Unassociated Document
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
þ
|
Quarterly
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
|
|
For
the quarterly period ended June 30,
2009
|
¨
|
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 registrant as
specified in its charter )
California
|
94-1721931
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification Number)
|
incorporation
or organization)
|
|
41324
Christy Street
Fremont,
CA 94538-3158
(Address
of principal executive offices)
(510)
657-2635
(Registrant’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 þ No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ 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
filer
|
¨
|
Smaller
reporting company
|
þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12(b)-2 of the Exchange Act). Yes ¨ No
þ
At August
10, 2009, the registrant had outstanding 6,620,708 shares of common
stock.
DIGITAL
POWER CORPORATION
TABLE
OF CONTENTS
|
|
|
Page
|
|
|
|
|
PART
I – FINANCIAL INFORMATION
|
3
|
|
|
|
|
|
Item 1.
|
Financial
Statements
|
3
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of June 30, 2009 and December 31,
2008
|
3
|
|
|
|
|
|
|
Consolidated
Statements of Operations for the six months ended June 30, 2009 and June
30, 2008 and for the three months ended June 30, 2009 and June 30,
2008
|
4
|
|
|
|
|
|
|
Statement
of Changes in Shareholders’ Equity for the six months ended June 30,
2009
|
5
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the six months ended June 30, 2009 and June
30, 2008
|
6
|
|
|
|
|
|
|
Notes
to Interim Consolidated Financial Statements
|
7
|
|
|
|
|
|
Item 2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
12
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
16
|
|
Item 4T.
|
Controls
and Procedures
|
16
|
|
|
|
|
PART
II – OTHER INFORMATION
|
16
|
|
|
|
|
|
Item 1.
|
Legal
Proceedings
|
16
|
|
Item 1A.
|
Risk
Factors
|
16
|
|
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 Holders
|
22
|
|
Item 5.
|
Other
Information
|
23
|
|
Item 6.
|
Exhibits
|
23
|
|
|
|
|
|
23
|
PART I — FINANCIAL INFORMATION
ITEM
1.
|
FINANCIAL STATEMENTS
|
DIGITAL
POWER CORPORATION
CONSOLIDATED
BALANCE SHEETS
U.S.
dollars in thousands (except share and per share data)
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,196 |
|
|
$ |
2,476 |
|
Restricted
cash
|
|
|
87 |
|
|
|
76 |
|
Trade
receivables, net of allowance for doubtful accounts of $ 129 and
$ 124 as of June 30, 2009 and December 31, 2008,
respectively
|
|
|
1,597 |
|
|
|
1,901 |
|
Prepaid
expenses and other accounts receivable
|
|
|
236 |
|
|
|
139 |
|
Inventories
|
|
|
1,301 |
|
|
|
1,494 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
5,417 |
|
|
|
6,086 |
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
219 |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEPOSITS
|
|
|
41 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
5,677 |
|
|
$ |
6,280 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
652 |
|
|
$ |
1,069 |
|
Related
parties – trade payables
|
|
|
201 |
|
|
|
957 |
|
Deferred
revenues
|
|
|
256 |
|
|
|
134 |
|
Other
current liabilities
|
|
|
542 |
|
|
|
514 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,651 |
|
|
|
2,674 |
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Share
capital -
|
|
|
|
|
|
|
|
|
Series
A redeemable, convertible Preferred shares, no par value - 500,000 shares
authorized, 0 shares issued and outstanding at June 30, 2009 and
December 31, 2008
|
|
|
- |
|
|
|
- |
|
Preferred
shares, no par value - 1,500,000 shares authorized, 0 shares issued
and outstanding at June 30, 2009 and December 31, 2008
|
|
|
- |
|
|
|
- |
|
Common
shares, no par value - 30,000,000 shares authorized; 6,620,708 and
6,615,708 shares issued and outstanding at June 30, 2009 and December 31,
2008, respectively
|
|
|
- |
|
|
|
- |
|
Additional
paid-in capital
|
|
|
13,999 |
|
|
|
13,927 |
|
Accumulated
deficit
|
|
|
(9,733 |
) |
|
|
(9,784 |
) |
Accumulated
other comprehensive loss
|
|
|
(240 |
) |
|
|
(537 |
) |
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
4,026 |
|
|
|
3,606 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$ |
5,677 |
|
|
$ |
6,280 |
|
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 share and per share data)
|
|
Six
months ended
June
30,
|
|
|
Three
months ended
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
4,516 |
|
|
$ |
6,516 |
|
|
$ |
2,095 |
|
|
$ |
3,347 |
|
Cost
of revenues
|
|
|
2,875 |
|
|
|
4,833 |
|
|
|
1,385 |
|
|
|
2,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,641 |
|
|
|
1,683 |
|
|
|
710 |
|
|
|
859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
and product development
|
|
|
269 |
|
|
|
302 |
|
|
|
133 |
|
|
|
142 |
|
Selling
and marketing
|
|
|
584 |
|
|
|
460 |
|
|
|
265 |
|
|
|
