Comverge 10-Q 2010 Q1 Quarterly report

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 March 31, 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

Comverge, Inc.

(Exact name of Registrant as specified in its charter)

Delaware	22-3543611
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
5390 Triangle Parkway, Suite 300 Norcross, Georgia	30092
(Address of principal executive offices)	(Zip Code)

(678) 392-4954

 (Registrant’s telephone number including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   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   xNon-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 25,141,300 shares of the Registrant’s common stock, $0.001 par value per share, outstanding on May 3, 2010. 

Comverge, Inc.

Index to Form 10-Q

		Page
Part I - Financial Information
Item 1.	Unaudited Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009	1
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009	2
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009	3
	Notes to Unaudited Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
Part II - Other Information
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 6.	Exhibits	27

COMVERGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	March 31,			December 31,
	2010			2009
Assets
Current assets
Cash and cash equivalents	$	5,612		$	16,069
Restricted cash		1,344			3,000
Marketable securities		34,966			34,409
Billed accounts receivable, net		9,683			8,119
Unbilled accounts receivable		8,417			11,873
Inventory, net		6,840			6,605
Deferred costs		2,717			1,715
Other current assets		1,406			938
Total current assets		70,985			82,728
Restricted cash		2,758			2,636
Property and equipment, net		18,692			18,340
Intangible assets, net		8,075			8,779
Goodwill		8,179			8,179
Other assets		290			235
Total assets	$	108,979		$	120,897
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable	$	6,024		$	6,874
Accrued expenses		7,261			11,574
Deferred revenue		10,772			5,890
Current portion of long-term debt		3,000			3,000
Other current liabilities		4,726			5,648
Total current liabilities		31,783			32,986
Long-term liabilities
Deferred revenue		1,168			1,203
Long-term debt		9,000			9,750
Other liabilities		2,712			2,914
Total long-term liabilities		12,880			13,867
Shareholders' equity
Common stock, $0.001 par value per share, authorized 150,000,000 shares;  issued 25,152,529 and outstanding 25,143,753 shares as of  March 31, 2010 and issued 25,072,764 and outstanding 25,067,102 shares as of December 31, 2009		25			25
Additional paid-in capital		259,160			258,660
Common stock held in treasury, at cost, 8,776 and 5,662 shares as of March 31, 2010 and December 31, 2009, respectively		(98	)		(63	)
Accumulated deficit		(194,780	)		(184,596	)
Accumulated other comprehensive income		9			18
Total shareholders' equity		64,316			74,044
Total liabilities and shareholders' equity	$	108,979		$	120,897

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

1

COMVERGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

	Three Months Ended March 31,
	2010			2009
Revenue
Product	$	5,461		$	4,836
Service		7,920			6,744
Total revenue		13,381			11,580
Cost of revenue
Product		3,624			3,104
Service		5,042			4,058
Total cost of revenue		8,666			7,162
Gross profit		4,715			4,418
Operating expenses
General and administrative expenses		8,098			7,889
Marketing and selling expenses		4,778			3,759
Research and development expenses		1,365			1,116
Amortization of intangible assets		536			552
Operating loss		(10,062	)		(8,898	)
Interest and other expense, net		62			195
Loss before income taxes		(10,124	)		(9,093	)
Provision for income taxes		60			42
Net loss	$	(10,184	)	$	(9,135	)
Net loss per share (basic and diluted)	$	(0.41	)	$	(0.43	)
Weighted average shares used in computation		24,577,453			21,366,409

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

2

COMVERGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2010			2009
Cash flows from operating activities
Net loss	$	(10,184	)	$	(9,135	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation		282			250
Amortization of intangible assets		704			679
Stock-based compensation		482			1,387
Other		230			91
Changes in operating assets and liabilities
Billed and unbilled accounts receivable, net		1,960			5,313
Inventory, net		(275	)		27
Deferred costs and other assets		(515	)		335
Accounts payable		(690	)		(2,327	)
Accrued expenses and other liabilities		(5,266	)		(2,238	)
Deferred revenue		4,847			7,018
Net cash (used in) provided by operating activities		(8,425	)		1,400
Cash flows from investing activities
Changes in restricted cash		1,534			893
Purchases of marketable securities		(9,110	)		(4,019	)
Maturities of marketable securities		8,350			11,900
Purchases of property and equipment		(1,765	)		(3,941	)
Net cash (used in) provided by investing activities		(991	)		4,833
Cash flows from financing activities
Borrowings under credit agreement		-			2,339
Repayment of debt facility		(750	)		-
Other		(291	)		(52	)
Net cash (used in) provided by financing activities		(1,041	)		2,287
Net change in cash and cash equivalents		(10,457	)		8,520
Cash and cash equivalents at beginning of period		16,069			19,571
Cash and cash equivalents at end of period	$	5,612		$	28,091
Cash paid for interest	$	161		$	330
Supplemental disclosure of noncash investing and financing activities
Recording of asset retirement obligation	$	(231	)	$	(17	)

