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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

             

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FORM 10-Q

 

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(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, 2013

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

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ACTIVE POWER, INC.

(Exact name of registrant as specified in its charter)

 

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(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)

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 31, 2013 was 19,362,301.

 

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ACTIVE POWER, INC.

FORM 10-Q

INDEX

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PART I – FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements.

Active Power, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

See accompanying notes.

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Active Power, Inc.

Condensed Consolidated Statement of Operations and Comprehensive Loss

(in thousands, except per share amounts; unaudited)

See accompanying notes.

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Active Power, Inc.

Condensed Consolidated Statement of Stockholders' Equity

(in thousands, except per share amounts; unaudited)

See accompanying notes.

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Active Power, Inc.

Condensed Consolidated Statement of Cash Flows

(in thousands; unaudited)

See accompanying notes.

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Active Power, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2013

(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 modular 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 our direct sales force, manufacturer’s representatives, Original Equipment Manufacturer (“OEM”) channels and IT partners. Our current principal markets are the Americas, Europe Middle East and Africa (“EMEA”), and Asia.

The accompanying condensed consolidated balance sheet as of December 31, 2012, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements and pursuant to the rules and regulations of the SEC for interim reporting, 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, 2012. Please refer to our filings on Form 10-Q/A for the periods ended March 31, 2013 and June 30, 2013, for information regarding the restatements of our financial results for the periods ended March 31, 2013 and June 30, 2013, respectively, and the impact of such restatements on our unaudited condensed financial statements for the period ended September 30, 2013.

 

2.	Supplemental Balance Sheet Information

Restricted Cash

Our restricted cash balance of $0.5 million as of September 30, 2013 consists primarily 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):

We estimate an allowance for doubtful accounts based on factors related to the credit risk of each customer. Historically, our credit losses have been minimal. The increase in allowance for doubtful accounts in the third quarter of 2013 was primarily related to customers in China.

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Inventories

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

 

Property and Equipment

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

Accrued Expenses

Accrued expenses consist of the following (in thousands):

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.

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

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:

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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 may enter into bill-and-hold arrangements and when this occurs delivery may not be present, but other criteria are reviewed to determine the proper timing of revenue recognition.

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

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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.

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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.

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Shipping costs reimbursed by the customer are included in revenue.

When collectability is not reasonably assured, we defer revenue and will recognize revenue on a cost recovery basis as payments are received.

Multiple element arrangements (“MEAs”) are arrangements to sell products to customers that 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 take 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. 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.

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3.	Net Loss Per Share

All common stock information regarding the prior year included in this note have been adjusted to reflect the reverse stock split that took effect on December 21, 2012.

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data):

The calculation of basic and diluted net loss per share excludes shares of common stock issuable upon exercise of employee stock options of 1,943,064 and 1,928,236 as of September 30, 2013 and 2012, respectively, and non-vested shares of common stock issuable upon exercise of restricted stock units of 96,299 and 199,329 as of September 30, 2013 and 2012, respectively, because their inclusion would have the effect of being anti-dilutive.

4.	Fair Value of Financial Instruments

Our assets and liabilities, which are carried at fair value, are classified in one of the following categories:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Significant 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—One or more significant inputs that are unobservable and supported by little or no market data.

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, 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.

Our cash and cash equivalents include money-market funds for which the fair value was determined using Level 1 inputs and was $3.1 million as of September 30, 2013 and December 31, 2012. For cash and cash equivalents, 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 EMEA, 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, 2013 and December 31, 2012, we had $0.5 million and $0, respectively, of performance guarantees outstanding to customers that were secured with letters of credit. The current guarantee is set to expire on April 17, 2014. There is no foreseeable risk that we will not be able to meet the performance obligations. Our restricted cash, as shown on the balance sheet, is related to these guarantees.

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6.	Subsequent Events

On October 29, 2013, we received $0.2 million in cash from Qiyuan Network System Limited, as an additional payment towards the outstanding amount owed on previous shipments made by us. We will recognize revenue for this cash payment in the fourth quarter of 2013. We also accepted a return of goods from such customer on November 4, 2013 that we will put back into inventory in the amount of $1.6 million in the fourth quarter of 2013.

On September 10, 2013, a purported class action complaint was filed in the United States District Court for the Western District of Texas against the Company and certain of its current and former executives. The case is captioned Don Lee v. Active Power, Inc., et. al., Civil Action No. 1:3-cv-00797. The complaint alleges that on April 30, 2013, the Company announced during a conference call that it had entered into a strategic distribution partnership with Digital China.  However, on September 5, 2013, after the close of trading, the Company disclosed that its partnership was with Qiyuan Network System Limited, which is neither an affiliate nor a subsidiary of Digital China.  The complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, and seeks unspecified damages on behalf of all stockholders.

On September 13 and October 14, 2013, two separate stockholders filed complaints in the District Court of Travis County, Texas purporting to bring derivative actions on behalf of the Company against certain current and former officers and directors of the Company.  The first derivative action is captioned Okumura v. Almgren, et. al., Cause No. D-1-GN-13-003230 and the second derivative action is captioned David B. Shaev IRA v. Milner, et. al., Cause No. D-1-GN-13-003557.  The allegations of each derivative complaint mirror those of the class action complaint, and they assert claims for breach of fiduciary duty, unjust enrichment, and/or abuse of control and seek damages on behalf of the Company.  Defendants have entered into an agreement with each of the plaintiffs to stay both of the derivative actions pending the outcome of the motion to dismiss in the securities class action described above.

As of November 18, 2013 we cannot assess the potential outcome of these lawsuits.

