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
September 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
November 10, 2009, the registrant had outstanding 6,626,468 shares of common
stock.
TABLE
OF CONTENTS
|
|
Page
|
|
|
|
PART
I – FINANCIAL INFORMATION
|
3
|
|
|
|
|
|
Item 1.
|
Financial
Statements
|
3
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of September 30, 2009 and December 31,
2008
|
3
|
|
|
|
|
|
|
Consolidated
Statements of Operations for the nine months ended September 30, 2009 and
September 30, 2008 and for the three months ended September 30, 2009 and
September 30, 2008
|
4
|
|
|
|
|
|
|
Statement
of Changes in Shareholders’ Equity for the nine months ended September 30,
2009
|
5
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the nine months ended September 30, 2009 and
September 30, 2008
|
6
|
|
|
|
|
|
|
Notes
to Interim Consolidated Financial Statements
|
7
|
|
|
|
|
|
Item 2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
16
|
|
Item 4T.
|
Controls
and Procedures
|
16
|
|
|
|
|
|
17
|
|
|
|
|
|
Item 1.
|
Legal
Proceedings
|
17
|
|
Item 1A.
|
Risk
Factors
|
17
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
22
|
|
Item 3.
|
Defaults
Upon Senior Securities
|
22
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
22
|
|
Item 5.
|
Other
Information
|
23
|
|
Item 6.
|
Exhibits
|
23
|
|
|
|
|
|
23
|
PART
I — FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,543 |
|
|
$ |
2,476 |
|
Restricted
cash
|
|
|
84 |
|
|
|
76 |
|
Trade
receivables, net of allowance for doubtful accounts of $ 127 and
$ 124 as of September 30, 2009 and December 31, 2008,
respectively
|
|
|
1,373 |
|
|
|
1,901 |
|
Prepaid
expenses and other accounts receivable
|
|
|
218 |
|
|
|
139 |
|
Inventories
|
|
|
1,059 |
|
|
|
1,494 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
5,277 |
|
|
|
6,086 |
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
235 |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEPOSITS
|
|
|
41 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
5,553 |
|
|
$ |
6,280 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
428 |
|
|
$ |
1,069 |
|
Related
parties – trade payables
|
|
|
507 |
|
|
|
957 |
|
Deferred
revenues
|
|
|
277 |
|
|
|
134 |
|
Other
current liabilities
|
|
|
591 |
|
|
|
514 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,803 |
|
|
|
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 September 30, 2009 and
December 31, 2008
|
|
|
- |
|
|
|
- |
|
Preferred
shares, no par value - 1,500,000 shares authorized, 0 shares issued
and outstanding at September 30, 2009 and December 31,
2008
|
|
|
- |
|
|
|
- |
|
Common
shares, no par value - 30,000,000 shares authorized; 6,626,468 and
6,615,708 shares issued and outstanding at September 30, 2009 and December
31, 2008, respectively
|
|
|
- |
|
|
|
- |
|
Additional
paid-in capital
|
|
|
14,010 |
|
|
|
13,927 |
|
Accumulated
deficit
|
|
|
(9,938 |
) |
|
|
(9,784 |
) |
Accumulated
other comprehensive loss
|
|
|
(322 |
) |
|
|
(537 |
) |
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
3,750 |
|
|
|
3,606 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$ |
5,553 |
|
|
$ |
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 per share data
|
|
Nine months ended
September 30,
|
|
|
Three months ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
6,224 |
|
|
$ |
9,341 |
|
|
$ |
1,708 |
|
|
$ |
2,825 |
|
Cost
of revenues
|
|
|
4,071 |
|
|
|
6,594 |
|
|
|
1,196 |
|
|
|
1,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,153 |
|
|
|
2,747 |
|
|
|
512 |
|
|
|
1,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
and product development
|
|
|
405 |
|
|
|
460 |
|
|
|
136 |
|
|
|
158 |
|
Selling
and marketing
|
|
|
834 |
|
|
|
702 |
|
|
|
250 |
|
|
|
242 |
|
General
and administrative
|
|
|
1,022 |
|
|
|
1,243 |
|
|
|
357 |
|
|
|
364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
2,261 |
|
|
|
2,405 |
|
|
|
743 |
|
|
|
764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(108 |
) |
|
|
342 |
|
|
|
(231 |
) |
|
|
300 |
|
Financial
income (expense), net
|
|
|
(46 |
) |
|
|
74 |
|
|
|
26 |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(154 |
) |
|
|
416 |
|
|
|
(205 |
) |
|
|
362 |
|
Income
taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(154 |
) |
|
$ |
416 |
|
|
$ |
(205 |
) |
|
$ |
362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net earnings (loss) per share
|
|
$ |
(0.023 |
) |
|
$ |
