UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



ý	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012



¨	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-33399

Comverge, Inc.

(Exact name of Registrant as specified in its charter)



Delaware		22-3543611
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

5390 Triangle Parkway, Suite 300 Norcross, Georgia		30092
(Address of principal executive offices)		(Zip Code)

(678) 392-4954

(Registrant’s telephone number including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer ¨ Accelerated filer ý Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller Reporting Company ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

There were 27,525,863 shares of the Registrant’s common stock, $0.001 par value per share, outstanding on May 8, 2012.

Comverge, Inc.

Index to Form 10-Q




		Page
Part I - Financial Information

Item 1.	Unaudited Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011	1

	Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011	2

	Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2012 and 2011	3

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011	4

	Notes to Unaudited Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

Part II - Other Information

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 6.	Exhibits	52

Index to Form 10-Q

COMVERGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)



	March 31, 2012			December 31, 2011
Assets
Current assets
Cash and cash equivalents	$	18,053		$	23,641
Restricted cash	2,192			4,051
Billed accounts receivable, net	18,988			18,481
Unbilled accounts receivable	11,660			12,730
Inventory, net	8,632			10,377
Deferred costs	2,566			1,804
Other current assets	1,547			1,313
Total current assets	63,638			72,397
Restricted cash	9,000			332
Property and equipment, net	27,755			26,865
Intangible assets, net	3,662			3,635
Goodwill	499			499
Other assets	1,642			1,681
Total assets	$	106,196		$	105,409
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable	$	6,707		$	5,123
Accrued expenses	14,691			20,347
Deferred revenue	13,542			7,094
Current portion of long-term debt	26,147			9,188
Other current liabilities	7,194			7,561
Total current liabilities	68,281			49,313
Long-term liabilities
Deferred revenue	484			490
Long-term debt	—			17,062
Other liabilities	1,256			1,563
Total long-term liabilities	1,740			19,115
Shareholders' equity
Common stock, $0.001 par value per share, authorized 150,000,000 shares; issued 27,577,716 and outstanding 27,479,908, shares as of March 31, 2012 and issued 25,968,436 and outstanding 25,913,694 shares as of December 31, 2011	27			26
Additional paid-in capital	268,083			266,090
Common stock held in treasury, at cost, 97,808 and 54,742 shares as of March 31, 2012 and December 31, 2011, respectively	(400		)	(338		)
Accumulated deficit	(231,490		)	(228,772		)
Accumulated other comprehensive loss	(45		)	(25		)
Total shareholders' equity	36,175			36,981
Total liabilities and shareholders' equity	$	106,196		$	105,409

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

Index to Form 10-Q

COMVERGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)



	Three Months Ended
	March 31,
	2012			2011
Revenue
Product	$	8,095		$	4,691
Service	24,486			13,934
Total revenue	32,581			18,625
Cost of revenue
Product	6,125			3,462
Service	9,942			7,396
Total cost of revenue	16,067			10,858
Gross profit	16,514			7,767
Operating expenses
General and administrative expenses	11,362			10,234
Marketing and selling expenses	5,034			5,089
Research and development expenses	1,133			1,049
Amortization of intangible assets	66			237
Operating loss	(1,081		)	(8,842		)
Interest and other expense, net	1,385			929
Loss before income taxes	(2,466		)	(9,771		)
Provision for income taxes	252			15
Net loss	$	(2,718	)	$	(9,786	)
Net loss per share (basic and diluted)	$	(0.10	)	$	(0.39	)
Weighted average shares used in computation	26,167,484			24,790,385

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

Index to Form 10-Q

COMVERGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(Unaudited)



	Three Months Ended
	March 31,
	2012			2011
Net loss	$	(2,718	)	$	(9,786	)
Other comprehensive income:
Change in foreign currency translation adjustment	(20		)	—
Other comprehensive income	(20		)	—
Comprehensive loss	$	(2,738	)	$	(9,786	)

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

Index to Form 10-Q

COMVERGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Three Months Ended
	March 31,
	2012			2011
Cash flows from operating activities
Net loss	$	(2,718	)	$	(9,786	)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation	1,281			529
Amortization of intangible assets and capitalized software	256			410
Stock-based compensation	746			1,136
Other	382			537
Changes in operating assets and liabilities:
Billed and unbilled accounts receivable, net	608			9,547
Inventory, net	1,181			(1,457		)
Deferred costs and other assets	(473		)	(234		)
Accounts payable	1,558			238
Accrued expenses and other liabilities	(5,642		)	(9,539		)
Deferred revenue	6,442			2,768
Net cash provided by (used in) operating activities	3,621			(5,851		)
Cash flows from investing activities
Changes in restricted cash	(6,809		)	918
Maturities/sales of marketable securities	—			27,724
Purchases of property and equipment	(2,903		)	(2,830		)
Capitalized software costs	(283		)	(323		)
Net cash provided by (used in) investing activities	(9,995		)	25,489
Cash flows from financing activities
Borrowings under Peak Holding Corp. debt facility, net of debt discount	11,104			—
Repayment of Silicon Valley Bank debt facility	(11,250		)	(750		)
Proceeds from issuance of common stock, net of offering costs	1,239			—
Other	(293		)	54
Net cash provided by (used) in financing activities	800			(696		)
Effect of exchange rate changes on cash and cash equivalents	(14		)	—
Net change in cash and cash equivalents	(5,588		)	18,942
Cash and cash equivalents at beginning of period	23,641			7,800
Cash and cash equivalents at end of period	$	18,053		$	26,742
Cash paid for interest	$	490		$	257
Supplemental disclosure of noncash investing and financing activities
Recording of asset retirement obligation	$	(261	)	$	(222	)

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

Index to Form 10-Q

COMVERGE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)


1.	Description of Business, Basis of Presentation, Merger Agreement, Liquidity and Substantial Doubt about Ability to Continue as a Going Concern

Description of Business

Comverge, Inc., a Delaware corporation, and its subsidiaries (collectively, the “Company”), provide intelligent energy management solutions that enable energy providers and consumers to optimize their power usage and meet peak demand. The Company delivers its intelligent energy management solutions through a portfolio of hardware, software and services. The Company has two operating segments: the Residential Business segment and the Commercial & Industrial, or C&I, Business segment. In December 2011, the Company began international operations in South Africa.

Basis of Presentation

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

In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair statement of the Company’s financial position as of March 31, 2012 and the results of operations for the three months ended March 31, 2012 and 2011, and cash flows for the three months ended March 31, 2012 and 2011, consisting only of normal and recurring adjustments. All significant intercompany transactions have been eliminated in consolidation. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012. The interim condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the Company’s consolidated financial statements and footnotes thereto for the year ended December 31, 2011 on Form 10-K filed on March 15, 2012.

The condensed consolidated balance sheet as of December 31, 2011 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States.

Merger Agreement

On March 26, 2012, the Company, Peak Holding Corp., a Delaware corporation (“Parent”) and Peak Merger Corp., a Delaware corporation and a wholly owned subsidiary of Parent (“Purchaser”), entered into an Agreement and Plan of Merger (“Merger Agreement”). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, Purchaser has agreed to commence a cash tender offer to acquire all of the shares of the Company's common stock (the “Offer”) for a purchase price of $1.75 per share, net to the holders thereof, in cash (the “Offer Price”), without interest, subject to the terms and conditions of the Merger Agreement.

On April 11, 2012, Purchaser commenced the Offer. The consummation of the Offer is conditioned on at least a majority of the shares of the Company's common stock (calculated in accordance with the Merger Agreement) having been validly tendered into and not withdrawn prior to 5:00 p.m., New York City time, on May 9, 2012, as well as other customary conditions, including receipt of certain regulatory approvals, the accuracy of the representations and warranties and compliance with the covenants contained in the Merger Agreement, in certain cases subject to certain qualifications and limitations. On May 10, 2012, the Company announced that the tender offer expired at 5:00 p,m., New York City time, on May 9, 2012 and that, as of the expiration time, 14,407,789 shares of the Company's common stock had been validly tendered and not withdrawn, including 744,898 shares that had been tendered pursuant to notices of guaranteed delivery, representing approximately 52.2% of the outstanding shares of the Company. H.I.G. Capital, LLC also announced on May 10, 2012 that , commencing immediately, Purchaser commenced a subsequent offering period to acquire all of the remaining untendered shares, commencing immediately and expiring at 11:59 p.m., New York City time, on Monday, May 14, 2012. During the subsequent offering period, the Company's stockholders who did not previously tender their shares of common stock in the offer may do so and Peak will accept for payment and promptly pay for such shares as they are tendered. Stockholders who tender shares during such period will receive the same $1.75 per share price, without interest and subject to applicable withholding taxes, that was paid in the tender offer. Procedures for tendering shares during the subsequent offering period are the same as during the initial

Index to Form 10-Q

offering period with two exceptions: (1) shares cannot be delivered by the guaranteed delivery procedure and (2) in accordance with SEC rules, shares tendered during the subsequent offering period may not be withdrawn.

The Merger Agreement provides that, following the consummation of the Offer, Purchaser will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. In the Merger, each outstanding share of the Company's common stock (other than treasury shares, shares held by Parent, Purchaser or any of their wholly-owned subsidiaries, or as to which dissenters' rights have been properly exercised) will be converted into the right to receive the Offer Price. The consummation of the Merger is subject to certain closing conditions, including approval by the Company's stockholders, if required.

During the period beginning on the date of the Merger Agreement and continuing through April 25, 2012 (the “Go-Shop Period”), the Company initiated, solicited and encouraged alternative acquisition proposals from third parties and provided non-public information to and entered into discussions or negotiations with third parties with respect to alternative acquisition proposals. The Company did not extend the Go-Shop period for up to 10 days following April 25, 2012. At the end of the Go-Shop Period, the Company became subject to customary “no-shop” restrictions on its ability to solicit alternative acquisition proposals from third parties and to provide non-public information to and enter into discussions or negotiations with third parties regarding alternative acquisition proposals. These “no-shop” restrictions are subject to a customary “fiduciary-out” provision which allows the Company, under certain circumstances, to provide information to and participate in discussions and engage in negotiations with third parties with respect to an unsolicited acquisition proposal that the Company's Board of Directors has determined is, or would reasonably be expected to result in, a Superior Proposal.

On March 26, 2012, in connection with entering into the Merger Agreement , the Company also entered into (1) a Note Purchase and Security Agreement by and among the Company, Peak Holding Corp. and the Purchasers and subsidiaries of the Company named therein (the “Note Purchase Agreement”), (2) a Forbearance Agreement by and among the Company, Grace Bay and the subsidiaries of the Company named therein (the “Grace Bay Forbearance Agreement”), (3) a Forbearance Agreement by and among the Company and the other parties to the Note Purchase Agreement (the “NPA Forbearance”), and (4) a Forbearance and Sixth Amendment Agreement by and among the Company, Silicon Valley Bank and the subsidiaries of the Company named therein (the “SVB Forbearance and Amendment”). Refer to Note 5 for more detail on the note and forbearance agreements.

Liquidity and Substantial Doubt about Ability to Continue as a Going Concern

The Company has incurred losses since inception, resulting in an accumulated deficit of $231,490 and stockholders' equity of $36,175 as of March 31, 2012. Working capital deficit as of March 31, 2012 was $4,643, consisting of $63,638 in current assets and $68,281 in current liabilities. We anticipate spending approximately $5,800 on capital expenditures during the remaining months of 2012.

As of March 31, 2012, the Company classified the Peak Holding Corp. and the Grace Bay debt as current liabilities as both facilities will become due and payable on the forbearance termination dates if the Offer as described above is not completed. Any failure by the Company to pay any obligations that become due and payable under the agreements may constitute an event of default under such agreement.

The Company is required to meet certain financial covenants contained in the Peak Holding Corp., Grace Bay and SVB agreements, specifically a minimum tangible net worth and an adjusted quick ratio. Compliance with the adjusted quick ratio covenant is measured on a monthly basis and compliance with the tangible net worth covenant is measured on a quarterly basis. For the quarter ended March 2012, the Peak Holding Corp. and SVB agreements required a minimum tangible net worth of $41,650 and $49,000, respectively. For March 2012, the Peak Holding Corp. and SVB agreements required a minimum ratio of current assets to current liabilities of 0.70:1.00 and 0.80:1.00, respectively. The Company met the financial covenant requirements for the period ended March 31, 2012. However, management believes it is possible that the Company will not meet the covenant requirements during 2012 if additional capitalization of the Company is not achieved. The Company's failure to comply with these covenants may result in the declaration of an event of default under each of the loan agreements.

An event of default would enable Peak Holding Corp., Grace Bay or SVB, as applicable, to accelerate all amounts due under their respective loans, including outstanding letters of credit, and to exercise other remedies available to them under the respective loan agreements.

Index to Form 10-Q

Purchaser on the Merger, there can be no assurance that the Merger will be consummated which could have a material adverse impact on Company's liquidity, financial position and results of operations and its ability to continue as a going concern.

2. Significant Accounting Policies and Recent Accounting Pronouncements

Revenue Recognition - Residential Business

The Company sells intelligent energy management solutions directly to utilities for use and deployment by the utility. The Company recognizes revenue for such sales when delivery has occurred or services have been rendered and the following criteria have been met: persuasive evidence of an arrangement exists, the price is fixed or determinable, delivery has occurred and collection is probable.

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

The Company enters into long-term contracts with utilities in which the Company typically owns the underlying intelligent energy management network and provides its customer with electric capacity during the peak season. The Company invoices Virtual Peaking Capacity, or VPC, customers on a monthly or quarterly basis throughout the contract year. Contract years typically begin at the end of a control season (generally, at the end of a utility’s summer cooling season that correlates to the end of the utility’s peak demand for electricity) and continue for twelve months thereafter. The VPC contracts require the Company to provide electric capacity through demand reduction to utility customers, and require a measurement and verification of such capacity on an annual basis. In certain VPC contracts, the results of the measurement and verification process are applied retrospectively to the program year. For these contracts, the Company defers revenue and the associated cost of revenue related to these until such time as the annual contract payment is fixed or determinable. Once a utility’s customer, or program participant, enrolls in one of the Company’s VPC programs, the Company installs hardware at the participant’s location. The cost of the installation and the hardware are capitalized and depreciated as cost of revenue over the remaining term of the contract with the utility or an estimated operating life if such equipment may be placed into an open market on contract expiration. The Company also records telecommunications costs related to the network as cost of revenue. The cost of revenue is recognized contemporaneously with revenue.

Revenue Recognition - Commercial & Industrial Business

The Company enters into agreements to provide demand response services. The demand response programs require the Company to provide electric capacity through demand reduction when the utility or independent system operator calls a demand response event to curtail electrical usage. Demand response revenues are earned based on the Company’s ability to deliver capacity. In order to provide capacity, the Company manages a portfolio of commercial and industrial end users’ electric loads. Capacity amounts are verified through the results of an actual demand response event or a demand response test. The Company recognizes revenue and associated cost of revenue in its demand response services at such time as the capacity amount is fixed or determinable.

The Company bids into forward auctions for open market programs with independent system operators, or ISO's. The program year, which spans from June 1st to May 31st annually for the Company's primary program, is three years from the date of the initial auction. Participation in the capacity program requires the Company to respond to requests from the ISO to curtail energy usage during the mandatory performance period of June through September, which is the peak demand season. For participation, the Company receives cash payments on a monthly basis in the program year. The Company may utilize the incremental auctions held within the three-year period prior to the commencement of the program year or may enter into bilateral agreements with other market demand or supply-side providers to fulfill a portion of the megawatts awarded in the initial auction. For the remaining megawatts, the Company enrolls C&I participants in order to fulfill its megawatt commitment with the ISO. If the Company

Index to Form 10-Q

remains the primary obligor for the megawatt commitment, the Company recognizes revenue and cost of revenue on a gross basis for those megawatts ratably over the performance period, once the revenue is fixed or determinable. If the Company is released from its obligations to fulfill those megawatts through an incremental auction or a bilateral agreement, the Company recognizes revenue, net of the cost of revenue, at the time that megawatts are accepted by the ISO and the financial assurance is released.

The Company enters into agreements to provide base load reduction. Energy efficiency revenues are earned based on the Company’s ability to achieve committed capacity through base load reduction. In order to provide this reduction, the Company delivers and installs energy efficiency management solutions. The base load capacity contracts require the Company to provide electric capacity to utility customers and include a measurement and verification of such capacity in order to determine contract consideration. The Company defers revenue and associated cost of revenue until such time as the capacity amount, and therefore the related revenue, is fixed or determinable. Once the reduction amount has been verified, the revenue is recognized. If the revenue is subject to penalty, refund or an ongoing obligation, the revenue is deferred until the contingency is resolved and/or the Company has met its performance obligation. Certain contracts contain multiple deliverables, or elements, which require the Company to assess whether the different elements qualify for separate accounting. The separate deliverables in these arrangements meet the separation criteria.

Revenue from time-and-materials service contracts and other services are recognized as services are provided. Revenue from certain fixed price contracts are recognized on a percentage-of-completion basis, which involves the use of estimates. If the Company does not have a sufficient basis to measure the progress towards completion, revenue is recognized when the project is completed or when final acceptance is received from the customer. The Company also enters into agreements to provide hosting services that allow customers to monitor and analyze their electrical usage. Revenue from hosting contracts is recognized as the services are provided, generally on a recurring monthly basis.

Foreign Currency Transactions

The currency of the primary economic environment in which the operations of the Company are conducted is the United States Dollar (“dollar”). The functional currency of the Company's international subsidiary is the local currency. The Company translates the financial statements of the subsidiary to dollars using month-end rates of exchange for assets and liabilities and average rates of exchange for revenues, costs, and expenses. The Company records translation gains and losses in accumulated other comprehensive income as a component of stockholders’ equity. Translation losses were immaterial for the three months ended March 31, 2012. As the Company's international subsidiary was established in late 2011, no such translation gains or losses were recorded in the first quarter of 2011. The Company records net gains and losses resulting from foreign exchange transactions as a component of interest and other income, net. Foreign currency gains were immaterial for the three months ended March 31, 2012 and 2011.

