The Company recognizes revenue and associated cost of
revenue in its demand response services at such time as the capacity amount is
fixed and determinable.
The
Company records revenue from capacity programs with independent system
operators. The capacity year for its primary capacity program spans from June
1st to May 31st annually. For participation,
the Company receives cash payments on a monthly basis in the capacity year.
Participation in the capacity program requires the Company to respond to
requests from the system operator to curtail energy usage during the mandatory
performance period of June through September, which is the peak demand season.
The annual payments for a capacity year are recognized 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.
Comprehensive
Loss
The
Company reports total changes in equity resulting from revenues, expenses, and
gains and losses, including those that do not affect the accumulated deficit.
Accordingly, other comprehensive loss includes those amounts relating to
unrealized gains and losses on investment securities classified as available for
sale.
The
components of comprehensive loss are as follows:
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
loss
|
$ | (10,348 | ) | $ | (9,141 | ) | $ | (20,532 | ) | $ | (18,276 | ) | ||||
Unrealized
gain (loss) on marketable securities
|
(1 | ) | 30 | (10 | ) | 19 | ||||||||||
Comprehensive
loss
|
$ | (10,349 | ) | $ | (9,111 | ) | $ | (20,542 | ) | $ | (18,257 | ) |
Concentration
of Credit Risk
The
Company derives a significant portion of its revenue from products and services
that it supplies to electricity providers, such as utilities and independent
service operators. Changes in economic conditions and unforeseen events could
occur and could have the effect of reducing use of electricity by our customers’
consumers. The Company’s business success depends in part on its relationships
with a limited number of large customers. During the three and six
months ended June 30, 2010, the Company had one customer which accounted for 24%
and 21%, respectively, of the Company’s revenue. The total accounts receivable
from this customer was $4,116 as of June 30, 2010, or 20% of net accounts
receivable outstanding. During the three and six months ended June 30, 2009, the
Company had one customer which accounted for 16% of the Company’s revenue during
both periods. No other customer accounted for more than 10% of the
Company’s total revenue during the three and six months ended June 30, 2010 and
2009.
The
Company is subject to concentrations of credit risk from its cash and cash
equivalents and short term investments. The Company limits its exposure to
credit risk associated with cash and cash equivalents and short term investments
by placing its cash and cash equivalents with a number of domestic financial
institutions and by investing in investment grade securities.
Goodwill
The
Company performs its annual impairment test of goodwill as of December 31st.
Goodwill is tested for impairment using the two-step approach. Step 1 of the
goodwill impairment test compares the fair value of the reporting unit with its
carrying amount, including goodwill. The Company bases its fair value
estimates on projected financial information which it believes to be
reasonable. 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. As of June 30, 2010, the goodwill
balance of $7,680 is related to the Energy Efficiency reporting unit in the
Residential Business segment.
This
reporting unit is experiencing a decline in installations in its service
territories, resulting in revenue from the reporting unit being less than
expected. As of June 30, 2010, the Company does not believe an event
or change in circumstance has occurred that would more likely than not reduce
the fair value of the reporting unit below its carrying amount. If
the decline in revenue and associated cash flows continues, it may impact the
fair value of the reporting unit, causing its carrying value to exceed its fair
value. Also, materially different assumptions regarding future
performance of the reporting unit or a change in the strategic direction of the
reporting unit could result in significant impairment losses.
Recent
Accounting Pronouncements
In
October 2009, the Financial Accounting Standards Board, or 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.
In January 2010, the FASB
issued Accounting Standards Update, or ASU, No. 2010-06 Fair
Value Measurements and Disclosures: Improving Disclosures about Fair Value
Measurements. The guidance requires previous fair value
hierarchy disclosures to be further disaggregated by class of assets and
liabilities. A class is often a subset of assets or liabilities within a line
item in the statement of financial position. In addition, significant transfers
between Levels 1 and 2 of the fair value hierarchy are required to be disclosed.
These additional requirements became effective January 1, 2010 for
quarterly and annual reporting. These amendments did not have an impact on the
consolidated financial results as this guidance relates only to additional
disclosures.
In
February 2010, the FASB issued ASU No. 2010-09 Subsequent Events: Amendments to
Certain Recognition and Disclosure Requirements. The update
removes the requirement to disclose a date through which subsequent events have
been evaluated. The update is effective for interim or annual
periods ending after June 15, 2010. The change in disclosure did not
have a material impact on the Company’s financial position, results of operation
or cash flows.
3.
|
Net
Loss Per Share
|
Basic net loss per share is computed by
dividing net loss by the weighted average number of common shares outstanding
for the period. Diluted net loss per share is computed using the weighted
average number of common shares outstanding and, when dilutive, potential common
shares from options and warrants using the treasury stock method and from
convertible securities using the if-converted method. Because the Company
reported a net loss for the three and six months ended June 30, 2010 and 2009,
all potential common shares have been excluded from the computation of the
dilutive net loss per share for all periods presented because the effect would
have been anti-dilutive. Such potential common shares consist of the
following:
Six
Months Ended June 30,
|
||||
2010
|
2009
|
|||
Unvested
restricted stock awards
|
559,179
|
652,890
|
||
Outstanding
options
|
2,489,984
|
2,313,153
|
||
Total
|
3,049,163
|
2,966,043
|
4.
|
Marketable
Securities
|
The
amortized cost and fair value of marketable securities, with gross unrealized
gains and losses, as well as the balance sheet classification as of June 30,
2010 and December 31, 2009 is presented below.
June
30, 2010
|
||||||||||||||||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
Cash
and
|
Restricted
|
Marketable
|
||||||||||||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
Equivalents
|
Cash
|
Securities
|
||||||||||||||||||||||
Money
market funds
|
$ | 13,811 | $ | - | $ | - | $ | 13,811 | $ | 7,480 | $ | 4,331 | $ | 2,000 | ||||||||||||||
Commercial
paper
|
1,400 | - | - | 1,400 | - | - | 1,400 | |||||||||||||||||||||
Corporate
debentures/bonds
|
21,545 | 23 | (15 | ) | 21,553 | - | - | 21,553 | ||||||||||||||||||||
Total
marketable securities
|
36,756 | 23 | (15 | ) | 36,764 | 7,480 | 4,331 | 24,953 | ||||||||||||||||||||
Cash
in operating accounts
|
3,043 | - | - | 3,043 | 2,952 | 91 | - | |||||||||||||||||||||
Total
|
$ | 39,799 | $ | 23 | $ | (15 | ) | $ | 39,807 | $ | 10,432 | $ | 4,422 | $ | 24,953 |
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
marketable securities
|
48,013 | 45 | (27 | ) | 48,031 | 11,406 | 2,216 | 34,409 | ||||||||||||||||||||
Cash
in operating accounts
|
8,083 | - | - | 8,083 | 4,663 | 3,420 | - | |||||||||||||||||||||
Total
|
$ | 56,096 | $ | 45 | $ | (27 | ) | $ | 56,114 | $ | 16,069 | $ | 5,636 | $ | 34,409 |
Realized
gains and losses to date have not been material. Interest income for the three
and six months ended June 30, 2010 was $249 and $510,
respectively. Interest income for the three and six months ended June
30, 2009 was $141 and $350, respectively.
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 the Company’s estimates of assumptions market
participants would use in pricing the asset or
liability.
|
The
Company’s assets that are measured at fair value on a recurring basis are
generally classified within Level 1 or Level 2 of the fair value hierarchy. The
types of instruments valued based on quoted market prices in active markets
include most money market securities, U.S. Treasury securities and equity
investments. Such instruments are generally classified within Level 1 of the
fair value hierarchy. The Company invests in money market funds that are traded
daily and does not adjust the quoted price for such instruments.
The types
of instruments valued based on quoted prices in less active markets, broker or
dealer quotations, or alternative pricing sources with reasonable levels of
price transparency include the Company’s U.S. Agency securities, Commercial
Paper, U.S. Corporate Bonds and certificates of deposit. Such instruments are
generally classified within Level 2 of the fair value hierarchy. The Company
uses consensus pricing, which is based on multiple pricing sources, to value its
fixed income investments.
The table
below presents marketable securities, grouped by fair value levels, as of June
30, 2010 and December 31, 2009.