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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, 2012 included in our 2012 Annual Report on Form 10-K. Please refer to our filings on Form 10-Q/A for the periods ended March 31, 2013 and June 30, 2013, for information regarding the restatements of our financial results for the periods ended March 31, 2013 and June 30, 2013, respectively, and the impact of such restatements on our unaudited condensed financial statements for the period ended September 30, 2013. 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 2012 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 patented flywheel-based uninterruptible power supply (“UPS”) products and Modular Infrastructure Solutions (“MIS”). These solutions are designed to 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 (“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 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 UPS systems since 1999. Our patented flywheel-based UPS products 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 products, 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 up to 8,400kVA. Our flywheel-based UPS systems are marketed under the brand name CleanSource®. UPS product revenue may include ancillary components delivered as part of a total UPS solution. As of September 30, 2013, we have shipped more than 3,900 flywheels in UPS system installations, delivering more than 900 megawatts of power to customers in 57 countries around the world, providing nearly 170 million runtime hours of operation. In late 2012, we introduced our next generation CSHD 625kVA and 750 kVA UPS products, which we plan to start distributing in the fourth quarter of 2013.

We also sell modular power infrastructure solutions, which incorporate our UPS products with other equipment including switchboards, generators and monitoring and analytics tools to provide complete short- and long-term protection in the event of a power disturbance. Where this integrated solution is sold in a containerized package, it is marketed under the brand name PowerHouseTM. PowerHouse can be deployed in an International Shipping Organization (“ISO”) or purpose built container depending upon location. These systems are specifically designed to handle the demands of the most technically advanced 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 respond to a customer’s constantly changing environment, our PowerHouse systems are offered in four standard configurations, enabling sizing for infrastructure on demand. These systems are highly differentiated as they offer flexibility in placement, space savings, rapid deployment, high energy efficiency, and just in time use of capital deployment. 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 modular power infrastructure solutions to customers in a non-containerized format, typically deploying such solutions inside buildings. We plan to grow revenue in coming years from current and future customers as modular data center infrastructure continues to gain acceptance in the market.

In close cooperation with our strategic partners in the technology industry and leveraging our expertise in containerization and power distribution, in 2010 we began to manufacture modular IT infrastructure solutions, designed to specification for select IT channel business partners.  These solutions serve as the infrastructure for the modular data center deployment model.  Modular data centers may be rapidly deployed with other modular infrastructure such as power and cooling to deliver a cost-effective alternative to traditional raised-floor data centers.  Active Power designs and delivers the exterior shell and a fully outfitted interior – including electrical, cooling, monitoring, and other elements – ready for the IT channel partner to add its IT racks and servers.  After the IT channel partner adds its IT equipment to our modular IT infrastructure solution, the IT channel partner has a functional data center ready for deployment at its end-user site.

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Finally, we offer services in the form of installation, maintenance, project management, and other professional services. Services are often sold in conjunction with the products above, and are increasingly becoming a larger part of our overall revenue.

Our headquarters are in Austin, Texas, with international offices in the United Kingdom, Germany, and China.

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. However, our primary focus is on data center applications within these vertical markets.  We have expanded our global sales channels and direct sales force, selling in major geographic regions of the world, but particularly in North America, Europe and Asia. We sell our products through the following distribution methods:

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sales made directly by Active Power;

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manufacturer’s representatives;

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distributors;

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OEM partners; and

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strategic IT partners.

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

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the increasing business costs of downtime;

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a rapidly expanding need for data center infrastructure;

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ever-increasing demands placed on the public utility infrastructure;

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an inadequate investment in global utility infrastructure;

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rising costs of energy worldwide driven by volume of energy used; and

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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 expand our addressable markets and on building channels of distribution to have more avenues into the market.

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

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Customer:  Data Center Applications Across Vertical Markets

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Distribution:  Partner Enabled Distribution Strategy Transacted Locally

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Geography:  Global Markets served from four Centers of Operation

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Products:  UPS and Modular Infrastructure Systems

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Value:  Efficient, Reliable, Green Solutions

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Service: Installation Maintenance, Project Management and Other Professional Services

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.

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Results of Operations

 

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Total product revenue for the three-month period ended September 30, 2013 decreased by $8.6 million, or 52%, compared to the same period in 2012 and decreased $7.4 million, or 48%, from $15.4 million in the second quarter 2013. The decrease from third quarter 2012 to third quarter 2013 was driven primarily by a reduction in UPS sales, while the reduction from the second quarter 2013 to the third quarter 2013 was primarily due to lower MIS sales, as the second quarter included two large MIS orders. UPS revenue was down $8.3 million, or 56%, in the third quarter 2013 from the same period in the prior year as we had a single large installation in our EMEA region included in the prior year period, of which $5.6 million was ancillary equipment. UPS revenue increased in third quarter 2013 compared to second quarter 2013 due to two large shipments of our 300 series flywheel units into Asia, $1.6 million of which was reversed in the first quarter 2013 restatement described in our Form 10-Q/A and recognized in the third quarter 2013 when the revenue was collected.  MIS revenue was down $0.3 million, or 18%, in the third quarter 2013 from the same period in the prior year and decreased $11.0 million from the second quarter 2013 due to the two large customer shipments mentioned previously. We expect product mix to continue to shift as we obtain large customer orders for either UPS or MIS products in any particular quarter.

Product revenue for the nine-month period ended September 30, 2013 decreased by $15.7 million, or 31%, compared to the same period in 2012. This decrease was driven primarily by a decrease of $11.8 million in sales of UPS products, primarily in the EMEA region. MIS sales comprised 52% and 44% of product revenue in the nine-month period ended September 30, 2013 and 2012, respectively.

