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P10 Industries, Inc. 10-Q 2012
form10q.htm


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, 2012
 
Or
 
o
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  o  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       o
(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 October 29, 2012 was 95,457,376.
 


 
 

 
 
ACTIVE POWER, INC.
FORM 10-Q
 

 
2



Active Power, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
 
 
 
September
30,
2012
 
 
December
31,
2011
 
 
 
(unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
14,079
 
 
$
10,357
 
Restricted cash
 
 
386
 
 
 
389
 
Accounts receivable, net of allowance for doubtful accounts of $662 and $337 at September 30, 2012 and December 31, 2011, respectively
 
 
17,666
 
 
 
11,163
 
Inventories
 
 
9,362
 
 
 
9,439
 
Prepaid expenses and other
 
 
1,457
 
 
 
414
 
Total current assets
 
 
42,950
 
 
 
31,762
 
Property and equipment, net
 
 
2,896
 
 
 
2,861
 
Deposits and other
 
 
307
 
 
 
404
 
Total assets
 
$
46,153
 
 
$
35,027
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
Accounts payable
 
$
4,653
 
 
$
4,757
 
Accrued expenses
 
 
3,849
 
 
 
5,351
 
Deferred revenue
 
 
5,464
 
 
 
2,366
 
Revolving line of credit
 
 
5,535
 
 
 
5,535
 
Total current liabilities
 
 
19,501
 
 
 
18,009
 
Long-term liabilities
 
 
798
 
 
 
726
 
Stockholders’ equity:
 
 
 
 
 
 
 
 
Common stock
 
 
95
 
 
 
80
 
Treasury stock
 
 
(135
)
 
 
         (115
)
Additional paid-in capital
 
 
288,193
 
 
 
277,023
 
Accumulated deficit
 
 
(262,399
)
 
 
    (260,895
)
Other accumulated comprehensive income
 
 
100
 
 
 
          199
 
Total stockholders’ equity
 
 
25,854
 
 
 
16,292
 
Total liabilities and stockholders’ equity
 
$
46,153
 
 
$
35,027
 

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,
 
 
 
2012
 
 
2011
 
 
2012
 
 
2011
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Product revenue
 
$
16,647
 
 
$
16,996
 
 
$
50,534
 
 
$
47,890
 
Service and other revenue
 
 
2,964
 
 
 
3,612
 
 
 
10,534
 
 
 
9,262
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenue
 
 
19,611
 
 
 
20,608
 
 
 
61,068
 
 
 
57,152
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of product revenue
 
 
12,254
 
 
 
13,112
 
 
 
35,608
 
 
 
35,625
 
Cost of service and other revenue
 
 
1,742
 
 
 
2,649
 
 
 
6,766
 
 
 
7,337
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cost of goods sold
 
 
13,996
 
 
 
15,761
 
 
 
42,374
 
 
 
42,962
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
 
5,615
 
 
 
4,847
 
 
 
18,694
 
 
 
14,190
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
 
1,325
 
 
 
1,272
 
 
 
4,045
 
 
 
3,279
 
Selling and marketing
 
 
3,447
 
 
 
3,527
 
 
 
10,891
 
 
 
10,397
 
General and administrative
 
 
1,691
 
 
 
1,280
 
 
 
5,175
 
 
 
4,083
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total operating expenses
 
 
6,463
 
   
6,079
 
   
20,111
 
   
17,759
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating loss
 
 
(848)
 
 
 
(1,232
)
 
 
(1,417
)
 
 
(3,569
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
 
(80
)
 
 
(68
)
 
 
(246
)
 
 
(149
)
Other income (expense), net
 
 
81
 
 
 
8
 
 
 
159
 
 
 
(34
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(847)
 
 
$
(1,292
)
 
$
(1,504
)
 
$
(3,752
)
Net loss per share, basic and diluted
 
$
(0.01)
 
 
$
(0.02
)
 
$
(0.02
)
 
$
(0.05
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares used in computing net loss per share, basic and diluted
 
 
95,575
 
 
 
80,119
 
 
 
91,998
 
 
 
79,990
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(847)
 
 
$
(1,292
)
 
$
(1,504
)
 
$
(3,752
)
Translation gain (loss) on subsidiaries denominated in foreign currencies
 
 
211
 
 
 
(193)
 
 
 
(99
)
 