0.063 |
|
|
$ |
(0.031 |
) |
|
$ |
0.055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net earnings (loss) per share
|
|
$ |
(0.023 |
) |
|
$ |
0.062 |
|
|
$ |
(0.031 |
) |
|
$ |
0.054 |
|
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
|
|
|
- |
|
|
|
- |
|
|
|
14 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
14 |
|
Stock
compensation related to options granted to employees
|
|
|
- |
|
|
|
- |
|
|
|
57 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
57 |
|
Exercise
of options granted to employees
|
|
|
10,760 |
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(154 |
) |
|
|
- |
|
|
$ |
(154 |
) |
|
|
(154 |
) |
Foreign
currency translation adjustments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
215 |
|
|
|
215 |
|
|
|
215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of September 30, 2009 (unaudited)
|
|
|
6,626,468 |
|
|
$ |
- |
|
|
$ |
14,010 |
|
|
$ |
(9,938 |
) |
|
$ |
(322 |
) |
|
|
|
|
|
$ |
3,750 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
|
Nine months ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(154 |
) |
|
$ |
416 |
|
Adjustments
required to reconcile net (loss) income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
56 |
|
|
|
69 |
|
Stock
compensation related to options granted to employees
|
|
|
57 |
|
|
|
43 |
|
Stock
compensation related to options granted to Telkoor's employees and other
non-employee consultant
|
|
|
14 |
|
|
|
41 |
|
Decrease
in trade receivables, net
|
|
|
612 |
|
|
|
618 |
|
Increase
in prepaid expenses and other accounts receivable
|
|
|
(73 |
) |
|
|
(39 |
) |
Decrease
in inventories
|
|
|
459 |
|
|
|
14 |
|
Decrease
in accounts payable and related parties-trade payables
|
|
|
(1,154 |
) |
|
|
(463 |
) |
Increase
in deferred revenues and other current liabilities
|
|
|
183 |
|
|
|
460 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
- |
|
|
|
1,159 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(53 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(53 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of employee stock options
|
|
|
12 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
12 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
108 |
|
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
67 |
|
|
|
945 |
|
Cash
and cash equivalents at the beginning of the period
|
|
|
2,476 |
|
|
|
1,443 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at the end of the period
|
|
$ |
2,543 |
|
|
$ |
2,388 |
|
|
|
|
|
|
|
|
|
|
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 (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 September 30,
2009 and for the nine months ended September 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 nine months ended September
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 Accounting Codification Statement 718-10 (formerly SFAS No. 123
(revised 2004)), “Stock compensation” (“ASC 718-10”).
The
Company and its subsidiary apply ASC 718-10 and ASC 505-50 (formerly EITF
96-18), “Equity-Based Payments to Non-Employees” (“ASC 505-50") with respect to
options issued to non-employees. ASC 718-10 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 ASC 855, “Subsequent Events” (ASC 855)
(originally issued as SFAS 165). ASC 855 establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. ASC
855 is effective for interim and annual reporting periods ending after
June 15, 2009. The Company evaluated all events or transactions that
occurred after September 30, 2009 up through November 13, 2009. During this
period no material subsequent events came to its attention.
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
In June
2009, the FASB issued SFAS 168, "The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles". SFAS No. 168,
which is incorporated in ASC Topic 105, Generally Accepted Accounting
Principles, identifies the accounting standard codification (ASC) as the
authoritative source of generally accepted accounting principles in the United
States. Rules and interpretive releases of the SEC under federal securities laws
are also sources of authoritative GAAP for SEC registrants. We adopted SFAS
No. 168 in Q3 2009 and include references to the ASC within our
consolidated financial statements. The Company adopted ASC 105 in September
2009, and therefore all references by the Company to authoritative accounting
principles recognized by the FASB reflect the codification.