Product revenue from Active Power branded products through our direct and manufacturer’s representative channels was $4.0 million, or 50% of our product revenue, for the three-month period ended September 30, 2013, compared to $10.2 million, or 61% of our product revenue, in the same period of 2012, and $6.4 million, or 42% of our product revenue, for the second quarter of 2013.  For the nine-month period ended September 30, 2013, product sales of Active Power branded products through our direct and manufacturer’s representative channels were $19.0 million, or 55% of our product revenue, compared to $24.5 million, or 48%, for the same period of 2012.

Product revenue from our OEM channels for the three-month period ended September 30, 2013 was $2.4 million, a decrease of approximately $2.6 million, or 52%, compared to revenue of $5.0 million for the third quarter of 2012. For the nine-month period ended September 30, 2013, product revenue from our OEM channel was $5.5 million, a decrease of $2.3 million, or 30%, compared to $7.8 million for the same period in 2012.  Product revenue from our OEM channels for the three-month period ended September 30, 2013 increased by $1.4 million, or 138%, compared to $1.0 million for the second quarter of 2013. Sales to Caterpillar, our primary OEM channel, represented $2.4 million and $5.3 million, or 30% and 15% of our product revenue, for the three-month and nine-month periods ended September 30, 2013, respectively, compared to $5.0 million and $7.8 million, or 30% and 15% of our product revenue, in the comparable periods of 2012 and $1.0 million, or 6%, respectively, in the second quarter 2013. Caterpillar remains one of our largest UPS customers as well as our largest OEM customer.

Product revenue from our IT channel for the third quarter of 2013 was $1.5 million, which was relatively flat compared to $1.4 million for the third quarter of 2012 and decreased from the $7.9 million of IT channel revenue in the second quarter 2013.  For the nine-month period ended September 30, 2013, product revenue from our IT channel was $10.4 million, a decrease of $8.0 million, or 43%, compared to $18.3 million for the same period of 2012.  These decreases were primarily due to a decrease in demand for infrastructure solutions from Hewlett Packard (“HP”), our largest IT channel partner. Historically, we have manufactured and sold infrastructure solutions to HP, for them to re-sell to end users in conjunction with sales of their IT and computing products. Thus, the level of orders will fluctuate depending upon the timing of our partner’s need for infrastructure solutions. We have historically experienced large quarterly fluctuations in the number and value of such orders. Sales to HP accounted for 19% of our product revenue for the third quarter of 2013 compared to 8% in the same period of 2012, however sales to HP accounted for only 28% of product revenue for the nine months ended September 30, 2013 compared to 36% of product revenue in the nine months ended September 30, 2012.

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Our MIS products tend to be larger in value and derive sales from a smaller number of customers compared to sales of our UPS products. This smaller number of customers with greater transaction value can contribute to large quarterly fluctuations in revenue from each product family due to the timing of orders and shipments in any particular accounting period. A small number of transactions can lead to significant revenue, but cause greater volatility in our quarterly results and can increase liquidity risk.  To manage this risk we continue to attempt to refine and improve the payment terms of these opportunities as part of our working capital management process.

Sales in the Americas were $4.1 million or 51% of our product revenue for the three-month period ended September 30, 2013, compared to $5.9 million, or 35% of our product revenue, for the same period in 2012 and $14.6 million, or 95% of product revenue, in the second quarter of 2013.

We also sell products directly to customers in Asia and EMEA and we have a network of international distributors in these and other territories. In some of these markets, customers are more likely to purchase a total power solution such as PowerHouse from us rather than a stand-alone UPS system. This usually results in a longer selling cycle and makes quarterly results from these regions more inconsistent and dependent upon a smaller number of larger value transactions. Thus, the amount of revenue from our international markets can fluctuate significantly on a quarterly basis. Product sales to customers in Asia were $2.8 million, or 35% of our total product revenue, in the three-month period ended September 30, 2013, compared to $2.0 million, or 12%, for the same period in 2012 and $0.4 million, or 3%, for the second quarter of 2013. Product revenue in EMEA was $1.1 million, or 14% of product revenue, in the three-month period ended September 30, 2013, compared to $8.8 million, or 53%, for the same period of 2012 and $0.4 million, or 2%, for the second quarter of 2013. These fluctuations are primarily attributable to variations in sales of our UPS products in each region in the relevant periods. Products may sometimes be shipped outside of the region in which the revenues were generated.

Product revenue sales in the Americas for the nine month period ending September 30, 2013 was $28.8 million, compared to $28.6 million for the nine months ended September 30, 2012. The slight increase was primarily related to more MIS products sold in North America in the current year. Product revenue in Asia was $2.9 million in the nine months ended September 2013, compared to $4.5 million in the nine months ended September 2012. This decrease was related to a decline in sales in China. See our first and second quarter 2013 results reported in our Forms 10-Q/A for more information on our distributor relationships in China and their impact on year to date revenues in Asia.  Finally, product revenue from EMEA for the nine months ended September 2013 was $3.2 million compared to $17.5 million in the nine months ended September 2012. This decrease year over year was related to a large single customer project included in the 2012 period.

Service and other revenue. Service and other revenue primarily relates to revenue generated from both traditional (after-market) service work and from customer-specific system engineering. This includes revenue from design, installation, startup, repairs or reconfigurations of our products and the sale of spare or replacement parts to our OEM and end-user customers. It also includes revenue associated with the costs of travel of our service personnel and revenues or fees received upon contract deferment or cancellation. Revenue from extended maintenance contracts with our customers is also included in this revenue category.

