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Executives

James Clishem - President and CEO

John Penver – CFO

Analysts

Dilip Warrier – Stifel Nicolaus

Carter Driscoll – Capstone Investments

Matthew Crews – Noble Financial Group

Eiad Asbahi – Prescience Investment Group

Peter Holman [ph]

Active Power, Inc. (ACPW) Q2 2011 Earnings Call July 26, 2011 4:30 PM ET

Operator

Good afternoon everyone. Thank you for participating in today’s conference call to discuss Active Power’s Financial Results for the Second Quarter 2011 ended June 30, 2011.

With us today is, Mr. Jim Clishem, President and Chief Executive Officer of Active Power and Mr. John Penver, the Company’s Chief Financial Officer. Following their remarks, we will open the call for any questions.

Before I continue, I would like to take a moment to read the Company’s Safe Harbor statement. The company’s management on this call may make forward-looking statements that involve risks and uncertainties, including statements relating to Active Power’s current expectations of operating results for the third quarter of 2011, its future operating results and its customers’ current intentions.

Any forward-looking statements and all other statements that may be made during this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. Factors that could cause the actual results to differ materially from the results predicted include, among others, the deferral or collection of sales commitments, as a result of general economic conditions or uncertainty, risks related to our international operations and production performance and quality issue.

For more information on the risk factors that could cause actual results to differ from these forward-looking statements, please refer to Active Power’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2010 and its current reports on Form 8-K filed since then.

Active Power assumes no obligation to update any forward-looking statements or information, which are in effect as of their respective dates. I would now like to remind everyone that this call will be available for replay online through August 9, 2011, via Active Power’s website at www.activepower.com.

I would now like to turn the call over to the President and Chief Executive Officer of Active Power, Mr. Jim Clishem. Sir, please go ahead.

James Clishem

Great, thank you. Good afternoon, and thank you everyone for joining us today. Earlier today we issued a press release announcing our second quarter 2011 results.

Our revenue for the quarter of $19.2 million continues our trend of increasing quarterly revenue for Active Power. We achieved year-over-year growth and sequential growth on a year-to-date basis. Our first half year revenue of $36.5 million was up 35% to the same period in 2010. What’s exciting is that this growth is occurring on a global scale.

For example, sales revenue increased substantially this quarter in the Asia-Pacific region, with the majority of these sales for our PowerHouse product. We’ll be delivering PowerHouse systems to a Japanese-based pharmaceutical and chemical company for deployment in Thailand later this year.

Most recently, we delivered two systems to a large China-based utility. The success in this particular region is due in large part to the talent and infrastructure investments that we’ve made in China and Japan over the last few years, which has led to the this uptick in sales. This quarter’s revenue growth masks several underlying changes in the business.

As a positive, our Solutions business with our continuous power and infrastructure products continue to grow and gain market acceptance. We received large orders for our PowerHouse product in particular in all geographies. In fact, our Solutions business represented 62% of our total revenue for the quarter, compared to 44% of total revenue a year ago.

At the same time, our UPS business this quarter was down 16% compared to the prior-year quarter on lower OEM sales. Sales have been flat year-to-date compared to the prior-year largely due to lower sales from our direct channel. We believe this is more a function of order timing rather than any underlying channel issues.

As our pipeline of opportunities for our UPS business and our OEM channel have grown by approximately 50% since December of 2010. Our internal forecasts suggest our UPS business should improve in the second half of 2011. This change in sales mix towards products with typically lower margins resulted in an aggregate decrease in our overall gross profit margin for this quarter, compared to the prior-year.

That said and as previously mentioned, one of our main operational challenges in 2011 is to manage the balance between making the investments needed to position the company for future growth and achieving quarterly and annual operating profitability. I’ll provide more insight into investments we’ve made in the second quarter later in the call.

However, we have not lost our sight on the importance of achieving and sustaining profitability for the business. The substantial increase in our Solutions business has resulted in some large changes in our balance sheet. Most of these increases are due to the timing of orders and value of orders received and where we happen to be in fulfillment of those orders at the end of the quarter. The amounts involved are getting larger as our order sizes grow and as we fund specific orders to build products and solutions for future delivery.

I believe that we are managing our working capital very effectively and that we have sufficient liquidity to continue growing our business for the foreseeable future. To provide additional insight, I’d like to share with you a few highlights from the quarter.

Our business in Asia was up substantially compared to the prior-year quarter, due in large part to PowerHouse sales in both Japan and China. Our sales channel showed mixed growth compared to the prior-year with our direct business and IT channel business up substantially, but offset by a decline in OEM sales, albeit with we believe temporary.

Strategic solution selling generated revenues from PowerHouse and continuous infrastructure solutions that represented more than half of our revenues this quarter and more than doubled from the second quarter of 2010.

Now, I’d like to turn the call over to our Chief Financial Officer, John Penver, who will take us through the financial details for the quarter. I’ll then come back to discuss the key market trends for leveraging and meet our financial and strategic objectives, why we continue to win in the marketplace and to provide a little more insight into our long-term strategy. We’ll then open the call up to your questions. So John?

John Penver

Okay, thank you, Jim. Good afternoon everyone and thank you for joining the call today. As Jim indicated, our revenue for the second quarter of 2011 was $19.2 million, increasing sequentially by 11% and up by 20% compared to the second quarter of 2010. For the first six months of 2011, our revenue totaled $36.5 million or up by 35% from the $27.2 million we reported in the first half of 2010.

Revenue in the second quarter included $11.9 million of PowerHouse and Continuous Infrastructure Solutions demonstrating continuing acceptance of our solutions and technologies in the critical power and infrastructure markets. This number increased from $6.2 million in the previous quarter to comprise 62% of our revenue for the period.

In terms of megawatt to critical power delivered in combining our UPS systems and our PowerHouse products, we delivered a total of 23.4 megawatt to critical power solutions to customers this quarter. The average revenue that we generated per megawatt of critical power delivered was $660,000. This compares to 24.3 megawatts of critical power delivered in the second quarter of 2010, for which we generated revenue of $491,000 per megawatt delivered. The increase in revenue per megawatt delivered reflects the high proportion of our Solution sales compared to the prior-year.

The amount of critical power solutions delivered decreased from 31.2 megawatts delivered in the first quarter of 2011, reflecting lower UPS shipments in this quarter. This metric and the changes in it will reflect how successful we are at delivering solutions to our customers, rather than just delivering point products like UPS systems. I would anticipate this to fluctuate based on the size and timing of PowerHouse and infrastructure solution orders in future periods.

For example, if we have no UPS systems revenues and total solutions delivered, the dollars per megawatt delivered number would naturally decrease.

