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Article by DailyStocks_admin    (04-10-12 12:51 AM)

Description

Comverge Inc. 10% Owner WILLIAM C MARTIN bought 224705 shares on 4-05-2012 at $ 1.76

BUSINESS OVERVIEW

We are a leading provider of intelligent energy management, or IEM, solutions that empower utilities, commercial and industrial customers, and residential consumers to use energy in a more effective and efficient manner. IEM solutions build upon demand response, enabling two-way communication between providers and consumers, giving all customer classes the insight and control needed to optimize energy usage and meet peak demand. Beyond reducing the energy load, this approach reduces cost for the utility or grid operator, integrates other systems and allows for the informed decision-making that will power the smart grid.
We provide our IEM solutions through our two reportable segments: the Residential Business segment and the Commercial & Industrial, or C&I, Business segment. The Residential Business segment sells IEM solutions to utility customers for use in programs with residential and small commercial end-use participants. These solutions include hardware, our IntelliSOURCE software and services, such as installation, participant marketing and program management. If the utility customer elects to own the IEM system, we refer to the program as a turnkey program. If we provide capacity through fully-outsourced programs, in which we typically own the underlying system, we refer to the program as a Virtual Peaking Capacity, or VPC, program. Our VPC programs are pay-for-performance in that we are only paid for capacity that we provide as determined by a measurement and verification process with our customers. The C&I Business segment provides IEM solutions to utilities and independent system operators that are managing programs or auctions for large C&I consumers. These IEM solutions are delivered through the management of C&I megawatts in open markets and VPC programs as well as through the completion of energy efficiency projects.
The Comverge Solution
Our IEM solutions enable our electric utility industry customers and open market operators to address issues they confront on a daily basis, such as rising demand, decreasing supply, fluctuating commodity prices, reducing greenhouse gases and emerging government or regulatory mandates to use energy efficiency solutions to address these issues. Our IEM solutions yield the benefits described below to our commercial and industrial customers, residential customers, electric utility industry customers and open market operators.
Improve the Developing Smart Grid through Advanced, Multi-functioning Solution Sets. We offer our customers IEM solutions to match their needs for improving and advancing a smarter electrical grid. Our state-of-the-art IntelliSOURCE software system provides demand management functionality, enabling control of various end-use devices and systems, integration into the utility customer’s back office operational systems, and inter-operability with Advanced Metering Infrastructure (“AMI”). In conjunction with our software, our solution set includes multiple service offerings, including engineering and energy audits, project management, installation, customer acquisition marketing, and measurement and verification. These services allow our utility customers to tailor their programs to achieve better marketing penetration rates, lower installation costs, and real time verification of the functionality of their system. Our hardware products complete our solution set by offering technologically advanced functionality for various residential and C&I demand management devices. Through providing solutions to our customers’ issues, we are able to offer our own individual products and services, or integrate other companies’ products into our solutions, ultimately improving the developing smart grid.
Provide an Alternative to Building Expensive New Plants and Associated Transmission and Distribution Infrastructure. We have the ability to reduce our utility and grid operator customers’ capital expenditures and costs for electric transmission and distribution. Our solutions can be directly substituted for new power generation facilities that would otherwise be built to satisfy either peak periods of electricity demand or the expected increase in base load demand. Our IEM systems require significantly lower short-term capital expenditures than a natural gas-fired power plant, and our pay-for-performance capacity solutions often require little to no capital expenditures on the part of electric utilities. By avoiding the build-out of new generation, utilities can also avoid building the incremental new transmission and distribution assets needed to bring power from the location where it is generated to where it is consumed, thereby further reducing required capital expenditures.
Improve System Reliability and Operational Flexibility. Our IEM solutions enhance the reliability of the electric grid by providing the ability to reduce power consumption in specific distribution areas during times of peak energy demand and emergency conditions, thereby relieving strain on the aging grid infrastructure. With our IEM solutions, our customers gain the benefit of more reliable infrastructure and lower operating costs associated with fewer emergency maintenance and customer care issues. In addition to improving system reliability, our targeted approach focuses on specific distribution areas allowing for a more targeted approach to using and reducing energy in highly constrained areas. For example, once deployed, our VPC programs become operational, or ramp up, more rapidly than natural gas-fired power plants. Our VPC programs typically require less than five minutes to provide demand reduction. In addition, our technology enables devices to be controlled both individually and in clusters, thereby allowing those devices to be operated at the time and location (such as at a substation, circuit or feeder) required to manage localized constraints or emergency conditions.
Save Costs for Electricity Consumers. Certain of our IEM solutions enable residential, commercial and industrial consumers to receive time-of-use electricity price signals, thereby allowing them to match electricity use with the costs to purchase such electricity. Consumers who deploy our solutions can realize cost savings on their electric bills by using less energy, particularly during peak periods when prices are the highest, or shifting their usage to times when electricity is less expensive.
Conserve and Create a Positive Environmental Impact. Our IEM solutions allow electric utilities to reduce both peak and permanent load. Our demand management programs provide electric utilities with similar functionality to the peaking capacity typically provided by natural gas-fired power plants while also providing clean alternative energy. By reducing electricity demand during peak times, our demand management programs have the potential to displace older, inefficient peaking power plants and can reduce the operating time of intermediate plants. By substituting our programs for new natural gas-fired power generation facilities, utilities are able to conserve electricity and reduce greenhouse gases and pollutants.
Enable Electric Utilities to Meet Regulatory Mandates. Federal and state legislation over the past five years have served to stimulate the developing smart grid and has mandated that the Federal Energy Regulatory Commission and the Department of Energy provide detailed assessments and recommendations for demand response initiatives. We work closely with federal and state regulators and electric utilities to formulate and coordinate effective demand response solutions in light of these regulatory developments and mandates. Advanced technologies for demand response, energy efficiency, smart metering, and distributed generation, including digital information capabilities to implement these technologies, is being driven through regulatory and legislative efforts. This includes a smart grid policy using a national task-force, modernization through deployment of “smart” technologies, a new communications and an inter-operability framework, research and development, and removal of the barriers to smart grid roll-out. Federal grants and matching funds are being deployed to help spur smart grid investments.

Segments
As of December 31, 2011, we reported our results of operations in two reportable segments: our Residential Business segment and our Commercial & Industrial Business segment. In prior periods, we reported the results of operations in three segments: the Utility Products & Services segment, the Residential Business segment and the C&I Business segment. Beginning for the year ended December 31, 2010, the former Utility Products & Services segment is presented as part of the Residential Business segment. The results of our energy efficiency programs were previously reported in the Residential Business segment. Beginning for the year ended December 31, 2010, the energy efficiency programs are reported as part of the C&I Business segment. Accordingly, the results of operations have been reclassified for the year ended December 31, 2009 to conform to the presentation for the years ended December 31, 2011 and 2010. We believe that this reporting structure more accurately represents the broader customer markets that we serve: residential and commercial and industrial.
See “Item 8. Financial Statements and Supplementary Data, Note 15” for our presentation of results of operations for the last three fiscal years by reportable segment.
Residential Business
Our Residential Business segment offers IEM solutions that address demands for residential and small commercial end-use participants. These solutions include intelligent hardware, our IntelliSOURCE software and services, such as installation, marketing and program management. Our suite of intelligent hardware includes a broad range of products from basic one-way load control switches to technologically sophisticated smart thermostats and in-home displays that encompass the entire range of the smart grid market. Our products are designed to communicate on multiple communication modes, including wireless internet, VHF paging, telephone, broadband cable, cellular and radio frequency communication. We provide the hardware that is installed at a utility consumer's location on high-energy consumption equipment, such as central air conditioning. Our software applications send wireless messages to manage and control our hardware. Upon receiving the messages, our hardware, in turn, provides more intelligent operation of the equipment, thereby making electric capacity available to the utility. The information delivered from the IEM solutions can then be used by the utility to better manage electricity consumption, analyze usage trends and anticipate energy constraints.

