Unassociated Document
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
Quarterly
report under Section 13 or 15(d) of the Securities Exchange Act
of
1934
|
|
For
the quarterly period ended September 30, 2008
|
|
|
o
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
|
For
the transition period from ________ to ________
.
|
Commission
file number 1-12711
DIGITAL
POWER CORPORATION
(Exact
name of small business issuer as specified in its charter)
California
(State
or other jurisdiction of
incorporation
or organization)
|
94-1721931
(I.R.S.
Employer Identification
Number)
|
41324
Christy Street
Fremont,
CA 94538-3158
(Address
of principal executive offices)
(510)
657-2635
(Issuer’s
telephone number)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
¨ |
Accelerated filer |
¨ |
|
|
|
|
Non-accelerated file |
¨ |
Smaller reporting company |
x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12(b)-2 of the Exchange Act). Yes ¨
No
x
At
November 7, 2008, the registrant had outstanding 6,615,708 shares of common
stock.
DIGITAL
POWER CORPORATION
TABLE
OF CONTENTS
|
|
|
Page
|
|
|
PART
I - FINANCIAL INFORMATION
|
3
|
|
|
|
|
|
Item
1.
|
Financial
Statements.
|
3
|
|
|
|
|
|
|
Consolidated
Balance Sheet as of September 30, 2008
|
3
|
|
|
|
|
|
|
Consolidated
Statements of Operations
for
the nine months ended September 30, 2008 and September 30,
2007
and
for the three months ended September 30, 2008 and September 30,
2007
|
4
|
|
|
|
|
|
|
Statement
of Changes in Shareholders’ Equity for the nine months ended September 30,
2008
|
5
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
for
the nine months ended September 30, 2008 and September 30,
2007
|
6
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
7
|
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operation.
|
14
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
16
|
|
|
|
|
|
Item
4T.
|
Controls
and Procedures.
|
16
|
|
|
PART
II - OTHER INFORMATION
|
17
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
17
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
17
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
22
|
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
22
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders22
|
22
|
|
|
|
|
|
Item
5.
|
Other
Information
|
22
|
|
|
|
|
|
Item
6.
|
Exhibits
|
22
|
|
|
SIGNATURES
|
23
|
PART
I -- FINANCIAL INFORMATION
ITEM
1.
|
FINANCIAL
STATEMENTS
|
DIGITAL
POWER CORPORATION
CONSOLIDATED
BALANCE SHEET
U.S.
dollars in thousands (except share and per share data)
|
|
September
30,
|
|
|
|
2008
|
|
|
|
Unaudited
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,388
|
|
Restricted
cash
|
|
|
96
|
|
Trade
receivables, net of allowance for doubtful accounts of
$ 103
|
|
|
2,058
|
|
Prepaid
expenses and other accounts receivable
|
|
|
142
|
|
Inventories
|
|
|
1,591
|
|
|
|
|
|
|
Total
current assets
|
|
|
6,275
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
186
|
|
|
|
|
|
|
LONG-TERM
DEPOSITS
|
|
|
41
|
|
|
|
|
|
|
Total
assets
|
|
$
|
6,502
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
Accounts
payable
|
|
$
|
973
|
|
Related
parties - trade payables
|
|
|
651
|
|
Deferred
revenues
|
|
|
243
|
|
Other
current liabilities
|
|
|
628
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,495
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
Share
capital -
|
|
|
|
|
Series
A redeemable, convertible Preferred shares, no par value - 500,000
shares
authorized, 0 shares issued and outstanding at September 30,
2008
|
|
|
-
|
|
Preferred
shares, no par value - 1,500,000 shares authorized, 0 shares issued
and outstanding at September 30, 2008
|
|
|
-
|
|
Common
shares, no par value - 30,000,000 shares authorized; 6,615,708 shares
issued and outstanding at September 30, 2008
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
13,969
|
|
Accumulated
deficit
|
|
|
(9,926
|
)
|
Accumulated
other comprehensive loss
|
|
|
(36
|
)
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
4,007
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
6,502
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
DIGITAL
POWER CORPORATION
CONSOLIDATED STATEMENTS
OF OPERATIONS
U.S.
dollars in thousands, except per share data
|
|
Nine
months ended
September
30,
|
|
Three
months ended
September
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,341
|
|
$
|
8,306
|
|
$
|
2,825
|
|
$
|
3,028
|
|
Cost
of revenues
|
|
|
6,594
|
|
|
6,177
|
|
|
1,761
|
|
|
2,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,747
|
|
|
2,129
|
|
|
1,064
|
|
|
790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
and product development
|
|
|
460
|
|
|
587
|
|
|
158
|
|
|
185
|
|
Selling
and marketing
|
|
|
702
|
|
|
716
|
|
|
242
|
|
|
238
|
|
General
and administrative
|
|
|
1,243
|
|
|
979
|
|
|
364
|
|
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
2,405
|
|
|
2,282
|
|
|
764
|
|
|
768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
342
|
|
|
(153
|
)
|
|
300
|
|
|
22
|
|
Financial
income, net
|
|
|
74
|
|
|
36
|
|
|
62
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
416
|
|
|
(117
|
)
|
|
362
|
|
|
29
|
|
Income
taxes
|
|
|
-
|
|
|
(3
|
)
|
|
-
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
416
|
|
$
|
(114
|
)
|
$
|
362
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net earnings (loss) per share
|
|
$
|
0.063
|
|
$
|
(0.017
|
)
|
$
|
0.055
|
|
$
|
0.006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net earnings (loss) per share
|
|
$
|
0.062
|
|
$
|
(0.017
|
)
|
$
|
0.054
|
|
$
|
0.006
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
DIGITAL
POWER CORPORATION
STATEMENT
OF CHANGES IN SHAREHOLDERS' EQUITY
U.S.
