10-K 1 dpw20131231_10k.htm FORM 10-K dpw20131231_10k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934

 

 

For the fiscal year ended December 31, 2013

or

 

TRANSITION REPORT PURSUANT TO 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 registrant as specified in its charter)

 

California

 94-1721931

(State or other jurisdiction of

Incorporation or organization)

 (I.R.S. Employer

 Identification No.)

 

48430 Lakeview Blvd, Fremont, California 94538-3158

(Address of principal executive offices, including zip code)

 

510-657-2635

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Name of each exchange on which registered

Common Stock, no par value

NYSE MKT

 

Securities registered pursuant to Section 12(g) of the Act:

 

Title of Each Class

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes   No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes    No

 

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    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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

 

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     (do not check if a smaller reporting company)

Smaller reporting company    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes      No

 

As of June 30, 2013, the aggregate market value of the voting common stock held by non-affiliates was approximately $1,990,544 based upon the closing price of the common stock on the NYSE MKT on that date. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

As of March 20, 2014, the number of shares of common stock outstanding was 6,853,161.

 

DOCUMENTS INCORPORATED BY REFERENCE

None. 

 
 

 

 

INDEX

 

 

Page No.

Forward-Looking Statements

1

PART I

 

 

Item 1.

Description of Business.

1

Item 1A.

Risk Factors.

9

Item 1B.

Unresolved Staff Comments.

15

Item 2.

Description of Property.

15

Item 3.

Legal Proceedings.

15

Item 4.

Mine Safety Disclosures

15

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

16

     

Item 6.

Selected Financial Data.

16

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

16

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

21

Item 8.

Financial Statements and Supplementary Data.

21

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

22

Item 9A.

Controls and Procedures.

22

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance.

23

Item 11.

Executive Compensation.

27

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

31

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

33

Item 14.

Principal Accountant Fees and Services.

35

PART IV

 

 

Item 15.

Exhibits and Financial Statement Schedules.

36

Signatures

 

 

 

 
 

 

 

As used in this annual report, the terms “we,” “us,” “our,” “Company,” “Digital,” or “Digital Power,” mean Digital Power Corporation, a California corporation, and its subsidiaries unless otherwise indicated.

 

The following information should be read in conjunction with the Consolidated Financial Statements and the notes thereto located elsewhere in this Annual Report on Form 10-K. This Report, and in particular “Management's Discussion and Analysis of Financial Condition and Results of Operations,” contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In this report, the words "believes," "anticipates," "intends," "expects," "plans," "should," "will," "seeks" and words of similar import identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: our history of net losses; our dependence on Telkoor Telecom Ltd. to design certain of our standard products; the possible limits of our strategic focus on our power supply component competencies; our dependence on a few major customers; uncertainty of market acceptance of our product; the effects of the ongoing slowdown affecting world financial markets; and other factors referenced in "Risk Factors" and other sections of this Annual Report. Given these uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.

 

PART I.

 

ITEM 1.        DESCRIPTION OF BUSINESS.

 

General

 

Digital Power Corporation is a solution-driven organization that designs, develops, manufactures and sells high-grade customized and flexible power system solutions for the most demanding applications in the medical, military, telecom and industrial markets.  We are highly focused on high-grade and custom product designs for both the commercial and military/defense markets, where customers demand high density, high efficiency and ruggedized products to meet the harshest and/or military mission critical operating conditions.  We are a California corporation originally formed in 1969, and our common stock trades on the NYSE MKT under the symbol “DPW”. Our corporate headquarters are located in the heart of the Silicon Valley. 

 

We also have a wholly-owned subsidiary, Digital Power Limited ("DPL"), which operates under the brand name of “Gresham Power Electronics” (“Gresham”).  DPL is located in Salisbury, England, and designs, manufactures and sells power products and system solutions mainly for the European marketplace, including power conversion, power distribution equipment, DC/AC (Direct Current/Active Current) inverters and UPS (Uninterrupted Power Supply) products. DPL’s defense business has specialists in the field of naval applications of power distribution conversion. 

 

We believe that we are one of the first companies in the power solutions industry to introduce a product strategy based on the premise that products developed with an extremely flexible architecture enable rapid modifications to meet unique customer requirements for non-standard output voltages. The development and implementation of this strategy has resulted in broad acceptance in the telecom/industrial, and increasingly in the medical market, segments for our new line of high density and high efficiency power products.  These products set an industry standard for providing high-power output in package sizes that are among the smallest available for such commercial products.

 

We market and sell our products to many diverse market segments, including the telecom, industrial, medical and military/defense industries.  Our products serve a global market, with an emphasis on North America and Europe.  We offer a broad product variety, including a full custom product design, standard and modified-standard products. Our unique high-speed switching power rectifiers includes but is not limited to custom power products, front-end, open-frame, enclosed, Compact PCI, MicroTCA, PoE (Power over Ethernet) and other product solutions, providing power output from 50 to 24,000 watts.

 

 
1

 

 

In an effort to provide short lead-times, high quality products and competitive pricing to support our markets, we have entered into production agreements with several contract manufacturers located in Asia, primarily China.  These agreements allow us to better control production costs and ensure high quality products deliverable in a timely manner to meet market demand.   

 

We intend to remain an innovative leader in the development of cutting-edge custom power solutions and feature rich products to meet any customer needs and requirements, rugged power systems to meet harsh and extreme operation environmental requirements, and high performance, high efficiency, high-density and modular power systems.   We are focusing today on developing even more high-grade custom power system solutions for numerous customers in a broadly diversified range of markets and challenging environments. Each product development is based on best of class performance criteria, including unique, advanced feature sets and a special layout to meet our customers’ unique operating conditions where efficiency, size and time to market are key to their success.  We are taking initiatives to develop and sell high efficiency “green power” solutions.   

 

Power System Solutions

 

We provide custom power system solutions, high-grade flexibility series power supply products, off-the-shelf products and value-added services to diverse industries and markets including military/defense, telecom, medical and industrial.  We believe that our solutions leverage a combination of low leakage power emissions, high power density, superior power efficiency, design flexibility and short time to market.

 

Custom Power System Solution.    We provide high-grade custom power system solutions to numerous customers in multiple industry segments. Each custom solution that we develop is based on high power density, digital power processing and a special layout to meet each of our customer’s unique operation environments where efficiency, size and performance are key.   We combine our power design capabilities with the latest circuit designs to provide complete power solutions for virtually any need.   In the design of custom power solutions, we work closely with our customers’ engineering teams to develop mechanical enclosures to ensure 100% compatibility with any hosted platform.

 

Our standard contract for custom power solutions includes a multi-year high-volume production forecast that allows us to secure long-term production guarantees (and therefore possible savings on manufacturing costs for volume orders) while providing an environment that promotes the development of our intellectual property (“IP”) portfolio.    We believe that this business model provides an incentive to our customers to be committed to high-volume production orders.

 

High-Grade Flexibility Series Power Supply Product .   We offer our feature rich based power rectifiers that support flexible configuration and high-grade design implementation. This include innovative designs and implementation including Digital Signal Processing (“DSP”) control for Power Factor Correction (“PFC”) and DC/DC, synchronous rectifier outputs under DSP control, two phase PFC, hot pluggable, current sharing and other features. While some of our customers have special requirements that include a full custom design, other customers may require only certain electrical changes to standard power supply products, such as modified output voltages and unique status and control signals, and mechanical repackaging tailored to fit the specific application. We offer a wide range of standard and modified standard products that can be easily integrated with any platform across our diversified market segments. 

 

Value-Added Services .    In addition to our custom solutions and high-grade flexibility series proprietary products that we offer, we also provide value-added services to original equipment manufacturers (“OEMs”).  We incorporate an OEM’s selected electronic components, enclosures, cable assemblies and other compliance components into our power system solutions to produce a power subassembly that is compatible with the OEM’s own equipment and specifically tailored to meet the OEM’s needs.  We purchase parts and components that the OEM itself would otherwise attach to, or integrate with, our power systems, and provide the OEM with the integration and installation service, thus eliminating a complex, time-consuming and costly integration.  We believe that this value-added service is well suited to those OEMs who wish to reduce their vendor base and minimize their investment in manufacturing that leads to increased fixed costs.  Based on these value-added services, the OEMs do not need to build assembly facilities to manufacture their own power subassemblies and thus are not required to purchase individual parts from many vendors.

 

 
2

 

 

Our products have a warranty period from date of shipment to the customer.

 

Markets

 

We sell our custom power system solutions, high-grade flexibility series power supply products and value-added services to customers in a diverse range of commercial and defense industries and markets throughout the world, with an emphasis on North America and Europe.   Our current customer base consists of approximately 200 companies, some of which are served through our partner channels.  We serve the North American power electronics market primarily through our domestic corporation, Digital Power Corporation; the European marketplace is served through DPL, our wholly-owned subsidiary.

 

Our products are sold directly by our sales force and through a network of manufacturers’ representatives and distributors.  Our sales strategy is to identify and focus on strategic accounts. This strategy allows us to maintain a close and direct relationship with them, which positions us as the supplier of choice for these customers’ challenging, innovative and demanding new product requirements.  In striving for additional market share, we simultaneously seek to strengthen our traditional sales channels of manufacturer representatives and distributors. We plan to continue to build more channels and increase our market share through 2014.

 

Commercial Customers .   We serve global commercial markets including medical, telecom, and industrial companies. Our products are deployed in a variety of applications and operate in a broad range of systems where customers require mission critical power reliability and occasionally extreme environmental conditions.  Examples of the commercial markets we serve and products for these markets include:

 

 

Medical (Patient Contact and Non-patient Contact)

 

Colonoscopy imaging system

 

Imaging, dispensing equipment

 

Ventilators

 

Dialysis, endoscopy, surgical equipment

 

Ultrasound, MRI

 

Oxygen concentration

 

 

Telecom

 

Switches

 

Routers

 

Servers

 

Broadband networks and video broadcast systems

 

Fiber optic networks

 

Wireless systems

 

 

Industrial Process Equipment and Embedded Controls

 

Packaging equipment, pumps, CNC machines, laser

 

Intelligent / LED lighting

 

Industrial printers

 

Laboratory and diagnostic equipment

 

ATE (Automatic Test Equipment), scientific

 

Advanced projectors

 

These product solutions, which include standard, modified-standard or full custom designs, are designed to meet our customers’ requirements.  

 

Military/Defense Customers .   We have developed a broad range of rugged product solutions for the military and defense market, featuring the ability to withstand harsh environments.  These ruggedized product solutions, which include both specific modifications of existing products or full custom designs, are designed for combat environments and meet the requirements of our defense customers. We are compliant with the regulations of International Traffic in Arms Regulations (“ITAR”) and are an approved vendor for the U.S. Air Force, Navy and Army.

 

 
3

 

 

At the core of every military electronic system is a power supply. Mission critical systems require rugged high performance power platforms that will operate and survive the harsh environmental conditions placed upon such systems. Our power supplies, which include the following, function effectively in these severe military environments:

 

 

Missiles – Ground-to-Air, Air-to-Air and Sea-to-Air

 

Naval – Shipboard radar, EW and communication

 

Mobile and Ground Communications – Active Protection, Communications and Navigation

 

Surveillance, test equipment

 

UAV (Unmanned Aerial Vehicle) – Very lightweight power systems

 

Space, weight, output power, electromagnetic compatibility, power density and multiple output requirements are only part of the challenges that any military power supply design faces. With many decades of experience, our engineering teams meet these tough challenges.  Our power supplies are a critical component of many major weapon systems worldwide.

 

We leverage our strategic alliance and collaboration with Telkoor Telecom Ltd. (“Telkoor”), our largest shareholder, and DPL, our wholly-owned subsidiary, to develop some of the MIL-SPEC products.
 

Full custom military project services:

 

Program management for each project

 

Quality assurance and control:

 

o

ISO 9001: 2008 and ISO 17025: 2005 certified

 

o

Compliance with AS9100 through our manufacturing

 

o

Compliance with MIL-Q 9858A

 

o

Compliance with environmental testing in accordance with MIL-STD 810, MIL-STD 202

 

o

FRACAS (Failure Reporting, Analysis, and Corrective Action System)

 

o

100% screening, including ESS (Environmental Stress Screening) and ATP (Acceptance Test Procedure) with random vibration and temperature cycling tests

 

Product Tests:

 

o

Vertical Random Vibration

 

o

Sine Sweep Vibrations

 

o

Shock

 

o

Salt

 

o

Fog

 

o

Polar Temperatures   

 

Typical Product Features:

 

Wide input voltage range

 

Multi-output voltages (DC and AC)

 

Fully approved according to MIL-STD 704, MIL-STD 1275 and MIL-STD 1399

 

Environmental conditions per MIL-STD 810

 

EMI/RFI per MIL-STD 461

 

Wide operating temperature range of -40°C up to +90°C

 

Power output up to 72,000 Watts (3 x 24,000 Watts system)

 

High switching frequency up to 500KHz

 

High efficiency, over 90%

 

High power density up to 26 watts/inch 3

 

Power factor correction

 

Redundancy and hot swap N+1

 

Switching Frequency sync to external clock

 

Free convection, forced air cooling and base plate cooling

 

 
4

 

 

Strategy

 

Our strategy is to be the supplier of choice to those companies and OEMs requiring high-quality power system solutions where custom design, superior product, high quality, time to market and very competitive prices are critical to business success. We believe that we provide advanced custom product design services to deliver high-grade products that reach a high level of efficiency and density and can meet rigorous environmental requirements. Our customers benefit from a direct relationship with us that support all of their needs for designing and manufacturing power solutions and products. By implementing our advanced core technology, including process implementation in integrated circuits, we can provide cost reductions to our customers by replacing their existing power sources with our custom design cost-effective products.

 

Our target market segments include the industrial, telecommunication, medical, and military/defense industries.  We do not participate in the personal computer power supply market because of the low margins arising out of the high volume and extremely competitive nature of that market.

 

Our strategy will continue to focus on expanding our market share by adding new customers from all of our target market segments. We are developing long term relationships, and we intend to expand our customer base in our commercial market segments, including medical, telecom and industrial, while continuing to maintain our existing customers.  In the military and defense market segment, we will continue to provide advanced rugged products to customers, and we are striving to expand our business to support the military and defense industries. We believe that our custom power supply solutions, flexibility series, high-grade and high-efficiency power product solutions provide customers with a more effective choice as compared to products offered by other power solution competitors, due in part to a customer’s requirement for output voltages and other features such as redundancy and sense control tailored to its exact requirements within specific parameters.