Depending on customer needs, the Residential Business segment sells product and software offerings, VPC programs and turnkey programs. In some instances, we sell the customer product and software and the customer elects to perform the services, such as installation and marketing, to complete its IEM network. In other instances, as in our VPC and turnkey programs, we provide the product and software as well as perform full program services including installation and customer acquisition marketing. If we provide full outsourced, pay-for-performance capacity through the IEM network, we refer to the program as a VPC program, in which we typically own the assets of the system. Our VPC programs are pay-for-performance in that we are only paid for capacity that we provide as determined by a measurement and verification process with our customers, as described below. If the customer elects to own the IEM network or we are paid for the services, as opposed to being paid for reduced capacity or energy, we refer to the program as a turnkey program.
Peak load demand, defined as the maximum capacity of electricity required over a specified time, is dynamic in nature and places the greatest stress on the grid system due to both the elevated levels and fluctuating duration of demand. Our VPC and turnkey offerings compete in the peak capacity markets and provide a solution to alleviate stress on the electric grid by aggregating and coordinating the demands of load consuming equipment.
Virtual Peaking Capacity (VPC) Programs
The structure of our VPC programs is on a pay-for-performance basis whereby we enter into long-term contracts with utilities and are paid under each contract based on the amount of verifiable kilowatts of capacity that we provide. Under our VPC programs, we typically own and operate the entire IEM network.
The consumers who elect to participate in our VPC programs agree to allow us to install our products in their homes or businesses in order to decrease energy usage of certain appliances, such as their central air conditioner, electric water heater, irrigation pump or pool pump, during short periods of peak energy demand. These devices are controlled remotely by using our digital control units or thermostats coupled with our IntelliSOURCE software. We, in return, receive payment for this capacity from the utility under our existing contract with the utility.
We operate our VPC programs through long-term, fixed price contracts with our utility customers, which make periodic payments to us based on the amount of electric capacity that we expect to make available to them during the cooling season. The cooling season is the months in which seasonal peak energy demand is the highest. A contract year begins at the end of the utility's cooling season. For example, the cooling season for one of our VPC contracts runs from June 1 st to September 30 th and the contract year for this agreement begins on October 1 st and ends on September 30 th . We and our utility customers analyze results of measurement and verification tests that are performed during the cooling season of each contract year to statistically determine the capacity that was available to the utility during the cooling season. Measurement and verification tests are necessary when our hardware installed at participant locations to control energy usage of selected appliances consists of one-way devices, as those devices are programmed to receive and respond to a wireless signal initiated by our software and transmitted over a public or private network but do not send a confirmation. Therefore, there is no immediate verification that any certain device received a signal or properly executed its command. Because thousands of devices are subject to control in typical residential VPC programs, for one-way communicating systems, statistically significant measurement and verification is performed on a subset of these devices. This methodology has been developed that verifies the reduction of energy usage, measured in kilowatts, for a statistical sample of devices with an accepted utility confidence level generally of 90% or greater. This methodology is widely accepted in the industry. We refer to the results of this measurement and verification process as our available capacity.
Available capacity varies with the electricity demand of high-use energy equipment, such as central air conditioning compressors, at the time the measurement and verification tests are conducted, which, in turn, depends on factors beyond our control, such as temperature and humidity and the time of day and the day of the week the measurement and verification tests are performed. The correct operation of, and timely communication with, devices used to control equipment are also important factors that affect available capacity. Depending on the terms of the VPC contract, a difference between our available capacity and the estimated capacity on which proxy payments were previously made will result in either a refund payment from us to our utility customer or an additional payment to us by our customer. We refer to this process as the annual settlement.
Turnkey Programs
Our turnkey programs are targeted for utilities that not only need to have available capacity but often want to own the underlying assets and pay for our services and solutions. We provide the same or similar intelligent energy management network as that provided in our VPC programs; however, we do not own the underlying assets and are not paid based on available capacity. We are paid based on negotiated rates for our product, software and services and these payments are not subject to annual settlement.

Commercial & Industrial (C&I) Business

The C&I Business segment provides IEM solutions to utilities and independent system operators that are managing programs or energy markets, where large C&I consumers participate. These solutions are delivered through the management of megawatts for these C&I consumers in VPC and open market programs as well as through the completion of energy efficiency projects. Similar to the Residential Business segment, the C&I Business segment contracts with utilities to provide available capacity to utility customers through pay-for-performance VPC programs. We recruit large C&I end-use participants into the VPC program, requesting that participants reduce electricity usage at certain times, and provide the available capacity to our customer.
Open Markets
In open markets, grid operators and utilities seek bids from demand response providers to utilize the commercial and industrial consumer base to provide demand response capacity based on prices offered in competitive bidding. These opportunities are generally characterized by energy and capacity obligations with shorter contract periods and prices that may vary by hour, by day, by month or by bidding period. Several major grid operators, including PJM Interconnection, New York Independent System Operator, New England Power Pool and Electric Reliability Council of Texas, have active demand capacity markets in which we participate. Our C&I Business segment works with commercial and industrial consumers to first identify available demand response capacity and then register and facilitate the sale of that capacity or energy in the open market on behalf of those consumers. In these transactions, we receive payments from grid operators throughout the year and are required to respond during the grid operator's mandatory performance period. For our largest capacity program with PJM Interconnection, we receive payments from June 1st to May 31st of each year and are required to provide demand reduction from June 1st to September 31st. We make payments to commercial and industrial consumers for both contracting to reduce electricity usage and actually doing so when called upon.
Energy Efficiency Program
The structure of our energy efficiency program is a pay-for-performance model whereby we provide permanent base load reduction through equipment upgrades, energy auditing and consulting, building automation, lighting retrofits and other measures that reduce C&I consumers' total energy consumption. We enter into long-term contracts to provide the reduced capacity, maintain and operate the improvements and ensure their utilization.
Customers
We have an established customer base of utility and other energy service providers, including municipal and cooperative electric utilities, located across North America in both regulated and deregulated jurisdictions. For example, our customers include large investor-owned utilities, independent system operators and regional transmission organizations (which are regional entities that monitor and control a regional electric grid), electric cooperatives, municipalities, energy service companies and military bases, including energy providers such as Austin Energy, Consolidated Edison Company of New York, Inc., Georgia Power, Gulf Power Company, Inc., PacifiCorp, PECO, Pepco Holdings, Inc., PJM Interconnection, PPL Corporation, Progress Energy, Inc., Public Service Company of New Mexico, San Diego Gas & Electric Company and Southern Maryland Electric Cooperative, Inc. For the year ended December 31, 2011, our top ten customers accounted for 72% of our consolidated revenue. Of these customers, two customers accounted for more than 10% of revenue: PJM Interconnection LLC (22%) and Pepco Holdings, Inc. (16%). For the year ended December 31, 2010, our top ten customers accounted for 71% of our consolidated revenue. Of these customers, two customers accounted for more than 10% of revenue: PJM Interconnection LLC (28%) and Pepco Holdings, Inc. (12%). For the year ended December 31, 2009, our top ten customers accounted for 67% of our consolidated revenue. Of these customers, two customers accounted for more than 10% of our revenue: PJM Interconnection LLC (20%) and NV Energy (12%).
Manufacturing
We outsource all of our product manufacturing operations to contract manufacturers. For our current production requirements, we utilize both a domestic manufacturer and an additional manufacturer that has facilities offshore. This dual sourcing complements our supply chain effort and helps support our plans for continual cost reductions, quality improvement and diversification of supply risk.
We employ dedicated test engineers who design all product test systems, write custom software for product tests and monitor product quality and yields. All outgoing product at our contract manufacturers is tested on the systems that we have designed. Additionally, quality data is collected electronically and utilized by our design engineers for continuous product improvement and by the contract manufacturer for improvement of key manufacturing processes. Quality control tests are performed on a statistically significant portion of all outgoing orders to ensure compliance to specifications and corrective action techniques are employed to permanently resolve issues.