dollars in thousands, except share data
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
other
|
|
Total
other
|
|
Total
|
|
|
|
Common
shares
|
|
paid-in
|
|
Accumulated
|
|
comprehensive
|
|
comprehensive
|
|
shareholders'
|
|
|
|
Number
|
|
Amount
|
|
capital
|
|
deficit
|
|
loss
|
|
income
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2008
|
|
|
6,615,708
|
|
$
|
-
|
|
$
|
13,885
|
|
$
|
(10,342
|
)
|
$
|
200
|
|
|
|
|
$
|
3,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation related to options granted to Telkoor's
employees
|
|
|
-
|
|
|
-
|
|
|
41
|
|
|
-
|
|
|
-
|
|
|
|
|
|
41
|
|
Stock
compensation related to options granted to employees
|
|
|
-
|
|
|
-
|
|
|
43
|
|
|
-
|
|
|
-
|
|
|
|
|
|
43
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
416
|
|
|
-
|
|
$
|
416
|
|
|
416
|
|
Foreign
currency translation adjustments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(236
|
)
|
|
(236
|
)
|
|
(236
|
)
|
Total
other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of September 30, 2008 (unaudited)
|
|
|
6,615,708
|
|
$
|
-
|
|
$
|
13,969
|
|
$
|
(9,926
|
)
|
$
|
(36
|
)
|
|
|
|
$
|
4,007
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
2007
|
|
|
|
Unaudited
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
416
|
|
$
|
(114
|
)
|
Adjustments
required to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
69
|
|
|
58
|
|
Stock
compensation related to options granted to employees
|
|
|
43
|
|
|
41
|
|
Stock
compensation related to options granted to Telkoor's
employees
|
|
|
41
|
|
|
41
|
|
Decrease
in trade receivables, net
|
|
|
618
|
|
|
479
|
|
Increase
in prepaid expenses and other accounts receivable
|
|
|
(39
|
)
|
|
(17
|
)
|
Decrease
(increase) in inventories
|
|
|
14
|
|
|
(389
|
)
|
Increase (decrease)
in accounts payable and related parties- trade payables
|
|
|
(463
|
)
|
|
359
|
|
Increase
(decrease) in deferred revenues and other current
liabilities
|
|
|
460
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
1,159
|
|
|
332
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(64
|
)
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(64
|
)
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(150
|
)
|
|
53
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
945
|
|
|
354
|
|
Cash
and cash equivalents at the beginning of the period
|
|
|
1,443
|
|
|
1,494
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at the end of the period
|
|
$
|
2,388
|
|
$
|
1,848
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
on account of change in accounting for uncertainties in income
taxes
|
|
$
|
-
|
|
$
|
6
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
Digital
Power Corporation ("the Company" or "DPC") was incorporated in 1969, under
the
General Corporation Law of the state of California. The Company has a
wholly-owned subsidiary, Digital Power Limited ("DPL"), located in the United
Kingdom. The Company and its subsidiary are currently engaged in the design,
manufacture, sale and distribution of switching power supplies and converters.
The Company has two reportable geographic segments - North America (sales
through DPC) and Europe (sales through DPL).
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
|
|
a.
|
The
significant accounting policies applied in the annual financial statements
of the Company as of December 31, 2007, are applied consistently
in these
financial statements. In addition, the following accounting policy
is
applied:
|
The
accompanying unaudited consolidated financial statements as of September 30,
2008, and for the nine months ended September 30, 2008 and 2007 are unaudited
and reflect all adjustments (consisting only of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation
of
the financial position and operating results for the interim periods. The
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto, together with
management's discussion and analysis of the financial condition and results
of
operations, contained in the Company Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2007. The results of operations for the nine months
ended September 30, 2008, are not necessarily indicative of the results for
the
entire fiscal year ending December 31, 2008.
|
b.
|
Accounting
for stock-based compensation:
|
The
Company has several stock-based employee compensation plans, which are described
more fully in Note 4. Effective January 1, 2006, the Company adopted the fair
value recognition provisions of FASB Statement No. 123(R), "Share-Based Payment"
("SFAS 123(R)"),
using the modified-prospective-transition method.
The
Company and its subsidiary apply SFAS 123 and Emerging Issues Task Force No.
96-18 "Accounting for Equity Instruments That are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF
96-18"), with respect to options issued to non-employees. SFAS 123 requires
use
of an option valuation model to measure the fair value of the options at the
grant date.
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
|
September
30,
2008
|
|
|
|
Unaudited
|
|
|
|
|
|
Raw
materials, parts and supplies
|
|
$
|
297
|
|
Work
in progress
|
|
|
239
|
|
Finished
products
|
|
|
1,055
|
|
|
|
|
|
|
|
|
$
|
1,591
|
|
NOTE
4:- |
ACCOUNTING
FOR STOCK BASED
COMPENSATION
|
|
1.
|
Under
the Company's stock option plans, options may be granted to employees,
officers, consultants, service providers and directors of the Company
or
its subsidiary.
|
|
2.
|
As
of September 30, 2008, the Company has authorized, by several Incentive
Share Option Plans, the grant of options to officers, management,
other
key employees and others of up to 2,272,000 of the Company's Common
shares. As of September 30, 2008, an aggregate of 895,870 of the
Company's
options are still available for future
grant.
|
|
3.
|
The
options granted generally become fully exercisable after four years
and
expire no later than 10 years from the approval date of the option
plan
under the terms of grant. Any options that are forfeited or cancelled
before expiration become available for future
grants.
|
A
summary
of the Company's employee share option activity (except options to consultants
and service providers) and related information is as follows:
|
|
Nine
months ended September 30, 2008
|
|
|
|
Amount
of
options
|
|
Weighted
average
exercise
price
|
|
Weighted
average remaining contractual term (years)
|
|
Aggregate
intrinsic
value
*)
|
|
Outstanding
at the beginning of the period
|
|
|
930,190
|
|
$
|
1.15
|
|
|
|
|
|
|
|
Granted
|
|
|
100,000
|
|
|
0.83
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(220,000
|
)
|
|
1.29
|
|
|
|
|
|
|
|
Expired
|
|
|
(31,155
|
)
|
$
|
2.31
|
|
|
|
|
|
|
|
Outstanding
at the end of the period
|
|
|
779,035
|
|
$
|
1.03
|
|
|
5.82
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
options at the end of the period
|
|
|
577,535
|
|
$
|
1.01
|
|
|
4.78
|
|
|
7
|
|
|
*)
|
Calculation
of aggregate intrinsic value is based on the share price of the Company's
Common stock as of September 30, 2008 ($0.71 per
share).
|
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
NOTE
4:-
|
ACCOUNTING
FOR STOCK BASED COMPENSATION
(Cont.)
|
Under
the
provisions of SFAS 123(R), the fair value of each option is estimated on the
date of grant using a Black-Scholes option valuation model that uses the
assumptions such as stock price on the date of the grant, exercise price,
risk-free interest rate, expected volatility, expected life and expected
dividend yield of the option. Because Black-Scholes option valuation models
incorporate various judgmental assumptions for inputs, as described above.
