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 a
solution-driven organization that designs, develops, manufactures and sells
cutting-edge high-grade power system solutions to military/defense,
telecom/datacom, industrial and medical industries. We are highly
focused on custom product designs for both the commercial and military/defense
markets, where customers demand high density, high efficiency and ruggedized
products to meet the harshest operating conditions. We are a
California corporation originally formed in 1969, and our common stock trades on
the NYSE Amex under the symbol “DPW”. Our corporate
headquarters is located in the heart of the Silicon Valley.
We also
have a wholly-owned subsidiary, Digital Power Limited ("DPL"), which operates
under the brand name of “Gresham Power Electronics”
(“Gresham”). Gresham is located in Salisbury, England, and designs,
manufactures, sells and distributes power products and system solutions for the
European marketplace, including power conversion products for naval and military
applications and DC/AC inverters for the telecommunications
industry
We
believe that we are one of the first companies in the power systems solutions
industry to introduce a product strategy based on the premise that products
developed with an extremely flexible architecture enable rapid modifications to
meet unique customer requirements for non-standard output voltages. The
development and implementation of this strategy has resulted in broad acceptance
in both the telecom/industrial and medical market segments for our new line of
high density and high efficiency power products. These products set an industry
standard for providing high power output in package sizes that are smaller than
any other commercially available product.
We market
and sell our products to many diverse market segments including the telecom,
industrial, medical and military/defense industries. Our products
serve a global market, with an emphasis on North America and
Europe. We have an extremely broad product offering including Custom
and Modified-Standard, Open-Frame, CompactPCI, ATSC Front-Ends and Power Over
Ethernet (PoE), providing power output from 50 watts to 25,000
watts.
In an
effort to provide short lead-times, high quality products and competitive prices
to support our markets, we have entered into production agreements with numerous
manufacturers located in Asia. These contract manufacturing (CM) agreements
allow us to control production costs and insure high quality products
deliverable in a timely matter to meet market demand.
We intend
to remain an innovative leader in the development of cutting-edge custom power
solutions, rugged power systems to meet harsh and extreme environmental
requirements, and high performance, high density and modular power
systems. We are focusing today on developing even more
high-grade custom power system solutions to numerous customers in a broadly
diversified range of markets and challenging environments. Each product
development is based on best of class performance criteria, including unique,
advanced feature sets and a special layout to meet each of our customers’ unique
operating conditions where efficiency, size and time to market are key to their
success. We intend to release these efforts to production within the
next two to three quarters. Further, we believe that all of these new
designs will have a near-term demand, as each of them is a full custom solution
for industry leaders. Our customers’ requirements for these new designs are
similarly advanced and challenging, as they will serve as the foundation for
leading edge products for mobile, medical, telecom and defense
industries. Examples of current custom design projects include
a medical mobile oxygen concentrator to provide unparalleled freedom for the
active oxygen user, next generation digital video encoder systems and an optical
fiber network distribution system. More recently, we have been
awarded a contract to develop and manufacture a custom, advanced power solution
for a leading provider of video delivery solutions to broadcast, cable,
satellite, IPTV and mobile service providers worldwide. Digital Power
will provide this product for the customer’s next generation, scalable, content
ingest platform for storage and streaming solutions for video-on-demand and
high-speed data network architectures. We are also exploring innovative “green
power” solutions that will complement our current product lines.
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED MARCH 31, 2009, COMPARED TO MARCH 31, 2008
Our
financial results for the first quarter of 2009 reflected the significance of
our decision to focus on developing high-grade custom power solutions while
continuing our cost reduction efforts. The resulting improvement in
our gross margins (an increase to 38.5% for the three months ended March 31,
2009, compared to 26.0% for the comparable period in 2008) resulted in a
respectable net income for the first quarter in spite of the revenue shortfall
caused by the global recession.