Competition

The clean energy sector is highly competitive. We face competition from traditional clean energy providers, advanced metering equipment and service providers, and supply-side independent power producers. In addition, some traditional providers of advanced meter reading products may add demand response products and services to their existing business. We also compete against traditional supply-side resources such as natural gas-fired peaking plants as well as independent power producers. Electric utilities could also offer their own demand response solutions, which would decrease our base of potential customers and could decrease our revenues and profitability. For more information on the risks we face in our highly competitive market, see “Part I, Item 1A - Risk Factors - We operate in highly competitive markets; if we are unable to compete successfully, we could lose market share, revenues and profit. ”
Regulatory
Our products and services are typically not subject to existing federal and state regulations in the U.S. governing the electric utility industry. However, our solutions are subject to oversight by FERC, NERC, and other regulatory entities under the Federal Power Act, and the individual Regional Transmission Owner or Independent System Operator approved tariffs and manuals. In addition, our products and their installation are subject to government oversight and regulation under state and local ordinances relating to communications requirements, building codes, public safety regulations pertaining to electrical connections and local and state licensing requirements. In the future, federal, state or local governmental entities or competitors may seek to change existing regulations, impose additional regulations or apply current regulations to cover our products and services.
Trademarks
Comverge, Inc. and its subsidiaries own the following trademarks in the United States: 6D, Apollo, Comverge, Coolibrium, Datapult, Enerwise, IntelliSUPPORT, IntelliPLAN, IntelliMEASURE, IntelliPEAK, IntelliMARKET, IntelliFOCUS, IntelliTEMP, IntelliCONNECT, kw Operation Kill-a-Watt, Maingate, Powerportal, Profit from Energy, Public Energy Solutions, Sixth Dimension, SuperStat, The Energy To Go Clean, The Energy To Be Clean, The Energy To Be Green, TheWattSpot, Virtual Peaking Capacity and Wattspot.
History and Development of the Business
Our business began as divisions of Scientific Atlanta, Inc. and Lucent Technologies Inc. in 1974 and 1991, respectively. In 1992, Acorn Energy, Inc. (formerly known as Acorn Factor, Inc.), or AEI, created its Powercom Division to develop advanced meter reading, electric utility data management and analysis, and load management solutions. Comverge, Inc. was organized in 1997 as a Delaware corporation by AEI. We evolved our operations through the acquisition of the Utility Solutions Division of Lucent Technologies Inc. in 1997 and the organization of Comverge Control Systems, Ltd. in 1998. In 1999, we acquired the Controls System Division of Scientific Atlanta, Inc. We made the strategic decision in 2002 to develop, own and operate load management systems on an outsourced basis for the benefit of our utility customers. We named this offering Virtual Peaking Capacity. In 2003, we acquired the intellectual property, operating assets and customers of Sixth Dimension, Inc. In April 2007, we completed an initial public offering. In July 2007, we acquired Enerwise Global Technologies, Inc., reported as part of the C&I Business segment. We acquired the four operating entities comprising the business of Public Energy Solutions in September 2007, and include their offerings as part of the C&I Business segment. In February 2010, we appointed R. Blake Young as our President and Chief Executive Officer. In October 2010, we unveiled our vision for IEM, the next-generation of software, hardware and services that help electric utilities, commercial and industrial organizations and consumers optimize energy usage. In December 2011, we were selected by Eskom, the largest electricity provider in Africa, to manage its complex supply and demand challenges by creating and co-managing Africa's first open market for demand response resources. The Eskom contract represents the first significant international contract for us.
Employees
We had 519 employees as of December 31, 2011. Our employees are not represented by any labor unions, and we have not experienced any work stoppages. We consider our relations with our employees to be good.
Available Information
Our web site is located at http://www.comverge.com. Our investor relations website is located at http://ir.comverge.com. The information on or accessible through our web sites is not part of this Annual Report on Form 10-K. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such reports are available, free of charge, on our investor relations website as soon as reasonably practicable after we electronically file with or furnish such material to the SEC. Further, a copy of this Annual Report on Form 10-K is located at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at http://www.sec.gov.

CEO BACKGROUND

Alec G. Dreyer Director since 2008


Alec G. Dreyer became a member of our Board of Directors in January 2008 and serves as the Chairman of the Board and lead director. Mr. Dreyer also serves as Chairman of the Audit Committee and as a member of the Compensation Committee of the Board. Mr. Dreyer previously served on the Nominating and Corporate Governance Committee. Mr. Dreyer has served as Chief Executive Officer of the Port of Houston Authority in Houston, Texas since October 2009. Mr. Dreyer previously served as the Chief Executive Officer and a director of Horizon Wind Energy, LLC, a wind energy developer, from September 2005 to July 2007, when Horizon was sold to Energias de Portugal, S.A., a major Portuguese utility. From February 2000 to September 2005, Mr. Dreyer served as an Executive Vice President of publicly traded Dynegy, Inc. and President of Dynegy Generation, a division of Dynegy Inc. Prior to February 2000 Mr. Dreyer was President of Illinova Generating Company, and a Senior Vice President of Illinois Power Company. Before starting his career at Illinova, Mr. Dreyer was a Senior Manager in the Accounting and Auditing Services division of PriceWaterhouse in St. Louis. In November 2009, Mr. Dreyer resigned from the board of directors of publicly traded EcoSecurities Group PLC, which is in the business of sourcing, developing and trading carbon credits. Mr. Dreyer had been a non-executive director of EcoSecurities’ board since February 2008, and had served on the audit committee and as Chair of the remuneration committee of EcoSecurities’ board of directors. Mr. Dreyer received a B.A. from the University of Illinois and an M.B.A. from Washington University in St. Louis.

Scott B. Ungerer Director since 2009


Scott B. Ungerer became a member of our Board of Directors in October 2009 and serves on our Audit and Nominating and Corporate Governance Committees. Since 1996, Mr. Ungerer has been a managing director and founder of EnerTech Capital Partners, a pioneer in the clean technology space that has been successfully investing in energy and clean energy technology companies since 1996. Mr. Ungerer also serves on the board of directors and is an officer or managing member of various EnerTech Capital Partners-related entities, including, ECPII Management LLC, ECPIII Management LLC, EOI Management LLC and EnerTech, Inc. Mr. Ungerer’s experience in the energy and power markets has spanned his 29 year career beginning with Atlantic Electric in 1980, including his role as president and chief operating officer of Atlantic Energy Enterprises. Mr. Ungerer previously served on Comverge's Board of Directors from October 2003 to January 2008. Mr. Ungerer currently sits on the boards of directors of The NanoSteel Company, a developer of nano-structural materials, and privately-held, CURRENT Group, LLC, Tangent Energy Solutions and CoaLogix, and is also chairman of the National Renewable Energy Lab (NREL) Venture Advisory Board. Mr. Ungerer is also a governing board member of the NIST Smart Grid Interoperability Panel (SGIP), a member of the Princeton Alumni Schools Committee and a former member of the Cleantech Venture Network Advisory Board. Mr. Ungerer received a B.S. in mechanical engineering from Princeton University.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Comverge is a leading provider of intelligent energy management, or IEM, solutions that empower utilities, commercial and industrial customers, and residential consumers to use energy in a more effective and efficient manner. IEM solutions build upon demand response, enabling two-way communication between providers and consumers, giving all customer classes the insight and control needed to optimize energy usage and meet peak demand. Beyond reducing the energy load, this new approach reduces cost for the utility or grid operator, integrates other systems and allows for the informed decision-making that will power the smart grid.

We provide our IEM solutions through our two reportable segments: the Residential Business segment and the Commercial & Industrial, or C&I, Business segment. The Residential Business segment sells IEM solutions to utility customers for use in programs with residential and small commercial end-use participants. These solutions include hardware, our IntelliSOURCE software and services, such as installation, participant marketing and program management. If the utility customer elects to own the IEM system, we refer to the program as a turnkey program. If we provide capacity through fully-outsourced programs, in which we typically own the underlying system, we refer to the program as a Virtual Peaking Capacity, or VPC, program. Our VPC programs are pay-for-performance in that we are only paid for capacity that we provide as determined by a measurement and verification process with our customers. The C&I Business segment provides IEM solutions to utilities and independent system operators that are managing programs or auctions for large C&I consumers. These solutions are delivered through the management of C&I megawatts in open markets and VPC programs as well as through the completion of energy efficiency projects.

Liquidity

We were notified by letters dated February 24, 2012 and March 8, 2012, that Grace Bay Holdings II, LLC (“Grace Bay”) had acquired all of the outstanding principal amount of the notes issued by Partners for Growth III, L.P. (“PFG”) and all other rights and obligations under our loan agreement with PFG. Our SVB and Grace Bay loan and security agreements contain customary covenants, including covenants which require us to meet specified financial ratios and financial tests. The Grace Bay agreement sets forth quarterly revenue targets that if not maintained, give Grace Bay the right to require us to make monthly repayments of the loan balance over the remaining term of the loan. For the fiscal quarter ended December 31, 2011, we were not able to meet the revenue targets in the Grace Bay agreement and Grace Bay has requested that we begin making amortization payments. If we subsequently comply with the minimum revenues target for succeeding measurements periods, we will prospectively cease monthly amortization of the loan; provided however, Grace Bay may again exercise its right to require amortization under the loan agreement if we fail to meet future minimum revenue targets. In letters dated February 27, 2012 and March 1, 2012, Grace Bay also alleged that we are in default under the Grace Bay agreement. An event of default in the Grace Bay agreement triggers a cross-default in the SVB loan and security agreement. Such events of default may result in the acceleration of the maturity of indebtedness outstanding under these agreements, which would require us to repay all amounts outstanding. If the maturity of our indebtedness is accelerated, we may not have sufficient funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us or at all. As of the date of this filing on Form 10-K, the Company has not received notice to accelerate the debt and would contest any such acceleration.

