HYPERSCALE DATA, INC.
10-Ks and 10-Qs
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________
FORM
10-Q
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þ
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Quarterly
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
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For the quarterly
period ended September 30, 2010
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¨
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Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For the transition
period from ________ to ________ .
Commission
file number 1-12711
_________________
(
Exact name of registrant as
specified in its charter
)
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California
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94-1721931
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification Number)
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|
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incorporation
or organization)
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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.
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Large
accelerated
filer
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¨
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Accelerated
filer
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¨
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Non-accelerated
filer
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¨
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Smaller
reporting company
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þ
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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
DIGITAL
POWER CORPORATION
TABLE
OF CONTENTS
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Page
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Item 1.
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Financial
Statements
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3
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||
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R
eview of Unaudited Interim
Consolidated Financial Statements
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4
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|||
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Consolidated
Balance Sheets as of September 30, 2010 and December 31,
2009
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5
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|||
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Consolidated
Statements of Operations for the nine months ended September 30, 2010 and
September 30, 2009 and for the three months ended September 30, 2010 and
September 30, 2009
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6
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|||
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Statement
of Changes in Shareholders’ Equity for the nine months ended September 30,
2010
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7
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|||
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Consolidated
Statements of Cash Flows for the nine months ended September 30, 2010 and
September 30, 2009
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8
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|||
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Notes
to Interim Consolidated Financial Statements
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9-14
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|||
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Item 2.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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15
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Item 3.
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Quantitative
and Qualitative Disclosures About Market Risk
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19
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Item 4.
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Controls
and Procedures
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19
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PART
II – OTHER INFORMATION
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||||
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Item 1.
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Legal
Proceedings
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19
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Item 1A.
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Risk
Factors
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19
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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25
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Item 3.
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Defaults
Upon Senior Securities
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25
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Item 4.
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Reserved
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25
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Item 5.
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Other
Information
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25
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Item 6.
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Exhibits
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25
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SIGNATURES
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26
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DIGITAL
POWER CORPORATION AND SUBSIDIARY
INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
AS
OF SEPTEMBER 30, 2010
IN
U.S. DOLLARS
UNAUDITED
INDEX
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Page
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||
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Review
of Unaudited Interim Consolidated Financial Statements
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4
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5
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6
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|
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Statement
of Changes in Shareholders' Equity
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7
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8
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Notes
to Consolidated Financial Statements
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9 -
14
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-
- - - - - - -
- 3
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The Board
of Directors
Digital Power
Corporation
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Re:
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Review
of unaudited interim consolidated financial
statements
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for the three and nine-month periods ended September 30,
2010
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We have reviewed the accompanying
interim consolidated balance sheet of Digital Power Corporation ("the Company")
and its subsidiary as of September 30, 2010, and the related interim
consolidated statements of operations and cash flows for the three and
nine-month periods ended September 30, 2010 and 2009, and the interim statement
of changes in shareholders' equity for the nine-month period ended September 30,
2010. These financial statements are the responsibility of the Company's
management.
We conducted our review in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). A review of interim financial information consists principally
of applying analytical procedures and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with the standards of the Public Company
Accounting Oversight Board, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not
aware of any material modifications that should be made to the interim
consolidated financial statements referred to above for them to be in conformity
with U.S. generally accepted accounting principles.
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Tel-Aviv,
Israel
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KOST
FORER GABBAY & KASIERER
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November
5, 2010
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A
Member of Ernst & Young
Global
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- 4
-
DIGITAL
POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
U.S.
dollars in thousands, except share and per share data
|
September
30,
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December
31,
|
|||||||
|
2010
|
2009
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|||||||
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Unaudited
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||||||||
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ASSETS
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||||||||
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CURRENT
ASSETS:
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||||||||
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Cash
and cash equivalents
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$ | 2,398 | $ | 2,967 | ||||
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Restricted
cash
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83 | 84 | ||||||
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Trade
receivables (net of allowance for doubtful accounts of $ 111 and
$ 127 at September 30, 2010 and December 31, 2009,
respectively)
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2,585 | 1,522 | ||||||
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Prepaid
expenses and other receivables
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165 | 243 | ||||||
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Inventories
(Note 3)
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1,890 | 1,056 | ||||||
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Total
current assets
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7,121 | 5,872 | ||||||
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PROPERTY
AND EQUIPMENT, NET
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236 | 231 | ||||||
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TECHNOLOGY,
NET (Note 4)
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479 | - | ||||||
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LONG-TERM
DEPOSITS
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42 | 41 | ||||||
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Total
assets
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$ | 7,878 | $ | 6,144 | ||||
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LIABILITIES
AND SHAREHOLDERS' EQUITY
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||||||||
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CURRENT
LIABILITIES:
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||||||||
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Accounts
payable
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$ | 1,158 | $ | 891 | ||||
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Related
parties - trade payables
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1,031 | 531 | ||||||
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Advances
from customers and deferred revenue
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1,012 | 471 | ||||||
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Other
current liabilities
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644 | 492 | ||||||
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Total
current liabilities
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3,845 | 2,385 | ||||||
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SHAREHOLDERS'
EQUITY:
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||||||||
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Share
capital -
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||||||||
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Series
A Redeemable, Convertible Preferred shares, no par value - 500,000 shares
authorized at September 30, 2010 and December 31, 2009; 0 shares issued
and outstanding at September 30, 2010 and December 31,
2009
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- | - | ||||||
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Preferred
shares, no par value - 1,500,000 shares authorized at September 30,
2010 and December 31, 2009; 0 shares issued and outstanding at
September 30, 2010 and December 31, 2009
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- | - | ||||||
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Common
shares, no par value - 30,000,000 shares authorized at September 30,
2010 and December 31, 2009; 6,678,968 and 6,626,468 shares issued and
outstanding at September 30, 2010 and December 31, 2009,
respectively
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- | - | ||||||
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Additional
paid-in capital
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14,150 | 14,042 | ||||||
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Accumulated
deficit
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(9,658 | ) | (9,932 | ) | ||||
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Accumulated
other comprehensive loss
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(459 | ) | (351 | ) | ||||
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Total
shareholders' equity
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4,033 | 3,759 | ||||||
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Total
liabilities and shareholders' equity
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$ | 7,878 | $ | 6,144 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
- 5
-
DIGITAL
POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF
OPERATIONS
U.S.
