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Our products and solutions are designed to deliver continuous conditioned (&#8220;clean&#8221;) power during power disturbances and outages, voltage surges and sags, and provide ride-through power in the event of a utility failure, supporting operations until utility power is restored or a longer term alternative power source, such as a diesel generator, is started. We sell our products globally through our direct sales force, manufacturer&#8217;s representatives, Original Equipment Manufacturer (&#8220;OEM&#8221;) channels and IT partners. Our current principal markets are the Americas, Europe Middle East and Africa (&#8220;EMEA&#8221;), and Asia.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">We were founded as a Texas Corporation in 1992 and reincorporated in Delaware in 2000 prior to our initial public offering. Our headquarters are in Austin, Texas with international offices in the UK, Germany and China.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (&#8220;US GAAP&#8221;) and include the accounts of the Company and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">The accompanying consolidated financial statements have also been prepared on the assumption that the Company will continue to operate as a going concern. Accordingly assets and liabilities are recorded on the basis that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. The Company&#8217;s history of operating losses and use of cash, in the absence of other factors, may cause uncertainty as to its ability to continue as a going concern. We have reviewed the current and prospective sources of liquidity, significant conditions and events and forecast financial results and concluded that we have adequate resources to continue to operate as a going concern. Our business plan and our assumptions around the adequacy of our liquidity are based on estimates regarding expected revenues and future costs. However, our revenues may not meet our projections or our costs may exceed our estimates. 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 2014 or significantly affect our level of liquidity, which may require us to seek additional financing or take other measures to reduce our operating costs in order to continue operating. These financial statements do not include any adjustments that might result from the Company not being able to continue as a going concern.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">All common stock information and related share prices included in these notes to financial statements have been adjusted to reflect the five for one reverse stock split that occurred on December 21, 2012.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">As previously disclosed in its September 5, 2013 press release and Form 8-K, the Company announced in error in April 2013 that it had entered into a strategic distribution agreement in China with Digital China Information Service Company Limited (&#8220;Digital China&#8221;). The actual party to this agreement is Qiyuan Network System Limited (&#8220;Qiyuan&#8221;). A Company employee in China represented to management that Qiyuan was a subsidiary of Digital China. Management subsequently discovered that the Company employee in China intentionally misrepresented the relationship between Qiyuan and Digital China. Qiyuan has no affiliation with Digital China. Due to this discovery, we restated our first quarter 2013 and second quarter 2013 results on Form 10-Q/A.</div></div> 13524000 12261000 15416000 10357000 <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div style="text-align: left; font-style: italic; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Cash and Cash Equivalents</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Investments with a contractual maturity of three months or less when purchased are classified as cash equivalents.</div></div> 3167000 -1263000 -5059000 3100 3100 <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div style="text-align: left; font-family: ''Times New Roman'', Times, serif; font-size: 10pt; font-weight: bold;">5. Commitments</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">We lease our office and manufacturing and engineering facilities and our foreign sales offices under operating lease agreements. These facilities&#8217; leases are non-cancelable and obligate us to pay taxes and maintenance costs. Our corporate headquarters facility is subject to a lease agreement that expires in December 2016. From 2007 to December 2011, we subleased 31,000 square feet of our corporate headquarters facility pursuant to sublease agreements. Rent expense was offset by $0.3 million in 2011 for cash received pursuant to these sublease agreements. Our engineering facility of approximately 12,000 square feet is leased pursuant to a lease agreement that expires in March 2016. In July 2011, we leased an additional 26,195 square feet in a facility adjacent to our headquarters facility, in order to expand our manufacturing facility. This lease expired and we vacated the space in January 2013. For leases with escalating or de-escalating rent payments, we straight-line the cash flows over the period of the lease and defer the differences between cash flows and expense in the income statement on the balance sheet in either accrued expenses or prepaids and other assets. Net deferred rent on the consolidated balance sheet as of December 31, 2013 was $0.1 million. There was no deferred rent in 2012 or 2011.