190 |
|
General
and administrative
|
|
|
665 |
|
|
|
880 |
|
|
|
331 |
|
|
|
321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,518 |
|
|
|
1,642 |
|
|
|
729 |
|
|
|
653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
123 |
|
|
|
41 |
|
|
|
(19 |
) |
|
|
206 |
|
Financial
income (expense), net
|
|
|
(72 |
) |
|
|
13 |
|
|
|
(99 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
51 |
|
|
|
54 |
|
|
|
(118 |
) |
|
|
215 |
|
Income
taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
51 |
|
|
$ |
54 |
|
|
$ |
(118 |
) |
|
$ |
215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net earnings (loss) per share
|
|
$ |
0.008 |
|
|
$ |
0.008 |
|
|
$ |
(0.018 |
) |
|
$ |
0.032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net earnings (loss) per share
|
|
$ |
0.008 |
|
|
$ |
0.008 |
|
|
$ |
(0.018 |
) |
|
$ |
0.031 |
|
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
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
accumulated
|
|
|
Total
|
|
|
Total
|
|
|
|
Common
shares
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
comprehensive
|
|
|
comprehensive
|
|
|
shareholders'
|
|
|
|
Number
|
|
|
Amount
|
|
|
capital
|
|
|
Deficit
|
|
|
loss
|
|
|
income
|
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2009
|
|
$ |
6,615,708 |
|
|
$ |
- |
|
|
$ |
13,927 |
|
|
$ |
(9,784 |
) |
|
$ |
(537 |
) |
|
|
|
|
$ |
3,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation related to options granted to Telkoor's employees and other
non- employee consultant
|
|
|
- |
|
|
|
- |
|
|
|
36 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
36 |
|
Stock
compensation related to options granted to employees
|
|
|
- |
|
|
|
- |
|
|
|
31 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
31 |
|
Exercise
of options granted to employees
|
|
|
5,000 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
51 |
|
|
|
- |
|
|
$ |
51 |
|
|
|
51 |
|
Foreign
currency translation adjustments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
297 |
|
|
|
297 |
|
|
|
297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2009 (unaudited)
|
|
|
6,620,708 |
|
|
$ |
- |
|
|
$ |
13,999 |
|
|
$ |
(9,733 |
) |
|
$ |
(240 |
) |
|
|
|
|
|
$ |
4,026 |
|
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands (except share and per share data)
|
|
Six
months ended
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
51 |
|
|
$ |
54 |
|
Adjustments
required to reconcile net income to net cash (used in) provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
64 |
|
|
|
46 |
|
Stock
compensation related to options granted to employees
|
|
|
36 |
|
|
|
21 |
|
Stock
compensation related to options granted to Telkoor's
employees
|
|
|
31 |
|
|
|
38 |
|
Decrease
in trade receivables, net
|
|
|
436 |
|
|
|
62 |
|
(Increase)
in prepaid expenses and other accounts receivable
|
|
|
(89 |
) |
|
|
(33 |
) |
Decrease
in inventories
|
|
|
252 |
|
|
|
197 |
|
(Decrease)
in accounts payable and related parties trade payables
|
|
|
(1,219 |
) |
|
|
(429 |
) |
Increase
in deferred revenues and other current liabilities
|
|
|
96 |
|
|
|
167 |
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
(342 |
) |
|
|
123 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(37 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(37 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of employees stock options
|
|
|
5 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
5 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
94 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(280 |
) |
|
|
121 |
|
Cash
and cash equivalents at the beginning of the period
|
|
|
2,476 |
|
|
|
1,443 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at the end of the period
|
|
$ |
2,196 |
|
|
$ |
1,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of inventory to fixed assets
|
|
$ |
74 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
DIGITAL
POWER CORPORATION
NOTES
TO INTERIM 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, 2008 are applied consistently in these
financial statements. In addition, the following accounting policy is
applied:
The
accompanying unaudited consolidated financial statements as of June 30,
2009 and for the six months ended June 30, 2009 and 2008 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-K for the fiscal year ended December 31, 2008. The
results of operations for the six months ended June 30, 2009 are not
necessarily indicative of the results for the entire fiscal year ending
December 31,
2009.
|
|
b.
|
Accounting
for stock-based compensation:
The
Company has several stock-based employee compensation plans, which are
described more fully in Note 4. The Company accounts for stock based
compensation in accordance with SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123(R)").