I’m now going to provide a breakdown of the revenue by product category, by geography and then by sales channel, providing second quarter 2011 revenues and year-to-date revenues and hopefully this will make over numbers that I deliver a bit easier to digest. I’ll also provide a little analysis and color behind these revenues numbers.

So looking at our product revenues of $16.2 million, they were split as follows, UPS systems, $5.5 million; continuous power solutions, $8.4 million; and continuous infrastructure solutions, $2.3 million. While the general trend over the many quarters has been positive, the split of product revenue between these categories has and will continue to fluctuate on a quarterly basis due to variable size and timing of our actual orders and the orders particularly for the continuous power solutions like PowerHouse can be large and it will cause significant fluctuations in the quarterly sales mix and revenues. These factors affected our UPS systems this quarter where we shipped 96 flywheels in UPS systems this quarter versus 131 wheels in the previous quarter.

This was also up slightly from the 99 wheels that were shipped in the same year-ago quarter, leading to a 16% decrease in our UPS systems revenue. The decline was largely attributed to a decrease this quarter in UPS orders from our OEM channel, where our product revenue was 52% lower than the same year-ago quarter.

Total UPS systems revenue year-to-date are comparable to the prior-year. And in fact on a year-to-date basis, our OEM sales were actually 15% higher than in the first six months of 2010. This highlights that so far this year, we had a decrease in direct sales of UPS systems compared to 2010. We have had an absence of large UPS only sales so far this year, which is behind this decrease.

As Jim mentioned earlier, we believe this is more a function of order timing and sales execution as our pipeline of UPS systems opportunities has grown by almost 50% since December, 2010, supporting our belief that our UPS sales will increase in the second half of 2011. The real growth in that business compared to a year-ago was from the sale of continuous power solutions, including our PowerHouse products, with product revenues were up by 86% or $3.9 million, compared to the same year-ago quarter and were up by 80% or $3.7 million, compared to the first quarter of 2011.

In particular, we had several large continuous power system sales in the Europe and Asia markets that we delivered this quarter, which drove this increase. On a year-to-date basis, our continuous power solutions revenue has increased by $8 million or 160% from the first half of 2010 to $13.1 million, driving almost all of the increase in our revenues compared to 2010.

Now looking at the revenues by geography, our revenues from Asia increased from approximately $200,000 in the second quarter of 2010 to $4.2 million in the second quarter of 2011. This resulted in revenues from Asia comprising 22% of that total revenue this last quarter.

This compared to 1% of revenue in the previous quarter and in the same year-ago quarter. For the first half of 2011, our revenue from Asia is up 37% from 2010, driven by $1.7 million in new revenue from our China operations. Revenues from Europe were 23% of total revenue in the second quarter, compared to 46% in the previous quarter and 30% the same year-ago quarter.

We had anticipated this decrease in Europe and increase in Asia on our last call due to the orders we had on hand at the beginning of the quarter. For the first half of 2011, our revenues from Europe was 34% of total revenue, compared to 22% in 2010. And in absolute dollar terms our business in Europe is up 108% or $6.5 million compared to the first half of 2010.

Revenues from the Americas were 55% of our total revenue this quarter, compared to 52% in the prior quarter and 70% in the same year ago quarter. In absolute dollar terms our sales from the Americas were up by 5% from a year ago, due to the strength of our continuous power and infrastructure solutions business.

Our total international sales was 45% of revenue in the second quarter, as compared to 52% in the previous quarter and 31% in the second quarter of 2010. If I look at revenues by sales channel, we really had mixed results this quarter compared to a year ago from our differences sales channels.

The strong growth in our continuous power and infrastructure business drive the 125% increase in revenues from our IT channels compared to 2010. The IT channel revenues were 27% of revenue this quarter, compared to 12% in the prior quarter and 14% in the same year ago quarter. On a year-to-date basis, our IT channel has contributed 20% of that total revenue compare to 13% of revenue in the first half of 2010.

Direct sales, which include sales made by Active Power directly or through its network of manufacturers, representatives and distributors, represented 61% of our revenue this quarter. This compares to 55% of total revenue in the previous quarter and 60% of revenue the same quarter a year ago. On a year-to-date basis, our direct sales represent 58% of revenues in 2011, compared to 61% of revenue in the first half of 2010.

Sales from our OEM business, which includes sales to Caterpillar, decreased to 12% of our revenue in this quarter from 33% in the previous quarter and 26% in the same year ago quarter. We also experienced in absence of large orders from our OEM channel in the second quarter.

And as I’ve mentioned, this level can fluctuate substantially from quarter-to-quarter based on size and timing of orders. On a first half basis, the effects of this quarterly volatility are not as apparent as the OEM business represented 22% of revenues in the half as compared to 26% of revenue in the first half of 2010.

In absolute dollar terms, our OEM revenues have actually increased by $1 million or 15% in the first half of 2011, compared to the first half of 2010 and our OEM partners efforts to sell solutions does appear to be helping them selling to larger accounts, which drives UPS product revenue and we anticipate this channel will continue to grow in 2011 in absolute dollar terms as our partner continues to broaden his marketing activities.

Service and other revenues this quarter improved by 12%, compared to the same year-ago quarter, mainly reflecting professional services associated with a higher level of PowerHouse and continuous power systems sales generated. The service revenues associated with these projects will fluctuate along with the level of product revenues and can cause that quarterly level of services and other revenue to fluctuate accordingly.

In total, service revenues were 16% of revenue in the second quarter, compared to 17% of revenue in the same year ago quarter. So now that I’ll discuss the revenue, let me turn to the overall financial performance. The gross margin this quarter was 24%, this compares to 27% in the prior quarter and in the same year ago quarter.

As Jim mentioned earlier, the decrease in margin is primarily due to the change in product mix and proportionally higher sales of continuous power and infrastructure solutions we had this quarter. We generated lower margins on these products and our UPS systems. So we would expect the higher proportion of continuous power and infrastructure solutions revenue would contribute to an overall lower gross profit margin.

The decrease in UPS revenues also exacerbated this situation, as the lower volume of UPS revenue this quarter resulted in less efficient utilization of our manufacturing facility and higher unabsorbed overhead cost, negatively impacting our margins. We’ve also invested in additional infrastructure to support our growing solutions business, resulting in an increase in absolute cost of production and further decreasing our gross margin levels.

Our gross margin and gross profit were also negatively impacted by lower than customary margins on our professional services revenue in Europe, due to higher cost associated with certain continuous power systems installations. But as mentioned earlier, change in margin was mainly dominated by change in sales mix. We expect UPS revenues as a percentage of total revenue to improve in the second half of 2011 and issues with professional service installations revenue we believe will not repeat, leading to higher gross profit margins for the remainder of the year.