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

3

COMVERGE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

1. Description of Business and Basis of Presentation

Description of Business

Comverge, Inc., a Delaware corporation, and its subsidiaries (collectively, the “Company”), provide demand management solutions to electric utilities, grid operators and associated electricity markets in the form of peaking and base load capacity. The Company provides capacity to its customers either through long-term contracts or through open markets in which it actively manages electrical demand or by selling its demand response systems to customers for their operation. The Company has three operating segments: the Utility Products & Services segment, the Residential Business segment, and the Commercial & Industrial Business segment.

Basis of Presentation

The 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 March 31, 2010 and the results of operations for the three months ended March 31, 2010 and 2009, and cash flows for the three months ended March 31, 2010 and 2009, consisting only of normal and recurring adjustments. All significant intercompany transactions have been eliminated in consolidation. Operating results for the three months ended March 31, 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.

4

 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 March 31, 2010 and December 31, 2009 are provided below:  

	March 31,		December 31,
	2010		2009
Deferred revenue:
VPC contract related	$	8,323	$	3,443
Other		2,449		2,447
Current deferred revenue	$	10,772	$	5,890
Deferred cost of revenue:
VPC contract related	$	2,082	$	1,072
Other		635		643
Current deferred cost of revenue	$	2,717	$	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 demand side management measures. The base load capacity contracts require the Company to provide electric capacity to utility customers, and include a measurement and verification of such capacity in order to determine contract consideration. The Company defers revenue and associated cost of revenue 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.

5

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 March 31,
	2010			2009
Net loss	$	(10,184	)	$	(9,135	)
Unrealized loss on marketable securities		(9	)		(11	)
Comprehensive loss	$	(10,193	)	$	(9,146	)

Concentration of Credit Risk

The Company derives a significant portion of its revenue from products and services that it supplies to electricity providers, such as utilities and independent service operators. Changes in economic conditions and unforeseen events could occur and could have the effect of reducing use of electricity by our customers’ consumers. The Company’s business success depends in part on its relationships with a limited number of large customers.  During the three months ended March 31, 2010, the Company had one customer which accounted for 17% of the Company’s revenue. The total accounts receivable from this customer was $2,806 as of March 31, 2010, or 16% of net accounts receivable outstanding. During the three months ended March 31, 2009, the Company had one customer which accounted for 18% of the Company’s revenue.  No other customer accounted for more than 10% of the Company’s total revenue during the three months ended March 31, 2010 and 2009.

6

The Company is subject to concentrations of credit risk from its cash and cash equivalents and short term investments. The Company limits its exposure to credit risk associated with cash and cash equivalents and short term investments by placing its cash and cash equivalents with a number of domestic financial institutions and by investing in investment grade securities.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board, or FASB, issued 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 will 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 months ended March 31, 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:

	Three Months Ended March 31,
	2010	2009
Subordinated debt convertible to common stock	-	16,986
Unvested restricted stock awards	556,097	633,426
Outstanding options	2,539,865	2,269,868
Total	3,095,962	2,920,280

7

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 March 31, 2010 and December 31, 2009 is presented below.

	March 31, 2010
	Amortized		Unrealized		Unrealized			Fair		Cash and		Restricted		Marketable
	Cost		Gains		Losses			Value		Equivalents		Cash		Securities
Money market funds	$	11,002	$	-	$	-		$	11,002	$	4,900	$	4,102	$	2,000
Commercial paper		6,845		-		-			6,845		-		-		6,845
Corporate debentures/bonds		26,112		24		(15	)		26,121		-		-		26,121
Total marketable securities		43,959		24		(15	)		43,968		4,900		4,102		34,966
Cash in operating accounts		712		-		-			712		712		-		-
Total	$	44,671	$	24	$	(15	)	$	44,680	$	5,612	$	4,102	$	34,966

	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 months ended March 31, 2010 and 2009 was $261 and $237, 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.

8

The table below presents marketable securities, grouped by fair value levels, as of March 31, 2010 and December 31, 2009.