 

Furthermore, we believe that we have the talent and engineering experience to satisfy any of our customers’ product or platform requirements.  If an OEM customer specifies a different set of power system parameters, we will custom design or modify a product to meet the OEM’s requirements    With a wide range of solutions from our custom designs to our high-grade flexibility series products, our professional design team can provide economical and timely product solutions to our OEM customers.  In addition, as our power systems meet all appropriate environmental requirements and safety standards, our smaller OEM customers can expedite the process of independent safety agency testing by companies such as Underwriters Laboratories, and save considerable expense.   By offering OEM customers choices with Digital Power’s custom, flexibility series, high-grade and high-efficiency power system solutions, we believe we provide certain strategic advantages over our competitors.

 

Digital Power Limited (Gresham Power Electronics)

 

Digital Power Limited, our wholly-owned subsidiary organized and headquartered in Salisbury, United Kingdom , designs, manufactures, and distributes switching power supplies, uninterruptible power supplies, and power conversion and distribution equipment frequency converters for the commercial and military markets, under the name Gresham Power Electronics (“Gresham”). Frequency converters manufactured by Gresham are used by navel warships to convert their generated 60-cycle electricity supply to 400 cycles.  This 400-cycle supply is used to power their critical equipment such as gyro, compass, and weapons systems.  Gresham also designs and manufactures transformer rectifiers for naval use.  Typically, these provide battery supported back up for critical DC systems, such as machinery and communications.  In addition, higher power rectifiers are used for the starting and servicing of helicopters on naval vessels, and Gresham now supplies these as part of overall helicopter start and servicing systems.  We believe that Gresham products add diversity to our product line, provide greater access to the United Kingdom and European markets, and strengthen our engineering and technical resources. 

 

Manufacturing and Testing

 

Consistent with our strategy of focusing on custom design products and high-grade flexibility series products, we aim to maintain a high degree of flexibility in our manufacturing through the use of strategically focused contract manufacturers.   We select contract manufacturers to ensure that they will meet our near term cost, delivery, and quality goals.  In addition, we believe these relationships will eventually give us access to new markets and beneficial cross-licensing opportunities.  The competitive nature of the power supply industry has placed continual downward pressure on selling prices.  In order to achieve our low cost manufacturing goals with labor-intensive products, we have entered into production agreements with certain contract manufacturers in Asia.  At present, our principal contract manufacturers in Asia are Winco-Power Technology, Shenzhen Watt Electronics, Ultra Level Tech Co. Ltd, Teamwise and Energy Recovery Products.

  

 
5

 

 

We sell certain products that are developed, manufactured and sold to us by Telkoor, an Israeli company that currently holds 42.3% of our outstanding common stock.   In coordination with Telkoor, and in order to accelerate delivery and reduce the cost of some of the products we purchase from Telkoor, we have obtained the right to order products directly from Telkoor’s contract manufacturers, as well as from our own contract manufacturers in China, in exchange for the payment of royalties to Telkoor.

 

We are continually improving our internal processes, while monitoring the processes of our contract manufacturers, to ensure the highest quality and consistent manufacturing of our power solutions. We test all of our custom power assemblies per clearly defined test procedures developed by us and our customers. This approach ensures that our customers can use our systems right out of the box. Customer specific testing services are offered with custom designed test stands to simulate operation within our customer applications.

 

Compliance with international safety agency standards is critical in every application, and power solutions play a major role in meeting these compliance requirements. Our safety engineers and quality assurance teams help ensure that our custom products are designed to meet all safety requirements and are appropriately documented to expedite safety approval processes.

 

Regulatory Requirements

 

We and our manufacturing partners are required to meet applicable regulatory, environmental, emissions, safety and other requirements where specified by the customer and accepted by us or as required by local regulatory or legal requirements.  The products that we market and sell in Europe may be subject to the 2003 European Directive on Restriction of Hazardous Substances (“RoHS”), which restricts the use of six hazardous materials in the manufacture of certain electronic and electrical equipment, as well as the 2002 European Directive on Waste Electrical and Electronic Equipment (“WEEE”), which determines collection, recycling and recovery goals for electrical goods.  In July 2006, our industry began phasing in RoHS and WEEE requirements in most geographical markets with specific emphasis on consumer-based products.   We believe that RoHS and WEEE-compliant components may be subject to longer lead-times and higher prices as the industry transitions to these new requirements.

 

Some of our products are subject to ITAR, which is administered by the U.S. Department of State. ITAR controls not only the export of certain products specifically designed, modified, configured or adapted for military systems, but also the export of related technical data and defense services and foreign production. We obtain required export licenses for any exports subject to ITAR. Compliance with ITAR may require a prolonged period of time; if the process of obtaining required export licenses for products subject to ITAR is delayed, it could have a materially adverse effect on our business, financial condition, and operating results. Any future restrictions or charges imposed by the United States or any other country on our international sales or sales by DPL, our foreign subsidiary, could have a materially adverse effect on our business, financial condition, and operating results.  In addition, from time to time, we entered into contracts with defense contract manufacturers for the government of Israel’s defense programs, which were funded by, and governed by the regulations of, the U.S. Foreign Military Financing program.

 

Sales and Marketing

 

We market our products directly through our internal sales force as well as through a partner network of independent manufacturer representatives and distributors.  Each representative organization is responsible for managing sales in a particular geographic territory.  Generally, the representative has the opportunity to earn exclusive access to all potential customers in the assigned territory as a result of achieving its marketing and sales goals as defined in the representative agreement. Our manufacturer representative agreements provide for a commission equal to 5% of net sales of new “design-in” and 1.75% of net sales for retention, payable after the product is shipped, for any direct sale contribution.  Typically, either we or the representative organization may terminate the agreement upon 30 days’ written notice.

 

 
6

 

 

Historically, we have also sold products through multiple distributor arrangements which do not specify a particular territory.  Each of these arrangements can be terminated by either party upon 30 days’ written notice.

 

Our promotional efforts, to date, have included product data sheets, participation in trade shows, and our website, www.digipwr.com.  We use the corporate website to emphasize our capabilities and marketing direction. All products specifications are uploaded onto our website and accessible to the marketplace. We will continue to enhance our website by adding more features and functionalities, such as ecommerce, that will allow our customers to buy directly through our website.  Our future promotional activities will likely include advertising in industry-specific publications, as well as public relations for our new products.

 

Engineering and Technology

 

Our engineering and product development efforts are primarily directed toward developing new products in connection with custom product design and modification of our standard power systems to provide a broad array of individual models.

 

Our new custom product design solutions are driven by our ability to provide to our customers advanced technology that meets their product needs and supports special operation and environmental requirements, with a short turnaround time and a very competitive price point. We believe that we are successfully executing our strategic account focus, as evidenced by the award of second and third generation product development contracts from some of these customers.  Our standard contract for custom power solutions includes a multi-year high-volume production forecast that could allow us to secure long-term production guarantees while providing an environment that promotes the development of our IP portfolio.

 

We also partner with various design and contract engineering firms for development of some of our new products supported by our internal engineering services staff.  Furthermore, we continue to leverage the close relationship we have with one of our major shareholders, Telkoor, to introduce new products that Telkoor develops for its market and makes available for us. Finally, from time to time, we modify standard products to meet specific customer requirements, including, but not limited to, converting commercial products into full military MIL-SPEC products and other unique modification and adjustments, when applicable. We are experiencing an increasing demand for ruggedization of commercial products for military applications. To meet that requirement, our engineering team continues to ruggedize commercial products, which we sell as commercial off the shelf products to some of our military customers. We continually seek to improve our product power density, adaptability, and efficiency, while attempting to anticipate changing market demands for increased functionality, such as PFC and improved EMI (electromagnetic interference) filtering. We continue to differentiate all of our products from commodity-type products by enhancing, modifying and customizing our existing product portfolio, using our engineering lab in California. In August 2010, we purchased the IP and production packages of the compact peripheral component interface (Compact PCI, or CPCI) AC/DC and DC/DC power supply series from Telkoor Power Systems Ltd. (“TPS”), a wholly owned subsidiary of Telkoor.  The IP purchase was to support our strategy being a leader supplier of CPCI products for commercial and defense markets.  We received from this purchase a portfolio of industry-leading CPCI AC/DC power supplies delivering 600 Watts and 650 Watt of continuous power. These hot-swappable power supplies feature N+1 redundant connection and active load current share. This IP strategic acquisition expands our presence for industrial, telecom, and military/defense applications that require increasing amounts of power.  As a result of this purchase, we have decreased our manufacturing costs.

 

 
7

 

 

Competition

 

The power system solutions industry is highly fragmented and characterized by intense competition.  Our competition includes hundreds of companies located throughout the world, some of which have advantages over us in terms of labor and component costs, and some of which may offer products comparable in quality to ours.  Many of our competitors, including Power-One, Emerson (Astec) Technologies, Inc., Lambda Electronics, and Mean-Well Power Supplies, have substantially greater fiscal and marketing resources and geographic presence than we do.  If we are successful in increasing our revenues, competitors may notice and increase competition with our customers.  We also face competition from current and prospective customers who may decide to design and manufacture internally power supplies needed for their products.  Furthermore, certain larger OEMs tend to contract only with larger power supply manufacturers.

 

We anticipate in the current economic situation, additional competitors may enter into strategic alliances or even acquisitions.  Competition could thus become more problematic if consolidation trends in the electronics industry continue and some of the OEMs to whom we sell our products are acquired by larger OEMs.  To remain competitive, we must continue to compete favorably on the basis of value by providing reliable manufacturing, offering customer-driven engineering services including custom design and manufacturing, continuously improving quality and reliability levels, and offering flexible and reliable delivery schedules.

  

We believe that our power system solutions and advanced product design have significant advantages in the power supply solutions market because they have higher efficiency and high-power density, or power-to-volume ratio, which make them smaller than the solutions offered by our competitors and can thus fit well in numerous custom environments in compliance with our customers’ requirements.

 

Another advantage of our power system solutions product line is based on the “Flexible” series that employs adjustable power range of product design.  We believe we have a competitive position with our targeted customers who need a high-quality, compact product, which can be readily modified to meet the customer’s unique requirements.  We have designed the base model power system platform so that it can be quickly and economically modified and adapted to the specific power needs of any hosting platform or OEM.  This “flexibility” approach has allowed us to provide samples of modified power systems to OEM customers in only a few days after initial consultation, an important capability given the emphasis placed by OEMs on “time to market.” It also results in very low non-recurring engineering (“NRE”) expenses.  Because of reduced NRE expenses, we do not generally charge our OEM customers for NRE related to tailoring a power system to a customer’s specific requirements.  We believe this gives us an advantage over our competitors, many of which charge their customers for NRE expenses.

 

Raw Materials

 

The raw materials for power supplies principally consist of electronic components.  These raw materials are available from a variety of sources, and we are not dependent on any one supplier.  We generally allow our subcontractors to purchase components based on orders received or forecasts to minimize our risk of unusable inventory.  To the extent necessary, we may allow them to procure materials prior to orders received to obtain shorter lead times and to achieve quantity discounts following a risk assessment.  In addition, we have decided to directly procure certain long lead-time electronic components in an effort to reduce our lead-time.

 

Many raw material vendors have reduced capacities, closed production lines and, in some cases, even discontinued their operations. As a result, there is a global shortage of certain electronic components, which has extended our production lead-time and our production costs.  For example, in some cases, finished goods that used to be available in 12 weeks for a production purchase order are now available only after 22 weeks.  Also, some materials are no longer available to support some of our products, thereby requiring us to search for cross materials or, even worse, redesign some of our products to support currently-available materials.

 

Intellectual Property

 

We rely upon a combination of trade secrets, industry expertise, confidential procedures, and contractual provisions to protect our intellectual property.  We believe that because our products are continually updated and revised, obtaining patents would be costly and not beneficial. However, in the future, as we continue to develop unique core technology, we may seek to obtain patents for some of the core technology.  On July 8, 2004, our trademark, “DP Digital Power – Powering Your Technologies,” was registered with the United States Patent and Trademark Office.

 

 
8

 

 

Employees

 

As of December 31, 2013, we had 28 employees located in the United States and the United Kingdom, of whom seven were engaged in engineering and product development, eight in sales and marketing, seven in general operations and six in general administration and finance.  All but three of these employees are employed on a full-time basis.  None of our employees are currently represented by a trade union. We consider our relations with our employees to be good.

 

ITEM 1A.     RISK FACTORS.

 

The risk factors listed in this section provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Readers should be aware that the occurrence of any of the events described in these risk factors could have a material adverse effect on our business, results of operations and financial condition. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

We experienced an operating and a net loss during the years ended December 31, 2013 and December 31, 2012, have historically experienced net losses, and may experience operating and net losses in the future.

 

For the year ended December 31, 2013, we had an operating loss of $317,000 and a net loss of $632,000 compared to an operating loss of $94,000 and a net loss of $329,000 for the year ended December 31, 2012.  Although we have actively taken steps to increase our revenue and reduce our costs, we may incur operating and net losses in the future unless we continue to increase revenues by selling current and custom design products, transitioning to production stage of our custom design products and decreasing manufacturing costs through a greater use of contract manufacturers in Asia and other strategic locations.

 

 

We depend on Telkoor to design and manufacture some of our products.