Fair
Value Measurements at Reporting Date Using
|
||||||||||||||||
Quoted
Prices in Active
|
Significant
Other
|
Significant
|
||||||||||||||
Markets
for Identical
|
Observable
|
Unobservable
|
||||||||||||||
June
30,
|
Assets
|
Inputs
|
Inputs
|
|||||||||||||
2010
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
Money
market funds
|
$ | 13,811 | $ | 11,811 | $ | 2,000 | $ | - | ||||||||
Commercial
paper
|
1,400 | - | 1,400 | - | ||||||||||||
Corporate
debentures/bonds
|
21,553 | - | 21,553 | - | ||||||||||||
Total
|
$ | 36,764 | $ | 11,811 | $ | 24,953 | $ | - |
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 | $ | - |
5.
|
Long-Term
Debt
|
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 $20,000 bringing the total revolver loan to
$30,000 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. As of June 30, 2010, the Company had $18,145 of
outstanding letters of credit and $11,855 of borrowing availability from the
revolver loan.
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, Inc.
All other terms and conditions of the credit facility remain the same and in
full force and effect.
Long-term
debt as of June 30, 2010 and December 31, 2009 consisted of the
following:
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Security
and loan agreement with a U.S. bank, collateralized by substantially
all of the Company's
assets, maturing in December 2012, interest payable at a
variable rate (3.35% and 3.28% as of
June 30, 2010 and December 31, 2009)
|
$ | 11,250 | $ | 12,750 | ||||
Total
debt
|
11,250 | 12,750 | ||||||
Less:
Current portion of long-term debt
|
(3,000 | ) | (3,000 | ) | ||||
Total
long-term debt
|
$ | 8,250 | $ | 9,750 |
6.
|
Stock-Based
Compensation
|
The
Company’s Amended and Restated 2006 Long-Term Incentive Plan (“2006
LTIP”) was approved by the Company’s shareholders in May 2010 and provides for
the granting of stock-based incentive awards to eligible Company employees and
directors and to other non-employee service providers, including options to
purchase the Company’s common stock and restricted stock awards at not less than
the fair value of the Company’s common stock on the grant date and for a term of
not greater than seven years. Awards are granted with service vesting
requirements, performance vesting conditions, market vesting conditions, or a
combination thereof. Subject to adjustment as defined in the 2006 LTIP, the
aggregate number of shares available for issuance is 7,556,036. Stock-based
incentive awards expire between five and ten years from the date of grant and
generally vest over a one to four-year period from the date of
grant. As of June 30, 2010, 2,126,326 shares were available for grant
under the 2006 LTIP. The expense related to stock-based incentive awards
recognized for the three and six months ended June 30, 2010 was $843 and $1,325,
respectively. The expense related to stock-based incentive awards
recognized for the three and six months ended June 30, 2009 was $1,430 and
$2,817, respectively.
A summary
of the Company’s stock option activity for the six months ended June 30, 2010 is
presented below:
June
30, 2010
|
||||||||||||
Weighted
|
||||||||||||
Number
of
|
Average
|
|||||||||||
Options
|
Exercise
|
Range
of
|
||||||||||
(in
Shares)
|
Price
|
Exercise
Prices
|
||||||||||
Outstanding
at beginning of period
|
1,988,400 | $ | 12.63 | $0.58 to $34.23 | ||||||||
Granted
|
829,793 | 10.02 | $8.70 to $11.52 | |||||||||
Exercised
|
(106,856 | ) | 1.58 | $0.58 to $7.56 | ||||||||
Cancelled
|
(78,000 | ) | 22.31 | $10.34 to $34.23 | ||||||||
Forfeited
|
(143,353 | ) | 7.64 | $3.76 to $18.00 | ||||||||
Outstanding
at end of period
|
2,489,984 | $ | 12.22 | $0.58 to $34.23 | ||||||||
Exercisable
at end of period
|
1,364,627 | $ | 14.45 | $0.58 to $34.23 |
Outstanding
as of June 30, 2010
|
Exercisable
as of June 30, 2010
|
|||||||||||||||||||||||||
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 | 204,431 | 1.7 | $ | 0.73 | 204,431 | 1.7 | $ | 0.74 | ||||||||||||||||||
$2.40 - $3.99 | 33,191 | 1.7 | 2.89 | 33,191 | 1.7 | 2.89 | ||||||||||||||||||||
$4.00 - $7.99 | 275,224 | 5.1 | 4.47 | 114,338 | 4.3 | 4.33 | ||||||||||||||||||||
$8.00-$10.33 | 708,919 | 6.4 | 9.81 | 83,362 | 5.1 | 9.57 | ||||||||||||||||||||
$10.34 - $14.09 | 591,287 | 5.1 | 11.59 | 257,909 | 3.5 | 12.18 | ||||||||||||||||||||
$14.10 - $17.99 | 11,250 | 0.9 | 14.10 | 11,250 | 0.9 | 14.10 | ||||||||||||||||||||
$18.00 - $23.53 | 453,121 | 3.3 | 18.08 | 447,586 | 3.3 | 18.08 | ||||||||||||||||||||
$23.54 | 15,547 | 3.7 | 23.54 | 15,547 | 3.7 | 23.54 | ||||||||||||||||||||
$23.55 - $36.00 | 197,014 | 3.6 | 32.59 | 197,013 | 3.6 | 32.59 | ||||||||||||||||||||
2,489,984 | 4.7 | $ | 12.22 | 1,364,627 | 3.3 | $ | 14.45 |
For
awards with performance and/or service conditions only, the Company utilized the
Black-Scholes option pricing model to estimate fair value of options issued,
with the following assumptions (weighted averages based on grants during the
period):
Six
Months Ended June 30,
|
|||||
2010
|
2009
|
||||
Risk-free
interest rate
|
2.12
|
%
|
1.85
|
%
|
|
Expected
term of options, in years
|
4.6
|
4.6
|
|||
Expected
annual volatility
|
70
|
%
|
70
|
%
|
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
The
weighted average grant-date fair value of options granted during the six months
ended June 30, 2010 and 2009 was $5.68 and $3.13, respectively.
A summary
of the Company’s restricted stock award activity for the six months ended June
30, 2010 is presented below:
June
30, 2010
|
||||||||
Weighted
|
||||||||
Average
|
||||||||
Grant
Date
|
||||||||
Number
of
|
Fair
Value
|
|||||||
Shares
|
Per
Share
|
|||||||
Unvested
at beginning of period
|
496,589 | $ | 9.28 | |||||
Granted
|
206,260 | 10.37 | ||||||
Vested
|
(44,010 | ) | 14.61 | |||||
Cancelled
|
- |
NA
|
||||||
Forfeited
|
(99,660 | ) | 8.64 | |||||
Unvested
at end of period
|
559,179 | $ | 9.38 |
7.
|
Segment
Information
|
As of
June 30, 2010, 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,
primarily through marketing and installing our devices on residential and small
commercial end-use participants. 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 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 energy efficiency networks, primarily
lighting costs and installation services related to energy efficiency upgrades.
The Commercial & Industrial Business segment’s cost of revenue includes
participant payments for the demand response services as well as materials,
labor and overhead for the energy management 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.
