U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2007
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _______ to
_______
COMMISSION FILE NUMBER 1-12711
DIGITAL POWER CORPORATION
(Exact name of small business issuer as specified in its charter)
California 94-1721931
---------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
41920 Christy Street, Fremont, CA 94538-3158
--------------------------------------------
(Address of principal executive offices)
(510) 657-2635
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 |X| No |_|
Number of shares of common stock outstanding as of May 8, 2007: 6,610,708
-1-
DIGITAL POWER CORPORATION
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2007
IN U.S. DOLLARS
UNAUDITED
INDEX
Page
--------
Review of Unaudited Interim Consolidated Financial Statements 3
Consolidated Balance Sheet 4
Consolidated Statements of Income 5
Statement of Changes in Shareholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8 - 14
- - - - - - - -
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[LOGO GRAPHIC OMITTED]
The Board of Directors
Digital Power Corporation
-------------------------
Re: Review of unaudited interim consolidated
financial statements for the three-month period
ended March 31, 2007
-------------------------------------------------
We have reviewed the accompanying consolidated balance sheet of Digital
Power Corporation ("the Company") and its subsidiaries as of March 31, 2007, and
the related consolidated statements of income and cash flows for the three-month
periods ended March 31, 2007 and 2006, and the statement of changes in
shareholders' equity for the three-month period ended March 31, 2007. 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 consolidated interim financial statements referred to
above for them to be in conformity with U.S. generally accepted accounting
principles.
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
May 14 , 2007 A Member of Ernst & Young Global
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DIGITAL POWER CORPORATION
-------------------------
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
March 31,
2007
----------
Unaudited
----------
CURRENT ASSETS:
Cash and cash equivalents $ 1,225
Restricted cash 104
Trade receivables, net of allowance for doubtful accounts of $ 124 1,781
Prepaid expenses and other receivables 187
Inventories 1,917
----------
Total current assets 5,214
----------
PROPERTY AND EQUIPMENT, NET 161
----------
Total assets $ 5,375
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 602
Related parties - trade payables 900
Deferred revenues 11
Other current liabilities 328
----------
Total current liabilities 1,841
----------
SHAREHOLDERS' EQUITY:
Share capital:
Series A redeemable, convertible Preferred shares, no par value: 500,000
shares authorized, 0 shares issued and outstanding at March 31, 2007 --
Preferred shares, no par value: 1,500,000 shares authorized,
0 shares issued and outstanding at March 31, 2007 --
Common shares, no par value: 30,000,000 shares authorized;
6,610,708 shares issued and outstanding at March 31, 2007 --
Additional paid-in capital 13,792
Accumulated deficit (10,428)
Accumulated other comprehensive income 170
----------
Total shareholders' equity 3,534
----------
Total liabilities and shareholders' equity $ 5,375
==========
The accompanying notes are an integral part of the consolidated financial
statements.
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DIGITAL POWER CORPORATION
-------------------------
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
Three months ended
March 31,
---------------------
2007 2006
--------- ---------
Unaudited
---------------------
Revenues $ 2,742 $ 2,708
Cost of revenues 1,967 1,926
--------- ---------
Gross profit 775 782
--------- ---------
Operating expenses:
Engineering and product development 221 138
Selling and marketing 229 302
General and administrative 300 304
--------- ---------
Total operating expenses 750 744
--------- ---------
Operating income 25 38
Financial income (expenses), net 16 (1)
--------- ---------
Net income $ 41 $ 37
========= =========
Basic and diluted net earnings per share $ 0.006 $ 0.006
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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DIGITAL POWER CORPORATION
-------------------------
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
Accumulated
Common shares Additional other Total other Total
------------------------- paid-in Accumulated comprehensive comprehensive shareholders'
Number Amount capital deficit income income equity
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance as of
January 1, 2007 6,610,708 $- $ 13,768 $ (10,463) $ 166 -- $ 3,471
Stock compensation related
to options granted to
Telkoor's employees -- -- 12 -- -- -- --
Stock compensation related
to options granted
to employees -- -- 12 -- -- -- 12
Comprehensive income:
Net income -- -- -- 41 -- $ 41 41
Foreign currency
translation adjustments -- -- -- -- 4 4 4
Cumulative impact of
change in accounting
for uncertainties in
income taxes -- -- -- (6) -- -- (6)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total other
comprehensive income $ 45
============
Balance as of March 31,
2007 (unaudited) 6,610,708 $ -- $ 13,792 $ (10,428) $ 170 $ 3,534
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
-6-
DIGITAL POWER CORPORATION
-------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Three months ended
March 31,
----------------------
2007 2006
--------- ---------
Unaudited
----------------------
Cash flows from operating activities:
Net income $ 41 $ 37
Adjustments required to reconcile net income to net
cash used in operating activities:
Depreciation 19 20
Stock compensation related to options granted to
employees 12 2
Stock compensation related to options granted to 12 8
Telkoor's employees
Decrease in trade receivables, net 426 95
Increase in prepaid expenses and other receivables (47) (37)
Increase in inventories (317) (128)
Decrease in accounts payable and related parties- (203) (44)
trade payables
Decrease in deferred revenues and other current (195) (85)
liabilities
--------- ---------
Net cash used in operating activities (252) (132)
--------- ---------
Cash flows from investing activities:
Restricted cash -- (1)
Purchase of property and equipment (18) (2)
--------- ---------
Net cash used in investing activities (18) (3)
--------- ---------
Cash flows from financing activities:
Exercise of options of a director -- 140
--------- ---------
Net cash provided by financing activities -- 140
--------- ---------
Effect of exchange rate changes on cash and cash 1 5
equivalents
--------- ---------
Increase (decrease) in cash and cash equivalents (269) 10
Cash and cash equivalents at the beginning of the period 1,494 1,409
--------- ---------
Cash and cash equivalents at the end of the period $ 1,225 $ 1,419
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
-7-
DIGITAL POWER CORPORATION
-------------------------
NOTE 1:- GENERAL
Digital Power Corporation ("the Company" or "DPC") was incorporated in
1969, under the General Corporation Law of the state of California. The
Company has a wholly-owned subsidiary, Digital Power Limited ("DPL"),
located in the United Kingdom. The Company and its subsidiary are
currently engaged in the design, manufacture, sale and distribution of
switching power supplies and converters. The Company has two reportable
geographic segments - North America (sales through DPC) and Europe (sales
through DPL).
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
a. The significant accounting policies applied in the annual financial
statements of the Company as of December 31, 2006, are applied
consistently in these financial statements. In addition, the
following accounting policy is applied:
The accompanying unaudited consolidated financial statements as of
March 31, 2007, and for the three months ended March 31, 2007 and
2006 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 Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2006. The results of operations for the three months
ended March 31, 2007, are not necessarily indicative of the results
for the entire fiscal year ending December 31, 2007.
b. Accounting for stock-based compensation:
The Company has several stock-based employee compensation plans,
which are described more fully in Note 5. Prior to January 1, 2006,
the Company accounted for those plans under the recognition and
measurement provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related Interpretations, as
permitted by FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Effective January 1, 2006, the Company
adopted the fair value recognition provisions of FASB Statement No.
123(R), "Share-Based Payment" ("SFAS 123(R)"), using the
modified-prospective-transition method.
-8-
Under that transition method, compensation cost recognized in the
first quarter of 2006 includes compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of
SFAS 123(R). On December 31, 2005, the Company accelerated all of
its unvested outstanding employees' stock options, and therefore, no
compensation costs were included for share-based payments granted
prior to January 1, 2006 in the first quarter of 2006.
-9-
DIGITAL POWER CORPORATION
-------------------------
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company and its subsidiaries apply SFAS 123 and Emerging Issues
Task Force No. 96-18 "Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18"), with respect to options
issued to non-employees. SFAS 123 requires use of an option
valuation model to measure the fair value of the options at the
grant date.
c. FIN 48 - Uncertainty in income taxes:
In June 2006, the Financial Accounting Standards Board ("FASB")
issued FASB interpretation ("FIN") No. 48, "Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement
109" ("FIN 48"). FIN 48 establishes a single model to address
accounting for uncertain tax positions. FIN 48 clarified the
accounting for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized
in the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The
Company adopted the provisions of FIN 48 effective January 1, 2007.
As a result of the implementation of FIN 48, the Company recorded an
increase of $ 6 associated with the liability for unrecognized tax
benefits, which was accounted for as an increase to the accumulated
deficit balance as of January 1, 2007.
NOTE 3:- INVENTORIES
March 31,
2007
------------
Unaudited
-------------
Raw materials, parts and supplies $ 289
Work in progress 474
Finished products 1,154
-------------
$ 1,917
=============
NOTE 4:- ACCOUNTING FOR STOCK BASED COMPENSATION
a. Share 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 subsidiaries.
2. As of March 31, 2007, the Company has authorized, by several
Incentive Share Option Plans, the grant of options to
officers, management, other key employees and others of up to
2,272,200 of the Company's Common shares. As of March 31,
2007, an aggregate of 668,715 of the Company's options are
still available for future grant.
-10-
DIGITAL POWER CORPORATION
-------------------------
NOTE 4:- ACCOUNTING FOR STOCK BASED COMPENSATION (Cont.)