 

We depend on Telkoor, our largest shareholder and one of our third party subcontractors, for design and manufacturing capabilities for some of the products that we sell. If Telkoor is unable or unwilling to continue designing or manufacturing our products in required volumes and with a certain level of quality on a timely basis, that could lead to loss of sales and adversely affect our operating results and cash position. We also depend on Telkoor's intellectual property and ability to transfer production to third party manufacturers. Failure to obtain new products in a timely manner or delay in delivery of products to customers will have an adverse effect on our ability to meet our customers’ expectations.  In addition, we operate in highly competitive markets where our ability to sell Telkoor’s products could be adversely affected by Telkoor’s agreements with other companies, long lead-times and the high cost of Telkoor’s products.  In April 2008, for example, Telkoor signed a “Private Label” agreement with Murata Power Solutions in Canada to sell Telkoor’s products under the Murata brand name, which agreement positions Murata as a direct competitor of ours with respect to the sale of Telkoor’s products in North America.  Also, in 2012, Telkoor’s manufacturing lead-times increased, which has hindered our ability to respond to our customers’ needs.  Telkoor’s principal offices, research and development and manufacturing facilities are located in Israel. Political, economic, and military conditions in Israel directly affect Telkoor’s operations.  We are also dependent upon Telkoor’s terms and conditions with its contract manufacturers for some of our products, which terms and conditions may not always be in our best interest.  In 2010, the Company purchased certain IP from Telkoor in order to reduce its dependency on Telkoor with respect to a certain line of products. We also entered into a Manufacturing Rights Agreement with Telkoor, in 2012, pursuant to which we were granted the non-exclusive right to directly place purchase orders for certain products from third party manufacturers in consideration for payment of royalties.

 

 
9

 

 

We are dependent upon our ability, and our contract manufacturers’ ability, to timely procure electronic components.

 

Because of the global economy, many raw material vendors have reduced capacities, closed production lines and, in some cases, even discontinued their operations. As a result, there is a global shortage of certain electronic components, which has extended our production lead-time and our production costs.  For example, in some cases, finished goods that used to be available in 14 weeks for a production purchase order are now available only after 20 weeks.  Also, some materials are no longer available to support some of our products, thereby requiring us to search for cross materials or, even worse, redesign some of our products to support currently-available materials.  Such redesign efforts may require certain regulatory and safety agency re-submittals, which may cause further production delays. While we have initiated actions that we believe will limit our exposure to such problems, the dynamic business conditions in many of our markets may challenge the solutions that have been put in place, and issues may recur in the future.  

 

In addition, some of our products are manufactured, assembled and tested by third party subcontractors and contract manufacturers located in Asia. While we have had relationships with many of these third parties in the past, we cannot predict how or whether these relationships will continue in the future. In addition, changes in management, financial viability, manufacturing demand or capacity, or other factors, at these third parties could hurt our ability to have our products manufactured.

 

Our strategic focus on our custom power supply solution competencies and concurrent cost reduction plans may be ineffective or may limit our ability to compete.

 

As a result of our strategic focus on custom power supply solutions, we will continue to devote significant resources to developing custom products for a large number of customers, where each product represents a uniquely tailored solution for a specific customer’s requirements.  A failure to meet these customer product requirements or a failure to meet production schedules and/or product quality standards may put us at risk with one or more of these customers.  Moreover, market condition changes and strategic changes at the direction of our customers may affect their decision to continue to purchase products from us. The loss of one or more of our significant custom power supply solution customers could have a material adverse impact on our revenues, business or financial condition.

 

We have also implemented a series of initiatives designed to increase efficiency and reduce costs.  While we believe that these actions will reduce costs, they may not be sufficient to achieve the required operational efficiencies that will enable us to respond more quickly to changes in the market or result in the improvements in our business that we anticipate. In such event, we may be forced to take additional cost-reducing initiatives, which may negatively impact quarterly earnings and profitability as we account for severance and other related costs. In addition, there is the risk that such measures could have long-term adverse effects on our business by reducing our pool of talent, decreasing or slowing improvements in our products or services, making it more difficult for us to respond to customers, limiting our ability to increase production quickly if and when the demand for our solutions increases and limiting our ability to hire and retain key personnel. These circumstances could cause our earnings to be lower than they otherwise might be.

 

We are dependent upon our ability to attract, retain and motivate our key personnel.

 

Our success depends on our ability to attract, retain and motivate our key management personnel, including, but not limited to, our President and CEO, sales force, and key engineers, necessary to implement our business plan and to grow our business. Competition for certain specific technical and management skill sets is intense. If we are unable to identify and hire the personnel that we need to succeed, or if one or more of our present key employees were to cease to be associated with us, our future results could be adversely affected.  Our President and CEO, Amos Kohn, continues to serve in his role as our President and CEO. However, Mr. Kohn’s employment agreement with the Company expired on December 31, 2010, and as of March 26, 2014, Mr. Kohn and the Company have not signed a new employment agreement.

 

 
10

 

 

We depend upon a few major customers for a majority of our revenues, and the loss of any of these customers, or the substantial reduction in the quantity of products that they purchase from us, would significantly reduce our revenues and net income.

 

We currently depend upon a few major OEMs and other customers for a significant portion of our revenues. We have experienced a reduction of orders by OEMs and a reduction or cancellation of orders, scaling back of certain activities and workforce layoffs by other customers.  The loss of any of these customers, or a substantial reduction in the quantity of products that they purchase from us, would significantly reduce our revenues and net income. Furthermore, diversions in the capital spending of certain of these customers to new network elements have and could continue to lead to their reduced demand for our products, which could, in turn, have a material adverse effect on our business and results of operations. If the financial condition of one or more of our major customers should deteriorate, or if they have difficulty acquiring investment capital due to any of these or other factors, a substantial decrease in our revenues would likely result.

 

We are dependent on the electronic equipment industry, and accordingly will be affected by the impact on that industry by the current economic conditions.

 

Substantially all of our existing customers are in the electronic equipment industry, and they manufacture products that are subject to rapid technological change, obsolescence, and large fluctuations in demand.  This industry is further characterized by intense competition and volatility.  The OEMs serving this industry are pressured for increased product performance and lower product prices.  OEMs, in turn, make similar demands on their suppliers, such as us, for increased product performance and lower prices.  The current economic condition have affected the entire supply chain, including us.  Recently, certain segments of the electronic industry have experienced a significant softening in product demand.  Such lower demand may affect our customers, in which case the demand for our products may decline and our growth could be adversely affected.

 

Our reliance on subcontract manufacturers to manufacture certain aspects of our products involves risks, including delays in product shipments and reduced control over product quality.

 

Since we do not own significant manufacturing facilities, we must rely on, and will continue to rely on, a limited number of subcontract manufacturers to manufacture our power supply products. Our reliance upon such subcontract manufacturers involves several risks, including reduced control over manufacturing costs, delivery times, reliability and quality of components, unfavorable currency exchange fluctuations, and continued inflationary pressures on many of the raw materials used in the manufacturing of our power supply products. If we were to encounter a shortage of key manufacturing components from limited sources of supply, or experience manufacturing delays caused by reduced manufacturing capacity, inability of our subcontract manufacturers to procure raw materials, the loss of key assembly subcontractors, difficulties associated with the transition to our new subcontract manufacturers or other factors, we could experience lost revenues, increased costs, and delays in, or cancellations or rescheduling of, orders or shipments, any of which would materially harm our business.

 

We outsource, and are dependent upon developer partners for, the development of some of our custom design products.

 

We made an operational decision to outsource some of our custom design products to numerous developer partners. This business structure will remain in place until the custom design volume justifies expanding our in house capabilities. Incomplete product designs that do not fully comply with the customer specifications and requirements might affect our ability to transition to a volume production stage of the custom designed product where the revenue goals are dependent on the high volume of custom product production. Furthermore, we rely on the design partners’ ability to provide high quality prototypes of the designed product for our customer approval as a critical stage to approve production.

 

We face intense industry competition, price erosion and product obsolescence, which, in turn, could reduce our profitability.

 

We operate in an industry that is generally characterized by intense competition. We believe that the principal bases of competition in our markets are breadth of product line, quality of products, stability, reliability and reputation of the provider, along with cost. Quantity discounts, price erosion, and rapid product obsolescence due to technological improvements are therefore common in our industry as competitors strive to retain or expand market share. Product obsolescence can lead to increases in unsalable inventory that may need to be written off and, therefore, could reduce our profitability. Similarly, price erosion can reduce our profitability by decreasing our revenues and our gross margins. In fact, we have seen price erosion over the last several years on most of the products we sell, and we expect additional price erosion in the future.

 

 
11

 

 

Our future results are dependent on our ability to establish, maintain and expand our OEM relationships and our other distribution channels.

 

We market and sell our products through domestic and international OEM relationships and other distribution channels. Our future results are dependent on our ability to establish, maintain and expand our relationships with OEMs as well as with other marketing and sales distribution channels. If, however, the third parties with whom we have entered into such OEM and other arrangements should fail to meet their contractual obligations, cease doing, or reduce the amount of their, business with us or otherwise fail to meet their own performance objectives, customer demand for our products could be adversely affected, which would have an adverse effect on our revenues.

 

We may not be able to procure necessary key components for our products, or we may purchase too much inventory or the wrong inventory.

 

The power supply industry, and the electronics industry as a whole, can be subject to business cycles.   During periods of growth and high demand for our products, we may not have adequate supplies of inventory on hand to satisfy our customers' needs. Furthermore, during these periods of growth, our suppliers may also experience high demand and, therefore, may not have adequate levels of the components and other materials that we require to build products so that we can meet our customers' needs. Our inability to secure sufficient components to build products for our customers could negatively impact our sales and operating results. We may choose to mitigate this risk by increasing the levels of inventory for certain key components. Increased inventory levels can increase the potential risk for excess and obsolescence should our forecasts fail to materialize or if there are negative factors impacting our customers’ end markets. If we purchase too much inventory or the wrong inventory, we may have to record additional inventory reserves or write-off the inventory, which could have a material adverse effect on our gross margins and on our results of operations.

 

We depend on sales of our legacy products for a meaningful portion of our revenues, but these products are mature and their sales will continue to decline.

 

A large portion of our sales have historically been attributable to our legacy products. We expect that these products may continue to account for a meaningful percentage of our revenues for the foreseeable future. However, these sales are declining. Although we are unable to predict future prices for our legacy products, we expect that prices for these products will continue to be subject to significant downward pressure in certain markets for the reasons described above. Accordingly, our ability to maintain or increase revenues will be dependent on our ability to expand our customer base, to increase unit sales volumes of these products and to successfully, develop, introduce and sell new products such as custom design and value added products. We cannot assure you that we will be able to expand our customer base, increase unit sales volumes of existing products or develop, introduce and/or sell new products.

 

Our operating results may vary from quarter to quarter.

 

Our operating results have in the past been subject to quarter-to-quarter fluctuations, and we expect that these fluctuations will continue, and may increase in magnitude, in future periods. Demand for our products is driven by many factors, including the availability of funding for our products in customers’ capital budgets. There is a trend for some of our customers to place large orders near the end of a quarter or fiscal year, in part to spend remaining available capital budget funds. Seasonal fluctuations in customer demand for our products driven by budgetary and other concerns can create corresponding fluctuations in period-to-period revenues, and we therefore cannot assure you that our results in one period are necessarily indicative of our revenues in any future period. In addition, the number and timing of large individual sales and the ability to obtain acceptances of those sales, where applicable, have been difficult for us to predict, and large individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. The loss or deferral of one or more significant sales in a quarter could harm our operating results. It is possible that, in some quarters, our operating results will be below the expectations of public market analysts or investors. In such events, or in the event adverse economic conditions prevail, the market price of our common stock may decline significantly.

 

 
12

 

 

Failure of our information technology infrastructure to operate effectively could adversely affect our business.

 

We depend heavily on an information technology infrastructure to achieve our business objectives. If a problem occurs that impairs this infrastructure, the resulting disruption could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to remediate.

 

We are subject to certain governmental regulatory restrictions relating to our international sales.

 

Some of our products are subject to ITAR rules, which are administered by the U.S. Department of State. ITAR controls not only the export, import and trade of certain products specifically designed, modified, configured or adapted for military systems, but also the export of related technical data and defense services as well as foreign production.  Any delays in obtaining the required export, import or trade licenses for products subject to ITAR rules could have a materially adverse effect on our business, financial condition, and/or operating results.  In addition, changes in United States export and import laws that require us to obtain additional export and import licenses or delays in obtaining export or import licenses currently being sought could cause significant shipment delays and, if such delays are too great, could result in the cancellation of orders. Any future restrictions or charges imposed by the United States or any other country on our international sales or foreign subsidiary could have a materially adverse effect on our business, financial condition, and/or operating results. In addition, from time to time, we have entered into contracts governed by the U.S. Foreign Military Financing program (FMF).  Failure to retain compliance with ITAR rules could have a materially adverse effect on our business, financial condition, and/or operating results.

 

We depend on international operations for a substantial majority of our components and products.

 

We purchase a substantial majority of our components from foreign manufacturers and have a substantial majority of our commercial products assembled, packaged, and tested by subcontractors located outside the United States. These activities are subject to the uncertainties associated with international business operations, including trade barriers and other restrictions, changes in trade policies, governmental regulations, currency exchange fluctuations, reduced protection for intellectual property, war and other military activities, terrorism, changes in social, political, or economic conditions, and other disruptions or delays in production or shipments, any of which could have a materially adverse effect on our business, financial condition, and/or operating results.

 

We depend on international sales for a portion of our revenues.

 

Sales to customers outside of North America accounted for 51.2% of net revenues in the year ended December 31, 2013 and for 86.7% of net revenues in the year ended December 31, 2012, and we expect that international sales will continue to represent a material portion of our total revenues. International sales are subject to the risks of international business operations as described above, as well as generally longer payment cycles, greater difficulty collecting accounts receivable, and currency restrictions.  In addition, DPL, our wholly-owned foreign subsidiary in the United Kingdom, supports our European and other international customers, distributors, and sales representatives, and therefore is also subject to local regulation.  International sales are also subject to the export laws and regulations of the United States and other countries.

 

If our accounting controls and procedures are circumvented or otherwise fail to achieve their intended purposes, our business could be seriously harmed.

 

We evaluate our disclosure controls and procedures as of the end of each quarter, and are annually reviewing and evaluating our internal control over financial reporting in order to comply with Securities and Exchange Commission (“SEC”) rules relating to internal control over financial reporting adopted pursuant to the Sarbanes-Oxley Act of 2002. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. If we fail to maintain effective internal control over financial reporting or our management does not timely assess the adequacy of such internal control, we may be subject to regulatory sanctions, and our reputation may decline.

 

 
13

 

  

The sale of our products is dependent upon our ability to satisfy the proprietary requirements of our customers.

 

We depend upon a relatively narrow range of products for the majority of our revenue. Our success in marketing our products is dependent upon their continued acceptance by our customers. In some cases, our customers require that our products meet their own proprietary requirements. If we are unable to satisfy such requirements, or forecast and adapt to changes in such requirements, our business could be materially harmed.