Service and other revenue increased by approximately $2.2 million, or 73%, for the three-month period ended September 30, 2013, compared to the same period of 2012, and increased $0.3 million or 7% compared to the second quarter of 2013.  This increase compared to the second quarter 2013 reflects a pricing increase for one of our primary OEM customers in the third quarter of 2013. For the nine-month period ended September 30, 2013, our service and other revenue increased by approximately $2.4 million, or 23%, compared to the same period in 2012.  For our MIS customers, we provide a full power solution, including design services, site preparation, installation of an entire power solution and provision of all products required to provide a turnkey product to the end user, often including maintenance services.  Where we make sales through our OEM channel, it is typical for the OEM to provide these types of services to their end-user customers, so these revenue opportunities do not typically exist for us on our OEM sales. We anticipate that service and other revenue will continue to grow with product revenue, particularly as our PowerHouse system revenue grows and as our installed base of UPS product expands, because as more units are sold to customers, more installation, startup and maintenance services will be required.

Cost of product revenue. Cost of product revenue includes the cost of component parts of our products, ancillary equipment that is sourced from external suppliers, personnel, equipment and other costs associated with our assembly and test operations, including costs from having underutilized facilities, depreciation of our manufacturing property and equipment, shipping costs, warranty costs, and the costs of manufacturing support functions such as logistics and quality assurance. The cost of product revenue as a percentage of total product revenue was 85% and 73% for the three-month and nine-month periods ended September 30, 2013, respectively, compared to 74% and 70%, respectively, for the same periods in 2012 and 69% for the second quarter of 2013. The increase in costs as a percentage of revenue compared to the third quarter 2012 reflected a higher percentage of revenue coming from distributors in Asia where margins are typically lower, and the prior year quarter also included one large shipment to EMEA that had a relatively high margin. We continue to operate a manufacturing facility that has a manufacturing and testing capacity that can be significantly greater than our current product revenue levels in any given quarter, dependent upon the product mix. A large portion of the costs involved in operating this manufacturing facility are fixed in nature and we have incurred unabsorbed overhead each quarter depending on the level of UPS system production. We continue to work on reducing our product costs through design enhancements and modifications and increasing our sales volume to absorb these expenses. We also are working to create cross-functional utilization of our personnel between UPS and MIS product manufacturing so as to obtain higher overall labor efficiency.

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Cost of service and other revenue. Cost of service and other revenue includes the cost of component parts that we use in service or sell as spare parts, as well as labor and overhead costs of our service organization.  This includes travel and related costs incurred in fulfilling service obligations to our customers and the costs of third party contractors used in completion of some of our professional services. The cost of service and other revenue was 47% of service and other revenue in the three-month period ended September 30, 2013, compared to 59% for the same period of 2012 and 55% in the second quarter of 2013.  The decrease in the third quarter of 2013 compared to the third quarter of 2012 and second quarter 2013 reflects favorable pricing increases on our spare parts with one of our primary OEM customers in the third quarter 2013. The utilization of our service personnel will be affected by the number of MIS solution products implemented in a particular period, and in periods where we have a low number of installation projects we would expect our costs as a percentage of revenue to increase due to lower employee utilization.

The cost of service and other revenue was 56% of service and other revenue in the nine-month period ended September 30, 2013, compared to 64% for the same period of 2012.  The decrease in the nine-month period ended September 30, 2013, compared to the same period of 2012 was related to the decreased costs to install MIS solutions due to the concentrated timing and location of the 2013 shipments compared to 2012.

Gross profit. For the three-month period ended September 30, 2013, our gross profit margin was 30% of revenue, compared to 29% of revenue for the third quarter of 2012 and 34% of revenue for the second quarter of 2013.  The slight increase in gross profit margin from the third quarter of 2012 is primarily related to our higher percentage of revenue coming from services. The decrease in the margin from the second quarter of 2013 is related high margin shipments of MIS products that occurred.

For the nine-month period ended September 30, 2013, our gross profit margin was 32% of revenue compared to 31% of revenue for the same period of 2012.  Our ability to further improve gross profit margins will depend, in part, on our ability to further improve our sales channel mix, increase sales of higher margin products such as our UPS products, optimize our product pricing, improve our professional service margins through further pricing optimization and operating efficiency, and increase our total revenues to a level that will allow us to improve the utilization of our manufacturing and service operations.

Research and development. Research and development expense primarily consists of compensation and related costs for employees engaged in research, development and engineering activities, third party consulting and development activities, as well as an allocated portion of our occupancy costs. Overall, our research and development expenses were approximately $0.8 million, or 62%, higher in the third quarter of 2013 compared to the third quarter of 2012 and were $0.3 million, or 19%, higher than the second quarter of 2013. The increases were primarily due to development activities on our next generation of UPS product, which is in its final stages of production release. With our new product we feel we will offer greater power modularity and space efficiencies compared to our existing UPS products, especially as we target the higher power level market.

For the nine-month period ended September 30, 2013, our research and development expense was $5.6 million, compared to $4.0 million for the same period of 2012.  The increase is due to our next generation UPS development as we are in the final phases of production release, as well as optimizing ways to reduce the overall future costs of production.  It is anticipated that our new UPS product line will allow improved profit margins in the long term and provide a larger addressable market for our UPS systems business.

Selling and marketing. Selling and marketing expense primarily consists of compensation, including variable sales commissions for sales personnel, related travel, trade shows and promotional expenses, compensation paid to resellers and agents, an allocated portion of our occupancy and other costs, and the cost of our foreign sales operations. Selling and marketing costs were approximately $0.7 million, or 21%, lower in the third quarter of 2013 compared to the third quarter of 2012 related to lower sales expenditures in such areas as wages, commissions and travel costs in sales.  Selling and marketing expenses decreased approximately $0.3 million, or 11%, from the second quarter of 2013 primarily due to decreased sales wages and commission costs.