Expected volatility is based exclusively on historical volatility of the
entity's stock as allowed by SFAS 123(R). The Company uses historical
information with respect to the employee options exercised to estimate the
expected term of options granted, representing the period of time that options
granted are expected to be outstanding The risk-free interest rate of period
within the contractual life of the option is based on the U.S. Treasury yield
curve in effect at the time of grant.
Grants
for the nine months ended September 30, 2008:
Under
the
provisions of SFAS 123(R), the fair value of each option is estimated on the
date of grant using a Black-Scholes option valuation model that uses the
assumptions noted in the following table. Because Black-Scholes option valuation
models incorporate various judgmental assumptions for inputs, those assumptions
are disclosed. Expected volatility is based exclusively on historical volatility
of the entity's stock as allowed by SFAS 123(R). The Company uses historical
information with respect to the employee options exercised to estimate the
expected term of options granted, representing the period of time that options
granted are expected to be outstanding. The risk-free interest rate of period
within the contractual life of the option is based on the U.S. Treasury yield
curve in effect at the time of grant.
|
|
Nine
months ended
September
30, 2008
|
|
|
|
Unaudited
|
|
|
|
|
|
Expected
volatility
|
|
|
100.7%-101.7
|
%
|
Divided
Yield
|
|
|
0
|
%
|
Expected
life of up to (in years)
|
|
|
10
|
|
Risk
free interest rate
|
|
|
3.85
|
%
|
As
of
September 30, 2008, there was $ 169 of total unrecognized compensation cost
related to unvested share-based compensation arrangements granted under the
plan. That cost is expected to be recognized over a period of two years.
|
b.
|
Employee
Stock Ownership Plan:
|
The
Company has an Employee Stock Ownership Plan ("ESOP") covering eligible
employees. The ESOP provides for the Employee Stock Ownership Trust ("ESOT")
to
distribute shares of the Company's Common shares as retirement benefits to
the
participants. The Company has not distributed shares since 1998. As of September
30, 2008, the outstanding Common shares held by the ESOT amount to 167,504
shares.
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
NOTE
5:- NET
EARNINGS (LOSS) PER SHARE
The
following table sets forth the computation of the basic and diluted net earnings
(loss) per share:
|
|
Nine
months ended
September
30,
|
|
Three
months ended
September
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
Unaudited
|
|
Net
income (loss) available to Common
shareholders
|
|
$
|
416
|
|
$
|
(114
|
)
|
$
|
362
|
|
$
|
41
|
|
Denominator
for basic net earnings per share of weighted average number of Common
shares
|
|
|
6,615,708
|
|
|
6,610,708
|
|
|
6,615,708
|
|
|
6,610,708
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
96,154
|
|
|
-
|
|
|
42,439
|
|
|
284,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted net earnings per Common share
|
|
|
6,711,862
|
|
|
6,610,708
|
|
|
6,658,147
|
|
|
6,895,126
|
|
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
NOTE
6:-
|
SEGMENTS,
MAJOR CUSTOMERS AND GEOGRAPHIC
INFORMATION
|
The
Company has two reportable geographic segments, see Note 1 for a brief
description of the Company's business. The data is presented in accordance
with
Statement of Financial Accounting Standard No. 131, "Disclosure About
Segments of an Enterprise and Related Information" ("SFAS No.
131").
The
following data presents the revenues, expenditures and other operating data
of
the Company's geographic operating segments:
|
|
Nine
months ended September 30, 2008 (unaudited)
|
|
|
|
DPC
|
|
DPL
|
|
Eliminations
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,947
|
|
$
|
5,394
|
|
$
|
|
|
$
|
$9,341
|
|
Intersegment
revenues
|
|
|
234
|
|
|
5
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
4,181
|
|
$
|
5,399
|
|
$
|
(239
|
)
|
$
|
9,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
$
|
23
|
|
$
|
46
|
|
$
|
-
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(125
|
)
|
$
|
467
|
|
$
|
-
|
|
$
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
income, net
|
|
|
|
|
|
|
|
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(108
|
)
|
$
|
524
|
|
$
|
-
|
|
$
|
416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for segment assets,
net
as of September 30, 2008
|
|
$
|
4
|
|
$
|
86
|
|
$
|
-
|
|
$
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets as of
September
30, 2008
|
|
$
|
2,623
|
|
$
|
3,879
|
|
$
|
-
|
|
$
|
6,502
|
|
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share
data
NOTE
6:- |
SEGMENTS,
MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
(Cont.)
|
|
|
Nine
months ended September 30, 2007 (unaudited)
|
|
|
|
DPC
|
|
DPL
|
|
Eliminations
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,886
|
|
$
|
4,420
|
|
$
|
-
|
|
$
|
8,306
|
|
Intersegment
revenues
|
|
|
118
|
|
|
-
|
|
|
(118
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
4,004
|
|
$
|
4,420
|
|
$
|
(118
|
)
|
$
|
8,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
$
|
13
|
|
$
|
45
|
|
$
|
-
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(247
|
)
|
$
|
94
|
|
$
|
-
|
|
$
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
income, net and income taxes
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(218
|
)
|
$
|
104
|
|
$
|
-
|
|
$
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for segment assets as of September 30, 2007
|
|
$
|
-
|
|
$
|
31
|
|
$
|
-
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets as of September 30, 2007
|
|
$
|
2,680
|
|
$
|
3,351
|
|
$
|
-
|
|
$
|
6,031
|
|
|
|
Three
months ended September 30, 2008 (unaudited)
|
|
|
|
DPC
|
|
DPL
|
|
Eliminations
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,536
|
|
$
|
1,289
|
|
$
|
-
|
|
$
|
2,825
|
|
Intersegment
revenues
|
|
|
114
|
|
|
5
|
|
|
(119
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
1,650
|
|
$
|
1,294
|
|
$
|
(119
|
)
|
$
|
2,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
$
|
8
|
|
$
|
15
|
|
$
|
-
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
147
|
|
$
|
154
|
|
$
|
-
|
|
$
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
income, net
|
|
|
|
|
|
|
|
|
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
148
|
|
$
|
214
|
|
$
|
-
|
|
$
|
362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for segment assets as of September 30, 2008
|
|
$
|
4
|
|
$
|
55
|
|
$
|
-
|
|
$
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets as of September 30, 2008
|
|
$
|
2,623
|
|
$
|
3,879
|
|
$
|
-
|
|
$
|
6,502
|
|
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
NOTE
6:-
|
SEGMENTS,
MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
(Cont.)