The
Company and its subsidiary apply SFAS 123(R) 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(R) requires use of an option valuation model to
measure the fair value of the options at the grant
date.
|
|
c.
|
Recently
issued accounting pronouncements:
In
May 2009, the FASB issued Statement 165, "Subsequent Events" ("SFAS 165").
SFAS 165 should not result in significant changes in the subsequent events
that an entity reports. Rather, SFAS 165 introduces the concept of
financial statements being available to be issued. Financial statements
are considered available to be issued when they are complete in a form and
format that complies with generally accepted accounting principles (GAAP)
and all approvals necessary for issuance have been
obtained.
|
DIGITAL
POWER CORPORATION
NOTES
TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials, parts and supplies
|
|
$ |
226 |
|
|
$ |
228 |
|
Work
in progress
|
|
|
227 |
|
|
|
308 |
|
Finished
products
|
|
|
848 |
|
|
|
958 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,301 |
|
|
$ |
1,494 |
|
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 June 30, 2009, 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 common shares of the Company. As
of June 30, 2009, options to purchase up to an aggregate of 757,870 common
shares of the Company 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 date 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:
|
|
Six
months ended June 30, 2009
|
|
|
|
Amount
of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average remaining contractual term (years)
|
|
|
Aggregate
intrinsic value *)
|
|
Outstanding
at the beginning of the period
|
|
|
779,035 |
|
|
$ |
1.02 |
|
|
|
|
|
|
|
Granted
|
|
|
20,000 |
|
|
|
0.93 |
|
|
|
|
|
|
|
Exercised
|
|
|
(5,000 |
) |
|
|
1.05 |
|
|
|
|
|
|
|
Forfeited
|
|
|
(32,000 |
) |
|
|
1.31 |
|
|
|
|
|
|
|
Expired
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at the end of the period
|
|
|
762,035 |
|
|
$ |
1.00 |
|
|
|
5.16 |
|
|
$ |
903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
options at the end of the period
|
|
|
611,535 |
|
|
$ |
1.02 |
|
|
|
4.17 |
|
|
$ |
715 |
|
|
*)
|
Calculation
of aggregate intrinsic value is based on the share price of the Company's
Common share as of June 30, 2009 ($ 2.18 per
share).
|
DIGITAL
POWER CORPORATION
NOTES
TO INTERIM 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. 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.
The weighted-average grant-date fair value of options granted during
the period of six months ended June 30, 2009 was $ 0.93 per share
As of June 30, 2009, there was $ 125 of total unrecognized
compensation cost related to unvested share-based compensation arrangements
granted under the stock option plans. 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 common shares of the Company as retirement benefits to
the participants. The Company has not distributed shares since 1998. As of June
30, 2009, the ESOT held 167,504 common shares.
NOTE
5:-
|
NET
EARNINGS (LOSS) PER SHARE
|
The
following table sets forth the computation of the basic and diluted net earnings
(loss) per share:
|
|
Six
months ended
June
30,
|
|
|
Three
months ended
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common shareholders
|
|
$ |
51 |
|
|
$ |
54 |
|
|
$ |
(118 |
) |
|
$ |
215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic net earnings (loss) per share of weighted average number of
common shares
|
|
|
6,616,481 |
|
|
|
6,615,708 |
|
|
|
6,616,499 |
|
|
|
6,615,708 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
135,562 |
|
|
|
150,336 |
|
|
|
- |
|
|
|
169,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted net earnings per common share
|
|
|
6,752,043 |
|
|
|
6,766,044 |
|
|
|
6,616,499 |
|
|
|
6,785,105 |
|
DIGITAL
POWER CORPORATION
NOTES
TO INTERIM 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
following data presents the revenues, expenditures and other operating data of
the Company's geographic operating segments in accordance with Statement of
Financial Accounting Standard No.131, "Disclosure About Segments of an
Enterprise and Related Information" ("SFAS No. 131").