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">In addition, we lease certain equipment such as copiers and phone systems under non-cancelable leases. 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padding-bottom: 2px; width: 1%; vertical-align: top;">&#160;</td></tr><tr><td valign="bottom" style="background-color: #cceeff; width: 68%; vertical-align: top;"><div style="text-align: left; text-indent: -7.2pt; font-family: ''Times New Roman'', Times, serif; margin-left: 7.2pt; font-size: 10pt;">2014</div></td><td valign="bottom" style="background-color: #cceeff; width: 1%; vertical-align: top;">&#160;</td><td valign="bottom" style="text-align: left; background-color: #cceeff; width: 1%; vertical-align: top;"><div style="font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">$</div></td><td valign="bottom" style="text-align: right; background-color: #cceeff; width: 9%; vertical-align: top;"><div style="font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">1,228</div></td><td nowrap="nowrap" valign="bottom" style="text-align: left; background-color: #cceeff; width: 1%; vertical-align: top;">&#160;</td></tr><tr><td valign="bottom" style="background-color: #ffffff; 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font-size: 10pt;">3,674</div></td><td nowrap="nowrap" valign="bottom" style="text-align: left; padding-bottom: 4px; background-color: #ffffff; width: 1%; vertical-align: top;">&#160;</td></tr></table></div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">We enter into certain commitments to purchase inventory and other items in the course of normal operations. At December 31, 2013, the total of these commitments was $3.3 million, of which $3.2 million will mature in 2014 and $25,000 will mature in each subsequent year through 2017.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">We have entered into Severance Benefits Agreements with our Chief Executive Officer (&#8220;CEO&#8221;) and Chief Financial Officer (&#8220;CFO&#8221;) and with each of our other executive officers. These agreements generally provide that, if within 12 months following a change in control the executive officer&#8217;s employment is terminated for reasons other than for cause (as defined in the agreement) or by the executive for good reason, including a significant reduction in the role and/or responsibility of the executive within 12 months of the change in corporate control, then all outstanding stock options or restricted shares held by the executive would vest as of the date of the termination and certain severance payments would be payable. In the case of our CEO and CFO, in the event of termination by the Company for reasons other than for cause or by him for good reason, he would be entitled to a severance payment equal to 12 months of salary and be entitled to receive health benefits for 12 additional months after termination. In the case of our other executive officers, in the event of a termination by the Company for reasons other than for cause or by the officer for good reason, they would be entitled to a severance payment equivalent to six months of salary and be entitled to receive health benefits for six additional months after termination.</div></div> 19388000 19125000 19000 19000 19452000 19171000 2900000 2700000 3651250 0.001 0.001 30000000 30000000 2470083 3667109 1700000 <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div style="text-align: left; font-family: ''Times New Roman'', Times, serif; font-size: 10pt; font-weight: bold;">6. Employee Benefit Plan</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">We maintain a 401(k) Plan that covers substantially all full-time employees. Company contributions to the plan are determined at the discretion of the Board of Directors and vest ratably over five years of service starting after the first year of employment. We did not contribute to this plan in 2013, 2012 or 2011.</div></div> -6734000 -7967000 -1799000 10% of our revenues 10% of our accounts receivable 10% of our accounts receivable <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div style="text-align: left; font-style: italic; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Concentration of Credit Risk</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Financial instruments which potentially subject Active Power to concentrations of credit risk consist of cash and cash equivalents, investments and accounts receivable. Active Power&#8217;s cash and cash equivalents and investments are placed with high credit quality financial institutions and issuers. Active Power performs credit evaluations of its customers&#8217; financial condition prior to entering into commercial transactions. We generally require letters of credit or prepayments from higher-risk customers as deemed necessary to ensure collection. Our allowance for doubtful accounts is estimated based on factors related to the credit risk of each customer. Individual receivables are written off after they have been deemed uncollectible. 