Research and development expenses for the quarter were approximately $1.1 million, which were 28% higher than the second quarter of 2010 and 18% higher than the previous quarter. This increase in spending reflects high development activities on containerized infrastructure solutions and development efforts on our next-generation UPS products. We anticipate that our R&D expenses to remain at these elevated levels compared to prior year as we add headcount increased product development efforts for the remainder of this year.

Our selling and marketing expenses at $3.4 million were 2% lower than the previous quarter and 4% lower than the same year ago quarter on higher sales volume. Higher headcount costs were offset by lower variable sales compensation, due to the lower margins generated this quarter. Our general and administrative expenses of $1.4 million increased by 5% from the prior quarter and was flat with the same year ago quarter. And the increase in the prior quarter is primarily from higher headcount costs and professional fees.

Our operating loss for the period of $1.3 million or $0.02 a share, this was an 11% reduction compared to an operating loss of $1.5 million or $0.02 a share that we had in the second quarter of 2010, was 23% higher than the $1 million operating loss in the prior quarter. Our net loss for the period was $1.4 million or $0.02 a share, which compared to a net loss of $1.5 million or $0.02 a share in the same year ago quarter.

On a year-to-date basis, our net loss of $2.5 million or $0.03 a share is a 40% reduction from the net loss of $4.1 million or $0.05 a share that we had in the first half of 2010 and there has been a number of substantial changes in our balance sheets since the previous quarter, for sometime now we’ve indicated on these calls and in our SEC filings, that if we were to experience a substantial increase in the number or value of orders for our continuous power and infrastructure solutions, that this has the potential to materially change our balance sheet quickly and impact deliver working capital we would require.

The good news or bad is that we have started to see such an increase in order value and the magnitude of some of these individual orders is also increasing. As a result, it’s possible at any point in time to see major swings in our inventory, receivables and accounts payable, depending upon where we are in the order fulfillment cycle and we’ve definitely experienced this in the second quarter.

In this slide, our receivables increased by 18% or $2.8 million from the previous quarter, primarily due to the number of continuous power solutions that we delivered in June. This increase was in Europe and Asia, where we delivered PowerHouse and continuous power products to customers in June that we have been working on since March.

The overall aging of our receivables has not changed significantly, we don’t believe there’s any material collection issues. Likewise, our inventories increased by $4.3 million since the previous quarter. This was been driven by an increase in continuous power and infrastructure solution orders that we’ve received during the second quarter and that we’ve commenced work on already, so that we deliver them in the third quarter.

Our inventory of raw materials to infrastructure solutions increased by $1 million since March, specifically for new customer order and our work-in process inventory for continuous power and infrastructure solutions increased by $3.3 million since March.

A large portion of these products are actually have already shipped in the third quarter. Our finished goods UPS inventory did increased slightly since March as we ship UPS products to Europe and Asia for integration into continuous power systems that we will deliver in the third quarter.

We were able to use our supply chain and our bank credit facility to help finance this growth and the increase in our accounts payable was almost all due to an increase in inventory, with outstanding to pass an equipment such as generators and container and closures.

We put in place a revolving credit facility last year in anticipation to this business trend and drew upon the line this quarter. We are monitoring this trend and working with our credit provider to evaluate if we need to further increase the credit facility or modify to enable more inventory borrowing and credit management, obtaining deposits and interim payments from our customers, negotiating payment terms with our vendors, by how we will continue to manage this process.

However, we believe we currently have adequate liquidity to support much more higher quarterly revenue and enough liquidity to stay at the 12 months for more of revenue growth. Our capital expenditures for the quarter were primarily from the building of several PowerHouse systems for marketing use in China, Germany, and the US. We also had tooling and other related cost in connection with our next-generation UPS products.

We do expect the level of capital expenditures will decrease significantly next quarter. On the Investor Relations front, we did have a new analyst from Capstone Securities initiate coverage of Active Power this quarter, bringing the number of firms covering our stock to five. And in June, we are pleased to be added the Russell 3000 Indexes, which we will believe will help rise visibility in trading activity in the stock.

This completes the financial portion of the presentation. So I’ll now turn the call back over to Jim, for some further comments about the quarter and the business. Thanks, Jim.

James Clishem

Okay, thank you, John. Looking ahead, we do expect our UPS and solutions business to grow in the second half of 2011 as we have a number of solutions-oriented projects in progress for delivery before the end of the year.

One of the big reasons we’re confident in the continued growth of the business is due to the inherent benefit of our UPS and our solutions offerings, high energy and space efficiency, high reliability, the economic green nature of our products and services continue to resonate with customers.

These performance and tangible economic benefits directly address the pain points IT professionals and datacenter operators have to manage on a daily basis. These pain points and some of the current market trends are behind much of the growth in our sales pipeline and once we believe are working in our favor.

Datacenters support our digital economy, which requires a tremendous amount of power, growing space and the demand for these three critical elements isn’t slowing down. One of the big reasons behind this demand increase is the sheer growth in data. According to a recent IDC study, overall data is expected to grow 50 times by 2020 and the number of servers is anticipated to grow by 10 times over the next decade. It’s no surprise than that approximately 36% or 525 datacenter operators and owners stated in a recent survey, that they anticipate running out of power, running out of cooling space by the end of 2012. This is according to the uptime institute.

To meet this demand, 40% of those surveyed claim they plan to build a new datacenter. 71% of survey respondents were based in North America.

In addition, modular datacenter and infrastructure design have become significantly more acceptable in the datacenter community. In fact, one in three key stakeholders in the European datacenter markets surveyed stated that they would consider this design approach for their next datacenter. Jones Lang LaSalle, a real estate company endorsed this recent poll.

So given these trends and the expanding market we operate in, why is Active Power winning in the marketplace? While we believe it comes down to offering products and solutions that provide leading energy and space efficiencies and simply require lower capital and operating expenses. Our solutions are engineered to deliver extremely high energy efficiencies and a compact footprint that reduces customers’ electricity cost, directly impacting their bottom-line.

This high efficiency however doesn’t come at the sacrifice reliability as our technology is proven to be less likely to fail compared to conventional solutions. Just as important though, we’re able to deliver a significant total cost of ownership savings to the customer, which is due in part to our high energy efficiencies.

I also believe we are winning in the marketplace because of what we offer with our continuous power solutions like PowerHouse. It’s clear the market is hungry for modular containerized design and one of the key drivers behind this trend is the rapid deployment capability, with PowerHouse, we’re able to deploy a pre-assembled and factory-tested modular continuous power system in a much shorter period of time, compared to the conventional design build. This factory testing, prior to deployment means mitigating operational risk as well at the customer premise.