|
|
|
Three
months ended September 30, 2007 (unaudited)
|
|
|
|
DPC
|
|
DPL
|
|
Eliminations
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,572
|
|
$
|
1,456
|
|
$
|
-
|
|
$
|
3,028
|
|
Intersegment
revenues
|
|
|
30
|
|
|
-
|
|
|
(30
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
1,602
|
|
$
|
1,456
|
|
$
|
(30
|
)
|
$
|
3,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
$
|
4
|
|
$
|
20
|
|
$
|
-
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(17
|
)
|
$
|
39
|
|
$
|
-
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
income, net and income taxes
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(7
|
)
|
$
|
48
|
|
$
|
-
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for segment assets as of September 30, 2007
|
|
$
|
-
|
|
$
|
6
|
|
$
|
-
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets as of September 30, 2007
|
|
$
|
2,680
|
|
$
|
3,351
|
|
$
|
-
|
|
$
|
6,031
|
|
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
|
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
quarterly report contains forward-looking statements regarding future events
and
our future results that are subject to the safe harbors created under the
Securities Act of 1933 and the Securities Exchange Act of 1934. All statements
other than statements of historical facts are statements that could be deemed
forward-looking statements. These statements are based on our expectations,
beliefs, forecasts, intentions and future strategies and are signified by the
words "expects," "anticipates," "intends," "believes" or similar language.
In
addition, any statements that refer to projections of our future financial
performance, our anticipated growth and trends in our business, and other
characterizations of future events or circumstances are forward-looking
statements. These forward-looking statements are only predictions and are
subject to risks, uncertainties, and assumptions that are difficult to predict,
including those identified below, under “Part II, Item 1A. Risk Factors” and
elsewhere in this report. Therefore, actual results may differ materially and
adversely from those expressed in any forward-looking statements. All
forward-looking statements included in this quarterly report are based on
information available to us on the date of this report and speak only as of
the
date hereof. We undertake no obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
In
this
quarterly report, the “Company,” “we,” “us” and “our” refer to Digital Power
Corporation, a California corporation, and our wholly-owned subsidiary, Digital
Power Limited.
GENERAL
We
are
engaged in the business of designing, developing, manufacturing, marketing
and
selling advanced switching power supplies solutions to the telecom, datacom,
industrial, medical and military industries. Revenues are generated from sales
to distributors and original equipment manufacturers (OEMs) in North America
and
Europe.
We
have
continued our efforts to develop advanced power products, to increase sales
to
existing and new customers, and to seek to manufacture our products in Asia
and
other strategic locations. While we believe our revenues have increased to
a
sufficient amount to offset our expenses, we may be subject to net losses in
any
individual quarter. We believe that our cash will be sufficient to fund any
losses for at least 12 months.
Our
corporate office, which contains our administrative, sales, and engineering
functions, is located in Fremont, California (“DPC”). In addition, we have a
wholly-owned subsidiary, Digital Power Limited (“DPL”), which is located in
Salisbury, United Kingdom and does business as Gresham Power Electronics. DPL
designs, manufactures and sells switching power supply products for the European
marketplace, including power conversion products for naval and military
applications and DC/AC inverters for the telecommunications
industry.
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2008, COMPARED TO SEPTEMBER 30,
2007
Revenues
Total
revenues for the Company decreased by 6.7% to $2,825,000 for the three months
ended September 30, 2008, from $3,028,000 for the three months ended September
30, 2007. The decrease in revenues is mainly due to decrease of sales of our
commercial products in Europe, partially offset by increase in sales of our
military products. Revenue from the military products of the Company increased
by 41.6% to $804,000 for the three months ended September 30, 2008, from
$568,000 for the three months ended September 30, 2007. Revenue from the
commercial products of the Company decreased by 17.9% to $2,021,000 from
$2,460,000 for the three months ended September 30, 2007. The increase in
military product revenues was primarily due to scheduling and lead-time
requirements of customer orders. The decrease in commercial product revenue
resulted primarily from the rescheduling of shipments by two of our larger
European customers, and was not reflective of a broad-based downturn in
business.
Revenues
from our U.S. operations decreased by 2.3% to $1,536,000 for the three months
ended September 30, 2008, from $1,572,000 for the three months ended September
30, 2007. Revenues from our European operations of DPL decreased by 11.5% to
$1,289,000 for the three months ended September 30, 2008, from $1,456,000 for
the three months ended September 30, 2007. The decreases in our revenues from
our U.S. and European operations are mainly attributed to a decrease in sales
of
our commercial products, partially offset by an increase in our military sales
as discussed above.
For
the
nine months ended September 30, 2008, our revenues increased by 12.5% to
$9,341,000, from $8,306,000 for the nine months ended September 30, 2007.
Revenues from our commercial products increased by 11.46% to $6,889,000 for
the
nine months ended September 30, 2008, from $6,181,000 for the nine months ended
September 30, 2007. Revenues from our military products increased by 15.39%
to
$2,452,000 for the nine months ended September 30, 2008, from $2,125,000 for
the
nine months ended September 30, 2007. The increase in revenues from our
commercial products was derived particularly from increased sales of our high
density product lines and products customized for particular customer
applications. The increase in revenues from our military products resulted
mainly from the scheduling and lead-time factors discussed above.
