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 September 30,
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
■ No
ྑ
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes
ྑ No
■
APPLICABLE
ONLY TO CORPORATE ISSUERS
State
the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 6,615,708
shares
of Common Stock, no par value, were outstanding as of November 10,
2007.
Transitional
Small Business Disclosure Format (check one)
Yes
ྑ No
■
DIGITAL
POWER CORPORATION
INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
AS
OF SEPTEMBER 30, 2007
IN
U.S. DOLLARS
UNAUDITED
INDEX
|
Page
|
|
|
Review
of Unaudited Interim Consolidated Financial Statements
|
2
|
|
Consolidated
Balance Sheet
|
3
|
|
Consolidated
Statements of Operations
|
4
|
|
Statement
of Changes in Shareholders' Equity
|
5
|
|
Consolidated
Statements of Cash Flows
|
6
|
|
Notes
to Consolidated Financial Statements
|
7
- 13
|
-
- - - - - - -
The
Board
of Directors
Digital
Power Corporation
|
Re:
|
Review
of unaudited interim consolidated financial statements
|
|
for
the nine-month period ended September 30,
2007
|
We
have
reviewed the accompanying consolidated balance sheet of Digital Power
Corporation ("the Company") and its subsidiaries as of September 30, 2007,
and
the related consolidated statements of operations for the three-month and
nine-month periods ended September 30, 2007 and 2006, and the statement of
changes in shareholders' equity for the nine-month period ended September
30,
2007 and the statements of cash flows for the nine-month period ended September
30, 2007 and 2006. 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
|
|
November
12, 2007
|
A
Member of Ernst & Young Global
|
-2-
CONSOLIDATED
BALANCE SHEET
U.S.
dollars in thousands (except share and per share data)
|
September
30,
|
||||
|
2007
|
||||
|
Unaudited
|
||||
|
ASSETS
|
||||
|
CURRENT
ASSETS:
|
||||
|
Cash
and cash equivalents
|
$
|
1,848
|
||
|
Restricted
cash
|
108
|
|||
|
Trade
receivables, net of allowance for doubtful accounts of
$109
|
1,752
|
|||
|
Prepaid
expenses and other receivables
|
168
|
|||
|
Inventories
|
2,014
|
|||
|
Total
current assets
|
5,890
|
|||
|
PROPERTY
AND EQUIPMENT, NET
|
141
|
|||
|
Total
assets
|
$
|
6,031
|
||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||
|
CURRENT
LIABILITIES:
|
||||
|
Accounts
payable
|
$
|
646
|
||
|
Related
parties - trade payables
|
1,438
|
|||
|
Deferred
revenues
|
15
|
|||
|
Other
current liabilities
|
407
|
|||
|
Total
current liabilities
|
2,506
|
|||
|
SHAREHOLDERS'
EQUITY:
|
||||
|
Share
capital -
|
||||
|
Series
A redeemable, convertible Preferred shares, no par value - 500,000
shares
authorized, 0 shares issued and outstanding at September 30,
2007
|
-
|
|||
|
Preferred
shares, no par value - 1,500,000 shares authorized, 0 shares issued
and outstanding at September 30, 2007
|
-
|
|||
|
Common
shares, no par value - 30,000,000 shares authorized; 6,610,708
shares
issued and outstanding at September 30, 2007
|
-
|
|||
|
Additional
paid-in capital
|
13,850
|
|||
|
Accumulated
deficit
|
(10,583
|
)
|
||
|
Accumulated
other comprehensive income
|
258
|
|||
|
Total
shareholders' equity
|
$
|
3,525
|
||
|
Total
liabilities and shareholders' equity
|
$
|
6,031
|
||
The
accompanying notes are an integral part of the consolidated financial
statements.