 
416
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive loss
 
$
(636)
 
 
$
(1,485
)
 
$
(1,603
)
 
$
(3,336
)
 
 
4

 
Active Power, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
 
 
Nine Months Ended
September 30,
 
 
 
2012
 
 
2011
 
Operating activities
 
 
 
 
 
 
Net loss
 
$
(1,504
)
 
$
(3,752
)
Adjustments to reconcile net loss to cash used in operating activities:
 
 
 
 
 
 
 
 
Depreciation expense
 
 
955
 
 
 
1,093
 
Change to allowance for doubtful accounts
 
 
325
 
 
 
16
 
(Gain) Loss on disposal of fixed assets
 
 
31
 
 
 
130
 
Stock-based compensation
 
 
1,131
 
 
 
1,149
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
Restricted cash
 
 
3
 
 
 
(403)
 
Accounts receivable
 
 
(6,828
)
 
 
    (2,033
)
Inventories
 
 
77
 
 
 
(4,301
)
Prepaid expenses and other assets
 
 
(946
)
 
 
(80)
 
Accounts payable
 
 
(104)
 
 
 
13
 
Accrued expenses
 
 
(1,502
)
 
 
    (1,689
)
Deferred revenue
 
 
3,098
 
 
 
2,074
 
Long-term liabilities
 
 
72
 
 
 
232
 
Net cash used in operating activities
 
 
(5,192
)
 
 
(7,551
)
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
 
Sales/maturities of marketable securities
   
        —
     
         134
 
Purchases of property and equipment
 
 
(1,021
)
 
 
(2,225
)
Net cash used in investing activities
 
 
(1,021
)
 
 
(2,091
)
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
 
Proceeds from private placement of common stock
 
 
9,750
 
 
 
 
Issuance costs of private placement
 
 
(187
)
 
 
 
Proceeds from draw on revolving line of credit
 
 
2,017
 
 
 
3,000
 
Payments on revolving line of credit
 
 
(2,017
)
 
 
 
Proceeds from employee stock purchases
 
 
491
 
 
 
277
 
Purchases of treasury stock
 
 
(20)
 
 
 
(12
)
Net cash provided by financing activities
 
 
10,034
 
 
 
3,265
 
 
 
 
 
 
 
 
 
 
Translation gain (loss) on subsidiaries in foreign currencies
 
 
(99)
 
 
 
416
 
 
 
 
 
 
 
 
 
 
Change in cash and cash equivalents
 
 
3,722
 
 
 
(5,961
)
Cash and cash equivalents, beginning of period
 
 
10,357
 
 
 
15,416
 
Cash and cash equivalents, end of period
 
$
14,079
 
 
$
9,455
 

See accompanying notes.
 
 
5

 
Active Power, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2012
(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 and infrastructure 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, 2011.

2.
Supplemental Balance Sheet Information

Restricted Cash

Restricted cash balance of $386,000 as of September 30, 2012 consists of secured performance and deposit guarantees given to customers. Upon satisfaction of these guarantees, the restriction on these funds will be released.

Receivables

Accounts receivable consist of the following (in thousands):

 
 
September
30,
2012
 
 
December
31,
2011
 
Trade receivables
 
$
18,328
 
 
$
11,500
 
Allowance for doubtful accounts
 
 
(662
)
 
 
(337
)
 
 
$
17,666
 
 
$
11,163
 

 
6


Inventory

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

 
 
September
30,
2012
 
 
December
31,
2011
 
Raw materials
 
$
6,897
 
 
$
6,493
 
Work in process
 
 
2,769
 
 
 
3,085
 
Finished goods
 
 
942
 
 
 
1,680
 
Allowances for obsolescence
 
 
(1,246
)
 
 
(1,819
)
 
 
$
9,362
 
 
$
9,439
 

Property and Equipment

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

 
 
September
30,
2012
 
 
December
31,
2011
 
Equipment
 
$
10,060
 
 
$
9,980
 
Demonstration units
 
 
2,149
 
 
 
1,345
 
Computers and purchased software
 
 
4,177
 
 
 
4,029
 
Furniture and fixtures
 
 
375
 
 
 
369
 
Leasehold improvements
 
 
7,647
 
 
 
7,425
 
Construction in progress
 
 
653
 
 
 
1,107
 
 
 
 
25,061
 
 
 
24,255
 
Accumulated depreciation
 
 
(22,165
)
 
 
(21,394
)
 
 
$
2,896
 
 
$
2,861
 

Accrued Expenses

Accrued expenses consist of the following (in thousands):

 
 
September
30,
2012
 
 
December
31,
2011
 
Compensation and benefits
 
$
1,844
 
 
$
3,037
 
Warranty liability
 
 
614
 
 
 
583
 
Property, income, state, sales and franchise tax
 
 
336
 
 
 
529
 
Professional fees
 
 
466
 
 
 
463
 
Other
 
 
589
 
 
 
739
 
 
 
$
3,849
 
 
$
5,351
 

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 to Caterpillar. 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.
 