dollars in thousands, except per share data
|
Nine
months ended
September
30,
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Three
months ended
September
30,
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|||||||||||||||
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2010
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2009
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2010
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2009
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|||||||||||||
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Unaudited
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||||||||||||||||
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Revenues
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$ | 7,324 | $ | 6,224 | $ | 3,186 | $ | 1,708 | ||||||||
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Cost
of revenues
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4,624 | 4,071 | 2,036 | 1,196 | ||||||||||||
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Gross
profit
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2,700 | 2,153 | 1,150 | 512 | ||||||||||||
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Operating
expenses:
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||||||||||||||||
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Engineering
and product development
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429 | 405 | 161 | 136 | ||||||||||||
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Selling
and marketing
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857 | 834 | 253 | 250 | ||||||||||||
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General
and administrative
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1,084 | 1,022 | 354 | 357 | ||||||||||||
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Total
operating expenses
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2,370 | 2,261 | 768 | 743 | ||||||||||||
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Operating
income (loss)
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330 | (108 | ) | 382 | (231 | ) | ||||||||||
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Financial
income (expense), net
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(56 | ) | (46 | ) | (79 | ) | 26 | |||||||||
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Net
income (loss)
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$ | 274 | $ | (154 | ) | $ | 303 | $ | (205 | ) | ||||||
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Basic
net earnings (loss) per share
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$ | 0.041 | $ | (0.023 | ) | $ | 0.045 | $ | (0.031 | ) | ||||||
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Diluted
net earnings (loss) per share
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$ | 0.040 | $ | (0.023 | ) | $ | 0.045 | $ | (0.031 | ) | ||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
- 6
-
DIGITAL
POWER CORPORATION AND SUBSIDIARY
STATEMENT
OF CHANGES IN SHAREHOLDERS' EQUITY
U.S.
dollars in thousands, except share data
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Other
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||||||||||||||||||||||||
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Common
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Additional
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accumulated
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Total
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Total
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||||||||||||||||||||
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shares
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paid-in
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Accumulated
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comprehensive
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comprehensive
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shareholders'
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|||||||||||||||||||
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Number
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capital
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deficit
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loss
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loss
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equity
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|||||||||||||||||||
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Balance
as of January 1, 2010
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6,626,468 | $ | 14,042 | $ | (9,932 | ) | $ | (351 | ) | - | $ | 3,759 | ||||||||||||
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Stock
compensation related to options granted to Telkoor's employees and other
non-employee consultant
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- | 1 | - | - | - | 1 | ||||||||||||||||||
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Stock
compensation related to options granted to employees
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- | 61 | - | - | - | 61 | ||||||||||||||||||
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Exercise
of options granted to employees
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52,500 | 46 | - | - | - | 46 | ||||||||||||||||||
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Comprehensive
income:
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||||||||||||||||||||||||
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Net
income
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- | - | 274 | - | 274 | 274 | ||||||||||||||||||
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Foreign
currency translation adjustments
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- | - | - | (108 | ) | (108 | ) | (108 | ) | |||||||||||||||
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Total
comprehensive income
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||||||||||||||||||||||||
| $ | 166 | |||||||||||||||||||||||
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Balance
as of September 30, 2010 (unaudited)
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6,678,968 | $ | 14,150 | $ | (9,658 | ) | $ | (459 | ) | $ | 4,033 | |||||||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
- 7
-
DIGITAL
POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
Nine
months ended
September
30,
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||||||||
|
2010
|
2009
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|||||||
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Unaudited