In August
2009, the FASB issued ASU No. 2009-05 "Fair Value Measurements and Disclosures
(Topic 820) - Measuring Liabilities at Fair Value". ASU 2009-05 amends Subtopic
820-10 "Fair Value Measurements and Disclosures - Overall" and provides
clarification on the methods to be used in circumstances in which a quoted price
in an active market for the identical liability is not available. The provisions
of ASU 2009-05 are effective for the third quarter of our fiscal 2009. The
adoption of ASU 2009-05 did not have a material impact on the Company’s
financial statements.
In
September 2009, the FASB reached a consensus on Accounting Standards
Update, or ASU, 2009-13, Revenue Recognition (Topic 605) – Multiple-Deliverable
Revenue Arrangements, or ASU 2009-13 and ASU 2009-14, Software (Topic 985) –
Certain Revenue Arrangements That Include Software Elements, or ASU 2009-14. ASU
2009-13 modifies the requirements that must be met for an entity to recognize
revenue from the sale of a delivered item that is part of a multiple-element
arrangement when other items have not yet been delivered. ASU 2009-13 eliminates
the requirement that all undelivered elements must have either: i) VSOE or ii)
third-party evidence (TPE) before an entity can recognize the portion of an
overall arrangement consideration that is attributable to items that already
have been delivered. In the absence of VSOE or TPE of the stand alone selling
price for one or more delivered or undelivered elements in a multiple-element
arrangement, entities will be required to estimate the selling prices of those
elements. Overall arrangement consideration will be allocated to each element
(both delivered and undelivered items) based on their relative selling prices,
regardless of whether those selling prices are evidenced by VSOE or TPE or are
based on the entity’s estimated selling price. The residual method of allocating
arrangement consideration has been eliminated. ASU 2009-14 modifies the software
revenue recognition guidance to exclude from its scope tangible products that
contain both software and non-software components that function together to
deliver a product’s essential functionality. These new updates are effective for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption is permitted. The
Company is currently evaluating the impact that the adoption of these ASUs will
have on its consolidated financial statements.
NOTE
3:- INVENTORIES
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials, parts and supplies
|
|
$ |
223 |
|
|
$ |
228 |
|
Work
in progress
|
|
|
151 |
|
|
|
308 |
|
Finished
products
|
|
|
685 |
|
|
|
958 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,059 |
|
|
$ |
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 September 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 September 30, 2009, options to purchase up to an
aggregate of 687,870 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:
|
|
Nine months ended September 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
|
|
|
90,000 |
|
|
|
1.60 |
|
|
|
|
|
|
|
Exercised
|
|
|
(10,760 |
) |
|
|
1.13 |
|
|
|
|
|
|
|
Forfeited
|
|
|
(32,000 |
) |
|
|
1.31 |
|
|
|
|
|
|
|
Expired
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at the end of the period
|
|
|
826,275 |
|
|
$ |
1.07 |
|
|
|
5.57 |
|
|
$ |
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
options at the end of the period
|
|
|
612,785 |
|
|
$ |
1.02 |
|
|
|
3.93 |
|
|
$ |
328 |
|
|
*)
|
Calculation
of aggregate intrinsic value is based on the share price of the Company's
common shares as of September 30, 2009 ($ 1.50 per
share).
|
NOTE
4:-
|
ACCOUNTING
FOR STOCK-BASED COMPENSATION
(Cont.)
|
Under the
provisions of ASC 718-10, 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 ASC 718-10. 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
nine months ended September 30, 2009 was $ 1.24 per share.
As of
September 30, 2009, there was $ 180 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 September
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:
1. Numerator:
|
|
Nine months ended
September 30,
|
|
|
Three months ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to Common shareholders
|
|
$ |
(154 |
) |
|
$ |
416 |
|
|
$ |
(205 |
) |
|
$ |
362 |
|
2. Denominator:
Denominator
for basic net earnings (loss) per share of weighted average number of
common shares
|
|
|
6,618,750 |
|
|
|
6,615,708 |
|
|
|
6,621,574 |
|
|
|
6,615,708 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
- |
|
|
|
96,154 |
|
|
|
- |
|
|
|
42,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted net earnings per common share
|
|
|
6,618,750 |
|
|
|
6,711,862 |
|
|
|
6,621,574 |
|
|
|
6,658,147 |
|
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 ASC 218-10
(formerly SFAS No. 131), “Segment reporting”.