Concentration of Credit Risk

The Company derives a significant portion of its revenue from products and services that it supplies to electricity providers, such as utilities and independent service operators. Changes in economic conditions and unforeseen events could occur and could have the effect of reducing use of electricity by our customers’ consumers. The Company’s business success depends in part on its relationships with a limited number of large customers. During the three months ended March 31, 2012, the Company had three customers which accounted for 17%, 15% and 11% of the Company’s revenue. The total billed and unbilled accounts receivable from these customers was $18,216, in the aggregate, as of March 31, 2012. The total billed and unbilled accounts receivable from these customers was $19,107, in the aggregate, as of December 31, 2011. During the three months ended March 31, 2011, the Company had two customers which accounted for 24% and 17% of the Company’s revenue. No other customer accounted for more than 10% of the Company’s total revenue during the three months ended March 31, 2012 and 2011.

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

Recent Accounting Pronouncements

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

Index to Form 10-Q

has elected to present two consecutive statements.


3.	Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed using the weighted average number of common shares outstanding and, when dilutive, potential common shares from options and warrants using the treasury stock method and from convertible securities using the if-converted method. Because the Company reported a net loss for the three months ended March 31, 2012 and 2011, all potential common shares have been excluded from the computation of the dilutive net loss per share for all periods presented because the effect would have been anti-dilutive. Such potential common shares consist of the following:



	Three Months Ended
	March 31,
	2012	2011
Subordinated debt convertible to common stock	2,747,252	2,747,252
Unvested restricted stock awards	872,146	450,042
Outstanding options	2,301,439	2,852,912
Total	5,920,837	6,050,206


4.	Marketable Securities

The amortized cost and fair value of marketable securities, with gross unrealized gains and losses, as well as the balance sheet classification as of March 31, 2012 and December 31, 2011, respectively, is presented below.



	March 31, 2012
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Cash and Equivalents		Restricted Cash
Money market funds	$	13,505	$	—	$	—	$	13,505	$	2,313	$	11,192
Total marketable securities	13,505		—		—		13,505		2,313		11,192
Cash in operating accounts	15,740		—		—		15,740		15,740		—
Total	$	29,245	$	—	$	—	$	29,245	$	18,053	$	11,192



	December 31, 2011
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Cash and Equivalents		Restricted Cash
Money market funds	$	14,305	$	—	$	—	$	14,305	$	11,312	$	2,993
Total marketable securities	14,305		—		—		14,305		11,312		2,993
Cash in operating accounts	13,719		—		—		13,719		12,329		1,390
Total	$	28,024	$	—	$	—	$	28,024	$	23,641	$	4,383

Realized gains and losses to date have not been material. Interest income for the three months ended March 31, 2012 and 2011 was immaterial.

The Company applies a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories:


•	Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.


•	Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.


•	Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions market participants would

Index to Form 10-Q

use in pricing the asset or liability.

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

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

The table below presents marketable securities, grouped by fair value levels, as of March 31, 2012 and December 31, 2011.



			Fair Value Measurements at Reporting Date Using
	March 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market funds	$	13,505	$	13,505	$	—	$	—
Total	$	13,505	$	13,505	$	—	$	—



			Fair Value Measurements at Reporting Date Using
	December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market funds	$	14,305	$	14,305	$	—	$	—
Total	$	14,305	$	14,305	$	—	$	—


5.	Long-Term Debt

On November 5, 2010, Comverge, Inc. and its wholly-owned subsidiaries entered into a five-year $15,000 subordinated convertible loan and security agreement with Partners For Growth III, L.P. ("PFG"). Pursuant to Schedule 13D filed with the Securities and Exchange Commission on February 27, 2012, Grace Bay Holdings II, LLC ("Grace Bay") entered into an Assignment and Assumption Agreement with PFG ("the Assignment Agreement”), whereby Grace Bay purchased $7,650 or 51% of the aggregate principal amount of the PFG loan with an option to purchase the remaining 49%, effective February 24, 2012. On March 2, 2012, PFG gave notice of its right under the Assignment Agreement to put its remaining interest in the loan to Grace Bay (the “Put”). By letter dated March 8, 2012, Grace Bay delivered notice to the Company that it had acquired PFG's remaining interest in the Note. From and after March 8, 2012, PFG does not have any voting or dispositive control over the loan.

On March 26, 2012, in connection with entering into the Merger Agreement as discussed in Note 1, the Company also entered into (1) a Note Purchase and Security Agreement by and among the Company, Peak Holding Corp. and the Purchasers and subsidiaries of the Company named therein (the “Note Purchase Agreement”), (2) a Forbearance Agreement by and among the Company, Grace Bay and the subsidiaries of the Company named therein (the “Grace Bay Forbearance Agreement”), (3) a Forbearance Agreement by and among the Company and the other parties to the Note Purchase Agreement (the “NPA Forbearance”), and (4) a Forbearance and Sixth Amendment Agreement by and among the Company, Silicon Valley Bank and the subsidiaries of the Company named therein (the “SVB Forbearance and Amendment”).

Index to Form 10-Q

Pursuant to the Note Purchase Agreement, the Company borrowed $12,000, which amount was funded on March 26, 2012. The Company paid $240 in closing fees and reimbursed certain expenses of the lender on March 26, 2012. The reimbursement was recorded as a discount to the debt and will be amortized to interest expense over the life of the note. The note issued pursuant to the Note Purchase Agreement matures on the earliest of December 31, 2013, an event of default, the maturity date of the SVB revolving loan, the maturity date of the SVB term loan or the date the SVB obligations are paid in full. The note bears interest at a rate of 15% per annum, which rate increases 0.5% per year on the anniversary of the effective date of the agreement, which is March 26, 2012. Interest is payable in kind in arrears on the first day of each calendar quarter. The amounts outstanding pursuant to the Note Purchase Agreement are secured by substantially all of the assets of Comverge, Inc. and its subsidiaries. Additionally, the indebtedness under the Note Purchase Agreement is convertible into 19.99% of the outstanding shares of common stock at a conversion price of $1.40 per share, until the Company obtains stockholder approval for the issuance of additional shares of common stock pursuant to the Note Purchase Agreement. If the stockholders of the Company approve the issuance of additional shares of common stock pursuant to the Note Purchase Agreement, the entire principal amount of the indebtedness would be convertible into 8,571,428 shares of common stock. The debt cannot be converted into shares until either (i) Purchaser accepts for purchase the shares of common stock tendered in the Offer or (ii) the Merger Agreement is terminated. The indebtedness may also be converted into preferred stock at $1,000 per share. The Note Purchase Agreement includes a beneficial conversion feature, valued at $3,343, as the conversion price is less than the market price at the commitment date. Conversion is limited to certain circumstances as described above and, as such, the beneficial conversion feature will be recorded when conversion is contractually available to Peak Holding Corp. At such time, the Company will record a debt discount for the beneficial conversion feature and subsequently amortize the debt discount to interest expense.

The Note Purchase Agreement also contains certain covenants of the Company that must be maintained during the time that the indebtedness under the Note Purchase Agreement is outstanding, including financial covenants. The Company must maintain a tangible net worth for the quarter ending March 31, 2012 of $41,650 and an adjusted quick ratio of 0.70:1.00 as of March 31, 2012. The Note Purchase Agreement also contains additional financial covenants, such as fixed charge coverage ratio, total leverage ratio and EBITDA, which are effective at varying dates after March 31, 2012. The Company must also limit capital expenditures during the years 2012 to 2015 to those amounts established in the agreement.

In connection with the Company's entry into the Merger Agreement, the Company also entered into the Grace Bay Forbearance Agreement, pursuant to which Grace Bay agreed to forbear its right to exercise rights and remedies under that certain Loan and Security Agreement dated as of November 5, 2010, as amended, originally between the Company and PFG, which loan agreement was acquired by Grace Bay as disclosed above (the “Grace Bay Loan Agreement”). Grace Bay's forbearance of its rights and remedies under the Grace Bay Loan Agreement extends until July 10, 2012, unless otherwise terminated earlier. The Grace Bay Forbearance terminates in the event of a Material Default (as defined in the Grace Bay Forbearance Agreement) or a Company breach of the terms of the Grace Bay Forbearance Agreement. Additionally, the Grace Bay Forbearance Agreement terminates immediately in the event the Offer is not completed, such as the Offer has not been accepted by the holders of at least 50% plus one share of the Company's outstanding common stock. In the event the Merger Agreement is terminated in connection with the Company's pursuit of a Superior Proposal, the forbearance period will continue for an additional 45 days from termination of the Merger Agreement and the Grace Bay Forbearance Agreement provides that the amounts outstanding under the Grace Bay Loan Agreement may be repaid by the Company upon the successful completion of a tender offer by such other acquiring party in a Superior Proposal transaction. If the Grace Bay Forbearance Agreement terminates, Grace Bay would be able to pursue any and all rights and remedies it may have with respect to events of default under the Grace Bay Loan Agreement.

Under the Grace Bay Loan Agreement, interest is payable monthly, on the first day of each month for interest accrued during the prior month. While Partners for Growth, III, L.P. (“PFG”) (Grace Bay's predecessor-in-interest) held the convertible note under the Loan Agreement, PFG had consistently initiated an automated funds transfer from Comverge's accounts on the first day of each month for the required interest payments, including on March 1, 2012, the date after which Grace Bay had acquired 51% of the convertible note. The Company anticipated that interest payments would continue to be made in such manner, but no such automated funds transfer was initiated on April 1, 2012. On April 17, 2012, upon discovering that such automated funds transfer had not been initiated by Grace Bay, the Company immediately notified Grace Bay. On April 18, 2012, the Company tendered the interest payment (the “April 1 Interest Payment”) and Grace Bay accepted such payment. Grace Bay also agreed to waive any alleged Defaults or Events of Default (as defined in each of the Grace Bay Loan Agreement), if any, and Material Defaults (as defined in each of the Grace Bay Forbearance Agreement and the Peak Forbearance Agreement, respectively), if any, arising as a result of or in connection with the April 1 Interest Payment, but also reserved its rights with respect to any other and/or future Events of Default or Material Defaults.

As previously disclosed in our Form 10-K for the year ended December 31, 2011, the Company did not meet the fiscal year

Index to Form 10-Q

2011 revenue target set forth in the Grace Bay Loan Agreement, which triggered the amortization right. The Grace Bay Forbearance Agreement provides for a forbearance of the requirement that the Company make amortization payments pursuant to the Grace Bay Loan Agreement. The Company paid $75 in a forbearance fee and reimbursed Grace Bay for reasonable costs and expenses related to the forbearance agreement, which were recorded to interest expense in the period. In the event the forbearance period is terminated, the Company would be required to make the amortization payments required by the Grace Bay Loan Agreement. Such amortization payments would be front-loaded, such that 45% of the loan balance (approximately $6,750 as of March 31, 2012) would be due over the first twelve months after Grace Bay's election to amortize. If the Company subsequently complies with succeeding measurements periods, the Company may prospectively cease monthly amortization of the loan; provided however, Grace Bay may again exercise its amortization right under the loan agreement if the Company fails to meet future minimum revenue targets. If Grace Bay exercises its amortization right at any time, the Company, at the election of Peak Holding Corp., must prepay 25% of the outstanding indebtedness under the Note Purchase Agreement immediately after the amortization right has been exercised, 25% within three months after the amortization right has been exercised, 25% within six months after the amortization right has been exercised and 25% within nine months after the amortization right has been exercised. These payments to Peak Holding Corp. are effective regardless of whether the amortization right has been suspended, deferred, terminated or otherwise stopped by Grace Bay.

The provisions of the NPA Forbearance Agreement are generally consistent with those set forth in the Grace Bay Forbearance Agreement. The NPA Forbearance Agreement similarly provides that Peak Holding Corp. and the Purchasers of Notes under the Note Purchase Agreement forbear on their rights and remedies otherwise available due to events of default under the Note Purchase Agreement. The term of the NPA Forbearance Agreement is consistent with the term of the Grace Bay Forbearance Agreement, including the early termination provisions thereof. If the NPA Forbearance Agreement terminates, the Purchasers thereunder would be able to pursue any and all rights and remedies they may have with respect to events of default under the Note Purchase Agreement.

The SVB Forbearance and Amendment provides that SVB will forbear on its rights to exercise any rights and remedies available to it pursuant to the Loan and Security Agreement dated November 6, 2008, as amended (the “SVB Loan Agreement”). The Company paid $150 in a forbearance fee and reimbursed Grace Bay for reasonable costs and expenses related to the forbearance agreement, which were recorded to interest expense in the period. The Company also recorded a $250 fee to interest expense that will be paid on the termination of the forbearance period. Unless otherwise terminated earlier, the forbearance set forth in the SVB Forbearance and Amendment terminates on July 10, 2012. The forbearance period, however, terminates immediately upon the occurrence of any event of default under the SVB Loan Agreement. Additionally, the forbearance period will terminate if the Company breaches the terms of the forbearance set forth in the SVB Forbearance and Amendment. Upon termination of the forbearance period, SVB may pursue any and all rights and remedies it may have with respect to events of default under the SVB Loan Agreement. Further, in the event one of the forbearance agreements (the Grace Bay Forbearance Agreement, the NPA Forbearance Agreement or the SVB Forbearance and Amendment) terminates, all of the forbearance agreements terminate. In addition to the forbearance terms set forth in the SVB Forbearance and Amendment, the agreement also amends the SVB Loan Agreement with respect to certain matters. The SVB Loan Agreement is amended to set the maturity date at July 10, 2012, which maturity date may be extended to December 31, 2012, if the Company consummates a sale of the Company pursuant to the Merger Agreement. Additionally, the SVB Loan Agreement has been amended to terminate the Company's ability to borrow under the revolver set forth in the SVB Loan Agreement and requires that the outstanding term loans and revolving balance be repaid in full. The Company paid the outstanding balance of the loan on March 26, 2012. Pursuant to the SVB Forbearance and Amendment the Company will have the ability to issue new letters of credit, however new letters of credit issued under the facility must be fully cash collateralized. The amendment establishes the tangible net worth and adjusted quick ratio for 2012. For the quarter ending March 31, 2012, the Company must maintain tangible net worth of $49,000. As of March 31, 2012, the Company must measure an adjusted quick ratio of 0.80:1.00. The amendment also changes the calculation of the borrowing base to include certain PJM bi-lateral transactions. The amendment no longer includes a minimum cash requirement, which was previously $20,000. As of March 31, 2012, we had $24,981 face value of irrevocable letters of credit outstanding from the SVB facility.

The Company met the financial covenant requirements for the period ended March 31, 2012. However, management believes it is possible that the Company will not meet the covenant requirements during 2012 if additional capitalization of the Company is not achieved. The Company's failure to comply with these covenants may result in the declaration of an event of default under each of the loan agreements.

The Note Purchase Agreement, the Grace Bay Forbearance Agreement, the NPA Forbearance and SVB Forbearance and Amendment are included as exhibits with the Company's Current Report on Form 8-K as filed with the SEC on March 26, 2012.

Long-term debt as of March 31, 2012 and December 31, 2011 consisted of the following:

Index to Form 10-Q



	March 31, 2012			December 31, 2011
Security and loan agreement with SVB, collateralized by all assets of Comverge, Inc. and its subsidiaries, interest payable at a variable rate (Not applicable as of March 31, 2012 and 3.27% as of December 31, 2011)	$	—		$	11,250
Subordinated convertible loan agreement with Grace Bay, secured by all assets of Comverge, Inc. and its subsidiaries, maturing in November 2015, interest payable at a variable rate (10.5% as of March 31, 2012 and 6.50% December 31, 2011)	15,000			15,000
Subordinated convertible loan agreement with Peak Holding Corp., secured by all assets of Comverge, Inc. and its subsidiaries, maturing in December 2013, interest payable at a fixed rate (15.0% as of March 31, 2012 and not applicable as of December 31, 2011)	11,147			N/A
Total debt	26,147			26,250
Less: Current portion of long-term debt	(26,147		)	(9,188		)
Total long-term debt	$	—		$	17,062

Based on the short maturities of the Company's loan agreements, the fair value of our outstanding debt approximates the carrying value.


6.	Legal Proceedings

The Company assesses the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the liability required, if any, for these contingencies is made after an analysis of each known issue. In accordance with applicable accounting guidance, a liability is recorded when the Company determines that a loss is probable and the amount can be reasonably estimated. Additionally, the Company discloses contingencies for which a material loss is reasonably possible, but not probable. As a litigation or regulatory matter develops, the Company monitors the matter for further developments that could affect the amount previously accrued, if any, and updates such amount accrued or disclosures previously provided as appropriate. As of March 31, 2012, there were no material contingencies requiring accrual.

On November 22, 2010, a civil action complaint was filed against the Company in the United States District Court for the Eastern District of Kentucky (Case No. 5:10-CV-00398) by East Kentucky Power Cooperative, Inc. (“EKPC”). EKPC alleged a breach of warranty claim relating to certain thermostats manufactured by White-Rodgers that it claims are defective. The relief sought by EKPC includes an unspecified amount of damages, pre- and post-judgment interest and costs. The parties are attempting to resolve the dispute, however, if the dispute cannot be resolved, the Company intends to defend this claim vigorously.

On May 9, 2011, a civil action complaint was filed against the Company and White-Rodgers, a division of Emerson Electric, in the Ontario Superior Court of Justice (Case No. CV-11-16275) by Enwin Utilities Ltd. Enwin alleged breach of contract and tort claims for approximately 2,000 thermostats, manufactured by White-Rodgers, and purchased from Comverge. The relief sought by Enwin includes $1,000 in damages plus costs. The Company intends to defend this claim vigorously.

Certain lawsuits have been filed in connection with the Merger and Offer. Each of the filed lawsuits alleges that the Company's directors breached their fiduciary duties in connection with the Offer and Merger and that some or all of the Company, Parent, Purchaser and H.I.G. aided and abetted the breaches. The actions purport to be brought individually and on behalf of similarly situated public shareholders of the Company and seek various forms of relief, including an injunction of the Offer and Merger, rescission of the Offer and Merger to the extent it is consummated prior to the entry of a final judgment, an accounting to the plaintiffs and the class for any damages suffered as a result of the defendants' alleged wrongdoing, and the costs and expenses of the actions.

