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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q


(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011
 
Or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______ to ______
 
Commission file number: 000-30939
 

ACTIVE POWER, INC.
(Exact name of registrant as specified in its charter)

 
Delaware
74-2961657
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
2128 W. Braker Lane, BK12, Austin, Texas
78758
(Address of principal executive offices)
(Zip Code)
 
(512) 836-6464
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
 

 
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.   x  Yes  ¨  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 such shorter period that the registrant was required to submit and post such files).    x  Yes  ¨  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large Accelerated Filer
¨
 
Accelerated Filer
x
         
Non-Accelerated Filer
¨  (Do not check if a smaller reporting company)
 
Smaller Reporting Company
¨
 
Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act).    ¨ Yes   x No
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
The number of shares of common stock, par value of $0.001 per share, outstanding at November 1, 2011 was 80,168,448.
 


 
 

 
ACTIVE POWER, INC.
FORM 10-Q
INDEX
 

 
2


Item 1.
Condensed Consolidated Financial Statements.

Active Power, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
 (Unaudited)

 
 
September 30,
2011
   
December 31,
2010
 
 
 
(unaudited)
   
 
 
ASSETS
 
 
   
 
 
 
 
 
   
 
 
Current assets:
 
 
   
 
 
Cash and cash equivalents
  $ 9,455     $ 15,416  
Short-term investments in marketable securities
    -       134  
Restricted cash
    403       -  
Accounts receivable, net of allowance for doubtful accounts of $346 and $330 at September 30, 2011 and December 31, 2010, respectively
    16,725       14,708  
Inventories
    10,731       6,430  
Prepaid expenses and other
    501       511  
Total current assets
    37,815       37,199  
Property and equipment, net
    3,007       2,005  
Deposits and other
    404       314  
Total assets
  $ 41,226     $ 39,518  
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 6,035     $ 6,022  
Accrued expenses
    5,379       7,068  
Deferred revenue
    4,566       2,492  
Revolving line of credit
    5,535       2,535  
Total current liabilities
    21,515       18,117  
Long-term liabilities
    811       579  
Stockholders’ equity:
               
Common stock
    80       80  
Treasury stock
    (115 )     (103 )
Additional paid-in capital
    276,233       274,807  
Accumulated deficit
    (257,553 )     (253,801 )
Other accumulated comprehensive income (loss)
    255       (161 )
Total stockholders’ equity
    18,900       20,822  
Total liabilities and stockholders’ equity
  $ 41,226     $ 39,518  

See accompanying notes.

 
3


Active Power, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
 
2011
 
 
2010
 
 
2011
 
 
2010
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Product revenue
 
$
16,996
 
 
$
16,663
 
 
$
47,890
 
 
$
39,356
 
Service and other revenue
 
 
3,612
 
 
 
1,793
 
 
 
9,262
 
 
 
6,264
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenue
 
 
20,608
 
 
 
18,456
 
 
 
57,152
 
 
 
45,620
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of product revenue
 
 
13,112
 
 
 
11,287
 
 
 
35,625
 
 
 
28,323
 
Cost of service and other revenue
 
 
2,649
 
 
 
1,691
 
 
 
7,337
 
 
 
4,606
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cost of goods sold
 
 
15,761
 
 
 
12,978
 
 
 
42,962
 
 
 
32,929
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
 
4,847
 
 
 
5,478
 
 
 
14,190
 
 
 
12,691
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
 
1,272
 
 
 
833
 
 
 
3,279
 
 
 
2,517
 
Selling and marketing
 
 
3,527
 
 
 
3,539
 
 
 
10,397
 
 
 
10,323
 
General and administrative
 
 
1,280
 
 
 
1,075
 
 
 
4,083
 
 
 
3,825
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total operating expenses
 
 
6,079
 
 
 
5,447
 
 
 
17,759
 
 
 
16,665
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit (loss)
 
 
(1,232
)
 
 
31
 
 
 
(3,569
)
 
 
(3,974
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
 
(68
)
 
 
(30
)
 
 
(149
)
 
 
(82
)
Other income (expense), net
 
 
8
 
 
 
13
 
 
 
(34
)
 