|
|
Nine
months ended September 30, 2009 (unaudited)
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
2,673 |
|
|
$ |
3,551 |
|
|
$ |
|
|
|
$ |
6,224 |
|
Intersegment
revenues
|
|
|
155 |
|
|
|
23 |
|
|
|
(178 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
2,828 |
|
|
$ |
3,574 |
|
|
$ |
(178 |
) |
|
$ |
6,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
$ |
23 |
|
|
$ |
33 |
|
|
$ |
- |
|
|
$ |
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$ |
(286 |
) |
|
$ |
178 |
|
|
$ |
- |
|
|
$ |
(108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
expenses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(298 |
) |
|
$ |
144 |
|
|
$ |
- |
|
|
$ |
(154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for segment assets, net as of September 30, 2009
|
|
$ |
13 |
|
|
$ |
40 |
|
|
$ |
- |
|
|
$ |
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets as of September 30, 2009
|
|
$ |
2,237 |
|
|
$ |
3,316 |
|
|
$ |
- |
|
|
$ |
5,553 |
|
|
|
Nine
months ended September 30, 2008 (unaudited)
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
3,947 |
|
|
$ |
5,394 |
|
|
$ |
- |
|
|
$ |
9,341 |
|
Intersegment
revenues
|
|
|
234 |
|
|
|
5 |
|
|
|
(239 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
4,181 |
|
|
$ |
5,399 |
|
|
$ |
(239 |
) |
|
$ |
9,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
$ |
23 |
|
|
$ |
46 |
|
|
$ |
- |
|
|
$ |
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$ |
(125 |
) |
|
$ |
467 |
|
|
$ |
- |
|
|
$ |
342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(108 |
) |
|
$ |
524 |
|
|
$ |
- |
|
|
$ |
416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for segment assets, net as of September 30, 2008
|
|
$ |
4 |
|
|
$ |
86 |
|
|
$ |
- |
|
|
$ |
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets as of September 30, 2008
|
|
$ |
2,623 |
|
|
$ |
3,879 |
|
|
$ |
- |
|
|
$ |
6,502 |
|
NOTE
6:-
|
SEGMENTS,
MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
(Cont.)
|
|
|
Three
months ended September 30, 2009 (unaudited)
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
546 |
|
|
$ |
1,162 |
|
|
$ |
|
|
|
$ |
1,708 |
|
Intersegment
revenues
|
|
|
4 |
|
|
|
10 |
|
|
|
(14 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
550 |
|
|
$ |
1,172 |
|
|
$ |
(14 |
) |
|
$ |
1,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense (income)
|
|
$ |
8 |
|
|
$ |
(14 |
) |
|
$ |
- |
|
|
$ |
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss)
|
|
$ |
(230 |
) |
|
$ |
(1 |
) |
|
$ |
- |
|
|
$ |
(231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(238 |
) |
|
$ |
33 |
|
|
$ |
- |
|
|
$ |
(205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for segment assets as of September 30, 2009
|
|
$ |
2 |
|
|
$ |
14 |
|
|
$ |
- |
|
|
$ |
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets as of September 30, 2009
|
|
$ |
2,237 |
|
|
$ |
3,316 |
|
|
$ |
- |
|
|
$ |
5,553 |
|
|
|
Three
months ended September 30, 2008 (unaudited)
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,536 |
|
|
$ |
1,289 |
|
|
$ |
- |
|
|
$ |
2,825 |
|
Intersegment
revenues
|
|
|
114 |
|
|
|
5 |
|
|
|
(119 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
1,650 |
|
|
$ |
1,294 |
|
|
$ |
(119 |
) |
|
$ |
2,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
$ |
8 |
|
|
$ |
15 |
|
|
$ |
- |
|
|
$ |
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
147 |
|
|
$ |
154 |
|
|
$ |
- |
|
|
$ |
301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
148 |
|
|
$ |
214 |
|
|
$ |
- |
|
|
$ |
362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for segment assets as of September 30, 2008
|
|
$ |
4 |
|
|
$ |
55 |
|
|
$ |
- |
|
|
$ |
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets as of September 30, 2008
|
|
$ |
2,623 |
|
|
$ |
3,879 |
|
|
$ |
- |
|
|
$ |
6,502 |
|
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
high-grade and custom product designs for both the commercial and
military/defense markets, where customers demand high density, high efficiency
and rich features products to meet advance applications. We provide
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 are 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”). DPL
is located in Salisbury, England, and it designs, manufactures and sells power
products and system solutions mainly for the European marketplace, including
power conversion, power distribution equipment, DC/AC inverters and
Uninterrupted Power Supply (UPS) products. DPL’s defense business has
specialists in the field of naval applications of power distribution
conversion.