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font-weight: bold;">Rental payments</div></td><td nowrap="nowrap" valign="bottom" style="text-align: left; padding-bottom: 2px; width: 1%; vertical-align: top;">&#160;</td></tr><tr><td valign="bottom" style="background-color: #cceeff; width: 68%; vertical-align: top;"><div style="text-align: left; text-indent: -7.2pt; font-family: ''Times New Roman'', Times, serif; margin-left: 7.2pt; font-size: 10pt;">2014</div></td><td valign="bottom" style="background-color: #cceeff; width: 1%; vertical-align: top;">&#160;</td><td valign="bottom" style="text-align: left; background-color: #cceeff; width: 1%; vertical-align: top;"><div style="font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">$</div></td><td valign="bottom" style="text-align: right; background-color: #cceeff; width: 9%; vertical-align: top;"><div style="font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">1,228</div></td><td nowrap="nowrap" valign="bottom" style="text-align: left; background-color: #cceeff; 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width: 1%; vertical-align: top;">&#160;</td><td valign="bottom" style="text-align: right; background-color: #ffffff; width: 9%; vertical-align: top;"><div style="font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">113</div></td><td nowrap="nowrap" valign="bottom" style="text-align: left; background-color: #ffffff; width: 1%; vertical-align: top;">&#160;</td></tr><tr><td valign="bottom" style="padding-bottom: 2px; background-color: #cceeff; width: 68%; vertical-align: top;"><div style="text-align: left; text-indent: -7.2pt; font-family: ''Times New Roman'', Times, serif; margin-left: 7.2pt; font-size: 10pt;">2018</div></td><td valign="bottom" style="padding-bottom: 2px; background-color: #cceeff; width: 1%; vertical-align: top;">&#160;</td><td valign="bottom" style="border-bottom: #000000 2px solid; text-align: left; background-color: #cceeff; width: 1%; vertical-align: top;">&#160;</td><td valign="bottom" style="border-bottom: #000000 2px solid; text-align: right; background-color: #cceeff; width: 9%; vertical-align: top;"><div style="font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">72</div></td><td nowrap="nowrap" valign="bottom" style="text-align: left; padding-bottom: 2px; background-color: #cceeff; width: 1%; vertical-align: top;">&#160;</td></tr><tr><td valign="bottom" style="padding-bottom: 4px; background-color: #ffffff; width: 68%; vertical-align: top;"><div style="text-align: left; text-indent: -7.2pt; font-family: ''Times New Roman'', Times, serif; margin-left: 7.2pt; font-size: 10pt;">Total future minimum lease payments</div></td><td valign="bottom" style="padding-bottom: 4px; background-color: #ffffff; width: 1%; vertical-align: top;">&#160;</td><td valign="bottom" style="border-bottom: #000000 4px double; text-align: left; background-color: #ffffff; width: 1%; vertical-align: top;"><div style="font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">$</div></td><td valign="bottom" style="border-bottom: #000000 4px double; text-align: right; background-color: #ffffff; width: 9%; vertical-align: top;"><div style="font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">3,674</div></td><td nowrap="nowrap" valign="bottom" style="text-align: left; padding-bottom: 4px; background-color: #ffffff; width: 1%; vertical-align: top;">&#160;</td></tr></table></div></div> 32825000 42510000 47664000 42303000 51601000 57581000 13273000 10070000 14491000 13887000 9750000 13996000 9227000 9210000 9917000 9478000 9091000 <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div style="text-align: left; font-family: ''Times New Roman'', Times, serif; font-size: 10pt; font-weight: bold;">9. Revolving Credit Facility</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">In August 2010, we entered into a Second Amended and Restated Loan and Security Agreement (the &#8220;Loan Agreement&#8221;) with Silicon Valley Bank (&#8220;SVB&#8221;). This facility increased the total liquidity available from $6.0 million to $12.5 million subject to certain borrowing bases. This new facility expanded our ability to borrow funds from United States receivables to also include qualifying receivables from our United Kingdom operations, as well, increased our ability to use inventory as collateral, and also added an ability to borrow against purchase orders. These additional bases of borrowing were designed to allow us to use the credit facility to fund inventory purchases in the event we received large or multiple sales orders that would require a major investment in inventory and work in progress, to help fund continued growth in our business, and to manage our working capital requirements.