Revenues
Total
revenues decreased by 23.6% to $2,421,000 for the three months ended March 31,
2009, from $3,169,000 for the three months ended March 31, 2008. The
decrease in revenues is mainly due to a decline in sales of our standard
commercial products as a result of the global recession, partially offset by an
increase in sales of our military products. Revenue from our military products
increased by 16.0% to $784,000 for the three months ended March 31, 2009, from
$676,000 for the three months ended March 31, 2008. Revenue from our commercial
products decreased by 34.3% to $1,637,000 for the three months ended March 31,
2009, from $2,493,000 for the three months ended March 31, 2008. The increase in
military product revenues was primarily due to scheduling and lead-time
requirements of customer orders. As set forth above, the decrease in commercial
product revenue resulted primarily from the broad-based global economic
downturn.
Revenues
from our U.S. operations decreased by 3.5% to $1,108,000 for the three months
ended March 31, 2009, from $1,149,000 for the three months ended March 31, 2008.
Revenues from our European operations of DPL decreased by 35.1% to $1,313,000
for the three months ended March 31, 2009, from $2,020,000 for the three months
ended March 31, 2008. The decreases in our revenues from our U.S. and European
operations are mainly attributed to a decrease in sales of our standard
commercial products, partially offset by an increase in our military sales as
discussed above. To lessen any potential impact of the ongoing global economic
downturn, we have implemented a new strategy to extend our distribution network
to cover numerous new market segments, such as alternative energy. In
addition, we are continuing to expand our focus on full custom power solutions,
which enable us to collaborate more closely with our customers and therefore
anticipate the timing of design cycles, shipments and other customer
requirements.
Gross
Margins
Gross margins increased to 38.5% for
the three months ended March 31, 2009, compared to 26.0% for the three months
ended March 31, 2008. The higher gross margins in 2009 were primarily
attributable to the continued outsourcing of our production to contract
manufacturers in Asia, cost reductions and variations in our product mix from
quarter to quarter. We believe that another significant factor in the
substantial increase in gross margins was our strategic shift, which began 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. We
believe that some of this business may be of a seasonal nature, however, 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 $136,000, or 5.6% of revenues, for the
three months ended March 31, 2009, compared to $160,000, or 5.1% of revenues,
for the three months ended March 31, 2008. The decrease was primarily
due to lower consulting expenses as well as to our adoption of a modified
product development cost structure for several of our custom power system
solution customers. This cost structure provides for a payment
schedule from the customer that will in turn fund our development costs for that
customer’s project.
Selling
and Marketing
Selling
and marketing expenses were $319,000, or 13.2% of revenues, for the three months
ended March 31, 2009, compared to $270,000, or 8.5% of revenues, for the three
months ended March 31, 2008. Actual dollar expenditures increased by
$49,000 in 2009, mainly due to an increase in travel and
advertising.
General
and Administrative
General
and administrative expenses were $334,000, or 13.8% of revenues, for the three
months ended March 31, 2009, compared to $559,000, or 17.6% or revenues, for the
three months ended March 31, 2008. The comparative decrease in expenditures for
the first quarter of 2009 is mainly due to the accrual of liabilities in the
first quarter of 2008 in relation to the separation agreement with our former
President and Chief Executive Officer.
Financial
Income
Financial
income was $27,000 for the three months ended March 31, 2009, compared to $4,000
for the three months ended March 31, 2008. The increase in financial income was
due to foreign currency fluctuations during the respective periods and changes
in the fair value of forward contracts. From time to time, we enter
into forward contracts to hedge certain sales transactions which are denominated
in foreign currencies.
Net
Income (Loss)
For the
three months ended March 31, 2009, we had net income of $169,000, or 7.0% of
revenues, compared to a net loss of $161,000, or 5.1% of revenues, for the three
months ended March 31, 2008. The increase in net income is due to primarily a
significant increase in gross margins.
LIQUIDITY
AND CAPITAL RESOURCES
On March
31, 2009, we had cash and cash equivalents and restricted cash of $1,828,000 and
working capital of $3,594,000. This compares with cash and cash
equivalents of $1,621,000 and working capital of $3,417,000 at March 31,
2008. The increase in working capital in 2009 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 used
by operating activities totaled $727,000 for the three months ended March 31,
2009, compared to cash provided by operating activities of $52,000 for the three
months ended March 30, 2008. The decrease in cash flow from operating
activities in 2009 was mainly due to a decrease in accounts payable and related
parties trade payables (due to the timing of certain payments to vendors),
offset partially by increase in net income.