The solution also makes a lot of sense from a business perspective as systems can be deployed in a modular fashion that improve operational efficiency to a better infrastructures utilization. Customers can more closely match as well their capital expenses to this real-time demand

Now, changing gears to the business, the evolutionary cycle we’re currently in requires a balancing act, where we’re focused on making smart investments for the future, while not compromising the company’s in-goal of annual operating profitability. We made prudent investments in the second quarter to support our growth, which include the following. We’ve expanded our operations and demonstration capability in the UK by more than 50% as we transition into a new 19,000 square foot facility. This transition into new office space in Germany to better support our sales and service efforts throughout Europe.

We are supporting the development as you’re aware of our next-generation flywheel product, which we’re still on track to launch to the market in 2012 and we’re adding headcount to sales, sales support, service positions to help manage our growing sales pipeline and global service business.

We’ve appointed a recent Vice President of Human Resources to help scale the business from a human capital perspective as well. We believe these investments will pay off and place us in an even stronger position to garner more market share. To put these – put number into this, our market share is actually up 65% from the 2009 last data that we have received for the North American three-phase UPS market and this was from the IMF research. In fact, Active Power ranks fifth in this geography. This data reflects the fact Active Power has a lot of room to grow, which we’re excited about.

In summary, we will continue to focus on our five-year strategic plan, which we believe will take Active Power to the next level of sustainable revenue growth and increasing annual profitability.

Now, looking at the third quarter expectations, our guidance, as you know, we usually provide a range of expected revenues and as unforeseen customers events can impact the timing and amount of revenue recognized for a particular quarter. Based on orders we have on hand and our current forecast, we’re providing revenue guidance of $18 million to $21 million for the third quarter of 2011. We expect third quarter earnings per share to range between a profit-loss of plus or minus $0.2 per share. Changes in cash and investment are expected to be minimal and driven by changes in working capital requirements.

Operating expenses excluding variable sales expenses should be fairly consistent with those seen in the second quarter. Cash used in operations were largely be driven by working capital requirements during the quarter, which will be affected by the timing and size of orders we fulfill. Our plan is to work closely with our credit provider to determine if modifications need to be made to our credit facility, but also manage customer and vendor cash flows appropriately in order to mitigate cash requirements where possible.

So with that, John and I would be happy to open the call up to your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Okay, the first question we have from Dilip Warrier. Your line is live. Go ahead.

Dilip Warrier – Stifel Nicolaus

Thank you. Congratulations on the quarter again. Just a question on the gross margin. So I know, we have talked consistently in the past of gross margins in the low to mid-30s in the relatively near-term and fully understanding that the product mix is changing very rapidly towards the solutions business. I was wondering, if it is if it’s time for us to reset our expectations for gross margins going forward and wondering what it will take for you to hit a, let’s call it a low-30s kind of gross margin?

James Clishem

Yeah, Dilip, I will chime in first and I will let John, also I’m sure who want to comment on this as well. Sales mix is driving so much of that particular line item, but from our visibility for the remainder of this year, we think that we’ll reset those gross margins very much back in line to where we had been previously guiding.

There was quite a few both in the product and channel mix that affected sort of point in time Q2, also as you know, we’ve expanded some infrastructure that affect the cost of goods sold component in our expansion of our PowerHouse in part in anticipation of some very large orders through the rest of the year. And I think those are the primary drivers at least on the gross margin side of things, both at mix, which is dominating.

I think the other things too, Dilip it’s important to understand is that as we begin to dominate more and more into solutions business, our operational efficiencies in executing upon more of the solutions versus just shipping out boxes. There are some inefficiencies as our own staff mature more and more and I think you will efficiencies and scaling of that throughout the rest of the years.

So I think that also was another element, again not dominant, mix was dominant, but we did see some evidence that our execution in the solutions business around professional services in particular probably did have some effect and as we improve that throughout the rest of the year, I think you will also see that rebound. But John may have another dimension to that answer.

John Penver

No, I think – hi, Dilip. I would probably echo a lot of that. I think to get to the premise of your answer, I think it might take us a little bit longer to get the margins up to the levels that we think we can do. I think our model was predicated on us expanding our solutions business on top of our existing UPS business and we’ve seen the solutions business come on, but we are a little bit behind on the UPS side this quarter. And so, that really had a negative effect.

And then, as we’re expanding that solutions business, we have to put some infrastructure in place to support that. So we haven’t really been able to leverage the infrastructure that we had. And I think that’s kind of delayed - had a negative effect on the margin. And then the point Jim just raised is, if you look on the size of the income statement, you’ll see that reported revenue versus cost of sales on the service business was down quite a bit as well. And that’s driven by the fact that we weren’t getting what we wanted on the services related to some of these solutions.

I think one of the catalysts that will help us, get the margin to where we want to, when it does arise, will be the next-generation UPS product. But I think, that will be a catalyst as really you see us better executing on our services and our solutions delivery, including the efficiency of building those solutions. I think both of those will get the margin up. But, I think it might take us a little bit longer than what we might have said six months ago.

Dilip Warrier – Stifel Nicolaus

Okay, thank you. And then just one more question. Jim, volume of new orders that you’ve recorded during the quarter. I was wondering if you could disclose that?

James Clishem

Yes, actually because of the volatility that we just sort of experienced in Q2, we’ve sort of made a decision to only project out revenue without that. But I can tell you qualitatively that the book of business is up substantially, but unfortunately Dilip, I think we’ve made sort of an internal decision, because as we’re transitioning from where we were to this more solution side of the business is to give strictly revenue guidance without order guidance.

Dilip Warrier – Stifel Nicolaus

Thank you.

James Clishem

Sure.

Operator

And the next question comes from Carter Driscoll. Go ahead, your line is live.

Carter Driscoll – Capstone Investments

Hi, good afternoon, gentlemen. Maybe you can talk about what you are seeing on the competitive front? Have you seen any new flywheel-based solutions introduced recently, may be gaining traction, any effect on the pricing environment? Maybe I’ll start with that question and I have a few more follow-ups?

James Clishem

Okay this is Jim. On the competitive fronts, we are continuing to steal quite a bit of share from our competitors. And that I would classify my answer as opposed to a flywheel comparison to the benefit comparison and I think our benefits at the end of the day are about saving people money on their utility bills under space, because that cost them more money in their operations.

So to the degree we are seeing competitors trying to address their inefficiency to improve it. We are seeing some movement there by some competitors to improve their energy efficiencies. But there is still substantially off from competing head-to-head with Active Power, but they have made some improvements. The ones that have surprised me in particular have been more the Toshiba, some of the Japanese guys have made some pretty nice improvements in their energy efficiency.