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active		Significant Other		Significant
			Markets for Identical		Observable		Unobservable
	March 31,		Assets		Inputs		Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
Money market funds	$	11,002	$	9,002	$	2,000	$	-
Commercial paper		6,845		-		6,845		-
Corporate debentures/bonds		26,121		-		26,121		-
Total	$	43,968	$	9,002	$	34,966	$	-

			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. Inventory, net

Inventory as of March 31, 2010 and December 31, 2009 consisted of the following:

	March 31,		December 31,
	2010		2009
Raw materials and supplies	$	898	$	689
Finished goods		5,942		5,916
Total inventory, net	$	6,840	$	6,605

As of March 31, 2010 and December 31, 2009, there were provisions of $189 and $188, respectively, for inventory identified as slow-moving, obsolete or unusable.

6. 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 March 31, 2010, the Company had $4,614 of outstanding letters of credit and $25,386 of borrowing availability from the revolver loan.

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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 March 31, 2010 and December 31, 2009 consisted of the following:

	March 31,			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 (3.23% and 3.28% as of March 31, 2010 and December 31, 2009)	$	12,000		$	12,750
Total debt		12,000			12,750
Less: Current portion of long-term debt		(3,000	)		(3,000	)
Total long-term debt	$	9,000		$	9,750

7. Stock-Based Compensation

The Company’s Amended and Restated 2006 Long-Term Incentive Plan  (“2006 LTIP”) was approved by the Company’s stockholders in May 2008 and provides for the granting of stock-based incentive awards to eligible Company employees and directors and to other non-employee service providers, including options to purchase the Company’s common stock and restricted stock awards at not less than the fair value of the Company’s common stock on the grant date and for a term of not greater than seven years. Awards are granted with service vesting requirements, performance vesting conditions, market vesting conditions, or a combination thereof. Subject to adjustment as defined in the 2006 LTIP, the aggregate number of shares available for issuance is 6,156,036. Stock-based incentive awards expire between five and ten years from the date of grant and generally vest over a one to four-year period from the date of grant.  As of March 31, 2010, 831,915 shares were available for grant under the 2006 LTIP. The expense related to stock-based incentive awards recognized for the three months ended March 31, 2010 and 2009 was $482 and $1,387, respectively.

 A summary of the Company’s stock option activity for the three months ended March 31, 2010 is presented below:

	March 31, 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-$34.23
Granted		673,793			10.30		$10.23-$10.39
Exercised		(9,969	)		1.85		$0.58-$5.03
Cancelled		(20,169	)		30.55		$13.68-$34.23
Forfeited		(92,190	)		7.04		$3.76-$18.00
Outstanding at end of period		2,539,865		$	12.11		$0.58-$34.23
Exercisable at end of period		1,436,007		$	14.07		$0.58-$34.23

10

		Outstanding as of March 31, 2010						Exercisable as of March 31, 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		273,477		2.0	$	0.74		273,477		2.0	$	0.73
	$2.40 - $3.99		47,702		1.5		2.83		47,334		1.5		2.83
	$4.00 - $7.99		304,025		5.3		4.46		107,729		4.3		4.23
	$8.00-$10.33		568,766		6.5		10.11		52,221		4.6		9.22
	$10.34 - $14.09		633,453		5.2		11.60		249,653		3.3		12.31
	$14.10 - $17.99		11,875		1.1		14.10		11,875		1.1		14.10
	$18.00 - $23.53		473,241		3.6		18.08		466,392		3.5		18.08
	$23.54		17,896		3.6		23.54		17,896		3.6		23.54
	$23.55 - $36.00		209,430		3.7		32.64		209,430		3.7		32.64
			2,539,865		4.6	$	12.11		1,436,007		3.2	$	14.07

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

	Three Months Ended March 31,
	2010		2009
Risk-free interest rate	2.12	%	1.67	%
Expected term of options, in years	4.6		4.5
Expected annual volatility	70	%	70	%
Expected dividend yield	0	%	0	%

The weighted average grant-date fair value of options granted during the three months ended March 31, 2010 and 2009 was $5.84 and $2.40, respectively.

A summary of the Company’s restricted stock award activity for the three months ended March 31, 2010 is presented below:

	March 31, 2010
				Weighted
				Average
				Grant Date
	Number of			Fair Value
	Shares			Per Share
Unvested at beginning of year		496,589		$	9.28
Granted		134,300			10.28
Vested		(10,288	)		13.94
Cancelled		-		NA
Forfeited		(64,504	)		8.68
Unvested at end of year		556,097		$	9.53

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8. Segment Information

As of March 31, 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.