For
the
nine months ended September 30, 2008, revenues attributed to our U.S. operations
increased by 1.4% to $3,942,000, from $3,886,000 for the nine months ended
September 30, 2007. The increase in product revenue is mainly attributed to
an
increase in sales of our high density product lines and products customized
for
particular customer applications. Revenues from our European operations of
DPL
increased by 22.2% to $5,399,000 for the nine months ended September 30, 2008,
from $4,420,000 for the nine months ended September 30, 2007. The increase
in
revenues is mainly attributed to increases in sales of our commercial products,
as discussed above.
Gross
Margins
Gross
margins increased to 37.7% for the three months ended September 30, 2008,
compared to 26.1% for the three months ended September 30, 2007. Gross margins
for the nine months ended September 30, 2008 were 29.4% compared to the gross
margin of 25.6% for the nine months ended September 30, 2007. The higher gross
margins in 2008 were primarily attributable to the continued outsourcing of
our
production to Chinese contract manufacturers, cost reductions and variations
in
our product mix from quarter to quarter. In addition, we experienced a
significant increase in revenues from some of our mature
product lines, which contribute higher gross margins. Management believes
that the most important factor in the substantial increase in gross margins
was
our strategic shift earlier in 2008 away from a dependence upon commoditized
products to more integrated custom product solutions. This value-added platform
of solutions, where we work in concert with our strategic customers and their
partners, requires a more direct, consultative selling effort on our
part.
Management believes that some of this business may be of a seasonal nature
and
that it most likely will not signify similar increases in gross margin in the
future.
Engineering
and Product Development
Engineering
and product development expenses were $158,000, or 5.6% of revenues, for the
three months ended September 30, 2008, compared to $185,000, or 6.1% of revenues
for the three months ended September 30, 2007. The decrease was primarily due
to
lower salary and consulting expenses, including the cessation of consulting
fees. Engineering and product development expenses were $460,000, or 4.9% of
revenues, for the nine months ended September 30, 2008, compared to $587,000,
or
7.1% of revenues, for the nine months ended September 30, 2007. This decrease
was primarily due to the increase in revenues from quarter to quarter, coupled
with decreases in salary and consulting expenses described above.
Selling
and Marketing
Selling
and marketing expenses were $242,000, or 8.6% of revenues, for the three months
ended September 30, 2008, compared to $238,000, or 7.9% of revenues, for the
three months ended September 30, 2007. Selling and marketing expenses were
$702,000, or 7.5% of revenues, for the nine months ended September 30, 2008,
compared to $716,000, or 8.6% of revenues, for the nine months ended September
30, 2007. Selling and marketing expenses remained approximately the same level
in absolute dollars between comparable periods.
General
and Administrative
General
and administrative expenses were $364,000, or 12.9% of revenues, for the three
months ended September 30, 2008, compared to $345,000, or 11.4% or revenues,
for
the three months ended September 30, 2007. General and administrative expenses
were $1,243,000, or 13.3% of revenues, for the nine months ended September
30,
2008, compared to $979,000, or 11.8% or revenues, for the nine months ended
September 30, 2007. Expenditures increased in the first nine months of 2008
due
primarily to the accrual of liabilities in relation to the separation agreement
with our former President and Chief Executive Officer.
Financial
Income
Financial
income was $62,000 for the three months ended September 30, 2008, compared
to
financial income of $7,000 for the three months ended September 30, 2007.
Financial income was $74,000 for the nine months ended September 30, 2008,
compared to financial income of $36,000 for the nine months ended September
30,
2007. The increase in financial income was due to foreign currency fluctuations
during the respective periods.
Net
Income (Loss)
For
the
three months ended September 30, 2008, we had net income of $362,000, or 12.8%
of revenues, compared to a net income of $41,000, or 1.4% of revenues, for
the
three months ended September 30, 2007. The increase in net income in 2008 is
due
to primarily a significant increase in gross margins. Net income for the nine
months ended September 30, 2008 was $416,000, or 4.5% of revenues, compared
to a
net loss of $114,000 for the nine months ended September 30, 2007. The increase
in net income in 2008 is primarily due to an increase in revenues and an
increase in gross margin, partially offset by higher operating
expenses.
LIQUIDITY
AND CAPITAL RESOURCES
On
September 30, 2008, we had cash and cash equivalents of $2,388,000 and working
capital of $3,780,000. This compares with cash and cash equivalents of
$1,848,000 and working capital of $3,384,000 at September 30, 2007. The increase
in working capital is mainly due to an increase in cash, and decreases in
accounts payable and related parties payables, offset partially by a decrease
in
accounts receivable and an increase in deferred revenue and other current
liabilities.
Cash
provided by operating activities totaled $1,162,000 for the nine months ended
September 30, 2008, compared to cash provided by operating activities of
$332,000 for the nine months ended September 30, 2007. The increase in cash
flow
from operating activities in 2008 was mainly due to an increase in net income
and a decrease in trade receivables, offset partially by decreases in accounts
payable and related parties trade payables.
Net
cash
used in investing activities was $64,000 for the nine months ended September
30,
2008, compared to net cash used in investing activities of $31,000 for the
nine
months ended September 30, 2007. We believe we have adequate resources at this
time to continue our operational and promotional efforts to increase sales
in
the electronic industry market. However, if we do not meet those goals, we
may
have to raise money through debts or equity, which may dilute shareholder's
equity.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Not
included for a smaller business issuer.
ITEM
4T.
|
DISCLOSURE
CONTROLS AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Our
Chief
Executive Officer and our Chief Financial Officer, after evaluating our
disclosure controls and procedures (as defined in the rules and regulations
of
the Securities and Exchange Commission under the Securities Exchange Act of
1934
(the "Exchange Act")) as of the end of the period covered by this quarterly
report, have concluded that as of such date, our disclosure controls and
procedures were effective to ensure that information we are required to disclose
in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
Changes
in Internal Controls over Financial Reporting
During
the period covered by this quarterly report, there were no significant changes
in our internal controls over financial reporting or in other factors that
have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
PART
II. OTHER INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
See
our
disclosures under “Legal Proceedings” in our Form 10-KSB filed March 31, 2008
and our Form 10-Q filed May 15, 2008. There have been no material developments
in those proceedings since those respective filings.