Net cash
used in investing activities was $17,000 for the three months ended March 31,
2009, compared to net cash provided by investing activities of $18,000 for the
three months ended March 31, 2008. In 2008, cash provided by
investing activities was due to proceeds received from our landlord for
leasehold improvements completed and expensed during the prior quarter in our
new location in Fremont, California. In 2009, cash was used to
purchase certain property and equipment.
No cash
was provided by or used in financing activities in either of the three-month
periods ended March 31, 2009 or March 31, 2008.
Our
liquidity will be affected by many factors, some of which are based on normal
ongoing operations of our business and some of which arise from fluctuations
related to global economics and markets. As evidenced by the recent turmoil in
the financial markets, credit has tightened. We are reviewing our
liabilities and capital structure to minimize any impact, and will pursue a
strategy to mitigate any reductions in cash flow as a result of an economic
slowdown by reducing capital expenditures and other discretionary
spending. We currently believe that our existing cash balances,
together with anticipated cash flows from operations, will be sufficient to fund
our operations through at least the next twelve months..
CRITICAL
ACCOUNTING POLICIES
In our
Annual Report on Form 10-K for the year ended December 31, 2008, we
identified the critical accounting policies which affect our more significant
estimates and assumptions used in preparing our consolidated financial
statements. The basis for developing the estimates and assumptions within
our critical accounting policies is based on historical information and known
current trends and factors. The estimates and assumptions are evaluated on
an ongoing basis and actual results have been within our expectations. We
have not changed these policies from those previously disclosed in our Annual
Report.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Not
applicable for a smaller reporting company.
ITEM
4T.
|
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 Annual Report on Form 10-K, filed
March 31, 2009. There have been no material developments in those proceedings
since that filing.
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 operating income during the quarter ended March 31, 2009 and the
year ended December 31, 2008, we have historically experienced net losses and
may experience net losses in the future.
For the
quarter ended March 31, 2009, we had operating income of $142,000, compared to
an operating loss of $165,000 for the quarter ended March 31,
2008. For the year ended December 31, 2008, we had
operating income of $391,000. 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.
We
depend on Telkoor to design and manufacture many of our products.
We depend
on 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.
Our strategic focus on our custom
power supply solution competencies and concurrent cost reduction plans may be
ineffective or may limit our ability to compete.
As a
result of our strategic focus on custom power supply solutions, we will continue
to devote significant resources to developing custom products for a large number
of customers, where each product represents a uniquely tailored solution for a
specific customer’s requirements. A failure to meet these customer
product requirements or a failure to meet production schedules and/or product
quality standards may put us at risk with one or more of these
customers. The loss of one or more of our significant custom power
supply solution customers could have a material adverse impact on our revenues,
business or financial condition.
We have
also implemented a series of initiatives designed to increase efficiency and
reduce costs. While we believe that these actions will reduce costs,
they may not be sufficient to achieve the required operational efficiencies that
will enable us to respond more quickly to changes in the market or result in the
improvements in our business that we anticipate. In such event, we may be forced
to take additional cost-reducing initiatives, which may negatively impact
quarterly earnings and profitability as we account for severance and other
related costs. In addition, there is the risk that such measures could have
long-term effects on our business by reducing our pool of talent, decreasing or
slowing improvements in our products or services, making it more difficult for
us to respond to customers, limiting our ability to increase production quickly
if and when the demand for our solutions increases and limiting our ability to
hire and retain key personnel. These circumstances could cause our earnings to
be lower than they otherwise might be.
If our new custom products
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 a new strategy of developing multiple custom product
designs. The successful development, introduction and commercial success of this
new technology will depend on a number of factors, including our ability to meet
customer requirements, our ability to meet all product criteria, successful
transition from development stage to production stage, 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. If we fail to accomplish all of
the above, our business could be materially and adversely affected.