The
following tables show operating results for each of the Company’s operating
segments:
Three
Months Ended June 30, 2010
|
||||||||||||||||||||
Utility
|
Commercial
|
|||||||||||||||||||
Products
|
&
|
Corporate
|
||||||||||||||||||
&
|
Residential
|
Industrial
|
Unallocated
|
|||||||||||||||||
Services
|
Business
|
Business
|
Costs
|
Total
|
||||||||||||||||
Revenue
|
||||||||||||||||||||
Product
|
$ | 5,294 | $ | - | $ | - | $ | - | $ | 5,294 | ||||||||||
Service
|
5,812 | 2,269 | 3,672 | - | 11,753 | |||||||||||||||
Total
revenue
|
11,106 | 2,269 | 3,672 | - | 17,047 | |||||||||||||||
Cost
of revenue
|
||||||||||||||||||||
Product
|
4,382 | - | - | - | 4,382 | |||||||||||||||
Service
|
3,734 | 1,265 | 2,309 | - | 7,308 | |||||||||||||||
Total
cost of revenue
|
8,116 | 1,265 | 2,309 | - | 11,690 | |||||||||||||||
Gross
profit
|
2,990 | 1,004 | 1,363 | - | 5,357 | |||||||||||||||
Operating
expenses
|
||||||||||||||||||||
General
and administrative expenses
|
2,272 | 2,238 | 842 | 3,862 | 9,214 | |||||||||||||||
Marketing
and selling expenses
|
582 | 1,389 | 1,416 | 679 | 4,066 | |||||||||||||||
Research
and development expenses
|
1,543 | - | - | - | 1,543 | |||||||||||||||
Amortization
of intangible assets
|
- | 299 | 233 | 4 | 536 | |||||||||||||||
Operating
loss
|
(1,407 | ) | (2,922 | ) | (1,128 | ) | (4,545 | ) | (10,002 | ) | ||||||||||
Interest
and other expense (income), net
|
3 | 1 | (1 | ) | 288 | 291 | ||||||||||||||
Loss
before income taxes
|
$ | (1,410 | ) | $ | (2,923 | ) | $ | (1,127 | ) | $ | (4,833 | ) | $ | (10,293 | ) |
Three
Months Ended June 30, 2009
|
||||||||||||||||||||
Utility
|
Commercial
|
|||||||||||||||||||
Products
|
&
|
Corporate
|
||||||||||||||||||
&
|
Residential
|
Industrial
|
Unallocated
|
|||||||||||||||||
Services
|
Business
|
Business
|
Costs
|
Total
|
||||||||||||||||
Revenue
|
||||||||||||||||||||
Product
|
$ | 5,077 | $ | - | $ | - | $ | - | $ | 5,077 | ||||||||||
Service
|
2,862 | 3,019 | 2,307 | - | 8,188 | |||||||||||||||
Total
revenue
|
7,939 | 3,019 | 2,307 | - | 13,265 | |||||||||||||||
Cost
of revenue
|
||||||||||||||||||||
Product
|
2,982 | - | - | - | 2,982 | |||||||||||||||
Service
|
1,380 | 1,690 | 1,375 | - | 4,445 | |||||||||||||||
Total
cost of revenue
|
4,362 | 1,690 | 1,375 | - | 7,427 | |||||||||||||||
Gross
profit
|
3,577 | 1,329 | 932 | - | 5,838 | |||||||||||||||
Operating
expenses
|
||||||||||||||||||||
General
and administrative expenses
|
1,369 | 2,500 | 773 | 3,459 | 8,101 | |||||||||||||||
Marketing
and selling expenses
|
775 | 1,943 | 1,027 | 938 | 4,683 | |||||||||||||||
Research
and development expenses
|
1,209 | - | - | - | 1,209 | |||||||||||||||
Amortization
of intangible assets
|
- | 314 | 233 | 5 | 552 | |||||||||||||||
Operating
income (loss)
|
224 | (3,428 | ) | (1,101 | ) | (4,402 | ) | (8,707 | ) | |||||||||||
Interest
and other expense, net
|
5 | 225 | 3 | 136 | 369 | |||||||||||||||
Income
(loss) before income taxes
|
$ | 219 | $ | (3,653 | ) | $ | (1,104 | ) | $ | (4,538 | ) | $ | (9,076 | ) |
Six
Months Ended June 30, 2010
|
||||||||||||||||||||
Utility
|
Commercial
|
|||||||||||||||||||
Products
|
&
|
Corporate
|
||||||||||||||||||
&
|
Residential
|
Industrial
|
Unallocated
|
|||||||||||||||||
Services
|
Business
|
Business
|
Costs
|
Total
|
||||||||||||||||
Revenue
|
||||||||||||||||||||
Product
|
$ | 10,755 | $ | - | $ | - | $ | - | $ | 10,755 | ||||||||||
Service
|
9,431 | 4,368 | 5,874 | - | 19,673 | |||||||||||||||
Total
revenue
|
20,186 | 4,368 | 5,874 | - | 30,428 | |||||||||||||||
Cost
of revenue
|
||||||||||||||||||||
Product
|
8,006 | - | - | - | 8,006 | |||||||||||||||
Service
|
6,102 | 2,604 | 3,644 | - | 12,350 | |||||||||||||||
Total
cost of revenue
|
14,108 | 2,604 | 3,644 | - | 20,356 | |||||||||||||||
Gross
profit
|
6,078 | 1,764 | 2,230 | - | 10,072 | |||||||||||||||
Operating
expenses
|
||||||||||||||||||||
General
and administrative expenses
|
4,032 | 4,779 | 1,618 | 6,883 | 17,312 | |||||||||||||||
Marketing
and selling expenses
|
1,358 | 3,140 | 2,907 | 1,439 | 8,844 | |||||||||||||||
Research
and development expenses
|
2,908 | - | - | - | 2,908 | |||||||||||||||
Amortization
of intangible assets
|
- | 598 | 466 | 8 | 1,072 | |||||||||||||||
Operating
loss
|
(2,220 | ) | (6,753 | ) | (2,761 | ) | (8,330 | ) | (20,064 | ) | ||||||||||
Interest
and other expense (income), net
|
6 | 1 | (7 | ) | 353 | 353 | ||||||||||||||
Loss
before income taxes
|
$ | (2,226 | ) | $ | (6,754 | ) | $ | (2,754 | ) | $ | (8,683 | ) | $ | (20,417 | ) |
Six
Months Ended June 30, 2009
|
||||||||||||||||||||
Utility
|
Commercial
|
|||||||||||||||||||
Products
|
&
|
Corporate
|
||||||||||||||||||
&
|
Residential
|
Industrial
|
Unallocated
|
|||||||||||||||||
Services
|
Business
|
Business
|
Costs
|
Total
|
||||||||||||||||
Revenue
|
||||||||||||||||||||
Product
|
$ | 9,913 | $ | - | $ | - | $ | - | $ | 9,913 | ||||||||||
Service
|
4,687 | 6,971 | 3,274 | - | 14,932 | |||||||||||||||
Total
revenue
|
14,600 | 6,971 | 3,274 | - | 24,845 | |||||||||||||||
Cost
of revenue
|
||||||||||||||||||||
Product
|
6,086 | - | - | - | 6,086 | |||||||||||||||
Service
|
2,153 | 4,333 | 2,017 | - | 8,503 | |||||||||||||||
Total
cost of revenue
|
8,239 | 4,333 | 2,017 | - | 14,589 | |||||||||||||||
Gross
profit
|
6,361 | 2,638 | 1,257 | - | 10,256 | |||||||||||||||
Operating
expenses
|
||||||||||||||||||||
General
and administrative expenses
|
2,446 | 5,076 | 1,600 | 6,868 | 15,990 | |||||||||||||||
Marketing
and selling expenses
|
1,614 | 3,156 | 1,876 | 1,796 | 8,442 | |||||||||||||||
Research
and development expenses
|
2,325 | - | - | - | 2,325 | |||||||||||||||
Amortization
of intangible assets
|
- | 629 | 466 | 9 | 1,104 | |||||||||||||||
Operating
loss
|
(24 | ) | (6,223 | ) | (2,685 | ) | (8,673 | ) | (17,605 | ) | ||||||||||
Interest
and other expense, net
|
9 | 436 | 3 | 116 | 564 | |||||||||||||||
Loss
before income taxes
|
$ | (33 | ) | $ | (6,659 | ) | $ | (2,688 | ) | $ | (8,789 | ) | $ | (18,169 | ) |
Cautionary
Statement Regarding Forward-Looking Statements
This Quarterly
Report on Form 10-Q and the documents incorporated into this Quarterly Report on
Form 10-Q by reference contain forward-looking statements. These forward-looking
statements include statements with respect to our financial condition, results
of operations and business. The words “assumes,” “believes,” “expects,”
“budgets,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,”
“forecasts,” “intends” or similar terminology identify forward-looking
statements. These forward-looking statements reflect our current expectations
regarding future events, results or outcomes. These expectations may not be
realized. Some of these expectations may be based upon assumptions or judgments
that prove to be incorrect. In addition, our business and operations involve
numerous risks and uncertainties, many of which are beyond our control, which
could result in our expectations not being realized, cause actual results to
differ materially from our forward-looking statements and/or otherwise
materially affect our financial condition, results of operations and cash flows.
Please see the section below entitled “Risk Factors,” the section entitled “Risk
Factors” in our Annual Report on Form 10-K (File No. 001-33399) filed with the
Securities and Exchange Commission, or SEC, on March 8, 2010, and elsewhere in
this filing for a discussion of examples of risks, uncertainties and events that
may cause our actual results to differ materially from the expectations we
describe in our forward-looking statements. You should carefully review the
risks described herein and in other documents we file from time to time with the
SEC, including the other Quarterly Reports on Form 10-Q filed and 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.
