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Digital Power (DPW) Completes Majority Purchase of Microphase

06/05/2017
Lisa Thompson

NYSE:DPW

Today the Digital Power (NYSE:DPW) finalized the purchase of 50.5% of Microphase, a 62 year old electronics company based in Shelton, Connecticut. Microphase designs, manufactures and sells microwave electronics components for radar, electronic warfare, and communication systems. Such components include radio frequency (“RF”) and microwave filters, diplexers, multiplexers, detectors, switch filters, integrated assemblies and detector logarithmic video amplifiers. Its customers are the U.S. military and allied militaries, and contractors to the U.S. military including prime contractors and sub-contractors. It products are used in many U.S. Government defense programs, including: the Polaris submarine, the F-16 aircraft, the F-35 aircraft and the Predator Drone. The company’s products were also used for: the Atlas Missile, Vanguard Missile, Polaris Missile System, SHRIKE Missile, ARM Missile, Patriot Missile System, THAAD (Terminal High Altitude Area Defense), the Samos, Tiros, and Currier Space Probes, the B-1 Bomber, the F-1, EA6B, F-14, F-18, and the Gripen fighter. 

Microphase reported revenues of $1.1 million and a loss of $1.2 million in the quarter ending March 31, 2017, which puts it at an annual revenue run rate of $4.3 million. In calendar year 2016 Microphase generated $6.6 million in sales and lost $3.1 million. The deal cost is approximately $2 million in stock and debt. Digital Power believes there are a lot of redundancies and it can get Microphase to breakeven within three months or so. Since Digital Power will be majority holder, it will consolidate 100% of Microphase’s revenues and expenses and deduct the 49.8% losses or profits as minority income. 

To acquire this majority interest Digital Power bought 1,603,434 shares of Microphase common stock (or 50.2% on a fully diluted basis) in exchange for:

1. An equivalent of 2,600,000 shares consisting of Digital Power common stock and Series D Convertible Preferred Stock, assuming full conversion thereof, plus
2. 1 million warrants exercisable at $1.10.
 
Digital Power also issued 10,000 shares of its Series E Convertible Preferred Stock to guarantee the payment of an 8% promissory note in the amount of $450,000 issued by Microphase to certain of its creditors. 

KEY POINTS

➢ Digital Power just completed the acquisition of 50.2% of Microphase, which, on a consolidated basis should double the company’s revenues. We expect this purchase to also contribute to earnings within the next four months.

➢ Digital Power also recently received a $50 million (over three years) purchase order from MITX to assemble its proprietary equipment for the textile industry. This purchase order was received from a MTIX Ltd., which is under contract by the company’s controlling shareholder and was introduced to the Company by its new Chairman. This purchase order could double sales for the company in 2018 and revitalize growth.

➢ In addition to the MITX order, the new board of directors, elected in December, is reviving the company by allowing management to invest in future growth both by internal investment in staff and plant, as well as acquisitions.

➢ Management is continuing to actively seek acquisitions, particularly for companies that sell or service the defense and aerospace sectors.  There is particular opportunity to purchase foreign companies who wish to sell to countries that need to purchase product from US companies and pay with US State Department funds. 

➢ Sales to the military (primarily the US and Israel) are approximately 30% of total sales. The new Trump administration plans to hike military spending significantly and DPW should benefit.

➢ The company plans to sell equity to support its growth and expects to use combinations of common and preferred stock and cash for future acquisitions.

➢ At its current fully diluted market value (post acquisition) of $8.2 million or  0.7 times estimated 2017 sales (taking out the half of sales from Microphase,) we believe that there is considerable upside versus its peers who trade at 1.6 times sales should the company begin to show sustainable growth and reach profitability. Spending on new business and acquisitions is expected to produce losses for at least the next two year.

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