Unfortunately, their footprint doesn’t scale as well as well ours, because of the battery plant that they have to still put in place, but I have seen that. We are winning pretty substantially against the rotary guys as well. We think that not only are we price competitive there but the Active Power brand and those people that are influencers representing us are really making some inroads and I think we’re going to continue stealing share.

But from a technology perspective, there really isn’t anyone as strong on the power efficiency although I think that gap is closing little bit. With the new product that we are developing, both the density, the power density and the to a small degree the efficiency improvement, but largely it’s going to be power density with this new product that’s going to give a tremendous benefit, I don’t know if anybody is anything close to what we are going to be launching next year. So, I think that’s the other thing we’re doing is working pretty hard on the R&D side to give us that next leg up.

Carter Driscoll – Capstone Investments

And then drilling down that point about the next-gen UPS, obviously do you have any specific timeframe in 2012 when you’re going to introduce it yet, but when you do think you might be able to give some early samples to some our existing customers? Could that happen in back half of this year?

James Clishem

No, it wouldn’t happen really until the back half of next year. There is a lot of testing that’s just required from a UL, as well as safety testing and all that. Our energy storage design and development is well underway right now, we believe we’re going to generate both the power and I think until we build the first prototype, which we’re0 very close to doing, the energy is the next test of it. And then you really can’t test that until it’s built and running, then you got a whole bunch of testing, UL testing, installation testing and then. So before you can really roll it out, it’s probably we’re looking at the second half of next year before you will see that out in the field.

Carter Driscoll – Capstone Investments

Prototype is just the first step?

James Clishem

That’s right. Then we got final rigor and then production. That’s right.

Carter Driscoll – Capstone Investments

Okay. Is there any danger you think may be that people all waiting for that next-generation product, you may be get a quarter or two lag before UPS kicks back in or is it really just the mixed shift in the timing and you just said such great results on the continuous infrastructure solutions side with a little bit more investment line that you just subject to a lot of volatility on a quarter-by-quarter bases. But no reason to believe that people are waiting for the next-generation UPS for you see an order exhilaration on the UPS side again?

John Penver

Hi, Carter. This is John. I think answer is, definitely not. Typically when we we’re engaging with customers or give some of the numbers that Jim talked about in his on the call today, there’s usually such pint-up urgency and need for these datacenters that most of these customers can’t afford to sit around and wait. So we don’t think there’s any risk at this point that people are delaying decisions because of the expectations in future product.

James Clishem

Yeah, and I will just add on top of that Carter, is that this new product is really addressing a slightly different market segment, which is the higher prior market segment. So we don’t think that will be much to vary maybe even no cannibalization as a result of that. So it really is opening up in new market, which is the fastest growing part of the market and that 800KVA and above for single modules.

Carter Driscoll – Capstone Investments

Okay, that’s what I was getting at, really was the cannibalization potential. Given the dramatic increase in the continuous power operating segment or I should say just product segment. The inventory balances as you’ve been talking about and the working capital needs you have, I mean is there a danger that you get to a level of where you might want to do some type of capital raise, just to have a buffer of cash rather than having a certain amount tied up with working cap.

Are you worried about the other customers might look at, your balance sheet today and say, hey, we’d like you to have a little bit more buffer involved if before we give you a larger order? I mean is there are some potential quarter where you could bump up against that issue, do you think?

John Penver

This is John again. I think there’s always a risk of that, but it’s not something that we’ve experienced today and it’s not something that’s come up from really any of our customers. The challenge is that these orders get very large very quickly and if we have a significant increase, we kind of got a hierarchy of how we’re trying to do it and certainly as part of the United States, it’s a lot more customary for that customers to effectively fund that business by giving us deposits and progress payments as we basically build the product and deliver it.

So, we can grow in those markets without really needing additional sources of financing. And that tend to mature in Europe and Asia in particular. And then in the United States where it’s possible we try and do that with our customers as well. It’s a little tough with some of the larger companies in the U. S., but not impossible. And in fact we’ve gone back to negotiate it.

So, obviously the best way to fund this growth will be from profits and we’re obviously working towards that. And then having our customers basically provide the working capital for that, to the extent we can’t do that, we then looked kind of in priority at that supply chain and making our vendors mirror payment terms that mirror what we’re doing.

And then we’d really defer to a bank credit facility, which is really what we put in place, that we’d rather use that than some kind of dilutive equity rise at this point. And we certainly believe we’ve got the capacity as the business is growing to expand that credit facility beyond where is that, if we really needed to do it. So, I think there’s really that hierarchy and I really wouldn’t want to set an expectation of that by contemplating any kind of equity rise at this point.

That said, to the other question, it does come from some large companies is, jeez, your balance sheet small, I’m at the hand of multi-national really like your product. In some cases, some of those companies may prefer to buy our products and solutions through our partners, just because of the brand aura of perceived stability of the Caterpillar or HP or someone like that. So, sometimes I’ll mitigate the risk that way and again I think they’re all probably preferable solutions than just trying to continue to dilute out the shareholders.

Carter Driscoll – Capstone Investments

Okay. That was going to be my next question was, are there any - when your partnerships, I’m particular with Caterpillar, do you face any different financing terms? Are you can you work off your customers’ balance sheet to some degree, which obviously answered. And then just the last question and I’m not sure you could be able to answer this or want to answer this. But, given that at that revenue run rate you’re at now that the factory utilization tends to still be a gross margin drag and periods with a little bit later and then obviously the enhancement as you continue to fill the factory? Could you maybe ballpark at what quarterly run rate you might see a material jump in factory at least from that percentage of your profitability from factory utilization, better cost absorption? And is it $25 million, is it $30 million run rate, is it - could you see incremental margins in the 40% range about $25 million? Could you help frame where we might see that step function occur at least from a revenue perspective?

John Penver

I’ll probably give you the answer that you don’t want to hear, which is, as the long-term listeners of Active Power and when we were a UPS-only business, we were to predicted that our breakeven point would have been around $15 million of quarterly revenue, which was predicated on, what was us costing us to build the factory and a service organization. As the product mix changes, there’s differences in margin between UPS and what we get on the solutions business and infrastructure solution. So I can get the same dollar of revenue that make 10%, 15%, 17% less margin on that product. So, if my product mix moves that way, that pushes my breakeven point straight up.

That said, I still think if we can get the UPS revenue in the neighborhood of $10 million a quarter, the incremental cost that we’ve added to support the other business is as not as substantial. And so, I think that will suggest that close to the $20 million you should expect to be - if our product mix stays more conventional, not like it was this quarter, we were thinking UPS revenues to be in the 45%, 50% range. If they’re going to come in at 35%, that number could be $21 million or $22 million to breakeven. So it’s probably not the ideal answer, but does that give you some metric?

