Edgar Filing: DIGITAL POWER CORP

( Exact name of registrant as specified in its charter )

California		94-1721931
(State or other jurisdiction of		(I.R.S. Employer Identification Number)
incorporation or organization)

41324 Christy Street

Fremont, CA 94538-3158

(Address of principal executive offices)

(510) 657-2635

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes ¨ No þ

At November 5, 2010, the registrant had outstanding 6,678,968 shares of common stock.

TABLE OF CONTENTS

			Page

PART I – FINANCIAL INFORMATION

	Item 1.	Financial Statements	3

		Review of Unaudited Interim Consolidated Financial Statements	4

		Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009	5

		Consolidated Statements of Operations for the nine months ended September 30, 2010 and September 30, 2009 and for the three months ended September 30, 2010 and September 30, 2009	6

		Statement of Changes in Shareholders’ Equity for the nine months ended September 30, 2010	7

		Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and September 30, 2009	8

		Notes to Interim Consolidated Financial Statements	9-14

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
	Item 4.	Controls and Procedures	19

PART II – OTHER INFORMATION

	Item 1.	Legal Proceedings	19
	Item 1A.	Risk Factors	19
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
	Item 3.	Defaults Upon Senior Securities	25
	Item 4.	Reserved	25
	Item 5.	Other Information	25
	Item 6.	Exhibits	25

SIGNATURES			26

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2010

IN U.S. DOLLARS

UNAUDITED

INDEX

		Page

Review of Unaudited Interim Consolidated Financial Statements		4

Consolidated Balance Sheets		5

Consolidated Statements of Operations		6

Statement of Changes in Shareholders' Equity		7

Consolidated Statements of Cash Flows		8

Notes to Consolidated Financial Statements		9 - 14

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The Board of Directors

Digital Power Corporation

Re:

Review of unaudited interim consolidated financial statements

for the three and nine-month periods ended September 30, 2010

We have reviewed the accompanying interim consolidated balance sheet of Digital Power Corporation ("the Company") and its subsidiary as of September 30, 2010, and the related interim consolidated statements of operations and cash flows for the three and nine-month periods ended September 30, 2010 and 2009, and the interim statement of changes in shareholders' equity for the nine-month period ended September 30, 2010. 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 interim consolidated 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 5, 2010	A Member of Ernst & Young Global

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CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands, except share and per share data

	September 30,			December 31,
	2010			2009
	Unaudited
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	2,398		$	2,967
Restricted cash		83			84
Trade receivables (net of allowance for doubtful accounts of $ 111 and $ 127 at September 30, 2010 and December 31, 2009, respectively)		2,585			1,522
Prepaid expenses and other receivables		165			243
Inventories (Note 3)		1,890			1,056

Total current assets		7,121			5,872

PROPERTY AND EQUIPMENT, NET		236			231

TECHNOLOGY, NET (Note 4)		479			-

LONG-TERM DEPOSITS		42			41

Total assets	$	7,878		$	6,144

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable	$	1,158		$	891
Related parties - trade payables		1,031			531
Advances from customers and deferred revenue		1,012			471
Other current liabilities		644			492

Total current liabilities		3,845			2,385

SHAREHOLDERS' EQUITY:
Share capital -
Series A Redeemable, Convertible Preferred shares, no par value - 500,000 shares authorized at September 30, 2010 and December 31, 2009; 0 shares issued and outstanding at September 30, 2010 and December 31, 2009		-			-
Preferred shares, no par value - 1,500,000 shares authorized at September 30, 2010 and December 31, 2009; 0 shares issued and outstanding at September 30, 2010 and December 31, 2009		-			-
Common shares, no par value - 30,000,000 shares authorized at September 30, 2010 and December 31, 2009; 6,678,968 and 6,626,468 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		-			-
Additional paid-in capital		14,150			14,042
Accumulated deficit		(9,658	)		(9,932	)
Accumulated other comprehensive loss		(459	)		(351	)

Total shareholders' equity		4,033			3,759

Total liabilities and shareholders' equity	$	7,878		$	6,144

The accompanying notes are an integral part of the consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS

U.S. dollars in thousands, except per share data

	Nine months ended September 30,						Three months ended September 30,
	2010			2009			2010			2009
	Unaudited

Revenues	$	7,324		$	6,224		$	3,186		$	1,708
Cost of revenues		4,624			4,071			2,036			1,196

Gross profit		2,700			2,153			1,150			512

Operating expenses:
Engineering and product development		429			405			161			136
Selling and marketing		857			834			253			250
General and administrative		1,084			1,022			354			357

Total operating expenses		2,370			2,261			768			743

Operating income (loss)		330			(108	)		382			(231	)
Financial income (expense), net		(56	)		(46	)		(79	)		26

Net income (loss)	$	274		$	(154	)	$	303		$	(205	)

Basic net earnings (loss) per share	$	0.041		$	(0.023	)	$	0.045		$	(0.031	)

Diluted net earnings (loss) per share	$	0.040		$	(0.023	)	$	0.045		$	(0.031	)

The accompanying notes are an integral part of the consolidated financial statements.