|
||||||||
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Cash flows from operating
activities:
|
||||||||
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Net
income (loss)
|
$ | 274 | $ | (154 | ) | |||
|
Adjustments
required to reconcile net income (loss) to net cash used in
operating activities:
|
||||||||
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Depreciation
and amortization
|
38 | 56 | ||||||
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Stock
compensation related to options granted to employees
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61 | 57 | ||||||
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Stock
compensation related to options granted to Telkoor's employees and other
non-employee consultant
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1 | 14 | ||||||
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Decrease
(increase) in trade receivables, net
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(1,066 | ) | 612 | |||||
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Decrease
(increase) in prepaid expenses and other accounts
receivable
|
77 | (73 | ) | |||||
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Decrease
(increase) in inventories
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(829 | ) | 459 | |||||
|
Increase
(decrease) in accounts payable and related parties- trade
payables
|
762 | (1,154 | ) | |||||
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Increase
in deferred revenues
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526 | 129 | ||||||
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Increase
in other current liabilities
|
149 | 54 | ||||||
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Net
cash used in operating activities
|
(7 | ) | - | |||||
|
Cash flows from investing
activities:
|
||||||||
|
Purchase
of property and equipment
|
(49 | ) | (53 | ) | ||||
|
Purchase
of technology
|
(471 | ) | - | |||||
|
Net
cash used in investing activities
|
(520 | ) | (53 | ) | ||||
|
Cash flows from financing
activities:
|
||||||||
|
Proceeds
from exercise of options
|
46 | 12 | ||||||
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Net
cash provided by financing activities
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46 | 12 | ||||||
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Effect
of exchange rate changes on cash and cash equivalents
|
(88 | ) | 108 | |||||
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Increase
(decrease) in cash and cash equivalents
|
(569 | ) | 67 | |||||
|
Cash
and cash equivalents at the beginning of the period
|
2,967 | 2,476 | ||||||
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Cash
and cash equivalents at the end of the period
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$ | 2,398 | $ | 2,543 | ||||
|
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
.
- 8
-
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
1:-
|
GENERAL
|
|
|
a.
|
Digital
Power Corporation (the "Company" or "DPC") was incorporated in 1969, under
the General Corporation Law of the State of California. The Company and
Digital Power Limited ("DPL"), a wholly owned subsidiary located in the
United Kingdom, are currently engaged in the design, manufacture and sale
of high-grade switching power supplies and solutions. The
Company also provides static frequency and AC/DC switching converters,
including distributed power systems. The Company has two
reportable geographic segments - North America (sales through DPC) and
Europe (sales through DPL).
|
|
|
b.
|
The
Company depends on Telkoor Telecom Ltd. ("Telkoor"), a major shareholder
of the Company and one of DPC's third party subcontractors, for some of
its products know-how, and for its manufacturing capabilities in the
production of some of the products that DPC sells. If Telkoor is unable or
unwilling to continue manufacturing the Company's products in required
volumes on a timely basis, that could lead to loss of sales, and adversely
affect the Company's operating results and cash position. The Company also
depends on Telkoor's intellectual property and ability to transfer
production of some of Digital Power’s product line 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 the
Company's ability to meet its customers'
expectations.
|
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
|
|
|
a.
|
The
significant accounting policies applied in the annual financial statements
of the Company as of December 31, 2009 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,
2010 and for the three and nine months ended September 30, 2010 and 2009 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’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2009. The results of operations for
the nine months ended September 30, 2010 are not necessarily indicative of the
results for the entire fiscal year ending December 31, 2010.
|
|
b.
|
Accounting
for stock-based compensation:
|
The
Company has several stock-based employee compensation plans, which are described
more fully in Note 5. The Company accounts for stock-based
compensation in accordance with Accounting Standards Codification Statement
("ASC") 718 (formerly SFAS No. 123 (revised 2004)) “Stock compensation” (“ASC
718”).
- 9
-
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
Company and its subsidiary apply ASC 718 and ASC 505-50 (formerly EITF 96-18)
“Equity-Based Payments to Non-Employees” (“ASC 505-50") to options issued to
non-employees.
ASC 718 requires use of an option valuation model to measure the fair value of
the options at the grant date.
|
NOTE
3:-
|
INVENTORIES
|
|
September
30,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Unaudited
|
||||||||
|
Raw
materials, parts and supplies
|
$ | 387 | $ | 232 | ||||
|
Work
in progress
|
514 | 285 | ||||||
|
Finished
products
|
989 | 539 | ||||||
| $ | 1,890 | $ | 1,056 | |||||
|
NOTE
4:-
|
TECHNOLOGY,
NET
|
On August
25, 2010, the Company and its wholly-owned subsidiary, DPL, entered into an
agreement with Telkoor Power Supplies Ltd. (“TPS”), a subsidiary of Telkoor,
pursuant to which, (1) TPS sold, assigned and conveyed to DPL all of its rights,
title and interest in and to the intellectual property associated with the
Compact Peripheral Component Interface 600 W AC/DC power supply series (the
“Assets” or "IP") and (2) DPL granted to TPS an irrevocable license to sell the
Assets in Israel on an exclusive basis. In consideration for the purchase of the
IP, DPL has paid TPS $480. The consideration for the license provided
to TPS to sell the Assets in Israel is a royalty fee of 15% of TPS's direct
production costs of sales, due on a quarterly basis.
