That’s the upshot from Comverge’s conference call Friday morning, held to discuss its 2011 fourth-quarter and annual results released the day before. Amidst news of growing revenues, shrinking annual losses and new customers, Comverge also reported that a combination of cash flow, debt and creditor covenant restrictions has placed “substantial doubt about the Company's ability to continue as a going concern.”
CEO Blake Young said Friday that the company was “working very diligently to improve the liquidity of Comverge,” via strategic capital or equity and debt infusions into the company, to help avoid a crisis. It’s also talking with creditors on a daily basis to manage some issues that have precipitated the current crisis, he said.
Key to the Norcross, Ga.-based company’s concerns is a covenant with creditor Grace Bay, which required Comverge to meet revenue targets to avoid penalties. Comverge’s 2011 annual revenues of $136 million were up from $119 million in 2010. But they still didn’t meet Grace Bay’s target of $139.8 million for the year, Young noted.
With this miss, Grace Bay “has the right, but not the obligation,” to seek accelerated payment of a portion of its loan balance that adds up to about $6.8 million within 12 months of its decision to seek it. Right now, Comverge has $1.7 million of that due by the end of the first quarter of 2012, later this month, and has reclassified that to current debt, Young said.
Stopping that outflow of cash will be important to avoid a second problem with lender Silicon Valley Bank. SVB has the right to restrict access to its credit facility if Comverge’s unrestricted cash falls below $20 million. As of Dec. 31, 2011, Comverge had $23.1 million in working capital, down from $31 million at the end of September 2011. Continued accelerated payments to Grace Bay could tilt that cash balance below the $20 million target, which could lead to cross-default in other borrowing arrangements that could bring all its outstanding debt due and payable.
To avoid this, “the challenge is ensuring as Q1 approaches that we’re able to achieve the cure” of having first-quarter revenues above the target of $17.7 million in Grace Bay’s covenant, Young said. Given that Comverge reported revenues of $18.8 million in the first quarter of 2011, and that its financial performance has been improving since then, that seems like a reasonable target to make.
Indeed, beyond the issue of short-term capital and debt issues, the company’s report had a lot of good news. Some highlights:
- For the full year 2011, adjusted EBITDA was $800,000, compared to negative $8.5 million for 2010. It’s the first time Comverge has seen a positive figure for earnings before interest, taxes, depreciation, amortization, non-cash stock compensation expense and non-cash impairment charges, and could be a bellwether for future profitability. Gross margin for 2011 also improved to 41 percent compared to 38 percent in 2010.
- Fourth-quarter 2011 net income was $4.9 million on revenues of $36.7 million, compared to net loss of $9.4 million from the same quarter last year. While the figure disappointed analysts who’d expected higher revenue growth, it did contain good news of a doubling of Comverge’s commercial and industrial revenues to $10.2 million during the quarter, including a 65-megawatt contract with Pennsylvania utility PECO.
- Comverge also made some key gains in the residential demand response business, including a doubling of its residential dynamic pricing program contract with Florida panhandle utility Gulf Power from about 8,000 to an expected 16,000 participants over the next four years. Comverge differs from its big demand response competitors like EnerNOC and Constellation Energy in that it serves residential customers, alongside the commercial and industrial customers that its rivals target. However, its total residential business fell to 1,134 megawatts, down from 1,287, due to the end of a contract with Nevada utility NV Energy.
- Comverge expanded the number of customers using its next-generation IntelliSOURCE platform to 22 utilities, not counting the most recent customer, 80,000-member New Hampshire Electric Co-Op to connect smart meters from Elster into Comverge’s IntelliSOURCE demand response platform.
- Comverge’s December deal to build a countrywide demand response market and platform for South African utility Eskom represents another level of complexity for the company to manage. Thus, it’s good news that earlier this year, Comverge executed the first dispatch of load drop for Eskom, turning down 4 megawatts of power use at a cement plant for about an hour, all controlled from its Georgia headquarters, Young said Friday.
- As of Dec. 31, 2011, Comverge’s backlog of business stood at $143 million through 2012. As for ongoing business, it anticipated payments from long-term contracts to add up to $147 million in 2012 and $140 million in 2013.
- Comverge also said that it anticipates no material effect on its business of the recent Federal Energy Regulatory Commission's ruling on how grid operator PJM may ask its demand response partners to account for their revenues. That ruling could have an impact on rival demand response aggregator EnerNOC, however.
Comverge went public in April 2007, becoming the first pure-play bellwether in the field of demand response, or turning down lots of customers' power use to shave peak grid demand. EnerNOC, current U.S. market leader, went public in May 2007. Since then, a lot has changed in the industry, with both EnerNOC and Comverge renovating their technology and business plans to take account of shifting rules and regulations on demand response. It's also seen new aggregation competitors like Constellation Energy and the partnership of Viridity Energy and ConEd Solutions, and new technologies from the likes of Honeywell and Johnson Controls.
While Comverge's incumbent status helps it prove its viability against new competitors, it also has led some industry watchers to wonder whether it wasn't being left behind by new developments in the field. One key threat is that utilities and big power-using customers may be able to use new technology to bypass the need for an aggregator like EnerNOC or Comverge, working directly together to shave power use when needed.
Needham & Co. analyst Sean Hannan reiterated a buy on Comverge, saying that the company should be able to overcome its non-compliance problems in the first quarter of 2012. The company’s share price has fallen from around $7 in early 2011 to trade below $2 since October, and the company had an accumulated deficit of $228.8 million and stockholders equity of just $37 million as of the end of 2011.
Comverge projects 2012 revenues of $145 million to $170 million, and Young said the company expected a positive EBITDA of $3 million to $10 million, which should provide a “clear demonstration of improving cash-flow characteristics” of the company.
Comverge has more than 500 utility and 2,100 commercial customers and had 4,564 megawatts under management at the end of 2011. That makes it a serious heavyweight in the demand response industry, though not as big as U.S. market leader EnerNOC, which had more than 7,000 megawatts under management as of late last year.