3. The options granted generally become fully exercisable after four
years and expire no later than 10 years from the approval date of
the option plan under the terms of 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:
Three months ended March 31, 2007
-----------------------------------------
Weighted
average
Weighted remaining
Amount average contractual Aggregate
of exercise term intrinsic
options price (years) value*)
--------- ---------- --------- ----------
Outstanding at the
beginning
of the period 901,225 $1.12 6.63
Granted 80,000 $1.70
Forfieted (20,035) $1.12
---------
Outstanding at the
end of the period 961,190 $1.17 6.67 255,120
========= ========== ========= ==========
Exercisable options
at the end of the
period 772,440 $1.08 6.00 246,045
========= ========== ========= ==========
*) Calculation of aggregate intrinsic value is based on the share
price of the Company's Common stock as of March 31, 2007
($1.27 pershare).
Grants for the three months ended March 31, 2006:
Under the provisions of SFAS 123(R), the fair value of each option
is estimated on the date of grant using a Black-Scholes option
valuation model that uses the assumptions noted in the following
table. Because Black-Scholes option valuation models incorporate
various judgmental assumptions for inputs, those assumptions are
disclosed. Expected volatility is based exclusively on historical
volatility of the entity's stock as allowed by SFAS 123(R). 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.
-11-
DIGITAL POWER CORPORATION
-------------------------
NOTE 4:- ACCOUNTING FOR STOCK BASED COMPENSATION (Cont.)
Three
months
ended
March 31,
2007
-------------
Unaudited
-------------
Expected volatility 102-118%
Divided Yield 0%
Expected life of up to (in years) 5-7
Risk free interest rate 4.47-5.03%
The fair value of options granted during the first quarter of 2007
was $ 1.39.
As of March 31, 2007, there was $ 185 of total unrecognized
compensation cost related to unvested share-based compensation
arrangements granted under the plan. That cost is expected to be
recognized over a period of 4 years.
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 March 31, 2007,
the outstanding Common shares held by the ESOT amount to 167,504
shares.
NOTE 5:- NET EARNINGS PER SHARE
The following table sets forth the computation of the basic and
diluted net earnings per share:
1. Numerator:
Three months ended
March 31,
------------------------
2007 2006
---------- ------------
Net income available to Common
stockholders $ 41 $ 37
========== ============
2. Denominator:
Denominator for basic net earnings per
share of weighted average number of
Common stock 6,610,708 6,261,859
Effect of dilutive securities:
Employee stock options 346,182 192,912
Convertible note -- 235,849
--------- ---------
Denominator for diluted net earnings
per share of Common stock 6,956,890 6,690,620
========== ==========
-12-
NOTE 6:- 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 data is presented in accordance
with Statement of Financial Accounting Standard No.131, "Disclosure About
Segments of an Enterprise and Related Information" ("SFAS No. 131").
The following data presents the revenues, expenditures and other operating
data of the Company's geographic operating segments:
Three months ended March 31, 2007 (unaudited)
--------------------------------------------------
DPC DPL Eliminations Total
---------- ---------- ---------- ----------
Revenues $ 1,203 $ 1,539 $ -- $ 2,742
Intersegment revenues 36 -- (36) --
---------- ---------- ---------- ----------
Total revenues $ 1,239 $ 1,539 $ (36) $ 2,742
========== ========== ========== ==========
Depreciation expense $ 5 $ 14 $ -- $ 19
========== ========== ========== ==========
Operating income (loss) $ (57) $ 82 $ -- $ 25
========== ========== ==========
Financial income, net $ 16
----------
Net income (loss) $ (47) $ 88 $ -- $ 41
========== ========== ========== ==========
Expenditures for
segment assets as of
March 31, 2007 $ -- $ 18 $ -- $ 18
========== ========== ========== ==========
Identifiable assets as
of March 31, 2007 $ 2,340 $ 3,035 $ -- $ 5,375
========== ========== ========== ==========
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DIGITAL POWER CORPORATION
-------------------------
NOTE 6:- SEGMENTS, MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION (Cont.)