TPS will
provide the Company reasonable training and technical support, if necessary, for
a period of 60 months in order to enable the Company to properly and effectively
use the IP to manufacture the Assets. In accordance with the agreement, the
consideration for the IP may be reduced over a four year period in the event
that annual sales for each fiscal year between 2011 and 2014 are less than a
fixed threshold of units on an annual basis based on an offset value per unit as
described in the agreement. If there is a shortfall in sale of units in one
annual period and, in the subsequent period, the Company sells more than the
fixed unit threshold, this difference will be offset from any reduced
consideration in any annual periods between 2011and
2014.
Since the
transaction was made between two related parties, an external independent
valuation has been prepared in order to support the fair value of the IP
purchased in accordance with ASC 820.
The
useful life of the IP has been determined to be five years and the amortization
method is straight line as management considers this method as the most
appropriate.
- 10
-
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
5:-
|
ACCOUNTING
FOR STOCK-BASED COMPENSATION
|
|
|
a.
|
Stock
option plans:
|
|
|
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, 2010, the Company has authorized, by three Incentive
Share Option Plans, the grant of options to officers, management, other
key employees and others of up to 513,000, 240,000 and 1,519,000,
respectively, of the Company's common stock. As of September 30, 2010,
options to purchase up to an aggregate of 762,645 shares of the Company's
common stock 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 the option 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, 2010
|
||||||||||||||||
|
Amount
of options
|
Weighted
average
exercise
price
|
Weighted
average
remaining
contractual
term (years)
|
Aggregate
Intrinsic
value
*)
|
|||||||||||||
|
Outstanding
at the beginning of the period
|
825,240 | $ | 1.05 | |||||||||||||
|
Exercised
|
(52,500 | ) | 0.89 | |||||||||||||
|
Forfeited
|
(56,740 | ) | 1.19 | |||||||||||||
|
Expired
|
(17,000 | ) | 2.38 | |||||||||||||
|
Outstanding
at the end of the period
|
699,000 | $ | 1.02 | 4.49 | 121 | |||||||||||
|
Exercisable
options at the end of the period
|
599,750 | $ | 1.00 | 3.69 | 240 | |||||||||||
|
|
*)
|
Calculation
of aggregate intrinsic value is based on the share price of the Company's
common stock as of September 30, 2010 ($ 1.08 per
share).
|
- 11
-
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
5:-
|
ACCOUNTING
FOR STOCK-BASED COMPENSATION
(Cont.)
|
Under the
provisions of ASC 718, 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. 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.
No
options were granted during the first nine months of 2010.
As of
September 30, 2010, there was $ 119 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 the
next 38 months.
|
|
b.
|
Employee
Stock Ownership Plan:
|
The
Company has an Employee Stock Ownership Plan ("ESOP") covering eligible
employees. The ESOP provides for the Employee Stock Ownership Trust ("ESOT") to
distribute shares of the Company's common shares as retirement benefits to the
participants. The Company has not distributed shares since 1998. As of September
30, 2010, the ESOT held 167,504 common shares.
|
NOTE
6:-
|
NET
INCOME (LOSS) PER SHARE
|
The
following table sets forth the computation of the basic and diluted net earnings
(loss) per share:
a.
Numerator:
|
Nine
months ended
September
30,
|
Three
months ended
September
30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Unaudited
|
||||||||||||||||
|
Net
income (loss) available to common shareholders
|
$ | 274 | $ | (154 | ) | $ | 303 | $ | (205 | ) | ||||||
b.
Denominator:
|
Denominator
for basic net earnings (loss) per share of weighted average number of
common shares
|
6,660,996 | 6,615,708 | 6,678,968 | 6,615,708 | ||||||||||||
|
Effect
of dilutive securities:
|
||||||||||||||||
|
Employee
stock options
|
126,191 | 96,154 | 106,810 | 42,439 | ||||||||||||
|
Denominator
for diluted net earnings per common share
|
6,787,187 | 6,711,862 | 6,785,778 | 6,658,147 |
- 12
-
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
7:-
|
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").
|
Nine
months ended September 30, 2010 (unaudited)
|
||||||||||||||||
|
DPC
|
DPL
|
Eliminations
|
Total
|
|||||||||||||
|
Revenues
|
$ | 4,174 | $ | 3,150 | $ | $ | 7,324 | |||||||||
|
Intersegment
revenues
|
59 | 129 | (188 | ) | - | |||||||||||
|
Total
revenues
|
$ | 4,233 | $ | 3,279 | $ | (188 | ) | $ | 7,324 | |||||||
|
Depreciation
expense
|
$ | 16 | $ | 26 | $ | - | $ | 42 | ||||||||
|
Operating
income
|
$ | 53 | $ | 277 | $ | - | $ | 330 | ||||||||
|
Financial
expenses, net
|
$ | 56 | ||||||||||||||
|
Net
income
|
$ | 47 | $ | 227 | $ | - | $ | 274 | ||||||||
|
Expenditures
for segment assets, net as of September 30, 2010
|
$ | 42 | $ | 7 | $ | - | $ | 49 | ||||||||
|
Identifiable
assets as of September 30, 2010
|
$ | 3,524 | $ | 4,354 | $ | - | $ | 7,878 | ||||||||
|
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)
|
$ | (354 | ) | $ | 246 | $ | - | $ | (108 | ) | ||||||
|
Financial
expenses, net
|
$ | 46 | ||||||||||||||
|
Net
income (loss)
|
$ | (372 | ) | $ | 218 | $ | - | $ | (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 | ||||||||
- 13
-
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
7:-
|
SEGMENTS,
MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
(Cont.)