Selling and marketing expenses were approximately $2.2 million, or 20%, lower for the nine-month period ended September 30, 2013 compared to the same period of 2012 primarily from reduced employee compensation costs, commissions for third party manufacturers’ representatives and travel costs.

General and administrative. General and administrative expense is primarily comprised of compensation and related costs for board, executive and administrative personnel, and professional fees. General and administrative expenses for the third quarter of 2013 increased approximately $0.4 million, or 21%, compared to the same period in 2012 primarily due to higher bad debt expense. General and administrative expenses increased by approximately $0.5 million, or 30%, compared to the second quarter of 2013 primarily due to bad debt expense associated with customers in China.

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General and administrative expenses for the nine-month period ended September 30, 2013 decreased approximately $0.4 million, or 8%, compared to the same period in 2012 due to lower stock compensation expense, bonus and legal fees, partially offset by higher relocation costs. We expect our legal fees to increase in the fourth quarter as a result of pending legal items. Refer to “Part II- Item 1.Legal Proceedings” for information regarding these items.

Interest expense, net. Net interest expense remained relatively flat for the third quarter of 2013 compared to the third quarter of 2012. The interest expense incurred during 2013 and 2012 was in connection with the outstanding balance on our revolving credit facility.

Other income (expense). Other income (expense), net in the third quarter of 2013 and 2012 primarily reflects foreign exchange losses or gains on bank accounts and sales contracts held in foreign currencies.

Liquidity and Capital Resources

Our primary sources of liquidity at September 30, 2013 are our cash and cash equivalents on hand, our bank credit facilities and projected cash flows from operating activities. If we meet our cash flow projections in our current business plan, we expect we will have adequate capital resources to continue operating our business for at least the next 12 months. Our business plan and our assumptions around the adequacy of our liquidity are based on estimates regarding expected revenues and future costs. However, there are scenarios in which our revenues may not meet our projections, our costs may exceed our estimates or our working capital needs may be greater than anticipated. Further, our estimates may change and future events or developments may also affect our estimates. Any of these factors may change our expectation of cash usage in the remainder of 2013 and beyond or adversely affect our level of liquidity.

A substantial increase in sales of our PowerHouse or our modular IT infrastructure solutions products or a substantial increase in UPS sales will likely materially increase the amount of liquidity required to fund our operations. The amount of time between the receipt of payment from our customers and our expenditures for raw materials, manufacturing and shipment of products (the cash cycle) for sales of our CleanSource UPS product can be as short as 45 days, and is typically 60 days, however this can vary by geographic market. The cash cycle on a MIS sale can be significantly longer due to the longer lead time needed on materials purchases and the longer manufacturing schedule. We attempt to mitigate the financial impact of this longer cash cycle by requiring customer deposits and periodic payments where possible from our customers. This is not always commercially feasible, and in order to increase our MIS sales, we may be required to make larger investments in inventory and receivables. These larger investments may require us to obtain additional sources of working capital, debt or equity financing in order to fund the MIS business.

Should additional funding be required, we would expect to raise the required funds through borrowings or public or private sales of debt or equity securities. If we raise additional funds through the issuance of convertible debt or equity securities, the ownership of our stockholders could be significantly diluted. If we obtain additional debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations. We do not know whether we will be able to secure additional funding, or funding on terms acceptable to us, to continue our operations as planned. If financing is not available, we may be required to reduce, delay or eliminate certain activities or to license or sell to others some of our proprietary technology.

The following table summarizes the changes in cash used in operating activities:

Cash provided from operating activities was $0.9 million in the nine-month period ended September 30, 2013 compared to a use of cash of $5.2 million the same period of 2012. Changes in the period ending September 30, 2013 were primarily related to changes in our working capital, as were the changes in the prior year nine month period.

The fluctuations in working capital can be impacted by the timing of product orders and shipments. In the nine-month period ended September 30, 2013, we saw a $2.6 million use of cash related to inventory manufactured in the period. This was in part due to a reduction in UPS orders for our current product and an increase in build for our new product through the third quarter of 2013.  There was also an increase in cash related to lower accounts receivable of approximately $8.8 million, partially offset by a use of cash of $1.8 million in other current assets primarily related to the restatement of amounts owed to us by Qiyuan Network Systems. We anticipate that cash flows from operations will fluctuate significantly based upon the volume and size of our customer orders and by the timing of product delivery relative to our reporting periods, and that such volatility in sources and uses of funds will continue based upon growth of our various product lines. We anticipate a significant reduction in operating cash in the fourth quarter 2013 as a result of lower sales in the third quarter of 2013.

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The following table summarizes the changes in cash used in investing activities:

Investing activities primarily consist of purchases of property and equipment. Capital expenditures were $0.1 million, or 9% lower in the nine-month period ending September 30, 2013, compared to the same period of 2012, which is attributable to the fact that in the 2012 period we invested in multiple demonstration UPS systems in Asia and EMEA. This year’s expenditures include the purchase of equipment to support our next generation of UPS product in addition to the purchase of heavy equipment expected to help us make our manufacturing facility more efficient and reduce our rental expenses going forward.

The following table summarizes the changes in cash provided by financing activities:

Funds provided by financing activities in the period ending September 30, 2013 primarily includes proceeds received from stock option exercises. Funds provided during the nine-months ended September 30, 2012 primarily reflect the sale of common stock of approximately 2.9 million shares at a purchase price of $3.40 per share, for proceeds, net of fees and expenses, of approximately $9.6 million, and also reflects proceeds from the exercise of employee stock options.