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">This loan facility provides for a secured revolving line of credit in an aggregate amount of up to eighty percent (80%) of the facility amount of $15.625 million, or $12.5 million, subject to certain borrowing bases. In the event we have maintained cash and cash equivalents of at least $6.25 million with SVB for at least 30 consecutive days, which is referred to as being in a &#8220;Streamline Period&#8221;, the borrowing base formula is based on eligible accounts receivable, eligible purchase orders and eligible inventory, subject to a sublimit of $5.0 million for U.K. accounts receivable, $3.5 million for inventory and $1.5 million for purchase orders. When we are not in a Streamline Period, our borrowings are limited based on accounts receivable and purchase orders that SVB has specifically agreed to finance and a borrowing base for eligible inventory. We may also request that SVB issue letters of credit on our behalf, of up to $1.5 million, as a portion of our total loan facility.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">On August 5, 2010, we borrowed approximately $2.5 million in revolving loans, all of which was used to refinance all indebtedness owing from us to SVB under our previous credit facility. The new credit facility increased the total credit available from our previous loan facility with SVB, which was $5.0 million, and enables us to borrow against eligible inventory, foreign receivables and customer purchase orders in addition to eligible accounts receivable.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">In August 2012, we entered into the Second Amendment to Second Amended and Restated Loan and Security Agreement with SVB (the &#8220;Amendment&#8221;) which amends the Second Amended and Restated Loan and Security Agreement, dated as of August 5, 2010, by and between us and SVB. Pursuant to the Amendment, the maturity date of the loan facility was extended by two years, to August 5, 2014, unless earlier terminated by us, subject to any then applicable early termination fee. The Amendment further provides for, among other things, (i) adding a $1.5 million sublimit under the borrowing base formula for 91 to 120 day aged accounts receivable, (ii) removing eligible purchase orders from the borrowing base formula, and (iii) removing sublimits providing for the issuance of letters of credit and cash management services. Additionally, pursuant to the Amendment, the definition of &#8220;Streamline Period&#8221; was amended such that the Company will be deemed to be in a Streamline Period in the event that it has a liquidity ratio of greater than or equal to 1.75:1.00 at all times for at least 60 consecutive days; provided that a Streamline Period will automatically be in effect if the Company achieves such liquidity ratio as a result of the sale of its equity securities.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Further, the Amendment provides for, among other things, (i) amending the finance charge on each eligible account financed by SVB to a per annum rate equal to SVB&#8217;s prime rate, subject to a minimum prime rate of four percent (4.00%), plus (a) one and one-quarter percent (1.25%) when we are in a Streamline Period or (b) one and three-quarters percent (1.75%) for eligible accounts (other than eligible 91 to 120 day aged accounts) and (c) two percent (2.00%) for eligible 91 to 120 day aged accounts when we are not in a Streamline Period, and (ii) reducing the interest rate upon which each inventory advance accrues interest such that each advance based upon inventory accrues interest at a per annum rate equal to SVB&#8217;s prime rate, subject to a minimum prime rate of four percent (4.00%), plus (a) one and one-quarter percent (1.25%) when we are in a Streamline Period or (b) three and one half percent (3.50%) when the Company is not in a Streamline Period.</div><div style="text-align: center;"><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Finance charges and interest are payable monthly, and all principal is due on the maturity date of August 5, 2014. 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font-size: 10pt;"><div style="text-align: left; font-style: italic; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Fair Value of Financial Instruments</div><div><br /></div><div style="text-align: left; text-indent: 31.5pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Fair value is measured based on an exit price, representing the amount that would be received to sell an asset or paid to satisfy a liability in an orderly transaction between market participants. 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These guarantees usually provide financial protection to our customers in the event that we fail to fulfill our delivery or warranty obligations. We secure these guarantees with standby letters of credit through our bank. At December 31, 2013 and 2012 we had $0.5 million and $0, respectively, of performance guarantees outstanding to customers that were secured with letters of credit.&#160; The current guarantee is set to expire on April 17, 2014. There is no foreseeable risk that we will not be able to meet the performance obligations. 