On March 29, 2012, a purported stockholder of the Company filed a putative class action lawsuit, captioned Stourbridge Investments LLC v. Dreyer, et al., Case No. 12A-02787-8, in the Superior Court of Gwinnett County, Georgia, naming as defendants the Company, the Company's directors, Purchaser and Parent. On April 2, 2012, the plaintiff in the Stourbridge Investments action filed a motion for expedited discovery and proceedings and a motion for preliminary injunction with the Superior Court of Gwinnett County, Georgia. On April 3, 2012, a putative class action lawsuit, captioned Cunningham v.

Index to Form 10-Q

Comverge, Inc., et al., Case No. 12A-02929-2, was filed in the Superior Court of Gwinnett County, Georgia, naming as defendants the Company, the Company's directors, Purchaser, Parent and H.I.G.

On March 29, 2012, a putative class action lawsuit, captioned Schultz v. Young, et al., Case No. 7368, was filed in the Delaware Court of Chancery, naming as defendants the Company, the Company's directors, Purchaser, Parent, and H.I.G. On March 30, 2012, a putative class action lawsuit, captioned Somlinga v. Dreyer, et al., Case No. 7371, was filed in the Delaware Court of Chancery, naming as defendants the Company, the Company's directors, Purchaser, and H.I.G. On April 2, 2012, a putative class action lawsuit, captioned Cohen v. Young, et al., Case No. 7386, was filed in the Delaware Court of Chancery, naming as defendants the Company, the Company's directors, Purchaser, Parent and H.I.G. On April 4, 2012, a putative class action lawsuit, captioned Kanakamedala v. Young, et al., Case No. 7399, was filed in the Delaware Court of Chancery, naming as defendants the Company, the Company's directors, Parent and Purchaser. Also on April 4, 2012, a putative class action lawsuit, captioned Walker v. Comverge, Inc., et al., Case No. 7398, was filed in the Delaware Court of Chancery, naming as defendants the Company, the Company's directors, Parent, Purchaser, and H.I.G. Plaintiffs in the Somlinga, Cohen, and Cunningham actions also filed requests for the production of documents. On April 6, 2012, the Delaware Court of Chancery consolidated the individual cases pending in Delaware under the caption In re Comverge, Inc. Shareholders Litigation, Case No. 7368-VCP and designated the complaint in the Somlinga action as the operative complaint (the “Consolidated Action”).

On April 11, 2012, the defendants in the Consolidated Action filed a Motion to Proceed in One Jurisdiction and Dismiss or Stay Litigation in Other Jurisdiction with the Court of Chancery and with the Superior Court of Gwinnett County in the Stourbridge and Cunningham cases described above asking the two courts to confer and rule that the litigation should proceed in either the Delaware or Georgia courts and that proceedings in the other jurisdiction should be stayed or dismissed. On April 13, 2012, the Court of Chancery issued a letter ruling granting the defendants' motion and indicating that the courts had conferred and concluded that the Consolidated Action would proceed in Delaware and that the Stourbridge and Cunningham cases would either be stayed or dismissed.

On April 18, 2012, the plaintiffs in the Consolidated Action filed a Consolidated Amended Complaint (“CAC”). The CAC alleges, among other things, that the Individual Defendants breached their fiduciary duties in connection with the Offer and the Merger by failing to take steps to maximize the value of the Company to its public stockholders and are attempting to deprive stockholders of the true value of their investment in the Company. The CAC also alleges Purchaser and H.I.G. Capital, LLC have aided and abetted the Individual Defendants' breach of their fiduciary duties to the Company's stockholders by, among other things, causing Grace Bay to purchase the Convertible Senior Debt in violation of the Confidentiality Agreement and asserting rights thereunder. The CAC also alleges that the Schedule 14D-9 filed by the Company on April 12, 2012 fails to disclose material facts necessary for stockholders to make an informed decision with regard to the Offer. The CAC seeks, among other things, a declaration that the action brought by the complaint is properly maintainable as a class action and that the plaintiff be certified as a class representative, an order enjoining the Merger Agreement and proposed Merger, an order requiring the Company to enforce the Confidentiality Agreement, an order requiring the disclosure of additional information to stockholders and an extension of the Offer, an accounting to plaintiff of damages, an award to the plaintiff of costs, including reasonable attorneys' and experts' fees and such other relief as the court deems proper. Purchaser, Parent, H.I.G. Capital, LLC and the Company believe that the CAC is without merit and intend to defend the case vigorously. The foregoing summary of the CAC does not purport to be complete and is qualified in its entirety by reference to the CAC.

Also on April 18, 2012, Cunningham filed a complaint in the Court of Chancery of the State of Delaware (the “Cunningham Delaware Complaint”) reasserting the same claims and requesting the same relief as in his complaint filed in Georgia in addition to claims that the defendants had failed to disclose material facts necessary for stockholders to make an informed decision with regard to the Offer. The foregoing summary of the Cunningham Delaware Complaint does not purport to be complete and is qualified in its entirety by reference to the Cunningham Delaware Complaint. The Cunningham Delaware Complaint was consolidated with the CAC on May 2, 2012.

On April 19, 2012, the plaintiffs in the Consolidated Action filed a motion to expedite proceedings in anticipation of a motion for a preliminary injunction and hearing thereon. On April 27, 2012, the Court of Chancery granted plaintiffs' motion to expedite. Following limited discovery and a hearing on May 7, 2012, the Court of Chancery denied plaintiffs' motion for a preliminary injunction on May 8, 2012.

At this time, the Company's management cannot estimate with reasonable certainty the ultimate disposition of any of the unresolved lawsuits and, while the Company does not believe it will sustain material liability in relation to any of the two active disputes described above, there can be no assurance that the Company will not sustain material liability as a result of, or related to, these lawsuits.

Index to Form 10-Q


7.	Stock-Based Compensation

The Company’s Amended and Restated 2006 Long-Term Incentive Plan (“2006 LTIP”) was approved by the Company’s stockholders in May 2010 and provides for the granting of stock-based incentive awards to eligible Company employees and directors and to other non-employee service providers, including options to purchase the Company’s common stock and restricted stock awards at not less than the fair value of the Company’s common stock on the grant date and for a term of not greater than seven years. Awards are granted with service vesting requirements, performance vesting conditions, market vesting conditions, or a combination thereof. Subject to adjustment as defined in the 2006 LTIP, the aggregate number of shares available for issuance is 7,556,036. Stock-based incentive awards expire between five and seven years from the date of grant and generally vest over a one to four-year period from the date of grant. As of March 31, 2012, 1,132,771 shares were available for grant under the 2006 LTIP. The expense related to stock-based incentive awards recognized for the three months ended March 31, 2012 and 2011 was $746 and $1,136, respectively.

A summary of the Company’s stock option activity for the three months ended March 31, 2012 is presented below:



	March 31, 2012
	Number of Options (in Shares)		Weighted Average Exercise Price		Range of Exercise Prices
Outstanding at beginning of period	2,361,750		$	11.06	$0.58-$34.23
Granted	—		N/A		N/A
Exercised	(12,650	)	0.71		$0.58-$0.74
Cancelled	(43,317	)	22.03		$0.58-$34.23
Forfeited	(4,344	)	9.50		$8.59-$12.83
Outstanding at end of period	2,301,439		10.91		$0.58-$34.23
Exercisable at end of period	1,603,825		12.30		$0.58-$34.23



	Outstanding as of March 31, 2012				Exercisable as of March 31, 2012
Exercise Prices	Number Outstanding	Average Remaining Contractual Life	Weighted Average Exercise Price per Share		Number Exercisable	Average Remaining Contractual Life	Weighted Average Exercise Price per Share
	(In Shares)	(In Years)			(In Shares)	(In Years)
$0.58 - $2.39	98,970	0.6	$	0.75	98,970	0.6	$	0.75
$2.40 - $3.99	109,524	5.9	3.36		20,524	4.8	3.35
$4.00 - $7.99	486,468	4.4	5.22		254,061	3.3	4.86
$8.00-$10.33	676,554	4.3	9.78		384,729	3.9	9.71
$10.34 - $14.09	461,282	2.7	11.56		376,900	2.2	11.73
$14.10 - $17.99	750	0.5	14.10		750	0.5	14.10
$18.00 - $23.53	341,869	1.7	18.05		341,869	1.7	18.05
23.54	13,672	1.5	23.54		13,672	1.5	23.54
$23.55 - $36.00	112,350	2.2	32.80		112,350	2.2	32.80
	2,301,439	3.4	10.91		1,603,825	2.6	12.30

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

Index to Form 10-Q



	Three Months Ended
	March 31,
	2012	2011
Risk-free interest rate	N/A	2.19	%
Expected term of options, in years	N/A	4.5
Expected annual volatility	N/A	70	%
Expected dividend yield	N/A	—	%

The weighted average grant-date fair value of options granted during the three months ended March 31, 2011 was $3.20.

A summary of the Company’s restricted stock award activity for the three months ended March 31, 2012 is presented below:



	March 31, 2012
	Number of Shares		Weighted Average Grant Date Fair Value Per Share
Unvested at beginning of period	395,693		$	4.95
Granted	625,830		1.41
Vested	(120,177	)	6.92
Forfeited	(29,200	)	19.06
Unvested at end of period	872,146		1.67


8.	Segment Information

As of March 31, 2012, the Company had two reportable segments: the Residential Business segment and the C&I Business segment. Management has three primary measures of segment performance: revenue, gross profit and operating income. The Company does not allocate assets and liabilities to its operating segments. All inter-operating segment revenues were eliminated in consolidation. During the three months ended March 31, 2012, 89% of revenues were generated with domestic customers.

The Residential Business segment sells intelligent energy management solutions to utility customers for use in programs with residential and small commercial end-use participants. These solutions include intelligent hardware, our IntelliSOURCE software and services, such as installation, customer acquisition marketing and program management. If the Company enters into a fully-outsourced pay-for-performance agreement providing capacity or energy, in which it typically owns the intelligent energy management system, the Company refers to the program as a VPC program. The VPC programs are pay-for-performance in that the Company is only paid for capacity that it provides as determined by a measurement and verification process with its customers. For VPC programs, cost of revenue is based on operating costs of the demand response system, primarily telecommunications costs related to the system and depreciation of the assets capitalized in building the demand response system. If the customer elects to own the intelligent energy management system, the Company refers to the program as a turnkey program. For turnkey programs and other sales, product and service cost of revenue includes materials, labor and overhead.

The C&I Business segment provides intelligent energy management solutions to utilities and independent system operators that are managing programs or auctions for large C&I consumers. These solutions are delivered through the management of C&I megawatts in open markets and VPC programs as well as through the completion of energy efficiency projects. Cost of revenue includes participant payments for the VPC and open market programs as well as materials, labor and overhead for the energy efficiency programs.

Operating expenses directly associated with each operating segment include sales, marketing, product development, amortization of intangible assets and certain administrative expenses. Operating expenses not directly associated with an operating segment are classified as “Corporate Unallocated Costs.” Corporate Unallocated Costs include support group compensation, travel, professional fees and marketing activities.

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

Index to Form 10-Q



	Three Months Ended						March 31, 2012
	Residential Business			C&I Business			Corporate Unallocated Costs			Total
Revenue
Product	$	8,095		$	—		$	—		$	8,095
Service	11,654			12,832			—			24,486
Total revenue	19,749			12,832			—			32,581
Cost of revenue
Product	6,125			—			—			6,125
Service	6,285			3,657			—			9,942
Total cost of revenue	12,410			3,657			—			16,067
Gross profit	7,339			9,175			—			16,514
Operating expenses
General and administrative expenses	4,280			1,042			6,040			11,362
Marketing and selling expenses	2,564			1,943			527			5,034
Research and development expenses	1,133			—			—			1,133
Amortization of intangible assets	—			62			4			66
Operating income (loss)	(638		)	6,128			(6,571		)	(1,081		)
Interest and other expense (income), net	1			(139		)	1,523			1,385
Income (loss) before income taxes	$	(639	)	$	6,267		$	(8,094	)	$	(2,466	)



	Three Months Ended					March 31, 2011
	Residential Business		C&I Business			Corporate Unallocated Costs			Total
Revenue
Product	$	4,691	$	—		$	—		$	4,691
Service	10,567		3,367			—			13,934
Total revenue	15,258		3,367			—			18,625
Cost of revenue
Product	3,462		—			—			3,462
Service	4,981		2,415			—			7,396
Total cost of revenue	8,443		2,415			—			10,858
Gross profit	6,815		952			—			7,767
Operating expenses
General and administrative expenses	3,647		990			5,597			10,234
Marketing and selling expenses	1,770		1,865			1,454			5,089
Research and development expenses	1,049		—			—			1,049
Amortization of intangible assets	—		233			4			237
Operating income (loss)	349		(2,136		)	(7,055		)	(8,842		)
Interest and other expense, net	1		1			927			929
Income (loss) before income taxes	$	348	$	(2,137	)	$	(7,982	)	$	(9,771	)

Index to Form 10-Q

9. Subsequent Event

In May 2012, the Company committed pre-auction cash collateral of $7,500 in advance of PJM’s 2015-2016 Reliability Pricing Model Base Residual. All, a portion or none of the deposits may be returned to the Company during the second quarter pending the completion of the open market auction process.

Index to Form 10-Q

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

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q and the documents incorporated into this Quarterly Report on Form 10-Q by reference contain forward-looking statements. These forward-looking statements include statements with respect to our financial condition, results of operations and business. The words “assumes,” “believes,” “expects,” “budgets,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or similar terminology identify forward-looking statements. These forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized, cause actual results to differ materially from our forward-looking statements and/or otherwise materially affect our financial condition, results of operations and cash flows. Please see the section below entitled “Risk Factors,” the section entitled “Risk Factors” in our Annual Report on Form 10-K (File No. 001-33399) filed with the Securities and Exchange Commission, or SEC, on March 15, 2012, and elsewhere in this filing for a discussion of examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. You should carefully review the risks described herein and in other documents we file from time to time with the SEC, including our other Quarterly Reports on Form 10-Q to be filed in 2012. We caution readers not to place undue reliance on any forward-looking statements, which only speak as of the date hereof. Except as provided by law, we undertake no obligation to update any forward-looking statement based on changing circumstances or otherwise.

You should read the following discussion together with management’s discussion and analysis, financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 15, 2012 and the financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Overview

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

We provide our IEM solutions through our two reportable segments: the Residential Business segment and the Commercial & Industrial, or C&I, Business segment. The Residential Business segment sells IEM solutions to utility customers for use in programs with residential and small commercial end-use participants. These solutions include hardware, our IntelliSOURCE software and services, such as installation, 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. The C&I Business also includes the market operator program as we create and co-manage South Africa's open market for demand response resources.

Merger Agreement

Index to Form 10-Q

into and not withdrawn prior to 5 p.m., New York City time, on May 9, 2012, as well as other customary conditions, including receipt of certain regulatory approvals, the accuracy of the representations and warranties and compliance with the covenants contained in the Merger Agreement, in certain cases subject to certain qualifications and limitations. On May 10, 2012, the Company announced that the tender offer expired at 5:00 p,m., New York City time, on May 9, 2012 and that, as of the expiration time, 14,407,789 shares of the Company's common stock had been validly tendered and not withdrawn, including 744,898 shares that had been tendered pursuant to notices of guaranteed delivery, representing approximately 52.2% of the outstanding shares of the Company. H.I.G. Capital, LLC also announced on May 10, 2012 that , commencing immediately, Purchaser commenced a subsequent offering period to acquire all of the remaining untendered shares, commencing immediately and expiring at 11:59 p.m., New York City time, on Monday, May 14, 2012. During the subsequent offering period, the Company's stockholders who did not previously tender their shares of common stock in the offer may do so and Purchaser will accept for payment and promptly pay for such shares as they are tendered. Stockholders who tender shares during such period will receive the same $1.75 per share price, without interest and subject to applicable withholding taxes, that was paid in the tender offer. Procedures for tendering shares during the subsequent offering period are the same as during the initial offering period with two exceptions: (1) shares cannot be delivered by the guaranteed delivery procedure and (2) in accordance with SEC rules, shares tendered during the subsequent offering period may not be withdrawn.

On March 26, 2012, in connection with entering into the Merger Agreement , the Company also entered into (1) a Note Purchase and Security Agreement by and among the Company, Peak Holding Corp. and the Purchasers and subsidiaries of the Company named therein (the “Note Purchase Agreement”), (2) a Forbearance Agreement by and among the Company, Grace Bay and the subsidiaries of the Company named therein (the “Grace Bay Forbearance Agreement”), (3) a Forbearance Agreement by and among the Company and the other parties to the Note Purchase Agreement (the “NPA Forbearance”), and (4) a Forbearance and Sixth Amendment Agreement by and among the Company, Silicon Valley Bank and the subsidiaries of the Company named therein (the “SVB Forbearance and Amendment”). Refer to Liquidity and Capital Resources for more detail on the note and forbearance agreements.

Liquidity and Substantial Doubt about Ability to Continue as a Going Concern

The Company has incurred losses since inception, resulting in an accumulated deficit of $231.5 million and stockholders' equity of $36.2 million as of March 31, 2012. Working capital deficit as of March 31, 2012 was $4.6 million, consisting of $63.6 million in current assets and $68.3 million in current liabilities. We anticipate spending approximately $5.8 million on capital expenditures during the remaining months of 2012.

Index to Form 10-Q

$41.7 million and $49.0 million, respectively. For March 2012, the Peak Holding Corp. and SVB agreements required a minimum ratio of current assets to current liabilities of 0.70:1.00 and 0.80:1.00, respectively. The Company met the financial covenant requirements for the period ended March 31, 2012. However, management believes it is possible that the Company will not meet the covenant requirements during 2012 if additional capitalization of the Company is not achieved. The Company's failure to comply with these covenants may result in the declaration of an event of default under each of the loan agreements.

As of the date of filing the Company's Annual Report on Form 10-K, there was substantial doubt about the Company's ability to continue as a going concern. If the Merger is not consummated, the debt forbearance agreements will immediately terminate and the Company will continue to face capitalization issues. While the Company continues actively working with the Purchaser on the Merger, there can be no assurance that the Merger will be consummated which could have a material adverse impact on Company's liquidity, financial position and results of operations and its ability to continue as a going concern.