You
should read the following discussion together with management’s discussion and
analysis, financial statements and the notes thereto included in our Annual
Report on Form 10-K filed with the SEC on March 8, 2010 and the financials
statements and the notes thereto included elsewhere in this Quarterly Report on
Form 10-Q.
Overview
We are an
intelligent energy management 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 customers for their operation. 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 intelligent energy management 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 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 and make informed decisions on
energy and renewable energy purchases and programs.
As of
June 30, 2010, we owned or managed 3,355 megawatts, an increase of 456 megawatts
or 16% from December 31, 2009. We include megawatts as owned or
managed if there is a contract in place that requires us to either provide
capacity to the utility or open market; provide a turnkey program to a utility;
or manage megawatts for a fee. The table below summarizes the
megawatts we own or manage by segment.
As
of June 30, 2010
|
|||||||
Commercial
&
|
|||||||
Utility
Products
|
Residential
|
Industrial
|
Total
|
||||
&
Services
|
Business
|
Business
|
Comverge
|
||||
Megawatts
owned/managed under capacity contracts
|
-
|
640
|
270
|
910
|
|||
Megawatts
owned for sale in open market programs
|
-
|
10
|
1,443
|
1,453
|
|||
Megawatts
managed under turnkey contracts
|
555
|
-
|
-
|
555
|
|||
Megawatts
managed for a fee on a pay-for-performance basis
|
-
|
-
|
437
|
437
|
|||
Megawatts
owned or managed
|
555
|
650
|
2,150
|
3,355
|
The table
below presents the activity in megawatts owned or managed during the six months
ended June 30, 2010.
Megawatts
|
|
Owned
or Managed
|
|
As
of December 31, 2009
|
2,899
|
Capacity
contracts
|
12
|
Open
market programs
|
259
|
Turnkey
contracts
|
185
|
As
of June 30, 2010
|
3,355
|
Megawatts
owned/ managed under capacity contracts
As of
June 30, 2010, we owned or managed 910 megawatts of contracted capacity from VPC
and energy efficiency contracts, an increase of 12 megawatts from December 31,
2009. Our existing VPC contracts represented contracted capacity of 817
megawatts and our energy efficiency contracts represented contracted capacity of
93 megawatts.
Cumulatively,
we have installed capacity of 548 megawatts under our VPC and energy efficiency
capacity contracts as of June 30, 2010 compared to 462 megawatts as of December
31, 2009, an increase of 86 megawatts. The main components of the change are an
increase of 84 megawatts installed during the six months ended June 30, 2010 in
our existing VPC programs and an increase of 2 megawatts from the energy
efficiency program during the six months ended June 30, 2010. The table below
presents contracted, installed and available capacity as of June 30, 2010 and
December 31, 2009, respectively.
(Megawatts)
|
June
30, 2010
|
December
31, 2009
|
|
Contracted
capacity
|
910
|
898
|
|
Installed
capacity (1)
|
548
|
462
|
|
Available
capacity (2)
|
506
|
421
|
|
(1)
|
For
residential VPC programs, 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 C&I VPC programs, installed capacity
generally refers to the megawatts that our participants 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. For residential VPC programs,
we have used the most recently settled measurement and verification
results to present available capacity for each period, which is typically
measured during the fourth quarter of each year. For C&I
VPC programs, we have assumed that our participants will shed the
committed capacity as included in installed
capacity.
|
Megawatts
owned for sale in open markets
As of
June 30, 2010, we had 1,453 megawatts enrolled in open market programs, an
increase of 259 megawatts from December 31, 2009. We consider
capacity enrolled when a participant has agreed to shed a committed capacity in
an open market program in which we participate.
Megawatts
managed under turnkey contracts
As of
June 30, 2010, we managed 555 megawatts under turnkey contracts, an increase of
185 megawatts from December 31, 2009. The increase of 185 megawatts consists of
40 megawatts from an expansion of our program with Pepco Holdings, Inc. in
January 2010 and 145 megawatts from our executed agreement with
PECO. Under both agreements, we will provide a full turnkey program,
including hardware, installation, marketing and call center
services. We calculate megawatts managed under turnkey contracts by
using a pre-determined factor of anticipated load reduction for each unit
deployed, in relation to the type of end-use participant, whether residential or
commercial and industrial, and our customer’s service territory.
Recent
Developments
In April
2010, we committed pre-auction cash collateral of approximately $18.0 million in
advance of the 2013-2014 Reliability Pricing Model Base Residual Auction
conducted by PJM Interconnection in May 2010. The amount was funded with
borrowings under our $30.0 million revolver loan with Silicon Valley Bank.
PJM awarded a total of 9,282 megawatts to demand response resources in the
2013-2014 Reliability Pricing Model Base Residual Auction, an increase of 32%
from the previous year. We were awarded 997 megawatts, an increase in
our market share to more than 10% of the total awarded demand response resources
in the 2013-2014 auction. After
the auction was completed, we were refunded our pre-auction cash collateral and
repaid the $18.0 million of borrowings under the revolver loan, replacing our
cash collateral with a letter of credit for $7.9 million.
In June
2010, the Company entered into a joint venture master agreement with Projects
International, Inc., or PI, to form a strategic alliance arrangement under which
the parties will identify and jointly pursue opportunities for demand response,
smart grid and energy efficiency projects in certain countries or country
groups.
In early
July 2010, we delivered more than 250 megawatts of reduced electricity demand in
response to the heat wave that gripped the Eastern United States. With grid
instability threatening all or parts of 13 eastern states, several local grid
operators and utilities, including PJM Interconnection, leveraged our
intelligent energy management solutions to reduce strain on the grid by
executing mandatory curtailment programs.
In July
2010, we were selected
by Public Service Company of Oklahoma (PSO) to deliver a comprehensive energy
management pilot program to eligible residential and commercial customers. The
demand response pilot program will be built on our Apollo Demand Response
Management System (DRMS) software. Under the three-year agreement, we
will provide full turnkey services to both PSO’s residential and commercial
and industrial customers.
We
currently plan to centralize our business support operations in our Norcross,
Georgia headquarters to establish a more unified culture and to run our business
more efficiently. To that end, we will be relocating several key
employees from our East Hanover, New Jersey; Kennett Square, Pennsylvania; and
Newark, California offices to Norcross and hiring others here locally. This
impacts approximately 40-50 positions, in total. We estimate the one-time costs
for relocation, hiring, knowledge transfer and leased office closures to be
approximately $3.5 million to be incurred in the second half of 2010, with the
majority occurring in the fourth quarter.
New
Executive Officers
On June
2, 2010, Chris Camino joined Comverge as Executive Vice President of Sales and
Chief Marketing Officer. Mr. Camino brings more than 20 years of
experience to his role overseeing sales and go-to-market strategies for
Comverge. Mr. Camino has spent the past seven years with SAP in its
utilities and telecommunications divisions. Prior to SAP, Mr. Camino
held a variety of senior-level sales positions in the technology and medical
sales sectors.
On July
1, 2010, Steve Moffitt joined Comverge as Executive Vice President of
Engineering and Operations. Mr. Moffitt joined Comverge with more
than 20 years experience in the energy, utility and commodity trading business.
In his new role, Mr. Moffitt will oversee the company's day-to-day operations
and lead our engineering teams responsible for developing intelligent energy
management solutions. He was previously with BG Group, UBS Investment Bank and
Dynegy, Inc. and held numerous executive positions. Mr. Moffitt’s
career includes significant experience in information technology, utility
transmission, distribution, and generation operations.
2010
Current Outlook
As of the
date of this filing, we are reaffirming our revenue outlook for full year 2010
and expect revenues to be in the range of $125 to $137 million. We
also expect to grow total megawatts under management by 800
megawatts.
Payments
from Long-Term Contracts
Payments
from long-term contracts represent our estimate of total payments that we expect
to receive under long-term agreements with our customers. The information
presented below with respect to payments from long-term contracts includes
payments related to our VPC contracts, energy efficiency contracts, and open
market bidding programs. As of June 30, 2010, we estimated that our total
payments to be received through 2024 will be approximately $614
million.