|
|
Three
months ended September 30, 2010 (unaudited)
|
||||||||||||||||
|
DPC
|
DPL
|
Eliminations
|
Total
|
|||||||||||||
|
Revenues
|
$ | 1,784 | $ | 1,402 | $ | $ | 3,186 | |||||||||
|
Intersegment
revenues
|
29 | 21 | (50 | ) | - | |||||||||||
|
Total
revenues
|
$ | 1,813 | $ | 1,423 | $ | (50 | ) | $ | 3,186 | |||||||
|
Depreciation
expense
|
$ | 4 | $ | 9 | $ | - | $ | 13 | ||||||||
|
Operating
income
|
$ | 164 | $ | 218 | $ | - | $ | 382 | ||||||||
|
Financial
expenses, net
|
$ | 79 | ||||||||||||||
|
Net
income
|
$ | 164 | $ | 139 | $ | - | $ | 303 | ||||||||
|
Expenditures
for segment assets as of September 30, 2010
|
$ | 8 | $ | - | $ | - | $ | 8 | ||||||||
|
Identifiable
assets as of September 30, 2010
|
$ | 3,524 | $ | 4,354 | $ | - | $ | 7,878 | ||||||||
|
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
income (loss)
|
$ | (298 | ) | $ | 67 | $ | - | $ | (231 | ) | ||||||
|
Financial
income, net
|
$ | 26 | ||||||||||||||
|
Net
income (loss)
|
$ | (312 | ) | $ | 107 | $ | - | $ | (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 | ||||||||
- - - - -
- - -
- 14
-
|
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
Digital
Power Corporation is a solution-driven organization that designs, develops,
manufactures and sells high-grade customized and flexible power system solutions
for the most demanding applications in the medical, military, telecom and
industrial markets. 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 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 (Direct Current/Active
Current) inverters and UPS (Uninterrupted Power Supply) products. DPL’s defense
business has specialists in the field of naval applications of power
distribution.
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 the
telecom/industrial, and increasingly in the medical market segments for our new
line of high density and high efficiency power products. These
products set an industry standard for providing high-power output in package
sizes that are among the smallest available for such commercial
products.
In an
effort to provide short lead-times, high quality products and competitive
pricing to support our markets, we have entered into production agreements with
several Asia-Pacific contract manufacturers. These agreements allow us to
better control production costs and ensure high quality products deliverable in
a timely manner to meet our market demand.
- 15
-
We intend
to remain an innovative leader in the development of cutting-edge custom power
solutions and feature-rich 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
high-grade 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 are taking initiatives to develop and sell
high-efficiency “green power” solutions.
RESULTS
OF OPERATIONS
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2010, COMPARED TO SEPTEMBER 30,
2009
Revenues
Our
revenues increased by 86.5 % to $3,186,000 for the three months ended September
30, 2010, from $1,708,000 for the three months ended September 30, 2009. The
increase in revenues is mainly due to higher sales of our standard and custom
design commercial products and our military products. During the three months
ended September 30, 2010, we generated revenues from the sale of a fully
customized product solution for the medical market, as part of our earlier
strategy to transition away from a dependence on standard, commodity products.
In addition, during this period, we successfully delivered one of our major
military projects. Revenues from sales of our commercial products during this
period increased by 100.2% to $2,246,000 for the three months ended September
30, 2010, from $1,122,000 for the three months ended September 30, 2009.
Revenues from sales of our military products increased by 60.4% to $940,000 for
the three months ended September 30, 2010, from $586,000 for the three months
ended September 30, 2009. The increase in our revenue from our military products
was mainly due to the delivery of one of our major defense
projects.
Revenues
from our U.S. operations increased by 226.7% to $1,784,000 for the three months
ended September 30, 2010, from $546,000 for the three months ended September 30,
2009. Revenues from our European operations of DPL increased by 20.7% to
$1,402,000 for the three months ended September 30, 2010, from $1,162,000 for
the three months ended September 30, 2009. The increase in revenues in our U.S.
operations is mainly due to higher sales of our standard commercial products and
to revenues from the sale of a fully customized product solution for the medical
industry. The increase in revenues from our European operations is mainly
attributable to the delivery of one of our major military projects in
Europe.