-3-
CONSOLIDATED STATEMENTS
OF OPERATIONS
U.S.
dollars in thousands, except share and per share data
|
Nine
months ended
September
30,
|
Three
months ended
September
30,
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Unaudited
|
|||||||||||||
|
Revenues
|
$
|
8,306
|
$
|
9,445
|
$
|
3,028
|
$
|
3,404
|
|||||
|
Cost
of revenues
|
6,177
|
6,894
|
2,238
|
2,496
|
|||||||||
|
Gross
profit
|
2,129
|
2,551
|
790
|
908
|
|||||||||
|
Operating
expenses:
|
|||||||||||||
|
Engineering
and product development
|
587
|
482
|
185
|
172
|
|||||||||
|
Selling
and marketing
|
716
|
909
|
238
|
292
|
|||||||||
|
General
and administrative
|
979
|
1,017
|
345
|
367
|
|||||||||
|
Total
operating expenses
|
2,282
|
2,408
|
768
|
831
|
|||||||||
|
Operating
income (loss)
|
(153
|
)
|
143
|
22
|
77
|
||||||||
|
Financial
income (expenses), net
|
36
|
(14
|
)
|
7
|
(2
|
)
|
|||||||
|
(loss)
before income taxes
|
(117
|
)
|
129
|
29
|
75
|
||||||||
|
Income
taxes
|
3
|
-
|
12
|
-
|
|||||||||
|
Net
loss (income)
|
$
|
(114
|
)
|
$
|
129
|
$
|
41
|
$
|
75
|
||||
|
Basic
net earnings (loss) per share
|
$
|
(0.017
|
)
|
$
|
0.020
|
$
|
0.006
|
$
|
0.011
|
||||
|
Diluted
net earnings (loss) per share
|
$
|
(0.017
|
)
|
$
|
0.019
|
$
|
0.006
|
$
|
0.011
|
||||
The
accompanying notes are an integral part of the consolidated financial
statements.
-4-
STATEMENT
OF CHANGES IN SHAREHOLDERS' EQUITY
U.S.
dollars in thousands, except share data
|
Accumulated
|
||||||||||||||||||||||
|
Additional
|
other
|
Total
other
|
Total
|
|||||||||||||||||||
|
Common
shares
|
paid-in
|
Accumulated
|
comprehensive
|
comprehensive
|
shareholders'
|
|||||||||||||||||
|
Number
|
Amount
|
capital
|
deficit
|
income
|
loss
|
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
|
-
|
-
|
41
|
-
|
-
|
-
|
41
|
|||||||||||||||
|
Stock
compensation related to options granted to employees
|
-
|
-
|
41
|
-
|
-
|
-
|
41
|
|||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||
|
Net
income (loss)
|
-
|
-
|
-
|
(114
|
)
|
-
|
$
|
(114
|
)
|
(114
|
)
|
|||||||||||
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
92
|
92
|
92
|
|||||||||||||||
|
Cumulative
impact of change in accounting for uncertainties in income taxes
|
-
|
-
|
-
|
(6
|
)
|
-
|
-
|
(6
|
)
|
|||||||||||||
|
Total
other comprehensive income
|
$
|
(22
|
)
|
|||||||||||||||||||
|
Balance
as of September 30, 2007 (unaudited)
|
6,610,708
|
$
|
-
|
$
|
13,850
|
$
|
(10,583
|
)
|
$
|
258
|
$
|
3,525
|
||||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
-5-
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
Nine
months ended
September
30,
|
|||||||
|
2007
|
2006
|
||||||
|
Unaudited
|
|||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
(loss) income
|
$
|
(114
|
)
|
$
|
129
|
||
|
Adjustments
required to reconcile net (loss) income to net cash provided by
(used in)
operating activities:
|
|||||||
|
Depreciation
|
58
|
57
|
|||||
|
Stock
compensation related to options granted to employees
|
41
|
18
|
|||||
|
Stock
compensation related to options granted to Telkoor's
employees
|
41
|
40
|
|||||
|
Decrease
(increase) in trade receivables, net
|
479
|
(176
|
)
|
||||
|
Increase
in prepaid expenses and other receivables
|
(17
|
)
|
(26
|
)
|
|||
|
Increase
in inventories
|
(389
|
)
|
(231
|
)
|
|||
|
Increase
in accounts payable and related parties- trade payables
|
359
|
318
|
|||||
|
Increase
(decrease) in deferred revenues and other current
liabilities
|
(126
|
)
|
3
|
||||
|
Net
cash provided by operating activities
|
332
|
132
|
|||||
|
Cash
flows from investing activities:
|
|||||||
|
Restricted