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
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 differing significantly from management’s
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” as
contained in our Annual Report on Form 10-K for the year ended December 31,
2009, filed with the SEC on March 8, 2010. 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 as of June 30, 2010 represented contracted capacity
of 817 megawatts. In calculating an estimated $242 million of payments
from our VPC contracts as of June 30, 2010, we have included expectations
regarding build-out based on our historical experience as well as future
expectations of participant enrollment in each contract’s service
territory.
|
•
|
We
have assumed that once our build-out phase is completed, we will operate
our VPC contracts at the capacity achieved during build-out, which
generally will be the contracted
capacity.
|
•
|
The
amount our utility customers pay to us at the end of each contract year
may vary 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 $19.9 million that we expect to recognize
as revenue over the remainder of this year, which we include in backlog.
Payments from long-term contracts exclude $9.3 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.
|
Energy
Efficiency Contracts:
•
|
Our
existing energy efficiency contracts as of June 30, 2010 represent
potential base load contracted capacity of 93 megawatts. In calculating
the estimated $53 million in payments from these contracts, while the
build-out rate has slowed, we have assumed we will complete full build-out
of the entire remaining megawatts under contract by the end of 2012 or, if
the contract is extended, the end of the extension date. We have assumed
that once our build-out is complete, the permanent base load reduction
will remain installed and will continue to provide the installed capacity
for the remainder of the contract
term.
|
Open
Market Programs:
•
|
As
of June 30, 2010, we had up to 997 megawatts bid into various capacity
open market programs with PJM Interconnection, LLC. We currently expect to
receive approximately $143 million in long term payments through the year
2014. We also have megawatts bid into open market programs in other
geographical service territories from which we currently expect to receive
$8 million through the year 2012. 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.
|
Turnkey
Contracts:
•
|
Our
turnkey contracts as of June 30, 2010 represent $132 million in payments
expected to be received through the year 2013 with five utility customers
to provide products, software, and services, including program management,
installation, and/or marketing. Payments from turnkey contracts are based
on contractual minimum order volumes, forecasted installations and other
services applied over the term of the
contract.
|
Other
Contracts:
•
|
We
expect to receive an estimated $36 million in payments through 2014
pursuant to currently executed contracts for our intelligent energy
management 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.” in our Annual Report on Form 10-K for the year ended December 31, 2009,
filed with the SEC on March 8, 2010.
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 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 twelve months. The inaccuracy of any of our estimates and
other factors may result in actual results being significantly lower than
estimated under our reported backlog. Material delays, market
conditions, cancellations or payment defaults could materially affect our
financial condition, results of operation and cash flow. Accordingly,
a comparison of backlog from period to period is not necessarily meaningful and
may not be indicative of actual revenues. As of June 30, 2010, we had
contractual backlog of $128 million through June 30, 2011.
Results
of Operations
Three
and Six Months Ended June 30, 2010 Compared to Three and Six Months Ended June
30, 2009
Revenue
The
following table summarizes our revenues for the three and six months ended June
30, 2010 and 2009 (dollars in thousands):
Three Months Ended June 30, |
Six
Months Ended June 30,
|
|||||||||||||||||||||||
Percent
|
Percent
|
|||||||||||||||||||||||
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
|||||||||||||||||||
Segment
Revenue:
|
||||||||||||||||||||||||
Utility
Products & Services
|
$ | 11,106 | $ | 7,939 | 40 | % | $ | 20,186 | $ | 14,600 | 38 | % | ||||||||||||
Residential
Business
|
2,269 | 3,019 | (25 | ) | 4,368 | 6,971 | (37 | ) | ||||||||||||||||
Commercial
& Industrial Business
|
3,672 | 2,307 | 59 | 5,874 | 3,274 | 79 | ||||||||||||||||||
Total
|
$ | 17,047 | $ | 13,265 | 29 | % | $ | 30,428 | $ | 24,845 | 22 | % |
Utility
Products & Services Revenue
Our
Utility Products & Services segment had revenue of $11.1 million for the
three months ended June 30, 2010 compared to $7.9 million for the three months
ended June 30, 2009, an increase of $3.2 million or 40%. Service revenue
increased by $3.0 million due to revenue contributed from the operation of our
turnkey programs, which includes such services as installation, marketing,
and/or program management. Product revenue increased by $0.2
million primarily due to an increase of $1.3 million in Superstat revenue
partially offset by a decrease of $1.1 million in digital control unit and other
product revenue.
Our
Utility Products & Services segment had revenue of $20.2 million for the six
months ended June 30, 2010 compared to $14.6 million for the six months ended
June 30, 2009, an increase of $5.6 million or 38%. Service revenue increased by
$4.8 million due to revenue contributed from the operation of our turnkey
programs. Product revenue increased by $0.8 million primarily due to
an increase of $3.2 million in Superstat and other product revenue partially
offset by a decrease of $2.4 in digital control unit revenue.
Residential
Business Revenue
Our
Residential Business segment had revenue of $2.3 million for the three months
ended June 30, 2010 compared to $3.0 million for the three months ended June 30,
2009, a decrease of $0.7 million or 25%. Of the decrease, $1.0 million is due to
a decline in the number of installations we performed during the second quarter
of 2010 in the energy efficiency programs. The decrease in energy
efficiency revenue was partially offset by a $0.3 million increase in revenue
from our marketing and other services.
Our
Residential Business segment had revenue of $4.4 million for the six months
ended June 30, 2010 compared to $7.0 million for the six months ended June 30,
2009, a decrease of $2.6 million or 37%. The $2.6 million decrease is primarily
due to a decline in the number of installations we performed during the first
half of 2010 in the energy efficiency programs. If the decline in
revenue and associated cash flows continues, it may impact the fair value of the
reporting unit, causing its carrying value to exceed its fair
value. Also, materially different assumptions regarding future
performance of the reporting unit or a change in the strategic direction of the
reporting unit could result in significant impairment losses. The related
goodwill balance is currently $7.7 million.
We defer
revenues and direct costs under our VPC contracts until such revenue can be made
fixed and determinable through a measurement and verification test, generally in
our fourth quarter. Deferred revenue and deferred charges related to VPC
contracts are presented
below:
As
of
|
||||||||||||||||||||||||
June
30,
|
December
31,
|
Percent
|
June
30,
|
December
31,
|
Percent
|
|||||||||||||||||||
2010
|
2009
|
Change
|
2009
|
2008
|
Change
|
|||||||||||||||||||
VPC
Contract Related:
|
||||||||||||||||||||||||
Deferred
revenue
|
$ | 14,347 | $ | 3,443 | 317 | % | 20,189 | $ | 4,271 | 373 | % | |||||||||||||
Deferred
cost of revenue
|
3,452 | 1,072 | 222 | % | 6,950 | 791 | 779 | % |
Deferred
revenue as of June 30, 2010 increased by $10.9 million from December 31, 2009 as
compared to a $15.9 million increase in deferred revenue from December 31, 2008
to June 30, 2009. During the first half of 2010, deferred revenue increased at a
lesser amount due to our Nevada VPC program, which has transitioned from an
aggressive growth phase to primarily maintenance of the megawatts previously
deployed. Payments for maintenance in the Nevada VPC program are less
than those received during the original build out of the program.
Commercial
& Industrial Business Revenue
Our
Commercial & Industrial Business segment had revenue of $3.7 million for the
three months ended June 30, 2010 compared to $2.3 million for the three months
ended June 30, 2009, an increase of $1.4 million or 59%. Of the increase, $0.8
million was due to providing increased megawatts in open market programs in
geographic service territories throughout the nation. In addition,
the Commercial & Industrial Business had an increase of $0.8 million in
revenue due to increased megawatt commitments in our C&I VPC programs
compared to the prior year. The increase in revenue from open market
and VPC programs was partially offset by a decrease of $0.2 million in our
energy management services for the three months ended June 30, 2010 as compared
to prior period due to the decline in our engineering projects.
Our
Commercial & Industrial Business segment had revenue of $5.9 million for the
six months ended June 30, 2010 compared to $3.3 million for the six months ended
June 30, 2009, an increase of $2.6 million or 79%. Of the increase, $2.2 million
was due to providing increased megawatts in open market programs in geographic
service territories throughout the nation. In addition, the
Commercial & Industrial Business had an increase of $0.8 million in revenue
due to increased megawatt commitments in our C&I VPC programs compared to
the prior year. The increase in revenue from open market and VPC
programs was partially offset by a decrease of $0.4 million in our energy
management services for the six months ended June 30, 2010 as compared to prior
period due to the decline in our engineering projects.