 
(55
)
Income (loss) before income taxes
 
 
(1,292
)
 
 
14
 
 
 
(3,752
)
 
 
(4,111
)
Income tax benefit
 
 
-
 
 
 
41
 
 
 
 
-
 
 
41
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(1,292
)
 
$
55
 
 
$
(3,752
)
 
$
(4,070
)
Net income (loss) per share, basic
 
$
(0.02
)
 
$
0.00
 
 
$
(0.05
)
 
$
(0.05
)
Net income (loss) per share, diluted
 
$
(0.02
)
 
$
0.00
 
 
$
(0.05
)
 
$
(0.05
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares used in computing net income (loss) per share, basic
 
 
80,119
 
 
 
79,674
 
 
 
79,990
 
 
 
76,982
 
Shares used in computing net income (loss) per share, diluted
 
 
80,119
 
 
 
80,366
 
 
 
79,990
 
 
 
76,982
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income ( loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(1,292
)
 
$
55
 
 
$
(3,752
)
 
$
(4,070
)
Translation gain (loss) on subsidiaries denominated in foreign currencies
 
 
(193)
 
 
 
247
 
 
 
416
 
 
 
(12
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
$
(1,485
)
 
$
302
 
 
$
(3,336
)
 
$
(4,082
)

 
4


Active Power, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
 
 
Nine Months Ended
September 30,
 
 
 
2011
 
 
2010
 
Operating activities
 
 
 
 
 
 
Net loss
 
$
(3,752
)
 
$
(4,070
)
Adjustments to reconcile net loss to cash used in operating activities:
 
 
 
 
 
 
 
 
Depreciation expense
 
 
1,093
 
 
 
1,510
 
Change to allowance for doubtful accounts
 
 
16
 
 
 
(42
)
(Gain) Loss on disposal of fixed assets
 
 
130
 
 
 
8
 
Stock-based compensation
 
 
1,149
 
 
 
716
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
Accounts receivable
 
 
(2,033
)
 
 
    (1,086)
 
Inventories
 
 
(4,301
)
 
 
300
 
Prepaid expenses and other assets
 
 
(80)
 
 
 
(253)
 
Accounts payable
 
 
13
 
 
 
(533)
 
Accrued expenses
 
 
(1,689
)
 
 
809
 
Deferred revenue
 
 
2,074
 
 
 
(10)
 
Long-term liabilities
 
 
232
 
 
 
138
 
Net cash used in operating activities
 
 
(7,148
)
 
 
(2,513
)
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
 
Sales/maturities of marketable securities
 
 
134
 
 
 
 
Increase in restricted cash
   
(403)
     
 
Purchases of property and equipment
 
 
(2,225
)
 
 
(532
)
Net cash used in investing activities
 
 
(2,494
)
 
 
(532
)
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
 
Proceeds from private placement of common stock
 
 
 
 
 
9,923
 
Issuance costs of private placement
 
 
 
 
 
(886
)
Proceeds from draw on revolving line of credit
 
 
3,000
 
 
 
1,008
 
Payments on revolving line of credit
   
     
(32)
 
Proceeds from employee stock purchases
 
 
277
 
 
 
24
 
Purchases of treasury stock
 
 
(12
)
 
 
(30
)
Net cash provided by financing activities
 
 
3,265
 
 
 
10,007
 
 
 
 
 
 
 
 
 
 
Translation gain (loss) on subsidiaries in foreign currencies
 
 
416
 
 
 
(12
)
 
 
 
 
 
 
 
 
 
Change in cash and cash equivalents
 
 
(5,961
)
 
 
6,950
 
Cash and cash equivalents, beginning of period
 
 
15,416
 
 
 
7,489
 
Cash and cash equivalents, end of period
 
$
9,455
 
 
$
14,439
 

See accompanying notes.