 
7

 
Changes in our warranty liability are presented in the following table (in thousands):
 
 
 
 
 
Balance at December 31, 2011
 
$
613
 
Warranty expense
 
 
1,060
 
Warranty charges incurred
 
 
(1,009
)
Balance at September 30, 2012
 
$
664
 
Warranty liability included in accrued expenses
 
$
614
 
Long-term warranty liability
 
 
50
 
Balance at September 30, 2012
 
$
664
 
 
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. 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 Loss Per Share

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data):
 
 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
 
2012
 
 
2011
 
 
2012
 
 
2011
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(847)
 
 
$
(1,292)
 
 
$
(1,504
)
 
$
(3,752
)
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share
 
 
95,575
 
 
 
80,119
 
 
 
91,998
 
 
 
79,990
 
 
 
 
                         
 
Basic and diluted net loss per share
 
$
(0.01)
 
 
$
(0.02)
 
 
$
(0.02
)
 
$
(0.05
)
Common stock equivalents that were not included in the calculation because the option or restricted stock unit 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
 
 
9,641
 
 
 
10,260
 
 
 
9,641
 
 
 
10,260
 
Performance-based options
   
-
     
1,440
     
-
     
1,440
 
Restricted stock units
 
 
997
 
 
 
-
 
 
 
997
 
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10,638
 
 
 
11,700
 
 
 
10,638
 
 
 
11,700
 

There were no restricted stock unit awards outstanding at September 30, 2011. As of September 30, 2012 and 2011, 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.

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, 2012 and December 31, 2011 (in thousands):

September 30, 2012
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Money-market funds
 
$
3,092
 
 
$
 
 
$
 
 
$
3,092
 
Total
 
$
3,092
 
 
$
 
 
$
 
 
$
3,092
 
Amounts included in:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
3,092
 
 
$
 
 
$
 
 
$
3,092
 
Short-term investments
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
3,092
 
 
$
 
 
$
 
 
$
3,092
 

December 31, 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
 

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 delivery or product warranty obligations. We secure these guarantees with standby letters of credit through our bank. At September 30, 2012 and December 31, 2011, we had $433,000and $446,000 respectively, of performance guarantees outstanding to customers that were secured with letters of credit.
 
 
10

 

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, 2011 included in our 2011 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 2011 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 designs and manufactures continuous power and infrastructure solutions. These solutions ensure continuity for data centers and other mission critical operations in the event of power disturbances.

Our products and solutions are designed to deliver continuous conditioned 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 engaged.  We believe our products offer an advantage over those of our competitors in the areas of power density (less space) and energy efficiency, total cost of ownership, system reliability, modular design, and the economically green benefits of our solutions.

We have sold our patented flywheel-based uninterruptible power supply (“UPS”) systems since 1999. As of September 30, 2012, we have shipped more than 3,500 flywheels in UPS system installations, delivering more than 875 megawatts of power to customers in 43 countries around the world with more than 131 million runtime hours of operation.

In addition to selling stand-alone UPS systems, we also manufacture and sell modular infrastructure solutions (“MIS”) that provide critical power and infrastructure solutions in a pre-packaged format and that offer the same customer benefits with regard to operating efficiency, reliability and cost as our UPS systems. These MIS solutions may include our UPS systems as a component. For example we manufacture and sell continuous power systems (“CPS”) that integrate our UPS products with other related equipment such as switchgear and backup diesel generators that are sold as a complete power solution for customers. We also manufacture and sell other containerized power and infrastructure solutions. These solutions serve as the infrastructure for modular data center products which are self-contained fully functioning data centers. We design and build enclosures that have a fully built out interior – including electrical, cooling, monitoring and other elements – ready for the customer to add its IT racks and servers. We also integrate and build modular power and infrastructure solutions to specification, based on our customers and other third party designs. Once the customer adds its IT equipment to our infrastructure solution, it has a functional modular data center. These industry emerging products can be deployed rapidly and at a lower cost than traditional brick-and-mortar solutions and are optimally suited for hyper-scale IT and cloud applications.