Gross
Profit and Gross Margin
The
following table summarizes our gross profit and gross margin for the three and
six months ended June 30, 2010 and 2009 (dollars in thousands):
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||||||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||||||||||||
Gross
|
Gross
|
Gross
|
Gross
|
Gross
|
Gross
|
Gross
|
Gross
|
|||||||||||||||||||||||||
Profit
|
Margin
|
Profit
|
Margin
|
Profit
|
Margin
|
Profit
|
Margin
|
|||||||||||||||||||||||||
Segment
Gross Profit and Margin:
|
||||||||||||||||||||||||||||||||
Utility
Products & Services
|
$ | 2,990 | 27 | % | $ | 3,577 | 45 | % | $ | 6,078 | 30 | % | $ | 6,361 | 44 | % | ||||||||||||||||
Residential
Business
|
1,004 | 44 | 1,329 | 44 | 1,764 | 40 | 2,638 | 38 | ||||||||||||||||||||||||
Commercial
& Industrial Business
|
1,363 | 37 | 932 | 40 | 2,230 | 38 | 1,257 | 38 | ||||||||||||||||||||||||
Total
|
$ | 5,357 | 31 | % | $ | 5,838 | 44 | % | $ | 10,072 | 33 | % | $ | 10,256 | 41 | % |
Utility
Products & Services Gross Profit and Gross Margin
Gross
profit from our Utility Products & Services segment was $3.0 million for the
three months ended June 30, 2010 compared to $3.6 million for the three months
ended June 30, 2009, a decrease of $0.6 million or 17%. Product gross
profit decreased by $1.2 million due to the recording of $0.5 million of expense
for estimated costs associated with a voluntary product replacement effort in
one of our customer’s programs as well as a $1.0 million decrease in gross
profit from sales of our digital control units partially offset by a $0.3
million increase in gross profit from sales of our Superstats and other
products. During the three months ended June 30, 2010, we sold
approximately 44,000 digital control units and Superstats compared to 50,000
digital control units and Superstats during the three months ended June 30,
2009. The decrease in product gross profit was partially offset by a
$0.6 million increase in service gross profit from the expansion and operation
of our turnkey solutions.
Our
Utility Products & Services segment’s gross margin for the three months
ended June 30, 2010 and 2009 was 27% and 45%, respectively, a decrease of 18
percentage points. A decrease of 5 percentage points is the result of
the $0.5 million expense recorded during the second quarter for the voluntary
product replacement effort, which we do not expect to recur in future
periods. A decrease of 11 percentage points is the result of the
operation of our largest turnkey program which required an accelerated
build-out. Future gross margins for the segment are expected to be
lower than comparable prior year periods as we continue to expand our turnkey
programs. While these programs have lower gross margins than our VPC
programs, we incur less incremental selling, general and administrative expenses
in operating these programs. The remaining decrease of 2 percentage
points is the result of the lower margin contributed by revenue from our product
sales.
Gross
profit from our Utility Products & Services segment was $6.1 million for the
six months ended June 30, 2010 compared to $6.4 million for the six months ended
June 30, 2009, a decrease of $0.3 million or 5%. Product gross profit
decreased by $1.1 million due to the recording of $0.5 million of expense for
estimated costs associated with a voluntary product replacement effort in one of
our customer’s programs as well as a $1.4 million decrease in gross profit from
sales of our digital control units partially offset by an increase of $0.8
million in gross profit from sales of our Superstats and other
products. During the six months ended June 30, 2010, we sold
approximately 86,000 digital control units and Superstats compared to 90,000
digital control units and Superstats during the six months ended June 30,
2009. The decrease in product gross profit was partially offset by a
$0.8 million increase in service gross profit from the expansion and operation
of our turnkey solutions.
Our
Utility Products & Services segment’s gross margin for the six months ended
June 30, 2010 and 2009 was 30% and 44%, respectively, a decrease of 14
percentage points. A decrease of 2 percentage points is the result of
the $0.5 million expense recorded during the second quarter for the voluntary
product replacement effort, which we do not expect to recur in future
periods. A decrease of 10 percentage points is the result of the
operation of our largest turnkey program which required an accelerated
build-out. Future gross margins for the segment are expected to be
lower than comparable prior year periods as we continue to expand our turnkey
programs. While these programs have lower gross margins than our VPC
programs, we incur less incremental selling, general and administrative expenses
in operating these programs. The remaining decrease of 2 percentage
points is the result of the lower margin contributed by revenue from our product
sales.
Residential
Business Gross Profit and Gross Margin
Gross
profit for our Residential Business segment was $1.0 million for the three
months ended June 30, 2010 compared to $1.3 million for the three months ended
June 30, 2009, a decrease of $0.3 million or 23%. The decrease in gross profit
is due to a decrease of $0.8 million from our energy efficiency programs
partially offset by an increase of $0.5 million from our marketing and other
services. Gross margin for the three months ended June 30, 2010 and
2009 remained consistent at 44% due to the higher margin provided from our
marketing and other services offset by a lower gross margin from our energy
efficiency programs.
Gross
profit for our Residential Business segment was $1.8 million for the six months
ended June 30, 2010 compared to $2.6 million for the six months ended June 30,
2009, a decrease of $0.8 million or 31%. The decrease in gross profit is due to
a decrease of $1.1 million from our energy efficiency programs partially offset
by an increase of $0.3 million from our marketing and other
services. The increase of 2 percentage points for the six months
ended June 30, 2010 compared to the six months ended June 30, 2009 is due to the
higher margin provided from our marketing and other services partially offset by
a lower gross margin from our energy efficiency programs.
Commercial
& Industrial Business Gross Profit and Gross Margin
During
the three months ended June 30, 2010 and 2009, our Commercial & Industrial
Business segment’s gross profit was $1.4 million and $0.9 million, respectively,
an increase of $0.5 million or 56%. The increase of $0.5 million is due to an
increase of $0.1 million in gross profit from our megawatts enrolled in open
markets and an increase of $0.4 million in gross profit from our C&I VPC
programs. Gross margin for the three months ended June 30, 2010
decreased by 3 percentage points compared to gross margin for three months ended
June 30, 2009 due to lower margins realized for those megawatts enrolled in open
markets during the quarter. We
recognize revenue from the PJM capacity program in the third quarter of each
year. Due to the enrollment of more profitable megawatts in the PJM
capacity program, we expect the gross margin for the third quarter 2010 to
increase by five to ten percentage points as compared to the third quarter
2009.
During
the six months ended June 30, 2010 and 2009, our Commercial & Industrial
Business segment’s gross profit was $2.2 million and $1.3 million, respectively,
an increase of $0.9 million or 69%. The increase of $0.9 million is due to an
increase $0.7 million in gross profit from our megawatts enrolled in open
markets and an increase of $0.4 million in gross profit from our C&I VPC
programs partially offset by a decrease of $0.2 million in gross profit from
energy management services. Gross margin for both six month periods
ended June 30, 2010 and 2009 remained consistent at 38%.
Operating
Expenses
The
following table summarizes our operating expenses for the three and six months
ended June 30, 2010 and 2009 (dollars in thousands):
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||||||||||||||
Percent
|
Percent
|
|||||||||||||||||||||||
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
|||||||||||||||||||
Operating
Expenses:
|
||||||||||||||||||||||||
General
and administrative expenses
|
$ | 9,214 | $ | 8,101 | 14 | % | $ | 17,312 | $ | 15,990 | 8 | % | ||||||||||||
Marketing
and selling expenses
|
4,066 | 4,683 | (13 | ) | 8,844 | 8,442 | 5 | |||||||||||||||||
Research
and development expenses
|
1,543 | 1,209 | 28 | 2,908 | 2,325 | 25 | ||||||||||||||||||
Amortization
of intangible assets
|
536 | 552 | (3 | ) | 1,072 | 1,104 | (3 | ) | ||||||||||||||||
Total
|
$ | 15,359 | $ | 14,545 | 6 | % | $ | 30,136 | $ | 27,861 | 8 | % |
General
and Administrative Expenses
General
and administrative expenses were $9.2 million for the three months ended June
30, 2010 compared to $8.1 million for the three months ended June 30, 2009, an
increase of $1.1 million or 14%. The increase in general and administrative
expenses was due to an increase of $0.6 million in compensation and benefits,
$0.2 million in professional fees, $0.3 million in consulting expense and $0.3
million in other expenses partially offset by a decrease of $0.3 million in
stock-based compensation.