For the
nine months ended September 30, 2010, our revenues increased by 17.7% to
$7,324,000, from $6,224,000 for the nine months ended September 30, 2009.
Revenues from sales of our commercial products increased by 37.7% to $5,602,000
for the nine months ended September 30, 2010, from $4,069,000 for the nine
months ended September 30, 2009. Revenues from our sales of military products
decreased by 20.1% to $1,722,000 for the nine months ended September 30, 2010,
from $2,155,000 for the nine months ended September 30, 2009. The decrease in
revenues of our military products is mainly attributable to differentials in the
phasing of such large capital projects.
For the
nine months ended September 30, 2010, revenues from our U.S. operations
increased by 56.2% to $4,174,000, from $2,673,000 for the nine months ended
September 30, 2009. This increase in revenues is mainly attributable to an
increase in sales of our standard commercial products and the sale of a fully
customized product solution for the medical industry, as discussed above.
Revenues from our European operations of DPL decreased by 11.3% to $3,150,000
for the nine months ended September 30, 2010, from $3,551,000 for the nine
months ended September 30, 2009. The decrease in revenues from our European
operation is mainly attributable to the decrease in sales of our military
products, as explained above.
Gross
Margins
Gross
margins increased to 36.1% for the three months ended September 30, 2010,
compared to 30.0% for the three months ended September 30, 2009. Gross margins
for the nine months ended September 30, 2010 increased to 36.9% compared to
gross margins of 34.6% for the nine months ended September 30, 2009. The
increase in gross margins for the nine and three-month periods ended September
30, 2010 is mainly attributable to the increase in revenue with a similar level
of fixed cost structure.
- 16
-
Engineering
and Product Development
Engineering
and product development expenses were $161,000, or 5.1% of revenues, for the
three months ended September 30, 2010, compared to $136,000, or 8.0% of
revenues, for the three months ended September 30, 2009. Engineering and product
development expenses were $429,000, or 5.9% of revenues, for the nine months
ended September 30, 2010, compared to $405,000, or 6.5% of revenues, for the
nine months ended September 30, 2009. The increase is attributable to
salary-related expenses due to the fact that during the three months ended
September 30, 2009, we had a temporary decrease in salary-related
expenses.
Selling
and Marketing
Selling
and marketing expenses were $253,000, or 7.9% of revenues, for the three months
ended September 30, 2010, compared to $250,000, or 14.6% of revenues, for the
three months ended September 30, 2009. Selling and marketing expenses
were $857,000, or 11.7% of revenues, for the nine months ended September 30,
2010, compared to $834,000, or 13.4% of revenues, for the nine months ended
September 30, 2009. The increase in selling and marketing expenses for the nine
months ended September 30, 2010 was primarily due to an increase in salary
expenses related to a separation agreement from a senior marketing staff member,
and to an increase in other marketing expenses, partially offset by the
temporary decrease in salary-related expenses during the three months ended June
30, 2010.
General
and Administrative
General
and administrative expenses were $354,000, or 11.1% of revenues, for the three
months ended September 30, 2010, compared to $357,000, or 20.9% of revenues, for
the three months ended September 30, 2009. General and administrative expenses
were $1,084,000, or 14.8% of revenues, for the nine months ended September 30,
2010, compared to $1,022,000, or 16.4% of revenues, for the nine months ended
September 30, 2009. The increase in general and administrative expenses during
the nine months ended September 30, 2010 was mainly due to an increase in salary
expenses, attributable to the hiring of a full-time Chief Financial Officer, and
to an increase in general expenses, such as travel, offset by a temporary
decrease in salary-related expenses during the three months ended June 30,
2010.
Financial
Income (Expense)
Financial
expense was $79,000 for the three months ended September 30, 2010, compared to
financial income of $26,000 for the three months ended September 30, 2009.
Financial expense was $56,000 for the nine months ended September 30, 2010,
compared to financial expense of $46,000 for the nine months ended September 30,
2009. 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, 2010, we had a net income of $303,000 compared
to a net loss of $205,000 for the three months ended September 30, 2009. Net
income for the nine months ended September 30, 2010 was $274,000 compared to a
net loss of $154,000 for the nine months ended September 30, 2009. The increase
in the net income for the three and nine months ended September 30, 2010 is due
primarily to the increase in our revenues and gross margins, partially offset by
the increase in our financial expenses.
LIQUIDITY
AND CAPITAL RESOURCES
On
September 30, 2010, we had cash and cash equivalents of $2,398,000 and working
capital of $3,276,000. This compares with cash and cash equivalents of
$2,967,000 and working capital of $3,487,000 at December 31, 2009. The decrease
in cash and cash equivalents is due mainly to the completion of the purchase of
a technology for a consideration of $480,000, and to an increase in trade
receivables and in inventories, offset by increases in accounts payable, related
parties-trade payables, deferred revenues and other current liabilities. The
decrease in working capital is mainly due to a decrease in cash and cash
equivalents, offset partially by an increase in inventory and in trade
receivables.
