Filing summary
Reporting entity: Digital Power Corporation and its wholly owned subsidiary, Digital Power Limited (DPL), as identified in the filing. The filing is a Form 10-Q for the quarter ended September 30, 2012; financial amounts are in U.S. dollars in thousands unless stated otherwise. The supplied company metadata names Hyperscale Data, Inc., which does not match the registrant named in this filing.
Business context and reporting period
The company designs, manufactures and sells customized power supplies and conversion products for commercial, medical, telecom, industrial and military markets. It reports North American operations through Digital Power Corporation (DPC) and European operations through DPL. The statements are unaudited.
Financial results and liquidity
| Metric | Three months ended Sept. 30, 2012 | Three months ended Sept. 30, 2011 | Nine months ended Sept. 30, 2012 | Nine months ended Sept. 30, 2011 |
|---|---|---|---|---|
| Revenue | $1,679 | $3,024 | $6,861 | $9,174 |
| Gross profit | $642 | $1,213 | $2,845 | $3,612 |
| Gross margin | 38.2% | 40.8% | 41.5% | 39.0% |
| Operating income (loss) | $(243) | $474 | $344 | $1,089 |
| Net income (loss) | $(467) | $449 | $86 | $1,027 |
| Basic EPS | $(0.068) | $0.067 | $0.013 | $0.153 |
For the nine months ended September 30, 2012, operating cash flow was $169, compared with $714 in 2011. Investing activities used $81, versus $1,050 used in 2011; the prior-period outflow was mainly for Telkoor securities. Financing cash flow was nil in 2012. Cash rose to $1,890 at September 30, 2012 from $1,777 at December 31, 2011.
At September 30, 2012, total assets were $7,502, current assets $5,957 and current liabilities $1,573, giving working capital of approximately $4,384. Shareholders’ equity was $5,929. The balance sheet presents no debt balance. The filing reports no borrowing facility or specific debt capacity.
Material changes versus the prior comparable period
- Quarterly revenue fell 44%; nine-month revenue fell 25.2%. Management attributed the declines to lower shipments of custom commercial products and military products, the end of life of certain European military products, and softer domestic demand.
- Nine-month gross margin improved to 41.5% from 39.0%, which management attributed mainly to supplier pricing and product mix. Quarterly margin declined to 38.2% from 40.8%, attributed to lower sales.
- The nine-month operating expenses shown in the financial statements totaled $2,501, compared with $2,523 in 2011; general and administrative expenses increased, while the company reported higher consulting, marketing headcount, and legal costs.
- Quarterly financial expense was $216, compared with financial income of $14 in the prior-year quarter. The nine-month financial expense was $238 versus $13, primarily reflecting a $218 impairment of the Telkoor investment.
- The Telkoor investment was reclassified from available-for-sale accounting to the cost method in September 2012, based on management’s conclusion that the shares lacked a readily determinable fair value. An other-than-temporary impairment of $218 was recognized.
Outlook, risks and other disclosures
No numerical guidance is provided. Management stated that current resources were adequate to continue operations and promotional efforts, but warned that if sales do not increase, the company may need debt or equity financing, potentially diluting shareholders. Management also cautioned that interim results are not necessarily indicative of full-year results.
Key risks include dependence on Telkoor for design, manufacturing and intellectual property; reliance on contract manufacturers and international component suppliers; customer concentration and volatile demand; product obsolescence, pricing pressure and inventory risk; and the ability to develop custom products and meet delivery, quality and certification requirements. The company reported an operating and net loss for the quarter despite positive nine-month results. It also noted that CEO Amos Kohn was serving as interim CFO. Disclosure controls were assessed as effective, with no material changes in internal control reported. The filing states there were no material developments in previously disclosed legal proceedings.
Important facts for investors to verify
- Confirm the registrant identity: this filing is for Digital Power Corporation, not Hyperscale Data, Inc.
- Review the decline in revenue and the causes and sustainability of the quarterly operating loss.
- Verify the Telkoor investment accounting, valuation basis and $218 impairment, including any subsequent changes.
- Reconcile expense comparisons: the MD&A gives nine-month 2011 engineering, selling and marketing, and G&A figures that differ from the comparative amounts in the statements of operations.
- Assess cash conversion, customer and supplier concentration, and whether additional financing may be needed if sales remain weak.