 

The sale of our products is dependent on our ability to respond to rapid technological change, including evolving industry-wide standards, and may be adversely affected by the development, and acceptance by our customers, of new technologies which may compete with, or reduce the demand for, our products.

 

Rapid technological change, including evolving industry standards, could render our products obsolete. To the extent our customers adopt such new technology in place of our products, the sales of our products may be adversely affected. Such competition may also increase pricing pressure for our products and adversely affect the revenues from such products.

 

Our limited ability to protect our proprietary information and technology may adversely affect our ability to compete, and our products could infringe upon the intellectual property rights of others, resulting in claims against us, the results of which could be costly.

 

Many of our products consist entirely or partly of proprietary technology owned by us. Although we seek to protect our technology through a combination of copyrights, trade secret laws and contractual obligations, these protections may not be sufficient to prevent the wrongful appropriation of our intellectual property, nor will they prevent our competitors from independently developing technologies that are substantially equivalent or superior to our proprietary technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. In order to defend our proprietary rights in the technology utilized in our products from third party infringement, we may be required to institute legal proceedings, which would be costly and would divert our resources from the development of our business.  If we are unable to successfully assert and defend our proprietary rights in the technology utilized in our products, our future results could be adversely affected.

 

Although we attempt to avoid infringing known proprietary rights of third parties in our product development efforts, we may become subject to legal proceedings and claims for alleged infringement from time to time in the ordinary course of business. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, require us to reengineer or cease sales of our products or require us to enter into royalty or license agreements which are not advantageous to us. In addition, parties making claims may be able to obtain an injunction, which could prevent us from selling our products in the United States or abroad.

 

If we are unable to satisfy our customers’ specific product quality, certification or network requirements, our business could be disrupted and our financial condition could be harmed.

 

Our customers demand that our products meet stringent quality, performance and reliability standards. We have, from time to time, experienced problems in satisfying such standards. Defects or failures have occurred in the past, and may in the future occur, relating to our product quality, performance and reliability. From time to time, our customers also require us to implement specific changes to our products to allow these products to operate within their specific network configurations. If we are unable to remedy these failures or defects or if we cannot effect such required product modifications, we could experience lost revenues, increased costs, including inventory write-offs, warranty expense and costs associated with customer support, delays in, or cancellations or rescheduling of, orders or shipments and product returns or discounts, any of which would harm our business.

 

 
14

 

 

If we ship products that contain defects, the market acceptance of our products and our reputation will be harmed and our customers could seek to recover their damages from us.

 

Our products are complex, and despite extensive testing, may contain defects or undetected errors or failures that may become apparent only after our products have been shipped to our customers and installed in their network or after product features or new versions are released. Any such defect, error or failure could result in failure of market acceptance of our products or damage to our reputation or relations with our customers, resulting in substantial costs for us and our customers as well as the cancellation of orders, warranty costs and product returns. In addition, any defects, errors, misuse of our products or other potential problems within or out of our control that may arise from the use of our products could result in financial or other damages to our customers. Our customers could seek to have us pay for these losses. Although we maintain product liability insurance, it may not be adequate.

 

Our common stock price is volatile.

 

Our common stock is listed on the NYSE MKT and is thinly traded.  In the past, our trading price has fluctuated widely, depending on many factors that may have little to do with our operations or business prospects.  The exercise of outstanding options and warrants may adversely affect our stock price and a shareholder’s percentage of ownership.  As of December 31, 2013, we had outstanding options to purchase an aggregate of 712,763 shares of common stock, with a weighted average exercise price of $1.33 per share, exercisable at prices ranging from $0.68 to $1.79 per share.

 

ITEM 1B.     UNRESOLVED STAFF COMMENTS.

 

Not applicable.

 

ITEM 2.        DESCRIPTION OF PROPERTY.

 

Our headquarters utilizes 12,396 square foot of leased office, engineering, laboratory, and warehouse space in Fremont, California. (the “Original Premises”).  Our total space lease (the “Lease”) commenced on November 1, 2012 and expires on June 30, 2019.  The annual base rent under the Lease, payable on a monthly basis, increases during the term of the Lease from approximately $138,000 during the first year to approximately $160,000 during the final year; our current rent under the Lease is $12,119 per month.  The Lease also provides for one option to renew for a term of five years.

 

In September, 2010, our wholly-owned subsidiary, DPL, entered into a new fifteen-year lease for its 25,000 square-foot facility in Salisbury, United Kingdom, where it designs, develops, manufactures, markets and distributes commercial and military power products for the European market. Sales and service support staff for its European network of distributors are located within the building together with other functions, such as engineering and administration.  DPL’s rent expense is approximately $13,000 per month, and DPL has the option to cancel the lease after ten years.

 

We currently anticipate that the current leased space will be sufficient to support our current and foreseen future needs.

 

ITEM 3.       LEGAL PROCEEDINGS.

 

None.

 

ITEM 4.        MINE SAFETY DISCLOSURES

 

Not Applicable

 

 
15

 

 

PART II

 

ITEM 5.        MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER  MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

                    (a)              Market Information.

 

Our common stock is listed and traded on the NYSE MKT under the symbol DPW.  The following tables set forth the high and low closing sale prices, as reported by NYSE MKT, for our common stock for the prior two years.

 

Quarter Ended

 

High

   

Low

 

12/31/2013

  $ 0.73     $ 0.56  

09/30/2013

    0.75       0.60  

06/30/2013

    0.78       0.53  

03/31/2013

    0.82       0.62  
                 

12/31/2012

  $ 1.40     $ 0.65  

09/30/2012

    1.36       1.03  

06/30/2012

    1.52       1.10  

03/31/2012

    2.05       1.53  

 

The last reported sale price of our common stock on the NYSE MKT on March 20, 2014 was $2.01 per share.

 

              (b)              Holders

 

As of March 20, 2014, there was an aggregate of 6,853,161 shares of our common stock outstanding, held by approximately 67 holders of record.

 

              (c)              Dividends

 

We have not declared or paid any cash dividends since our inception, and we do not intend to pay any cash dividends in the foreseeable future.  The declaration of dividends in the future, if any, will be at the discretion of our Board of Directors (the “Board”) and will depend upon our earnings, capital requirements, and financial position.

 

ITEM 6.        SELECTED FINANCIAL DATA.

 

Not applicable.

 

ITEM 7.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

General

 

We are a solution-driven organization that designs, develops, manufactures and markets high-grade, customized and flexible power solutions for demanding applications in the medical, military, telecom, and industrial markets. Our products serve global markets worldwide.  Revenues are generated from selling products to our customers directly by our sales force and through manufacturing representatives and distributors.

 

During the year ended December 31, 2013, profitability decreased significantly from the prior year. A significant portion of the loss in 2013 (49%) resulted from the further impairment of our 2011 investment in Telkoor (net of a cash dividend of $63,000) and did not have a cash effect in 2013. We intend to remain an innovative leader in the development of cutting-edge custom power solutions, low emission, high-grade, high-density, modular power systems and rugged power solutions to meet harsh and extreme environmental requirements. We also intend to continue to pursue our strategy to reduce production costs and deliver high quality products in a timely manner through production agreements with numerous contract manufacturers in Asia. We believe that our cash will be sufficient to fund our operation in the next 12 months.

 

 
16

 

  

Foreign Currency Fluctuations

 

Our wholly-owned subsidiary, DPL, operates using the United Kingdom pound sterling.  Therefore, we are subject to monetary fluctuations between the U.S. dollar and the United Kingdom pound sterling. The financial statement of the subsidiary is included in the Company’s consolidated financial statements based on translation into U.S. dollars.  For the year ended December 31, 2013, we recorded a foreign currency translation gain of $46,000 in Other Comprehensive Income (Loss) in shareholders’ equity.  For the year ended December 31, 2012, we recorded a foreign currency translation gain of $132,000.

  

Results of Operations

 

The table below sets forth certain statements of operations data as a percentage of revenues for the years ended December 31, 2013 and 2012:

 

   

Years Ended December 31,

 
   

2013

   

2012

 

Revenues

    100.00

%

    100.00

%

Cost of revenues

    63.87       59.71  

Gross profit

    36.13       40.29  

Engineering and product development

    8.76       8.20  

Sales and marketing

    12.11       12.42  

General and administrative

    18.85       20.77  

Total operating expenses

    39.72       41.39  

Operating income (loss)

    (3.59 )     (1.10 )

Impairment of investment

    (3.58 )     (2.53 )

Other income (expense), net

    -       (0.17 )

Income before tax

    (7.17 )     (3.80 )

Tax expenses

    (0.03 )     (0.03 )

Net income (loss)

    (7.20

)%

    (3.83

)%

 

The following discussion and analysis should be read in connection with the consolidated financial statements and the notes thereto and other financial information included elsewhere in this Annual Report.  We prepared the financial statements in accordance with U.S. generally accepted accounting principles, which require management to make estimates, and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

 

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

 

Revenues

 

For the year ended December 31, 2013, revenues increased by 2.1% to $8,770,000 from $8,589,000 for the year ended December 31, 2012.  The slight increase in revenues was mainly due to higher sales of our military products. During the years ended December 31, 2013 and December 31, 2012, we generated revenues from the sale of a fully customized product solution for the medical market, as part of our earlier strategy to transition away from a dependence on standard, commodity products.

 

Revenues derived from our defense products for the year ended December 31, 2013 were $2,662,000, an increase of 44.4% from revenues of $1,844,000 from defense products for the year ended December 31, 2012. The year to year increase was primarily attributable to the completion of an incremental major naval military contract in the fourth quarter of the 2013 fiscal year which was not recorded in the prior year. Revenues derived from our commercial products for the year ended December 31, 2013 decreased by 9.4% to $6,108,000 from $6,745,000 for the year ended December 31, 2012.  The decrease in commercial product revenue in 2013 resulted primarily from the decrease in sales of our standard commercial products.

 

Revenues from our domestic operations increased by 3.6% to $5,258,000 for the year ended December 31, 2013, from $5,077,000 for the year ended December 31, 2012. The increase in product revenues was mainly attributed to an increase in sales of our custom and standard commercial products.

 

 
17

 

 

 Revenues from our European operations (Gresham) were identical at $3,512,000 for the years ended December 31, 2013 and December 31, 2012 but included an increase of 13.2% in defense revenue in 2013 versus 2012 at the expense of an equal decline in dollar value of commercial product revenues in the respective years. The decline in commercial product sales was mainly attributed to standard commodity products.

 

Gross Margins

 

Gross margins were 36.1% for the year ended December 31, 2013, compared to 40.3% for the year ended December 31, 2012.  The year to year decline was primarily the result of higher inventory write offs and incremental warranty expenses associated with certain large foreign contracts in addition to variations in our product mix.

 

Engineering and Product Development

 

Engineering and product development expenses were $768,000, or 8.8% of revenues, for the year ended December 31, 2013, compared to $704,000, or 8.2% of revenues, for the year ended December 31, 2013.  The increase was attributable to new product development during the year.

 

Selling and Marketing

 

Selling and marketing expenses were $1,062,000, or 12.1% of revenues, for the year ended December 31, 2013, compared to $1,067,000, or 12.4% of revenues, for the year ended December 31, 2012. The slight decrease in selling and marketing expenses for the year ended December 31, 2013 compared to the year ended December 31, 2012 was primarily due to a temporary decline in internal sales personnel.

 

General and Administrative

 

General and administrative expenses were $1,656,000, or 18.9% of revenues, for the year ended December 31, 2013, compared to $1,784,000, or 20.8% of revenues, for the year ended December 31, 2012. The decrease in general and administrative expenses during the year ended December 31, 2013 was mainly due to a decline in outside contracted services costs including financial services now provided by our new V.P. of Finance along with lower legal expenses.

 

Impairment of investment

 

The Company recorded an impairment of its investment in Telkoor of $312,000 for the year ended December 31, 2013 compared to $218,000 in the year ended December 31, 2012. In both years an independent appraiser valuated the holding value of this investment based upon guidelines outlined in ASC 320 and concluded the fair value of the asset had declined from its original cost at acquisition in June, 2011. Accordingly the Company wrote down its investment to the appraised value in the fourth quarter of the year ended December 31, 2012 (recording the $218,000 impairment in the year ended December 31, 2012) and again in the second quarter of the year ended December 31, 2013 (recording an impairment of $196,000 in the quarter ended June 30, 2013). In the quarter ended December 31, 2013, the Company recognized an impairment charge of $180,000 based upon information available with respect to transactions between investors in Telkoor's share subsequent to the balance sheet date. The Company concluded that the price paid in these transactions was the fair value of its own Telkoor shares under ASC 325.

 

Financial Expenses, Net

 

Financial income, net for the year ended December 31, 2013 was null. Financial expense was $15,000 for the year ended December 31, 2012 and consisted primarily of foreign currency fluctuations during the period.

 

Net Income (Loss)

 

For the year ended December 31, 2013, we had a net loss of $632,000 compared to a net loss of $329,000 for the year ended December 31, 2012 as detailed in the above narrative.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported assets, liabilities, sales, and expenses in the accompanying consolidated financial statements.  Critical accounting policies are those that require the most subjective and complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain.  The following are considered our most critical accounting policies that, under different conditions or using different assumption or estimates, could show materially different results on our financial condition and results of operations.

 

 
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Revenue Recognition

 

Revenue from product sales is recognized in accordance with the provisions of ASC 605-15, "Revenue Recognition in Financial Statements", when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred (when risk of loss and title have transferred to the customer) , the sale price is fixed or determinable and collection is reasonably assured.

 

We generally use customer purchase orders and contracts to determine the existence of an arrangement. Shipping documents and customer acceptance, when applicable, are used to verify delivery. We assess whether the sales price is fixed or determinable based on the payment terms associated with the transaction and whether the price is subject to refund or adjustment. We assess collectability based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.

 

Revenue on shipments to distributors and resellers is recognized on delivery. Generally, we do not grant a right of return. However, certain distributors are allowed, in the sixth month after the initial stock purchase, to rotate stock that has not been sold for other products. This stock rotation may be repeated every six months thereafter for fifteen to eighteen months, based on a fixed percentage at no more than the distributor's purchases during the previous six months. Revenues subject to stock rotation rights are deferred until the products are sold to the end customer or until the rotation rights expire.