cash
|
-
|
180
|
|||||
|
Purchase
of property and equipment
|
(31
|
)
|
(19
|
)
|
|||
|
Net
cash provided by (used in) investing activities
|
(31
|
)
|
161
|
||||
|
Cash
flows from financing activities:
|
|||||||
|
Exercise
of options of a director
|
-
|
162
|
|||||
|
Net
cash provided by financing activities
|
-
|
162
|
|||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
53
|
57
|
|||||
|
Increase
in cash and cash equivalents
|
354
|
512
|
|||||
|
Cash
and cash equivalents at the beginning of the period
|
1,494
|
1,409
|
|||||
|
Cash
and cash equivalents at the end of the period
|
$
|
1,848
|
$
|
1,921
|
|||
|
Supplemental
disclosure of non-cash activities:
|
|||||||
| Adjustments on account of change in accounting for uncertainties in income taxes |
$
|
6
|
$
|
- | |||
| Conversion of a convertible note |
$
|
- |
$
|
250 | |||
The
accompanying notes are an integral part of the consolidated financial
statements.
-6-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share
data
|
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 September
30,
2007, and for the nine months ended September 30, 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 and
nine
months ended September 30, 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.
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.
-7-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share
data
|
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
September 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 a reduction
to the retained earnings balance as of January 1, 2007. There have been no
changes to the unrecognized tax benefits during the current period.
|
NOTE
3:-
|
INVENTORIES
|
|
September
30,
2007
|
||||
|
Unaudited
|
||||
|
Raw
materials, parts and supplies
|
$
|
215
|
||
|
Work
in progress
|
317
|
|||
|
Finished
products
|
1,482
|
|||
|
$
|
2,014
|
|||
|
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 September 30, 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 September 30, 2007, an aggregate of 668,715 of the
Company's
options are still available for future
grant.
|
-8-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share
data
|
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:
|
Nine
months ended September 30, 2007
|
|||||||||||||
|
Amount
of
options
|
Weighted
average
exercise
price
|
Weighted
average remaining contractual term (years)
|
Aggregate
intrinsic value *)
|
||||||||||
|
Outstanding
at the beginning of
the period
|
901,225
|
$
|
1.12
|
6.63
|
|||||||||
|
Granted
|
100,000
|
$
|
1.61
|
||||||||||
|
Forfeited
|
30,035
|
$
|
0.98
|
||||||||||
|
Outstanding
at the end of the period
|
971,190
|
$
|
1.18
|
6.22
|
$
|
646,320
|
|||||||
|
Exercisable
options at the end of the period
|
798,890
|
$
|
1.05
|
5.33
|
$
|
585,845
|
|||||||
|
*)
|
Calculation
of aggregate intrinsic value is based on the share price of the
Company's
Common shares as of September 30, 2007 ($ 1.77 per
share).
|
Grants
for the nine months ended September 30, 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.
-9-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share
data
|
NOTE
4:-
|
ACCOUNTING
FOR STOCK BASED COMPENSATION
(Cont.)
|
|
Nine
months ended
September
30, 2007
|
||
|
Unaudited
|
||
|
Expected
volatility
|
93.6%-107.1%
|
|
|
Divided
Yield
|
0%
|
|
|
Expected
life of up to (in years)
|
5-7
|
|
|
Risk
free interest rate
|
4.38%-5.09%
|
|
As
of September 30, 2007, there was $169 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 September
30, 2007, the outstanding Common shares held by the ESOT amount to 167,504
shares.