 
5


Active Power, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2011
(Unaudited)

1.
Significant Accounting Policies

Organization and Basis of presentation
Active Power, Inc. and its subsidiaries (hereinafter referred to as “we”, “us”, “Active Power” or the “Company”) manufacture and provide critical power quality solutions that provide business continuity and protect customers in the event of an electrical power disturbance. Our products and solutions are designed to deliver continuous clean power, protecting customers from voltage fluctuations, such as surges and sags and frequency fluctuations, and also to provide ride-through, or temporary, power to bridge the gap between a power outage and the restoration of utility power. Our target customers are those global enterprises requiring “power insurance” because they have zero tolerance for downtime in their mission critical operations. The Uninterruptible Power Supply (“UPS”) products we manufacture use kinetic energy to provide short-term power as a cleaner alternative to electro-chemical battery-based energy. We sell stand-alone UPS products as well as complete continuous power and infrastructure solutions, including containerized continuous power systems that we brand as PowerHouse. We sell our products globally through direct, manufacturer’s representatives, Original Equipment Manufacturer (“OEM”) channels and IT partners. Our current principal markets are Europe, Middle East and Africa (“EMEA”), Asia and North America.

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accounts of the Company and its consolidated subsidiaries. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the consolidated financial position of the Company and its consolidated results of operations and cash flows. These interim financial statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

2.
Supplemental Balance Sheet Information

Restricted Cash
Restricted cash balance of $403 as of September 30, 2011, secured performance guarantees given to a customer. Upon satisfaction of these guarantees, the restriction on these funds will be released.

Receivables
Accounts receivable consist of the following (in thousands):

 
 
September 30,
2011
 
 
December 31,
2010
 
Trade receivables
 
$
17,071
 
 
$
15,038
 
Allowance for doubtful accounts
 
 
(346
)
 
 
(330
)
 
 
$
16,725
 
 
$
14,708
 

 
6


Inventory
We state inventories at the lower of cost or market, using the first-in-first-out-method (in thousands):

 
 
September 30,
2011
   
December 31,
2010
 
Raw materials
  $ 6,859     $ 5,243  
Work in process
    3,452       2,382  
Finished goods
    2,246       1,148  
Allowances for obsolescence
    (1,826 )     (2,343 )
 
  $ 10,731     $ 6,430  

Property and Equipment
Property and equipment consist of the following (in thousands):

 
 
September 30,
2011
 
 
December 31,
2010
 
Equipment
 
$
9,991
 
 
$
9,574
 
Demonstration units
 
 
1,483
 
 
 
1,195
 
Computers and purchased software
 
 
3,932
 
 
 
3,425
 
Furniture and fixtures
 
 
389
 
 
 
362
 
Leasehold improvements
 
 
7,423
 
 
 
7,328
 
Construction in progress
 
 
1,078
 
 
 
389
 
 
 
 
24,296
 
 
 
22,273
 
Accumulated depreciation
 
 
(21,289
)
 
 
(20,268
)
 
 
$
3,007
 
 
$
2,005
 

Accrued Expenses
Accrued expenses consist of the following (in thousands):

 
 
September 30,
2011
 
 
December 31,
2010
 
Compensation and benefits
 
$
2,331
 
 
$
3,985
 
Warranty liability
 
 
701
 
 
 
677
 
Property, income, state, sales and franchise tax
 
 
862
 
 
 
1,193
 
Professional fees
 
 
413
 
 
 
360
 
Other
 
 
1,072
 
 
 
853
 
 
 
$
5,379
 
 
$
7,068
 

Warranty Liability
Generally, the warranty period for our power quality products is 12 months from the date of commissioning or 18 months from the date of shipment from Active Power, whichever period is shorter. Occasionally we offer longer warranty periods to certain customers. The warranty period for products sold to our primary OEM customer, Caterpillar, is 12 months from the date of shipment to the end-user, or up to 36 months from shipment. This is dependent upon Caterpillar complying with our storage requirements for our products in order to preserve this warranty period beyond the standard 18-month limit. We provide for the estimated cost of product warranties at the time revenue is recognized and this accrual is included in accrued expenses and long-term liabilities on the accompanying consolidated balance sheet.