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The following tables show operating results for each of the Company’s operating segments:

	Three Months Ended March 31, 2010
	Utility						Commercial &			Corporate
	Products &			Residential			Industrial			Unallocated
	Services			Business			Business			Costs			Total
Revenue
Product	$	5,461		$	-		$	-		$	-		$	5,461
Service		3,619			2,099			2,202			-			7,920
Total revenue		9,080			2,099			2,202			-			13,381
Cost of revenue
Product		3,624			-			-			-			3,624
Service		2,368			1,339			1,335			-			5,042
Total cost of revenue		5,992			1,339			1,335			-			8,666
Gross profit		3,088			760			867			-			4,715
Operating expenses
General and administrative expenses		1,760			2,541			776			3,021			8,098
Marketing and selling expenses		776			1,751			1,491			760			4,778
Research and development expenses		1,365			-			-			-			1,365
Amortization of intangible assets		-			299			233			4			536
Operating loss		(813	)		(3,831	)		(1,633	)		(3,785	)		(10,062	)
Interest and other expense (income), net		3			-			(6	)		65			62
Loss before income taxes	$	(816	)	$	(3,831	)	$	(1,627	)	$	(3,850	)	$	(10,124	)

	Three Months Ended March 31, 2009
	Utility						Commercial &			Corporate
	Products &			Residential			Industrial			Unallocated
	Services			Business			Business			Costs			Total
Revenue
Product	$	4,836		$	-		$	-		$	-		$	4,836
Service		1,825			3,952			967			-			6,744
Total revenue		6,661			3,952			967			-			11,580
Cost of revenue
Product		3,104			-			-			-			3,104
Service		773			2,643			642			-			4,058
Total cost of revenue		3,877			2,643			642			-			7,162
Gross profit		2,784			1,309			325			-			4,418
Operating expenses
General and administrative expenses		1,077			2,576			827			3,409			7,889
Marketing and selling expenses		839			1,213			849			858			3,759
Research and development expenses		1,116			-			-			-			1,116
Amortization of intangible assets		-			315			233			4			552
Operating loss		(248	)		(2,795	)		(1,584	)		(4,271	)		(8,898	)
Interest and other expense (income), net		4			211			-			(20	)		195
Loss before income taxes	$	(252	)	$	(3,006	)	$	(1,584	)	$	(4,251	)	$	(9,093	)

9. Subsequent Event

In April 2010, the Company committed pre-auction cash collateral of approximately $18,000 in advance of the 2013-2014 Base Residual Auction to be conducted by PJM Interconnection in May 2010.  The amount was funded with borrowings under the Company’s $30,000 revolver loan with Silicon Valley Bank.  All, a portion or none of the deposits may be returned to the Company during the second quarter pending the completion of the open market auction process.  After the auction is completed, the Company expects to replace its cash collateral with a letter of credit for the entire amount of post-auction collateral required.

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q and the documents incorporated into this Quarterly Report on Form 10-Q by reference contain forward-looking statements. These forward-looking statements include statements with respect to our financial condition, results of operations and business. The words “assumes,” “believes,” “expects,” “budgets,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or similar terminology identify forward-looking statements. These forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized, cause actual results to differ materially from our forward-looking statements and/or otherwise materially affect our financial condition, results of operations and cash flows. Please see the section below entitled “Risk Factors,” the section entitled “Risk Factors” in our Annual Report on Form 10-K (File No. 001-33399) filed with the Securities and Exchange Commission, or SEC, on March 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 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 a clean energy company providing technologically advanced demand management solutions and load capacity which improve the evolving Smart Grid.  We provide our solutions to electric utilities, grid operators and associated electricity markets.  As an alternative to the traditional method of providing capacity by building a new power plant, we deliver our solutions through demand management products, services and systems that decrease energy consumption.  Our demand management solutions utilize state-of-the-art advancements in hardware, software, and services—the solutions are designed, built and operated for the benefit of our customers, which serve residential, commercial and industrial consumers.  We provide capacity to our customers either through long-term contracts or through open markets where we actively manage electrical demand or by selling demand management solutions to 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 clean energy solutions through our three reporting segments: the Utility Products & Services segment, the Residential Business segment, and the Commercial & Industrial, or C&I, Business segment.  The Utility Products & Services segment sells solutions comprising hardware, our Apollo software and services, such as installation, marketing, IT integration and project management, to utilities that elect to own and operate demand management networks for their own benefit.  The Residential Business segment sells electric capacity to utilities under long-term contracts, either through demand response or energy efficiency, primarily through marketing and installing our devices on residential and small commercial end-use participants.  The 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.  