Management continues actively exploring all such financing options including restructuring of its current credit facilities in the near term or the possible sale of the Company. Our ability to secure additional capital or modify our existing debt terms to meet our projected revenue growth or cash expenditure reductions or our ability to sell the Company cannot be assured. In addition, certain financing options may require the consent of our current debt holders and we may not be able to obtain such consent or the terms of such consent may be cost-prohibitive. Thus, due to the combination of the amount of cash flow that is expected from operations, debt that is due in 2012, and the restrictive debt covenants with which it may not comply, there is substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements have been prepared assuming that we will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business.

See Liquidity and Capital Resources herein for further details.

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. Our assumptions are based on timing of cash receipts, which will not necessarily be equivalent to revenue recognized in each period. The information presented below with respect to payments from long-term contracts includes payment assumptions for our VPC and energy efficiency, turnkey, open market and market operator programs. As of December 31, 2011 , we estimated that our total payments to be received through 2024 are approximately $539 million. The table below summarizes these expected payments from long-term contracts in the year in which we anticipate receipt. For 2012, a portion of the cash payments has already been reflected in revenue for the year ended December 31, 2011.

These estimates of payments from long-term contracts are forward-looking statements based on the contractual terms and conditions. In management’s view, such information was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and, to management’s knowledge and belief, presents the assumptions and considerations on which we base our belief that we can receive such payments. However, this information should not be relied upon as being necessarily indicative of actual future results, and readers of this filing should not place undue reliance on this information. Any differences among these assumptions, other factors and our actual experiences may result in actual payments in future periods significantly differing from management’s current estimates of payments allowed under the long-term contracts and our actual experiences may result in actual payments collected being significantly lower than current estimates. See "Part I, Item 1A - Risk Factors— We may not receive the payments anticipated by our long-term contracts and recognize revenues or the anticipated margins from our backlog, and comparisons of period-to-period estimates are not necessarily meaningful and may not be indicative of actual payments .” The information in this section is designed to summarize the financial terms of our long-term contracts and is not intended to provide guidance on our future operating results, including revenue or profitability.

VPC and Energy Efficiency Programs

In calculating an estimated $210 million of payments through 2024 from our VPC and energy efficiency contracts, we have included expectations regarding build-out based on our historical experience as well as future expectations of participant enrollment in each contract’s service territory. We have assumed that once our build-out phase is completed, we will operate our VPC contracts at the capacity achieved during build-out.

For our VPC contracts, the amount our utility customers pay to us at the end of each contract year may vary due to the results of measurement and verification tests performed each contract year based on the electric capacity that we made available to the utility during the contract year. The payments from VPC contracts reflect our most reasonable currently available estimates and judgments regarding the capacity that we believe we will provide our utility customer in future periods.

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.

Turnkey Programs

Our turnkey contracts as of December 31, 2011 represent $98 million in payments expected to be received through the year 2014 with seven utility customers to provide products, software, and services, including program management, installation, and/or marketing. Payments from turnkey contracts are based on contractual anticipated order volumes, forecasted installations and other services applied over the term of the contract.

Open Market Programs

As of December 31, 2011 , we expect to receive $183 million in long-term payments through the year 2015 in open market programs in which we have been awarded megawatts. In estimating the long-term payments, we have assumed that we will retain our commercial and industrial participants that we have currently enrolled in the programs and that we will be able to enroll additional participants or fulfill additional capacity through incremental auctions in order to meet the megawatts awarded to us.

Market Operator

As of December 31, 2011, we expect to receive $27 million in long-term payments through 2013 as we create and co-manage Africa's first open market for demand response resources. Under the terms of agreement, we will deploy the IntelliSOURCE 2.0 platform for Eskom to register, dispatch and operate a new competitive demand response market in South Africa.

Other Contracts

We expect to receive an estimated $21 million in payments through 2014 pursuant to currently executed contracts for our IEM solutions, the majority of which is based on projected hardware orders.

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 2011, 2010 and 2009 was $12.8 million , $31.4 million and $31.7 million, respectively. We may continue to generate annual net losses in the future, including through the term of our long-term contracts. See “Part I, Item 1A - Risk Factors— We have incurred annual net losses since our inception, and we may continue to incur annual net losses in the future. ”

Although we currently intend to release quarterly updates of future revisions that we may make to our estimated payments from long-term contracts, we do not undertake any obligation to release the results of any future revisions that we may make to these estimated payments from long-term contracts to reflect events or circumstances occurring after the date of this filing.

Backlog

Our backlog represents our estimate of revenue from commitments, including purchase orders and long-term contracts, that we expect to recognize over the course of the next twelve months. The timing of payments from long-term contracts and revenue recognition may vary period to period. 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, operational deficiencies, market conditions, cancellations or payment defaults could materially affect our financial condition, results of operation and cash flow. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of actual revenues. As of December 31, 2011 , we had contractual backlog of $143 million through December 31, 2012.

Megawatts

We evaluate the megawatts of capacity that we make available to the electric utility industry according to operating segment. For VPC, energy efficiency and turnkey contracts, we include the maximum contracted capacity at contract inception. For open markets, we included megawatts when we had enrolled a participant in prior periods. In order to present megawatts in a more consistent manner with the VPC, energy efficiency and turnkey programs, we have updated our disclosure to include the maximum megawatts that we have been awarded for an auction period for our capacity megawatts. For our role as a market operator, we have included the amount of megawatts that we believe will be registered in the market. The following table summarizes our megawatts as of December 31, 2011 and 2010. The megawatts presented as of December 31, 2010 have been revised to be consistent with the presentation as of December 31, 2011.

Residential Business

Our Residential Business segment had revenue of $77.4 million for the year ended December 31, 2011 compared to $67.6 million for the year ended December 31, 2010 , an increase of $9.8 million or 14% . The increase in revenue is due to a $14.9 million increase from our turnkey programs as we continued to build out these programs during the year ended December 31, 2011 . The increase in revenue from turnkey programs was partially offset by a $0.9 million decrease in our VPC programs. For our residential VPC programs during the year ended December 31, 2011, we recognized a decrease of $3.0 million from our Nevada program which expired on January 1, 2011 and a decrease of $2.5 million due to lower available capacity in 2011 compared to 2010 for certain of our VPC programs as well as a non-recurring contractual payment in one of our VPC programs during 2010. These decreases in revenue from certain of our residential VPC programs were partially offset by an increase of $4.6 million from our Pennsylvania VPC program, which began initial build-out in 2011. The remaining decrease of $4.2 million is due to our other product and service sales as one of our customers transitioned to a full turnkey program in mid-2010, a services agreement expired at the end of 2010 and we did not bid substantial residential megawatts into an open market during 2011. These decreases in other product and service sales were partially offset by the payments received from White-Rodgers as discussed below.

During the year ended December 31, 2011 , we sold 257,000 digital control units and thermostats compared to 210,000 digital control units and thermostats during the year ended December 31, 2010 , an increase of 47,000 units mainly due to the build-out of digital control units in our turnkey programs. For the year ended December 31, 2011 , our turnkey programs comprised 50% of total units sold compared to 44% during the year ended December 31, 2010 .

In August 2010, we were notified by the supplier of our thermostats, White-Rodgers, that White-Rodgers had filed with the Consumer Product Safety Commission, or CPSC, to address a product issue with the thermostats that White-Rodgers had shipped to Comverge. White-Rodgers did not concede that the thermostats contained a defect or posed a substantial product hazard, but voluntarily proposed a corrective action plan to address thermostats in inventory and thermostats installed in the field. In January 2011, the CPSC approved the corrective action plan. White-Rodgers stated that it will provide compensation for our work in implementing the corrective action plan and, to date, we received a non-recurring payment during the first and third quarters of 2011 for the majority of our field work. After the corrective action plan was approved and any needed remediation work was completed for our inventory, we resumed installing thermostats in certain turnkey programs during the first quarter of 2011. Please also see “Part I, Item 3 - Legal Proceedings” and “Part II, Item 8 - Financial Statements and Supplementary Data - Note 12” in this report for additional information related to the White-Rodgers thermostats.