|
|
Six
months ended June 30, 2009 (unaudited)
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
2,127 |
|
|
$ |
2,389 |
|
|
$ |
- |
|
|
$ |
4,516 |
|
Intersegment
revenues
|
|
|
151 |
|
|
|
13 |
|
|
|
(164 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
2,278 |
|
|
$ |
2,402 |
|
|
$ |
(164 |
) |
|
$ |
4,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
$ |
15 |
|
|
$ |
49 |
|
|
$ |
- |
|
|
$ |
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$ |
(56 |
) |
|
$ |
179 |
|
|
$ |
- |
|
|
$ |
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(60 |
) |
|
$ |
111 |
|
|
$ |
- |
|
|
$ |
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for segment assets, net as of June 30, 2009
|
|
$ |
11 |
|
|
$ |
26 |
|
|
$ |
- |
|
|
$ |
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets as of June 30, 2009
|
|
$ |
2,294 |
|
|
$ |
3,383 |
|
|
$ |
- |
|
|
$ |
5,677 |
|
|
|
Six
months ended June 30, 2008 (unaudited)
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
2,406 |
|
|
$ |
4,110 |
|
|
$ |
- |
|
|
$ |
6,516 |
|
Intersegment
revenues
|
|
|
120 |
|
|
|
- |
|
|
|
(120 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
2,526 |
|
|
$ |
4,110 |
|
|
$ |
(120 |
) |
|
$ |
6,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
$ |
15 |
|
|
$ |
31 |
|
|
$ |
- |
|
|
$ |
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$ |
(272 |
) |
|
$ |
313 |
|
|
$ |
- |
|
|
$ |
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(256 |
) |
|
$ |
310 |
|
|
$ |
- |
|
|
$ |
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for segment assets, net as of June 30, 2008
|
|
$ |
- |
|
|
$ |
31 |
|
|
$ |
- |
|
|
$ |
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets as of June 30, 2008
|
|
$ |
2,134 |
|
|
$ |
4,023 |
|
|
$ |
- |
|
|
$ |
6,157 |
|
DIGITAL
POWER CORPORATION
NOTES
TO INTERIM 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 June 30, 2009 (unaudited)
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,019 |
|
|
$ |
1,076 |
|
|
$ |
- |
|
|
$ |
2,095 |
|
Intersegment
revenues
|
|
|
69 |
|
|
|
6 |
|
|
|
(75 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
1,088 |
|
|
$ |
1,082 |
|
|
$ |
(75 |
) |
|
$ |
2,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
$ |
7 |
|
|
$ |
31 |
|
|
$ |
- |
|
|
$ |
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$ |
(20 |
) |
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(99 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(31 |
) |
|
$ |
(87 |
) |
|
$ |
- |
|
|
$ |
(118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for segment assets as of June 30, 2009
|
|
$ |
4 |
|
|
$ |
16 |
|
|
$ |
- |
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets as of June 30, 2009
|
|
$ |
2,294 |
|
|
$ |
3,383 |
|
|
$ |
- |
|
|
$ |
5,677 |
|
|
|
Three
months ended June 30, 2008 (unaudited)
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,257 |
|
|
$ |
2,090 |
|
|
$ |
- |
|
|
$ |
3,347 |
|
Intersegment
revenues
|
|
|
91 |
|
|
|
- |
|
|
|
(91 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
1,348 |
|
|
$ |
2,090 |
|
|
$ |
(91 |
) |
|
$ |
3,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
$ |
7 |
|
|
$ |
14 |
|
|
$ |
- |
|
|
$ |
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
22 |
|
|
$ |
184 |
|
|
$ |
- |
|
|
$ |
206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
31 |
|
|
$ |
184 |
|
|
$ |
- |
|
|
$ |
215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for segment assets as of June 30, 2008
|
|
$ |
- |
|
|
$ |
23 |
|
|
$ |
- |
|
|
$ |
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets as of June 30, 2008
|
|
$ |
2,134 |
|
|
$ |
4,023 |
|
|
$ |
- |
|
|
$ |
6,157 |
|
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
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,” “Digital Power,” “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 telecom/datacom, industrial,
medical and military/defense 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 and/or military mission critical 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 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. Digital Power system solutions set an
industry standard as the highest power efficiency products and the
highest power output in package sizes that are smaller than 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 offer a broad product variety, including a full custom
product design and production, modified-standard and value added products,
open-Frame, Compact-PCI, ATSC front-ends and power over ethernet (PoE) product
solutions, 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 ensure that high quality products are
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 to meet any customer needs and requirements, 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 and to continue
acquiring new product development projects. 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 cutting-edge design that will incorporate many advanced features including a
universal, dual source, redundant input allowing for the automatic selection of
a primary or secondary AC main source. Further, the operating efficiency will
exceed 90% over much of the intended operating range. 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 to be used by the broadcast service
operators. We are also exploring innovative “green” and renewable power
solutions that will complement our current product lines.