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As of March 31, 2010, we owned or managed 3,334 megawatts, an increase of 435 megawatts or 15% 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 March 31, 2010
			Commercial &
	Utility Products	Residential	Industrial	Total
	& Services	Business	Business	Comverge
Megawatts owned or managed under capacity contracts	-	640	270	910
Megawatts owned for sale in open market programs	-	40	1,392	1,432
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	680	2,099	3,334

Megawatts owned or managed under capacity contracts

As of March 31, 2010, we owned or managed 910 megawatts of contracted capacity from VPC and energy efficiency contracts. Our existing VPC contracts represented contracted capacity of 817 megawatts and our energy efficiency contracts represented contracted capacity of 93 megawatts.  The table below presents the activity in megawatts of contracted capacity during the first quarter of 2010.

	Megawatts
	under
	Capacity Contracts
As of December 31, 2009	898
Expansion of existing VPC program	12
As of March 31, 2010	910

Cumulatively, we have installed capacity of 521 megawatts under our VPC and energy efficiency capacity contracts as of March 31, 2010 compared to 462 megawatts as of December 31, 2009, an increase of 59 megawatts. The main components of the change are an increase of 58 megawatts installed during the three months ended March 31, 2010 in our existing VPC programs and an increase of 1 megawatt from the energy efficiency program during the three months ended March 31, 2010. The table below presents contracted, installed and available capacity as of March 31, 2010 and December 31, 2009, respectively.

(Megawatts)	March 31, 2010	December 31, 2009
Contracted capacity	910	898
Installed capacity (1)	521	462
Available capacity (2)	481	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.

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Megawatts owned for sale in open markets

As of March 31, 2010, we had 1,432 megawatts enrolled in open market programs.  During the first quarter of 2010, we added 238 megawatts owned for sale in open market programs in which we participate.

Megawatts managed under turnkey contracts

As of March 31, 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 newly executed agreement with PECO.  Under both agreements, we will provide a full turnkey program, including hardware, installation, marketing and call center services.

Recent Developments

In April 2010, we committed pre-auction cash collateral of approximately $18 million in advance of the 2013-2014 Base Residual Auction conducted by PJM Interconnection in May 2010.  The amount was funded with borrowings under our $30 million revolver loan with Silicon Valley Bank.  All, a portion or none of the deposits may be returned to us during the second quarter pending the completion of the open market auction process.  After the auction is completed, we expect to replace our cash collateral with a letter of credit for the entire amount of post-auction collateral required.

The contract executed in July 2009 with a major Virginia-based energy provider received partial regulatory approval during the first quarter of 2010.  The C&I VPC program for contracted capacity of 117 megawatts was not approved by the Virginia State Corporation Commission.  However, the $15 million residential portion of the contract to provide our hardware and software to 150,000 homes was approved.  We will begin delivering on the approved portion of the contract this year.

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 utility 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 March 31, 2010, we estimated that our total payments to be received through 2024 were approximately $558 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.

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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 March 31, 2010 represented contracted capacity of 817 megawatts. In calculating an estimated $250 million of payments from our VPC contracts as of March 31, 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 $26.2 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 $4.5 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 March 31, 2010 represent potential base load contracted capacity of 93 megawatts. In calculating the estimated $54 million in payments from these contracts, we have assumed we will complete full build-out of the entire remaining megawatts under contract by the end of 2012. We have assumed that once our build-out is complete, the permanent base load reduction will remain installed and will continue to provide the installed capacity for the remainder of the contract term.

Open Market Programs:

• As of March 31, 2010, we had up to 683 megawatts bid into various capacity open market programs with PJM Interconnection, LLC. We currently expect to receive approximately $70 million in long term payments through the year 2013. 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 March 31, 2010 represent $138 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.

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Other Contracts:

• We expect to receive an estimated $38 million in payments through 2014 pursuant to currently executed contracts for our Smart Grid solutions.

In addition to the foregoing assumptions, our estimated payments from long-term contracts assume that we will be able to meet on a timely basis all of our obligations under these contracts and that our customers will not terminate the contracts for convenience or other reasons. Our annual net loss in 2009, 2008 and 2007 was $31.7 million, $94.1 million and $6.6 million, respectively. We may continue to generate annual net losses in the future, including through the term of our long-term contracts. See “Risk Factors—We have incurred annual net losses since our inception, and we may continue to incur annual net losses in the future” 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 March 31, 2010, we had contractual backlog of $120 million through March 31, 2011.