Changes in our warranty liability are presented in the following table (in thousands):

 
 
 
 
Balance at December 31, 2010
 
$
734
 
Warranty expense
 
 
695
 
Warranty charges incurred
 
 
(687
)
Balance at September 30, 2011
 
$
742
 
Warranty liability included in accrued expenses
 
$
701
 
Long-term warranty liability
 
 
41
 
Balance at September 30, 2011
 
$
742
 

 
7

 
Revenue Recognition
In general, we recognize revenue when four criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. In general, revenue is recognized when revenue-generating transactions generally fall into one of the following categories of revenue recognition:

 
We recognize product revenue at the time of shipment for substantially all products sold directly to customers and through distributors because title and risk of loss pass on delivery to the common carrier. Our customers and distributors do not have the right to return products. If title and risk of loss pass at some other point in time, we recognize such revenue for our customers when the product is delivered to the customer and title and risk of loss have passed.

 
We recognize installation and service and maintenance revenue at the time the service is performed.

 
We recognize revenue associated with extended maintenance agreements (“EMAs”) over the life of the contracts using the straight-line method, which approximates the expected timing in which applicable services are performed. Amounts collected in advance of revenue recognition are recorded as a current or long-term liability based on the time from the balance sheet date to the future date of revenue recognition.

 
We recognize revenue on certain rental programs over the life of the rental agreement using the straight-line method. Amounts collected in advance of revenue recognition are recorded as a current or long-term liability based on the time from the balance sheet date to the future date of revenue recognition.

 
Shipping costs reimbursed by the customer are included in revenue.

Multiple element arrangements (“MEAs”). Arrangements to sell products to customers frequently include multiple deliverables. Our most significant MEAs include the sale of one or more of our CleanSource UPS or PowerHouse products, combined with one or more of the following products: design services, project management, commissioning and installation services, spare parts or consumables, and EMAs. Delivery of the various products or performance of services within the arrangement may or may not coincide. Certain services related to design and consulting may occur prior to delivery of product and commissioning and installation typically takes place within six months of product delivery, depending upon customer requirements. EMAs, consumables, and repair, maintenance or consulting services generally are delivered over a period of one to five years. In certain arrangements revenue recognized is limited to the amount invoiced or received that is not contingent on the delivery of future products and services.

When arrangements include multiple elements, we allocate revenue to each element based on the relative selling price and recognize revenue when the elements have stand-alone value and the four criteria for revenue recognition have been met for each element. We establish the selling price of each element based on Vendor Specific Objective Evidence (“VSOE”) if available, Third Party Evidence (“TPE”) if VSOE is not available, or best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. We generally determine selling price based on amounts charged separately for the delivered and undelivered elements to similar customers in stand-alone sales of the specific elements. When arrangements include an EMA, we recognize revenue related to the EMA at the stated contractual price on a straight-line basis over the life of the agreement.

Any taxes imposed by governmental authorities on our revenue-producing transactions with customers are shown in our consolidated statements of operations on a net-basis; that is, excluded from our reported revenues.

 
8


3.
Net Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2011
   
2010
   
2011
   
2010
 
Numerator:
 
 
   
 
   
 
   
 
 
Net income (loss)
  $ (1,292 )   $ 55     $ (3,752 )   $ (4,070 )
Denominator:
                               
Weighted-average shares of common stock outstanding
    80,119       79,674       79,990       76,982  
Dilutive effect of employee stock options and restricted stock awards
          692              
Weighted average shares for diluted net income per share
    80,119       80,366       79,990       76,982  
Basic net income (loss) per share
  $ (0.02 )   $ 0.00     $ (0.05 )   $ (0.05 )
Diluted income (loss) per share:
  $ (0.02 )   $ 0.00     $ (0.05 )   $ (0.05 )
                                 
Common stock equivalents that were not included in the calculation because the option price was greater than the average market price of the common shares or the net loss would cause the effect of the options to be anti-dilutive:
                               
Employee stock options
    10,260       5,363       10,260       7,160  
Performance-based options
    1,440       2,100       1,440       2,100  
Restricted stock awards
    -       9       -       19  
 
    11,700       7,472       11,700       9,279  

There were no restricted stock awards outstanding at September 30, 2011. As of September 30, 2011 and 2010, respectively, there was no common stock subject to repurchase.