C&I Business

Our C&I Business segment had revenue of $59.0 million for the year ended December 31, 2011 compared to $51.8 million for the year ended December 31, 2010 , an increase of $7.2 million or 14% . The increase in revenue is due to an increase of $4.2 million in VPC program revenue as we committed and fulfilled increased megawatts compared to the prior year's control season, an increase of $1.3 million in energy efficiency program revenue due to the increase in annual payments that we received for maintaining the lighting upgrades originally installed as well as increased build-out, an increase of $0.8 million in revenue from other energy services and an increase of $0.9 million in our open market programs. The increase in open market revenue of $0.9 million consisted of an increase of $2.7 million recognized due to the results of an incremental auction in the PJM open market and $4.6 million in other open markets in which we participate, excluding the PJM capacity program, partially offset by a decrease of $6.4 million in PJM capacity revenue due to a decrease of approximately 40% in the current program auction price compared to the prior program year.

Residential Business

Gross profit for our Residential Business segment was $33.5 million for the year ended December 31, 2011 compared to $27.9 million for the year ended December 31, 2010 , an increase of $5.6 million or 20%. The increase in gross profit is due to an increase of $6.2 million from our turnkey programs and $0.8 million from our VPC programs partially offset by a decrease of $1.4 million from our other product and service sales. The increase in gross profit from our turnkey programs is due to the increased revenue as we continued to build out these programs during the year ended December 31, 2011 . The increase in gross profit from our VPC programs is a result of the gross profit contributed by our new Pennsylvania program partially offset by a decrease from our remaining residential VPC programs, in the aggregate, including the NV Energy contract expiration.

Gross margin for our Residential Business segment was 43% for the year ended December 31, 2011 compared to 41% for the year ended December 31, 2010 . The increase of two percentage points is due to the higher gross margin contributed by our turnkey programs as we focused on efficient build-out as well as the non-recurring payments received from White-Rodgers during the first and third quarters of 2011 for a portion of our field work to implement White-Rodgers' corrective action plan.

C&I Business

Gross profit for our C&I Business segment was $22.5 million for the year ended December 31, 2011 compared to $17.0 million for the year ended December 31, 2010 , an increase of $5.6 million or 33%. The increase in gross profit is due to an increase of $2.5 million from our VPC programs, $1.7 million from our energy efficiency programs due to the increase in annual payments that we received for maintaining the lighting upgrades originally installed as well as increased cost efficiency and $1.4 million from our open markets. Gross profit from our open markets included $2.7 million of revenue recognized on a net basis from the incremental auction.

Gross margin for the year ended December 31, 2011 was 38% compared to 33% for the year ended December 31, 2010 . The increase of five percentage points was mainly due to the recognition of revenue from the incremental auction.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview

Comverge is a leading provider of intelligent energy management, or IEM, solutions that empower utilities, commercial and industrial customers, and residential consumers to use energy in a more effective and efficient manner. IEM solutions build upon demand response, enabling two-way communication between providers and consumers, giving all customer classes the insight and control needed to optimize energy usage and meet peak demand. Beyond reducing the energy load, this new approach reduces cost for the utility or grid operator, integrates other systems and allows for the informed decision-making that will power the smart grid.

We provide our IEM solutions through our two reportable segments: the Residential Business segment and the Commercial & Industrial, or C&I, Business segment. The Residential Business segment sells IEM solutions to utility customers for use in programs with residential and small commercial end-use participants. These solutions include hardware, our IntelliSOURCE software and services, such as installation, participant marketing and program management. If the utility customer elects to own the IEM system, we refer to the program as a turnkey program. If we provide capacity through fully-outsourced programs, in which we typically own the underlying system, we refer to the program as a Virtual Peaking Capacity, or VPC, program. Our VPC programs are pay-for-performance in that we are only paid for capacity that we provide as determined by a measurement and verification process with our customers. The C&I Business segment provides IEM solutions to utilities and independent system operators that are managing programs or auctions for large C&I consumers. These solutions are delivered through the management of C&I megawatts in open markets and VPC programs as well as through the completion of energy efficiency projects.

Recent Developments
Annual Guidance
We expect 2011 annual revenues to range from $136 to $141 million. We plan to provide full year 2012 guidance when we report our fourth quarter and full year 2011 results.
Megawatts

We evaluate the megawatts of capacity that we own, manage or provide to the electric utility industry according to operating segment. For VPC, energy efficiency and turnkey contracts, we include the maximum contracted capacity at contract inception. For open market programs, we include megawatts when we have enrolled a participant to fulfill the megawatt awarded to us in the open market program. The following table summarizes megawatts owned, managed or provided as of September 30, 2011.

Payments from Long-Term Contracts

Payments from long-term contracts represent our estimate of total payments that we expect to receive under long-term agreements with our customers. The information presented below with respect to payments from long-term contracts includes payments related to our VPC contracts, energy efficiency contracts, turnkey contracts and open market programs. As of September 30, 2011 , we estimated that our total payments to be received through 2024 are approximately $541 million. The long-term contracts that relate to these anticipated payments provide for such anticipated payments as follows: $39 million in the fourth quarter of 2011 (a portion of which has already been reflected in revenue for the period ended September 30, 2011 ), $138 million in 2012, $152 million in 2013, $91 million in 2014 and the remaining $121 million thereafter.

These estimates of payments from long-term contracts are forward-looking statements based on the contractual terms and conditions. In management’s view, such information was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and, to management’s knowledge and belief, presents the assumptions and considerations on which we base our belief that we can receive such payments. However, this information should not be relied upon as being necessarily indicative of actual future results, and readers of this filing should not place undue reliance on this information. Any differences among these assumptions, other factors and our actual experiences may result in actual payments in future periods significantly differing from management’s current estimates of payments allowed under the long-term contracts and our actual experiences may result in actual payments collected being significantly lower than current estimates. See “Part II, Item 1A - Risk Factors— We may not receive the payments anticipated by our long-term contracts and recognize revenues or the anticipated margins from our backlog or expected business, and comparisons of period-to-period estimates are not necessarily meaningful and may not be indicative of actual payments. ” below. 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.

VPC Programs

In calculating an estimated $214 million of payments from our VPC contracts, we have included expectations regarding build-out based on our historical experience as well as future expectations of participant enrollment in each contract’s service territory. We have assumed that once our build-out phase is completed, we will operate our VPC contracts at the capacity achieved during build-out.

The amount our utility customers pay to us at the end of each contract year may vary due to the results of measurement and verification tests performed each contract year based on the electric capacity that we made available to the utility during the contract year. The payments from VPC contracts reflect our most reasonable currently available estimates and judgments regarding the capacity that we believe we will provide our utility customer in future periods.

The amount of available capacity we are able to provide, and therefore the amount of payments we receive, is dependent upon the number of participants in our VPC programs. For purposes of estimating our payments under long-term contracts, we have assumed the rate of replacement of participant terminations under our VPC contracts will remain consistent with our historical average.

Energy Efficiency Programs

In calculating an estimated $6 million in payments from these contracts through 2013, we have included expectations for build-out through contract end based on our historical experience. We have assumed that once our build-out is complete, the permanent base load reduction will remain installed and will continue to provide the installed capacity for the remainder of the contract term.

Open Market Programs

As of September 30, 2011 , we expect to receive $193 million in long-term payments through the year 2015 in open market programs in which we have been awarded megawatts. In estimating the long-term payments, we have assumed that we will retain our commercial and industrial participants that we have currently enrolled in the auctions and that we will be able to fulfill additional capacity.

Turnkey Programs

Our turnkey contracts as of September 30, 2011 represent $107 million in payments expected to be received through the year 2014 with seven utility customers to provide products, software, and services, including program management, installation, and/or marketing. Payments from turnkey contracts are based on contractual anticipated order volumes, forecasted installations and other services applied over the term of the contract.

Other Contracts

We expect to receive an estimated $21 million in payments through 2014 pursuant to currently executed contracts for our IEM solutions.

In addition to the foregoing assumptions, our estimated payments from long-term contracts assume that we will be able to meet, on a timely basis, all of our obligations under these contracts and that our customers will not terminate the contracts for convenience or other reasons. Our annual net loss in 2010, 2009 and 2008 was $31.4 million, $31.7 million and $94.1 million, respectively. We may continue to generate annual net losses in the future, including through the term of our long-term contracts. See “Part II, Item 1A - Risk Factors— We have incurred annual net losses since our inception, and we may continue to incur annual net losses in the future. ” below.

We do not undertake any obligation to release the results of any future revisions that we may make to these estimated payments from long-term contracts to reflect events or circumstances occurring after the date of this filing.

Backlog

Our backlog represents our estimate of revenues from commitments, including purchase orders and long-term contracts, that we expect to recognize over the course of the next twelve months. The inaccuracy of any of our estimates and other factors may result in actual results being significantly lower than estimated under our reported backlog. Material delays, operational deficiencies, 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 September 30, 2011 , we had contractual backlog of $123 million through September 30, 2012.