2015-2016 Reliability Pricing Model Base Residual Auction

In May 2012, the Company committed pre-auction cash collateral of $7.5 million in advance of PJM’s 2015-2016 Reliability Pricing Model Base Residual. All, a portion or none of the deposits may be returned to the Company during the second quarter pending the completion of the open market auction process.

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 March 31, 2012, we estimated that our total payments to be received through 2024 are approximately $515 million. The table below summarizes these expected payments from long-term contracts in the year in which we anticipate receipt. For the remainder of 2012, a portion of the cash payments has already been reflected in revenue for the three months ended March 31, 2012.



	Payments
	from Long-
(in millions)	Term Contracts
2012 (remaining)	$	122
2013	135
2014	108
Thereafter	150
Total	$	515

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, 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

Index to Form 10-Q

In calculating an estimated $205 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. 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 March 31, 2012 represent $84 million in payments expected to be received through the year 2014 with 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 and Market Operator

As of March 31, 2012, we expect to receive $198 million in long-term payments through the year 2015 in open market programs in which we have been awarded megawatts as well as our program in which we are creating and co-managing Africa's first open market for demand response resources. In estimating the long-term payments from our domestic open market programs, 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.

Other Contracts

We expect to receive an estimated $28 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 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.”

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 March 31, 2012, we had contractual backlog of $153 million through March 31, 2013.

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 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

Index to Form 10-Q

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 March 31, 2012 and 2011. The megawatts presented as of March 31, 2011 have been revised to be consistent with the presentation as of March 31, 2012.



	March 31, 2012
(Megawatts)	Residential Business	C&I Business	Total Comverge
VPC and energy efficiency	457	280	737
Turnkey	692	—	692
Open market (1)	—	2,636	2,636
Market operator	—	500	500
Total (2)	1,149	3,416	4,565



	March 31, 2011
(Megawatts)	Residential Business	C&I Business	Total Comverge
VPC and energy efficiency	442	294	736
Turnkey	690	—	690
Open market (1)	—	2,248	2,248
Market operator	—	—	—
Total (2)	1,132	2,542	3,674

(1) Megawatts reported for Open Markets include capacity which may be enrolled in the various programs specific to the individual Regional Transmission Operator ("RTO")/ISO market structure. Each market allows demand resources to participate in their capacity, energy and/or ancillary services markets, to the extent in which the individual resources are able to meet requirements for fulfillment of specific market products. For example, a resource may be enrolled in capacity, reserve and energy programs and at different levels such that the same megawatts are included in each program's participation.

(2) The megawatts presented in the tables above do not include 437 megawatts that we manage for a fee. We believe these megawatts are more effectively assessed by considering sites, and we have removed these megawatts from the disclosure of megawatts.

Index to Form 10-Q

Results of Operations

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

Revenue

The following table summarizes our revenue for the three months ended March 31, 2012 and 2011 (dollars in thousands):



	Three Months Ended
	March 31,
	2012		2011		Percent Change
Segment Revenue:
Residential Business	$	19,749	$	15,258	29	%
C&I Business	12,832		3,367		281	%
Total	$	32,581	$	18,625	75	%

Residential Business

Our Residential Business segment had revenue of $19.7 million for the three months ended March 31, 2012 compared to $15.3 million for the three months ended March 31, 2011, an increase of $4.5 million or 29%. The increase in revenue is due to a $1.3 million increase from our turnkey programs as we continued to build out those programs during the three months ended March 31, 2012. We also recognized an increase of $1.8 million in VPC program revenue as the results of the measurement and verification process completed for the Maryland VPC program in late 2011 are applied prospectively to the current contract year based on contractual terms. Thus, revenue and cost of revenue for the Maryland VPC program is no longer deferred until the fourth quarter of each year, as we have traditionally reported in prior periods. In addition to the Maryland VPC program, the continued build-out of the Pennsylvania VPC program during the three months ended March 31, 2012 contributed to the increase in VPC program revenue. We also recognized an increase of $1.4 million in other products and services, the majority of which related to the sales of digital control units.

During the three months ended March 31, 2012, we sold 80,000 digital control units and thermostats compared to 60,000 digital control units and thermostats during the three months ended March 31, 2011, an increase of 20,000 units mainly due to the increase in stand-alone product sales. For the three months ended March 31, 2012, our turnkey programs comprised 32% of total units sold compared to 51% during the three months ended March 31, 2011.

C&I Business

Our C&I Business segment had revenue of $12.8 million for the three months ended March 31, 2012 compared to $3.4 million for the three months ended March 31, 2011, an increase of $9.5 million or 281%. The increase in revenue is due to an increase of $6.2 million in our open market programs and $3.5 million in our market operator program partially offset by a decrease of $0.2 million from other energy services. The increase in open market revenue of $6.2 million consisted of revenue recognized due to the results of our megawatt portfolio optimization in the PJM open market completed during the three months ended March 31, 2012 as well as megawatts bid into open markets in other geographical regions.

Gross Profit and Gross Margin

The following table summarizes our gross profit and gross margin for the three months ended March 31, 2012 and 2011 (dollars in thousands):

Index to Form 10-Q



	Three Months Ended
	March 31,
	2012				2011
	Gross Profit		Gross Margin		Gross Profit		Gross Margin
Segment Gross Profit:
Residential Business	$	7,339	37	%	$	6,815	45	%
C&I Business	9,175		72	%	952		28	%
Total	$	16,514	51	%	$	7,767	42	%

Residential Business

Gross profit for our Residential Business segment was $7.3 million for the three months ended March 31, 2012 compared to $6.8 million for the three months ended March 31, 2011, an increase of $0.5 million. The increase in gross profit is due to an increase of $1.5 million from our Maryland and Pennsylvania VPC programs partially offset by a decrease of $0.5 million from our turnkey programs and $0.5 million from our other product and service sales. The increase in gross profit from our VPC programs is due to the increased revenue during the three months ended March 31, 2012. The decrease in gross profit from our turnkey programs is due to increased costs for certain service deliverables for the three months ended March 31, 2012 as we continue to penetrate the markets for enrollments. The decrease in gross profit from other product and service is due to the non-recurring payment received from White-Rodgers during the three months ended March 31, 2011.

Gross margin for our Residential Business segment was 37% for the three months ended March 31, 2012 compared to 45% for the three months ended March 31, 2011. The decrease of eight percentage points is due to the higher gross margin from the non-recurring payment received from White-Rodgers during the first quarter of 2011 for a portion of our field work to implement the corrective action plan.

C&I Business

Gross profit for our C&I Business segment was $9.2 million for the three months ended March 31, 2012 compared to $1.0 million for the three months ended March 31, 2011, an increase of $8.2 million. The increase in gross profit is due to an increase of $8.6 million in our open market programs and market operator program partially offset by a decrease of $0.4 million from our other energy services. The increase in open market profit is due to increased revenue from the results of our megawatt portfolio optimization in the PJM open market completed during the three months ended March 31, 2012 as well as megawatts bid into open markets in other geographical regions.

Gross margin for our C&I Business segment was 72% for the three months ended March 31, 2012 compared to 28% for the three months ended March 31, 2011, an increase of 44 percentage points due to the margin contributed from the results of our megawatt portfolio optimization in the PJM open market as well as the market operator program.

Operating Expenses

The following table summarizes our operating expenses for the three months ended March 31, 2012 and 2011 (dollars in thousands):



	Three Months Ended
	March 31,
	2012		2011		Percent Change
Operating Expenses:
General and administrative expenses	$	11,362	$	10,234	11	%
Marketing and selling expenses	5,034		5,089		(1	)%
Research and development expenses	1,133		1,049		8	%
Amortization of intangible assets	66		237		(72	)%
Total	$	17,595	$	16,609	6	%

Index to Form 10-Q

General and Administrative Expenses

General and administrative expenses were $11.4 million for the three months ended March 31, 2012 compared to $10.2 million for the three months ended March 31, 2011, an increase of $1.1 million or 11%. The increase in general and administrative expenses is due to an increase of $1.8 million in professional and consulting fees as a result of the financial services and legal advisers utilized by the Company and the Board of Directors for strategic initiatives, including the recently announced Offer, and $0.5 million in depreciation expense partially offset by a decrease of $0.6 million in compensation and benefits, $0.3 million in stock-based compensation, $0.2 million in travel and $0.1 million in other expenses.

Marketing and Selling Expenses

Marketing and selling expenses were $5.0 million for the three months ended March 31, 2012 compared to $5.1 million for the three months ended March 31, 2011, a decrease of $0.1 million or 1%. The decrease in marketing and selling expenses is due to a decrease of $0.3 million in compensation and benefits, including commissions, and $0.1 million in stock-based compensation partially offset by a $0.3 million increase in other marketing expenses to support enrollments in our residential VPC programs.

Research and Development Expenses

Research and development expenses were $1.1 million for the three months ended March 31, 2012 compared to $1.0 million for the three months ended March 31, 2011, an increase of $0.1 million or 8%. The increase in research and development expenses is due to an increase in consulting expense of $0.1 million.

Intangible Assets

Amortization of intangible assets was $0.1 million for the three months ended March 31, 2012 compared to $0.2 million for the three months ended March 31, 2011, a decrease of $0.2 million or 72%. The decrease in amortization expense is due to the decrease in intangible assets as a result of the amortization period fully lapsing during the third quarter of 2011 for a certain asset.

In addition to the amortization presented in operating expenses, we also recorded $0.2 million in amortization expense in cost of revenue for both periods ended March 31, 2012 and 2011.

Interest and Other Expense, Net

We recorded net interest and other expense of $1.4 million during the three months ended March 31, 2012 compared to $0.9 million during the three months ended March 31, 2011, an increase of $0.5 million. The increase in net interest and other expense is primarily due to the increased interest expense recorded for fees related to the forbearance agreements entered into on March 26, 2012.

Income Taxes

A provision of $252,000 and $15,000 was recorded for the three months ended March 31, 2012 and 2011, respectively. The increase in the provision for income taxes is due to the recording of income taxes payable for our foreign entity, which commenced operations in late 2011. We provided a full valuation allowance for our deferred tax assets because the realization of any future tax benefits could not be sufficiently assured as of March 31, 2012 and 2011.

Index to Form 10-Q

Liquidity and Capital Resources

Merger Agreement

On April 11, 2012, Purchaser commenced the Offer. The consummation of the Offer is conditioned on at least a majority of the shares of the Company's common stock (calculated in accordance with the Merger Agreement) having been validly tendered into and not withdrawn prior to 5 p.m., New York City time, on May 9, 2012, as well as other customary conditions, including receipt of certain regulatory approvals, the accuracy of the representations and warranties and compliance with the covenants contained in the Merger Agreement, in certain cases subject to certain qualifications and limitations. On May 10, 2012, the Company announced that the tender offer expired at 5:00 p,m., New York City time, on May 9, 2012 and that, as of the expiration time, 14,407,789 shares of the Company's common stock had been validly tendered and not withdrawn, including 744,898 shares that had been tendered pursuant to notices of guaranteed delivery, representing approximately 52.2% of the outstanding shares of the Company. H.I.G. Capital, LLC also announced on May 10, 2012 that , commencing immediately, Purchaser commenced a subsequent offering period to acquire all of the remaining untendered shares, commencing immediately and expiring at 11:59 p.m., New York City time, on Monday, May 14, 2012. During the subsequent offering period, the Company's stockholders who did not previously tender their shares of common stock in the offer may do so and Purchaser will accept for payment and promptly pay for such shares as they are tendered. Stockholders who tender shares during such period will receive the same $1.75 per share price, without interest and subject to applicable withholding taxes, that was paid in the tender offer. Procedures for tendering shares during the subsequent offering period are the same as during the initial offering period with two exceptions: (1) shares cannot be delivered by the guaranteed delivery procedure and (2) in accordance with SEC rules, shares tendered during the subsequent offering period may not be withdrawn.

Liquidity and Substantial Doubt about Ability to Continue as a Going Concern

Index to Form 10-Q

The Company is required to meet certain financial covenants contained in the Peak Holding Corp., Grace Bay and SVB agreements, specifically a minimum tangible net worth and an adjusted quick ratio. Compliance with the adjusted quick ratio covenant is measured on a monthly basis and compliance with the tangible net worth covenant is measured on a quarterly basis. For the quarter ended March 2012, the Peak Holding Corp. and SVB agreements required a minimum tangible net worth of $41.7 million and $49.0 million, respectively. For March 2012, the Peak Holding Corp. and SVB agreements required a minimum ratio of current assets to current liabilities of 0.70:1.00 and 0.80:1.00, respectively. The Company met the financial covenant requirements for the period ended March 31, 2012. However, management believes it is possible that the Company will not meet the covenant requirements during 2012 if additional capitalization of the Company is not achieved. The Company's failure to comply with these covenants may result in the declaration of an event of default under each of the loan agreements.

The following table summarizes our cash flows for the three months ended March 31, 2012 and 2011 (dollars in thousands):



	Three Months Ended
	March 31,
	2012			2011
Operating activities	$	3,621		$	(5,851	)
Investing activities	(9,995		)	25,489
Financing activities	800			(696		)
Net change in cash and cash equivalents, excluding effect of foreign exchange	$	(5,574	)	$	18,942

Cash Flows Provided by (Used in) Operating Activities

Cash provided by operating activities is $3.6 million for the three months ended March 31, 2012 compared to cash used in operating activities of $5.9 million for the three months ended March 31, 2011, an increase of $9.5 million. The change in cash flows from operating activities included a decrease in net loss of $7.1 million, after adjusting for non-cash items including depreciation, amortization and stock-based compensation. The remaining change of $2.4 million in cash flows from operating activities is a result of the change in operating assets and liabilities, primarily in accounts receivable, inventory, accounts payable and other liabilities and deferred revenue.

Cash Flows Provided by (Used in) Investing Activities

Cash used in investing activities is $10.0 million for the three months ended March 31, 2012 compared to cash provided by investing activities of $25.5 million for the three months ended March 31, 2011, a decrease of $35.5 million. The decrease was due to a change in marketable securities of $27.7 million as we sold certain marketable securities and allowed others to mature in order to reinvest those funds in more liquid cash and cash equivalents during the three months ended March 31, 2011. The change in restricted cash for the three months ended March 31, 2012 is due to our posting cash of $9.0 million to collateralize a

Index to Form 10-Q

letter of credit currently outstanding with SVB partially offset by the release of restricted cash related to performance guarantees in other programs. Capital expenditures remained consistent period over period.

Cash Flows Provided by (Used in) Financing Activities

Cash flows provided by financing activities were $0.8 million for the three months ended March 31, 2012 and cash flows used in financing activities were $0.7 million for the three months ended March 31, 2011. During the three months ended March 31, 2012, we received $11.1 million in proceeds, net of debt discount, from the issuance of debt to Peak Holding Corp. and used these funds to repay $11.3 million of debt with SVB. We also received $1.2 million, net of offering costs, from the issuance of common stock to Aspire Capital Fund LLC. The cash flows used in financing activities for the three months ended March 31, 2011 mainly consisted of debt repayments to SVB.

Indebtedness

On November 5, 2010, Comverge, Inc. and its wholly-owned subsidiaries entered into a five-year $15.0 million subordinated convertible loan and security agreement with Partners For Growth III, L.P. ("PFG"). Pursuant to Schedule 13D filed with the Securities and Exchange Commission on February 27, 2012, Grace Bay Holdings II, LLC ("Grace Bay") entered into an Assignment and Assumption Agreement with PFG ("the Assignment Agreement”), whereby Grace Bay purchased $7.7 million or 51% of the aggregate principal amount of the PFG loan with an option to purchase the remaining 49%, effective February 24, 2012. On March 2, 2012, PFG gave notice of its right under the Assignment Agreement to put its remaining interest in the loan to Grace Bay (the “Put”). By letter dated March 8, 2012, Grace Bay delivered notice to the Company that it had acquired PFG's remaining interest in the Note. From and after March 8, 2012, PFG does not have any voting or dispositive control over the loan.

Pursuant to the Note Purchase Agreement, the Company borrowed $12.0 million, which amount was funded on March 26, 2012. The Company paid $0.2 million in closing fees and reimbursed certain expenses of the lender on March 26, 2012. The reimbursement was recorded as a discount to the debt and will be amortized to interest expense over the life of the note. The note issued pursuant to the Note Purchase Agreement matures on the earliest of December 31, 2013, an event of default, the maturity date of the SVB revolving loan, the maturity date of the SVB term loan or the date the SVB obligations are paid in full. The note bears interest at a rate of 15% per annum, which rate increases 0.5% per year on the anniversary of the effective date of the agreement, which is March 26, 2012. Interest is payable in kind in arrears on the first day of each calendar quarter. The amounts outstanding pursuant to the Note Purchase Agreement are secured by substantially all of the assets of Comverge, Inc. and its subsidiaries. Additionally, the indebtedness under the Note Purchase Agreement is convertible into 19.99% of the outstanding shares of common stock at a conversion price of $1.40 per share, until the Company obtains stockholder approval for the issuance of additional shares of common stock pursuant to the Note Purchase Agreement. If the stockholders of the Company approve the issuance of additional shares of common stock pursuant to the Note Purchase Agreement, the entire principal amount of the indebtedness would be convertible into 8,571,428 shares of common stock. The debt cannot be converted into shares until either (i) Purchaser accepts for purchase the shares of common stock tendered in the Offer or (ii) the Merger Agreement is terminated. The indebtedness may also be converted into preferred stock at $1,000 per share. The Note Purchase Agreement includes a beneficial conversion feature, valued at $3.3 million, as the conversion price is less than the market price at the commitment date. Conversion is limited to certain circumstances as described above and, as such, the beneficial conversion feature will be recorded when conversion is contractually available to Peak Holding Corp. At such time, the Company will record a debt discount for the beneficial conversion feature and subsequently amortize the debt discount to interest expense.

The Note Purchase Agreement also contains certain covenants of the Company that must be maintained during the time that the indebtedness under the Note Purchase Agreement is outstanding, including financial covenants. The Company must maintain a tangible net worth for the quarter ending March 31, 2012 of $41.7 million and an adjusted quick ratio of 0.70:1.00 as of March 31, 2012. The Note Purchase Agreement also contains additional financial covenants, such as fixed charge coverage ratio, total leverage ratio and EBITDA, which are effective at varying dates after March 31, 2012. The Company must also limit capital expenditures during the years 2012 to 2015 to those amounts established in the agreement.

