Digital Power Corporation — Q2 2016 Form 10-Q
Entity note: The filing is for Digital Power Corporation (NYSE MKT: DPW), not Hyperscale Data, Inc. The financial statements are unaudited and report U.S. dollars in thousands unless noted. Reporting period ended June 30, 2016.
Business context
The company designs, manufactures and sells customized power supplies and converters for medical, military, telecom and industrial markets. Its wholly owned UK subsidiary, Digital Power Limited (Gresham), serves Europe. The filing describes North American and European geographic segments.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $2,064 | $2,151 | $3,777 | $4,047 |
| Gross profit / margin | $754 / 36.5% | $801 / 37.2% | $1,374 / 36.4% | $1,514 / 37.4% |
| Operating income (loss) | $11 | ($147) | ($189) | ($366) |
| Net income (loss) | $66 | ($271) | ($127) | ($475) |
| Basic and diluted EPS | $0.01 | ($0.04) | ($0.02) | ($0.07) |
- For the six months, operating cash flow was $134, compared with cash used of $250 in 2015. Investing cash outflow was $74; there were no financing activities. Cash declined $29 to $1,212, including an $89 unfavorable exchange-rate effect.
- At June 30, cash was $1,212, current assets $3,799, current liabilities $1,343, total assets $4,564 and shareholders’ equity $3,221. The balance sheet reports no debt; no separate borrowing balance is shown.
- Gross margins eased year over year in both periods. The six-month operating loss narrowed, while Q2 returned to operating and net income.
Material changes and management commentary
- Six-month revenue declined 6.7%, mainly due to fewer military-product shipments from DPL. Q2 revenue fell 4.0%; North American revenue rose 14.0%, while European revenue fell 21.7%, which management attributed primarily to timing of deliveries for warship programs.
- Operating expenses declined year over year: management cited completion of certain development work, reduced sales staffing, the former CFO’s resignation, lower stock-option expense and lower legal costs.
- Net financial income was $55 in Q2 2016 versus a $68 expense in Q2 2015, primarily reflecting foreign-exchange movements. Foreign-currency translation produced a $210 six-month comprehensive loss, which management linked to sterling weakening after the UK EU-membership referendum.
- Management said cash and operating cash generation should meet anticipated needs for at least 12 months. It cautioned that failure to increase sales could require debt or equity financing, potentially diluting shareholders. No numerical revenue or earnings guidance is provided.
Risks, contingencies and unusual items
- The company depends on Advice Electronics for technology, design and manufacturing of certain products. The 2016 agreement permits manufacture of certain products through August 2017 for royalties; subsequent distribution rights are subject to Advice’s consent and extend through December 2020. The filing says termination of a related manufacturing-rights agreement could materially affect profitability and cash position.
- One customer represented 20% of first-half revenue ($768). Other risks include component shortages and long lead times, contract-manufacturer dependence, product and customer concentration, competitive pricing, foreign-currency exposure and fluctuating order timing.
- NYSE MKT had found the company below continued-listing equity standards. It granted an extension, based on the company’s plan, through June 19, 2017; failure to regain compliance could result in delisting.
- The filing reports no legal proceedings. Management concluded disclosure controls were effective and reported no significant changes in internal control over financial reporting.
Key facts for investors to verify
- Confirm the registrant identity: this 10-Q covers Digital Power Corporation, not Hyperscale Data, Inc.
- Track revenue, margins and cash generation, particularly DPL’s delivery timing and the company’s ability to sustain North American growth.
- Assess liquidity against the company’s 12-month sufficiency assertion, and monitor whether additional financing becomes necessary.
- Review the Advice agreements, royalty terms and consent requirements, as well as the company’s progress toward NYSE MKT listing compliance.
- Consider customer concentration and currency exposure; verify the effect of sterling and other exchange-rate changes on cash and reported equity.