The shares that were sold in the first quarter of 2012 were sold pursuant to our shelf registration statement on Form S-3 dated November 24, 2009, as amended on December 17, 2009 (Registration No. 333-163301), which was declared effective by the Securities and Exchange Commission (the “SEC”) on December 21, 2009, as supplemented by a prospectus supplement dated March 7, 2012.  No discounts or placement agent fees were payable in connection with the Offering. This shelf registration expired in late 2012.

We filed a new shelf registration statement on Form S-3 dated April 30, 2013, which was declared effective by the SEC on June 26, 2013. This shelf registration provides for the sale of a variety of security types up to an amount of $50.0 million. The net proceeds from sales of these securities will be used for general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies or businesses.

While we expect the fourth quarter to result in a significant reduction in our overall cash position, we believe that our existing sources of liquidity combined with cash generated from operations and borrowings under our credit agreement will be sufficient to meet our currently anticipated cash requirements for the next 12 months. However, our industry is capital intensive and, to the extent we continue to incur operating losses, we may need to raise additional funding through further borrowings under our credit agreement or from additional equity or debt financing. The timing and amount of any such financing will depend on a number of factors, including our operating results, our compliance with the covenants in our credit agreement, our stock price, demand for our products, changes in industry conditions, product mix and competitive factors. There can be no assurance that such financing will be available on acceptable terms, and any additional equity or convertible debt financing would result in incremental ownership dilution to our existing stockholders.

 Our cash cycle is such that we generally have some visibility in advance for future orders that allows us to anticipate revenues over this period of time.  However, a sudden change in business volume, positive or negative, from any of our business or channel partners or in our direct business or any customer-driven events such as order or delivery deferral could significantly impact our expected revenues. The global economic uncertainty has reduced our confidence at predicting future revenues, and even with improving economic conditions, there is still uncertainty and risk in our forecasting.  Our window of sales visibility does provide us with some opportunity to adjust expenditures or take other measures to reduce our cash consumption if we can see and anticipate a shortfall in revenue or give us time to identify additional sources of funding if we anticipate an increase in our working capital requirements due to changes in revenues or in our revenue mix. A significant increase in sales, especially in our PowerHouse or our modular IT infrastructure solutions business, would likely increase our working capital requirements, due to the longer production time and cash cycle of sales of these products.

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Item  3.

Quantitative and Qualitative Disclosures about Market Risk.

We invest our cash in a variety of financial instruments, including bank time deposits, and taxable variable rate and fixed rate obligations of corporations, municipalities, and local, state and national government entities and agencies. These investments are denominated in U.S. dollars.

Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. We believe that our investment policy is conservative, both in terms of the average maturity of investments that we hold and in terms of the credit quality of the investments. Because of the nature of the majority of our investments, we do not believe a 1% decline in interest rates would have a material effect on interest income or on the fair value of our investments.

We continue to sell products and services in foreign markets and do business in multiple foreign countries, executing transactions that are denominated in other currencies. Those sales and expenses in currencies other than U.S. dollars can result in translation gains and losses which have not been significant to date. Currently, we do not engage in hedging activities for our international operations other than an increasing amount of sales and support expenses being incurred in foreign currencies as a natural hedge. However, recent volatility in currencies, particularly with the pound and Euro, is increasing the amount of potential translation gains and losses and we may engage in hedging activities in the future to mitigate the risks caused by such currency volatility.

Item  4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer and our Chief Financial Officer, based on the evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), required by paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that, as of September 30, 2013, our disclosure controls and procedures were not effective to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act, (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

In connection with the restatements made for the periods ending March 31, 2013 and June 30, 2013 included in our Forms 10-Q/A filed with the SEC on November 18, 2013, management of the Company, including our current Chief Executive Officer and our Chief Financial Officer, reevaluated the effectiveness of our disclosure controls and procedures as of March 31, 2013 and June 30, 2013 pursuant to SEC Rule 13a-15(b) under the Exchange Act. As a result of such reevaluation, management has determined that there was a material weakness in our system of internal control over financial reporting as of such dates.  As a result of such material weakness, management, including our current Chief Executive Officer and Chief Financial Officer, has revised its earlier assessment and has now concluded that our disclosure controls and procedures were not effective as of as of those dates. The material weakness has yet to be remediated and therefore our management concluded that our disclosure controls and procedures were not effective at September 30, 2013.

 

Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are properly recorded, processed, summarized and reported within the time periods required by SEC rules and forms. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures that, by their nature, can provide only reasonable assurance regarding management’s control objectives. Management does not expect that its disclosure controls and procedures will prevent all errors and fraud. A control system, irrespective of how well it is designed and operated, can only provide reasonable assurance, and cannot guarantee that it will succeed in its stated objectives.

 

Changes in Internal Control Over Financial Reporting

 

Other than as described below, there have been no changes in internal control over financial reporting that occurred during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to affect materially, our internal control over financial reporting.

 

A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected.  Management has identified a material weakness resulting from control deficiencies related to our credit approval process whereby we did not confirm information from an employee of the Company in China regarding the facts surrounding Qiyuan, a distributor which we entered into a distribution agreement with.  In response to such material weakness, management is implementing additional credit approval process procedures including actions to further verify the financial condition and ownership structure of all new customers.

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PART II – OTHER INFORMATION

Item  1.

Legal Proceedings.

SEC Inquiry

By letter dated September 30, 2013, the SEC Division of Enforcement has notified us that it is conducting an investigation regarding us, including matters relating to our public statements regarding Digital China Information Services Company Limited (“Digital China”) and our distribution relationships in China. We have been and intend to cooperate fully with the SEC.