Residential Business

Our Residential Business segment had revenue of $16.8 million for the three months ended September 30, 2011 compared to $12.9 million for the three months ended September 30, 2010 , an increase of $3.9 million or 30% . The increase in revenue is due to a $2.3 million increase from our turnkey programs as we continued to build out these programs during the three months ended September 30, 2011 . We also recognized an increase of $2.4 million in revenue from our New Mexico and Pennsylvania VPC programs. For our New Mexico program, the measurement and verification results completed in late 2010 are contractually applied to the current program year. In prior periods, the measurement and verifications results were retrospectively applied; thus, we did not recognize revenue for the program until the fourth quarter. For our Pennsylvania program, we recognized revenue based on program build-out that is not subject to measurement and verification of delivered capacity. We continue to defer the revenue and cost of revenue for our remaining three residential VPC programs until the measurement and verification results are determined during the fourth quarter. The increase in revenue from turnkey and VPC programs was partially offset by a $0.8 million decrease in other products and services, mainly due to a decrease in stand-alone product sales.

During the three months ended September 30, 2011 , we sold 58,000 digital control units and thermostats compared to 65,000 digital control units and thermostats during the three months ended September 30, 2010 , a decrease of 7,000 units mainly due to the decrease in stand-alone product sales. For the three months ended September 30, 2011 , our turnkey programs comprised 47% of total units sold compared to 42% during the three months ended September 30, 2010 .

Our Residential Business segment had revenue of $50.9 million for the nine months ended September 30, 2011 compared to $34.8 million for the nine months ended September 30, 2010 , an increase of $16.1 million or 46% . The increase in revenue is due to a $13.1 million increase from our turnkey programs as we continued to build out these programs during the nine months ended September 30, 2011 . We also recognized an increase of $5.8 million from our New Mexico and Pennsylvania VPC programs. For our New Mexico program, the measurement and verification results completed in late 2010 are contractually applied to the current program year. In prior periods, the measurement and verifications results were retrospectively applied; thus, we did not recognize revenue for the program until the fourth quarter. For our Pennsylvania program, we recognized revenue based on program build-out that is not subject to measurement and verification of delivered capacity. We continue to defer the revenue and cost of revenue for our remaining three residential VPC programs until the measurement and verification results are determined during the fourth quarter. The increase in revenue from turnkey and VPC programs was partially offset by a $2.8 million decrease in other products and services, partially attributable to a decrease in stand-alone product sales.

During the nine months ended September 30, 2011 , we sold 204,000 digital control units and thermostats compared to 150,000 digital control units and thermostats during the nine months ended September 30, 2010 , an increase of 54,000 units mainly due to the build-out of digital control units in our turnkey programs. For the nine months ended September 30, 2011 , our turnkey programs comprised 50% of total units sold compared to 39% during the nine months ended September 30, 2010 .

In August 2010, we were notified by the supplier of our thermostats, White-Rodgers, that White-Rodgers had filed with the Consumer Product Safety Commission, or CPSC, to address a product issue with the thermostats that White-Rodgers had shipped to Comverge. White-Rodgers did not concede that the thermostats contained a defect or posed a substantial product hazard, but voluntarily proposed a corrective action plan to address thermostats in inventory and thermostats installed in the field. In January 2011, the CPSC approved the corrective action plan. White-Rodgers stated that it will provide compensation for our work in implementing the corrective action plan and, to date, we received a non-recurring payment during the first and third quarters of 2011 for the majority of our field work. After the corrective action plan was approved and any needed remediation work was completed for our inventory, we resumed installing thermostats in certain turnkey programs during the first quarter of 2011. Please also see Part II, Item 1 “Legal Proceedings” and Note 6 to the consolidated financial statements included in this report for additional information related to the White-Rodgers thermostats.

C&I Business

Our C&I Business segment had revenue of $31.8 million for the three months ended September 30, 2011 compared to $38.9 million for the three months ended September 30, 2010 , a decrease of $7.0 million or 18% . The decrease in revenue is due to a decrease of $11.9 million in PJM Interconnection, or PJM, capacity program revenue. Of the $11.9 million, a decrease of $5.8 million in PJM capacity revenue is due to timing of revenue recognition. We receive cash payments on a monthly basis in the capacity year and are required to curtail energy usage during the mandatory performance period of June through September, which is the peak demand season. In prior periods, we recognized the full program year revenue in September at the end of the mandatory performance period. In the current year, we determined that we have sufficient historical data to recognize the capacity program revenue ratably over the mandatory performance period. As such, we recognized $5.8 million of PJM capacity revenue in the second quarter of 2011. The remaining decrease of $6.1 million in PJM capacity revenue is due to a decrease of approximately 40% in the current program auction price compared to the prior program year. The decrease in PJM capacity revenue was partially offset by a $1.8 million increase in revenue in the other open markets in which we participate, such as ISO New England, as well as an increase of $3.3 million in VPC program revenue as we committed and fulfilled increased megawatts compared to the prior year's control season. The remaining $0.2 million decrease is due to the energy efficiency programs partially offset by revenue from other energy services.

Our C&I Business segment had revenue of $48.8 million for the nine months ended September 30, 2011 compared to $47.4 million for the nine months ended September 30, 2010 , an increase of $1.5 million or 3% . The increase in revenue is due to an increase of $3.2 million in VPC program revenue as we committed and fulfilled increased megawatts compared to the prior year's control season, an increase of $1.1 million in energy efficiency program revenue due to the increase in annual payments that we received for maintaining the lighting upgrades originally installed as well as increased build-out and an increase of $1.3 million in revenue from other energy services. These increases were partially offset by a decrease of $4.1 million in open market revenue. The decrease of $4.1 million in open market revenue consisted of a decrease of $6.1 million in PJM capacity revenue due to a decrease of approximately 40% in the current program auction price compared to the prior program year partially offset by an increase of $2.0 million in the other open markets in which we participate.

Residential Business

Gross profit for our Residential Business segment was $6.4 million for the three months ended September 30, 2011 compared to $3.9 million for the three months ended September 30, 2010 , an increase of $2.5 million or 63%. The increase in gross profit is due to an increase of $1.4 million from our turnkey programs and $1.8 million from our New Mexico and Pennsylvania VPC programs partially offset by a decrease of $0.7 million from our other product and service sales. The increase in gross profit from our turnkey programs is due to the increased revenue during the three months ended September 30, 2011 . The increase in gross profit from our VPC programs is a result of the recognition of revenue and cost of revenue in the New Mexico program as the measurement and verification results completed in late 2010 are contractually applied to the current program year as well as the build-out in our Pennsylvania program during 2011. The gross profit from other product and service sales decreased, in part, due to the decrease in stand-alone product sales.

Gross margin for our Residential Business segment was 38% for the three months ended September 30, 2011 compared to 31% for the three months ended September 30, 2010 . The increase of seven percentage points is due mainly to the higher gross margin contributed by the New Mexico and Pennsylvania VPC programs.

Gross profit for our Residential Business segment was $19.9 million for the nine months ended September 30, 2011 compared to $11.4 million for the nine months ended September 30, 2010 , an increase of $8.6 million or 76%. The increase in gross profit is due to an increase of $5.1 million from our turnkey programs and $4.9 million from our New Mexico and Pennsylvania VPC programs partially offset by a decrease of $1.4 million from our other product and service sales. The increase in gross profit from our turnkey programs is due to the increased revenue during the nine months ended September 30, 2011 . The increase in gross profit from our VPC programs is a result of the recognition of revenue and cost of revenue in the New Mexico program as the measurement and verification results completed in late 2010 are contractually applied to the current program year as well as the build-out in our Pennsylvania program during 2011. The gross profit from other product and service sales decreased, in part, due to the decrease in stand-alone product sales.

CONF CALL

Dan Pfeffer

Welcome everyone and thanks for joining me today on the call and with us are Bob Chiste, Chairman, CEO and President and Mike Picchi, Executive Vice President and CFO.

I'd like to begin today's call by reminding you that the remarks on this call will contain forward-looking statements. These forward-looking statements include among other things statements regarding the business strategy, plans and objectives of Comverge. More specifically, these statements will include discussions about the amount of future contracted revenue we expect, the amount of megawatts we expect to be generated by long term contracts in the open markets, the potential for AMI contracts, various regulatory and open market rule changes and the amount of revenue we expect to recognize for fiscal 2009.