4.
Fair Value of Financial Instruments
 
Investments in marketable securities consist of money-market funds, commercial paper and debt securities with readily determinable fair values. Active Power accounts for investments that are reasonably expected to be realized in cash, sold or consumed during the year as short-term investments. We classify investments in marketable securities as available-for-sale and all reclassifications made from unrealized gains/losses to realized gains/losses are determined based on the specific identification method. The carrying amount of investments in marketable securities approximated fair value at December 31, 2010. There were no investments in marketable securities at September 30, 2011.

In accordance with our investment policy and guidelines, our short-term investments are diversified among and limited to high quality securities with a minimum of investment grade ratings. We actively monitor our investment portfolio to ensure compliance with our investment objective to preserve capital, meet liquidity requirements and maximize return on our investments. We do not require collateral or enter into master netting arrangements to mitigate our credit risk.

 
9


Effective October 1, 2008, we adopted an accounting standard that defines fair value, establishes a framework for measuring fair value as well as expands on required disclosures regarding fair value measurements. This standard applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

Level 1—uses quoted prices in active markets for identical assets or liabilities we have the ability to access.

Level 2—uses observable inputs other than quoted prices in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3—uses one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment.

Inputs are referred to as assumptions that market participants would use in pricing the asset or liability. The uses of inputs in the valuation process are categorized into a three-level fair value hierarchy.

Our Level 1 assets and liabilities consist of cash equivalents and short-term investments, which are primarily invested in money-market funds. These assets are classified as Level 1 because they are valued using quoted prices in active markets and other relevant information generated by market transactions involving identical assets and liabilities.

The fair value of our cash equivalents, which are primarily invested in money-market funds, was determined using the following inputs as of September 30, 2011 and December 31, 2010 (in thousands):

September 30, 2011
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Money-market funds
 
$
3,093
 
 
$
 
 
$
 
 
$
3,093
 
Total
 
$
3,093
 
 
$
 
 
$
 
 
$
3,093
 
Amounts included in:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
3,093
 
 
$
 
 
$
 
 
$
3,093
 
Short-term investments
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
3,093
 
 
$
 
 
$
 
 
$
3,093
 

December 31, 2010
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Money-market funds
 
$
3,227
 
 
$
 
 
$
 
 
$
3,227
 
Total
 
$
3,227
 
 
$
 
 
$
 
 
$
3,227
 
Amounts included in:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
3,093
 
 
$
 
 
$
 
 
$
3,093
 
Short-term investments
 
 
134
 
 
 
 
 
 
 
 
 
134
 
Total
 
$
3,227
 
 
$
 
 
$
 
 
$
3,227
 

For cash and cash equivalents, marketable securities, accounts receivable, and accounts payable, the carrying amount approximates fair value because of the relative short maturity of those instruments.

5.
Guarantees
 
In certain geographical regions, particularly Europe and Africa, we are sometimes required to issue performance guarantees to our customers as a condition of sale. These guarantees usually provide financial protection to our customers in the event that we fail to fulfill our warranty obligations. We secure these guarantees with standby letters of credit through our bank. At September 30, 2011 and December 31, 2010, we had $450 and $547, respectively, of performance guarantees outstanding to customers that were secured with letters of credit.

6.
Subsequent Events

On October 14, 2011 we announced the resignation of our President and Chief Executive Officer and the appointment of Mr. Jan Lindelow, a company director, as interim President and Chief Executive Officer while we undertake a search for a new Chief Executive Officer. In connection with this change in our President and Chief Executive Officer we expect to incur approximately $940,000 in costs during the fourth quarter of 2011 relating to separation of employment and for costs incurred in hiring a new Chief Executive Officer. This change in President and Chief Executive Officer also resulted in a default of one of the affirmative covenants for our revolving bank lending facility; however our bank has provided us a waiver of this default so that we are in compliance with the terms of our bank lending facility.

 
10


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

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the financial statements and notes thereto included in Item 1 of this Form 10-Q and the financial statements and notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2010 included in our 2010 Annual Report on Form 10-K. This report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties. Our expectations with respect to future results of operations that may be embodied in oral and written forward-looking statements, including any forward-looking statements that may be included in this report, are subject to risks and uncertainties that must be considered when evaluating the likelihood of our realization of such expectations. Our actual results could differ materially. The words “believe,” “expect,” “intend,” “plan,” “project,” “will” and similar phrases as they relate to us are intended to identify such forward-looking statements. In addition, please see the “Risk Factors” in Part 1, Item 1A of our 2010 Annual Report on Form 10-K and in Part II, Item 1A of this Form 10-Q for a discussion of items that may affect our future results.