RESULTS
OF OPERATIONS
THREE
AND SIX MONTHS ENDED JUNE 30, 2009, COMPARED TO JUNE 30, 2008
Revenues
Our
revenues decreased by 37.4 % to $2,095,000 for the three months ended June 30,
2009, from $3,347,000 for the three months ended June 30, 2008. The decrease in
revenues is mainly due to a decline in sales of our standard commercial products
as a result of the global economic recession. Revenues from our commercial
products during this period decreased by 44.8% to $1,310,000 for the three
months ended June 30, 2009, from $2,375,000 for the three months ended June 30,
2008. Revenue from sales of our military products decreased by 19.2% to $785,000
for the three months ended June 30, 2009, from $972,000 for the three months
ended June 30, 2008.
Revenues
from our U.S. operations decreased by 19.0% to $1,018,000 for the three months
ended June 30, 2009, from $1,257,000 for the three months ended June 30, 2008.
Revenues from our European operations of DPL decreased 48.5% to $1,077,000 for
the three months ended June 30, 2009, from $2,090,000 for the three months ended
June 30, 2008. The decrease in our revenues from our U.S. and European
operations are mainly attributable to the global economic recession,
as discussed above.
For the
six months ended June 30, 2009, our revenues decreased by 30.7% to $4,516,000,
from $6,516,000 for the six months ended June 30, 2008. Revenues from our
commercial products decreased by 39.5% to $2,947,000 for the six months ended
June 30, 2009, from $4,868,000 for the six months ended June 30, 2008. Revenues
from our military products decreased by 4.8% to $1,569,000 for the six months
ended June 30, 2009, from $1,648,000 for the six months ended June 30, 2008. The
overall decrease in revenues is mainly attributable to the decrease in sales of
our commercial products, as discussed above.
For the
six months ended June 30, 2009, revenues attributed to our U.S. operations
decreased by 11.6% to $2,127,000, from $2,406,000 for the six months ended June
30, 2008. The decrease in product revenue is mainly attributed to a decrease in
sales of our commercial products. Revenues from our European operations of DPL
decreased by 41.9% to $2,389,000 for the six months ended June 30, 2009, from
$4,110,000 for the six months ended June 30, 2008. The decrease in revenues is
mainly attributed to decrease in sales of our commercial products, as discussed
above.
Gross
Margins
Gross
margins increased to 33.9% for the three months ended June 30, 2009, compared to
25.7% for the three months ended June 30, 2008. Gross margins for the six months
ended June 30, 2009 increased to 36.3% compared to the gross margins of 25.8%
for the six months ended June 30, 2008. The increase in gross margins for the
six and three month periods is mainly attributable to continued production of
our products in Asia.
Engineering
and Product Development
Engineering
and product development expenses were $133,000, or 6.4% of revenues, for the
three months ended June 30, 2009, compared to $142,000, or 4.2% of revenues, for
the three months ended June 30, 2008. Engineering and product development
expenses were $269,000, or 6.0% of revenues, for the six months ended June 30,
2009, compared to $302,000, or 4.6% of revenues, for the six months ended June
30, 2008. This decrease was primarily due to the decrease in salary
expenses.
Selling
and Marketing
Selling
and marketing expenses were $265,000, or 12.7% of revenues, for the three months
ended June 30, 2009, compared to $190,000, or 5.7% of revenues, for the three
months ended June 30, 2008. The increase was primarily due to an increase in
salary expenses and other marketing expenses. Selling and marketing expenses
were $584,000, or 12.9% of revenues, for the six months ended June 30, 2009,
compared to $460,000, or 7.1% of revenues, for the six months ended June 30,
2008. The increase was primarily due to an increase in salary expenses and other
marketing expenses, as discussed above.