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 but not limited to our CEO and CFO, controller,
sales force, and key engineers, necessary to implement our business plan and to
grow our business. Despite the adverse economic conditions at this time and
occurring over 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.
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 quantity of 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. Because of the global economic downturn, we have
already experienced the reduction of orders by OEMs and the reduction or
cancellation of orders, scaling back of certain activities and workforce layoffs
by other customers. The loss of any of these customers or a
substantial reduction in the quantity of 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 affect 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.
We
are dependent on the electronic equipment industry, and accordingly will be
affected by the impact on that industry of the current economic
downturn.
Substantially
all of our existing customers are in the electronic equipment industry and they
manufacture products that are subject to rapid technological change,
obsolescence, and large fluctuations in demand. This industry is
further characterized by intense competition and volatility. The OEMs
serving this industry 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 current economic downturn has affected the entire supply
chain, including us. Recently, certain segments of the electronic
industry 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.
Our
reliance on subcontract manufacturers 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 subcontract manufacturers to
manufacture our power supply products. Our reliance upon such subcontract
manufacturers involves 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 power supply
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 subcontract manufacturers to
procure raw materials, the loss of key assembly subcontractors, difficulties
associated with the transition to our new subcontract 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.
Our future results are dependent on
our ability to establish, maintain and expand our OEM relationships and our
other distribution channels.
We market
and sell our products through domestic and international OEM relationships and
other distribution channels. Our future results are dependent on our ability to
establish, maintain and expand our relationships with OEMs as well as with 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 sales of our legacy
products for a meaningful portion of our revenues, but these products are mature
and their sales will continue to decline.
A large
portion of our sales have historically been attributable to our legacy products.
We expect that these products may continue to account for a meaningful
percentage of our revenues for the foreseeable future. However, these sales are
declining. Although we are unable to predict future prices for our legacy
products, we expect that prices for these products will continue to be subject
to significant downward pressure in certain markets for the reasons described
above. Accordingly, our ability to maintain or increase revenues will be
dependent on our ability to expand our customer base, increase unit sales
volumes of these products and to successfully, develop, introduce and sell new
products such as custom design and value added products. We cannot assure you
that we will be able to expand our customer base, increase unit sales volumes of
existing products or develop, introduce and/or sell new products.
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’ capital 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 capital 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
are subject to certain governmental regulatory restrictions relating to our
international sales.
Some of
our products are subject to (International Trafficking and Arms Regulation
(ITAR) regulation, which is administered by the U.S. Department of State.
ITAR controls not only the export, import and trade 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. Any delays in obtaining the required export,
import or trade licenses for products subject to the ITAR could have a
materially adverse effect on our business, financial condition, and/or operating
results. In addition, changes in United States export and import laws
that require us to obtain additional export and import licenses or delays in
obtaining export or import licenses currently being sought could 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 depend on international sales for
a portion of our revenues.
Sales to
customers outside of North America accounted for 55.7% of net revenues in the
year ended December 31, 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 of international business operations as described
above as well as generally longer payment cycles, greater difficulty collecting
accounts receivable, and currency restrictions. In addition, Gresham,
our wholly-owned foreign subsidiary in the United Kingdom, supports our European
and other international customers, distributors, and sales representatives, and
therefore is also subject to local regulation. International sales
are also subject to the export laws and regulations of the United States and
other countries.
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.
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.
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.
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 and contractual obligations , 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 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
both the Company 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 common stock price is
volatile.
Our
common stock is listed on the NYSE Amex 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. The
exercise of outstanding options and warrants may adversely affect our stock
price and a shareholder’s percentage of ownership. As of March 31,
2009, we have outstanding options to purchase an aggregate of 779,035 shares of
common stock, with a weighted average exercise price of $1.01 per share,
exercisable at prices ranging from $0.48 to $2.375 per share.
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: May
14, 2009
Digital
Power Corporation
|
/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)
|