Overview
Active Power is headquartered in Austin, Texas, where we manufacture our patented flywheel uninterruptible power supply (“UPS”) systems and continuous power and infrastructure solutions.  These solutions ensure continuity for business and IT operations for enterprises, data center operations and IT service providers in the event of power disturbances.

Our products and solutions are designed to deliver continuous clean power during power disturbances and outages, voltage sags and surges and provide ride-through power in the event of utility failure, supporting operations until utility power is restored or a longer-term alternative power source, such as a diesel generator, is started.  We believe that our products offer an advantage over those of our competitors in the areas of space and energy efficiency, total cost of ownership, system reliability, modular design and the economically green benefits of our solutions.

As of September 30, 2011, we have shipped more than 3,200 flywheels in UPS system installations, delivering more than 800 megawatts of critical power to customers in 42 countries around the world. We are headquartered in Austin, Texas, with international offices in the United Kingdom, Germany, China and Japan.

Our patented flywheel-based UPS systems store kinetic energy by constantly spinning a compact steel wheel (“flywheel”) driven from utility power in a low friction environment. When the utility power used to spin the flywheel fluctuates or is interrupted, the flywheel’s inertia causes it to continue spinning. The resulting kinetic energy of the spinning flywheel generates electricity known as “bridging power” for short periods, until either utility power is restored or a backup electric generator starts and takes over generating longer-term power in the case of an extended electrical outage. We believe our flywheel products provide many competitive advantages over conventional battery-based UPS systems, including substantial space savings, higher power densities, “green” energy storage, and higher power efficiencies up to 98%. This high energy efficiency reduces operating costs and provides customers a lower total cost of ownership. We offer our flywheel products with load capabilities from 130kVA to 8,400kVA. We typically target higher power applications of 200kVA and above, largely because the majority of customers in this market segment have backup generators. Our flywheel-based UPS systems are marketed under the brand name CleanSource®.

We also sell continuous power systems (“CPS”), which incorporate our UPS products with switchgear and a generator to provide complete short- and long-term protection in the event of a power disturbance. Where the CPS is sold in a containerized package, it is marketed under the brand name PowerHouseTM. PowerHouse can be deployed in either a 20-foot or 40-foot-long container depending upon the customer’s power load requirements. These systems are specifically designed to handle the demands of high-tech facilities requiring the highest power integrity available while maximizing up time, useable floor space and operational efficiency. Designed to offer a highly flexible architecture to a customer’s constantly changing environment, our PowerHouse systems are offered in four standard modular power configurations, enabling sizing for infrastructure on demand. These systems are highly differentiated as they offer flexibility in placement, space savings, fast deployment time after receipt of order, high energy efficiency, and prompt capital deployment to meet current demands. They also deliver significant value to customers as the entire system is integrated and tested prior to delivery for a repeatable simple solution. We also sell CPS solutions to customers in a non-containerized format, typically deploying such solutions inside buildings.

Leveraging our expertise in containerization and power distribution, in 2010 we began to manufacture continuous infrastructure solutions, designed to specification for select business partners.  These solutions serve as the infrastructure for modular data centers, which are self-contained, fully-functional data centers.  Modular data centers may be rapidly deployed with other modular infrastructure, such as PowerHouse, as a cost-effective alternative to traditional raised-floor data centers.  Active Power designs and delivers the exterior shell and a fully fitted-out interior (including electrical, cooling, monitoring, and other elements) ready for the customer to add its IT racks and servers.  After the customer adds its IT equipment to our continuous infrastructure solution, the customer has a functional data center.   We expect revenue to grow in coming years from current and future customers as modular data center infrastructure continues to gain acceptance in the market.