NOTE
5:- NET
EARNINGS (LOSS) PER SHARE
The
following table sets forth the computation of the basic and diluted net earnings
(loss) per share:
1. Numerator:
|
Nine
months ended
September
30,
|
Three
months ended
September
30,
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Unaudited
|
|||||||||||||
|
Net
income (loss) available to Common shareholders
|
$
|
(114
|
)
|
$
|
129
|
$
|
41
|
$
|
75
|
||||
2. Denominator:
|
Denominator
for basic net earnings per share of weighted average number of
Common
shares
|
6,610,708
|
6,322,032
|
6,610,708
|
6,845,468
|
|||||||||
|
Effect
of dilutive securities:
|
|||||||||||||
|
Employee
stock options
|
-
|
384,506
|
284,418
|
313,109
|
|||||||||
|
Convertible
note
|
-
|
112,683
|
-
|
-
|
|||||||||
|
Denominator
for diluted net earnings per Common share
|
6,610,708
|
6,819,221
|
6,895,126
|
7,158,577
|
-10-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share
data
|
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:
|
Nine
months ended September 30, 2007 (unaudited)
|
|||||||||||||
|
DPC
|
DPL
|
Eliminations
|
Total
|
||||||||||
|
Revenues
|
$
|
3,886
|
$
|
4,420
|
$
|
-
|
$
|
8,306
|
|||||
|
Intersegment
revenues
|
118
|
-
|
(118
|
)
|
-
|
||||||||
|
Total
revenues
|
$
|
4,004
|
$
|
4,420
|
$
|
(118
|
)
|
$
|
8,306
|
||||
|
Depreciation
expense
|
$
|
13
|
$
|
45
|
$
|
-
|
$
|
58
|
|||||
|
Operating
income (loss)
|
$
|
(247
|
)
|
$
|
94
|
$
|
-
|
$
|
(153
|
)
|
|||
|
Financial
income, net and income taxes
|
$
|
39
|
|||||||||||
|
Net
income (loss)
|
$
|
(218
|
)
|
$
|
104
|
$
|
-
|
$
|
(114
|
)
|
|||
|
Expenditures
for segment assets as of September 30, 2007
|
$
|
-
|
$
|
31
|
$
|
-
|
$
|
31
|
|||||
|
Identifiable
assets as of September 30, 2007
|
$
|
2,680
|
$
|
3,351
|
$
|
-
|
$
|
6,031
|
|||||
-11-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share
data
|
NOTE
6:-
|
SEGMENTS,
MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
(Cont.)
|
|
Nine
months ended September 30, 2006 (unaudited)
|
|||||||||||||
|
DPC
|
DPL
|
Eliminations
|
Total
|
||||||||||
|
Revenues
|
$
|
4,375
|
$
|
5,070
|
$
|
-
|
$
|
9,445
|
|||||
|
Intersegment
revenues
|
405
|
-
|
(405
|
)
|
-
|
||||||||
|
Total
revenues
|
$
|
4,780
|
$
|
5,070
|
$
|
(405
|
)
|
$
|
9,445
|
||||
|
Depreciation
expense
|
$
|
13
|
$
|
44
|
$
|
-
|
$
|
57
|
|||||
|
Operating
income
|
$
|
125
|
$
|
18
|
$
|
-
|
$
|
143
|
|||||
|
Financial
expenses, net
|
(14
|
)
|
|||||||||||
|
Net
income (loss)
|
$
|
(30
|
)
|
$
|
159
|
$
|
-
|
$
|
129
|
||||
|
Expenditures
for segment assets as of September 30, 2006
|
$
|
14
|
$
|
5
|
$
|
-
|
$
|
19
|
|||||
|
Identifiable
assets as of September 30, 2006
|
$
|
2,963
|
$
|
3,304
|
$
|
-
|
$
|
6,267
|
|||||
|
Three
months ended September 30, 2007 (unaudited)
|
|||||||||||||
|
DPC
|
DPL
|
Eliminations
|
Total
|
||||||||||
|
Revenues
|
$
|
1,572
|
$
|
1,456
|
$
|
$
|
$3,028
|
||||||
|
Intersegment
revenues
|
30
|
(30
|
)
|
||||||||||
|
Total
revenues
|
$
|
1,602
|