Audit Committee Internal Investigation

The audit committee of our Board of Directors, with the assistance of independent counsel, is also conducting an investigation into the facts and circumstances surrounding our agreements and transactions with Qiyuan, including the statements made regarding Qiyuan’s affiliation with Digital China. The investigation is ongoing.

Stockholder Litigation

On September 10, 2013, a purported class action complaint was filed in the United States District Court for the Western District of Texas against the Company and certain of its current and former executives. The case is captioned Don Lee v. Active Power, Inc., et. al., Civil Action No. 1:3-cv-00797. The complaint alleges that on April 30, 2013, the Company announced during a conference call that it had entered into a strategic distribution partnership with Digital China.  However, on September 5, 2013, after the close of trading, the Company disclosed that its partnership was with Qiyuan Network System Limited, which is neither an affiliate nor a subsidiary of Digital China.  The complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, and seeks unspecified damages on behalf of all stockholders.

On September 13 and October 14, 2013, two separate stockholders filed complaints in the District Court of Travis County, Texas purporting to bring derivative actions on behalf of the Company against certain current and former officers and directors of the Company.  The first derivative action is captioned Okumura v. Almgren, et. al., Cause No. D-1-GN-13-003230 and the second derivative action is captioned David B. Shaev IRA v. Milner, et. al., Cause No. D-1-GN-13-003557.  The allegations of each derivative complaint mirror those of the class action complaint, and they assert claims for breach of fiduciary duty, unjust enrichment, and/or abuse of control and seek damages on behalf of the Company.  Defendants have entered into an agreement with each of the plaintiffs to stay both of the derivative actions pending the outcome of the motion to dismiss in the securities class action.

The Company has directors’ and officers’ and corporate liability insurance to cover risks associated with the stockholder litigation and has notified its insurers of the complaints described above.  Due to the early stage of each litigation, however, it is not possible to estimate the amount or range of possible loss that might result from adverse judgments or settlements of the actions.

Item  1A.

Risk Factors.

You should carefully consider the risks described below and in Item 1A of our 2012 Annual Report on Form 10-K before making a decision to invest in our common stock or in evaluating Active Power and our business. The risks and uncertainties described below and in our 2012 Annual Report on Form 10-K 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 and in our 2012 Annual Report on Form 10-K could materially harm our business, financial condition and results of operations. In that case, the trading price of our common stock could decline.

We have recognized additional risks that have not previously been mentioned in our 2012 Annual Report on Form 10-K as outlined below.

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The transition to a new Chief Executive Officer may limit our ability to effectively execute on our business plan.

Mark A. Ascolese joined us as our Chief Executive Officer and President on October 14, 2013. The presence of a new Chief Executive Officer may destabilize our relationships with customers, vendors, and employees, resulting in loss of business, loss of vendor relationships, and the loss of key employees or declines in the productivity of existing employees.  Any or all of these risks could adversely affect our business and operating results.

A material weakness is a control deficiency or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected.  Our management has identified a material weakness resulting from control deficiencies related to our credit approval process whereby we did not confirm information from an employee of ours in China regarding the facts surrounding Qiyuan, a distributor which we entered into a distribution agreement with.  In response to such material weakness, management is implementing additional credit approval process procedures including actions to further verify the financial condition and ownership structure of all new customers.  This material weakness is still ongoing and had not been remediated as of September 30, 2013. Management’s evaluation of our disclosure controls and procedures as of September 30, 2013 concluded that, as a result of the material weakness, our disclosure controls and procedures were not effective as of September 30, 2013 to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are properly recorded, processed, summarized and reported within the time periods required by SEC rules.  Any material weakness or unsuccessful remediation could adversely impact investor confidence in the accuracy and completeness of our financial statements. As a result, our ability to obtain any additional financing, if needed, could be materially and adversely affected, which in turn could materially and adversely affect our business, our financial condition and the market value of our stock. In addition, perceptions of us among customers, lenders, investors, securities analysts and others could also be adversely affected.  We can give no assurances that the measures we have taken to date, or any future measures we may take, will remediate the material weaknesses identified or that any additional material weaknesses will not arise in the future.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Mine Safety Disclosures.

None.

Item 5.

Other Information.

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Item  6.

Exhibits.

  The following documents are filed as exhibits to this report:

                                                                                                                                                                                                      

*	Incorporated by reference to the indicated filing.

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SIGNATURES

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

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Exhibit 10.1

September 25, 2013

Mark A. Ascolese

1117 Falls Bridge Drive

Raleigh North Carolina, 27614

Re: Offer of Employment with Active Power, Inc.

Dear Mark:

 

On behalf of Active Power, Inc. (the “Company”), I am pleased to invite you to join the Company as its Chief Executive Officer, reporting directly to the Board of Directors of the Company. In this position, you will be expected to devote your full business time, attention, and energies to the performance of your duties with the Company at its location in Austin, Texas, or while traveling on Company business. The effective date of your employment will be October 14, 2013 or such other date as you and the Company mutually agree in writing.

 

The terms of this offer of employment are as follows:

 

 

 

 

 

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We look forward to you joining the Company. If the foregoing terms are agreeable, please indicate your acceptance by signing this offer letter in the space provided below and returning it to me, along with your completed and signed EPIA and Severance Agreement.

 

AGREED TO AND ACCEPTED:

 

“Employee”

Exhibit 10.4

SEVERANCE BENEFITS AGREEMENT

THIS SEVERANCE BENEFITS AGREEMENT (the “Agreement”) is made as of the 22th day of October, 2013 between Active Power, Inc., (the “Company”), and Randall Adleman, an individual resident Austin, Texas (“Employee”).  Employee and the Company are collectively referred to herein as the “Parties.”