Although Comverse believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, estimates and other risks and uncertainties that could cause our expectations to prove to be incorrect. The actual results for Comverse could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors including market conditions, regulatory approval of contracts, other risks typically associated with our business and the risks and uncertainties discussed in Comverge's annual report on Form 10-K which was filed today with the Securities and Exchange Commission and is available from the SEC, online at Edgar and our web site.

You should consider these forward-looking statements in light of the related risks and we encourage you not to otherwise place undue reliance on these forward-looking statements which speak only as of the date of this conference call. Other than as required under the Securities Laws Comverge does not assume a duty to update these forward-looking statements if circumstances change or otherwise.

With that said, I'll turn the call over to our Chairman, President and CEO, Bob Chiste.

Robert Chiste

Thank you everyone for joining us on Comverge's fourth quarter 2008 earnings call. Despite the strong economic headwinds the county is experiencing, the macro drivers for our industry remain firm and continue to strengthen. Comverge attained annual revenue growth in excess of 35% in each of the past four years and we anticipate this momentum will continue.

I'll take a moment to focus on the big picture and long term prospects of our industry generally and then Comverge specifically. First, demand response and energy efficiency provide the fastest, cleanest and most economic megawatts. Second, regulators and legislators at the Federal and State level are encouraging and approving funding for increased investment in energy efficiency and demand management.

Major examples are the Federal Economic stimulus legislation which provides $4.5 million for Smart Grid projects including demand response devices and Pennsylvania Act 129 which requires all utilities in the Commonwealth to implement aggressive demand management and energy efficiency programs through the use of third party providers.

We have established internal teams to leverage our comprehensive program capabilities to capture our share of these opportunities. A major Comverge strength is that we have now attained the critical mass in our support structure which is enabling considerable operating leverage.

And third, to be part of a national drive for energy independence, a given solution must have significant impact. Electric Power Research Institute or EPRI, has signed the achievable demand management and energy efficiency opportunity at a staggering 156 gigawatts over the next two decades. That is 78 gigawatts of peak electric energy used and 78 gigawatts of base load reduction. That's the equivalent of eliminating the need for over 1,500 100 megawatt power plants.

To put this into perspective, the demand response and energy efficiency opportunity has the potential of far greater impact on energy independence than other alternatives such as solar and wind. In fact, wind and solar projects have slowed considerably because the financial and transmission constraints in the current install base of solar power in the United States is about 2 gigawatts.

By comparison, demand response currently accounts for over 20 gigawatts or ten times the size of the entire solar installed base in the United States.

Think of this as a potential efficiency surge which could provide relief as the non fossil fuel energy infrastructure is pursued over the coming decades while presenting a huge market opportunity to Comverge. Unlike other renewables, demand management and energy efficiency need to government subsidies to be economical.

Comverge has a comprehensive portfolio of demand side solutions for all customer classes and we are well positioned with our 500 utility customer base as these macro trends play out over the next decade. Our broad offering provides strong strategic utility management through innovation and technology, allowing utilities to reach new heights in their Smart Grid deployments.

After I discuss some of our fourth quarter business highlight and recent events, Mike Picchi will provide more detail and information about the company's financial and operational results for the fourth quarter. We will open the call afterwards and we have ample time for questions from analysts and investors.

Comverge now exceeds 2600 megawatts under management and we recently announced that our future contracted revenues surpassed $.5 billion driven by major AMI related and enabled and virtual peaking capacity contract awards. Our pipeline in each business segment continues to grow as does our large customer base.

In January alone, we responded to 14 utility RFP's worth more than $500 million in long term opportunities, by far our most active month ever. Although we don't expect that torrid monthly pace to continue, it clearly shows that Comverge business prospects are accelerating and we are poised for long term growth.

Comverge continues to focus on creating long term shareholder value. We have consistently used the following three metrics to measure our progress in creating long term value.

First, megawatts owned under long term capacity contracts which generate our highest gross margins and recurring revenues. We targeted a 2008 goal of adding 250 to 300 megawatts.

Second, megawatts managed under open market programs in our commercial and industrial business. Here our annual goal was to add 450 to 500 megawatts.

And third, future revenues from long term contracts. This goal was to add at least a net $150 million to $175 million. Including the contracts and megawatts awaiting regulatory approval, we met or exceeded all three of these major internal goals for 2008 and will continue to pursue and report on these three metrics in the future.

The result is that 828 megawatts were added in 2008 an increase of 63% compared to where we began the year. These megawatts, whether they be bilateral BPC contracts with utilities, contracts with end user C&I customers, or large multi-year turn key projects are valuable assets which we continually attempt to leverage for additional revenue streams.

Certainly winning outsource BPC contracts increases the value of the company and will remain a focus of Comverge, but we have seen an exciting new trend develop in the past three months which has the potential of long term contracts for the hardware, software and services components in anticipation of some of the large advance mirroring infrastructure for AMI projects.

These are coming in the form of large scale AMI ready demand management programs which are a hybrid approach between the traditional one year straight product sale compared to the totally outsourced virtually peaking capacity contracts.

Under this hybrid approach, the utility customer that wants to purchase Comverge hardware and software also wants to outsource to our services such as installation, marketing and program management. Often these programs are structured with a flexible migration path to a full scale AMI deployment. Based on recent RFP activity, we expect you'll see more of these large turn key contracts from us in the future.

We were awarded three of these major long term turn key contracts in the past three months that we expect to significantly boost our product and services revenue in the next few years. First, Comverge won its initial AMI enabled contract with Pepco Holdings. This large turn key contract deploys our hardware and software solution, utilizes our installation and marketing services and is expected to manage 200 megawatts over the next five years.

Second, we were awarded a new turn key contract with our long term customer, Austin Energy for the purchase of additional Comverge energy management devices including Comverge's Super Stats along with the installation of those devices in residential and commercial properties through Austin Energy's coverage area.

This contract is expected to generate nearly $20 million in revenue to Comverge over a five year period and will provide Austin Energy customers with the opportunity to optimize their energy usage.

And third, we signed a major new exclusive five year agreement with Progress Energy of Carolina, or PEC to provide energy management hardware and software solutions to implement PEC's new energy wise residential demand response and energy efficiency program. When fully implemented, the program is expected to provide up to 170 megawatts of peak load reduction.

These wins and our growing pipeline demonstrate the significant traction in our AMI ready demand response programs which are compatible with current or future utility AMI initiatives and bring immediate value. This traction is also a direct result of AMI enabled products which have been developed by Comverge.

Last fall we introduced the Power Portal in home display, a product that provides customers with current energy usage, energy price information and utility messaging. This in home display product is part of our growing portfolio of AMI solutions which includes our Smart Programmable Thermostat and enhanced software suite.

Our software provides homeowners with an energy portal to view and manage home energy consumption. With the rapid projected growth of AMI programs in North America, coupled with our leadership position in the demand response market, we believe Comverge will be a major beneficiary in the generation of Smart Grid investment by utilities.

And to help our utility customers further leverage their existing and future Smart Grid investment, Comverge recently announced the release of the Apollo Demand Response Management System, a state of the art open architecture software platform capable of handling the traditional demand response systems of today, while integrating AMI and Smart Grid systems of the future.

This system, using web technologies will manage residential and commercial demand management resources such as demand response control devices, programmable communicating thermostats and in home displays. It also has the ability to manage and integrate commercial and industrial systems, plug in hybrid electric vehicles and renewable energy resources.

For the first time, Apollo users will be able to deploy an integrated experience ranging from customer service, utility operations, customer portals and program administration that enable scalable utility operations for the Smart Grid.

In addition to our products and services market growth, Comverge continues to grow its residential and commercial segment business and continues to expand its pipeline of VPC programs. All of our sales activity throughout the company are geared initially towards educating our utility customers on the virtues of our outsourced VPC programs.

As the credit crunch has expanded to impact utilities, going the route of an outsource VPC program with Comverge should become even more attractive, given the utilities current capital constraints.

Our business model is a straight forward one. Comverge provides strategic utility management through innovation and technology. With the latest two way communication devices, our Apollo software platform or our C&I remote dispatchable software Comverge is a leader in technology focused on both providing state of the art cost effective advanced technology and capital free pay for performance capacity programs. This allows the utilities to reduce costs and enhance reliability by providing demand management programs for all classes of the utilities customers.

Comverge remains focused on successfully executing its business plan and vision which is to increase our market penetration, expand the market for a clean energy solutions and pursue strategic opportunities that will build long term value for our shareholders.

No other single company public or private, can offer as comprehensive of a solution set in demand management and energy efficiency as we do. This comprehensive approach to the entire spectrum of customers both expands our addressable market and mitigates business risk.