 

Inventory Obsolescence Accruals

 

We periodically assess our inventory valuation by reviewing revenue forecasts and technological obsolescence.  We write down the value of obsolete or unmarketable inventory to the estimated net realizable value based upon assumptions about future demand and market conditions.  If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

 

During 2013 and 2012, we recorded inventory write-offs of $46,000 and $45,000, respectively.

 

Allowance for Doubtful Accounts

 

Our accounts receivable are derived from sales to customers located primarily in the U.S. and Europe.  We perform ongoing credit evaluations of our customers’ financial condition and currently require no collateral from our customers.  An allowance for doubtful accounts for estimated losses is maintained in anticipation of the inability of customers to make required payments. The allowance for doubtful accounts as of December 31, 2013 and 2012 was $146,000 and $146,000, respectively. When we become aware that a specific customer is unable to meet its financial obligations as a result of bankruptcy or the deterioration of the customer’s operating results or financial position, for example, we record a specific allowance to reflect the level of credit risk in the customer’s outstanding receivable balance.  We are not able to predict changes in the financial condition of customers, and if the condition or circumstances of our customers deteriorates, estimates of the recoverability of trade receivables could be materially affected and we may be required to record additional allowances.  Alternatively, if our estimates are determined to be greater than the actual amounts necessary, we may decrease a portion of such allowance in future periods based on actual collection experience.

 

Other Accrued Liabilities

 

Our accrued liabilities are based on a variety of factors including past experience and, in many cases, require estimates.  If future experience differs from these estimates, operating results in future periods would be impacted.

 

 
19

 

 

Marketable Securities

 

The Company has classified its investment in Telkoor's shares as available-for-sale securities in accordance with ASC 320, "Investment in Debt and Equity Securities". Marketable securities classified as "available for sale securities" are carried at fair value, based on quoted market prices. Unrealized gains and losses are reported in a separate component of shareholders' equity in "accumulated other comprehensive loss". When evaluating the investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company's intent to sell, or whether it is more likely than not that it will be required to sell, the investment before recovery of the investment's amortized cost basis.

 

Equity securities that do not have readily determinable fair values (i.e. non-marketable equity securities) and are not required to be accounted for under the equity method are typically carried at cost(i.e., cost method investments), as described in ASC 325-20.

 

Management sought an independent appraisal in November, 2012 and in July, 2013 to determine the fair value of its investment in Telkoor as of September 30, 2012 and June 30, 2013, respectively. Based on the factors considered by the Company, the Company concluded that unrealized losses on its available-for-sale securities were other-than-temporary. As such, the Company recognized an impairment charge of $218,000 on outstanding securities during the year ended December 31, 2012 and which was classified as other expenses and reversed the temporary loss recognized in 2011. In the quarter ended June 30, 2013, the Company recorded an additional impairment of $196,000 based upon the July, 2013 independent appraisal. In the quarter ended December 31, 2013 the Company recorded an additional impairment of $180,000 based upon transactions between investors in Telkoor's share subsequent to the balance sheet date. In accordance with ASC 325, Telkoor’s equity shares held by the Company are presented at cost and will be reviewed for impairment in accordance with ASC 320.

 

Equity-based Compensation Expense

 

We account for equity-based compensation in accordance with SFAS No. 123(R), “Share-Based Payment.” Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service periods. Determining the fair value of share-based awards at the grant date requires the exercise of judgment, including the amount of share-based awards that are expected to be forfeited. Estimated forfeitures are based on historical pre-vesting forfeitures. If actual results differ from these estimates, equity-based compensation expense, and therefore our results of operations, could be impacted.

 

The Company estimates the fair value of stock options granted under ASC 718 (formerly: SFAS No. 123 (revised 2004)), "Share-Based Payment" ("ASC 718"), using the Black-Scholes option-pricing model, which uses the following assumption:

 

Expected volatility is based on historical volatility, which is representative of future volatility over the expected term of the options. The expected term of options granted was determined based on the simplified method, which is calculated as the midpoint between the vesting date and the end of the contractual term of the option. The risk free interest rate is based on the yield of U.S Treasury bonds with equivalent terms. The dividend yield is based on the Company's historical and future expectation of dividends payouts. The Company has not paid cash dividends historically and has no plans to pay cash dividends in the foreseeable future.

 

Liquidity and Capital Resources

 

On December 31, 2013, we had cash and cash equivalents of $1,696,000 and working capital of $3,841,000. This compares with cash and cash equivalents of $1,821,000 and working capital of $3,957,000 at December 31, 2012. The decrease in cash and cash equivalents and working capital was due mainly to the operating loss and an increase in accounts receivable due to the timing of the year end shipments partially offset by the timing of accounts payable terms and payments related to the year end shipments along with a decrease in inventory.

 

Net cash provided by operating activities totaled $71,000 and $197,000 for the year ended December 31, 2013 and December 31, 2012, respectively.  The net provided of cash from operating activities for the year ended December 31, 2013 was mainly due the aforementioned increase in accounts payable and decrease in inventories partially offset by the accounts receivable increase.

 

Net cash used in investing activities was $216,000 for the year ended December 31, 2013, compared to net cash used in investing activities of $154,000 for the year ended December 31, 2012. The net usage of cash from investing activities was due to purchase of capital equipment during both years.

 

Net cash used by financing activities was negligible for the year ended December 31, 2013 and amounted to $14,000 for the year ended December 31, 2012. The amount for 2012 was primarily due to purchase of treasury stock.

 

In November 2012, we entered into a new approximately six and half year lease for our headquarters which utilizes 12,396 square foot of leased office, engineering, laboratory, and warehouse space in Fremont, California.  The annual base rent under the lease, payable on a monthly basis, increases during the term of the lease from approximately $138,000 during the first year to approximately $160,000 during the final year.  The lease also provides for one option to renew for a term of five years.

 

 
20

 

 

In September, 2010, our wholly-owned subsidiary, DPL, entered into a new fifteen year lease for its 25,000 square-foot facility in Salisbury, United Kingdom, where it designs, develops, manufactures, markets and distributes commercial and military power products for the European market. Sales and service support staff for its European network of distributors are located within the building together with other functions, such as engineering and administration.  DPL’s rent expense is approximately $13,000 per month, and DPL has the option to cancel the lease after ten years.

 

We believe we have adequate resources at this time to continue our operational and promotional efforts to increase sales and support our current operation.  However, if we do not increase our sales, we may have to obtain financing through the issuance of debt and/or equity, which may dilute shareholders’ equity.

 

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

The financial statements required by this Item 8 are included in this Annual Report following Item 15 hereof.  As a smaller reporting company, we are not required to provide supplementary financial information.

 

 
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ITEM 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None.

 

ITEM 9A.     CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

As of December 31, 2013, we have carried out an evaluation, under the supervision of, and with the participation of, our management, including our Chief Executive Officer and principal financial officer, of the effectiveness of the design and operation of our controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based upon that evaluation, our Chief Executive Officer and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) were effective as of the end of the period covered by the report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act).  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013.  In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework.  Our management has concluded that, as of December 31, 2013, our internal control over financial reporting was effective.

 

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to a provision under the Dodd-Frank Wall Street Reform and Consumer Protection Act which grants a permanent exemption for non-accelerated filers from complying with Section 404(b) of the Sarbanes-Oxley Act of 2002.

  

Evaluation of Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

           On March 19, 2014, the Company issued a press release announcing that it had been awarded a five-year contract to provide its low voltage power supply (LVPS) multiple outputs DC/DC converter to Israel Aerospace Industries (IAI). The full text of this press release is attached as Exhibit 99.1 to this Form 10-K.

 

 
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PART III

 

ITEM 10.      DIRECTORS,   EXECUTIVE   OFFICERS AND CORPORATE GOVERNANCE.

 

The following table sets forth the positions and offices presently held by each of our current directors and executive officers and their ages:

 

Name (1)

Age  

Positions Held 

Amos Kohn

54

President, Chief Executive Officer, and Director

William J. Hultzman

61

Vice President of Finance, Chief Accounting Officer

Ben-Zion Diamant

64

Chairman of the Board and Director

Robert Smith

68

Director (2)

Haim Yatim

50

Director (2)

Aaron Ben-Ze’ev

64

Director (2)

 

(1)     On April 26, 2013, Yehezkel Manea, who had served as a director since 2002, resigned from the Board of Directors

(2)     Member of the Audit, Compensation and Nominating and Governance Committees.

 

Each of the directors named above will serve until the next annual meeting of our shareholders or until his respective successor is elected and qualified.   Subject to the terms of applicable employment agreements, our executive officers serve at the discretion of our Board.

 

Amos Kohn 

 

               Amos Kohn has served as a member of our board of directors since 2003, as our President and Chief Executive Officer since 2008. From March 2011 until August 2013 Mr. Kohn also served as interim Chief Financial Officer . Mr. Kohn has more than 20 years of successful global executive management experience, including multiple C-level roles across private and established, publicly-traded companies. Mr. Kohn has successfully managed cross-functional teams, dri ven corporations to high profitability, built customer loyalty and led businesses through expansion and sustained growth. His areas of expertise include operations, technology innovation, manufacturing, strategic analysis and planning and M&A. Mr. Kohn was Vice President of Business Development at Scopus Video Networks, Inc., a Princeton, New Jersey company that develops and markets digital video networking products (2006-2007); Vice President of Solutions Engineering at ICTV Inc., a leading provider of network-based streaming media technology solutions for digital video and web-driven programming, located in Los Gatos, California (2003-2006); Chief Architect at Liberate Technologies, a leading company in the development of a full range of digital media processing for telecom and cable TV industries, located in San Carlos, California (2000-2003); and Executive Vice President of Engineering and Technology at Golden Channel & Co., the largest cable television multiple-systems operator (MSO) in Israel, where he had executive responsibility for developing and implementing the entire nationwide cable TV system (1989-2000). Mr. Kohn holds a degree in electrical and electronics engineering and is named as an inventor on several United States and international patents. We believe that Mr. Kohn’s extensive executive-level management experience in diversified industries, including, but not limited to, power electronics, telecommunications, cable television, broadcast and wireless, as well as his service as a director on our board since 2003, give him the qualifications and skills to serve as one of our directors.

 

William J. Hultzman

  

           William J. Hultzman has been serving as Vice President of Finance since August, 2013. Before assuming this role, Mr. Hultzman was the Finance & Business Development Advisor for STEC USA, LLC, a startup company in the industrial automation space. From 2007 to 2009, Mr. Hultzman served as the Vice President of Finance and Corporate Secretary for R.T. Peak Travel Group, a private travel management company. From 1999 to 2007, Mr. Hultzman held the positions of Vice President of Finance & Controlling and then Business Unit General Manager & CFO with Voith Paper Automation, Inc., a subsidiary of one of the largest privately held companies in Europe, Voith AG. Mr. Hultzman held various other executive finance and accounting roles prior to joining Voith including Corporate Controller of Impact Systems, Inc., a publicly held industrial automation company based in Los Gatos, California. Mr. Hultzman has a Bachelor of Science in Business Administration from The Ohio State University, where he graduated cum laude and was a member of Beta Alph Psi, an honorary accounting fraternity

 

 
23

 

 

Ben-Zion Diamant

 

Ben-Zion Diamant has served as a member of our Board of Directors, and has been Chairman of our Board, since 2001. From March 2008 through July 2008, he also served as our Interim President and Chief Executive Officer. He has served as Chief Executive Officer of Telkoor Telecom Ltd. since August 2008; from 1994 through July 2008, he served as Chairman of the Board of Directors of Telkoor. From 1992 through 1994, he was a partner and business development manager at Phascom, and from 1989 to 1992, he was a partner and manager at Rotel Communication. Mr. Diamant holds a B.A. degree in political science from Bar-Ilan University.  We believe that Mr. Diamant’s business development and executive-level experience, as well as his service as Chairman of our Board since 2001, give him the qualifications and skills to serve as one of our directors.

 

Robert O. Smith

 

Robert Smith has served as a member of our Board of Directors since November 2010 and has served as a member of our Advisory Board since 2002. He is currently a C-level executive consultant working with Bay Area high-tech firms on various strategic initiatives in all aspects of their business. From 2004 to 2007, he served on the Board of Directors of Castelle Corporation. From 1990 to 2002, he was our President, Chief Executive Officer and Chairman of the Board. From 1980 to 1990, he held several management positions with Computer Products, Inc., the most recent being President of their Compower/Boschert Division. From 1970 to 1980, he held managerial accounting positions with Ametek/Lamb Electric and with the JM Smucker Company.  Mr. Smith received his BBA degree in Accounting from Ohio University.  We believe that Mr. Smith’s executive-level experience, including his previous service as our President, Chief Executive Officer and Chairman of the Board,  his extensive experience in the accounting industry, and his service on our Board since November 2010, give him the qualifications and skills to serve as one of our directors.

 

Haim Yatim

 

Haim Yatim has served as a member of our Board of Directors since September 2011. From 2006 until 2010, served as Chief Financial Officer and Board Member of  SimiGon Ltd., a publicly traded company (AIM:SIM) that develops software for training and simulation industry. As SimiGon's CFO, Mr. Yatim managed the initial public offering process on AIM on the London Stock Exchange including managing the legal due diligence process, working with underwriters and participating in a road show in UK and France with Investment Banks. Previously, Mr. Yatim served as CFO at Digital Power Corporation. As the company CFO, Mr. Yatim was responsible for financial reporting to the SEC, corporate accounting and tax preparation, budgeting, forecasting, and risk management. Prior his role at Digital Power, Mr. Yatim was a partner of Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global Limited where he advised on successful NASDAQ listings of technology companies. Mr. Yatim holds a B.Sc. in Accounting and Economics from University of Tel-Aviv, Israel

 

Aaron Ben-Ze’ev

 

Aaron Ben-Ze'ev has served as a member of our Board of Directors since September 2012. From 2004 to 2012, Mr. Ben-Ze’ev served as President of the University of Haifa (the "University"), one of seven research universities in Israel, which has a budget more than $217 million and an enrollment of approximately 18,000 students. As President, Professor Ben-Ze'ev was responsible for the overall administrative and financial direction of the University and served as a member of the Financial Committee and the Investment Committee (which oversees an investment portfolio of about $200 million). Professor Ben-Ze'ev is a professor of Philosophy at the University, holds a B.A. degree in Philosophy and Economics and an M.A. in Philosophy from the University of Haifa, and a Ph.D. in Philosophy from the University of Chicago.