Results of Operations

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

Revenue

The following table summarizes our revenues for the three months ended March 31, 2010 and 2009 (dollars in thousands):

	Three Months Ended March 31,
					Percent
	2010		2009		Change
Segment Revenue:
Utility Products & Services	$	9,080	$	6,661		36	%
Residential Business		2,099		3,952		(47	)
Commercial & Industrial Business		2,202		967		128
Total	$	13,381	$	11,580		16	%

Utility Products & Services Revenue

Our Utility Products & Services segment had revenue of $9.1 million for the three months ended March 31, 2010 compared to $6.7 million for the three months ended March 31, 2009, an increase of $2.4 million or 36%. The increase in revenue is due to an increase of $0.6 million in product sales, primarily due to an increase of $1.5 million in Superstat and other product revenue partially offset by a decrease of $0.9 million in digital control unit revenue. Service revenue increased by $1.8 million, mainly due to revenue contributed from the operation of our turnkey programs, which includes such services as installation, marketing, and/or program management.

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Residential Business Revenue

Our Residential Business segment had revenue of $2.1 million for the three months ended March 31, 2010 compared to $4.0 million for the three months ended March 31, 2009, a decrease of $1.9 million or 47%. Of the $1.9 million decrease, $1.5 million is due to the energy efficiency programs and $0.4 million is due to the Residential Business’ VPC programs.  The decrease of $1.5 million in energy efficiency revenue was due to a decline in the number of installations we performed during the first quarter of 2010.  During the three months ended March 31, 2010 and 2009, we recognized $0.3 million and $0.7 million, respectively, of VPC revenue related to the final settlement of certain VPC programs. For these VPC programs, we recognized a floor, as agreed to with our customers, for the programs during the previous year and the revenue recognized in the first quarter is incremental revenue greater than the floor.

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							As of
	March 31,		December 31,		Percent			March 31,		December 31,		Percent
	2010		2009		Change			2009		2008		Change
VPC Contract Related:
Deferred revenue	$	8,323	$	3,443		142	%		11,474	$	4,271		169	%
Deferred cost of revenue		2,082		1,072		94	%		3,232		791		309	%

Deferred revenue as of March 31, 2010 increased by $4.9 million from December 31, 2009 as compared to a $7.2 million increase in deferred revenue from December 31, 2008 to March 31, 2009. During the first quarter 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 $2.2 million for the three months ended March 31, 2010 compared to $1.0 million for the three months ended March 31, 2009, an increase of $1.2 million or 128%. The Commercial & Industrial Business segment had revenue of $1.7 million and $0.3 million in demand response services, mainly from our megawatts in open markets, for the three months ended March 31, 2010 and 2009, respectively.  The increase of $1.4 million was mainly due to providing increased megawatts in open market programs in geographic service territories throughout the nation.  The increase in revenue from open market programs was partially offset by a decrease of $0.2 million in our energy management services for the three months ended March 31, 2010 as compared to prior period due to the decline in our engineering projects.

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Gross Profit and Gross Margin

The following table summarizes our gross profit and gross margin for the three months ended March 31, 2010 and 2009 (dollars in thousands):

	Three Months Ended March 31,
	2010					2009
	Gross		Gross			Gross		Gross
	Profit		Margin			Profit		Margin
Segment Gross Profit and Margin:
Utility Products & Services	$	3,088		34	%	$	2,784		42	%
Residential Business		760		36			1,309		33
Commercial & Industrial Business		867		39			325		34
Total	$	4,715		35	%	$	4,418		38	%

Utility Products & Services Gross Profit and Gross Margin

Gross profit from our Utility Products & Services segment was $3.1 million for the three months ended March 31, 2010 compared to $2.8 million for the three months ended March 31, 2009, an increase of $0.3 million or 11%.  The increase in gross profit is due to an increase in hardware units sold as well as the gross profit contributed from the operation of our turnkey programs. During the three months ended March 31, 2010, we shipped approximately 42,000 digital control units and Superstats compared to 41,000 digital control units and Superstats during the three months ended March 31, 2009.  Gross margin for the three months ended March 31, 2010 was 34%, a decrease of 8 percentage points from the three months ended March 31, 2009.  The decrease in gross margin is due to the operation of our largest turnkey program, which began in the second quarter of the prior year.  As we continue to expand our turnkey programs, we expect future gross margins for the segment to be consistent with the reported gross margin for the three months ended March 31, 2010, as the growth in lower margin service offerings become proportionally more significant.  While our turnkey programs have lower gross margins, we generally incur less incremental selling, general and administrative expenses in operating these programs.