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STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

U.S. dollars in thousands, except share data

								Other
	Common		Additional					accumulated			Total			Total
	shares		paid-in		Accumulated			comprehensive			comprehensive			shareholders'
	Number		capital		deficit			loss			loss			equity

Balance as of January 1, 2010		6,626,468	$	14,042	$	(9,932	)	$	(351	)		-		$	3,759

Stock compensation related to options granted to Telkoor's employees and other non-employee consultant		-		1		-			-			-			1
Stock compensation related to options granted to employees		-		61		-			-			-			61
Exercise of options granted to employees		52,500		46		-			-			-			46
Comprehensive income:
Net income		-		-		274			-			274			274
Foreign currency translation adjustments		-		-		-			(108	)		(108	)		(108	)
Total comprehensive income
											$	166
Balance as of September 30, 2010 (unaudited)		6,678,968	$	14,150	$	(9,658	)	$	(459	)				$	4,033

The accompanying notes are an integral part of the consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Nine months ended September 30,
	2010			2009
	Unaudited
Cash flows from operating activities:

Net income (loss)	$	274		$	(154	)
Adjustments required to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		38			56
Stock compensation related to options granted to employees		61			57
Stock compensation related to options granted to Telkoor's employees and other non-employee consultant		1			14
Decrease (increase) in trade receivables, net		(1,066	)		612
Decrease (increase) in prepaid expenses and other accounts receivable		77			(73	)
Decrease (increase) in inventories		(829	)		459
Increase (decrease) in accounts payable and related parties- trade payables		762			(1,154	)
Increase in deferred revenues		526			129
Increase in other current liabilities		149			54

Net cash used in operating activities		(7	)		-

Cash flows from investing activities:

Purchase of property and equipment		(49	)		(53	)
Purchase of technology		(471	)		-

Net cash used in investing activities		(520	)		(53	)

Cash flows from financing activities:

Proceeds from exercise of options		46			12

Net cash provided by financing activities		46			12

Effect of exchange rate changes on cash and cash equivalents		(88	)		108

Increase (decrease) in cash and cash equivalents		(569	)		67
Cash and cash equivalents at the beginning of the period		2,967			2,476

Cash and cash equivalents at the end of the period	$	2,398		$	2,543

Supplemental disclosure of non-cash activities:

Reclassification of inventory to fixed assets	$	-		$	74

The accompanying notes are an integral part of the consolidated financial statements.

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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 and Digital Power Limited ("DPL"), a wholly owned subsidiary located in the United Kingdom, are currently engaged in the design, manufacture and sale of high-grade switching power supplies and solutions. The Company also provides static frequency and AC/DC switching converters, including distributed power systems. The Company has two reportable geographic segments - North America (sales through DPC) and Europe (sales through DPL).

The Company depends on Telkoor Telecom Ltd. ("Telkoor"), a major shareholder of the Company and one of DPC's third party subcontractors, for some of its products know-how, and for its manufacturing capabilities in the production of some of the products that DPC sells. If Telkoor is unable or unwilling to continue manufacturing the Company's products in required volumes on a timely basis, that could lead to loss of sales, and adversely affect the Company's operating results and cash position. The Company also depends on Telkoor's intellectual property and ability to transfer production of some of Digital Power’s product line to third party manufacturers. Failure to obtain new products in a timely manner or delay in delivery of product to customers will have an adverse effect on the Company's ability to meet its customers' expectations.

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies applied in the annual financial statements of the Company as of December 31, 2009 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, 2010 and for the three and nine months ended September 30, 2010 and 2009 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’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. The results of operations for the nine months ended September 30, 2010 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2010.

Accounting for stock-based compensation:

The Company has several stock-based employee compensation plans, which are described more fully in Note 5. The Company accounts for stock-based compensation in accordance with Accounting Standards Codification Statement ("ASC") 718 (formerly SFAS No. 123 (revised 2004)) “Stock compensation” (“ASC 718”).

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U.S. dollars in thousands, except share and per share data

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company and its subsidiary apply ASC 718 and ASC 505-50 (formerly EITF 96-18) “Equity-Based Payments to Non-Employees” (“ASC 505-50") to options issued to non-employees. ASC 718 requires use of an option valuation model to measure the fair value of the options at the grant date.

NOTE 3:-

INVENTORIES

	September 30,		December 31,
	2010		2009
	Unaudited

Raw materials, parts and supplies	$	387	$	232
Work in progress		514		285
Finished products		989		539

	$	1,890	$	1,056

NOTE 4:-

TECHNOLOGY, NET

On August 25, 2010, the Company and its wholly-owned subsidiary, DPL, entered into an agreement with Telkoor Power Supplies Ltd. (“TPS”), a subsidiary of Telkoor, pursuant to which, (1) TPS sold, assigned and conveyed to DPL all of its rights, title and interest in and to the intellectual property associated with the Compact Peripheral Component Interface 600 W AC/DC power supply series (the “Assets” or "IP") and (2) DPL granted to TPS an irrevocable license to sell the Assets in Israel on an exclusive basis. In consideration for the purchase of the IP, DPL has paid TPS $480. The consideration for the license provided to TPS to sell the Assets in Israel is a royalty fee of 15% of TPS's direct production costs of sales, due on a quarterly basis.