- 17
-
Net cash used in operating activities
totaled $7,000 for the nine months ended September 30, 2010, compared to net
cash provided by operating activities of $0 for the nine months ended September
30, 2009. The net usage of cash from operating activities was mainly due to the
net income for the nine months ended September 30, 2010, and to an increase in
accounts payable, related parties-trade payables, deferred revenues and other
current liabilities, offset by an increase in inventories and trade
receivables.
Net cash used in investing activities
was $520,000 for the nine months ended September 30, 2010, compared to net cash
used in investing activities of $53,000 for the nine months ended September 30,
2009. The net usage of cash from investing activities is due to the purchase of
technology for a consideration of $480,000. In particular, on August 25, 2010,
the Company and its wholly-owned subsidiary, DPL, entered into an agreement with
Telkoor Power Supplies Ltd. (“TPS”), a subsidiary of Telkoor, pursuant to which,
(1) TPS sold, assigned and conveyed to DPL all of its rights, title and interest
in and to the intellectual property associated with the Compact Peripheral
Component Interface 600 W AC/DC power supply series (the “Assets” or "IP") and
(2) DPL granted to TPS an irrevocable license to sell the Assets in Israel on an
exclusive basis. In consideration for the purchase of the IP, DPL has paid TPS
$480,000. The consideration for the license provided to TPS to sell the Assets
in Israel is a royalty fee of 15% of TPS's direct production costs of sales, due
on a quarterly basis.
TPS will
provide the Company reasonable training and technical support, if necessary, for
a period of 60 months in order to enable the Company to properly and effectively
use the IP to manufacture the Assets. In accordance with the agreement, the
consideration for the IP may be reduced over a four year period in the event
that annual sales for each fiscal year between 2011 and 2014 are less than a
fixed threshold of units on an annual basis based on an offset value per unit as
described in the agreement. If there is a shortfall in sale of units in one
annual period and, in the subsequent period, the Company sells more than the
fixed unit threshold, this difference will be offset from any reduced
consideration in any annual periods between 2011 and 2014.
Since the
transaction was made between two related parties, an external independent
valuation has been prepared in order to support the fair value of the IP
purchased in accordance with ASC 820.
The useful life of the IP has been
determined to be five years and the amortization method is straight line as
management considers this method the most appropriate.
Net cash provided by financing
activities was $46,000 for the nine months ended September 30, 2010 and $12,000
for the nine months ended September 30, 2009, and was due to employees’ options
exercised.
Our
wholly-owned subsidiary, DPL, leases a 24,500 square-foot facility in Salisbury,
United Kingdom, where it designs, develops, manufactures, markets and
distributes commercial and military power products for the European and other
international markets. Sales and service support staff for its European network
of distributors are located within the building together with other functions,
such as engineering, manufacturing and administration DPL’s rent expense is
approximately $13,000 per month. On September 27, 2010, DPL signed a
lease with the building’s owners for a rent equal to that for the lease that
recently expired. The lease, which commenced on September 29, 2010,
is for a period of fifteen years with an option for DPL to cancel after ten
years. DPL agreed to perform certain decoration work upon
commencement of 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.
In our
Annual Report on Form 10-K for the year ended December 31, 2009, 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.
- 18
-
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET
RISK
|
Not applicable for a smaller reporting
company.
|
ITEM 4.
|
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.
|
ITEM 1.
|
LEGAL
PROCEEDINGS
|
See our
disclosures under “Legal Proceedings” in our Annual Report on Form 10-K, filed
March 25, 2010. 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 adverse effect on our business, results of operations and
financial condition. We undertake no obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
Although
we experienced an operating income and a net income during the nine months ended
September 30, 2010, we experienced an operating loss and a net loss during the
year ended December 31, 2009, we have historically experienced net losses and we
may experience net losses in the future.
For the
three months ended September 30, 2010, we had an operating income of $382,000
and a net income of $303,000; for the nine months ended September 30, 2010 we
had an operating income of $330,000 and a net income of $274,000, and for the
year ended December 31, 2009, we had an operating loss of $102,000 and a net
loss of $148,000. Although we have actively taken steps to increase
our revenue and reduce our costs, we may incur operating and net losses in the
future unless we continue to increase revenues by selling current and custom
design 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 some of our products.
We depend
on Telkoor, our largest shareholder and one of our third party subcontractors,
for design and manufacturing capabilities for some of the products that we sell.
If Telkoor is unable or unwilling to continue designing or manufacturing our
products in required volumes and with a certain level of quality 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
Telkoor’s agreements with other companies, long lead-times and the high cost of
Telkoor’s products. In April 2008, for example, Telkoor signed a
“Private Label” agreement with Murata Power Solutions in Canada to sell
Telkoor’s products under the Murata brand name, which agreement positions Murata
as a direct competitor of ours with respect to the sale of Telkoor’s products in
North America. Also, in 2009, Telkoor’s manufacturing lead-times
increased, which has hindered our ability to respond to our customers’
needs. 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. We are also dependent upon Telkoor’s terms and conditions
with its contract manufacturers for some of our products, which terms and
conditions may not always be in our best interest.