Residential Business Gross Profit and Gross Margin

Gross profit for our Residential Business segment was $0.8 million for the three months ended March 31, 2010 compared to $1.3 million for the three months ended March 31, 2009, a decrease of $0.5 million or 38%. The decrease in gross profit is due to a decrease of $0.4 million from our VPC programs and $0.3 million from our energy efficiency programs partially offset by an increase of $0.2 million from our marketing and other services.  Gross margin for the three months ended March 31, 2010 was 36% compared to a gross margin of 33% for the three months ended March 31, 2009, an increase of 3 percentage points. The increase in gross margin was mainly due to our marketing and other services partially offset by a lower gross margin from our energy efficiency programs for the three months ended March 31, 2010 compared to the three months ended March 31, 2009.

Commercial & Industrial Business Gross Profit and Gross Margin

During the three months ended March 31, 2010 and 2009, our Commercial & Industrial Business segment’s gross profit was $0.9 million and $0.3 million, respectively, an increase of $0.6 million or 200%. The increase of $0.6 million is due to an increase in gross profit from our megawatts enrolled in open markets.  Gross margin for the three months ended March 31, 2010 was 39% compared to gross margin of 34% for the three months ended March 31, 2009, an increase of 5 percentage points, due to the higher margins realized for those megawatts enrolled in open markets.

20

Operating Expenses

The following table summarizes our operating expenses for the three months ended March 31, 2010 and 2009 (dollars in thousands):

	Three Months Ended March 31,
					Percent
	2010		2009		Change
Operating Expenses:
General and administrative expenses	$	8,098	$	7,889		3	%
Marketing and selling expenses		4,778		3,759		27
Research and development expenses		1,365		1,116		22
Amortization of intangible assets		536		552		(3	)
Total	$	14,777	$	13,316		11	%

General and Administrative Expenses

General and administrative expenses were $8.1 million for the three months ended March 31, 2010 compared to $7.9 million for the three months ended March 31, 2009, an increase of $0.2 million or 3%. The increase in general and administrative expenses was due to an increase of $0.4 million in compensation and benefits, $0.3 million in professional fees and $0.3 million in other expenses partially offset by a decrease of $0.8 million in stock-based compensation.

Marketing and Selling Expenses

Marketing and selling expenses were $4.8 million for the three months ended March 31, 2010 compared to $3.8 million for the three months ended March 31, 2009, an increase of $1.0 million or 27%. The increase in marketing and selling expenses was mainly due to an increase of $0.8 million in compensation and benefits, mainly as a result of the current expansion of our C&I sales force, as well as an increase of $0.2 million in VPC customer acquisition costs.

Although VPC revenue for the current contract year was deferred during the three months ended March 31, 2010 and 2009, we expensed customer acquisition costs as incurred. VPC customer acquisition costs were $1.1 million and $0.9 million for the three months ended March 31, 2010 and 2009, respectively.

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 $1.4 million for the three months ended March 31, 2010 and $1.1 million for the three months ended March 31, 2009, an increase of $0.3 million or 22%. 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 for the three months ended March 31, 2010 compared to $0.6 million for the three months ended March 31, 2009, a decrease of $16,000 or 3%. In addition to the amortization presented in operating expenses, we also recorded $0.2 million and $0.1 million in amortization expense for three months ended March 31, 2010 and 2009, respectively, 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 $0.1 million during the three months ended March 31, 2010 compared to $0.2 million during the three months ended March 31, 2009. The decrease in expense is due to the decrease in our outstanding debt facilities.

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Income Taxes

A provision of $60,000 and $42,000 was recorded for the three months ended March 31, 2010 and March 31, 2009 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 March 31, 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 March 31, 2010, we had $4.6 million of outstanding letters of credit and $25.4 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.

The following table summarizes our cash flows for the three months ended March 31, 2010 and 2009 (dollars in thousands):

	Three Months Ended March 31,
	2010			2009
Operating activities	$	(8,425	)	$	1,400
Investing activities		(991	)		4,833
Financing activities		(1,041	)		2,287
Net change in cash and cash equivalents	$	(10,457	)	$	8,520

Cash Flows Provided by (Used in) Operating Activities

Cash used in operating activities was $8.4 million for the three months ended March 31, 2010 and cash provided by operating activities was $1.4 million for the three months ended March 31, 2009.  Cash flows provided by or used in operating activities consisted of the following:

• our net loss of $10.2 million and $9.1 million for the three months ended March 31, 2010 and 2009, respectively;

• depreciation and amortization of $1.0 million and $0.9 million for the three months ended March 31, 2010 and 2009, respectively;