We are headquartered in Austin, Texas, with international offices in the United Kingdom, Germany, and China.

We continue to develop client relationships by selling directly and through our network partners. Specifically, we bring products to market through the following distribution methods:

 
 ●
sales made directly by us;
 
 
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 and infrastructure solutions. These trends include:

 
 
increasing business costs of downtime;
 
 
a rapidly expanding need for data center infrastructure
 
 
ever-increasing demands placed on the public utility infrastructure;

 
11

 
 
 
an inadequate investment in global utility infrastructure;
 
 
rising costs of energy worldwide driven by volume of energy used; and
 
 
an increasing demand for economically green solutions.

We have evolved significantly since the company was founded in 1992.  Our early focus was on research and development of the core products that continue to enable our business today.  Over the past several years, we have focused our efforts on brand, markets, and channels of distribution.  The technological foundation of Active Power has yielded more than 100 worldwide patents and a highly differentiated, cost-efficient product platform that we have evolved into an expanding suite of infrastructure solutions. As we go forward, it is critical for us to focus on both developing technology to maintain and grow our leadership position and building channels of distribution to have more avenues into the market.

Active Power has developed and implemented a go-to-market strategy to set the direction for our sales and marketing initiatives and plans around the following components:

 
 
Customer:  Data Center Applications Across Vertical Markets
 
 
Distribution:  Partner Enabled Distribution Strategy Transacted Locally
 
 
Geography:  9 Global Markets around 4 Centers of Operation
 
 
Products:  Continuous Power and Infrastructure Solutions
 
 
Value:  Efficient, Reliable, Green Solutions

As a result of this strategy, we have been successful in improving our operating 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.

In line with our ongoing efforts to improve margins and operational efficiency and to achieve consistent and growing levels of profitability, we have been evaluating our fixed cost position. During the third quarter of 2012, we executed cost savings measures that we expect to yield annualized savings of about $1.6 million, and recorded a one-time restructuring charge of approximately $200,000. We believe these measures will help ensure we are making appropriate investments for the future while also aligning our overhead to support consistent and profitable growth.
 
 
12


Results of Operations
 
 
 
Three Months Ended September 30,
 
 
Variance 2012 vs. 2011
 
($ in thousands)
 
2012
 
 
% of
 total
revenue
 
 
2011
 
 
% of
total
 revenue
 
 
$
 
 
%
 
Product revenue
 
$
16,647
 
 
 
85
%
 
$
16,996
 
 
 
82
%
 
$
(349)
 
 
 
(2)
%
Service and other revenue
 
 
2,964
 
 
 
15
%
 
 
3,612
 
 
 
18
%
 
 
(648)
 
 
 
(18)
%
Total revenue
 
 
19,611
 
 
 
100
%
 
 
20,608
 
 
 
100
%
 
 
(997)
 
 
 
(5)
%
Cost of product revenue
 
 
12,254
 
 
 
62
%
 
 
13,112
 
 
 
64
%
 
 
(858)
 
 
 
(7)
%
Cost of service and other revenue
 
 
1,742
 
 
 
9
%
 
 
2,649
 
 
 
13
%
 
 
(907)
 
 
 
(34)
%
Total cost of goods sold
 
 
13,996
 
 
 
71
%
 
 
15,761
 
 
 
76
%
 
 
(1,765)
 
 
 
(11)
%
Gross profit
 
 
5,615
 
 
 
29
%
 
 
4,847
 
 
 
24
%
 
 
768
 
 
 
16
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
 
1,325
 
 
 
7
%
 
 
1,272
 
 
 
6
%
 
 
53
 
 
 
4
%
Selling and marketing
 
 
3,447
 
 
 
18
%
 
 
3,527
 
 
 
17
%
 
 
(80)
 
 
 
(2)
%
General and administrative
 
 
1,691
 
 
 
9
%
 
 
1,280
 
 
 
6
%
 
 
411
 
 
 
32
%
Total operating expenses
 
 
6,463
 
 
 
33
%
 
 
6,079
 
 
 