$
|
1,456
|
$
|
(30
|
)
|
$
|
3,028
|
||||
|
Depreciation
expense
|
$
|
4
|
$
|
20
|
$
|
-
|
$
|
24
|
|||||
|
Operating
income (loss)
|
$
|
(17
|
)
|
$
|
39
|
$
|
-
|
$
|
22
|
||||
|
Financial
income, net and income taxes
|
$
|
19
|
|||||||||||
|
Net
income (loss)
|
$
|
(7
|
)
|
$
|
48
|
$
|
-
|
$
|
41
|
||||
|
Expenditures
for segment assets as of September 30, 2007
|
$
|
-
|
$
|
6
|
$
|
-
|
$
|
6
|
|||||
|
Identifiable
assets as of September 30, 2007
|
$
|
2,680
|
$
|
3,351
|
$
|
-
|
$
|
6,031
|
|||||
-12-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share
data
|
NOTE
6:-
|
SEGMENTS,
MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
(Cont.)
|
|
Three
months ended September 30, 2006 (unaudited)
|
|||||||||||||
|
DPC
|
DPL
|
Eliminations
|
Total
|
||||||||||
|
Revenues
|
$
|
1,514
|
$
|
1,890
|
$
|
-
|
$
|
3,404
|
|||||
|
Intersegment
revenues
|
87
|
-
|
(87
|
)
|
-
|
||||||||
|
Total
revenues
|
$
|
1,601
|
$
|
1,890
|
$
|
(87
|
)
|
$
|
3,404
|
||||
|
Depreciation
expenses
|
$
|
4
|
$
|
14
|
$
|
-
|
$
|
18
|
|||||
|
Operating
income (loss)
|
$
|
1
|
$
|
76
|
$
|
-
|
$
|
77
|
|||||
|
Financial
expenses, net
|
$
|
(2
|
)
|
||||||||||
|
Net
income (loss)
|
$
|
1
|
$
|
74
|
$
|
-
|
$
|
75
|
|||||
|
Expenditures
for segment assets as of September 30, 2006
|
$
|
12
|
$
|
3
|
$
|
-
|
$
|
15
|
|||||
|
Identifiable
assets as of September 30, 2006
|
$
|
2,963
|
$
|
3,304
|
$
|
-
|
$
|
6,267
|
|||||
-
- - - -
- - -
-13-
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 that 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, and data communication, medical and military industries.
Revenues are generated from sales to distributors, who will then resell our
products to end customers who are often referred to as OEM’s (original equipment
manufacturers) and direct sales to OEM’s that may involve the use of
manufacturer representatives. Domestic refers to as revenue or operations
that
is principally in North America, while International refers to revenue or
operations that is principally out of Europe. Domestically and in Europe,
the
company will sell to ‘Commercial’ customers who typically buy standard or
modified standard product that are sellable to multiple customers while
‘military’ customers typically utilize custom power supplies and Commercial Off
The Shelf Supplies (COTS) that are typically sold to multiple customers.
Digital
Power custom supplies for the Military are typically sold through its European
Subsidiary, Digital Power Limited.
We
have
continued our efforts to increase sales of our products to existing and new
customers, and have continued our strategy to utilize our contract manufactures
in Asia and our Design Partners. While we believe our revenues have increased
to
a sufficient amount to exceed our expenses, we may be subject to net losses
in
an individual quarter. We believe that our cash and cash equivalents will
be
sufficient to fund those losses for at least 12 months.