 
11


We sell our products to a wide array of commercial and industrial customers across a variety of vertical markets, including data centers, manufacturing, technology, broadcast and communications, financial, utilities, healthcare, government and airports. We have expanded our global sales channels and direct sales force, selling in most all major geographic regions of the world, but particularly in North America, Europe and Asia. We sell our products through the following distribution methods:

 
Sales made directly by Active Power;
 
Manufacturer’s representatives;
 
Distributors;
 
OEM partners; and
 
Strategic IT Partners.

We believe a number of underlying macroeconomic trends place Active Power in a strong position to be one of the leading providers of critical power protection. These trends include:

 
Ever-increasing demands placed on the public utility infrastructure;
 
An inadequate investment in global utility infrastructure;
 
Rising costs of energy worldwide;
 
Increasing business costs of downtime;
 
A rapidly expanding need for data centers that provide reliable, efficient power; and
 
An increasing demand for economically green solutions.

We believe that our total revenue will continue to grow from all of our products and as we continue to focus on selling more complete systems rather than just products. In particular, we expect continuing market acceptance of containerized solutions to drive higher sales of our PowerHouse and containerized infrastructure solution products globally. We also believe that the global growth in data center demand will lead to higher sales of our UPS products. We are specifically targeting those customers with large IT and power needs who have the ability to make frequent and large UPS purchases as their global operations expand.

Our commercialization strategy remains focused on the following:
 
 
Building the Active Power brand globally;
 
Expanding our distribution channels;
 
Creating innovative solutions; and
 
Focusing on operating and product cost reduction.

As a result of this strategy, we have been successful in improving our operating and financial performance, broadening our global footprint, diversifying our customer base, broadening our sales channels and partners, and moving higher up the customer value chain with innovative developments of our core underlying product technology.

 
12


Results of Operations
 
   
Three Months ended September 30,
   
Variance 2011 vs. 2010
 
($ in thousands)
 
2011
   
% of total revenue
   
2010
   
% of total revenue
   
$
   
%
 
Product revenue
 
$
16,996
     
82
%
 
$
16,663
     
90
%
 
$
333
     
2
%
Service and other revenue
   
3,612
     
18
%
   
1,793
     
10
%
   
1,819
     
101
%
Total revenue
   
20,608
     
100
%
   
18,456
     
100
%
   
2,152
     
12
%
Cost of product revenue
   
13,112
     
64
%
   
11,287
     
61
%
   
1,825
     
16
%
Cost of service and other revenue
   
2,649
     
13
%
   
1,691
     
9
%
   
958
     
57
%
Total cost of revenue
   
15,761
     
76
%
   
12,978
     
70
%
   
2,783
     
21
%
Gross profit
   
4,847
     
24
%
   
5,478
     
30
%
   
(631
)    
(12
)%
Operating expenses:
                                               
Research and development
   
1,272
     
6
%
   
833
     
5
%
   
439
     
53
%
Selling and marketing
   
3,527
     
17
%
   
3,539
     
19
%
   
(12
)
   
%
General and administrative
   
1,280
     
6
%
   
1,075
     
6
%
   
205
     
19
 %
Total operating expenses
   
6,079
     
29
%
   
5,447
     
30
%
   
632
     
12
%
Operating profit (loss)
   
(1,232
)
   
(6
)%
   
31
     
%
   
(1,263
   
(4,074
)%
Interest expense, net
   
(68
)
   
     
(30
)
   
     
(38
)
   
(127
)%
Other income (expense), net
   
8
     
     
13
     
     
(5
)    
(38
)%
Income (loss) before income taxes
   
(1,292
)    
  (6
)%
   
  14
     
%
   
(1,306
)
   
(9,329
)%
Income tax benefit
   
     
     
41
     
     
(41
)    
(100)
%
Net income (loss)
 
$
(1,292
)
   
(6
)%
 
$
55
     
%
 
$
(1,347
)    
(2,449
)%
 
($ in thousands)
 
Nine months ended September 30,
 
 
Variance 2011 vs. 2010
 
 
 
2011
 
 
% of total revenue
 
 
2010
 
 
% of total revenue
 
 
$
 
 
%
 
Product revenue
 
$
47,890
 
 
 
84
%
 
$
39,356
 
 
 
86
%
 
$
8,534
 
 
 
