Business context and reporting period
The supplied filing is Digital Power Corporation’s unaudited Form 10-Q for the quarter ended September 30, 2013, covering the three and nine months then ended. This does not match the request metadata naming Hyperscale Data, Inc.; the filing identifies Digital Power Corporation (NYSE MKT: DPW), with wholly owned U.K. subsidiary Digital Power Limited. The company designs, manufactures and sells customized power supplies and converters for commercial, medical, telecom, industrial and defense markets.
Financial performance and position
Amounts below are in U.S. dollars in thousands, except per-share data.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | 2,087 | 1,679 | 6,503 | 6,861 |
| Gross profit | 689 | 642 | 2,403 | 2,845 |
| Gross margin | 33% | 38% | 37% | 41% |
| Operating income (loss) | (234) | (243) | (144) | 344 |
| Net income (loss) | (252) | (467) | (271) | 86 |
| Basic loss per share | (0.037) | (0.068) | (0.039) | 0.013 |
At September 30, 2013, cash and cash equivalents were $1,544; current assets were $5,875 and current liabilities $1,922, for reported working capital of approximately $4.0 million. Total assets were $7,235 and shareholders’ equity $5,313. The balance sheet lists no separate debt balance; it does not clearly disclose a debt total.
For the first nine months, operating cash flow was negative $125, compared with positive $169 a year earlier; investing cash outflow was $155, mainly equipment purchases, versus $81. No financing cash flows were reported. Cash declined $277 from year-end 2012. Trade receivables increased to $2,323 from $1,390. The company reported $196 of impairment expense on its Telkoor investment during 2013.
Material changes versus prior periods
- Q3 revenue rose 24% year over year, which management attributed mainly to increased shipments of standard commercial products. U.S. revenue increased 17% and European revenue 30%.
- Nine-month revenue fell 6% year over year: U.S. revenue declined 2.5% and European revenue 10%. Management cited lower custom shipments in the U.S., the end of life of certain European military products, and lower European commercial shipments.
- Gross margins declined in both reported comparisons. Management attributed the decrease mainly to lower revenues.
- The nine-month operating result moved from income of $344 to a loss of $144; net results moved from income of $86 to a loss of $271. The filing also records a $196 Telkoor investment impairment in 2013, versus $218 in 2012.
- Operating expenses for nine months were $2,547 versus $2,501. Engineering and development expense increased, mainly due to outside consulting; selling and marketing expense increased mainly due to headcount; general and administrative expense decreased mainly due to lower consulting costs.
Outlook, risks and unusual items
Management said it believed available resources were adequate to continue operations and sales efforts, but warned that failure to increase sales could require debt or equity financing, potentially diluting shareholders. No quantified revenue or earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Material operating risks include dependence on Telkoor for some design, intellectual property and manufacturing capabilities; reliance on contract manufacturers and timely component supply; and extended manufacturing lead times and component shortages.
- The company reported operating and net losses for the nine months and cited dependence on a few major customers, competitive pricing, product obsolescence, and uncertain acceptance and profitability of custom products.
- International sales were 39.8% of nine-month revenue. The filing also identifies foreign operations, export-control requirements, and political and economic conditions as risks.
- The Telkoor investment is valued using a third-party assessment and is subject to further impairment risk. Management stated it had the ability and intent to hold the investment until recovery.
- The ESOP was being terminated; participants were notified of options for cash payment or equivalent company shares. The filing reported no material developments in previously disclosed legal proceedings.
- Management concluded disclosure controls and procedures were effective at quarter-end and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity: the filing is for Digital Power Corporation, not Hyperscale Data, Inc.
- Track revenue recovery, gross margins and operating performance, particularly given the nine-month revenue decline and operating loss.
- Monitor receivables, operating cash flow and cash balances, and whether additional financing becomes necessary.
- Assess the sustainability of supply and manufacturing arrangements, especially the company’s dependence on Telkoor and third-party manufacturers.
- Review future Telkoor investment valuations and any additional impairment, as well as customer concentration and product end-of-life effects.