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. 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 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 offer a broad product variety, including a full custom
product design and production, unique high-speed switching power front-end,
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 to 25,000 watts.
In an effort to provide short
lead-times, high quality products and competitive pricing to support our
markets, we have entered into numerous production agreements with manufacturers
located in Asia, primarily China. These contract manufacturing (CM)
agreements allow us to control production costs and ensure high quality products
deliverable in a timely manner to meet market
demand.
We intend
to remain an innovative leader in the development of cutting-edge custom power
solutions and rich features products to meet any customer needs and
requirements, rugged power systems to meet harsh and extreme operation
environmental requirements, and high performance, high efficiency, high density
and modular power systems. We are focusing today on developing
even more advanced custom power system solutions for 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 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 few 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 diversified industries. Further, the operating
efficiency of our products exceeds 90% of power efficiency, which satisfies many
of our customers’ objectives to provide “green power” to their customers and to
improve products lifetime. Digital Power will provide these products
for the customer’s next generation digital video encoders and streaming
solutions, medical equipment and other products. We also continue to explore
innovative alternative and renewable power solutions to complement our current
product lines.
RESULTS
OF OPERATIONS
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2009, COMPARED TO SEPTEMBER 30,
2008
Revenues
Total
revenues for the Company decreased by 39.5% to $1,708,000 for the three months
ended September 30, 2009, from $2,825,000 for the three months ended September
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 the military products of the Company decreased by 27.1%
to $586,000 for the three months ended September 30, 2009, from $804,000 for the
three months ended September 30, 2008. Revenues from the commercial products of
the Company decreased by 44.5% to $1,122,000, from $2,021,000 for the three
months ended September 30, 2008.
Revenues
from our U.S. operations decreased by 64.5% to $546,000 for the three months
ended September 30, 2009, from $1,536,000 for the three months ended September
30, 2008. Revenues from our European operations of DPL decreased 9.9% to
$1,162,000 for the three months ended September 30, 2009, from $1,289,000 for
the three months ended September 30, 2008. The decrease in our revenues from our
U.S. and European operations are mainly attributable to a decline in sales
of our standard commercial products as a result of the global economic
recession, as discussed above.
For the
nine months ended September 30, 2009, our revenues decreased by 33.4% to
$6,224,000, from $9,341,000 for the nine months ended September 30, 2008.
Revenues from our commercial products decreased by 40.9% to $4,069,000 for the
nine months ended September 30, 2009, from $6,889,000 for the nine months ended
September 30, 2008. Revenues from our military products decreased by 12.1% to
$2,155,000 for the nine months ended September 30, 2009, from $2,452,000 for the
nine months ended September 30, 2008. The overall decrease in
revenues is mainly attributable to the decrease in sales of our commercial
products, as discussed above.
For the
nine months ended September 30, 2009, revenues attributed to our U.S. operations
decreased by 32.2% to $2,673,000 from $3,942,000 for the nine months ended
September 30, 2008. Revenues from our European operations of DPL
decreased by 34.2% to $3,551,000 for the nine months ended September 30, 2009,
from $5,399,000 for the nine months ended September 30, 2008. The decrease in
revenues from our U.S. and European operations is mainly attributable to a
decrease in sales of our commercial products, as discussed above.
Gross
Margins
Gross
margins decreased to 30.0% for the three months ended September 30, 2009,
compared to 37.7% for the three months ended September 30, 2008. The decrease in
gross margins for the three-month period is mainly attributable to the decrease
in revenue partially offset by continued production of our products in Asia.
Gross margins for the nine months ended September 30, 2009 increased to 34.6%
compared to the gross margins of 29.4% for the nine months ended September 30,
2008. The increase in gross margins for the nine-month period is mainly
attributable to continued production of our products in Asia.
Engineering
and Product Development
Engineering
and product development expenses were $136,000, or 8.0% of revenues, for the
three months ended September 30, 2009, compared to $158,000, or 5.6% of
revenues, for the three months ended September 30, 2008. Engineering and product
development expenses were $405,000, or 6.5% of revenues, for the nine months
ended September 30, 2009, compared to $460,000, or 4.9% of revenues, for the
nine months ended September 30, 2008. This decrease for the three and nine-month
periods was primarily due to a decrease in salary expenses.