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width: 9%; vertical-align: top;"><div style="font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">1,409</div></td><td nowrap="nowrap" valign="bottom" style="text-align: left; padding-bottom: 4px; background-color: #ffffff; width: 1%; vertical-align: top;">&#160;</td><td valign="bottom" style="padding-bottom: 4px; background-color: #ffffff; width: 1%; vertical-align: top;">&#160;</td><td valign="bottom" style="border-bottom: #000000 4px double; text-align: left; background-color: #ffffff; width: 1%; vertical-align: top;"><div style="font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">$</div></td><td valign="bottom" style="border-bottom: #000000 4px double; text-align: right; background-color: #ffffff; width: 9%; vertical-align: top;"><div style="font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">1,706</div></td><td nowrap="nowrap" valign="bottom" style="text-align: left; padding-bottom: 4px; background-color: #ffffff; width: 1%; vertical-align: top;">&#160;</td></tr></table></div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">We account for our stock-based compensation using Black Scholes option valuation model. Stock-based compensation cost is estimated at the grant date based on the fair-value of the award and is recognized as expense ratably over the requisite service period of the award. We develop our estimates of volatility, expected life, and forfeitures based on historical data and market information that can change significantly over time. We estimate stock price volatility based on implied and historical volatilities. Estimated option life and forfeiture rate assumptions are derived from historical data. 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We classify shipping and handling costs associated with receiving production inventory as cost of product revenue. Any materials received or shipped which are related to our engineering, sales, marketing and administrative functions are classified as operating expenses.</div></div> <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div style="text-align: left; font-family: ''Times New Roman'', Times, serif; font-size: 10pt; font-weight: bold;">1. Summary of Significant Accounting Policies</div><div><br /></div><div style="text-align: left; font-style: italic; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Description of Business</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Active Power, Inc. and its subsidiaries (hereinafter referred to as &#8220;we&#8221;, &#8220;us&#8221;, &#8220;Active Power&#8221; or the &#8220;Company&#8221;) design, manufacture and sell our flywheel-based uninterruptible power supply (&#8220;UPS&#8221;) products and modular infrastructure solutions (&#8220;MIS&#8221;) which 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 (&#8220;clean&#8221;) power during power disturbances and outages, voltage surges and sags, and provide ride-through power in the event of a utility failure, supporting operations until utility power is restored or a longer term alternative power source, such as a diesel generator, is started. We sell our products globally through our direct sales force, manufacturer&#8217;s representatives, Original Equipment Manufacturer (&#8220;OEM&#8221;) channels and IT partners. Our current principal markets are the Americas, Europe Middle East and Africa (&#8220;EMEA&#8221;), and Asia.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">We were founded as a Texas Corporation in 1992 and reincorporated in Delaware in 2000 prior to our initial public offering. Our headquarters are in Austin, Texas with international offices in the UK, Germany and China.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (&#8220;US GAAP&#8221;) and include the accounts of the Company and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">The accompanying consolidated financial statements have also been prepared on the assumption that the Company will continue to operate as a going concern. Accordingly assets and liabilities are recorded on the basis that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. The Company&#8217;s history of operating losses and use of cash, in the absence of other factors, may cause uncertainty as to its ability to continue as a going concern. We have reviewed the current and prospective sources of liquidity, significant conditions and events and forecast financial results and concluded that we have adequate resources to continue to operate as a going concern. Our business plan and our assumptions around the adequacy of our liquidity are based on estimates regarding expected revenues and future costs. However, our revenues may not meet our projections or our costs may exceed our estimates. 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 2014 or significantly affect our level of liquidity, which may require us to seek additional financing or take other measures to reduce our operating costs in order to continue operating. These financial statements do not include any adjustments that might result from the Company not being able to continue as a going concern.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">All common stock information and related share prices included in these notes to financial statements have been adjusted to reflect the five for one reverse stock split that occurred on December 21, 2012.