Index to Form 10-Q

As previously disclosed in our Form 10-K for the year ended December 31, 2011, the Company did not meet the fiscal year 2011 revenue target set forth in the Grace Bay Loan Agreement, which triggered the amortization right. The Grace Bay Forbearance Agreement provides for a forbearance of the requirement that the Company make amortization payments pursuant to the Grace Bay Loan Agreement. The Company paid $0.1 million in a forbearance fee and reimbursed Grace Bay for reasonable costs and expenses related to the forbearance agreement, which were recorded to interest expense in the period. In the event the forbearance period is terminated, the Company would be required to make the amortization payments required by the Grace Bay Loan Agreement. Such amortization payments would be front-loaded, such that 45% of the loan balance (approximately $6.8 million as of March 31, 2012) would be due over the first twelve months after Grace Bay's election to amortize. If the Company subsequently complies with succeeding measurements periods, the Company may prospectively cease monthly amortization of the loan; provided however, Grace Bay may again exercise its amortization right under the loan agreement if the Company fails to meet future minimum revenue targets. If Grace Bay exercises its amortization right at any time, the Company, at the election of Peak Holding Corp., must prepay 25% of the outstanding indebtedness under the Note Purchase Agreement immediately after the amortization right has been exercised, 25% within three months after the amortization right has been exercised, 25% within six months after the amortization right has been exercised and 25% within nine months after the amortization right has been exercised. These payments to Peak Holding Corp. are effective regardless of whether the amortization right has been suspended, deferred, terminated or otherwise stopped by Grace Bay.

Index to Form 10-Q

recorded a $0.3 million fee to interest expense that will be paid on the termination of the forbearance period. Unless otherwise terminated earlier, the forbearance set forth in the SVB Forbearance and Amendment terminates on July 10, 2012. The forbearance period; however, terminates immediately upon the occurrence of any event of default under the SVB Loan Agreement. Additionally, the forbearance period will terminate if the Company breaches the terms of the forbearance set forth in the SVB Forbearance and Amendment. Upon termination of the forbearance period, SVB may pursue any and all rights and remedies it may have with respect to events of default under the SVB Loan Agreement. Further, in the event one of the forbearance agreements (the Grace Bay Forbearance Agreement, the NPA Forbearance Agreement or the SVB Forbearance and Amendment) terminates, all of the forbearance agreements terminate. In addition to the forbearance terms set forth in the SVB Forbearance and Amendment, the agreement also amends the SVB Loan Agreement with respect to certain matters. The SVB Loan Agreement is amended to set the maturity date at July 10, 2012, which maturity date may be extended to December 31, 2012, if the Company consummates a sale of the Company pursuant to the Merger Agreement. Additionally, the SVB Loan Agreement has been amended to terminate the Company's ability to borrow under the revolver set forth in the SVB Loan Agreement and requires that the outstanding term loans and revolving balance be repaid in full. The Company paid the outstanding balance of the loan on March 26, 2012. Pursuant to the SVB Forbearance and Amendment the Company will have the ability to issue new letters of credit, however new letters of credit issued under the facility must be fully cash collateralized. The amendment establishes the tangible net worth and adjusted quick ratio for 2012. For the quarter ending March 31, 2012, the Company must maintain tangible net worth of $49.0 million. As of March 31, 2012, the Company must measure an adjusted quick ratio of 0.80:1.00. The amendment also changes the calculation of the borrowing base to include certain PJM bi-lateral transactions. The amendment no longer includes a minimum cash requirement, which was previously $20.0 million.

Letters of Credit

As of March 31, 2012, we had $25.0 million face value of irrevocable letters of credit outstanding from the SVB facility. Additionally, we have $2.4 million of performance guarantees presented as a portion of the restricted cash or as deposits in other assets in our financial statements.

Capital Spending

Our residential VPC programs require a significant amount of capital spending to build out our demand response systems. We expect to incur approximately $5.0 million in capital expenditures, primarily over the next three years, to continue building out our existing VPC programs, of which approximately $3.2 million is anticipated to be incurred through December 31, 2012. If we are successful in being awarded additional VPC contracts, we would incur additional amounts to build out these new VPC programs.

Additionally, we expect to incur $2.0 million in capital spending in executing our contract with ESKOM to create and co-manage South Africa's first open market for demand response resources and $0.6 million in other capital expenditures.

Non-GAAP Financial Measures

Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA, is defined as net loss before net interest expense, income tax expense, and depreciation and amortization. EBITDA is a non-GAAP financial measure and is not a substitute for other GAAP financial measures such as net loss, operating loss or cash flows from operating activities as calculated and presented in accordance with accounting principles generally accepted in the U.S., or GAAP. In addition, our calculation of EBITDA may or may not be consistent with that of other companies. We urge you to review the GAAP financial measures included in this filing and our consolidated financial statements, including the notes thereto, and the other financial information contained in this filing, and to not rely on any single financial measure to evaluate our business.

EBITDA is a common alternative measure of performance used by investors, financial analysts and rating agencies to assess operating performance for companies in our industry. Depreciation is a necessary element of our costs and our ability to generate revenue. We do not believe that this expense is indicative of our core operating performance because the depreciable lives of assets vary greatly depending on the maturity terms of our VPC contracts. The clean energy sector has experienced recent trends of increased growth and new company development, which have led to significant variations among companies with respect to capital structures and cost of capital (which affect interest expense). Management views interest expense as a by-product of capital structure decisions and, therefore, it is not indicative of our core operating performance.

Index to Form 10-Q

We define Adjusted EBITDA as EBITDA before stock-based compensation expense. Management does not believe that stock-based compensation is indicative of our core operating performance because the stock-based compensation is fixed at the grant date, then expensed over a period of several years after the grant date, and generally cannot be changed or influenced by management after the grant date.

A reconciliation of net loss, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA for each of the periods indicated is as follows (dollars in thousands):



	Three Months Ended
	March 31,
	2012			2011
Net loss	$	(2,718	)	$	(9,786	)
Depreciation and amortization	1,537			939
Interest expense, net	1,517			956
Provision for income taxes	252			15
EBITDA	588			(7,876		)
Non-cash stock compensation expense	746			1,136
Adjusted EBITDA	$	1,334		$	(6,740	)

Index to Form 10-Q

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

For a complete discussion of our critical accounting policies, refer to the notes to the consolidated financial statements and management’s discussion and analysis in our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the SEC on March 15, 2012.

Contractual Obligations

For additional information about our contractual obligations as of December 31, 2011, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Commitments and Contingencies — Contractual Obligations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the SEC on March 15, 2012. Our long-term debt obligations are discussed in Note 5 to the consolidated financial statements included in this report.

Recent Accounting Pronouncements

For a complete discussion of recent accounting pronouncements, refer to Note 2 in the condensed consolidated financial statements included in this report.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

Foreign Exchange Risk

In December 2011, we entered into a contract with a South African utility that will be transacted in South African Rand. Evaluating our strategy to minimize foreign exchange risk related to these operations is ongoing and we continue to monitor cash flows between international entities.

Interest Rate Risk

As of March 31, 2012, $15.0 million of outstanding debt was at floating interest rates. Based on outstanding floating rate debt of $15.0 million as of March 31, 2012, an increase of 1.0% in the market rate would result in an increase in our interest expense of approximately $0.2 million per year.

Market Value of Portfolio Investments

We maintain an investment portfolio of various holdings, types, and maturities. As of March 31, 2012, we had $13.5 million of investments in money market funds recorded at fair value on our balance sheet. While our investments are made in highly rated securities and in compliance with our investment policy, these investments are exposed to fluctuations in market values and could have a material impact on our financial position and results of operations.

Item 4: Controls and Procedures

Evaluation of Disclosure Controls

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Additionally, our disclosure controls and procedures were also effective in ensuring that information required to be disclosed in our Exchange Act reports is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in

Index to Form 10-Q

Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Index to Form 10-Q

PART II – OTHER INFORMATION

Item 1: Legal Proceedings

We have provided information about certain legal proceedings in which we are involved in Note 6 to the condensed consolidated financial statements included in this report.

In addition to the matters disclosed in Note 6, we are a party to various investigations, lawsuits, arbitrations, claims and other legal proceedings that arise in the ordinary course of our business, and, based on information available to us, we do not believe at this time that any such additional proceedings will individually, or in the aggregate, have a material adverse effect on our financial position, liquidity or results of operations. For further information on the risks we face from existing and future investigations, lawsuits, arbitrations, claims and other legal proceedings, please see the section entitled "Risk Factors" below.

Item 1A: Risk Factors

You should carefully consider the risks described in the risk factors below before making a decision to invest in our common stock or in evaluation of Comverge and our business. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we do not presently know, or that we currently view as immaterial, may also impair our business operations. This report is qualified in its entirety by these risk factors.

The actual occurrence of any of the risks described below could materially harm our business, prospects, financial condition and results of operations. In that case, the trading price of our common stock could decline.

Risks Related to the Proposed Merger

If the proposed Merger does not occur, we will have incurred significant expense and may need to pay a termination fee.

On March 26, 2012, we entered into a Merger Agreement with affiliates of H.I.G. (see Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 of this Report for additional information relative to the Offer and the Merger). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions described therein, Purchaser commenced the Offer to purchase all of the Company's outstanding shares of common stock at a price of $1.75 per share, without interest (less any applicable withholding taxes). The Offer was commenced by Purchaser and Parent on April 11, 2012. On May 10, 2012, the Company announced that the tender offer expired at 5:00 p,m., New York City time, on May 9, 2012 and that, as of the expiration time, 14,407,789 shares of the Company's common stock had been validly tendered and not withdrawn, including 744,898 shares that had been tendered pursuant to notices of guaranteed delivery, representing approximately 52.2% of the outstanding shares of the Company. H.I.G. Capital, LLC also announced on May 10, 2012 that , commencing immediately, Purchaser commenced a subsequent offering period to acquire all of the remaining untendered shares, commencing immediately and expiring at 11:59 p.m., New York City time, on Monday, May 14, 2012. During the subsequent offering period, the Company's stockholders who did not previously tender their shares of common stock in the offer may do so and Peak will accept for payment and promptly pay for such shares as they are tendered. Stockholders who tender shares during such period will receive the same $1.75 per share price, without interest and subject to applicable withholding taxes, that was paid in the tender offer. Procedures for tendering shares during the subsequent offering period are the same as during the initial offering period with two exceptions: (1) shares cannot be delivered by the guaranteed delivery procedure and (2) in accordance with SEC rules, shares tendered during the subsequent offering period may not be withdrawn.

The obligation of Purchaser and Parent to consummate the Merger is subject to customary conditions. We cannot assure you that these conditions will be met or that the Merger will close in the expected time frame or at all. Accordingly, investors should not place undue reliance on the occurrence of the proposed Merger.

If the Merger does not occur, we will nonetheless remain liable for the significant expenses that we have incurred related to the transaction, including the fees of our legal and financial advisors. In addition, if the Merger Agreement is terminated, under certain specified circumstances, we will be required to pay Purchaser a termination fee of $1.0 million, $1.2 million or $1.9 million, depending on the circumstances under which the Merger Agreement is terminated. Also, under certain specified circumstances, we will be required to reimburse Purchaser for its actual expenses incurred in connection with the proposed transaction, subject to a $1.5 million cap. Should the Merger Agreement be terminated in circumstances under which the termination fee and/or such expense reimbursement are payable, our financial results could be negatively impacted.

Index to Form 10-Q

The market price of our common stock has been, and may continue to be, materially affected by the Offer and the proposed Merger.

The current market price of our common stock may reflect, among other things, the anticipated outcome of the Offer and the Merger. The current market price traded higher than the price before the Offer was commenced on April 11, 2012. If the Offer and Merger are not completed, the share price of our common stock may decline to the extent that the current market price of our common stock reflects an assumption that the proposed transaction will be completed. There can be no assurance in this regard or as to any other forward-looking statements or matters relating to our stock price, which are subject to numerous uncertainties and matters beyond our control.

If a sufficient number of shares are not tendered pursuant to the pending tender offer to allow Purchaser to meet the threshold for a short-form merger under Delaware law and Purchaser is not able to utilize the Top Up Option in accordance with the Merger Agreement for any reason to reach the threshold for a short-form merger, the merger may not be completed and our business could be impaired.

If Purchaser is tendered a number of shares of our common stock that amounts to at least 90% plus 1 share of our outstanding common stock (the “Short Form Threshold”), the proposed merger can be effected without a vote of our stockholders. If Purchaser does not acquire enough shares to meet the Short Form Threshold, including through the use of the Top Up Option (as defined in the Merger Agreement) and the subsequent offering period, we would be required to obtain the approval of our stockholders to consummate the Merger. Although this would not prevent the Merger from occurring because Purchaser would control a sufficient number of our shares to approve the merger, it would delay the completion of the merger and could create uncertainty for Comverge and our business could be adversely affected.

Uncertainties associated with the Offer and proposed Merger may cause a loss of employees and may otherwise materially adversely affect our business operations.

The announcement and pendency of the Offer and Merger, whether or not consummated, could cause disruptions in and create uncertainty surrounding our business, including affecting our relationships with our customers, vendors, and employees, which could materially and adversely affect our business and results of operations. In particular, we could lose important personnel who decide to pursue other opportunities in light of the Offer and Merger and we could fail to attract and retain highly skilled and qualified employees in light of the uncertainty surrounding the Offer and Merger, both of which could materially adversely affect our ability to compete. In addition, we could potentially lose customers or suppliers, or customer orders could be delayed or decreased. In addition, we have diverted, and will continue to divert, significant management and employee attention and resources in an effort to complete the Offer and Merger, which could materially and adversely affect our business and results of operations. A delay in the consummation of the Merger may exacerbate the occurrence of these events.

The Merger Agreement contains restrictive covenants that may limit our ability to respond to changes in market conditions or pursue business opportunities.

The Merger Agreement contains restrictive covenants that limit our ability to take certain significant actions during the period prior to the consummation of the Merger absent the consent of Purchaser. Although the Merger Agreement provides that Purchaser will not unreasonably withhold its consent, there can be no assurances that it will grant such consent when and if requested. These restrictions may materially adversely affect our ability to react to changes in market conditions, take advantage of business opportunities, or fund capital expenditures, any of which could have a material and adverse effect on the prospects of our business, which could be detrimental to our stockholders in the event the Offer and Merger are not completed.

We are involved in litigation relating to the Merger Agreement that could divert Management's attention and harm our business.

As described in Part II, Item 1 of this quarterly report, “Legal Proceedings”, we and the individual members of our board of directors have been named as defendants in a number of lawsuits related to the Merger Agreement and the proposed Merger. These suits generally allege, among other things, that the Company's directors breached their fiduciary duties in connection with the Offer and Merger and that some or all of Comverge, Parent, Purchaser and H.I.G. aided and abetted the breaches. The actions purport to be brought individually and on behalf of similarly situated public shareholders of the Company and seek various forms of relief, including an injunction of the Offer and Merger, rescission of the Offer and Merger to the extent it is consummated prior to the entry of a final judgment, an accounting to the plaintiffs and the class for any damages suffered as a result of the defendants' alleged wrongdoing, and the costs and expenses of the actions. Although we believe these suits are without merit, the defense of these suits may be expensive and may divert Management's attention and resources, which could adversely affect our business.

Index to Form 10-Q

Our executive officers and directors may have interests that are different from, or in addition to, those of our stockholders generally.

Our executive officers and directors may have interests in the merger that are different from, or are in addition to, those of our stockholders generally. These interests include direct or indirect ownership of our common stock, stock options and restricted stock and the potential receipt of change in control payments by certain of our executive officers in connection with the proposed Merger.

Risks Related to Our Business


	We will require significant capital to pursue our strategy, but we may not be able to obtain additional financing on acceptable terms or at all.

For the last several years, we have financed our operations and capital expenditures through the sale of our securities and by borrowing money. Our ability to obtain additional financing will be subject to a number of factors, including the development of the market for IEM solutions, commercial acceptance of our products, our operating performance, the terms of our existing indebtedness and the credit and capital markets.

The growth of our business will depend on significant amounts of capital for marketing and product development of our IEM solutions, including intelligent hardware and software. In addition, international expansion will require significant capital. As the Company focuses on profitability, with a more refined approach to growth, we will still need working capital to operate the business. If we raise additional funds through the sale of equity or convertible debt securities, the ownership percentage of our then-existing stockholders will be reduced and the percentage of our outstanding common stock into which our convertible securities and our senior unsecured notes are convertible will be reduced. In addition, any such transaction may dilute the value of our common stock and other debt or equity securities. We may have to issue securities that have rights, preferences and privileges senior to our common stock. The terms of any additional indebtedness may include restrictive financial and operating covenants that would limit our ability to compete and expand or limit our flexibility in paying our indebtedness.

On November 29, 2011, we entered into a Common Stock Purchase Agreement (“Purchase Agreement”) with Aspire Capital Fund LLC (“Aspire Capital”). Under the terms of the Purchase Agreement, we have a right to sell up to a maximum of 100,000 shares per day, which total may be increased by mutual agreement up to an additional 1,000,000 shares per day up to an aggregate maximum of $10.0 million. The extent to which we rely on Aspire Capital as a source of funding will depend on a number of factors, including the prevailing market price of our common stock and the extent to which we are able to secure working capital from other sources. The Purchase Agreement provides that we only may sell shares of our common stock to Aspire Capital on business days on which the closing sale price of our common stock equals or exceeds $1.00. If the Agreement and Plan of Merger with Peak Holding Corp. (as defined below) is consummated, the Purchase Agreement with Aspire Capital will be terminated.