 

 
24

 

 

Family Relationships

 

Guy Diamant serves as the General Manager of Telkoor Power Supplies (TPS) and is the son of Ben-Zion Diamant and our Chairman of the Board of Directors. TPS is a key supplier to Digital Power and a wholly-owned subsidiary of our largest shareholder, Telkoor. , There are no other family relationships among any of our directors or executive officers.

 

Board and Committee Membership

 

Our Board is currently composed of five members and maintains the following three standing committees: (1) the Audit Committee; (2) the Compensation Committee; and (3) the Nominating and Governance Committee. The membership and the function of each of the committees are described below. Our Board may, from time to time, establish a new committee or dissolve an existing committee depending on the circumstances. Current copies of the charters for the Audit Committee, the Compensation Committee and the Nominating and Governance Committee can be found on our website at www.digipwr.com.

 

 
25

 

 

Audit Committee

 

Messrs. Smith, Yatim, and Ben-Ze’ev currently comprise the Audit Committee of our Board.  Our Board has determined that each of the current members of the Audit Committee satisfies the requirements for independence and financial literacy under the standards of the SEC and the NYSE MKT. Our Board has also determined that Mr. Yatim qualifies as an “audit committee financial expert” as defined in SEC regulations and satisfies the financial sophistication requirements set forth in the NYSE MKT Rules.

 

The Audit Committee is responsible for, among other things, selecting and hiring our independent auditors, approving the audit and pre-approving any non-audit services to be performed by our independent auditors; reviewing the scope of the annual audit undertaken by our independent auditors and the progress and results of their work; reviewing our financial statements, internal accounting and auditing procedures, and corporate programs to ensure compliance with applicable laws; and reviewing the services performed by our independent auditors to determine if the services rendered are compatible with maintaining the independent auditors’ impartial opinion.

 

Compensation Committee

 

Messrs. Smith, Yatim, and Ben-Ze’ev currently comprise the Compensation Committee of our Board.  Our Board has determined that each of the current members of the Compensation Committee meets the requirements for independence under the standards of the SEC and the NYSE MKT.

 

The Compensation Committee is responsible for, among other things, reviewing and approving executive compensation policies and practices; reviewing and approving salaries, bonuses and other benefits paid to our officers, including our Chief Executive Officer and Chief Financial Officer; and administering our stock option plans and other benefit plans.

 

Nominating and Governance Committee

 

Messrs. Smith, Yatim, and Ben-Ze’ev currently comprise the Nominating and Governance Committee of our Board.  Our Board has determined that each of the current members of the Nominating and Governance Committee meets the requirements for independence under the standards of the SEC and the NYSE MKT.

 

The Nominating and Governance Committee is responsible for, among other things, assisting our Board in identifying prospective director nominees and recommending nominees for each annual meeting of shareholders to the Board; developing and recommending governance principles applicable to our Board; overseeing the evaluation of our Board and management; and recommending potential members for each Board committee to our Board.

 

The Nominating and Governance Committee considers diversity when identifying Board candidates.  In particular, it considers such criteria as a candidate’s broad-based business and professional skills, experiences and global business and social perspective.

 

In addition, the Committee seeks directors who exhibit personal integrity and a concern for the long-term interests of shareholders, as well as those who have time available to devote to Board activities and to enhancing their knowledge of the power-supply industry.  Accordingly, we seek to attract and retain highly qualified directors who have sufficient time to attend to their substantial duties and responsibilities.

 

Section 16(a) Beneficial Ownership Reporting Compliance 

 

Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than ten percent of a registered class of our equity securities to file an initial report of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the SEC.  Executive officers, directors and 10% shareholders are also required by SEC rules to furnish us with copies of all Section 16(a) forms they file.  Based solely upon our review of Forms 3, 4 and 5 received by us, or written representations from certain reporting persons, we believe that during the year ended December 31, 2013, all such filing requirements applicable to our officers, directors and ten percent shareholders were fulfilled with the following exceptions:

 

  Name

Number of Late Insider

Reports

Number of Transactions Not

Reported on a Timely Basis

Failure to File Required Forms

  William J. Hultzman (1)

-

-

1

 

(1) The Company inadvertently failed to file a Form 3 upon the appointment of Mr. Hultzman as Vice President of Finance. Mr. Hultzman was beneficial owner of no shares or options of the Company at such time.

 

 
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Code of Ethics

 

We have adopted the Code of Ethical Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer, controller or person performing similar functions (collectively, the “Financial Managers”). The Code of Ethical Conduct is designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. The full text of our Code of Ethical Conduct is published on our website at www.digipwr.com.  We will disclose any substantive amendments to the Code of Ethical Conduct or any waivers, explicit or implicit, from a provision of the Code on our website or in a current report on Form 8-K.

 

ITEM 11.               EXECUTIVE COMPENSATION.

 

Summary Compensation Table

 

The following Summary Compensation Table sets forth all compensation earned in all capacities during the years ended December 31, 2013 and 2012, by our (i) Chief Executive Officer and (ii) executive officers, other than the Chief Executive Officer, whose salaries for the 2013 year, as determined by Regulation S-K, Item 402, exceeded $100,000 (the individuals falling within categories (i) and (ii) are collectively referred to as the “Named Executive Officers”).

 

SUMMARY COMPENSATION TABLE

 

Name and Principal Position

Year

 

Salary

($)

   

Bonus

($)

   

Stock

Awards

($)

   

Option

Awards

($)

   

Nonequity Incentive

Plan Compensation ($)

   

Nonqualified Deferred Compensation Earnings

($)

   

All

Other

Compensation

($) (1)

   

Total Compensation ($)

 

Amos

Kohn

2013

  $ 210,000       -       -       -       -       -     $ 66,406     $ 276,406  

Chief Executive Officer (2)

2012

  $ 210,000       -       -       -       -       -     $ 54,726     $ 289,726  

 

(1) The amounts in “All Other Compensation” consist of health insurance benefits, long-term and short-term disability insurance benefits and fees of approximately $44,000 and $9,000 in 2013 and 2012, respectively, paid to TechLead, a company for which Mr. Kohn serves as CEO, to reimburse TechLead for expenses incurred in connection with manpower services provided by TechLead.

 

(2) Mr. Kohn became our President and Chief Executive Officer in 2008.  Prior to that date, he had served as a non-employee member of our Board since 2003.  

 

Director Compensation

 

Independent directors receive $10,000 annually for serving on our Board. The director designated by the Board as the Audit Committee financial expert receives an additional annual fee of $5,000 for serving as the financial expert. Directors are paid quarterly in arrears for their services.

 

Subject to Board approval, upon joining our Board, independent directors may also receive a grant of an option under our 2012 Stock Option Plan to purchase 10,000 shares of our common stock. In addition, subject to Board approval, each independent director may be granted, from time to time, an option to purchase an additional 10,000 shares of our common stock. Options vest over a four-year period, 25% per year. Each option has an exercise price equal to the fair market value of our common stock on the grant date and a maximum term of ten years, subject to earlier termination upon the cessation of service as a director.

 

 
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Chairman of the Board of Directors, Ben-Zion Diamant, receives monthly consulting fees of $6,000 and no equity compensation.

 

The table below sets forth, for each non-employee director, the total amount of compensation related to his service during the year ended December 31, 2013:

 

Director Compensation

 

Name

 

Fees

Earned

or Paid

in Cash

($)

   

Stock

Awards

($)

   

Option

Awards

($)

   

Non-Equity Incentive

Plan

Compensation

($)

   

Nonqualified Deferred Compensation Earnings

($)

   

All Other Compensation

($)

   

Total

($)

 

Ben-Zion

Diamant (1)

    -       -       -       -       -     $ 72,000     $ 72,000  

Robert Smith

  $ 10,000       -       -       -       -       -     $ 10,000  

Yehezkel Manea

  $ 3,750       -       -       -       -       -     $ 3,750  

Aaron Ben-Ze’ev

  $ 10,000               -                             $ 10,000  

Haim Yatim

  $ 10,000       -       -       -       -       -     $ 10,000  

 

(1) On September 12, 2011, the Company’s Board of Directors approved the payment of monthly consulting fees of $6,000 to Ben-Zion Diamant, our Chairman of the Board of Directors. These fees were first paid on October 5, 2011 and have continued to be paid on a monthly basis since such date. The Board’s decision to approve these fees was based on a recommendation by the Compensation Committee, in consideration for Mr. Diamant’s services to the Company, including manufacturing advisory and corporate advisory services. The Company’s obligation to pay the fees may be terminated at any time by further decision of the Board of Directors and will terminate upon a strategic transaction of the Company.

 

Employment Agreement with Amos Kohn

 

An employment agreement with Mr. Kohn expired on December 31, 2010. As of March 20, 2014, Mr. Kohn has not signed a new employment agreement. 

 

In August 2012, the Compensation Committee granted Mr. Kohn a bonus of $25,000 reflecting the positive performance of the Company during the year ended December 31, 2011.

 

In March 2014, the Compensation Committee resolved to grant Mr. Kohn 300,000 stock options under the 2012 Stock Option Plan. The options, which will have an exercise price equal to the closing price of the Company’s shares as of the close of business on April 2, 2014, vest over four years at 25% per year and expire 10 years from the date of grant.

 

Mr. Kohn continues to serve as the Company’s President and Chief Executive Officer.

 

Letter Agreement with William J. Hultzman

 

On August 15, 2013, the Company entered into a letter agreement with William J. Hultzman (the “Letter Agreement”), pursuant to which he became the Company’s Vice President of Finance (principal financial officer and principal accounting officer) on August 21, 2013. Mr. Hultzman replaced Amos Kohn, the Company’s President and Chief Executive Officer, who served as interim Chief Financial Officer since March, 2011.

 

The following is a brief description of the Letter Agreement with Mr. Hultzman:

 

Annual Compensation. Mr. Hultzman’s base salary will be $110,000, subject to a performance review after six months and an annual performance review thereafter. He will be eligible for potential salary increases and a bonus grant subject to the Company’s yearly practice and his performance.

 

Equity Award. Subject to Compensation Committee and Board of Director approval, Mr. Hultzman will be granted an option to purchase 25,000 shares of the Company’s common stock at the closing price at the date of the grant.

 

Benefits. Mr. Hultzman is eligible to participate in the Company’s 401(k) pension plan and will receive other customary employee benefits.

 

 
28

 

 

In March, 2014, the Compensation Committee resolved to grant Mr. Hultzman 100,000 stock options under the 2012 Stock Option Plan. The options, which will have an exercise price equal to the closing price of the Company’s shares as of the close of business on April 2, 2014, vest over four years at 25% per year and expire 10 years from the date of grant.

 

Advisory Vote on Executive Compensation

 

At the annual meeting of shareholders on August 12, 2013, shareholders approved, on an advisory basis, the compensation paid to the Company’s named executive officers. In addition, shareholders voted, on an advisory basis, that an advisory vote on executive compensation should be held every three years.

 

 
29

 

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table provides information on outstanding equity awards as of December 31, 2013 to the Named Executive Officers:

 

   

Option Awards

 

Stock Awards

 

Name

 

Number of Securities Underlying Unexercised Options

(#) 

Exercisable

   

Number of Securities Underlying Unexercised Options (#) Unexercisable

   

Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)

   

Option

Exercise

Price ($)

 

Option Expiration Date

 

Number

of 

Shares

or 

Units

of 

Stock

That

Have

Not

Vested (#)

   

Market

Value

of

Shares

or 

Units

of

Stock

That

Have

Not

Vested

(#)

   

Equity

Incentive

Plan

Awards:

 Number

of

Unearned

Shares,

Units or

Other

Rights

That Have

Not

Vested

(#)

   

Equity

Incentive

Plan

Awards:

Market or

Payout

Value of

Unearned

Shares,

Units or

Other

Rights

That eHave

Not

Vested ($)

 

Amos

Kohn

    10,000       -       -     $ 1.05  

5/8/2014

    -       -       -       -  
      10,000       -       -     $ 1.19  

2/28/2015

    -       -       -       -  
      10,000       -       -     $ 1.16  

3/9/2016

    -       -       -       -  
      10,000       -       -     $ 1.66  

3/9/2017

    -       -       -       -  
      50,000       -       -     $ 0.84  

7/3/2018

    -       -       -       -  
      10,000       -       -     $ 0.79  

9/19/2018

    -       -       -       -  
      50,000       -       -     $ 1.79  

8/11/2019

    -       -       -       -  
      56,250       18,750       -     $ 1.51  

12/01/2020

    -       -       -       -  
      50,000       50,000       -     $ 1.60   09/11/2021     -       -       -       -  

 

Employee Stock Ownership Plan

 

The Company has a legacy employee stock ownership plan ("ESOP") that covered eligible employees which it is in the process of terminating. The ESOP provided for the Employee Stock Ownership Trust ("ESOT") to distribute the Company's Common shares or cash equivalent as retirement benefits to the participants. As of December 31, 2013, the outstanding Common shares held by the ESOT amounted to 157,515 shares. The Company began liquidation distributions of the ESOP in 2014 following notification of the plan termination to participants in September, 2013 and expects final distributions by June 30, 2014.

 

Stock Option Plans

 

Our stock option plans currently consist of the Digital Power 2012 (as amended), 2002, 1998, and 1996 incentive share option plans (the “Incentive Share Option Plans”). All of the Incentive Share Option Plans have expired, except for the 2012 Stock Option Plan (as amended) which was approved by shareholders at the annual general meeting held on August 12, 2013. At such annual general meeting, shareholders approved the 2012 Stock Option Plan (as amended) which increased the number of shares authorized for issuance to 1,372,630 shares from the 410,145 shares originally authorized in December, 2012 under the preceding 2012 Stock Option Plan. Currently authorized for issuance under the 2012 Stock Option Plan (as amended) are 1,372,630 shares of our common stock.

 

The purpose of the 2012 Stock Option Plan (as amended) is to encourage stock ownership by employees, officers, and directors by giving them a greater personal interest in the success of the business and by providing them an added incentive to advance in their employment or service to Digital Power. The 2012 Stock Option Plan (as amended) provides for the grant of either incentive or non-statutory stock options. The exercise price of any stock option granted under the 2012 Plan (as amended) may not be less than 100% of the fair market value of our common stock on the date of grant.

