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Digital Power (DPW) Continues Its Rapid Expansion Through Acquisition

11/28/2017
By Lisa Thompson

NYSE:DPW

Digital Power (NYSE:DPW) is rapidly acquiring companies in a variety of diversified businesses that are expected to eventually add to the company’s profitability. It is also progressing to a holding company structure to better facilitate the management of these various businesses and plans to change its name to DPW Holdings. While complex and frequent financial transactions cloud just how much of much common shareholders actually pay for this progress, overall they should add to the valuation of the company. Hopefully the dilution will be less that the value enhancement and common shareholders will ultimately benefit. By the acquisitions of Microphase, Power-Plus Technical Distributors, and i.am (which should close in the next few days) the company is already at an estimated $26 million run rate. Adding to this the MTIX order and the new crypto currency equipment joint venture, and the outlook for 2018 and beyond looks above $30 million in revenues.

Stock Is Trading as a Crypto Currency Play


While the company has yet to announce any products for the crypto currency market its stock being bought for its potential in this market as there are very few public companies in which to invest that can profit from the growth in crypto currencies. Digital Power, as a expert in power management may announce future products to be sold into this market later this month from its joint venture with PoW Digital Mining, but any estimates are impossible to forecast without even product or timing announced. We look for the company to further update us before year-end.


Revenues Ramped in Q3 With A Full Quarter of Microphase


Digital Power reported Q3 revenues of $3.2 million versus $1.8 million last year, in line with expectations. Q3 included a full quarter of Microphase revenue of $1.3 million versus only $223,000 booked in Q2 as it was only acquired on June 2, 2017. Microphase generated $1.3 million in revenue in Q3 compared with $1.1 million in revenues in both Q2 2017 and Q1 2017 before it was acquired. Also included in revenues was $223,000 contribution from Power-Plus Technical Distributors, and acquisition that closed on September 1st.

Gross margin decreased to 34% from 37% and down from the 40% in Q2 and 43% in Q1 2017. This is believed to be because of the larger percentage of sales from Microphase, which has historically operated at a much lower gross margin. In addition, there was one month of revenue from Power Plus Technical Distributors, affecting gross margin. 

Operating expenses were $2.4 million up from $2.2 million in Q2, and $783,000 in the year ago quarter. Despite this increase, the operating loss narrowed by $126,000 from Q2 2017. Interest expense was $753,000 versus income of $23,000 last year and up from the $407,000 in expense in Q2 2017. The company has borrowed to invest in new businesses and issued new notes and convertibles. 

Pretax income was a loss of $2.1 million versus a profit of $60,000 last year and a loss of $1.9 million in Q2 2017. There were no taxes paid. At the end of December the company’s tax loss carry forward was $5.3 million for federal and $3.6 million for state. This number has no doubt increased.

Minority interest was a $104,000 reduction in losses from the 44% of Microphase that Digital Power does not own. While it did not contribute profits, it contributed cash flow in the quarter. We expect Microphase to reach profitability shortly as Digital Power has right sized the business, eliminated overhead redundancies, and begun to cross sell to customers. In Q3 Microphase won a significant contract from the Air Force and received a new order along with Lockheed Martin, BAE Systems, and SAAB. 

Loss per share to common shareholders was $0.15 versus a loss of $0.01 last year. More meaningful was the increase in share count. This year primary shares were 13.7 million versus 6.8 million, an increase of 103%. Stock equivalents have also been increasing as show on the table below.


2018 Forecast

Investors are focused on 2018 revenues where more dramatic growth should appear. For now we are using $30 million in revenues. We are expecting a loss to common shareholders of $11.8 million or a loss of $0.36 per share based on 20 million primary shares outstanding. 

READ THE FULL RESEARCH REPORT HERE

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