In addition, on March 26, 2012, we entered into an Agreement and Plan of Merger, referred to as the Merger Agreement, with Peak Holding Corp., referred to as Parent, and Peak Merger Corp, a wholly owned subsidiary of Parent and referred to as the Purchaser. Parent is a subsidiary of H.I.G. Capital, LLC. Pursuant to the terms of the Merger Agreement, and on the terms and subject to the conditions thereof, among other things, the Purchaser commenced on April 11, 2012 a cash tender offer, referred to as the Offer, to acquire all of the outstanding shares of common stock of Comverge, which we refer to collectively as the Shares, at a price of $1.75 per share in cash, without interest, and less any required withholding taxes, referred to as the Offer Price. The Purchaser's obligation to accept for payment and pay for Shares tendered in the Offer is subject to certain conditions, including, among other things, a minimum number of Shares that must be tendered. The consummation of the Offer is not subject to any financing condition. Following the completion of the Offer and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, including, if required, approval by the stockholders of Comverge, the Purchaser will merge with and into Comverge, with Comverge surviving as a wholly owned subsidiary of Parent. At the effective time of the merger, the Shares not purchased pursuant to the Offer, other than shares held by Comverge, Parent, Purchaser, any subsidiary of Parent or by stockholders of Comverge who have perfected their statutory rights of appraisal under Delaware law, will be converted into the right to receive $1.75 per share in cash, without interest, and less any required withholding taxes. Under the terms of the Merger Agreement, each outstanding option to purchase Shares will be deemed exercised and cancelled, with each former holder thereof receiving an amount in cash equal to the excess, if any, of the Offer Price over the exercise price thereof multiplied by the number of shares subject to such option.

We may not be able to obtain additional capital on acceptable terms or at all. If our stock price continues to decline, it may be difficult for us to obtain sufficient funds through the sale of equity or convertible debt securities. Because of our losses, we do not fit traditional credit lending criteria, which, in particular, could make it difficult for us to obtain loans or to access the capital

Index to Form 10-Q

markets. Moreover, our loan and security agreements contain restrictions on our ability to incur additional indebtedness, which, if not waived, could prevent us from obtaining needed capital. There can be no assurance that we will be able to obtain such financing and a failure to obtain additional financing when needed could adversely affect our ability to (i) maintain and grow our business and (ii) retain key employees.

We have incurred annual net losses since our inception, and we may continue to incur annual net losses in the future.

Our annual net loss for the years ended December 31, 2011, 2010 and 2009 was $12.8 million, $31.4 million and $31.7 million, respectively. Our accumulated deficit from inception through December 31, 2011, was $228.8 million. Initially, our net losses were driven principally by start-up costs and the costs of developing our technology. More recently, our net losses have been driven principally by our operating and depreciation expenses as well as impairment charges. To grow our revenues and customer base, we plan to continue emphasizing the expansion and development of our IEM solutions in the domestic and international markets. This strategy may cause us to incur net losses in the foreseeable future, and there can be no assurance that we will be able to grow our revenues and expand our client base to become profitable.

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.

Payments from long-term contracts represent our estimate of the total payments that our contracts allow us to receive over the course of the contract term. Our estimated payments from these long-term contracts are based on a number of assumptions. The expectations regarding our annual and multi-year contracts include assumptions relating to purchase orders received, contractual anticipated order volumes and purchase orders that we expect to receive under a contract if it is extended based on amounts and timing of historical purchases. We also assume that we will be able to meet our obligations under these contracts on a timely basis. The expectations regarding the build-out of our turnkey and capacity contracts are based on our experience to date in building out the load management systems as well as future expectations for continuing to enroll participants in each contract's service territory. In some instances, we may not build out at the anticipated rate due to, among other things, enrollment rates varying from our expectations. We have also included assumptions for how we believe the programs will perform during the measurement and verification tests. If we are not able to meet this build-out schedule, we have higher than expected withdrawal by consumers from our programs or if the measurement and verification results are lower than expected, we may not be able to receive the full amount of estimated payments from long-term contracts. While we have historically recorded a $0.3 million penalty per megawatt in liquidated damages for each megawatt that we believed we would not fulfill for our energy efficiency contracts, we have not reduced our anticipated payments from long-term contracts for any penalties. As of March 31, 2012, we anticipated a potential payment of $0.1 million in liquidated damages for our energy efficiency contracts based on our build-out rate for the 2012 program year. We have also assumed that no contracts will be terminated for convenience or other reasons by our customers and that the rate of replacement of participant terminations under our capacity contracts will remain consistent with our historical average. Changes in our estimates or any of these assumptions, the number of load control devices installed, changes in our measurement and verification test results and payments, contracts being rescheduled, canceled or renewed, disputes as to actual capacity provided, or new contracts being signed before existing contracts are completed, and other factors, may result in actual payments from long-term contracts being significantly lower than estimated payments from long-term contracts. A comparison of estimated payments from long-term contracts from period to period is not necessarily meaningful and may not be indicative of actual payments. In addition, the timing of payments from long-term contracts and revenue recognition may vary period to period.

Our backlog represents our estimate of revenues from commitments, including purchase orders and long-term contracts, that we expect to recognize over the course of the next 12 months. The inaccuracy of any of our estimates and other factors may result in actual results being significantly lower than estimated under our reported backlog. Material delays, market conditions, cancellations or payment defaults could materially affect our financial condition, results of operation and cash flow. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of actual revenues. As of March 31, 2012, we had contractual backlog of $153 million through March 31, 2013.

Our loan and security agreements contain financial and operating restrictions that may limit our access to credit. If we fail to comply with covenants in our loan and security agreements, we may be required to repay our indebtedness thereunder, which may have an adverse effect on our liquidity and our business.

Our loan and security agreements contain covenants that limit our ability to operate our business, invest, sell assets, create liens or make distributions or other payments to our investors and creditors. All of these restrictions may limit our ability to take advantage of potential business opportunities as they arise. For instance, provisions in our loan and security agreements with SVB, Grace Bay and Peak Holding impose restrictions on our ability to, among other things: incur more debt; pay dividends

Index to Form 10-Q

and make distributions; make certain investments; redeem or repurchase capital stock; create liens; enter into transactions with affiliates; and merge or consolidate.

The SVB Forbearance and Amendment provides that SVB will forbear on its rights to exercise any rights and remedies available to it pursuant to the Loan and Security Agreement dated November 6, 2008, as amended (the “SVB Loan Agreement”). The Company paid $0.2 million in a forbearance fee and reimbursed SVB for reasonable costs and expenses related to the forbearance agreement, which were recorded to interest expense in the period. The Company also recorded a $0.3 million fee to interest expense that will be paid on the termination of the forbearance period. Unless otherwise terminated earlier, the forbearance set forth in the SVB Forbearance and Amendment terminates on July 10, 2012. The forbearance period; however, terminates immediately upon the occurrence of any event of default under the SVB Loan Agreement. Additionally, the forbearance period will terminate if the Company breaches the terms of the forbearance set forth in the SVB Forbearance and Amendment. Upon termination of the forbearance period, SVB may pursue any and all rights and remedies it may have with respect to events of default under the SVB Loan Agreement. Further, in the event one of the forbearance agreements (the Grace Bay Forbearance Agreement, the NPA Forbearance Agreement or the SVB Forbearance and Amendment) terminates, all of the forbearance agreements terminate. In addition to the forbearance terms set forth in the SVB Forbearance and Amendment, the agreement also amends the SVB Loan Agreement with respect to certain matters. The SVB Loan Agreement is amended to set the maturity date at July 10, 2012, which maturity date may be extended to December 31, 2012, if the Company consummates a sale of the Company pursuant to the Merger Agreement or with another acquiring party with respect to a Superior Proposal. Additionally, the SVB Loan Agreement has been amended to terminate the Company's ability to borrow under the revolver set forth in the SVB Loan Agreement and requires that the outstanding term loans and revolving balance be repaid in full. The Company paid the outstanding balance of the loan on March 26, 2012. Pursuant to the SVB Forbearance and Amendment the Company will have the ability to issue new letters of credit, however new letters of credit issued under the facility must be fully cash collateralized. The amendment establishes the tangible net worth and adjusted quick ratio for 2012. For the quarter ending March 31, 2012, the Company must maintain tangible net worth of $49.0 million. As of March 31, 2012, the Company must measure an adjusted quick ratio of 0.80:1.00. The amendment also changes the calculation of the borrowing base to include certain PJM bi-lateral transactions. The amendment no longer includes a minimum cash requirement, which was previously $20.0 million.

Our failure to meet the covenants and financial tests contained in, and any event of default under, our loan and security agreements, could have a material adverse effect on our financial condition.

The SVB, Grace Bay and Peak Holding 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. Such amortization payments are front-loaded, such that 45% of the loan balance ($6.8 million as of December 31, 2011) would be due over the first twelve months. If we comply with succeeding measurement periods, we may prospectively cease monthly amortization of the loan; provided however, Grace Bay may again exercise its amortization right 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 of Form 10-K, the Company has not received notice to accelerate the debt and would contest any such acceleration. Our ability to repay our indebtedness and meet the revenue targets in the Grace Bay loan and security agreement is dependent on us securing new customers. There can be no guarantee that we will be able to add customers and the related additional revenue sufficient to repay our indebtedness or meet such revenue targets.

Furthermore, under the Grace Bay Loan Agreement, interest is payable monthly, on the first day of each month for interest accrued during the prior month. While Partners for Growth, III, L.P. (“PFG”) (Grace Bay's predecessor-in-interest) held the convertible note under the Loan Agreement, PFG had consistently initiated an automated funds transfer from Comverge's accounts on the first day of each month for the required interest payments, including on March 1, 2012, the date after which Grace Bay had acquired 51% of the convertible note. The Company anticipated that interest payments would continue to be made in such manner, but no such automated funds transfer was initiated on April 1, 2012. On April 17, 2012, upon discovering that such automated funds transfer had not been initiated by Grace Bay, the Company immediately notified Grace Bay. On April 18, 2012, the Company tendered the interest payment (the “April 1 Interest Payment”) and Grace Bay accepted such payment. Grace Bay also agreed to waive any alleged Defaults or Events of Default (as defined in each of the Grace Bay Loan Agreement), if any, and Material Defaults (as defined in each of the Grace Bay Forbearance Agreement and the Peak

Index to Form 10-Q

Forbearance Agreement, respectively), if any, arising as a result of or in connection with the April 1 Interest Payment, but also reserved its rights with respect to any other and/or future Events of Default or Material Defaults.

In addition, we cannot assure that our assets or cash flow will be sufficient to make our amortization payments or to fully repay borrowings under our outstanding loan and security agreements following such event of default or any future event of default, upon maturity or if accelerated, or that we would be able to refinance or restructure the payments on those agreements. Upon a default, our lenders have the right to exercise their rights and remedies to collect payment on the loans, which would include the right to foreclose on our assets. Accordingly, the amortization payments we are required to make to Grace Bay and the events of default under our loan agreements, as well as any future event of default, may have a material adverse effect on our business, liquidity, financial position and results of operations. To the extent our lenders exercise their rights and remedies, we may be forced to seek bankruptcy protection.

Our ability to provide bid bonds, performance bonds or letters of credit is limited and could negatively affect our ability to bid on or enter into significant long-term agreements.

We are occasionally required to provide letters of credit, bid bonds or performance bonds to secure our performance under customer contracts or open market programs. Our ability to obtain such bonds primarily depends upon our capitalization, working capital, past performance, management expertise and reputation and external factors beyond our control, including the overall capacity of the surety market. Surety companies consider those factors in relation to the amount of our tangible net worth and other underwriting standards that may change from time to time. Events that affect surety markets generally may result in bonding becoming more difficult to obtain in the future, or being available only at a significantly greater cost. In addition, some of our customers also require collateral in the form of letters of credit to secure performance or to fund possible damages as the result of an event of default under our contracts with them. As of March 31, 2012, we had $25.0 million of letters of credit outstanding from the facility. If we enter into significant long-term agreements or increase our offering in certain open market power pools and either of which require the issuance of letters of credit, our liquidity could be negatively impacted. Our inability to obtain adequate bonding or letters of credit and, as a result, to bid or enter into significant long-term agreements, could have a material adverse effect on our future revenues and business prospects.

We operate in highly competitive markets; if we are unable to compete successfully, we could lose market share, revenues and profit.

We face strong competition from traditional IEM and clean energy providers, both larger and smaller than us, from advanced metering infrastructure equipment and from energy service providers. In addition, we may face competition from large internet and/or software based companies. Advanced metering infrastructure systems generally include advanced meter reading with a demand response component, including a communications infrastructure. Energy service providers typically provide expertise to utilities and end-use consumers relating to energy audits, demand reduction or energy efficiency measures. We also compete against traditional supply-side resources such as natural gas-fired power plants and independent power producers. In addition, some providers of advanced meter reading products may add demand response products or energy services to their existing business, and other such providers may elect to add similar offerings in the future. Further, energy service providers may add their own demand response solutions, which could decrease our base of potential customers and could decrease our revenues and profitability.

Certain energy service and advanced metering infrastructure providers are substantially larger and better capitalized than we are and these providers have the ability to combine (1) advanced meter reading or commodity sales and (2) demand response products into an integrated offering to a large existing customer base. Because many of our target customers already purchase either advanced meter reading, energy efficiency products or services, demand response products or services, or commodities from one or more of our competitors, our success depends on our ability to attract target customers away from their existing providers or to partner with one or more of these entities to distribute our products. In addition, the target market for our capacity programs has been composed largely of “early adopters,” or customers who have sought out new technologies and services. Because the number of early adopters is limited, our continued growth will depend on our success in marketing and selling our programs to mainstream customers in our target markets. Larger competitors could focus their substantial financial resources to develop a competing business model that may be more attractive to potential customers than what we offer. Competitors who also provide advanced metering infrastructure, energy services or commodities may offer such services at prices below cost or even for free in order to improve their competitive positions. In addition, because of the other services that our competitors provide, they may choose to offer IEM services as part of a bundle that includes other products, such as residential advanced meter reading and automated invoicing, which we do not offer. Any of these competitive factors could make it more difficult for us to attract and retain customers, cause us to lower our prices in order to compete and reduce our market share and revenues.

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Some of our strategic alliances are not exclusive, and accordingly, the companies with whom we have strategic alliances may in the future elect to compete with us by developing and selling competing products and services. In addition, these companies have similar, and often more established, relationships with our customers, and may recommend other products and services to their customers instead of our products and services.

The significant competition in our industry has resulted in increasingly aggressive pricing, and we anticipate that prices may continue to decrease. We believe that in some instances our prices are currently higher than those of our competitors for similar solutions. Users of our solutions may switch to another clean energy provider based on price, particularly if they perceive the quality of our competitors' products to be equal to or better than that of our products. Continued price decreases by our competitors could result in a loss of customers or a decrease in the growth of our business, or it may require us to lower our prices to remain competitive, which would result in reduced revenues and lower profit margins and may adversely affect our results of operations and financial position and delay or prevent our future profitability.

Failure to provide quality products and services, including third party suppliers manufacturing quality products and third-party installers' properly installing our products, could cause malfunctions of our products, potential recalls or replacements or delays in the delivery of our products or services, which could damage our reputation, cause us to lose customers and negatively impact our revenues and growth.

Our success depends on our ability to provide quality products and reliable services in a timely manner, which in part depends on the proper functioning of facilities and equipment owned, operated and/or manufactured by third parties upon which we depend. For example, our reliance on third parties includes:


•	utilizing components that they manufacture in our products;


•	utilizing products that they manufacture for our various capacity programs;


•	outsourcing cellular and paging wireless communications that are used to execute instructions to our devices under our VPC programs and clients in open market programs;


•	outsourcing certain installation, maintenance, data collection and call center operations to third-party providers; and


•	buying capacity from third parties who have contracted with electricity consumers to participate in our VPC programs.

Because we are wholly dependent upon third parties for the manufacture and supply of certain products, a significant interruption in the manufacturing or delivery of our products by these vendors or in defects from the manufacturers, could result in our being required to expend considerable time, effort and expense to establish alternate production lines at other facilities and our operations could be materially disrupted, which could cause us to not meet production deadlines and lose customers. In addition, our contracts often provide that we install products in the end-users' facilities or premises using Comverge employees or third party installers. To the extent such installations are faulty or inadequate, considerable time, effort and expense may be incurred to remedy the situation and restore customer satisfaction. Any delays, malfunctions, inefficiencies or interruptions in these products, services or operations could adversely affect the reliability or operation of our products or services, which could cause us to experience difficulty retaining current customers and attracting new customers. In addition, our brand, reputation and growth could be negatively impacted. For example, in August, 2010, we were notified by the supplier of our thermostats, White-Rodgers, that White-Rodgers had filed a notice with the Consumer Product Safety Commission (the “CPSC”) to address a product issue with the thermostats that White-Rodgers had shipped to Comverge. White-Rodgers reported to the CPSC that it was aware of incidents of battery leakage in the model of thermostat sold to Comverge, in which battery leakage led to an overheating of the device. We are not aware of any reports of personal injury associated with these incidents but are aware of claims for minor property damage. White-Rodgers informed us that in the event of battery leakage, electrolyte in the leakage can contact the printed circuit board, which may result in the circuit board overheating. White-Rodgers has not conceded that the thermostats contain a defect or pose a substantial product hazard, but has nevertheless voluntarily proposed a corrective action plan that was approved by the CPSC in January 2011 to address thermostats in inventory and thermostats installed in the field. White-Rodgers has stated that it will cover reasonable costs associated with implementing the corrective action. Comverge is not aware of any information suggesting that Comverge's communication module in these thermostats is related to the reported incidents. In relation to the White-Rodgers thermostat issue, Comverge is involved in litigation and disputes to address certain customers' complaints relating to the White-Rodgers thermostat issue. For further information on lawsuits relating to the thermostat issue, see “Part II, Item 1 - Legal Proceedings” contained in this Quarterly Report on Form 10-Q.

Regulatory or legislative rule changes made by major grid operators, state commissions, or FERC, could adversely impact our revenues.