 

 
30

 

 

To the extent that an incentive stock option may be exercised in any given year for more than $100,000, the option will be deemed to be a non-statutory stock option. Generally, our stock option agreements permit cashless exercises where options are exercised and the underlying common stock is sold on the same day. Unless otherwise provided by the Board, an option granted under the 2012 Stock Option Plan (as amended) is exercisable for 10 years. The 2012 Stock Option Plan (as amended) is administered by the Compensation Committee, which has discretion to determine optionees, the number of shares to be covered by each option, the exercise schedule and other terms of the options. The 2012 Stock Option Plan (as amended) may be amended, suspended, or terminated by the Board, but no such action may impair rights under a previously granted option. Each incentive stock option is exercisable, during the lifetime of the optionee, only so long as the optionee remains employed with us.  In general, no option is transferable by the optionee other than by will or by the laws of descent and distribution.

 

As of December 31, 2013, options to purchase 712,763 shares of common stock were issued and outstanding under the Incentive Share Option Plans.

 

401(k) Plan

 

We have adopted a tax-qualified employee savings and retirement plan, or 401(k) plan, which generally covers all of our full-time employees. Pursuant to the 401(k) plan, eligible employees may make voluntary contributions to the plan up to a maximum of 5% of eligible compensation. The 401(k) plan permits, but does not require, matching contributions by Digital Power on behalf of plan participants. We match contributions at the rate of (1) $1.00 for each $1.00 contributed, up to 3% of the base salary and (2) $0.50 for each $1.00 contributed thereafter, up to 5% of the base salary.  We are also permitted under the plan to make discretionary contributions. The 401(k) plan is intended to qualify under Sections 401(k) and 401(a) of the Internal Revenue Code of 1986, as amended. Contributions to such a qualified plan are deductible by Digital Power when made, and neither the contributions nor the income earned on those contributions is taxable to plan participants until withdrawn. All 401(k) plan contributions are credited to separate accounts maintained in trust.

 

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

Security Ownership

 

Except as otherwise indicated below, the following table sets forth certain information regarding beneficial ownership of our common stock as of March 20, 2014 by: (1) each of our current directors; (2) each of the named executive officers listed in the Summary Compensation Table; (3) each person known to us to be the beneficial owner of more than 5% of the outstanding shares of our common stock based upon Schedules 13G or 13D filed with the SEC; and (4) all of our directors and executive officers as a group. As of December 31, 2013, there were 6,853,161 shares of our common stock outstanding.

 

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of March 20, 2014 are deemed to be outstanding and to be beneficially owned by the person or group holding such options or warrants for the purpose of computing the percentage ownership of such person or group, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group. Unless otherwise indicated by footnote, to our knowledge the persons named in the table have sole voting and sole investment power with respect to all common stock shown as beneficially owned by them, subject to applicable community property laws. The table below is based upon information supplied by officers, directors and principal shareholders and Schedules 13D and 13G and Forms 3 and 4 filed with the SEC as of March 20, 2014. Unless otherwise indicated below, the address of each beneficial owner listed below is c/o Digital Power Corporation, 48430 Lakeview Blvd, Fremont, California 94538.

  

 
31

 

 

         

Name and Address

Of Beneficial Owner

   

Number of Shares

Beneficially Owned

   

Approximate Percent

of Class

 
                   

Telkoor Telecom Ltd.

5 Giborei Israel

Netanya 42293

Israel

      2,897,110       42.27 %

Amos Kohn

      403,765 (1)     5.89 %

Ben-Zion Diamant

      3,260,324 (2)     47.57 %

Robert Smith

      113,500 (3)     1.69 %

Yatim Haim

      2,500 (4)     *  

Aaron Ben-Ze’ev

      2,500 (4)     *  

Barry W. Blank

P.O. Box 32056

Phoenix, AZ 85064

      419,900       6.13 %

All directors and executive officers as a group

                 
(5)       3,625,074 (5)     52.90 %

 

*         Less than one percent.

 

(1)   Represents (a) options to purchase 246,250 shares of common stock that are currently exercisable or exercisable within 60 days of March 20, 2014 and (b) 157,515 shares of common stock owned by the Digital Power ESOP for which Mr. Kohn serves as a trustee.

 

(2)   Mr. Diamant serves as a director of Telkoor.  Represents (a) options to purchase 93,750 shares, owned by Mr. Diamant, that are currently exercisable or exercisable within 60 days of March 20, 2014; (b)  157,515 shares of common stock owned by the Digital Power ESOP, for which Mr. Diamant serves as a trustee; (c) 2,897,110 shares beneficially owned by Telkoor, and (d) 111,949 shares held by a brokerage firm. Mr. Diamant disclaims beneficial ownership of the shares held by Telkoor, except to the extent of his proportionate pecuniary interest therein.

 

(3)   Represents (a) options to purchase 110,000 shares of common stock that are currently exercisable or exercisable within 60 days of March 20, 2014 and (b) 3,500 shares of common stock held by a brokerage firm.

 

(4)   Represents options to purchase 2,500 shares of common stock that are currently exercisable.

 

(5) See Notes (1) – (4) above

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table sets forth information as of December 31, 2013 with respect to compensation plans under which our common shares are authorized for issuance, aggregated as follows:

 

 

All compensation plans previously approved by security holders; and

 

All compensation plans not previously approved by security holders.

 

 
32

 

 

EQUITY COMPENSATION PLAN INFORMATION

 

Name

 

Number of securities to be issued

upon exercise of outstanding

options, warrants and rights

(a)

   

Weighted-average exercise

price of outstanding options,

warrants and rights

(b)

   

Number of securities

remaining

available for future

issuance

under equity

compensation plans

(excluding securities in

column (a))

(c)

 

Equity compensation plans approved by security holders

    712,763     $ 1.33       1,452,630  

Equity compensation plans not approved by security holders

    -       -       -  

Total

    874,263     $ 1.31       1,452,630  

 

 

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

Relationship with Telkoor Power Supplies Ltd.

 

In the years ended December 31, 2013 and 2012, we purchased approximately $1,381,000 and $474,000, respectively, of products from Telkoor Power Supplies, Ltd., a wholly-owned subsidiary of our largest shareholder, Telkoor, of which Ben-Zion Diamant is the Chief Executive Officer.  We have no written agreement for the purchase of these products, other than purchase orders that are placed in the ordinary course of business when the products are needed.

 

Purchase of IP from Telkoor by DPL

 

On August 25, 2010, we and our wholly-owned subsidiary, DPL, entered into an agreement with TPS, a wholly-owned subsidiary of our largest shareholder, Telkoor Telecom Ltd., of which Mr. Diamant is the Chief Executive Officer.  Pursuant to such agreement, (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”) 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 Assets, DPL has paid TPS $480,000. 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. In accordance with the agreement, the consideration for the IP may be reduced over a four-year period in the event annual sales for each year between 2011 and 2014 are less than a fixed threshold of units on an annual basis based upon 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 2011 and 2014. As a result of lower than anticipated sales by our DPL subsidiary of the Compact Peripheral Component Interface 600W AC/DC power supply series (CPCI 600W) through 2013, the Company amended its agreement with Telkoor (effective January 1, 2014 for the duration of the original agreement or until the shortfall of CPCI 600W product sales will be offset) to include additional products in addition to the original CPCI 600W product. We will not be required to make any royalty payments to Telkoor under the Manufacturing Agreement with Telkoor (described below) until the shortfall of CPCI 600W product sales will be offset.

 

Acquisition of Shares of Telkoor

 

On June 16, 2011 the Company acquired 1,136,666 shares of Telkoor, a major shareholder of the Company and an Israeli company listed in the Tel Aviv stock exchange, for $0.88 (NIS 3) per share, which represents 8.8% of the outstanding shares of Telkoor. As a result of this transaction, an existing manufacturing agreement between Digital Power and Telkoor was updated and extended. Until September 30, 2012 the investment was accounted for as an available-for-sale investment and then reclassified the accounting of the investment at cost less accumulated impairments derived from independent appraisals or available market valuations

 

Manufacturing Agreement with Telkoor 

 

On December 31, 2012, the Company entered into a Manufacturing Rights Agreement (the "Manufacturing Agreement") with Telkoor, pursuant to which among other things, Telkoor granted to the Company the non-exclusive right to directly place purchase orders for certain products from third party manufacturers for the purpose of marketing, selling and distributing the products for telecom, industrial, medical and military market segments in North and South America in consideration for the payment of royalty fees by the Company to Telkoor. The royalty fees paid by the Company to Telkoor under the Manufacturing Agreement are between 5% and 25%, depending on the product. The Company incurred $44,000 in Telkoor royalty expense in 2013.The Manufacturing Agreement has a term of five years from the date of signature. During the agreement, Telkoor agreed not to directly or indirectly participate or engage, or assist any other party in engaging or preparing to engage, the customers of the Company in North and South America in connection with the sale or distribution of any of the products under the Manufacturing Agreement. We will not be required to make any royalty payments to Telkoor under the Manufacturing Agreement with Telkoor until the shortfall of CPCI 600W product sales will be offset, as described under “Purchase of IP from Telkoor by DPL” above.

 

 
33

 

 

Hiring of Dori Kohn as Procurement and Supply Chain Manager

 

In December, 2013, Mr. Dori Kohn,the son of Mr. Amos Kohn, was hired as the Procurement and Supply Chain Manager for the Company following Board of Directors’ approval of the appointment. The annual salary of Mr. Dori Kohn is $65,000.

 

 
34

 

 

  ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global (“Kost Forer”), has served as our independent registered public accounting firm since 2002 and has been appointed by the Audit Committee to continue as our independent registered public accounting firm for the year ending December 31, 2014.

 

Kost Forer also serves as the independent auditors of Telkoor. The auditing of our financial statements and Telkoor’s financial statements are handled by separate teams within Kost Forer.

 

Fees and Services

 

The following table shows the aggregate fees billed to us for professional services by Kost Forer for the years ended December 31, 2013 and 2012:

 

   

2013

   

2012

 

Audit Fees

  $ 115,000     $ 123,000  

Audit-Related Fees

  $ -     $ -  

Tax Fees

  $ -     $ -  

All Other Fees

  $ -     $ -  

Total

  $ 115,000     $ 123,000  

 

Audit Fees . This category includes the aggregate fees billed for professional services rendered for the audits of our financial statements for the years ended December 31, 2013 and 2012, for the reviews of the financial statements included in our quarterly reports on Form 10-Q during 2013 and 2012, and for other services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for the relevant years.

 

Audit-Related Fees . This category includes the aggregate fees billed in each of the last two years for assurance and related services by the independent auditors that are reasonably related to the performance of the audits or reviews of the financial statements and are not reported above under "Audit Fees," and generally consist of fees for other engagements under professional auditing standards, accounting and reporting consultations, internal control-related matters, and audits of employee benefit plans.

 

Tax Fees . This category includes the aggregate fees billed in each of the last two years for professional services rendered by the independent auditors for tax compliance, tax planning and tax advice.

  

All Other Fees . This category includes the aggregate fees billed in each of the last two years for products and services provided by the independent auditors that are not reported above under "Audit Fees," "Audit-Related Fees," or "Tax Fees."

 

The Audit Committee’s policy is to pre-approve all services provided by our independent auditors. These services may include audit services, audit-related services, tax services and other services. The Audit Committee may also pre-approve particular services on a case-by-case basis. Our independent auditors are required to report periodically to the Audit Committee regarding the extent of services they provide in accordance with such pre-approval. 

 

 
35

 

 

PART IV

 

ITEM 15.     EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 

(a)               Exhibits  

 

3.1

Amended  and  Restated  Articles  of  Incorporation  of  Digital  Power Corporation (1)

3.2

Amendment to the Articles of Incorporation (1)

3.3

Amendment to the Articles of Incorporation (2)

3.4 Bylaws of Digital Power Corporation (1)

10.1

1996 Digital Power Incentive Share Option (1)

10.2

1998 Digital Power Incentive Share Option Plan (3)

10.3

2002 Digital Power Incentive Share Option Plan (4)

10.4

Lease, dated as of August 21, 2007, between the Company and SDC Fremont Business Center, Inc. (5)

10.5*

Employment Agreement with Amos Kohn (6)

10.6*

2012 Stock Option Plan, as amended (7)

10.7†

Manufacturing Rights Agreement, dated December 30, 2012, by and between the Company and Telkoor Telecom Ltd. (8)

10.8*

Letter Agreement with William J. Hultzman (9)

10.9 *

Form of Stock Option Agreement for awards made under the 2012 Stock Option Plan (as amended).

23.1

Consent of Kost Forer Gabbay & Kasierer

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

32

Certification of Chief Executive Officer  and  Chief  Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act

99.1 Press Release, dated March 19, 2014

(1) 

Previously filed with the Commission on October 16, 1996 as an exhibit to the Company’s Registration Statement on Form SB-2.

(2)

Previously filed with the Commission as Exhibit 3.1 to the Company’s Form 8-K filed December 9, 2013

(3) 

Previously filed with the Commission as Exhibit 10.7 to the Company’s Form 10-KSB for the year ended December 31, 1998.

(4) 

Previously filed with the Commission as Exhibit A to the Company’s Proxy Statement filed on September 5, 2002.

(5) 

Previously filed with the Commission as Exhibit 10.1 to the Company’s Form 8-K filed on October 22, 2007.

(6)

(7) 

Previously filed with the Commission as Exhibit 10.1 to the Company’s Form 8-K filed on July 10, 2008.

Previously filed with the Commission as Exhibit A to the Company’s DEF-14A filed on June 26, 2013..

(8)

Previously filed with the Commission as Exhibit 10.8 to the Company’s Form 10-K for the year ended December 31, 2012

(9)

Previously filed with the Commission as Exhibit 10.9 to the Company’s Form 10-Q/A for the quarterly period ended June 30, 2012.

 

 

101+

The following materials from Digital Power Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.

 †Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request.

 

*Management contract or compensatory plan or arrangement.