29
%
 
 
384
 
 
 
6
%
Operating profit (loss)
 
 
(848)
 
 
 
(4)
%
 
 
(1,232)
 
 
 
(6
)%
 
 
384
 
 
 
(31)
%
Interest expense, net
 
 
(80
)
 
 
 
 
 
(68
)
 
 
 
 
 
(12)
 
 
 
18
%
Other income (expense), net
 
 
81
 
 
 
 
 
 
  8
 
 
 
 
 
 
        73
 
 
 
913
%
Net income (loss)
 
$
(847)
 
 
 
(4)
%
 
$
(1,292
)
 
 
(6
)%
 
$
445
 
 
 
(34)
%
 
($ in thousands)
 
Nine Months Ended September 30,
 
 
Variance
2012 vs. 2011
 
 
 
2012
 
 
% of
total
revenue
 
 
2011
 
 
% of
total
revenue
 
 
$
 
 
%
 
Product revenue
 
$
50,534
 
 
 
83
%
 
$
47,890
 
 
 
84
%
 
$
2,644
 
 
 
6
%
Service and other revenue
 
 
10,534
 
 
 
17
%
 
 
9,262
 
 
 
16
%
 
 
1,272
 
 
 
14
%
Total revenue
 
 
61,068
 
 
 
100
%
 
 
57,152
 
 
 
100
%
 
 
3,916
 
 
 
7
%
Cost of product revenue
 
 
35,608
 
 
 
58
%
 
 
35,625
 
 
 
62
%
 
 
(17)
 
 
 
 
Cost of service and other revenue
 
 
6,766
 
 
 
11
%
 
 
7,337
 
 
 
13
%
 
 
(571)
 
 
 
(8)
%
Total cost of revenue
 
 
42,374
 
 
 
69
%
 
 
42,962
 
 
 
75
%
 
 
(588)
 
 
 
(1)
%
Gross profit
 
 
18,694
 
 
 
31
%
 
 
14,190
 
 
 
25
%
 
 
4,504
 
 
 
32
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
 
4,045
 
 
 
7
%
 
 
3,279
 
 
 
6
%
 
 
766
 
 
 
23
%
Selling and marketing
 
 
10,891
 
 
 
18
%
 
 
10,397
 
 
 
18
%
 
 
494
 
 
 
5
%
General and administrative
 
 
5,175
 
 
 
8
%
 
 
4,083
 
 
 
7
%
 
 
1,092
 
 
 
27
%
Total operating expenses
 
 
20,111
 
 
 
33
%
 
 
17,759
 
 
 
31
%
 
 
2,352
 
 
 
13
%
Operating loss
 
 
(1,417
)
 
 
(2
)%
 
 
(3,569
)
 
 
(6)
%
 
 
2,152
 
 
 
(60)
%
Interest expense, net
 
 
(246
)
 
 
 
 
 
(149
)
 
 
 
 
 
(97)
 
 
 
65
%
Other income (expense), net
 
 
159
 
 
 
 
 
 
(34
)
 
 
 
 
 
193
 
 
 
(568)
%
Net loss
 
$
(1,504
)
 
 
(2
)%
 
$
(3,752
)
 
 
(6)
%
 
$
2,248
 
 
 
(60)
%
 
 
13

 
 
($ in thousands)
 
Three Months Ended
September 30,
 
 
Variance
 
 
 
2012
 
 
2011
 
 
$
 
 
%
 
Product revenue:
 
 
 
 
 
 
 
 
 
 
 
 
UPS systems
 
$
14,785
 
 
$
5,991
 
 
$
8,794
 
 
 
147
%
MIS solutions
   
1,862
 
 
 
11,005
 
 
 
(9,143)
 
 
 
(83)
%
                                 
                                 
Total product revenue
 
$
16,647
 
 
$
16,996
 
 
$
(349)
 
 
 
(2)
%
 
($ in thousands)
 
Nine Months Ended
September 30,
 
 
Variance
 
 
 
2012
 
 
2011
 
 
$
 
 
%
 
Product revenue:
 
 
 
 
 
 
 
 
 
 
 
 
UPS systems
 
$
28,554
 
 
$
20,764
 
 
$
7,790
 
 
 
38
%
MIS solutions
   
21,980
 
 
 
27,126
 
 
 
(5,146)
 
 
 
(19)
%