We operate in a regulated market. Changes to rules, regulations, or laws may affect our business and anticipated revenues. During 2008, PJM Interconnection LLC, or PJM, announced a rule change for economic demand response programs in the

Index to Form 10-Q

PJM open market. The rule change reduced the price we receive under our economic or voluntary demand response programs for commercial and industrial consumers. Because such programs are voluntary, the lower price and operating rule changes in 2008 made it less compelling for our commercial and industrial consumers to participate in the demand response programs. We rely on our demand response programs to generate revenue and PJM or any other major grid operator may reduce incentives to consumers or make other economic rule changes in the future that would have a negative impact on our business. Rule changes relating to the capacity market at PJM expanding the availability of demand response resources outside of the summer months have been approved by the FERC, which could take effect three years from now. In addition, FERC has made rule changes relating to measurement and verification of resources in PJM. While we do not anticipate any of the changes would have a significantly material negative effect on our financial statements, such changes will require additional administrative and operational requirements. These rule changes are not yet clearly defined, and in turn, the impact or effect of any such rule changes on our revenues or financial condition are unknown at this time. However, there can be no assurance that these rule changes will not have a material adverse effect on our business, financial condition and results of operations.

Any restructuring activities that we may undertake, including our expense reduction initiative, may not achieve the benefits anticipated and could result in additional unanticipated costs, which could have a material adverse effect on our business, financial condition, cash flows or results of operations.

We regularly evaluate our existing operations, anticipated customer demand and business efficiencies and, as a result of such evaluations, we may undertake restructuring activities within our businesses, including the announced expense reduction initiative in 2011. These restructuring plans may involve higher costs or longer timetables than we anticipate and could result in substantial costs related to severance and other employee-related matters, litigation risks and expenses and other costs. These restructuring activities may not result in improvements in future financial performance. If we are unable to realize the benefits of any restructuring activities or appropriately structure our businesses to meet market conditions, the restructuring activities could have a material adverse effect on our business, financial condition, cash flows or results of operations.

We rely on certain components and products from a single supplier or a limited number of suppliers.

We rely on third party suppliers to manufacture and supply certain products for our various capacity programs. In addition, some of the components necessary for our products are currently provided to us by a single supplier, including certain thermostats used in our utility residential demand response business, and we generally do not maintain large volumes of inventory. Our reliance on these third parties involves a number of risks, including, among other things, the risk that:


•	we may not be able to control the quality and cost of these products or respond to unanticipated changes and increases in demand;


•	we may lose access to critical services and components, resulting in an interruption in the delivery of products or services to our customers; and


•	we may not be able to find new or alternative components for our use or reconfigure our products in a timely manner if the components necessary for our products become unavailable.

If any of these risks materialize, it could significantly increase our costs and adversely affect the reliability or operation of our products or services. Lead times for materials and components ordered by us vary and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. If these manufacturers or suppliers stop providing us with the components or services necessary for the operation of our business, we may not be able to identify alternate sources in a timely fashion. Any transition to alternate manufacturers or suppliers would likely result in increased expenses and operational delays, and we may not be able to enter into agreements with new manufacturers or suppliers in a timely manner or on commercially reasonable terms. Any disruptions in product flow may harm our ability to generate revenue, lead to customer dissatisfaction, damage our reputation and result in additional costs.

We depend on the electric utility industry and associated power pool markets for revenues, and as a result, our operating results have experienced, and may continue to experience, significant variability due to volatility in electric utility capital spending or the open market programs, and other factors affecting the electric utility industry.

We derive substantially all of our revenues from the sale of solutions, products and services, directly or indirectly, to the electric utility industry and open market programs. In relation to our electric utility customers, purchases of our solutions, products or services by electric utilities may be deferred or canceled as a result of many factors, including consolidation among electric utilities, changing governmental or grid operator regulations, weather conditions, rising interest rates, reduced electric utility spending and general economic downturns. In addition, a significant amount of revenue is dependent on long-term relationships with our utility customers, which are not always supported by long-term contracts. This revenue is particularly susceptible to variability based on changes in the spending patterns of our utility customers.

Index to Form 10-Q

The open market programs in which we participate could be materially altered in ways that negatively affect our ability to participate and, in turn, decrease revenues. For example, these markets typically utilize short-term contracts and often have price volatility. Prices in these markets typically fall whenever capacity providers place excessive amounts of capacity for auction in these markets. If prices decline below the point at which customers who typically participate in these programs recognize a benefit from participating or if they decide to participate with another provider, we would no longer be able to enroll these customers, which could result in us recognizing lower than expected revenues. In addition, rule changes could negatively impact how we market, enroll, measure, verify, and settle with our end-customers and the open market authority.

We have experienced, and may in the future experience, significant variability in our revenues, on both an annual and a quarterly basis, as a result of these factors. Pronounced variability in the open markets or an extended period of reduction in spending by electric utilities could negatively impact our business and make it difficult for us to accurately forecast our future sales, which could lead to increased spending by us that is not matched with equivalent or better revenues.

A significant portion of our revenues are generated from contracts with a small number of customers, the postponement, modification or termination of which could significantly reduce our revenues.

Our revenues historically have been generated from a small number of customers. In 2011, 2010 and 2009, our top ten customers accounted for approximately 72%, 71% and 67% of our consolidated revenues, respectively. In 2011, two customers accounted for more than 10% of our revenues: PJM Interconnection LLC (22%) and Pepco Holdings Inc. (16%). In 2010, two customers accounted for more than 10% of our revenues: PJM Interconnection LLC (28%) and Pepco Holdings Inc. (12%).In 2009, two customers accounted for more than 10% of our revenues: PJM Interconnection LLC (20%) and NV Energy (12%). Our capacity contracts are multi-year contracts that are subject to postponement, modification or termination by our utility customers. Such action by a customer with respect to one or more of our significant contracts would significantly reduce our revenues.

Our failure to meet product development and commercialization milestones may result in customer dissatisfaction, cancellation of existing customer orders or our failure to successfully compete in new markets.

In the past, we have not met all of our product development and commercialization milestones. For example, we were behind schedule in developing a next-generation demand response product for a major customer. This delay resulted in a deferral of sales and gross profit associated with contracted delivery schedules for our products.

We establish milestones to monitor our progress toward developing commercially feasible products or to meet contractual delivery requirements of our customers. In meeting these milestones, we often depend on third-party contractors in the U.S. and other countries for much of our hardware manufacturing and software development. Internal delays or delays by third-party contractors could cause us to miss product development or delivery deadlines. In addition, internal development delays could result in the loss of commercially available hardware and software products, as we are unable to rely on outside vendors to provide such products when contractual rights for the supply or license of such products expire. As an example, we are developing and enhancing our software platform, IntelliSOURCE. Delays in development schedules could negatively affect our business. We may not successfully achieve our milestones in the future, which could distract our employees, harm our relationships with our existing and potential customers, and result in canceled orders, deferred or lost revenues and/or margin compression and our inability to successfully compete in new markets.

The expiration of our capacity contracts without obtaining a renewal or replacement capacity contract, or finding another revenue source for the capacity our operating assets can provide, could materially affect our business.

Although we have entered into additional long-term contracts in different geographic regions and are regularly in discussions with our customers to extend our existing contracts or enter into new contracts with these existing customers, there can be no assurance that any of these contracts will be extended or that we will enter into new contracts on favorable terms. If these contracts are not extended or replaced, we would expect to enroll the capacity that we make available under such contracts in another demand response capacity program, although there is no assurance we would be able to do so. For example, our capacity contract agreement with NV Energy was not continued in 2011. NV Energy accounted for 4% and 12% of our total revenue in 2010 and 2009, respectively.

We could be required to make substantial refunds or pay damages to our customers if the actual amount of electric capacity we provide under our capacity programs is materially less than estimated or required under the applicable agreements.

We typically operate our capacity programs through long-term, fixed price contracts with our utility customers. Under our base load contracts, our utility customers make periodic payments based on verified load reduction after inspecting and confirming

Index to Form 10-Q

the capacity reduced through energy efficiency measures. While the base load is able to be permanently reduced once the energy efficiency devices are installed and verified, the utility often retains the right to conduct follow up inspections for subsequent years. If the energy consumer removes the installed devices, shuts down operations or vacates the physical premises, there is the potential that any subsequent inspection by our utility customer would result in a lower amount of base load reduced capacity than originally verified, which may consequently obligate us to pay a penalty. In addition, our base load contracts require building out a specified amount of capacity (megawatts) at pre-determined dates throughout the contract life. Due to our potential participants' limited capital spending and increased competition in the marketplace, we are experiencing challenges in meeting certain contractual build-out milestones in a timely manner. If we fail to fulfill the required contracted capacity by the dates specified in our contracts, we would be obligated to pay penalties of up to $0.3 million per megawatt that we fail to obtain in 2012. As of March 31, 2012, we have recorded potential liquidated damages for capacity fulfillment delays related to certain 2012 contractual milestones.

In the open market programs, which typically have a term of one to three years, we sell capacity that we obtain through our programs to independent system operators. The independent system operator makes periodic payments to us based on estimates of the amount of electric capacity that we expect to make available during the contract year. We refer to these payments as proxy payments and electric capacity on which proxy payments are made as estimated capacity. A contract year generally begins on June 1st and ends May 31st of the following year. We and the independent system operator analyze results of the metering data collected during the capacity events or test events to determine the capacity that was available during the actual event. Any discrepancy between our analysis of the metering data and the analysis from the independent system operator could result in lower than expected revenues or potential damages payable by us. In addition, the PJM open market program has amended rules which create potential penalties if the projected megawatts do not perform. To the extent PJM does not call an event, test events will be initiated before September 30 of each year to test the potential capacity. If we do not provide the required capacity during an event or test event, we may be subject to penalties. PJM has recently eliminated the Interruptible Load for Reliability (“ILR”) program effective 2012. Customers that currently participate as ILR resources must be moved into other open market programs by 2012 in order to avoid loss of revenue. This change also (i) requires additional capital support for both planned and new megawatts under the three-year Base Residual Auction and (ii) has increased the potential penalties for non-compliance. As a result of the elimination of the ILR program and the changing open market programs, we may incur significantly higher penalties in the future.

Under our VPC contracts, which typically have a term of five to ten years, our utility customers make periodic payments to us based on estimates of the amount of electric capacity we expect to make available to them during the contract year. We refer to these payments as proxy payments and electric capacity on which proxy payments are made as estimated capacity. During contract negotiations or the first contract year of a VPC program, estimated capacity is negotiated and established by the contract. A contract year generally begins at the end of the summer months, after a utility's seasonal peak energy demand for electricity. We refer to this seasonal peak energy demand as the cooling season. For example, the cooling season for one of our VPC contracts runs from June 1st to September 30th and the contract year for this agreement begins on October 1st and ends on September 30th. We and our utility customers analyze results of measurement and verification tests that are performed during the cooling season of each contract year to statistically determine the capacity that was available to the utility during the cooling season. We refer to measured and verified capacity as our available capacity. Available capacity varies with the electricity demand of high-use energy equipment, such as central air conditioning compressors, at the time measurement and verification tests are conducted, which, in turn, depends on factors beyond our control such as fluctuations in temperature and humidity. Although our contracts often contain restrictions regarding the time of day and, in some cases, the day of the week the measurement and verification tests are performed, the actual time within the agreed testing period that the tests are performed is beyond our control. If the measurement and verification tests are performed during a period of generally lower electricity usage, then the capacity made available through our system could be lower than estimated capacity for the particular contract being tested. The correct operation of, and timely communication with, devices used to control equipment are also important factors that affect available capacity under our VPC contracts. Any difference between our available capacity and the estimated capacity on which proxy payments were previously made will result in either a refund payment from us to our utility customer or an additional payment to us by our customer. We refer to this process as the annual settlement. For contract year 2011, we estimate an aggregate payment of $2.0 million as a result of the annual settlement. For the contract year 2010, we received approximately $0.1 million, in the aggregate, excluding the NV Energy program which expired in January 2011, as a result of the programs' annual settlement. For 2009, we paid $0.6 million as a result of the annual settlement.

Any refund payments that we may be required to make (1) as a result of a subsequent inspection or failure to meet initial minimum capacity under our base load contracts, (2) to the power pool under our auction contracts, or (3) pursuant to an annual settlement determination under our VPC contracts could be substantial and could adversely affect our liquidity and anticipated revenue projections. In addition, because measurement and verification test results for each VPC contract generally establishes estimated capacity on which proxy payments will be made for the following contract year, a downward adjustment in estimated capacity for a particular VPC contract would decrease the dollar amount of proxy payments for the following contract year and

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could significantly decrease our estimated backlog and estimated payments from long-term contracts. In addition, such adjustment could result in significant year-to-year variations in our quarterly and annual revenues.

We face risks related to our expansion into international markets.

As we expand our addressable market by pursuing opportunities to provide IEM solutions in international markets, as noted through our Eskom agreement, we face additional risks. We have had little experience operating large programs in markets outside of the United States. Accordingly, new markets may require us to respond to new and unanticipated regulatory, marketing, sales and other challenges. There can be no assurance that we will be successful in responding to these and other challenges we may face in our current international enterprise, and as we attempt to expand in additional international markets. As an example, we anticipate our South African contract with Eskom to produce material revenue and profits in 2012; however, operational, regulatory, and market risks could impair our anticipated success in 2012. International operations also entail a variety of other risks, including:


•	unexpected changes in legislative or regulatory requirements of foreign countries;


•	currency exchange fluctuations;


•	longer payment cycles and greater difficulty in accounts receivable collection; and


•	significant taxes or other burdens of complying with a variety of foreign laws.

International operations are also subject to general geopolitical risks, such as political, social and economic instability and changes in diplomatic and trade relations. One or more of these factors could adversely affect any international operations and result in lower revenue than we expect and could significantly affect our profitability.

Changes in the availability and regulation of radio spectrum or paging providers limiting paging services may cause us to lose utility customers.

A significant number of our products use radio spectrum, which is subject to regulation in the United States by the Federal Communications Commission. Licenses for radio frequencies must be obtained and periodically renewed. Licenses granted to us or our customers may not be renewed on acceptable terms, if at all. The Federal Communications Commission may adopt changes to the rules for our licensed and unlicensed frequency bands that are incompatible with our business. These changes in frequency allocation may result in the termination of demand response programs by our utility customers or the replacement of our systems with ones owned by our competitors. This would erode our competitive advantage with respect to those utility customers and would force us to compete with other providers for their business. In addition, paging providers may discontinue providing paging services, which may result in no coverage or an increase in our cost in seeking alternative providers.

We may be subject to damaging and disruptive intellectual property litigation related to allegations that our products or services infringe on intellectual property held by others, which could result in the loss of use of the product or service.

Third-party patent applications and patents may be applicable to our products. As a result, third-parties have made and may in the future make infringement and other allegations that could subject us to intellectual property litigation relating to our products and services, which litigation is time-consuming and expensive, divert attention and resources away from our daily business, impede or prevent delivery of our products and services, and require us to pay significant royalties, licensing fees and damages. In addition, parties making infringement and other claims may be able to obtain injunctive or other equitable relief that could effectively block our ability to provide our services and could cause us to pay substantial damages. In the event of a successful claim of infringement, we may need to obtain one or more licenses from third parties, which may not be available at a reasonable cost, or at all.

If we are unable to protect our intellectual property, our business and results of operations could be negatively affected.

Our ability to compete effectively depends in part upon the maintenance and protection of the intellectual property related to our capacity programs and the solutions, hardware, firmware and software that we have acquired or developed internally. Patent protection is unavailable for certain aspects of the technology that is important to our business. In addition, one or more of our pending patent applications may not be issued. To date, we have attempted to rely on copyright, trademark and trade secrecy laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our rights to this technology. However, we have not obtained confidentiality agreements from all of our customers and vendors, some of our licensing or confidentiality agreements are not in writing, and some customers are subject to laws and regulations that require them to disclose information that we would otherwise seek to keep confidential. Policing unauthorized use of our technology is difficult and expensive, as is enforcing our rights against unauthorized use. The steps that we have taken or may take may not prevent

Index to Form 10-Q

misappropriation of the technology on which we rely. In addition, effective protection may be unavailable or limited if we expand to other jurisdictions outside the United States, as the intellectual property laws of foreign countries sometimes offer less protection or have onerous filing requirements. Any litigation could be unsuccessful, cause us to incur substantial costs and divert resources away from our daily business.

We may not be able to maintain quality customer care during periods of growth or in connection with the addition of new and complex products or services, which could adversely affect our ability to acquire and retain utility customers and participants in our capacity programs.

In the past, during periods of growth, we have not been able to expand our customer care operations quickly enough to meet the needs of our increased customer base, and the quality of our customer care has suffered. As we add new and complex products and services or we undergo product issues with corrective actions, we will face challenges in increasing and training our customer care staff. If we are unable to hire, train and retain sufficient personnel to provide adequate customer care in a timely manner, we may experience customer dissatisfaction and increased participant terminations. The risk is enhanced through selling solution based systems, contingent upon our IntelliSOURCE software, as the software and potential integration are complex and often times outside of our control, such as in the instance and to the extent we are required to integrate with an AMI provider's meter software.

Electric utility industry sales cycles can be lengthy and unpredictable and require significant employee time and financial resources with no assurances that we will realize revenues.

Sales cycles with our customers can generally be long and unpredictable. Our customers include electric utilities and large commercial and industrial energy consumers that generally have extended budgeting, procurement and regulatory approval processes. In addition, electric utilities tend to be risk averse and tend to follow industry trends rather than be the first to purchase new products or services, which can extend the lead time for or prevent acceptance of new products or services such as our capacity programs or advanced metering initiatives. Accordingly, our potential customers may take longer to reach a decision to purchase products. This extended sales process requires the dedication of significant time by our personnel and our use of significant financial resources, with no certainty of success or recovery of our related expenses. It is not unusual for an electric utility or commercial and industrial energy consumer to go through the entire sales process and not accept any proposal or quote. In addition, pilot test programs, which are often conducted and analyzed before a sale becomes final, generally result in operating losses to us due to the lack of scalability, start-up costs, development expenditures and other factors.

If we are unable to expand the distribution of our products through strategic alliances, we may not be able to grow our business.

Part of our ability to grow our business depends on our success in continuing to increase the number of customers we serve through a variety of strategic marketing alliances or channel partnerships with metering companies, communications providers, advanced meter reading providers, installation companies and other large multinational companies. Revenues from strategic alliances have not historically accounted for a significant portion of our total revenues. We may not be able to maintain productive relationships with the companies with which we have strategic alliances, and we may not be able to establish similar relationships with additional companies on a timely and economic basis, if at all.