Selling
and Marketing
Selling
and marketing expenses were $250,000, or 14.6% of revenues, for the three months
ended September 30, 2009, compared to $242,000, or 8.6% of revenues, for the
three months ended September 30, 2008. Selling and marketing expenses were
$834,000, or 13.4% of revenues, for the nine months ended September 30, 2009,
compared to $702,000, or 7.5% of revenues, for the nine months ended September
30, 2008. The increase was primarily due to an increase in salary expenses and
other marketing expenses.
General
and Administrative
General
and administrative expenses were $357,000, or 20.9% of revenues, for the three
months ended September 30, 2009, compared to $364,000, or 12.9% of revenues, for
the three months ended September 30, 2008. The increase in such expenses as a
percentage of revenues is due mainly to the decrease in revenues in the three
months ended September 30, 2009 compared to the revenues in the three months
ended September 30, 2008. General and administrative expenses were $1,022,000,
or 16.4% of revenues, for the nine months ended September 30, 2009, compared to
$1,243,000, or 13.3% of revenues, for the nine months ended September 30, 2008.
Expenditures decreased in 2009 by $221,000 mainly due to the accrual of
liabilities in relation to the separation agreement with our former President
and Chief Executive Officer in the nine months ended September 30,
2008.
Financial
Income (Expense)
Financial
income was $26,000 for the three months ended September 30, 2009, compared to
financial income of $62,000 for the three months ended September 30, 2008.
Financial expense was $46,000 for the nine months ended September 30, 2009,
compared to financial income of $74,000 for the nine months ended September 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 September 30, 2009, we had a net loss of $205,000 compared to
a net income of $362,000 for the three months ended September 30, 2008. Loss for
the nine months ended September 30, 2009 was $154,000 compared to a net income
of $416,000 for the nine months ended September 30, 2008. The loss in the three
and nine-month periods ended September 30, 2009 is due primarily to
the slowdown in the global economy, which had a significant impact on our
revenues.
LIQUIDITY
AND CAPITAL RESOURCES
On
September 30, 2009, we had cash and cash equivalents of $2,543,000 and working
capital of $3,474,000. This compares with cash and cash equivalents of
$2,476,000 and working capital of $3,412,000 at December 31, 2008. The increase
in cash and cash equivalents is due mainly to a decrease in trade receivables
and inventories, offset by a decrease in accounts payable and related parties
trade payables. The increase in working capital is mainly due to a decrease in
accounts payable and related parties trade payables and an increase in cash and
cash equivalents, offset partially by a decrease in trade receivables, a
decrease in inventories and an increase in deferred revenues.
Cash
provided by operating activities totaled $0 for the nine months ended September
30, 2009, compared to cash provided by operating activities of $1,159,000 for
the nine months ended September 30, 2008. The net provision of cash by operating
activities was mainly due to a decrease in accounts payable and related parties
trade payables, offset by a decrease in trade receivables, a decrease in
inventories, a decrease in revenues and a net loss.
Net cash
used in investing activities was $53,000 for the nine months ended September 30,
2009, compared to net cash used in investing activities of $64,000 for the nine
months ended September 30, 2008. This decrease is due to a decline in the
purchase of property and equipment.
If we
increase our activities and growth in the United States, we will require a
larger facility. We are reassessing the need on an ongoing basis in
order to determine the appropriate time to make such a move in light of the
global recession and our results of operations.
The lease
for our UK facility expired on September 26, 2009, however we continue to occupy
the facility and intend to renew the lease for an additional term. We
are currently in negotiations with the lessor in order to finalize the terms of
the new lease.
In the
event that the lease is not renewed, we believe that the only potential adverse
consequence on our future financial position, results of operations and cash
flows would be the disruption of the business while alternative premises were
sought and relocation was made, along with the costs associated with such search
for new premises and relocation. However, we believe that such
potential adverse consequences are unlikely since we are currently in the
process of renewing the lease.
We
believe we have adequate resources at this time to continue our operational and
promotional efforts to increase sales and support our current
operation. However, if we do not increase our sales, we may have to
raise money through debt or equity, which may dilute shareholders’
equity.