- 19
-
We
are dependent upon our ability, and our contract manufacturers’ ability, to
timely procure electronic components.
Because
of the global recession, many raw material vendors have reduced capacities,
closed production lines and, in some cases, even discontinued their
operations. As a result, there is a global shortage of certain
electronic components, which has extended our production lead-time and our
production costs. For example, in some cases, finished goods that
used to be available in 12 weeks for a production purchase order are now
available only after 22 weeks. Also, some materials are no longer
available to support some of our products, thereby requiring us to search for
cross materials or, even worse, redesign some of our products to support
currently-available materials. Such redesign efforts may require
certain regulatory and safety agency re-submittals, which may cause further
production delays.
While we have initiated
actions that we believe will limit our exposure to such problems, the dynamic
business conditions in many of our markets may challenge the solutions that have
been put in place, and issues may recur in the future.
In
addition, some of our products are manufactured, assembled and tested by third
party subcontractors and contract manufacturers located in Asia. While we have
had relationships with many of these third parties in the past, we cannot
predict how or whether these relationships will continue in the future. In
addition, changes in management, financial viability, manufacturing demand or
capacity, or other factors, at these third parties could hurt our ability to
have our products manufactured.
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 system 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 adverse 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 commercial success of this new technology will depend on a number
of factors, including the successful development of the custom products, 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.
- 20
-
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, 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, and delays in, or
cancellations or rescheduling of, orders or shipments, any of which would
materially harm our business.
We
outsource, and are dependent upon developer partners for, 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
specifications 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.
- 21
-
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
and high demand for our products, we may not have adequate supplies of inventory
on hand to satisfy our customers' needs. Furthermore, during these periods of
growth, our suppliers may also experience high demand and, therefore, may not
have adequate levels of the components and other materials that we require to
build products so that we can meet our customers' needs.
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.
- 22
-
Failure
of our information technology infrastructure to operate effectively could
adversely affect our business.
We depend
heavily on information technology infrastructure to achieve our business
objectives. If a problem occurs that impairs this infrastructure, the resulting
disruption could impede our ability to record or process orders, manufacture and
ship in a timely manner, or otherwise carry on business in the normal course.
Any such events could cause us to lose customers or revenue and could require us
to incur significant expense to remediate.
We
are subject to certain governmental regulatory restrictions relating to our
international sales.
Some of
our products are subject to 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. Any such future sales would be subject to such
regulations.
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 59.4% of net revenues during
the nine months ended September 30, 2010 and for 50.87% of net revenues in the
year ended December 31, 2009, 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.
- 23
-
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 Securities and Exchange Commission
(“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, which
would be costly and would divert our resources from the development of our
business. 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.
- 24
-
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, 2010, we had outstanding exercisable options to purchase an aggregate of
599,750 shares of common stock, with a weighted average exercise price of $1.02
per share, exercisable at prices ranging from $0.48 to $2.37 per
share.
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
None.
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
|
ITEM 4.
|
RESERVED
|
|
OTHER
INFORMATION
|
On
November 3, 2010, the Company issued a press release announcing its financial
results for the third quarter ended September 30, 2010. A copy of the
press release is furnished as Exhibit 99.1 hereto.
|
ITEM 6.
|
EXHIBITS
|
Exhibits
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer, as adopted
pursuant to Section 302 of the
Sarbanes-Oxley
of 2002
|
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer, as adopted
pursuant to Section 302 of the
Sarbanes-Oxley
of 2002
|
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer, pursuant to 18
U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
99.1
|
|
Press
Release, dated November 3, 2010, issued by Digital Power
Corporation
|
- 25
-
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
5, 2010
Digital
Power Corporation
|
/s/
Amos Kohn
|
||
|
Amos
Kohn
|
||
|
President
& Chief Executive Officer
|
||
|
(Principal
Executive Officer)
|
||
|
By:
|
/s/
Assaf (Assi) Itshayek
|
|
|
Assaf
(Assi) Itshayek
|
||
|
Chief
Financial Officer
|
||
|
(Principal
Financial and Accounting
Officer)
|
||
- 26
-
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial Statements 3Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations 15Item 3. Quantitative and Qualitative Disclosures About Market Risk 19Item 4. Controls and Procedures 19Part II Other InformationItem 1. Legal Proceedings 19Item 1A. Risk Factors 19Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds 25Item 3. Defaults Upon Senior Securities 25Item 4. Reserved 25Item 5. Other Information 25Item 6. Exhibits 25Note 1:- GeneralNote 2:- Significant Accounting PoliciesNote 2:- Significant Accounting Policies (cont.)Note 3:- InventoriesNote 4:- Technology, NetNote 5:- Accounting For Stock-based CompensationNote 5:- Accounting For Stock-based Compensation (cont.)Note 6:- Net Income (loss) Per ShareNote 7:- Segments, Major Customers and Geographic InformationNote 7:- Segments, Major Customers and Geographic Information (cont.)Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. ReservedItem 5. Other InformationItem 6. Exhibits