The
risk
factors listed in this section provide examples of risks, uncertainties and
events that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements. Readers should
be
aware that the occurrence of any of the events described in these risk factors
could have a material and adverse effect on our business, results of operations
and financial condition. We undertake no obligation to update or revise publicly
any forward-looking statements, whether as a result of new information, future
events, or otherwise.
Although
we experienced an operating profit during the nine month period ended September
30, 2008, we have historically experienced net losses and may experience net
losses in the future.
For
the
nine months ended September 30, 2008, we had an operating profit of $300,000.
We
had similar operating profits for the years ended December 31, 2007 and 2006.
Although we have actively taken steps to reduce our costs, we could incur losses
in the future until we increase revenues through the sale of current products
and decrease manufacturing costs through a greater use of contract manufacturers
in Asia and other strategic locations.
If
our new development efforts fail to result in products which meet our customers’
needs, or if our customers fail to accept our new products, our revenues will
be
adversely affected.
We
have
recently introduced on a limited basis our high density products. The successful
development, introduction and commercial success of reaching new market segments
providing advanced power products and introducing new products will depend
on a
number of factors, including our ability to meet customer requirements, the
existence of competitive products in the market, our ability to meet product
cost targets generating acceptable margins, timely remediation of product
performance issues, if any, identified during testing, product performance
at
customer locations, differentiation of our product from our competitors’
products, and management of customer expectations concerning product
capabilities and life cycles.
We
depend upon a few major customers for a majority of our revenues, and the loss
of any of these customers, or the substantial reduction in the products that
they purchase from us, would significantly reduce our revenues and net
income.
We
currently depend upon a few major OEMs and other customers for a significant
portion of our revenues and we expect to continue to derive a significant
portion of our revenues from a limited number of customers in the future. The
loss of any of these customers or a substantial reduction in the products that
they purchase from us would significantly reduce our revenues and net income.
Furthermore, diversions in the capital spending of certain of these customers
to
new network elements have and could continue to lead to their reduced demand
for
our products, which could in turn have a material adverse effect on our business
and results of operation. If the financial condition of one or more of our
major
customers should deteriorate, or if they have difficulty acquiring investment
capital due to any of these or other factors, a substantial decrease in our
revenues would likely result. Failure of our development efforts could adversely
affect our operations, revenues and growth.
We
are dependent on the electronic equipment and telecommunications
industries.
Substantially
all of our existing customers are in the electronic equipment and
telecommunications industries, and they manufacture products that are subject
to
rapid technological change, obsolescence, and large fluctuations in demand.
These industries are further characterized by intense competition. The OEMs
serving these markets are pressured for increased product performance and lower
product prices. OEMs, in turn, make similar demands on their suppliers, such
as
us, for increased product performance and lower prices. The telecommunication
industry is inherently volatile. Recently, certain segments of the
telecommunication and other electronic industries have experienced a significant
softening in product demand. Such lower demand may affect our customers, in
which case the demand for our products may decline and our growth could be
adversely affected.
Revenues
derived from sales of our military products are subject to military planning,
strategies and funding by U.S. and European governments and could be adversely
affected by changing government policies.
We
in
part rely on sales to customers who do business with U.S. and European
governments. Reduced funding by these governments for ongoing defense
procurement and research and development programs could result in cancelled
or
delayed contracts or lower sales of military products, all of which could
adversely affect our operations, cash flow and ability to grow.
Our
operating results may vary from quarter to quarter.
Our
operating results have in the past been subject to quarter to quarter
fluctuations, and we expect that these fluctuations will continue, and may
increase in magnitude, in future periods. Demand for our products is driven
by
many factors, including the availability of funding for our products in
customers’ budgets. There is a trend for some of our customers to place large
orders near the end of a quarter or fiscal year, in part to spend remaining
available budget funds. Seasonal fluctuations in customer demand for our
products driven by budgetary and other reasons can create corresponding
fluctuations in period-to-period revenues, and we therefore cannot assure you
that our results in one period are necessarily indicative of our revenues in
any
future period. In addition, the number and timing of large individual sales
and
the ability to obtain acceptances of those sales, where applicable, has been
difficult for us to predict, and large individual sales have, in some cases,
occurred in quarters subsequent to those we anticipated, or have not occurred
at
all. The loss or deferral of one or more significant sales in a quarter could
harm our operating results. It is possible that in some quarters our operating
results will be below the expectations of public market analysts or investors.
In such events, or in the event adverse conditions prevail, the market price
of
our common stock may decline significantly.
We
depend on Telkoor Telecom Ltd to design and manufacture many of our
products.
We
depend
on Telkoor Telecom Ltd. ("Telkoor"), our largest shareholder and one of our
third party subcontractors, for design and manufacturing capabilities for many
of the products which we sell. If Telkoor is unable or unwilling to continue
designing or manufacturing our products in required volumes on a timely basis,
that could lead to loss of sales, and adversely affect our operating results
and
cash position. We also depend on Telkoor's intellectual property and ability
to
transfer production to third party manufacturers. Failure to obtain new products
in a timely manner or delay in delivery of product to customers will have an
adverse effect on our ability to meet our customers’ expectations. In addition,
we operate in highly competitive markets where our ability to sell Telkoor’s
products could be adversely affected by long lead-times and the high costs
of
Telkoor’s products. Telkoor’s principal offices, research and development and
manufacturing facilities are located in Israel. . Political, economic, and
military conditions in Israel directly affect Telkoor’s operations. To the
extent that we depend on Telkoor, we could be adversely affected by any major
hostilities involving Israel, the interruption or curtailment of trade between
Israel and its trading partners, a significant increase in inflation, or a
significant downturn in the economic or financial conditions of Israel.
Our
reliance on third parties to manufacture certain aspects of our products
involves risks, including delays in product shipments and reduced control over
product quality.