• stock-based compensation expense of $0.5 million and $1.4 million for the three months ended March 31, 2010 and 2009, respectively;

• other adjustments to net loss of $0.2 million and $0.1 million for the three months ended March 31, 2010 and 2009, respectively; and

• a change in working capital of $0.1 million and $8.1 million for the three months ended March 31, 2010 and 2009, respectively.  The decrease in working capital was mainly due to the change in accounts receivable, accounts payable, accrued expenses and other liabilities and deferred revenue. The change in accounts receivable is due to the timing of cash receipts. During the three months ended March 31, 2009, we received $5.5 million of cash from a significant customer for invoices outstanding from the prior year. During the three months ended March 31, 2010, no such past due payments were received as the customer’s account was current throughout the period.  The change in accounts payable, accrued expenses and other liabilities is due to the cash payment of expenses either accrued at the end of the prior year or incurred in the first quarter of each year.  The change in deferred revenue and deferred costs is a function of our revenue recognition policy for the Residential Business’ VPC programs.

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Cash Flows Provided By (Used In) Investing Activities

Cash used in investing activities was $1.0 million for the three months ended March 31, 2010.  Cash provided by investing activities was $4.8 million for the three months ended March 31, 2009. Cash flows provided by or used in investing activities consisted of the following:

· capital expenditures of $1.8 million and $3.9 million for the three months ended March 31, 2010 and 2009, respectively;

· purchases of marketable securities of $9.1 million and $4.0 million for the three months ended March 31, 2010 and 2009, respectively;

· maturities of marketable securities of $8.4 million and $11.9 million for the three months ended March 31, 2010 and 2009, respectively; and

· a decrease of $1.5 million and $0.9 million in restricted cash during the three months ended March 31, 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 $1.0 million for the three months ended March 31, 2010, primarily consisting of $0.8 million payments of our current debt facility.  Cash flows provided by financing activities were $2.3 million for the three months ended March 31, 2009, consisting mainly of borrowings under our then credit agreement.

Indebtedness

As of March 31, 2010, $3.0 million of our outstanding debt was due within the next twelve months.  As of March 31, 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 March 31, 2010, we had $4.6 million face value of irrevocable letters of credit outstanding from the facility.  Additionally, we have $1.8 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 March 31, 2010, our VPC programs had installed capacity of 521 megawatts. Our existing VPC contracts as of March 31, 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 $15.3 million in capital expenditures, primarily over the next three years, to continue building out our existing VPC programs, of which $6.3 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.

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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 March 31,
	2010			2009
Net loss	$	(10,184	)	$	(9,135	)
Depreciation and amortization		986			929
Interest expense, net		65			191
Provision for income taxes		60			42
EBITDA		(9,073	)		(7,973	)
Non-cash stock compensation expense		482			1,387
Adjusted EBITDA	$	(8,591	)	$	(6,586	)

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.

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Item 3: Quantitative and Qualitative Disclosures About Market Risk

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 March 31, 2010.

Item 4: Controls and Procedures

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.

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PART II – OTHER INFORMATION

Item 1: Legal Proceedings

In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations and claims. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding or proceedings to which we are a party or of which any of our property is subject will have a material adverse effect on our business, results of operations, cash flows or financial condition. Our policy is to assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the liability required, if any, for these contingencies is made after an analysis of each known issue. A liability is recorded and charged to operating expense when we determine that a loss is probable and the amount can be reasonably estimated. Additionally, we disclose contingencies for which a material loss is reasonably possible, but not probable. As of March 31, 2010, there were no material contingencies requiring accrual or disclosure.

 Item 1A: Risk Factors

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 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 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 three months ended March 31, 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.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of equity securities during the quarter ended March 31, 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, $6 million to repay outstanding debt over the last three years, $3 million for non-financed capital expenditures, and $26 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 March 31, 2010:

	Total Number of		Average Price
Period	Shares Purchased (1)		Paid per Share
January 1 - January 31, 2010		224	$	10.57
February 1 - February 28, 2010		1,076	$	10.94
March 1 - March 31, 2010		1,553	$	11.76

(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.

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Item 6: Exhibits

The following documents are filed as exhibits to this report:

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

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.

	Comverge, Inc.
	(Registrant)
May 10, 2010	By:	/s/ R. Blake Young
(Date)		R. Blake Young
		President and Chief Executive Officer
		(Principal Executive Officer)

May 10, 2010	By:	/s/ Michael D. Picchi
(Date)		Michael D. Picchi
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

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