Carter Driscoll – Capstone Investments

That was very helpful. Thank you. And I’ll pass it along now. Thanks very much, gentlemen.

John Penver

Okay, thanks, Carter.

Operator

And the next question comes from Matthew Crews, your line is live.

Matthew Crews – Noble Financial Group

Good afternoon, everyone.

James Clishem

Hi, Matthew.

John Penver

Hi, Matt.

Matthew Crews – Noble Financial Group

On discussing the liquidity, could you highlight maybe where you are today from a liquidity position? Where were you at with your credit line with the Silicon Valley Bank?

James Clishem

Yes, sure. So, I mean we haven’t, we’ve actually haven’t moved since quarter end. We have about $5.5 million outstanding and I don’t have the exact number in front of me. That will be in our 10-Q, since we filed it. There is several million dollars more of availability under the existing facility, as of June 30. So we needed borrow several million more, we could have done that.

The current facility has multiple elements to it, which covers receivables in the U.S. and Europe, purchase orders and inventory. And actually most of that borrowings to-date in fact have operating against receivables. And it’s that you pay a different rate of interest depending upon whether you borrow against PO’s inventory receivables, we tend to borrow against the lowest cost of money. But we actually are looking at and having conversations with the bank, because we have got a pretty substantial increase in orders for PowerHouse and Infrastructure. And if I look at how much money I’m going to need to spend depending upon the timing of money from my customers itself, I might want to increase my inventory facility for example on my order facility.

And the good thing with both of those categories is that, most of those orders are coming from Blue chip, Fortune 100 customers with pretty good credit worthiness, which is only the bank’s concern and worry about the customer creditworthiness and our ability to execute and deliver, could we finish that, but then I said that answers what you’re off to Matthew that, we also have the ability, we believe if we need to increase the absolute aggregate amount of the revolving credit facility, if we really need to take it past the current, I think $12.5 million facility that we have. But, if we need to borrow that much, that would suggest that we revenue and business activities have increased quite a bit from where we are at today.

Matthew Crews – Noble Financial Group

I was just looking at the increase in sort of the working capital versus I think by around $7 million of available credit on the SCB credit line. And then you have a lot of if your mix is towards the power house at for Q3 that seems like that would, a lot of that would be absorbed.

John Penver

Yeah. If people was all borrowed, and then time to get, I said for the stands at about the customers come out of Western United States, we tend not to use the credit facility mix and have the customers funding it. Now I think we definitely had plenty there. I mean it’s, you kind of look at it very quick.

I know my inventories up that far, and most of that inventory increase the shift in May, in July, sorry to customers, because if that, it’s not point in time at the end of June on 95% of the way through are massive power house facility. You’re going to see this huge increase in my will and then it come to a conclusion like, oh, my gosh, we’re running out of money, but two weeks later our shift in. So the balance sheet is really going to move around, potentially very quickly if we continue to have this massive increase in and heavy proportion of solutions revenue.

Matthew Crews – Noble Financial Group

So some of that you’ve converted that inventory back into they gone into receivables at this point or back into cash?

John Penver

Partly receivable and cash in July.

Matthew Crews – Noble Financial Group

Okay and then, are you on the way you were talking about gross margin one thing you might not have been discussed and I’m just curious, how are you impacted with input cost like steel now that your mix has shifted towards more of a raw you get raw material on some of these new sales, is that impacting your margins well?

John Penver

No, it’s really has not been significant at all which I guess is a good thing, I mean it's always pressure on the supply side and we do a pretty good job of that sustaining engineering to look at as supply chain, qualify alternative vendors, there is still healthy competition on those component levels and really they raw material cost the copper and steel and stuff is not a significant and those changes significant of that.

Matthew Crews – Noble Financial Group

So if you go back and you look at what you’re getting when you put a contract together your margins, you feel or so you’re still getting the margin you want just goes back to that next discussion and volumes?

John Penver

Yes, it’s predominantly the mix. The absence of some of the large UPS system this year so far probably is that on the area where the pricing will not be up a little bit, and this will be counter intuitive almost profitable transaction last year were actually to a largest customer, often you see volume and after, but no, I mean it’s anecdotal.

James Clishem

When you build a volume for a single customer to degree, you get some efficiencies and I would say it’s that more so than any sort of pricing, it’s more of an operational. And the other thing I would just add for you Matthew is when you think about power houses and pods, it fundamentally is a more construction oriented business than a box business.

And as such, I would tell you there is some in my discussion topics on the call, but there are some operational efficiencies on the way that you execute upon that, that I think Active Power is okay at, but we’re getting lot better things like scope of work and clarity on commitments of execution so that when it’s not clear repeat visits for example out to a facility when you execute on a more construction oriented modular solution.

If that isn’t locked down enough than you’ve already ordered your price but yet you might have to visit the facility more time than you originally thought because of the scope of work wasn’t as clear as an example and that just gets tightened up to our operational efficiencies and so forth. So I think there is some leverage there that you’re see on our solutions business that will enhance the margin beyond. John is right; it’s not a material steel or labor to put that together. I think we’ve been able to ride that quite well so far. I don’t think that’s actually changing.

Matthew Crews – Noble Financial Group

And just one last question here, just when you discussed the OEM light for the quarter versus I believe your direct sales were better, how would you characterize what you saw in the direct channel versus the OEM that might have caused? I mean, you’re saying that there is pipeline back, you see some pipeline visibility on the OEM side, but we did see some nice flow-through on the direct side. So may be just more clarity on the differences between those two?

James Clishem

Yes, yes. So, I can maybe give you some qualitative color on that, because I’m sort of looking out between now and the end of the year and I have the data actually in front of me. As I look at our Q3, Q4 timeframes, we’re seeing the OEM, which is really our transactional UPS sales part of the business that is coming up directionally, we see over the next couple of quarters I think not just the infrastructure solutions, but the stuff is pulling through, which are really PowerHouse, most continuous prior infrastructure solutions are coming up significantly as well. So the IT channel looks like it’s going to move both pulling through the on the infrastructure solutions and the PowerHouse stuff together.

So that’s a good sign and as a result of proportion of our direct business, although it will be up as a percentage of the total, because OEM comes up and the IT continues to grow probably settling to I think for Q2 it was about 60% of our revenue was direct. And so you will see that as a percentage coming down in Q3 and Q4 but you’ll see the magnitude of the total actually going up, that makes sense, yes. And I think the margin improvement also because of that mix change that John has spoken will be reflected in that. And if I was cavorting this with some of the guys here some of my staff and I looked at, I don’t want to call it sort of the perfect storm analogy, but did a combination of the mix, both product and channel, there is the infrastructure investments we’ve made.