The
Company’s corporate office, which contains our administrative, sales, and
engineering functions, is located in Fremont, California. In addition the
Company has a wholly owned subsidiary, Digital Power Limited ("DPL"), located
in
Salisbury, England.
THREE
AND
NINE MONTHS ENDED SEPTEMBER 30, 2007, COMPARED TO SEPTEMBER 30,
2006
REVENUES
Total
revenues for the Company decreased by 11.0% to $3,028,000 for the three months
ended September 30, 2007, from $3,404,000 for the three months ended September
30, 2006. Revenue from the military products of the Company decreased by
18.3%
to $568,000 for the three months ended September 30, 2007, from $697,000
for the
three months ended September 30, 2006. Revenue from the commercial products
of
the Company decreased by 9.2% to $2,460,000 from $2,707,000 for the three
months
ended September 30, 2006. The decrease in military product revenues is mainly
due to scheduling and lead-time requirements of customer orders. The decrease
in
commercial product revenue is mainly attributed to maturation of older product
lines. The company is replacing the older product lines with newer product
lines, but is subject to uncertainties such as customer design cycles,
competition, and customer requirements that may impact revenue in a specific
quarter or quarters.
Revenues
from the domestic operations of the Company increased by 3.9% to $1,572,000
for
the three months ended September 30, 2007, from $1,514,000 for the three
months
ended September 30, 2006.
Revenues
from the Company’s European operations of DPL decreased 23.0% to $1,456,000 for
the three months ended September 30, 2007, from $1,890,000 for the three
months
ended September 30, 2006. The decrease in the company’s European operations is
mainly attributed to with existing and new customers.
For
the
nine months ended September 30, 2007, revenues for the Company decreased
by
12.1% to $8,306,000 from $9,445,000 for the nine months ended September 30,
2006. The decrease in product revenue is mainly attributed to maturation
issues
related to older product lines. The company is replacing the older product
lines
with newer product lines, but is subject to uncertainties such as customer
design cycles, competition, and customer requirements that may impact revenue
in
a specific quarter or quarters.
Revenues
attributed to the domestic operations of the Company decreased by 11.2% to
$3,886 for the nine months ended September 30, 2007 from $4,375,000 for the
nine
months ended September 30, 2006. The decrease in product revenue is mainly
attributed to maturation issues related to older product lines. The company
is
replacing the older product lines with newer product lines, but is subject
to
uncertainties such as customer design cycles, competition, and customer
requirements that may impact revenue in a specific quarter or
quarters.
Revenues
from the Company’s European operations of DPL decreased by 12.8% to $4,420,000
for the nine month ended September 30, 2007 from $5,070,000 for the nine
months
ended September 30, 2006.
GROSS
MARGINS
.
Gross
margins were 26.1% for the three months ended September 30, 2007, compared
to
26.7% for the three months ended September 30, 2006. Gross margins decrease
to
25.6% for the nine months ended September 30, 2007 compared to 27.0% for
the
nine months ended September 30, 2006, the decrease in gross margins is mainly
due to write-off provision for obsolete inventory in the amount of $140,000
during the quarter ended June 30, 2007.
ENGINEERING
AND PRODUCT DEVELOPMENT
Engineering
and product development expenses were 6.1% of revenues for the three months
ended September 30, 2007, compared to 5.1% for the three months ended September
30, 2006. Engineering and product development expenses were 7.1% of revenues
for
the nine months ended September 30, 2007, compared to 5.1% of revenues for
the
nine months ended September 30, 2006. Actual dollar expenditures increased
by
$105,000 mainly due to safety and consulting expenditures.
SELLING
AND MARKETING
Selling
and marketing expenses were 7.9% of revenues for the three months ended
September 30, 2007, compared to 8.6% for the three months ended September
30,
2006. Selling and marketing expenses were 8.6% of revenues for the nine months
ended September 30, 2007, compared to 9.6% for the nine months ended September
30, 2006. Actual dollar expenditures decreased by $193,000 mainly due decrease
in salary and consulting expenses.