General
and Administrative
General
and administrative expenses were $331,000, or 15.8% of revenues, for the three
months ended June 30, 2009, compared to $321,000, or 9.6% of revenues, for the
three months ended June 30, 2008. The increase in the percentage of the
expenditure of revenues is due mainly to the decrease in revenues in the three
months ended June 30, 2009 compared to the revenues in the three months ended
June 30, 2008. General and administrative expenses were $665,000, or 14.7% of
revenues, for the six months ended June 30, 2009, compared to $880,000, or 13.5%
of revenues, for the six months ended June 30, 2008. Expenditures decreased in
2009 by $215,000 mainly due to the accrual of liabilities in relation to the
separation agreement with our former President and Chief Executive Officer in
the six months ended June 30, 2008.
Financial
Income (Expense)
Financial
expense was $99,000 for the three months ended June 30, 2009, compared to
financial income of $9,000 for the three months ended June 30, 2008. Financial
expense was $72,000 for the six months ended June 30, 2009, compared to
financial income of $13,000 for the six months ended June 30, 2008. From time to
time, we enter into forward contracts to hedge certain sales transactions which
are denominated in foreign currencies. The change in financial results was due
to foreign currency fluctuations during the respective periods and changes in
the fair value of forward contracts.
Net
Income (Loss)
For the
three months ended June 30, 2009, we had a net loss of $118,000 compared to a
net income of $215,000 for the three months ended June 30, 2008. The loss in the
three months ended June 30, 2009 is due primarily to the slowdown in
the global economy which had a significant impact on our revenues. Net income
for the six months ended June 30, 2009 was $51,000 compared to a net income of
$54,000 for the six months ended June 30, 2008.
LIQUIDITY
AND CAPITAL RESOURCES
On June
30, 2009, we had cash and cash equivalents of $2,196,000 and working capital of
$3,766,000. This compares with cash and cash equivalents of $2,476,000 and
working capital of $3,412,000 at December 31, 2008. The decrease in cash and
cash equivalents is due mainly to a decrease in accounts payables and related
parties trade payable, offset by a decrease in trade receivable and a decrease
in inventories. The increase in working capital is mainly due to a decrease in
accounts payable and related parties trade payables, offset partially by a
decrease in cash and cash equivalents, a decrease in trade receivable, a
decrease in inventories and an increase in deferred revenues.
Cash used
in operating activities totaled $222,000 for the six months ended June 30, 2009,
compared to cash provided by operating activities of $123,000 for the six months
ended June 30, 2008. The net use of cash from operating activities was mainly
due to a decrease in accounts payable and related parties trade payables offset
by a decrease in trade receivable and a decrease in inventories.
Net cash
used in investing activities was $37,000 for the six months ended June 30, 2009,
compared to net cash used in investing activities of $5,000 for the six months
ended June 30, 2008. The increase is due to a purchase of property and
equipment. 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 debt or equity, which may dilute shareholders’ equity.
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 Control over Financial Reporting
During
the period covered by this quarterly report, there were no significant changes
in our internal control over financial reporting or in other factors that have
materially affected, or are reasonably likely to materially affect, our internal
control 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 six month period ended June 30, 2009
and the year ended December 31, 2008 and we experienced net income for the six
month period ended June 30, 2009, we experienced a net loss for the three month
period ended June 30, 2009 and have historically experienced net losses, and we
may experience net losses in the future.
For the
six month period ended June 30, 2009, we had operating income of $123,000,
compared to an operating income of $41,000 for the six month period ended June
30, 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 experienced a net loss of $118,000 for the three month
period ended June 30, 2009 and, we might incur losses in the future until we
increase revenues through the sale of current products and decreased
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, VP of
Finance, 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 a reduction of orders by OEMs and a 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 effect on our business and results of
operations. 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
outsource the development of some of our custom design products
We
made an operational decision to outsource some of our custom design products to
numerous developer partners. This business structure will remain in place until
the custom design volume justifies expanding our in house capabilities.
Incomplete product designs that do not fully comply with the customer
specification and requirements might affect our ability to transition to a
volume production stage of the custom designed product where the revenue goals
are dependent on the high volume of custom product production. Furthermore, we
rely on the design partners’ ability to provide high quality prototypes of the
designed product for our customer approval as a critical stage to approve
production.
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 basis 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 expect additional price erosion in the
future.
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)
rules, 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 ITAR rules 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 54.8% of net revenues in the
first six months of 2009 and 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 control 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 occured 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 effect 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 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 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 June 30,
2009, we have outstanding options to purchase an aggregate of 762,035 shares of
common stock, with a weighted average exercise price of $1.00 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: August
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)
|