Since
we
do not own significant manufacturing facilities, we must rely on, and will
continue to rely on, a limited number of outside parties to manufacture parts,
components, and equipment. Our reliance upon such third party contractors
involve several risks, including reduced control over manufacturing costs,
delivery times, reliability, quality of components, unfavorable currency
exchange fluctuations, and continued inflationary pressures on many of the
raw
materials used in the manufacturing of our products. If we were to encounter
a
shortage of key manufacturing components from limited sources of supply, or
experience manufacturing delays caused by reduced manufacturing capacity,
inability of our contract manufacturers to procure raw materials, the loss
of
key assembly subcontractors, difficulties associated with the transition to
our
new contract manufacturers or other factors, we could experience lost revenues,
increased costs, delays in, cancellations or rescheduling of orders or
shipments, any of which would materially harm our business.
We
face intense industry competition, price erosion and product obsolescence,
which, in turn, could reduce our profitability.
We
operate in an industry that is generally characterized by intense competition.
We believe that the principal bases of competition in our markets are breadth
of
product line, quality of products, stability, reliability and reputation of
the
provider, along with cost. Quantity discounts, price erosion, and rapid product
obsolescence due to technological improvements are therefore common in our
industry as competitors strive to retain or expand market share. Product
obsolescence can lead to increases in unsaleable inventory that may need to
be
written off and therefore could reduce our profitability. Similarly, price
erosion can reduce our profitability by decreasing our revenues and our gross
margins. In fact, we have seen price erosion over the last several years on
most
of the products we sell, and we have factored additional price erosion into
our
forecasts.
Sales
of our mature
products may continue to constitute a meaningful portion of our revenues.
A
large
portion of our sales have historically been attributable to our mature
product line. We expect that these products may continue to account
for a
meaningful percentage of our revenues for the foreseeable future, but may also
fluctuate from quarter to quarter. Our ability to maintain or increase revenues
will be dependent on our ability to expand our customer base and maintain
consistent sales of our mature products while successfully developing,
introducing and selling new products.
The
sale of our products is dependent on our ability to respond to rapid
technological change, including evolving industry-wide standards, and may be
adversely affected by the development, and acceptance by our customers, of
new
technologies which may compete with or reduce the demand for our products.
Rapid
technological change, including evolving industry standards, could render our
products obsolete. To the extent our customers adopt such new technology in
place of our products, the sales of our products may be adversely affected.
Such
competition may also increase pricing pressure for our products and adversely
affect the revenues from such products.
The
sale of our products is dependent upon our ability to satisfy the proprietary
requirements of our customers.
We
depend
upon a relatively narrow range of products for the majority of our revenue.
Our
success in marketing our products is dependent upon their continued acceptance
by our customers. In some cases, our customers require that our products meet
their own proprietary requirements. If we are unable to satisfy such
requirements, or forecast and adapt to changes in such requirements, our
business could be materially harmed.
If
we are unable to satisfy our customers’ specific product quality, certification
or network requirements, our business could be disrupted and our financial
condition could be harmed.
Our
customers demand that our products meet stringent quality, performance and
reliability standards. We have, from time to time, experienced problems in
satisfying such standards. Defects or failures have in the past, and may in
the
future occur relating to our product quality, performance and reliability.
From
time to time, our customers also require us to implement specific changes to
our
products to allow these products to operate within their specific network
configurations. If we are unable to remedy these failures or defects or if
we
cannot affect such required product modifications, we could experience lost
revenues, increased costs, including inventory write-offs, warranty expense
and
costs associated with customer support, delays in or cancellations or
rescheduling of orders or shipments and product returns or discounts, any of
which would harm our business.
If
we ship products that contain defects, the market acceptance of our products
and
our reputation will be harmed and our customers could seek to recover their
damages from us.
Our
products are complex, and despite extensive testing, may contain defects or
undetected errors or failures that may become apparent only after our products
have been shipped to our customers and installed in their network or after
product features or new versions are released. Any such defect, error or failure
could result in failure of market acceptance of our products or damage to our
reputation or relations with our customers, resulting in substantial costs
for
us and our customers as well as the cancellation of orders, warranty costs
and
product returns. In addition, any defects, errors, misuse of our products or
other potential problems within or out of our control that may arise from the
use of our products could result in financial or other damages to our customers.
Our customers could seek to have us pay for these losses. Although we maintain
product liability insurance, it may not be adequate.
Our
future results are dependent on our ability to establish, maintain and expand
our distribution channels and our existing third-party distributor
relationships.
We
market
and sell our products through domestic and international OEM relationships.
Our
future results are dependent on our ability to establish, maintain and expand
third party relationships with OEM as well as other marketing and sales
distribution channels. If, however, the third parties with whom we have entered
into such OEM and other arrangements should fail to meet their contractual
obligations, cease doing, or reduce the amount of their business with us or
otherwise fail to meet their own performance objectives, customer demand for
our
products could be adversely affected, which would have an adverse effect on
our
revenues.
We
may not be able to procure necessary key components for our products, or we
may
purchase too much inventory or the wrong inventory.
The
power
supply industry, and the electronics industry as a whole, can be subject to
business cycles. During periods of growth, key components required to build
our
products may become unavailable in the timeframe required for us to meet our
customers’ demands. Our inability to secure sufficient components to build
products for our customers could negatively impact our sales and operating
results. We may choose to mitigate this risk by increasing the levels of
inventory for certain key components. Increased inventory levels can increase
the potential risk for excess and obsolescence should our forecasts fail to
materialize or if there are negative factors impacting our customers’ end
markets. If we purchase too much inventory or the wrong inventory, we may have
to record additional inventory reserves or write-off the inventory, which could
have a material adverse effect on our gross margins and on our results of
operations.
We
depend on international sales for a portion of our revenues.
Sales
to
customers outside of North America accounted for 61.3% of net revenues during
the nine months ended September 30, 2008, and we expect that international
sales
will continue to represent a material portion of our total revenues.
International sales are subject to the risks described above as well as
generally longer payment cycles, greater difficulty collecting accounts
receivable, and currency restrictions. We also have a wholly-owned foreign
subsidiary, Digital Power Ltd., doing business as Gresham Power Electronics,
in
the United Kingdom, to support European and other international customers,
distributors, and sales representatives, which is subject to local regulation.
In addition, international sales are subject to the export laws and regulations
of the United States and other countries.
