Digital Power Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The filing identifies the registrant as Digital Power Corporation, not Hyperscale Data, Inc. The unaudited consolidated statements cover the company and its wholly owned U.K. subsidiary, Digital Power Limited (DPL). Amounts below are U.S. dollars in thousands, except per-share data.
Business context and financial results
The company designs, manufactures and sells customized power supplies and conversion systems for commercial, medical, telecom, industrial and military markets. It reports North American operations through DPC and European operations through DPL.
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $2,227 | $2,942 | $4,416 | $5,182 |
| Gross profit | $886 | $1,276 | $1,714 | $2,203 |
| Gross margin | 39.8% | 43.4% | 38.8% | 42.5% |
| Operating income (loss) | $(120) | $471 | $(106) | $587 |
| Net income (loss) | $(125) | $478 | $(18) | $553 |
| Basic earnings (loss) per share | $(0.018) | $0.070 | $(0.003) | $0.081 |
Liquidity, cash flow and balance sheet
- At June 30, 2013, cash and cash equivalents were $1,344, down from $1,821 at December 31, 2012. Current assets were $5,407 and current liabilities $1,335, implying working capital of approximately $4,072 and a current ratio of about 4.1.
- For the first half, operating cash flow was $(354), compared with $210 provided in the prior-year period. Investing cash outflow was $(105), principally for equipment; there were no financing cash flows. Cash declined by $477, including exchange-rate effects.
- Total assets were $6,708 and shareholders’ equity was $5,373 at June 30. The balance sheet lists no debt line; the filing text does not provide a separate debt total.
- Trade receivables rose to $2,046 from $1,390 at year-end; inventory declined to $1,793 from $2,012.
Material changes and unusual items
- Quarterly revenue fell 24% year over year; first-half revenue fell 15%. Management attributed the quarter decline mainly to lower shipments of custom products to commercial markets, especially in Europe. First-half declines reflected the end of life of certain European military products and lower domestic demand.
- First-half gross margin fell 3.7 percentage points to 38.8%. Lower revenue and gross profit, together with higher engineering, selling and marketing costs, contributed to the shift from prior-year operating profit to an operating loss.
- The company recorded a $196 impairment of its investment in Telkoor during the quarter and first half, based on an independent valuation. Telkoor’s investment carrying value was reported at $542 on the balance sheet; the note states the valuation was $505, with the difference not clearly reconciled in the filing text.
- Six-month financial income was $88 versus expense of $22 in the prior-year period, attributed to foreign-currency fluctuations. A $171 foreign-currency translation loss contributed to comprehensive loss.
Outlook, commentary and risks
- No quantitative revenue or earnings guidance is provided. Management said it believed available resources were adequate for current operations and efforts to grow sales, but warned that failure to increase sales could require debt or equity financing and potentially dilute shareholders.
- Key risks include reliance on Telkoor for design, intellectual property and manufacturing; dependence on contract manufacturers and component supply; concentrated major-customer exposure; declining legacy-product sales, price pressure and product obsolescence; and volatility in demand and quarterly results.
- The filing warns that Telkoor’s share price declined significantly after June 30, 2013. A continued decline could lead to a further impairment or reclassification of loss into earnings if judged permanent.
- Management concluded disclosure controls and procedures were effective at quarter-end and reported no material change in internal control over financial reporting. No material developments in previously disclosed legal proceedings were reported. The CEO was also serving as interim CFO.
Important facts for investors to verify
- Whether subsequent demand, particularly for European and custom commercial products, recovered and whether customer concentration affected orders.
- Collection and aging of the increased receivables, operating cash-flow trends, and the company’s stated need for possible external financing if sales do not improve.
- The Telkoor investment’s valuation and any subsequent impairment, given the valuation figures and post-quarter share-price warning.
- Dependence on Telkoor and other contract manufacturers, including production lead times and component availability.
- Share-count consistency: the balance sheet reports 6,853,161 shares outstanding, while the changes-in-equity statement displays 6,853,151 at June 30; the cover page reports 6,853,131 at August 9, 2013.