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">As previously disclosed in its September 5, 2013 press release and Form 8-K, the Company announced in error in April 2013 that it had entered into a strategic distribution agreement in China with Digital China Information Service Company Limited (&#8220;Digital China&#8221;). The actual party to this agreement is Qiyuan Network System Limited (&#8220;Qiyuan&#8221;). A Company employee in China represented to management that Qiyuan was a subsidiary of Digital China. Management subsequently discovered that the Company employee in China intentionally misrepresented the relationship between Qiyuan and Digital China. Qiyuan has no affiliation with Digital China. Due to this discovery, we restated our first quarter 2013 and second quarter 2013 results on Form 10-Q/A.</div><div><br /></div><div style="text-align: left; font-style: italic; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Use of Estimates</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Changes in the estimates or assumptions used by management could have a material impact upon reported amounts and our results of operations.</div><div><br /></div><div style="text-align: left;"><div style="text-align: left; font-style: italic; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Revenue Recognition</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">In general, we recognize revenue when four criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. In general, revenue is recognized when revenue-generating transactions generally fall into one of the following categories of revenue recognition:</div></div><div style="text-align: left;">&#160;</div><div style="text-align: left;"><table cellpadding="0" cellspacing="0" class="DSPFListTable" style="width: 100%; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><tr><td style="width: 27pt;"></td><td style="width: 18pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt; vertical-align: top; align: right;">&#9679;</td><td style="text-align: left; width: auto; font-family: ''Times New Roman'', Times, serif; font-size: 10pt; vertical-align: top;">We recognize product revenue at the time of shipment for a significant portion of 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 has passed. We may enter into bill-and-hold arrangements and when this happens delivery may not be occur, but other criteria are reviewed to determine proper timing of revenue recognition.</td></tr></table></div><div><br /></div><div style="text-align: left;"><table cellpadding="0" cellspacing="0" class="DSPFListTable" style="width: 100%; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><tr><td style="width: 27pt;"></td><td style="width: 18pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt; vertical-align: top; align: right;">&#9679;</td><td style="text-align: left; width: auto; font-family: ''Times New Roman'', Times, serif; font-size: 10pt; vertical-align: top;">We recognize installation, service and maintenance revenue at the time the service is performed.</td></tr></table></div><div><br /></div><div style="text-align: left;"><table cellpadding="0" cellspacing="0" class="DSPFListTable" style="width: 100%; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><tr><td style="width: 27pt;"></td><td style="width: 18pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt; vertical-align: top; align: right;">&#9679;</td><td style="text-align: left; width: auto; font-family: ''Times New Roman'', Times, serif; font-size: 10pt; vertical-align: top;">We recognize revenue associated with extended maintenance agreements (&#8220;EMAs&#8221;) 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 liability in the deferred revenue line of the consolidated balance sheet or long-term liability based on the time from the balance sheet date to the future date of revenue recognition.</td></tr></table></div><div><br /></div><div style="text-align: left;"><table cellpadding="0" cellspacing="0" class="DSPFListTable" style="width: 100%; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><tr><td style="width: 27pt;"></td><td style="width: 18pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt; vertical-align: top; align: right;">&#9679;</td><td style="text-align: left; width: auto; font-family: ''Times New Roman'', Times, serif; font-size: 10pt; vertical-align: top;">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.</td></tr></table></div><div><br /></div><div style="text-align: left;"><table cellpadding="0" cellspacing="0" class="DSPFListTable" style="width: 100%; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><tr><td style="width: 38px;"></td><td style="width: 22px; font-family: ''Times New Roman'', Times, serif; font-size: 10pt; vertical-align: top; align: right;">&#9679;</td><td style="text-align: left; width: auto; font-family: ''Times New Roman'', Times, serif; font-size: 10pt; vertical-align: top;">Shipping costs reimbursed by the customer are included in revenue.</td></tr></table></div><div><br /></div><div style="text-align: justify; text-indent: 27pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">When collectability is not reasonably assured, we defer revenue and will recognize revenue on a cost recovery basis as payments are received.</div><div><br /></div><div style="text-align: left; text-indent: 27pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Multiple element arrangements (&#8220;MEAs&#8221;) are 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 CleanSource PowerHouse products, combined with one or more of the following products: design services, project management, commissioning and installation services, spare parts or consumables, and EMA&#8217;s. 