We
are subject to certain governmental regulatory restrictions relating to our
international sales.
Some
of
our products are subject to ITAR (International Trafficking and Arms
Regulations), which is administered by the U.S. Department of State. ITAR
controls not only the export of certain products specifically designed,
modified, configured or adapted for military systems, but also the export of
related technical data and defense services as well as foreign production.
We
recently participated in the U.S. government’s voluntary disclosure program to
notify the government of potential export compliance issues that we discovered
and to take corrective actions to ensure that we obtain required export licenses
and to otherwise comply with ITAR. We have taken such corrective actions and
believe that we now have the necessary licenses for any exports subject to
the
ITAR. However, if the corrective actions were to fail or be ineffective for
a
prolonged period of time or if the process of obtaining required export licenses
for products subject to the ITAR is delayed, it could have a materially adverse
effect on our business, financial condition, and/or operating results. Changes
in United States export laws that require us to obtain additional export
licenses or delays in obtaining export licenses currently being sought sometimes
cause significant shipment delays and, if such delays are too great, could
result in the cancellation of orders. Any future restrictions or charges imposed
by the United States or any other country on our international sales or foreign
subsidiary could have a materially adverse effect on our business, financial
condition, and/or operating results. In addition, from time to time, we have
entered into contracts with the Israeli Ministry of Defense which were funded
with monies subject to, and we therefore were required to comply with the
regulations governing, the U.S. Foreign Military Financing program.
We
depend on international operations for a substantial majority of our components
and products.
We
purchase a substantial majority of our components from foreign manufacturers
and
have a substantial majority of our commercial products assembled, packaged,
and
tested by subcontractors located outside the United States. These activities
are
subject to the uncertainties associated with international business operations,
including trade barriers and other restrictions, changes in trade policies,
governmental regulations, currency exchange fluctuations, reduced protection
for
intellectual property, war and other military activities, terrorism, changes
in
social, political, or economic conditions, and other disruptions or delays
in
production or shipments, any of which could have a materially adverse effect
on
our business, financial condition, and/or operating results.
We
are dependent upon our ability to attract, retain and motivate our key
personnel.
Our
success depends on our ability to attract, retain and motivate our key
management personnel, including our CEO and CFO, and key engineers, necessary
to
implement our business plan and to grow our business. Despite the adverse
economic conditions of the past several years, competition for certain specific
technical and management skill sets is intense. If we are unable to identify
and
hire the personnel that we need to succeed, or if one or more of our present
key
employees were to cease to be associated with us, our future results could
be
adversely affected. Furthermore, we have recently experienced a number of
changes in our senior management positions, both as part of restructuring
initiatives and otherwise. Although we believe we have taken appropriate
measures to address the impact of these changes, there is the risk that such
changes could impact our business, which could negatively affect operating
results.
Our
limited ability to protect our proprietary information and technology may
adversely affect our ability to compete, and our products could infringe upon
the intellectual property rights of others, resulting in claims against us
the
results of which could be costly.
Many
of
our products consist entirely or partly of proprietary technology owned by
us.
Although we seek to protect our technology through a combination of copyrights,
trade secret laws, contractual obligations and patents, these protections may
not be sufficient to prevent the wrongful appropriation of our intellectual
property, nor will they prevent our competitors from independently developing
technologies that are substantially equivalent or superior to our proprietary
technology. In addition, the laws of some foreign countries do not protect
our
proprietary rights to the same extent as the laws of the United States. In
order
to defend our proprietary rights in the technology utilized in our products
from
third party infringement, we may be required to institute legal proceedings.
If
we are unable to successfully assert and defend our proprietary rights in the
technology utilized in our products, our future results could be adversely
affected.
Although
we attempt to avoid infringing known proprietary rights of third parties in
our
product development efforts, we may become subject to legal proceedings and
claims for alleged infringement from time to time in the ordinary course of
business. Any claims relating to the infringement of third-party proprietary
rights, even if not meritorious, could result in costly litigation, divert
management’s attention and resources, require us to reengineer or cease sales of
our products or require us to enter into royalty or license agreements which
are
not advantageous to us. In addition, parties making claims may be able to obtain
an injunction, which could prevent us from selling our products in the United
States or abroad.
If
our accounting controls and procedures are circumvented or otherwise fail to
achieve their intended purposes, our business could be seriously harmed.
We
evaluate our disclosure controls and procedures as of the end of each fiscal
quarter, and are annually reviewing and evaluating our internal controls over
financial reporting in order to comply with SEC rules relating to internal
control over financial reporting adopted pursuant to the Sarbanes-Oxley Act
of
2002. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate. If we
fail
to maintain effective internal control over financial reporting or our
management does not timely assess the adequacy of such internal control, we
may
be subject to regulatory sanctions and our reputation may decline.
Our
common stock price is volatile.
Our
common stock is listed on the American Stock Exchange and is thinly traded.
In
the past, our trading price has fluctuated widely, depending on many factors
that may have little to do with our operations or business prospects. Further,
the exercise of outstanding options and warrants may adversely affect our stock
price and a shareholder’s percentage of ownership.
As
of
September 30, 2008, we had outstanding employees’ options to purchase 779,035
shares of common stock, with a weighted average exercise price of $1.03,
exercisable at prices ranging from $0.48 to $2.38 per share, and consultants’
and service providers’ options and warrants to purchase 180,000 shares of common
shares, with a weighted average exercise price of $1.09, exercisable at prices
ranging from $0.55 to $1.19.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
None.
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
ITEM
5.
|
OTHER
INFORMATION
|
None.
Exhibits
|
31.1 |
Certification
of the CEO under the Sarbanes-Oxley
Act
|
|
31.2 |
Certification
of the CFO under the Sarbanes-Oxley
Act
|
|
32 |
Certification
of the CEO & CFO under the Sarbanes-Oxley Act
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated:
November 14, 2008
Digital
Power Corporation
By: /s/
Amos
Kohn
Amos
Kohn
President
& Chief Executive Officer
(Principal
Executive Officer)
By: /s/
Uri
Friedlander
Uri
Friedlander
Chief
Financial Officer
(Principal
Financial and Accounting Officer)