General
and administrative expenses were $17.3 million for the six months ended June 30,
2010 compared to $16.0 million for the six months ended June 30, 2009, an
increase of $1.3 million or 8%. The increase in general and administrative
expenses was due to an increase of $1.0 million in compensation and benefits,
$0.5 million in professional fees, $0.3 million in consulting expense and $0.6
million in various other expenses partially offset by a decrease of $1.1 million
in stock-based compensation.
We
currently plan to centralize our business support operations in our Norcross,
Georgia headquarters to establish a more unified culture and to run our business
more efficiently. We estimate the one-time costs for relocation,
hiring, knowledge transfer and leased office closures to be approximately $3.5
million to be incurred in the second half of 2010, with the majority occurring
in the fourth quarter.
Marketing
and Selling Expenses
Marketing
and selling expenses were $4.1 million for the three months ended June 30, 2010
compared to $4.7 million for the three months ended June 30, 2009, a decrease of
$0.6 million or 13%. The decrease in marketing and selling expenses was mainly
due to a decrease of $0.3 million in stock-based compensation and $0.8 million
in marketing and advertising partially offset by an increase of $0.5 million in
compensation and benefits, mainly as a result of the current expansion of our
C&I sales force.
Marketing
and selling expenses were $8.8 million for the six months ended June 30, 2010
compared to $8.4 million for the six months ended June 30, 2009, an increase of
$0.4 million or 5%. The increase in marketing and selling expenses was mainly
due to an increase of $1.4 million in compensation and benefits, mainly as a
result of the current expansion of our C&I sales force, partially offset by
a decrease of $0.4 million in stock-based compensation and $0.6 million in
marketing and advertising.
Although
VPC revenue for the current contract year was deferred during the six months
ended June 30, 2010 and 2009, we expensed customer acquisition costs as
incurred. VPC customer acquisition costs were $1.1 million and $1.6 million for
the three months ended June 30, 2010 and 2009, respectively, a decrease of $0.5
million. VPC customer acquisition costs were $2.2 million and $2.5
million for the six months ended June 30, 2010 and 2009, respectively, a
decrease of $0.3 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 solutions to support utility Advanced Metering
Infrastructure, or AMI. Research and development expenses were $1.5 million for
the three months ended June 30, 2010 compared to $1.2 million for the three
months ended June 30, 2009, an increase of $0.3 million or 28%. Research and
development expenses were $2.9 million for the six months ended June 30, 2010
compared to $2.3 million for the six months ended June 30, 2009, an increase of
$0.6 million or 25%. 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 solutions, including our AMI-enabled
hardware products and our Apollo software.
Amortization
of Intangible Assets
Amortization
of intangible assets was $0.5 million and $0.6 million for the three months
ended June 30, 2010 and 2009, respectively, and $1.1 million for both six month
periods ended June 30, 2010 and 2009. In addition to the amortization
presented in operating expenses, we also recorded $0.2 million and $0.1 million
for the three months ended June 30, 2010 and 2009, respectively, and $0.3
million for both six month periods ended June 30, 2010 and 2009 of amortization
expense in our cost of revenue. We record amortization expense as we amortize
the intangibles from our acquisitions completed in 2007 and our technology
licenses purchased in 2009.
Interest
and Other Expense, Net
We
recorded net interest and other expense of $0.3 million during the three months
ended June 30, 2010 compared to $0.4 million during the three months ended June
30, 2009. We recorded net interest and other expense of $0.4 million during the
six months ended June 30, 2010 compared to $0.6 million during the six
months ended June 30, 2009. The decrease in expense is due to the decrease in
our outstanding debt facilities.
Income
Taxes
A
provision of $55,000 and $65,000 was recorded for the three months ended June
30, 2010 and 2009, respectively, and a provision of $115,000 and $107,000 was
recorded for the six months ended June 30, 2010 and 2009, respectively, related
to a deferred tax liability. We provided a full valuation allowance for our
deferred tax assets because the realization of any future tax benefits could not
be sufficiently assured as of June 30, 2010 and 2009.
Liquidity
and Capital Resources
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 $10.0 million to $30.0 million for borrowings to fund
general working capital and other corporate purposes and issuances of letters of
credit. As of June, 2010, we had $18.1 million of outstanding letters
of credit and $11.9 million of borrowing availability from the revolver
loan.
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.
Six
Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Operating
activities
|
$ | (10,244 | ) | $ | 9,410 | |||
Investing
activities
|
6,353 | (928 | ) | |||||
Financing
activities
|
(1,746 | ) | 5,752 | |||||
Net
change in cash and cash equivalents
|
$ | (5,637 | ) | $ | 14,234 |
Cash
Flows Provided by (Used in) Operating Activities
Cash used
in operating activities was $10.2 million for the six months ended June 30, 2010
and cash provided by operating activities was $9.4 million for the six
months ended June 30, 2009. Cash flows provided by or used in
operating activities consisted of the following:
|
•
|
our
net loss of $20.5 million and $18.3 million for the six months ended June
30, 2010 and 2009, respectively;
|
|
•
|
depreciation
and amortization of $2.0 million and $1.9 million for the six months ended
June 30, 2010 and 2009,
respectively;
|
|
•
|
stock-based
compensation expense of $1.3 million and $2.8 million for the six months
ended June 30, 2010 and 2009,
respectively
|
|
•
|
other
adjustments to net loss of $0.5 million and $0.6 million for the six
months ended June 30, 2010 and 2009,
respectively;
|
|
•
|
a
decrease in the change in accounts receivable due to the timing of cash
receipts. During the six months ended June 30, 2009, we received $5.5
million of cash from a significant customer for invoices outstanding from
the prior year. During the six months ended June 30, 2010, no such past
due payments were received as the customer’s account was current
throughout the period; and
|
|
•
|
a
decrease in the change in deferred revenue and deferred costs is a
function of our revenue recognition policy for the Residential Business’
VPC programs, specifically our Nevada VPC program as discussed
above.
|
Cash
Flows Provided By (Used In) Investing Activities
Cash
provided by investing activities was $6.4 million for the six months ended June
30, 2010. Cash used in investing activities was $0.9 million for the
six months ended June 30, 2009. Cash flows provided by or used in investing
activities consisted of the following:
|
·
|
capital
expenditures of $3.9 million and $8.6 million for the six months ended
June 30, 2010 and 2009,
respectively;
|
|
·
|
purchases
of marketable securities of $9.1 million and $14.5 million for the six
months ended June 30, 2010 and 2009,
respectively;
|
|
·
|
maturities
of marketable securities of $18.2 million and $21.3 million for the six
months ended June 30, 2010 and 2009, respectively;
and
|
|
·
|
a
decrease of $1.2 million and $0.9 million in restricted cash during the
six months ended June 30, 2010 and 2009,
respectively.
|
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, which are primarily residential.
Cash
Flows Provided by (Used in) Financing Activities
Cash
flows used in financing activities were $1.7 million for the six months ended
June 30, 2010, primarily consisting of $1.5 million payments of our current debt
facility. Cash flows provided by financing activities were $5.8
million for the six months ended June 30, 2009, consisting mainly of borrowings
of $7.2 million under our then-outstanding credit agreement and payments of $1.5
million for our then-outstanding debt.
Working
Capital
Our
working capital as of June 30, 2010 was $29.4 million compared to $49.7 million
as of December 31, 2009, a decrease of $20.3 million. Current assets
decreased mainly due to a decrease of $15.1 million in cash and cash equivalents
and marketable securities partially offset by a $1.6 million increase in
inventory and a $4.4 million increase in deferred costs. Current
liabilities increased primarily attributable to an increase of $13.9 million in
deferred revenue partially offset by a $3.0 million decrease in accounts
payable, accrued expenses and other current liabilities. Deferred
revenue and deferred costs increased mainly due to our revenue recognition
policy for the Residential Business segment’s VPC contracts.
Indebtedness
As of
June 30, 2010, $3.0 million of our outstanding debt was due within the next
twelve months. As of June 30, 2010, we were in compliance with our
financial and restrictive debt covenants for the outstanding debt
facility.