Three months ended March 31, 2006 (unaudited)
---------------------------------------------
DPC DPL Eliminations Total
--------- --------- --------- ---------
Revenues $ 1,423 $ 1,285 $ -- $ 2,708
Intersegment revenues 210 -- (210) --
--------- --------- --------- ---------
Total revenues $ 1,633 $ 1,285 $ (210) $ 2,708
========= ========= ========= =========
Depreciation expense $ 5 $ 15 $ -- $ 20
========= ========= ========= =========
Operating income $ 9 $ 29 $ -- $ 38
========= ========= =========
Financial expenses, net (1)
---------
Net income $ 12 $ 25 $ -- $ 37
========= ========= ========= =========
Expenditures for
segment assets as of
March 31, 2006 $ -- $ 2 $ -- $ 2
========= ========= ========= =========
Identifiable assets as
of March 31, 2006 $ 2,459 $ 3,042 $ -- $ 5,501
========= ========= ========= =========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
With the exception of historical facts stated herein, the matters discussed in
this report are "forward looking" statements that involve risks and
uncertainties that could cause actual results to differ materially from
projected results. Such "forward looking" statements include, but are not
necessarily limited to, statements regarding anticipated levels of future
revenues and earnings from operations of the Company. Factors that could cause
actual results to differ materially include, in addition to other factors
identified in this report, dependence on the electronic equipment industry,
competition in the power supply industry, dependence on manufacturers in China
and other risks factors detailed in the Company's Form 10-KSB for the year ended
December 31, 2006. Readers of this report are cautioned not to put undue
reliance on "forward looking" statements which are, by their nature, uncertain
as reliable indicators of future performance. The Company disclaims any intent
or obligation to publicly update these "forward looking" statements, whether as
a result of new information, future events, or otherwise.
GENERAL
We are engaged in the business of designing, developing, manufacturing,
marketing, selling and distributing switching power supplies to the industrial,
telecommunication, data communication, medical and military industries. Revenues
are generated from sales to distributors and OEMs in North America and Europe.
We have continued our efforts to increase sales to existing and new customers,
and continue our strategy to manufacture our products in the Far East. While we
believe our revenues have increased to a sufficient amount to offset our
expenses, we may be subject to net losses in an individual quarter. We believe
that our cash will be sufficient to fund those losses for at least 12 months.
Our corporate office, which contains our administrative, sales, and engineering
functions, is located in Fremont, California (DPC). In addition the Company has
a wholly-owned subsidiary, Digital Power Limited ("DPL"), located in Salisbury,
England.
THREE MONTHS ENDED MARCH 31, 2007, COMPARED TO MARCH 31, 2006
REVENUES
Total revenues increased by 1.3% to $2,742,000 for the first quarter
ended March 31, 2007, from $2,708,000 for the first quarter ended March 31,
2006.
Revenues from the domestic operations of DPC decreased by 15.5% to $1,203,000
for the first quarter ended March 31, 2007, from $1,423,000 for the first
quarter ended March 31, 2006. Revenues from the Company's European operations of
DPL increased 19.8% to $1,539,000 for the first quarter ended March 31, 2007,
from $1,285,000 for the first quarter ended March 31, 2006.
-15-
GROSS MARGINS
Gross margins were 28.3% for the three months ended March 31, 2007, compared to
28.9% for the three months ended March 31, 2006.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 8.1% of revenues for the three
months ended March 31, 2007, and 5.1 % for the three months ended March 31,
2006. The increase is mainly due to product safety expenses and contract
services.
SELLING AND MARKETING
Selling and marketing expenses were 8.4% of revenues for the three months ended
March 31, 2007, compared to 11.2% for the three months ended March 31, 2006.
Actual dollar expenditures decreased by $73,000 mainly due to headcount
reduction.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were 10.9% of revenues for the three months
ended March 31, 2007 compared to 11.2% for the three months ended March 31,
2006. In actual dollars, general and administrative expenses remained
approximately at the same level.
FINANCIAL INCOME
Net financial income was $16,000 for the three months ended March 31, 2007,
compared to net financial expense of $1,000 for the three months ended March 31,
2006. Financial income is mainly from interest received from the exchange rate
fluctuation of the Company's United Kingdom's operations of DPL.
NET INCOME
Net income for the three months ended March 31, 2007, was $41,000 compared to
net income of $37,000 for the three months ended March 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 2007, the Company had cash, cash equivalent and a short-term bank
deposit of $1,225,000 and working capital of $3,373,000. This compares with cash
and cash equivalent of $1,419,000 and working capital of $2,653,000 at March 31,
2006. The increase in working capital is mainly due to increase in inventory,
decrease in accounts payable and deferred revenues.
Cash used in operating activities for the Company totaled $252,000 for the three
months ended March 31, 2007, compared to cash used of $132,000 for the three
months ended March 31, 2006. Cash used in investing activities was $18,000 for
the three months ended March 31, 2007, compared to cash used of $3,000 for the
three months ended March 31, 2006. Net cash provided by financing activities was
$140,000 for the three months ended March 31, 2006.
-16-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits
31.1 Certification of the CEO under the Sarbanes-Oxley Act
31.2 Certification of the CFO under the Sarbanes-Oxley Act
32 Certification of the CEO & CFO under the Sarbanes-Oxley Act
-17-
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.
DIGITAL POWER CORPORATION
(Registrant)
Date:
------------- ----------------------------
Jonathan Wax,
Chief Executive Officer
(Principal Executive Officer)
Date:
------------- ----------------------------
Leo Yen,
Chief Financial Officer
(Principal Financial Officer)