The industry and Comverge are poised for growth. Federal and State legislative and regulatory movement to decrease demand on our nation's existing infrastructure are wide spread. Demand response and energy efficiency are generally viewed as the most expedient and cost effective resource. Again, the cleanest, most efficient and economic megawatt is still the megawatt never produced.

Comverge is fortunate to have an $84 million liquidity position because in these difficult economic times, cash is king. As we look out through 2009, our focus is on preserving our substantial cash and liquidity position while we leverage our knowledge, expertise and leadership for profitable growth and significant increases in shareholder value.

Because of our strong financial and industry leadership position however, we will not bury our heads and wait for the economic storm to pass. Rather, we will continue to aggressively pursue and grow our business so that when the storm does pass, we will be even larger and stronger.

With that said, I'll turn the call over to Mick Picchi, our CFO who will talk about Comverge's fourth quarter financial and operational highlights.

Michael Picchi

As we have stated in previous earnings calls, under our residential VPC contracts, we defer significant portion of our consolidated revenues, our most profitable revenues until the fourth quarter of the year. We are required to defer revenue until the fourth quarter when we true up our estimates for megawatt capacity available to our utility customers during the peak summer cooling season in light of actual capacity that was made available to the utility over the summer.

Accordingly, our fourth quarter revenues will be the greatest of the year and are not meant to be taken as our annualized run rate.

For the year, revenues totaled $77.2 million, up 40% from $55.2 million in 2007. Revenues for the fourth quarter of 2008 were $33 million compared to $#34.8 million in the fourth quarter of 2007.

Broken down by business segment, $6.7 million of our total revenues in the fourth quarter of 2008 came from our utility products and services segment, which we call the Smart Grid solutions group. This compared to $4.8 million in revenue in the fourth quarter of 2007, a 40% increase and our highest quarter ever for this segment.

Our products and services business segment, the future looks real promising based on the large AMI implementation being planned in 2009 and beyond.

The residential business segment which has our VPC contracts and our energy efficiency contracts with Con Ed recognized revenues of $24 million for the fourth quarter of 2008 compared to $25.5 million for last year. $800,000 of VPC revenues that relate to the 2008 contract year were not recognized in Q4 of 2008 because a portion of the final settlement wasn't made until last month. Accordingly, this $800,000 of VPC revenue will be recognized in Q1 2009.

Also contributing to the revenue decrease in Q4 2008 was the lower lighting installations at our energy efficiency business.

Deferred revenue on the balance sheet from the VPC contracts was $4.3 million as of December 31, 2008 compared to $2.4 million in the year ended 2007, an increase of $1.9 million.

Under GAAP accounting rules, the proxy payments and the associated costs of the VPC contracts are not recognized in the income statement until after the summer cooling season, when we and our utility customers perform measurement and verification or M&V tests to statistically determine the capacity that was available to these utilities during the summer cooling season.

Remember we get paid whether the utility uses the demand response system or not. After the M&V test has occurred, we then do a true up calculation to determine the final settlement of the actual revenue earned for the contract year and recognize the deferred revenue from the previous three quarters generally during our fourth quarter.

Accordingly, during the first three quarters of 2008 we recognized no revenue and no profit from the residential VPC contracts but in the fourth quarter after completing the M&V tests, we recognized $18.8 million of revenue and $13.6 million of gross profit on the VPC contracts, a gross margin of 72%. This compares to gross margin on the VPC contracts of 66% last year, a nice improvement.

The M&V adjustments or true ups for 2008 were a net negative $300,000 in the aggregate for a total 2008 contract year consideration. That's less that 2% of the VPC revenues that we had for the year, but based on the timing of when the final settlement was obtained, in Q4, we actually recorded $1.1 million in downward adjustments offset by the $800,000 positive adjustments we will report in the first quarter of 2009.

As we win additional VPC contacts, Comverge is building a portfolio of contracts which diversity the risk of any one contract having a large impact on the annual M&V true up process.

Of the 701 megawatts under our capacity contracts approximately 319 megawatts are built out. During the fourth quarter of 2008, we incrementally built out 40 megawatts of capacity under our long term contracts. For all of 2008 we built out 126 megawatts of capacity. This represents a 62% increase from 2007 when we built out 78 megawatts during the year.

Revenues for the commercial and industrial business segment were $2.3 million in the fourth quarter of 2008 down from $4.5 million in 2007. Important to note, we recognized all of the capacity revenues during the third quarter of 2008 from the P&V capacity program that began June 1, 2008.

In 2007, we were recognizing the capacity revenues over 12 months, so Q4 2007 included capacity revenues where as Q4 2008 did not.

Our C&I business had 894 megawatts of commercial and industrial load under contract. Important to note during the first quarter of 2009 we've added almost another 200 megawatts of capacity primarily in PJM so the year is off to a good start.

Turning now to margins, consolidated gross profit for the fourth quarter was $18.4 million compared to $19 million for the fourth quarter of 2007. Consolidated gross margin for the fourth quarter of 2008 was 56% compared to 55% for the same quarter last year. For full year 2008 gross margin was 44% compared to 48% for 2007.

This decrease was primarily due to having the lower C&I margin business for a full year in 2008 compared to only five months in 2007. Let me add, we believe gross margin comparisons are only meaningful in looking at the entire year because of the deferred revenue recognition of the residential VPC contracts until the fourth quarter.

In total, the result was an adjusted EBITDA for the fourth quarter of $12.7 million compared to $13.3 million in the same period last year.

Capital expenditures for the fourth quarter were $4.1 million compared to $2.7 million in the same period last year and for all of 2008 they were $13.3 million compared to $5.5 million in 2007 as we have ramped up our build out in the residential VPC contracts.

Turning to our balance sheet, total unrestricted cash and cash investments as of year end were $47.8 million. We used $4.2 million of our cash in the fourth quarter to repay a portion of our convertible acquisition debt. We did enter into a new five year $25 million senior credit facility with Silicon Valley Bank to refinance $15 million of our convertible notes maturing on April 1, 2009 and to provide up to $10 million to grow the business.

This new facility combined with our strong cash position and our GE Capital credit facility which is used to fund the build out under the VPC contracts gives us $84 million of capital available to grow our business.

We were very pleased to obtain the SVB financing in the midst of these tight credit markets. We do not anticipate any need to access the capital markets in the coming year. It's no secret that we've been able to survive and thrive in this economic environment if cash and liquidity. We're pleased to be well positioned on both fronts.

Total debt was $28.1 million as of December 31, 2008. This consisted of $12.5 million under our GE Capital credit facility, $15 million under our new Silicon Valley Bank facility and $600,000 of subordinated convertible debt relating to our acquisition of Enerwise. You'll recall that at September 30, the amount of our debt due in the next 12 months was $20 million.

With the refinancing of the acquisition debt in the fourth quarter, the amount of debt due within the next 12 months is now down to $3 million. In December, we retired $19.2 million of the almost $20 million subordinated convertible debt that was due in April 2009 by offering the note holders a 2% early prepayment discount. We saved the company $328,000 with the 2% discount.

Now, I'd like to talk about our expectations for 2009. As was made clear last year, it is very challenging to predict quarter to quarter or even annual revenues due to a number of factors including the lumpiness of the quarter revenue in our hardware business, uneven installation activity in our energy efficiency business, uncertain timing of when the VPC contract and the settlements will be finalized and the unpredictability of regulators and long times to receive regulatory approval before we can start building out our VPC programs.

These uncertainties are further compounded by the tenuous market we are all experiencing. Accordingly, we expect our full 2009 revenues will exceed $90 million taking into consideration the items I just noted. What we are seeing is that the contracts that we are signing are larger in scale, particularly on the hardware side of our business.

Furthermore, we are uncertain as to the potential benefits of the stimulus bill and the timing, as any benefit received most likely will have a greater impact on 2010 compared to 2009.

While revenues are an important measure of progress in growing the business, at this stage of our company' development, management and the Board of Directors focus on growing the long term value creation metric that we announced last year. These three metrics measure the company's operational progress; megawatts owned under long term contracts, megawatts managed under open market programs and estimated future revenues from our long term contracts.

These metrics are the most important to management and investors as we continue to build a strong, viable company focused on creating long term shareholder value. Our 2009 internal goals for these three metrics are; to add at least a net 275 megawatts of capacity under long term contracts, add at least a net 225 megawatts in open market programs and to add at least $150 million in net estimated future revenues from long term contracts.

This concludes our prepared comments. At this point. we'll open it up for Q&A.

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