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.</div><div><br /></div><div style="text-align: left; text-indent: 27pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">When arrangements include multiple elements, we allocate revenue to each element based on the relative selling price and recognize revenue when the elements have standalone 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 (&#8220;VSOE&#8221;) if available, Third Party Evidence (&#8220;TPE&#8221;) if VSOE is not available, or best estimate of selling price (&#8220;BESP&#8221;) 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 standalone 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.</div><div><br /></div><div style="text-align: left; text-indent: 27pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">We allocate our MEAs primarily among revenues for internally manufactured products, externally manufactured ancillary products, and service revenues. We use VSOE to allocate our internally manufactured products, estimated based on a historical analysis of our sales for these products outside of an MEA. We use TPE to allocate externally manufactured ancillary equipment, as these items are generally a pass through from a third party vendor to our end customers. Finally, we use best estimate of selling prices to allocate revenues to the services elements, as some of these services are not sold individually. We estimate the selling price based on a historical analysis of all service revenues sold individually outside of an MEA.</div><div><br /></div><div style="text-align: left; text-indent: 27pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">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.</div><div><br /></div><div style="text-align: left; font-style: italic; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Shipping and Handling Costs</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">We classify shipping and handling costs related to product sales as cost of revenue, and any payments from customers for shipping and handling are categorized in revenue. We classify shipping and handling costs associated with receiving production inventory as cost of product revenue. Any materials received or shipped which are related to our engineering, sales, marketing and administrative functions are classified as operating expenses.</div><div><br /></div><div style="text-align: left; font-style: italic; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Cash and Cash Equivalents</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Investments with a contractual maturity of three months or less when purchased are classified as cash equivalents.</div><div><br /></div><div style="text-align: left; font-style: italic; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Fair Value of Financial Instruments</div><div><br /></div><div style="text-align: left; text-indent: 31.5pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Fair value is measured based on an exit price, representing the amount that would be received to sell an asset or paid to satisfy a liability in an orderly transaction between market participants. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy is established, which categorizes the inputs used in measuring fair value as follows:</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Level 1&#8212;Quoted prices in active markets for identical assets or liabilities.</div><div><br /></div><div style="text-align: justify; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Level 2&#8212;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.</div><div><br /></div><div style="text-align: justify; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Level 3&#8212;One or more significant inputs that are unobservable and supported by little or no market data.</div><div><br /></div><div style="text-align: justify; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">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.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Our financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable and our revolving line of credit. We believe all of these financial instruments are recorded at amounts that approximate their current market values.</div><div style="text-align: justify; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">&#160;</div><div style="text-align: justify; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Our Level 1 assets consist of cash equivalents, which are primarily invested in money-market funds. 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Under the liability method, deferred taxes are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not such assets will not be realized. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.</div><div><br /></div><div style="text-align: left; text-indent: 31.5pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon the ultimate settlement with the relevant tax authority. A number of years may elapse before a particular matter, for which we have recorded a liability, is audited and effectively settled. We review our tax positions quarterly and adjust the balance as new information becomes available. We classify interest accrued related to unrecognized tax benefits as interest expense.