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 June 30, 2010,
we had $18.1 million face value of irrevocable letters of credit outstanding
from the facility. Additionally, we have $2.0 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
June 30, 2010, our VPC programs had installed capacity of 511 megawatts. Our
existing VPC contracts as of June 30, 2010 provided for a potential contracted
capacity of 817 megawatts. Our residential VPC programs require a significant
amount of capital spending to build out our demand response networks. We expect
to incur approximately $13.7 million in capital expenditures, primarily
over the next three years, to continue building out our existing VPC programs,
of which $4.7 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, and depreciation and
amortization. EBITDA is a non-GAAP financial measure and is not a substitute for
other GAAP financial measures such as net loss, operating loss or cash flows
from operating activities as calculated and presented in accordance with
accounting principles generally accepted in the U.S., or GAAP. In addition, our
calculation of EBITDA may or may not be consistent with that of other companies.
We urge you to review the GAAP financial measures included in this filing and
our consolidated financial statements, including the notes thereto, and the
other financial information contained in this filing, and to not rely on any
single financial measure to evaluate our business.
EBITDA is
a common alternative measure of performance used by investors, financial
analysts and rating agencies to assess operating performance for companies in
our industry. Depreciation is a necessary element of our costs and our ability
to generate revenue. We do not believe that this expense is indicative of our
core operating performance because the depreciable lives of assets vary greatly
depending on the maturity terms of our VPC contracts. The clean energy sector
has experienced recent trends of increased growth and new company development,
which have led to significant variations among companies with respect to capital
structures and cost of capital (which affect interest expense). Management views
interest expense as a by-product of capital structure decisions and, therefore,
it is not indicative of our core operating performance.
We define
Adjusted EBITDA as EBITDA before stock-based compensation expense. Management
does not believe that stock-based compensation is indicative of our core
operating performance because the stock-based compensation is the result of
stock-based incentive awards which require a noncash expense to be recorded in
the financial statements.
A
reconciliation of net loss, the most directly comparable GAAP measure, to EBITDA
and Adjusted EBITDA for each of the periods indicated is as follows (dollars in
thousands):
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
loss
|
$ | (10,348 | ) | $ | (9,141 | ) | $ | (20,532 | ) | $ | (18,276 | ) | ||||
Depreciation
and amortization
|
1,002 | 947 | 1,988 | 1,877 | ||||||||||||
Interest
expense, net
|
292 | 358 | 357 | 548 | ||||||||||||
Provision
for income taxes
|
55 | 65 | 115 | 107 | ||||||||||||
EBITDA
|
(8,999 | ) | (7,771 | ) | (18,072 | ) | (15,744 | ) | ||||||||
Non-cash
stock compensation expense
|
843 | 1,429 | 1,325 | 2,817 | ||||||||||||
Adjusted
EBITDA
|
$ | (8,156 | ) | $ | (6,342 | ) | $ | (16,747 | ) | $ | (12,927 | ) |
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements.
Critical
Accounting Policies
For a
complete discussion of our critical accounting policies, refer to the notes to
the consolidated financial statements and management’s discussion and analysis
in our Annual Report on Form 10-K for the year ended December 31, 2009 filed
with the SEC on March 8, 2010.
Contractual
Obligations
For
additional information about our contractual obligations as of December 31,
2009, please read “Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Commitments and Contingencies — Contractual
Obligations” in Part II, Item 7 of our Annual Report on Form 10-K for the year
ended December 31, 2009 filed with the SEC on March 8, 2010.
Recent
Accounting Pronouncements
For a
complete discussion of recent accounting pronouncements, refer to Note 2 in the
condensed consolidated financial statements included elsewhere in this
report.
Quantitative
and qualitative disclosures about market risk were included in Item 7A of
our Annual Report on Form 10-K for the year ended December 31, 2009 filed with
the SEC on March 8, 2010. We believe that there have been no significant changes
from December 31, 2009 during the quarter ended June 30, 2010.
Evaluation
of Disclosure Controls
Based on
their evaluation as of the end of the period covered by this Quarterly Report on
Form 10-Q, the Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to
ensure that information required to be disclosed by us in reports that we file
or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms. Additionally, our disclosure controls and
procedures were also effective in ensuring that information required to be
disclosed in our Exchange Act reports is accumulated and communicated to our
management, including the Chief Executive Officer and Chief Financial Officer to
allow timely decisions regarding required disclosures.
Changes
in Internal Control over Financial Reporting
There
have not been any changes in the Company’s 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 Company’s internal
control over financial reporting.
PART
II – OTHER INFORMATION
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 June 30, 2010, there were no material contingencies requiring
accrual or disclosure.
You
should carefully consider the risks described in the risk factors disclosed in
our Annual Report on Form 10-K filed with the SEC on March 8, 2010
and the risk factors below before making a decision to invest in our common
stock or in evaluation of Comverge and our business. The risks and uncertainties
described in our Annual Report on Form 10-K are not the only ones we face.
Additional risks and uncertainties that we do not presently know, or that we
currently view as immaterial, may also impair our business operations. This
report is qualified in its entirety by these risk factors.
The
actual occurrence of any of the risks described in our Annual Report on Form
10-K or the risk factors below could materially harm our business, financial
condition and results of operations. In that case, the trading price of our
common stock could decline.
During
the six months ended June 30, 2010, there were no material changes to the Risk
Factors relevant to our operations, described in the Annual Report on Form 10-K
for the year ended December 31, 2009 as filed with the SEC on March 8,
2010, except as follows:
Failure
of third party suppliers to manufacture quality products and
our third-party installers’ failure to provide proper installation of our
products 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:
•
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;
•
utilizing components that they manufacture in our products;
•
utilizing products that they manufacture for our various capacity
programs or power pool program;
•
outsourcing certain installation, maintenance, data collection and call
center operations to third-party providers; and
•
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
are voluntarily replacing the communication module located inside approximately
5,000 thermostats deployed in TXU Energy service territory. The communication
module located only in these devices is being replaced due to potential
overheating. We have investigated the issue, have retained third-party
experts, have filed a report with the Consumer Product Safety Commission, and
have implemented a voluntary recall. Though it is possible that any
failure may be caused by supplier-provided components, the costs of remedying
component
failures are often only partially refundable by such third-party
suppliers. Because we are wholly dependent upon third parties for the
manufacture and supply of our products, 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 could cause us to not meet production
deadlines and lose customers. In addition, our contracts often provide
that we install products in the end-users’ facilities or premises 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.
Information
regarding unregistered sales of equity securities during the quarter ended June
30, 2010 is included in the Current Report on Form 8-K as filed with the SEC on
June 17, 2010.
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.
Of the
net proceeds received, we utilized $34 million for our two acquisitions
completed during 2007, $7 million to repay outstanding debt over the last three
years, $4 million for non-financed capital expenditures, and $27 million to fund
the operations of our business and for general corporate purposes.
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.
The
following table presents shares surrendered during the quarter ended June 30,
2010:
Total
Number of
|
Average
Price
|
|||||||
Period
|
Shares
Purchased (1)
|
Paid
per Share
|
||||||
April
1 - April 30
|
6,144 | $ | 11.24 | |||||
May
1 - May 31
|
1,025 | $ | 11.98 | |||||
June
1 - June 30
|
2,440 | $ | 9.52 |
|
(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, as amended.
|
The
following documents are filed as exhibits to this report:
10.1
*
|
Joint
Venture Master Agreement by and between the Company and Projects
International, Inc., dated June 11,
2010
|
10.2
|
Trademark
License Agreement by and between the Company and Projects International,
Inc., dated June 11, 2010
|
10.3
|
Warrant
Agreement by and between the Company and Projects International, Inc.,
dated June 11, 2010
|
10.4
|
Executive
Employment Agreement, as amended, Christopher Camino, dated June 14,
2010
|
10.5
|
Executive
Employment Agreement, Steven Moffitt, dated July 1,
2010
|
31.1
|
Rule
13a-14(a)/ 15d-14(a) Certification of Chief Executive
Officer
|
31.2
|
Rule
13a-14(a)/ 15d-14(a) Certification of Chief Financial
Officer
|
32.1
|
Section
1350 Certification of Chief Executive
Officer
|
32.2
|
Section
1350 Certification of Chief Financial
Officer
|
* Confidential
treatment has been requested for portions of this exhibit.
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
31