GENERAL
AND ADMINISTRATIVE
General
and administrative expenses were 11.4% of revenues for the three months ended
September 30, 2007, compared to 10.8% for the three months ended September
30,
2006. In actual dollars, expenditures decreased by $22,000. General and
administrative expenses were 11.8% of revenues for the nine months ended
September 30, 2007, compared to 10.8% for the nine months ended September
30,
2006. Actual dollar expenditures decreased by $38,000. The decrease is mainly
due to reduction in legal and consulting expenses.
FINANCIAL
INCOME AND EXPENSES
Financial
income net was $7,000 for the three months ended September 30, 2007, compared
to
financial expense net of $2,000 for the three months ended September 30,
2006.
Financial income was $36,000 for the nine months ended September 30, 2007,
compared to financial expenses of $14,000 for the nine months ended September
30, 2006. Financial income resulted mainly from interest income
received.
NET
INCOME (LOSS)
For
the
three months ended September 30, 2007, the Company had net income of $41,000
compared to a net income of $75,000 for the three months ended September
2006.
Net loss for the nine months ended September 30, 2007 was $114,000 compared
to
net income of $129,000 for the nine months ended September 30, 2006. Net
loss is
mainly due to decrease in revenues, decrease in gross margin offset partially
by
reduction in operating expenses.
LIQUIDITY
AND CAPITAL RESOURCES
On
September 30, 2007, the Company had cash, cash equivalents $1,848,000 and
working capital of $3,384,000. This compares with cash and cash equivalents
of
$1,921,000 and working capital of $3,200,000 at September 30, 2006. The increase
in working capital is mainly due to a decrease in accounts payable and a
decrease in deferred revenue offset partially by decrease in trade
receivables.
Cash
provided by operating activities for the Company totaled $332,000 for the
nine
months ended September 30, 2007, compared to cash provided from operating
activities of $132,000 for the nine months ended September 30, 2006. Cash
provided by operating activity was mainly due to increase in accounts payable
and related parties trade payables due to timing differences, decrease in
trade
receivable due to increase effort on collection, offset partially by increase
in
inventory. Cash used by investing activities was $31,000 for the nine months
ended September 30, 2007, compared to cash provided in investing activities
of
$161,000 for the nine months ended September 30, 2006. The cash used by
investing activities was mainly for purchase of equipment.
The
Company believes it has adequate resources at this time to continue its
promotional efforts to increase sales in the electronic industry market.
However, if the Company does not meet those goals, it may have to raise money
through debts or equity, which may dilute shareholder’s equity.
ITEM
3. CONTROLS AND PROCEDURES
(a) Evaluation
of disclosure controls and procedures. We maintain “disclosure controls and
procedures,” as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, or the Exchange Act, that are designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
or persons performing similar functions, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognized that disclosure
controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Our disclosure controls and procedures have
been designed to meet reasonable assurance standards. Additionally, in designing
disclosure controls and procedures, our management necessarily was required
to
apply its judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure controls and
procedures also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed
in
achieving its stated goals under all potential future conditions.
Based
on their evaluation as of the end of the period covered by this Quarterly Report
on Form 10-QSB, our Chief Executive Officer and Chief Financial Officer, or
persons performing similar functions, have concluded that, as of that date,
our
disclosure controls and procedures were effective at the reasonable assurance
level.
(b) Changes
in
internal control over financial reporting. There was no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) identified in connection with management’s evaluation during our
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II.
OTHER INFORMATION
ITEM
1.
LEGAL PROCEEDINGS
None.
ITEM
2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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 Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act
of 2002
31.2 Certification
of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act
of 2002
32.1 Certification
of the Chief Executive Officer & Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
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:
November 14, 2007
|
/s/
Jonathan
Wax
|
|
Jonathan
Wax,
|
|
|
Chief
Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
Date:
November 14, 2007
|
/s/
Uri
Friedlander
|
|
Uri
Friedlander,
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial Officer)
|