On the operating expense side, the additional R&D expense for the new product development, which is important. The sales head count, service head count, those things that we’re doing, I think this goes to the theme that you heard me say twice in our remarks that it’s the balance and this is what I think it’s important that it would be very transparent with you to know that we’ve got the balance for the future of these investments with the operational focus on profitability quality.

And I think that’s really the balancing act and the tough thing for this year’s and I think you heard me say several quarters and I think we are doing actually a reasonably good job at it but have been on that we get turn a curveball here or there and we react to it.

Matthew Crews – Noble Financial Group

Hey. Okay. Yes.

John Penver

One of the quick comment I’m going to add to it. I think you were also asking and we were worry about the volatility’s in the OEM channel and have pipeline to UPS business and also have pipeline for the OEM channel above top significantly. So and we don’t see any deterioration in market activity and coding activity, and we expected that about those beyond channels we’ve improved in the second half.

Matthew Crews – Noble Financial Group

Okay. Thank you very much for your time.

John Penver

All right. Thanks you Matthew.

Operator

Dilip Warrier your line is live.

Dilip Warrier – Stifel Nicolaus

Thank you. I just had one follow-up question. John, did you say, do you ship 96 UPS flywheels this quarter?

John Penver

That’s correct, Dilip.

Dilip Warrier – Stifel Nicolaus

With that imply a big like a decline in the ASP profile realer or might not looking into some of the apples-to-apples basis it look likes some like a $57,000, $58,000 ASP?

John Penver

Yeah. That’s the absolute aggregate number, some of those UPS systems actually shipped into power houses, I believe this 26 of them.

Dilip Warrier – Stifel Nicolaus

Okay.

John Penver

That is the other way, yeah, if you just break out that number you’d freak out.

Dilip Warrier – Stifel Nicolaus

Okay. Thanks.

John Penver

All right. Thank you.

Operator

Next question comes from Peter Holman [ph]. Go ahead, your line is live.

Peter Holman

Hi, congratulations going ahead.

James Clishem

Hi, Peter.

Peter Holman

I would like to ask questions, if it’s sufficient for you to ask them all at ones and sort of you listen them and then answer them in frequents. Is that okay?

James Clishem

Yeah.

Peter Holman

What was the order, I think you may have set up but you were talking rapidly, so go with the actual order value and Q2 versus Q1. Second question is our DSO and DOI stable are lower in Q3 as far as you can see. Third question is it seems you should be you are and should be focusing on solutions continues power systems et cetera, which have lower gross margins, what does that do on sort of a big picture expectation as you look at your business to the 500, 800 basis points improvements in the gross margins, the mid-30s that you have previously expected. Fourth question is relative to new hires which you planned. Where are you and where have they been sales, R&D or what? And finally, if you did lose in a competitive deals to other five real folks or battery folks, can you describe why that occurred?

James Clishem

Peter, what we have mentioned on the call was that rather than giving out the absolute dollar number of orders, we would just provide the guidance for the revenue because it’s a reasonable target of that. We did provide some qualitative guidance, which would suggest that our order value had increased over the previous quarter. And I could probably throw another on there, which would suggest that the order value magnitude is greater than the revenue that we booked. Okay, that’s the trend that’s continued.

Peter Holman

Fine.

John Penver

On the DSOs, we believe they are stable. We believe that the timing of revenue will be a little more evenly spread in the third quarter. So I would hope if we excel well without DSOs our receivables should be able to come down in the third quarter.

Peter Holman

And days of inventory as well? In other words, you have big increases in both of those because of larger continuous power orders. Now that you’ve had that increase, you wouldn’t expect further increases?

John Penver

Possibly, yes; possibly, no. And the answer for that is, because if substantial powerhouse orders come in over the next two months that require us to commence them to deliver them.

Peter Holman

Right, okay.

John Penver

Yeah. It’s favorable in September that I could be making substantial investments. I mean, I think in terms of quantum, I don’t think it’s going to increase the magnitude this year. If you look at our UPS inventory, it’s barely stable and really not moving. What’s driving inventory is where are we and if we’re in the middle of fulfilling some large infrastructure orders during the middle filling some large powerhouse orders, that number really could change quite significantly. And my expectation is that they will come down, but we are obviously working on orders for fourth quarter and first quarter are it’s more likely the fourth quarter delivery, we may have to preorder to pause that and by generating closures and switching them.

Peter Holman

All right. And then the next one was about the previously expected 500 to 800 basis points increases in GM to the mid-30s, you sort of talked about it. But is that not a level to which you expect together, you simply expect to get to that level over a slightly longer period of time.

John Penver

Yeah, I think that was kind of how I answered on the call. It’s still a reasonable goal for us. I think as the UPS revenue comes back and we’re able to cover the fixed cost of things. I think you’ll see the gross margin improves here even in the next two quarters and as the absolute value of that top-line continues to grow, that leverage will stop flowing through to the bottom-line. So, I think there will be a couple of catalysts. We will improve the efficiency of our service deployment and project management.

And even with some of the other products infrastructure solutions, as we build more and more of these and we get the repetition and the efficiency and the economies of those products. The product margins will actually improve on each of these product lines as well. I think it’s a combination of those three things that will be driving the revenue, the gross profit margin up. And of course we continue to monitor our overheads and try and make the decisions we can to control those costs and bringing them down without compromising on quality goal or responsiveness because…

Peter Holman

And I think you’ve done a very good job of that.

John Penver

Yeah. So, on the hiring, I’ll let Jim kind of alluded to it. The hiring was going into direct selling, in particular, improving our sales management, to support our channels. We’re adding service personnel where necessary to support our customers. We’ve added some personnel to help with the manufacturing of our solutions and have consignor’s business. We’ve been adding resources in engineering to deepen that talent pool there in connection with the generation of the new products.

And then we also added some qualitative products like HA to help provision the company to grow, because we’ve really leveraged the resources that we had. We have to position the business, so that you can’t instantly stretch existing resources, you’ve got to scale the business in an intelligent fashion so that it it’s capable of growing with that putting all that infrastructure in before you’ve actually grown

Peter Holman

But the actual majority of hire is in revenue generating provisions?

John Penver

Yes, absolutely. I’d say it’s probably 70:30 at this point in that number.

Peter Holman

Okay.

John Penver

And then Jim’s more of the person to the sales transactions. So I’ll let him explain why we lose when we do these.

James Clishem

Yeah, the only one, Peter, I’m aware of this past quarter that we ask was because of an indirect relationship through our OEM channel that inadequately was able to close, what we would have considered a very, very large deal. And I think that always is the frustrating thing of balancing training, which you always want to your OEM people took be able to have, because that’s why you give them a discount on the purchase price

Peter Holman

Right.