TPS will provide the Company reasonable training and technical support, if necessary, for a period of 60 months in order to enable the Company to properly and effectively use the IP to manufacture the Assets. In accordance with the agreement, the consideration for the IP may be reduced over a four year period in the event that annual sales for each fiscal year between 2011 and 2014 are less than a fixed threshold of units on an annual basis based on an offset value per unit as described in the agreement. If there is a shortfall in sale of units in one annual period and, in the subsequent period, the Company sells more than the fixed unit threshold, this difference will be offset from any reduced consideration in any annual periods between 2011and 2014.

Since the transaction was made between two related parties, an external independent valuation has been prepared in order to support the fair value of the IP purchased in accordance with ASC 820.

The useful life of the IP has been determined to be five years and the amortization method is straight line as management considers this method as the most appropriate.

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U.S. dollars in thousands, except share and per share data

NOTE 5:-

ACCOUNTING FOR STOCK-BASED COMPENSATION

Stock option plans:

Under the Company's stock option plans, options may be granted to employees, officers, consultants, service providers and directors of the Company or its subsidiary.

As of September 30, 2010, the Company has authorized, by three Incentive Share Option Plans, the grant of options to officers, management, other key employees and others of up to 513,000, 240,000 and 1,519,000, respectively, of the Company's common stock. As of September 30, 2010, options to purchase up to an aggregate of 762,645 shares of the Company's common stock are still available for future grant.

The options granted generally become fully exercisable after four years and expire no later than 10 years from the date of the option 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, 2010
	Amount of options			Weighted average exercise price		Weighted average remaining contractual term (years)		Aggregate Intrinsic value *)
Outstanding at the beginning of the period		825,240		$	1.05
Exercised		(52,500	)		0.89
Forfeited		(56,740	)		1.19
Expired		(17,000	)		2.38

Outstanding at the end of the period		699,000		$	1.02		4.49		121

Exercisable options at the end of the period		599,750		$	1.00		3.69		240

Calculation of aggregate intrinsic value is based on the share price of the Company's common stock as of September 30, 2010 ($ 1.08 per share).

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U.S. dollars in thousands, except share and per share data

NOTE 5:-

ACCOUNTING FOR STOCK-BASED COMPENSATION (Cont.)

Under the provisions of ASC 718, the fair value of each option is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions such as stock price on the date of the grant, exercise price, risk-free interest rate, expected volatility, expected life and expected dividend yield of the option. Expected volatility is based exclusively on historical volatility of the entity's stock as allowed by ASC 718. 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.

No options were granted during the first nine months of 2010.

As of September 30, 2010, there was $ 119 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a period of the next 38 months.

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, 2010, the ESOT held 167,504 common shares.

NOTE 6:-

NET INCOME (LOSS) PER SHARE

The following table sets forth the computation of the basic and diluted net earnings (loss) per share:

a. Numerator:

	Nine months ended September 30,					Three months ended September 30,
	2010		2009			2010		2009
	Unaudited

Net income (loss) available to common shareholders	$	274	$	(154	)	$	303	$	(205	)

b. Denominator:

Denominator for basic net earnings (loss) per share of weighted average number of common shares	6,660,996	6,615,708	6,678,968	6,615,708
Effect of dilutive securities:
Employee stock options	126,191	96,154	106,810	42,439

Denominator for diluted net earnings per common share	6,787,187	6,711,862	6,785,778	6,658,147

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U.S. dollars in thousands, except share and per share data

NOTE 7:-

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 following data presents the revenues, expenditures and other operating data of the Company's geographic operating segments in accordance with Statement of Financial Accounting Standard No.131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS No. 131").

	Nine months ended September 30, 2010 (unaudited)
	DPC		DPL		Eliminations			Total

Revenues	$	4,174	$	3,150	$			$	7,324
Intersegment revenues		59		129		(188	)		-

Total revenues	$	4,233	$	3,279	$	(188	)	$	7,324

Depreciation expense	$	16	$	26	$	-		$	42

Operating income	$	53	$	277	$	-		$	330

Financial expenses, net								$	56

Net income	$	47	$	227	$	-		$	274

Expenditures for segment assets, net as of September 30, 2010	$	42	$	7	$	-		$	49

Identifiable assets as of September 30, 2010	$	3,524	$	4,354	$	-		$	7,878

	Nine months ended September 30, 2009 (unaudited)
	DPC			DPL		Eliminations			Total

Revenues	$	2,673		$	3,551	$			$	6,224
Intersegment revenues		155			23		(178	)		-

Total revenues	$	2,828		$	3,574	$	(178	)	$	6,224

Depreciation expense	$	23		$	33	$	-		$	56

Operating income (loss)	$	(354	)	$	246	$	-		$	(108	)

Financial expenses, net									$	46

Net income (loss)	$	(372	)	$	218	$	-		$	(154	)

Expenditures for segment assets, net as of September 30, 2009	$	13		$	40	$	-		$	53

Identifiable assets as of September 30, 2009	$	2,237		$	3,316	$	-		$	5,553

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