An increased rate of terminations of residential, commercial and industrial energy consumers, or the use of more efficient products by such consumers, who are enrolled in our VPC, open market, or turnkey programs, or who would enroll in such programs, would negatively impact our business by reducing our revenues and requiring us to spend more money to maintain and grow our participant base.

Our ability to provide electric capacity under our capacity contracts depends on the number of residential, commercial and industrial energy consumers who enroll and participate in our programs. The average annual rate of participant terminations for our residential VPC programs from inception through December 31, 2011 was approximately 8%. As a result, we will need to acquire new participants on an ongoing basis to maintain available capacity provided to our utility customers. In addition, to the extent existing or future participants install high efficiency air conditioning units which could minimize the effectiveness of our solution as to that participant, we may face lower measurement and verification results. If we are unable to recruit and retain participants for our capacity programs, we will face difficulties acquiring capacity to sell through such programs. Furthermore, the increased competition and the length of contracts for commercial and industrial capacity consumers may result in an increase of such consumers not re-enrolling when their contract ends or terminating their contract for a more lucrative offer, which could further restrict our ability to acquire capacity to sell into such programs. If participant termination rates increase, we will need to acquire more participants in order to maintain our revenues and more participants than estimated to grow our business. This loss of revenues resulting from participant terminations can be significant, and limiting terminations is an

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important factor in our ability to achieve future profitability. If we are unsuccessful in controlling participant terminations, we may be unable to acquire a sufficient number of new participants or we may incur significant costs to replace participants, which could cause our revenues to decrease, and we might not become profitable.

If we lose key personnel upon whom we are dependent, we may not be able to manage our operations and meet our strategic objectives.

Many key responsibilities of our business have been assigned to a relatively small number of individuals. Our future success depends to a considerable degree on the vision, skills, experience and effort of our senior management team, including R. Blake Young, our President and Chief Executive Officer; David Mathieson, our Executive Vice President and Chief Financial Officer; Steve Moffitt, our Executive Vice President and Chief Operating Officer; George Hunt, our Senior Vice President, Commercial and Industrial; David Ellis, our General Manager, International; Matthew Smith, our Senior Vice President, General Counsel and Secretary; Teresa Naylor, our Senior Vice President of Human Resources; and Brent Dreher, Senior Vice President, Utility Sales. On April 7, 2012, Mr. Arthur Vos IV submitted his resignation as our Senior Vice President of Utility Sales and Chief Technology Officer. Mr. Vos will remain in the Company's employ until May 14, 2012. Mr. Dreher joined the Company effective May 1, 2012 as the Company's new Senior Vice President, Utility Sales. We do not maintain key-person insurance on any of these individuals. Any loss or interruption of the services of any of our key employees could significantly reduce our ability to effectively manage our operations and implement our strategy.

The success of our businesses depends in part on our ability to develop new products and services and increase the functionality of our current products.

From January 1, 2001 through March 31, 2012, we have invested over $27.4 million in research and development costs associated with our current products. From time to time, our customers have expressed a need for increased functionality in our products and software. In response, and as part of our strategy to enhance our solutions and grow our business, we plan to continue to make substantial investments in the research and development of new technologies. Our future success will depend in part on our ability to continue to design and manufacture new competitive products and software, to enhance our existing products and to provide new value-added services. Product development initiatives will require continued investment, and we may experience unforeseen problems in the performance of our technologies or products, including new technologies that we develop and deploy. Furthermore, we may not achieve market acceptance of our new products, solutions and software. In the past, we incurred significant costs to develop a specific product for large commercial and industrial customers that has found limited market acceptance. If we are unable to develop new products and services, or if the market does not accept such products and services, our business and results of operations will be adversely affected. In addition, if we are unable to maintain low costs for established products supplied under fixed fee contracts, our business and results of operations will be adversely affected.

If we have material weaknesses in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected.

There were no material weaknesses identified by management or our independent registered public accounting firm during the audit of our consolidated financial statements for the years ended December 31, 2011 and 2010. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. However, there is no assurance that we will not discover material weaknesses in internal controls in the future.

As part of our business strategy, we may pursue the acquisition of complementary businesses. To the extent we acquire a new business, we must integrate the accounting system for the business with our own, and we may experience challenges in our internal control over financial reporting as a result. Any such difficulty we encounter could increase the risk of a material weakness. The existence of one or more material weaknesses in any period would preclude a conclusion that we maintain effective internal control over financial reporting. Such conclusion would be required to be disclosed in our future Annual Reports on Form 10-K and may impact the accuracy and timing of our financial reporting.

Any internal or external security breaches, information technology system failures, cyber security attacks or network distributions that involve our products or our business could harm our reputation, business operations, energy usage and financial conditions and even the perception of security risks, whether or not valid, could inhibit market acceptance of our products and cause us to lose customers.

Our customers use our products to compile and analyze sensitive and confidential information. The occurrence or perception of security breaches in our products or services could harm our reputation, financial condition and results of operations. In

Index to Form 10-Q

addition, we may come into contact with sensitive consumer information or data when we perform operational, support or maintenance functions for our utility customers. A failure to handle this information properly, or a compromise of our security systems that results in customer personal information being obtained by unauthorized persons could adversely affect our reputation with our customers and others, as well as our operations, results of operations, financial condition and liquidity, and could result in litigation against us or the imposition of penalties. In addition, a security breach could require that we expend significant additional resources related to our information security systems and could result in a disruption of our operations. This risk is enhanced through the distribution of our new IntelliSOURCE software system and integration work with the utilities back office, as we anticipate our system and solutions will be utilized on a larger scale.

Additionally, we enter into contracts that require our systems to be secure, as the nation's energy infrastructure is critical to continued safety and business operations. Our products and services involve the (i) storage and transmission of customers' proprietary information and (ii) the use, reduction, and movement of energy and capacity. Security breaches could expose us to a risk of loss of this information, unmanaged electrical usage or stoppage, litigation, and potential liability. Our security measures may be breached due to the actions of outside parties, employee error, malfeasance, or otherwise, and, as a result, an unauthorized party may obtain access to our data or our customers' data and could inappropriately affect electrical management. Additionally, outside parties may attempt to fraudulently induce employees or customers to disclose sensitive information in order to gain access to our data or our customers' data. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and a loss of confidence in the security of our products and services that could potentially have a material adverse effect on our business. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed, and we could lose customers.

Current market developments may adversely affect our business, results of operations and access to capital.

Over the past few years, dramatic declines in the housing market, including increasing foreclosures, and concerns over certain European countries' economic health have resulted in concern about the stability of the financial markets generally. The resulting lack of available credit and lack of confidence in the financial markets could materially and adversely affect our results of operations and financial conditions and our access to capital. In particular, we may face the following risks in connection with these events:


•	continuing foreclosures in the housing market may cause a decline in participation in our demand response programs;


•	our ability to assess the creditworthiness of our customers may be impaired due to slow payment, receivership or bankruptcy of our customers; and


•	our ability to borrow, or our customer's availability to borrow, from other financial institutions could be adversely affected by further disruptions in the capital markets or other events, including actions by credit rating agencies and investor expectations.

Our business may become subject to modified or new government regulation, which may negatively impact our ability to market our products.

Our products and services are not subject to the majority of existing federal and state regulations in the U.S. governing the electric utility industry. However, our solutions are subject to oversight by the 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 services are subject to government oversight and regulation under certain federal, state and local laws and ordinances, particularly relating to market participation and manipulation, communication 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. If any of these things occur, as applicable to our products or services, whether at the federal, state or local level, they may negatively impact the installation, servicing and marketing of our products and increase our costs and the price of our products and services. We are currently evaluating various state regulations regarding installation work for one of our programs. While we do not know the outcome of our evaluation or the potential for any state regulatory board to address such work, there is the potential that we could suffer a loss of significant installation revenue, if not all installation revenue, for this contract.

We are exposed to fluctuations in the market values of our portfolio investments and interest rates; impairment of our investments could harm our earnings.

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We maintain an investment portfolio of various holdings, types, and maturities. These securities are generally classified as available-for-sale and, consequently, are recorded on our consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax. For information regarding the sensitivity of and risks associated with the market value of portfolio investments and interest rates, see ““Item 7A - Quantitative and Qualitative Disclosure About Market Risk” in this Annual Report on Form 10-K.

If we fail to hire and train additional personnel and improve our controls and procedures to respond to the growth of our business, the quality of our products and services could materially suffer and cause us to lose customers.

Our business and operations have expanded rapidly since our inception. For example, from January 1, 2003 through March 31, 2012, the number of our employees increased by 630%, growing from 70 to 511. To continue expanding our customer base effectively and to meet our growth objectives for the future, we are currently working to fill multiple positions within our company. In addition, we must continue to successfully train, motivate and retain our existing and future employees. In order to manage our expanding operations, we will also need to continue to improve our management, operational and financial controls and our reporting systems and procedures. All of these measures will require significant expenditures and will demand the attention of management. If we are not able to hire, train and retain the necessary personnel, or if these operational and reporting improvements are not implemented successfully, the quality of our products and services could materially suffer as a result and cause us to lose customers.

Our business may be subject to additional obligations to collect and remit sales, use or other tax and, any successful action by state, foreign or other authorities to collect additional sales, use or other tax could adversely harm our business.

We file sales and/or use tax returns in certain states within the U.S. as required by law and certain client contracts for a portion of the hardware, software and services that we provide. We do not collect sales or other similar taxes in other states and many of the states do not apply sales or similar taxes to the vast majority of the services that we provide. However, one or more states could seek to impose additional sales or use tax collection and record-keeping obligations on us. Any successful action by state, foreign or other authorities to compel us to collect and remit sales or use tax, either retroactively, prospectively or both, could adversely affect our results of operations and business.

We may not be able to identify suitable acquisition candidates or complete acquisitions successfully, which may inhibit our rate of growth, and we may not be successful in integrating any acquired businesses and acquisitions that we complete which may expose us to a number of unanticipated operational or financial risks.

In addition to organic growth, we have pursued, and to the extent we continue to pursue, growth through the acquisition of companies or assets, we may enlarge our geographic markets, add experienced management and increase our product and service offerings. However, we may be unable to implement this growth strategy if we cannot identify suitable acquisition candidates or reach agreement on potential acquisitions on acceptable terms or for other reasons. Moreover, our acquisition efforts involve certain risks, including:


•	difficulty integrating operations and systems;


•	the potential for key personnel and customers of the acquired company terminating their relationships with the acquired company as a result of the acquisition;


•	additional financial and accounting challenges and complexities in areas such as tax planning and financial reporting;


•	additional risks and liabilities (including for environmental-related costs) as a result of our acquisitions, some of which we may not discover during our due diligence;


•	disruption of our ongoing business or insufficient management attention to our ongoing business; and


•	realizing cost savings or other financial benefits we anticipated.

The rapid growth of the clean energy sector may cause us to experience more competition for acquisition opportunities, which could result in higher valuations for acquisition candidates. As a result, we may be required to pay more for acquisitions we believe are beneficial, which could, in turn, require us to recognize additional goodwill in connection with such acquisitions. To the extent that any acquisition results in additional goodwill, it will reduce our tangible net worth, which might have an adverse effect on our credit. In addition, in the event that we issue shares of our common stock as part or all of the purchase price, an acquisition will dilute the ownership of our then-current stockholders. Once integrated, acquired operations may not achieve levels of revenues, synergies or productivity comparable to those achieved by our existing operations, or otherwise perform as expected. For example, we did not experience the anticipated revenue growth during 2011, 2010 and 2009 from our acquisitions of Enerwise and PES, which was due in part to PES not reaching its anticipated build-out and in part to the regulatory rule change in 2008 that affected Enerwise's economic program in PJM. In addition, future acquisitions could result in the incurrence of additional indebtedness and other expenses. There can be no assurance that our acquisition strategy will not have a material adverse effect on our business, financial condition and results of operations.

Index to Form 10-Q

Risks Related to Our Common Stock

Shares eligible for future sale may cause the market price for our common stock to decline even if our business is doing well.

Sales of substantial amounts of our common stock in the public market, or the perception that these sales may occur, could cause the market price of our common stock to decline. This could also impair our ability to raise additional capital in the future through the sale of our equity securities. Under our fifth amended and restated certificate of incorporation, we are authorized to issue up to 150,000,000 shares of common stock, of which 27,479,908 shares of common stock were outstanding as of March 31, 2012. We cannot predict the size of future issuances of our common stock or the effect, if any, that future sales and issuances of shares of our common stock, or the perception of such sales or issuances, would have on the market price of our common stock.

We do not intend to pay dividends on our common stock.

We have not declared or paid any dividends on our common stock to date, and we do not anticipate paying any dividends on our common stock in the foreseeable future. We intend to reinvest all future earnings in the development and growth of our business. In addition, our senior loan agreement prohibits us from paying dividends and future loan agreements may also prohibit the payment of dividends. Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements, business opportunities, contractual restrictions and other factors deemed relevant. To the extent we do not pay dividends on our common stock, investors must look solely to stock appreciation for a return on their investment in our common stock.

The sale of our common stock to Aspire Capital may cause substantial dilution to our existing stockholders and the sale of the shares of common stock acquired by Aspire Capital could cause the price of our common stock to decline.

Shares offered to Aspire Capital under the Purchase Agreement between us and Aspire Capital may be sold over a period of up to 24 months from the date of the agreement. The number of shares ultimately offered for sale to Aspire Capital is dependent upon the number of shares we elect to sell to Aspire Capital under the Purchase Agreement. Depending upon market liquidity at the time, sales of shares of our common stock under the Purchase Agreement may cause the trading price of our common stock to decline. As of March 31, 2012, we have issued 1,400,000 shares of common stock under the Purchase Agreement, excluding the 144,927 Commitment Shares. After Aspire Capital has acquired shares pursuant to the Purchase Agreement, it may sell all, some or none of those shares.

Aspire Capital may ultimately purchase all, some or none of the $10.0 million of our common stock together with the 144,927 shares of common stock we refer to as the Commitment Shares. Sales to Aspire Capital by us pursuant to the Purchase Agreement may result in substantial dilution to the interests of other holders of our common stock. The sale of a substantial number of shares of our common stock to Aspire Capital in this offering, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales. However, we have the right to control the timing and amount of any sales of our shares to Aspire Capital and the Purchase Agreement may be terminated by us at any time at our discretion without any cost to us. If the Agreement and Plan of Merger with Peak Holding Corp. is consummated, the Purchase Agreement with Aspire Capital will be terminated.

Our fifth amended and restated certificate of incorporation, our second amended and restated bylaws and Delaware law contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock.

Provisions in our fifth amended and restated certificate of incorporation, our second amended and restated bylaws and applicable provisions of the General Corporation Law of the State of Delaware may make it more difficult or expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential hostile takeover attempts and could adversely affect the market price of our common stock. Our fifth amended and restated certificate of incorporation and our second amended and restated bylaws:

•

currently provide for a classified board of directors, which could discourage potential acquisition proposals and could delay or prevent a change of control. At our 2010 Annual Meeting, our shareholders approved a shareholder proposal that requested the board to take the necessary steps to declassify the board and to adopt the annual election of each director. While our board recommended declassifying the board at our 2011 Annual Meeting, the proposal did not receive the affirmative vote of at least 66 2/3% of the total number of outstanding shares required to amend our

Index to Form 10-Q

certificate of incorporation in order to implement the declassification of the board and therefore, the classified structure of the board remains in place;


•	authorize the issuance of blank check preferred stock that could be issued by our board of directors during a takeover attempt;


•	prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors;


•	require super-majority voting to effect amendments to certain provisions of our fifth amended and restated certificate of incorporation and to effect amendments to our second amended and restated bylaws concerning the number of directors;


•	limit who may call special meetings;


•	prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders;


•	establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at a stockholders meeting; and


•	require that vacancies on the board of directors, including newly-created directorships, be filled only by a majority vote of directors then in office.

In addition, Delaware law prohibits us from engaging in any business combination with any “interested stockholder,” meaning generally that a stockholder who beneficially owns more than 15% of our common stock cannot acquire us for a period of three years from the date this person became an interested stockholder, unless various conditions are met, such as approval of the transaction by our board of directors.

Our common stock may not continue to trade on the Nasdaq Global Market, which could cause the price of our common stock to decline and make your shares more difficult to sell.

In order for our common stock to trade on the Nasdaq Global Market, we must continue to meet the listing standards of that market. Among other things, those standards require that our common stock maintain a minimum closing bid price of at least $1.00 per share. During 2011, our common stock traded at times at prices near $1.00. If we do not continue to meet Nasdaq's applicable minimum listing standards, Nasdaq could delist us from the Nasdaq Global Market. If our common stock is delisted from the Nasdaq Global Market, we could seek to have our common stock listed on the Nasdaq Capital Market or other Nasdaq markets. However, delisting of our common stock from the Nasdaq Global Market could hinder your ability to sell, or obtain an accurate quotation for the price of, your shares of our common stock. Delisting could also adversely affect the perception among investors of Comverge and its prospects, which could lead to further declines in the market price of our common stock. Delisting may also make it more difficult and expensive for us to raise capital. In addition, delisting might subject us to a Securities and Exchange Commission rule that could adversely affect the ability of broker-dealers to sell or make a market in our common stock, thereby hindering your ability to sell your shares.

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

There were no unregistered sales of equity securities during the quarter ended March 31, 2012.

The following table presents shares of our common stock surrendered by employees during the quarter ended March 31, 2012:



Period	Total Number of Shares Purchased (1)	Average Price Paid per Share
January 2012	505	$	1.34
February 2012	33,486	$	1.43
March 2012	9,075	$	1.42

(1) Represents shares of the Company's common stock surrendered by employees to exercise stock options and to satisfy tax withholding obligations on vested restricted stock and stock option exercises pursuant to the Amended and Restated 2006 Long-Term Incentive Plan, as amended.

Index to Form 10-Q

Item 6: Exhibits

The following documents are filed as exhibits to this report:



31.1	Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

*XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

Index to Form 10-Q

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	Comverge, Inc.
	(Registrant)

May 10, 2012	/s/R. Blake Young
(Date)	R. Blake Young
	President and Chief Executive Officer
	(Principal Executive Officer)

May 10, 2012	/s/David Mathieson
(Date)	David Mathieson
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

COMVERGE, INC. 10-Q