James Clishem

I would tell you that I felt like that one in particular was poor sales execution actually through an indirect sales channel that could have in my view been better.

Peter Holman

And what sort of format did that deal lose to flywheel or battery-based?

James Clishem

It lost to a relationship that was battery based, because I felt like the inability of that indirect channel of being able to explain the benefits sufficiently to attack the obstacles, you know what I mean? And our direct people know how to do that pretty well. All of us here at Active Power know to do that pretty well. I think there is still that struggle that goes on with level of indirection. We’re addressing that from an operations prospective with our Head of Sales, Martin Olsen who is Head of our Global Sales and been working with this group. So it was a nice lesson learned, but it was not because of the economic benefits, it was not because of the technology, it was just, I felt poor sales execution on confronting the obstacles.

Peter Holman

Thanks very much for answering those questions.

James Clishem

Welcome.

John Penver

Thanks, Peter.

Operator

Carter Driscoll, go head, your line is live.

Carter Driscoll – Capstone Investments

Thanks guys. Just a quick follow-up. Could you address the linearity in the quarter? I mean did you see any weakness in the June period or was it relatively stable throughout end of the June month?

John Penver

Carter, it tend to actually go the other way to this quarter, where it tend to be more back-end driven than front-end driven. And some of that is difficult to plan, because we have a number of large power house systems, some of them we started working on back in the first quarter that delivered out in June. So, we tend to be a little back-end heavy. This quarter’s it’s safe I’ve always want it the other way, but this quarter is a little bit less back-end driven then the third quarter.

Carter Driscoll – Capstone Investments

Okay, and then just correct me if I’m wrong I may get this the fact a little bit screwed up. But I thought that in the first quarter, you had an order based in UK that either wasn’t fully completed or maybe a push in the second quarter. Could you talk about whether that was recovered or the circumstances around that particular order?

John Penver

Yes there was a large solution, tough tag where a large portions of the order was delivered in the first quarter. That comes – that was not for this quarter. And they kind rolled over from and calculated the period and that’s kind of stuff happened. Sometimes, customer makes this tag and that’s for instance, they needed to do some onsite engineering that we weren’t responsible for which the delay, their ability to receive the equipment.

That’s client-driven events like that, which is why we provide a range of revenue with that guidance each quarter, because as you get into the solutions than its more analogies to almost some construction activities, this client event can happen where we already deliver the product and I did say where we are unable to do that. And that concludes our revenue expectations to change and sometimes that might not be happens in very likely quarter. And so, that’s really the reason why we provide a range of revenue with that quarterly guidance because, why we do expect that is like, you have an order, you have a product, you spend months fulfilling it. These too many contributing events that can dictate on our abilities to deliver.

Carter Driscoll – Capstone Investments

Thank you very much.

James Clishem

Okay, thank you Carter.

Operator

(Operator Instructions) We have a question from Eiad Asbahi. Please go ahead, your line is live.

Eiad Asbahi – Prescience Investment Group

Thank you, guys. Hi guys, this is Eiad.

James Clishem

Hi, Eiad.

Eiad Asbahi – Prescience Investment Group

Yes, just on the container side, quick question. Based on ASPs and doing some back of the envelope calculation, it looks like for the full year, based on some of the things you guys have said in the past and also based on some of the things I am seeing from the sell-side, it looks like embedded in those numbers is the sale of about 30 units of powerhouse and about 30 units of pods on the full year.

But based on some channel checking, even just with HP, it looks like, it looks like HP’s expectation alone implies potentially significant upside to those numbers. And it’s a little bit confusing and I understand that there is a lot of volatility in quoting activity. But, based on the some of the things that I have heard, it just seems like you guys could easily surpass $90 million on the top-line and I am hoping you could give me some color as it relates to your full year guidance.

James Clishem

Well, let me first of all put my initial caveat at which is we tend to only provide that guidance for a quarter. But I am glad to hear you are checking the channel out and there is definitely a lot of opportunities from modularized datacenter applications and for the infrastructure it got with it and we have a very substantial pipeline including with our IT partners including HP.

I would say that a lot of activity comes up on opportunities and people get hot and heavy to use a bad expression. And a lot of the interest in the technology, but the time taken from that initial interest to actual execution of the sales order is where things tend to breakdown. And so people tell me out so and so wants X number of these things, everybody is really excited. And we have one which we’re delivering in this quarter that we’re going to sign on the dotted line at the beginning of last year. And so a channel check could shell a lot of people showing interest where I found that the disconnect is the time is taken to close the order out from that point.

Now that’s it, we also see significant opportunity for our solutions business away from modular datacenters. We’ve had a lot of interest in that on the direct side as well. So, I don’t know if I’m directly addressing it. But if some of those orders came through, I think the numbers that you’re alluding to would be in the balance of reasonableness. That would suggest a pretty big uptake in the second half and not impossible. But realistically, and once those orders happen relatively quickly, the time taken to procure components and closures and generate some stuff would probably stop we being able to deliver significant quantity this year.

Eiad Asbahi – Prescience Investment Group

Got you. Okay, thank you

James Clishem

Okay. Thanks a lot

Operator

(Operator Instructions) Peter Holman, your line is live.

Peter Holman

Sorry, the one question I forgot to ask and maybe it’s implicit in your guidance. But given the level of inventories at the end of the quarter, what does that suggest about the value of expected sales in Q3 sort of the high-end of your guidance or does it tell me anything?

James Clishem

I’m excited; it really doesn’t tell you a lot. I mean the increase of $4.3 million is less than 25% at the low-end of the guidance that we gave for the quarter. So when you look at how our inventory turns, our UPS inventory can turn one or two times in the quarter. All I can really tell you is that, at a minimum level at the end of this quarter with $3 million or $4 million worth of infrastructure solutions material back into the margins and say, all right, you’ve probably got some number higher than that in revenue. But it’s not necessarily an indicator of the quarterly revenue, okay.

Peter Holman

So relative to what the other gentleman asked a few minutes ago, having checked the channel, the material increase in inventories doesn’t suggest on expectation, which you would receive from your IT partners of upside to routers?

John Penver

No, we actually don’t hold a lot of inventory against those orders because of the size of them. So typically we wouldn’t be holding inventory without concerned orders for those things. So, if this serves to be a big uptake in orders for delivery, that would result in a further increase in the inventory from where we’re at.

Peter Holman

Okay. Thank you.

John Penver

Okay, thanks, Peter.

Operator

At this time, there are no further questions.

James Clishem

Okay, thank you so much. Well, I want to thank everybody for being on the call. This being our first aftermarket call and behalf of the entire employee base of Active Power and our Board, I would like to express again our appreciation for your interest in Active Power and look forward to speaking with you again next quarter. Thanks everybody.

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