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">We recognize and measure benefits for uncertain tax positions based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. At December 31, 2013 and 2012, the Company had no material unrecognized tax benefits.</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2013, the Company had no accrued interest or penalties related to uncertain tax positions.</div><div><br /></div><div style="text-align: left; font-style: italic; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Segment Reporting</div><div><br /></div><div style="text-align: left; text-indent: 31.5pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Active Power&#8217;s chief operating decision maker allocates resources and assesses the performance of its power management product development and sales activities as one segment.</div><div><br /></div><div style="text-align: left; font-style: italic; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Concentration of Credit Risk</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Financial instruments which potentially subject Active Power to concentrations of credit risk consist of cash and cash equivalents, investments and accounts receivable. 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We also purchase several components from sole source or limited source suppliers.</div><div><br /></div><div style="text-align: left; font-style: italic; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Economic Dependence</div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">We are significantly dependent on our relationships with Hewlett Packard Corporation (&#8220;Hewlett Packard&#8221;) and Caterpillar. If these relationships are unsuccessful or discontinue, our business and revenue may suffer. The loss of or a significant reduction in orders from Hewlett Packard or Caterpillar, or the failure to provide adequate service and support to the end-users of our products by Hewlett Packard or Caterpillar, could significantly reduce our revenue. 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font-size: 10pt;">&#160;</div><div style="text-align: justify; text-indent: 31.5pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">In February 2013, the Financial Accounting Standards Board (&#8220;FASB&#8221;) issued Accounting Standards Update (&#8220;ASU&#8221;) 2013-02, &#8220;Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income&#8221; (AOCI). ASU 2013-02 requires a roll-forward of changes in AOCI by component and information about significant reclassifications from AOCI to Net earnings to be presented in one location, either on the face of the financial statements or in the notes. This new guidance is effective for fiscal years beginning after December 15, 2012 and subsequent interim periods. The requirements of ASU 2013-02 did not have a material impact on our consolidated financial statements. 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background-color: #ffffff; width: 1%; vertical-align: top;">&#160;</td><td valign="bottom" style="border-bottom: #000000 4px double; text-align: left; background-color: #ffffff; width: 1%; vertical-align: top;"><div style="font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">$</div></td><td valign="bottom" style="border-bottom: #000000 4px double; text-align: right; background-color: #ffffff; width: 9%; vertical-align: top;"><div style="font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">61,699</div></td><td nowrap="nowrap" valign="bottom" style="text-align: left; padding-bottom: 4px; background-color: #ffffff; width: 1%; vertical-align: top;">&#160;</td><td valign="bottom" style="padding-bottom: 4px; background-color: #ffffff; width: 1%; vertical-align: top;">&#160;</td><td valign="bottom" style="border-bottom: #000000 4px double; text-align: left; background-color: #ffffff; width: 1%; vertical-align: top;"><div style="font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">$</div></td><td valign="bottom" style="border-bottom: #000000 4px double; text-align: right; background-color: #ffffff; width: 9%; vertical-align: top;"><div style="font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">76,315</div></td><td nowrap="nowrap" valign="bottom" style="text-align: left; padding-bottom: 4px; background-color: #ffffff; width: 1%; vertical-align: top;">&#160;</td></tr></table></div><div><br /></div><div style="text-align: left; text-indent: 29.7pt; font-family: ''Times New Roman'', Times, serif; font-size: 10pt;">Revenues from foreign countries above represented shipments to customers located in 34 countries during 2013. We often ship to areas that are outside of the jurisdiction in which revenue is recognized. Substantially all of our property, plant and equipment are located in the United States. Net assets of operations in foreign countries (excluding intercompany receivables and payables eliminated in consolidation) were $5.8 million at December 31, 2013 and were mostly located in the UK, Germany and China.</div></div> 34