CRITICAL
ACCOUNTING POLICIES
Revenue
from product sales is recognized in accordance with the provisions of Accounting
Codification Statement 605-10 (formerly SAB 104), "Revenue Recognition in
Financial Statements". We recognize revenue when persuasive evidence of an
arrangement exists, delivery has occurred (i.e., risk of loss and title have
transferred to the customer), the sale price is fixed or determinable and
collection is reasonably assured.
We
generally use customer purchase orders and contracts to determine the existence
of an arrangement. Shipping documents and customer acceptance, when applicable,
are used to verify delivery. We assess whether the sales price is fixed or
determinable based on the payment terms associated with the transaction and
whether the price is subject to refund or adjustment. We assess collectability
based primarily on the creditworthiness of the customer as determined by credit
checks and analysis, as well as the customer’s payment
history.
Revenue
on shipments to distributors and resellers is recognized on delivery. Generally,
the Company does not grant a right of return. However, allowances are provided
for stock rotation rights that are granted to distributors in accordance with
their respective arrangements.
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.
ITEM
1A. RISK FACTORS
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.
We
experienced operating loss during the three and nine-month periods ended
September 30, 2009, and have historically experienced net losses, and we may
experience net losses in the future.
For the
nine-month period ended September 30, 2009, we had an operating loss of
$108,000, compared to an operating income of $342,000 for the nine month period
ended September 30, 2008. Although we have actively taken steps to
reduce our costs, we experienced a loss of $205,000 for the three month period
ended September 30, 2009, and we might incur losses in the future until we
increase revenues by selling current products, transitioning to production stage
of our custom design products and decreasing 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 that 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 that 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 by 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 and 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 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 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, to 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 concerns 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, have 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 are 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 65.0% of net revenues in the
first nine 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, DPL, 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 occurred 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 September
30, 2009, we have outstanding options to purchase an aggregate of 826,275 shares
of common stock, with a weighted average exercise price of $1.07 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
Our
Annual Meeting of Shareholders was held on August 11, 2009. The
following is a listing of the votes cast for or withheld with respect to each
nominee for director and a listing of the votes cast for and against, as well as
abstentions and broker non-votes with respect to, the ratification of the
appointment of Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global Limited, as our independent auditors for the fiscal year ending December
31, 2010.
1. Election
of Board of Directors:
|
|
Number of Shares
|
|
|
|
For
|
|
|
Withheld
|
|
|
|
|
|
|
|
|
|
|
Ben-Zion
Diamant
|
|
|
5,550,599 |
|
|
|
101,929 |
|
|
|
|
|
|
|
|
|
|
Amos
Kohn
|
|
|
5,563,326 |
|
|
|
89,202 |
|
|
|
|
|
|
|
|
|
|
Yeheskel
Manea
|
|
|
5,547,599 |
|
|
|
104,929 |
|
|
|
|
|
|
|
|
|
|
Israel
Levi
|
|
|
5,647,893 |
|
|
|
4,635 |
|
|
|
|
|
|
|
|
|
|
Terry
Steinberg
|
|
|
5,648,893 |
|
|
|
3,635 |
|
|
2.
|
Ratification of the appointment
of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global
Limited, as our independent auditors for the fiscal year ending December
31, 2010:
|
For
|
|
|
5,630,183 |
|
|
|
|
|
|
Against
|
|
|
22,345 |
|
|
|
|
|
|
Abstentions
|
|
|
0 |
|
|
|
|
|
|
Broker
Non-Votes
|
|
|
0 |
|
ITEM
5. OTHER
INFORMATION
None.
ITEM
6. EXHIBITS
Exhibits
|
|
|
|
|
|
31.1
|
|
Certification
of the CEO under the Sarbanes-Oxley Act.
|
31.2
|
|
Certification
of the CFO under the Sarbanes-Oxley Act.
|
32
|
|
Certification
of the CEO & CFO under the Sarbanes-Oxley
Act.
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned thereunto duly
authorized.
Dated: November
16, 2009
Digital
Power Corporation
By:
|
/s/
Amos Kohn
|
|
|
Amos
Kohn
|
|
President
& Chief Executive Officer
|
|
(Principal
Executive Officer)
|
|
|
|
By:
|
/s/
Uri Friedlander
|
|
|
Uri
Friedlander
|
|
Chief
Financial Officer
|
|
(Principal
Financial and Accounting
Officer)
|