22
%
Service and other revenue
 
 
9,262
 
 
 
16
%
 
 
6,264
 
 
 
14
%
 
 
2,998
 
 
 
48
%
Total revenue
 
 
57,152
 
 
 
100
%
 
 
45,620
 
 
 
100
%
 
 
11,532
 
 
 
25
%
Cost of product revenue
 
 
35,625
 
 
 
62
%
 
 
28,323
 
 
 
62
%
 
 
7,302
 
 
 
26
%
Cost of service and other revenue
 
 
7,337
 
 
 
13
%
 
 
4,606
 
 
 
10
%
 
 
2,731
 
 
 
59
%
Total cost of revenue
 
 
42,962
 
 
 
75
%
 
 
32,929
 
 
 
72
%
 
 
10,033
 
 
 
30
%
Gross profit
 
 
14,190
 
 
 
25
%
 
 
12,691
 
 
 
28
%
 
 
1,499
 
 
 
12
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
 
3,279
 
 
 
6
%
 
 
2,517
 
 
 
6
%
 
 
762
 
 
 
30
%
Selling and marketing
 
 
10,397
 
 
 
18
%
 
 
10,323
 
 
 
23
%
 
 
74
 
 
 
1
%
General and administrative
 
 
4,083
 
 
 
7
%
 
 
3,825
 
 
 
8
%
 
 
258
 
 
 
7
%
Total operating expenses
 
 
17,759
 
 
 
31
%
 
 
16,665
 
 
 
37
%
 
 
1,094
 
 
 
7
%
Operating loss
 
 
(3,569
)
 
 
(6)
%
 
 
(3,974
)
 
 
(9)
%
 
 
405
 
 
 
(10)
%
Interest expense, net
 
 
(149
)
 
 
 
 
 
(82
)
 
 
 
 
 
(67)
 
 
 
82
%
Other income (expense), net
 
 
(34)
 
 
 
 
 
 
(55
)
 
 
 
 
 
21
 
 
 
(38)
%
Loss before income taxes
 
 
(3,752
)
 
 
(6)%
 
 
 
(4,111
)
 
 
(9)%
 
 
 
359
 
 
 
        9
%
Income tax benefit
 
 
 
 
 
 
 
 
41
 
 
 
 
 
 
(41)
 
 
 
(100)
%
Net loss
 
$
(3,752
)
 
 
(6
)%
 
$
(4,070
)
 
 
(9
)%
 
$
318
 
 
 
8
%

Product revenue. Product revenue primarily consists of sales of our CleanSource power quality products, CPS and other data center infrastructure solutions. Our CleanSource power quality products are comprised of both UPS and DC product lines and our CPS are comprised of our UPS systems and some combination of third party ancillary equipment, such as engine generators and switchgear. The CPS products may be sold in a containerized solution that we call PowerHouse, or as separate equipment. Our data center infrastructure solutions provide power distribution, cooling capabilities, security systems, fire suppression and monitoring capabilities for our IT channel partners. Our product revenue was derived from the following sources:

 
13

 
($ in thousands)
 
Three Months Ended
September 30,
 
 
Variance
 
 
 
2011
 
 
2010
 
 
$
 
 
%
 
Product revenue:
 
 
 
 
 
 
 
 
 
 
 
 
UPS product revenue
 
$
5,991
 
 
$
8,358
 
 
$
(2,367
)
 
 
(28
)%
Continuous Power Systems
 
 
7,034
 
 
 
1,210
 
 
 
5,824
 
 
 
481
%
Data center infrastructure solutions
 
 
3,971
 
 
 
7,095
 
 
 
(3,124
)
 
 
(44
)%
Total product revenue
 
$
16,996
 
 
$
16,663
 
 
$
333
 
 
 
2
%

($ in thousands)
 
Nine Months Ended
September 30,
 
 
Variance
 
 
 
2011
 
 
2010
 
 
$
 
 
%
 
Product revenue:
 
 
 
 
 
 
 
 
 
 
 
 
UPS product revenue
 
$
20,764
 
 
$
23,210
 
 
$
(2,446
)
 
 
(11
)%
Continuous Power Systems
 
 
20,105