 

 

 

 

 

 

 

 

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As used in Section 4(c), references to the business, customers, Territory, etc. of the Company refer to the status of the Company prior to any Change in Control (i.e., such breadth of business, customers, Territory, etc. shall not automatically be expanded to include those of a successor to the Company resulting from a Change in Control).  Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit Employee from acquiring as an investment not more than three percent (3%) of the capital stock of a competing business, whose stock is traded on a national securities exchange or over-the-counter.

 

 

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It is further agreed by the parties hereto that, in the event that Employee shall cease to be employed by the Company, and shall later enter into a business or pursue other activities not in competition with the Company (including the Company's subsidiaries)  as of Employee’s last date of employment with the Company, or similar activities or business in locations the operation of which, under such circumstances, does not violate clause (i) of this Section 4, and in any event such new business, activities or location are not in violation of this Section 4 or of Employee’s obligations under this Section 4, if any, Employee shall not be chargeable with a violation of this Section 4 if the Company (including the Company’s subsidiaries) shall thereafter enter the same, similar or a competitive (i) business, (ii) course of activities or (iii) location, as applicable.

 

 

 

 

 

 

 

 

 

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For these purposes, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the Company.

 

Notwithstanding the foregoing provisions of this definition, a transaction will not be deemed a Change in Control unless the transaction qualifies as a change in control event within the meaning of Section 409A.

 

Further and for the avoidance of doubt, a transaction will not constitute a Change in Control if: (i) its sole purpose is to change the state of the Company’s incorporation, or (ii) its sole purpose is to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction.

 

 

 

 

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Unless the Company and Employee otherwise agree in writing, any determination required under this Section shall be made in writing by the Company's independent public accountants (the “Accountants”), whose determination shall be conclusive and binding upon Employee and the Company for all purposes.  For purposes of making the calculations required by this Section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code.  The Company and Employee shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section.  The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section.

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IN WITNESS WHEREOF, the Parties have executed this Agreement on the dates set forth below.

 

Employee		Active Power, Inc.
/s/ Randall Adleman		/s/ Mark Ascolese
Signature		By: Mark Ascolese,
		Chief Executive Officer and President
Randall Adleman
(Printed Name)
Dated: 10/31/13		Dated: 11/04/13

Exhibit 10.5

 

SEPARATION AGREEMENT AND RELEASE

This Separation Agreement and Release (“Agreement”) is made by and between Martin Olsen (“Employee”) and Active Power, Inc. (the “Company”) (collectively referred to as the “Parties” or individually referred to as a “Party”).

 

RECITALS

 

WHEREAS, Employee and the Company entered into a Severance Benefits Agreement dated April 15, 2010 (the “Severance Agreement”);

 

WHEREAS, Employee and the Compny entered into a Proprietary Information and Nondisclosure Agreement dated March 4, 2007 (the “Confidentiality Agreement”);

 

WHEREAS, Employee has been granted certain stock options and/or restricted stock, subject to the terms and conditions of the Company’s stock plan (the “Stock Plan”);

 

WHEREAS, Employee is employed as the Vice President, Global Marketing and Sales Operations of the Company and is separating from the Company, effective as of November 5, 2013 (the “Separation Date”);

 

WHEREAS, the Parties agree that Employee’s separation will be considered a “termination without Cause,” as defined in the Severance Agreement;

 

WHEREAS, the Parties wish to resolve any and all disputes, claims, complaints, grievances, charges, actions, petitions, and demands that the Employee may have against the Company and any of the Releasees as defined below, including, but not limited to, any and all claims arising out of or in any way related to Employee’s employment with or separation from the Company;

 

NOW, THEREFORE, in consideration of the mutual promises made herein, the Company and Employee hereby agree as follows:

 

COVENANTS

(i)

Following the Separation Date, provided that this Agreement is in effect and Employee is in compliance with this Agreement (and any agreements incorporated herein) the Company will provide Employee with the following benefits (the “Separation Benefits”):

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Employee agrees that the release set forth in this section shall be and remain in effect in all respects as a complete general release as to the matters released.  This release does not extend to any obligations incurred under this Agreement.  This release does not release claims that cannot be released as a matter of law, including, but not limited to Employee’s right to file a charge with or participate in a charge by the Equal Employment Opportunity Commission, or any other local, state, or federal administrative body or government agency that is authorized to enforce or administer laws related to employment, against the Company (with the understanding that any such filing or participation does not give Employee the right to recover any monetary damages against the Company; Employee’s release of claims herein bars Employee from recovering such monetary relief from the Company).

 

Employee acknowledges and understands that revocation must be accomplihed by a written notification to the Company’s Chief Executive Officer that is received prior to the Effective Date.  The Parties agree that any changes to this Agreement, whether material or immaterial, do not restart the running of the 21- day consideration period.

 

Employee acknowledges and agrees that the confidentiality of the Separation Information is of the essence.  The Parties agree that if the Company proves that Employee breached this Confidentiality provision, the Company shall be entitled to an award of its costs spent enforcing this provision, including all reasonable attorneys’ fees associated with the enforcement action, without regard to whether the Company can establish actual damages from Employee’s breach, except to the extent that such breach constitutes a legal action by Employee that directly pertains to the ADEA. Any such individual breach or disclosure shall not excuse Employee from her obligations hereunder, nor permit her to make additional disclosures.  Employee warrants that he has not disclosed, orally or in writing, directly or indirectly, any of the Separation Information to any unauthorized party.

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(b)

he has been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of her own choice or has elected not to retain legal counsel;

 

(c)

he understands the terms and consequences of this Agreement and of the releases it contains; and

 

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IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below.