 

 
36

 

 

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2013

IN U.S. DOLLARS

 

INDEX

 

 

Page

 

 

Report of Independent Registered Public Accounting Firm

F-2

 

 

Consolidated Balance Sheets

F-3 to F-4

 

 

Consolidated Statements of Operations

F-5

 

 

Consolidated Statements of Comprehensive Income

F-6

   

Statements of Changes in Shareholders' Equity

F-7

 

 

Consolidated Statements of Cash Flows

F-8

 

 

Notes to Consolidated Financial Statements

F-9 to F-31

 

 
F-1

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders of

 

DIGITAL POWER CORPORATION

 

 

We have audited the accompanying consolidated balance sheets of Digital Power Corporation ("the Company") and its subsidiary as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiary as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles.

 

 

 

 

/s/ KOST FORER GABBAY & KASIERER

Tel-Aviv, Israel

KOST FORER GABBAY & KASIERER

March 28, 2014

A Member of Ernst & Young Global

 

 
F-2

 

  

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

 

CONSOLIDATED BALANCE SHEETS


U.S. dollars in thousands

 

   

December 31,

 
   

2013

   

2012

 

ASSETS

               
                 

CURRENT ASSETS:

               

Cash and cash equivalents

  $ 1,696     $ 1,821  
                 

Trade receivables (net of allowance for doubtful accounts of $ 146 and $ 146 as of December 31, 2013 and 2012, respectively)

    2,157       1,390  

Prepaid expenses and other receivables

    167       139  

Inventories (Note 3)

    1,751       2,012  
                 

Total current assets

    5,771       5,362  
                 

NON CURRENT ASSETS:

               

Property and Equipment, net (Note 4)

    616       504  

Intangible Asset, net (Note 5)

    171       267  

Investment in Telkoor (Note 11)

    406       780  

Long Term Deposits

    13       19  
                 

Total Non-Current Assets

    1,206       1,570  
                 

Total Assets

  $ 6,977     $ 6,932  

  

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

 

 
F-3

 

  

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

 

CONSOLIDATED BALANCE SHEETS


U.S. dollars in thousands

 

   

December 31,

 
   

2013

   

2012

 
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               
                 

CURRENT LIABILITIES:

               

Accounts payable

  $ 1,109     $ 870  

Trade payables - related parties (Note 12)

    248       110  

Advances from customers and deferred revenue

    128       6  

Other current liabilities (Note 6)

    445       419  
                 

Total Current Liabilities

    1,930       1,405  
                 
                 

COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)

               
                 
                 

SHAREHOLDERS' EQUITY (Note 8):

               

Share capital -

               

Series A Redeemable Convertible Preferred shares, no par value - 500,000 shares authorized; 0 shares issued and outstanding at December 31, 2013 and 2012

    -       -  

Preferred shares, no par value - 1,500,000 shares authorized; 0 shares issued and outstanding at December 31, 2013 and 2012

    -       -  

Common shares, no par value - 30,000,000 shares authorized; 6,853,161 shares issued and outstanding at December 31, 2013 and 2012

    -       -  

Additional paid-in capital

    14,582       14,476  

Accumulated deficit

    (9,282

)

    (8,650

)

Accumulated other comprehensive loss

    (253 )     (299

)

                 

Total Shareholders' Equity

    5,047       5,527  
                 

Total Liabilities and Shareholders' Equity

  $ 6,977     $ 6,932  

 

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

 

 
F-4

 

  

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY 

 

CONSOLIDATED STATEMENTS OF OPERATION


U.S. dollars in thousands (except per share data)

 

   

Year ended

December 31,

 
   

2013

   

2012

 
                 

Revenues (Note 13)

  $ 8,770     $ 8,589  

Cost of revenues

    5,601       5,128  
                 

Gross profit

    3,169       3,461  
                 

Operating expenses:

               
                 

Engineering and product development

    768       704  

Selling and marketing

    1,062       1,067  

General and administrative

    1,656       1,784  
                 

Total operating expenses

    3,486       3,555  
                 

Operating loss

    (317 )     (94 )

Impairment of investment

    (312 )     (218 )

Other income (expenses), net

    -       (15 )
                 

Loss before income taxes (Note 9c)

    (629 )     (327 )

Income taxes (Note 9d)

    3       2  
                 

Net Loss

  $ (632 )   $ (329 )
                 

Basic and diluted net loss per share (Note 10)

  $ (0.092 )   $ (0.048 )
                 

Weighted average number of shares used in per share calculations (in thousands)

    6,853       6,855  

 

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

 

 
F-5

 

 

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


 U.S. dollars in thousands

 

   

Year ended

December 31,

 
   

2013

   

2012

 
                 
                 

Net Loss

  $ (632

)

  $ (329 )

Other Comprehensive income, net of tax:

               
                 

Reclassified adjustment for gain included in net loss

    -       473  

Change in net foreign currency translation adjustment

    46       132  

Other comprehensive income

    46       605  
                 

Total comprehensive income (loss)

  $ (586

)

  $ 276  

 

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

 

 
F-6

 

  

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY 

 

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


U.S. dollars in thousands (except share data)

 

   

Common

shares

Number

   

Additional

paid-in

capital

   

Accumulated

deficit

   

Other

accumulated

comprehensive

income (loss)

   

Total

shareholders'

equity

 
                                         

Balance as of January 1, 2012

    6,649,954       14,358       (8,321

)

    (904

)

    5,133  

Stock compensation related to options granted to non-employee consultants

    -       (10 )     -       -       (10 )
                                         

Stock compensation related to options granted to employees

    -       142       -       -       142  
                                         

Exercise of warrants

    7,213                                  

Exercise of options granted to non-employee consultants

    6,283       -       -       -       -  
                                         

Purchase of treasury stock

    (9,989 )     (14 )                     (14 )

Comprehensive income:

                                       
                                         

Net loss

    -       -       (329 )     -       (329 )

Unrealized Loss on available for sale marketable securities

                            473       473  

Foreign currency translation adjustments

    -       -       -       132       132  
                                         

Balance as of December 31, 2012

    6,853,161     $ 14,476     $ (8,650

)

  $ (299

)

  $ 5,527  
                                         

Stock compensation related to options granted to non-employee

    -       2       -       -       2  
                                         

Stock compensation related to options granted to employees

    -       104       -       -       104  

Comprehensive income:

                                       

Net loss

    -       -       (632 )     -       (632

)

Foreign currency translation adjustments

    -       -       -       46       46  

Balance as of December 31, 2013

    6,853,161     $ 14,582     $ (9,282

)

  $ (253

)

  $ 5,047  

 

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

 

 
F-7

 

  

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS


U.S. dollars in thousands

 

   

Year ended

December 31,

 
   

2013

   

2012

 

Cash flows from operating activities :

               
                 

Net loss

  $ (632

)

  $ (329 )

Adjustments required to reconcile net income to net cash provided by operating activities:

               

Depreciation

    110       111  

Amortization of intangible asset

    96       97  

Inventory write-down

    46       45  

Impairment of investment in Telkoor

    376       218  

Stock compensation related to options granted to employees

    104       142  

Stock compensation related to options granted to Telkoor's employees and other non-employee consultants

    2       (10 )

Decrease (increase) in trade receivables, net

    (750

)

    472  

Increase in prepaid expenses and other receivables

    (28

)

    (42 )

Decrease in inventories

    238       326  

Increase (decrease) in accounts payable and trade payables - related parties

    365       (427 )

Decrease in advances from customers, deferred revenues and other current liabilities

    144       (406 )
                 

Net cash provided by operating activities

    71       197  
                 

Cash flows from investing activities :

               
                 

Purchase of property and equipment

    (216

)

    (154

)

                 

Net cash used in investing activities

    (216

)

    (154

)

                 

Cash flows from financing activities :

               
                 

Purchase of treasury stock

    -       (14 )
                 
                 

Net cash used in financing activities

    -       (14 )
                 

Effect of exchange rate changes on cash and cash equivalents

    20       15  
                 

Increase (decrease) in cash and cash equivalents

    (125 )     44  

Cash and cash equivalents at the beginning of the year

    1,821       1,777  
                 

Cash and cash equivalents at the end of the year

  $ 1,696     $ 1,821  
                 

Supplemental disclosure of cash flows activities :

               
                 

Income taxes paid

    -       2  

Unrealized gain on available for sale marketable securities (Telkoor)

  $ -     $ (473 )

 

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

 

 
F-8

 

  

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


U.S. dollars in thousands (except share and per share data)

 

NOTE 1:-       GENERAL

 

 

a.

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 switching power supplies and converters. The Company has two reportable geographic segments - North America (sales through DPC) and Europe (sales through DPL).

 

 

b.

The Company depends on Telkoor Telecom Ltd. ("Telkoor"), a major shareholder of the Company and one of DPC's third party subcontractors, for manufacturing capabilities in production of the products which DPC sells. If these manufacturers are 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 to third party manufacturers. Failure to obtain new products in a timely manner or delay in delivery of products to customers will have an adverse effect on the Company's ability to meet its customers' expectations. In 2010, the Company purchased a specific IP from Telkoor in order to reduce its dependency on Telkoor with respect to a certain line of products. See also Notes 5 and 12.

 

NOTE 2:-       SIGNIFICANT ACCOUNTING POLICIES

 

The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”).

 

 

a. 

Use of estimates:

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions. The Company's management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

 

b.

Financial statements in U.S. dollars:

 

A substantial portion of the revenues of the Company is generated in U.S. dollars ("dollar"). In addition, a substantial portion of the costs of the Company is incurred in dollars. The Company's management believes that the dollar is the currency of the primary economic environment in which the Company operates.

 

 
F-9

 

 

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


U.S. dollars in thousands (except share and per share data)

 

NOTE 2:-       SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

The financial statements of the foreign subsidiary, whose functional currency has been determined to be its local currency, have been translated into U.S. dollars in accordance with Accounting Codification Statement ("ASC") 830, "Foreign Currency Translation".  All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Statement of operations amounts have been translated using the average exchange rate for the period. The resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss) in shareholders' equity.

 

 

c.

Principles of consolidation:

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. Intercompany transactions and balances have been eliminated upon consolidation.

 

 

d. 

Cash equivalents:

 

Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less at acquisition.

 

 

e.

Inventories:

 

Inventories are stated at the lower of cost or market value. Inventory write-offs are provided to cover risks arising from slow-moving items or technological obsolescence.

 

Cost is determined as follows:

Raw materials, parts and supplies - using the "first-in, first-out" method.

 

Work-in-progress and finished products - on the basis of direct manufacturing costs with the addition of indirect manufacturing costs.

 

The Company periodically assesses its inventories valuation in respect of obsolete and slow moving items by reviewing revenue forecasts and technological obsolescence. When inventories on hand exceed the foreseeable demand or become obsolete, the value of excess inventory, which at the time of the review was not expected to be sold, is written off.

 

 
F-10

 

 

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


U.S. dollars in thousands (except share and per share data)

 

NOTE 2:-       SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

During 2013 and 2012, the Company recorded inventory write-offs of $46 and $45, respectively, within the cost of goods sold.

 

 

f.

Property and equipment and intangible asset:

 

Property and equipment as well as an intangible asset are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets, at the following annual rates:

 

    %  
           

Intangible asset

    20    

Computers, software and related equipment

  20

33

 

Office furniture and equipment

  10

20

 

Leasehold improvements

 

Over the term of the lease or the life

of the asset, whichever is shorter

 

 

The long-lived assets of the Company and its subsidiary are reviewed for impairment in accordance with ASC 360, "Property, Plant, and Equipment", whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. As of December 31, 2013 and 2012, no impairment losses have been identified.

 

 

g. 

Revenue recognition:

 

The Company and its subsidiary generate their revenues from the sale of their products through a direct and indirect sales force.

 

Revenues from products are recognized in accordance with ASC 605-15, "Revenue Recognition in Financial Statements", when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the seller's price to the buyer is fixed or determinable, no further obligation exists and collectability is reasonably assured.

 

 
F-11

 

 

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


U.S. dollars in thousands (except share and per share data)

 

NOTE 2:-       SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

Generally, the Company does not grant a right of return. However, certain distributors are allowed, in the sixth month after the initial stock purchase, to rotate stock that has not been sold for other products. This stock rotation may be repeated every six months thereafter for 15-18 months, based on a fixed percentage at no more than the distributor's purchases during the previous six months. Revenues subject to stock rotation rights are deferred until the products are sold to the end customer or until the rotation rights expire.

 

Service revenues are deferred and recognized on a straight-line basis over the term of the service agreement. Service revenues are immaterial in proportion to the Company's revenues.

 

 

h.

Engineering and product development costs:

 

Engineering and product development costs are charged to the statement of operations as incurred.

 

 

i.

Income taxes:

 

The Company and its subsidiary account for income taxes in accordance with ASC 740, "Income Taxes" (“ASC 740”). This Statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiary provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

 

ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. No liability for unrecognized tax benefits was recorded as a result of the implementation of ASC 740 as of December 31, 2013 and 2012.

 

 
F-12

 

  

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


U.S. dollars in thousands (except share and per share data)

 

NOTE 2:-       SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

 

j.

Warranty costs:

 

The Company offers a warranty period for all of its products. Warranty periods range from one to two years depending on the product. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company's warranty liability include the number of units sold, historical rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary.

 

Warranty liability accruals were $104 and $63 for the years ended December 31, 2013 and December 31, 2012 respectively.

 

 

k.

Accounting for stock-based compensation:

 

The Company accounts for stock-based compensation in accordance with ASC 718.

 

ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated statements of operations.

 

The Company estimates the fair value of stock options granted under ASC 718 using the Black-Scholes option-pricing model that uses the following assumptions.

 

Expected volatility is based on historical volatility that is representative of future volatility over the expected term of the options. The expected term of options granted was determined based on the simplified method, which is calculated as the midpoint between the vesting date and the end of the contractual term of the option. The Company uses the simplified method as it has determined that sufficient data is not available to develop an estimate of the expected option term based upon historical participant behavior.  The risk free interest rate is based on the yield of U.S. Treasury bonds with equivalent terms. The dividend yield is based on the Company's historical and future expectation of dividends payouts. The Company has not paid cash dividends historically and has no plans to pay cash dividends in the foreseeable future.

 

The Company recognizes compensation expense based on awards ultimately expected to vest, net of estimated forfeitures at the time of grant. Estimated forfeitures are based on historical pre-vesting forfeitures. ASC 718 requires forfeitures to be estimated and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

 
F-13

 

 

DIGITAL POWER CORPORATION AND ITS SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


U.S. dollars in thousands (except share and per share data)