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Digital Power (DPW) Ramps Spending on Acquisitions; Reports $0.20 Per Share Loss in Q2

08/28/2017
By Lisa Thompson

NYSE:DPW

Digital Power (NYSE:DPW) is restructuring its business into three areas of operation, electronics (Coolysys), MTIX production, and Digital Power Lending. The company is reorganizing and streamlining operations and staff to optimize production and sales efforts. Organized into three businesses, the company believes it will have the flexibility to take advantage of any opportunities down the road including M&A, financings, or spin-offs.
 
On June 2, 2017, Digital Power completed the acquisition of 56.4% of Microphase. In calendar year 2016 Microphase generated $6.6 million in sales. We expect this purchase to contribute to earnings in Q3 2017 and going forward.

Digital Power 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. We expect the company to start generating revenues from this purchase order in Q4 2017.

On August 10, 2017, Digital Power’s wholly owned subsidiary, Coolisys Technologies, entered into an agreement with PoW Digital Mining to develop an equipment and services portfolio targeting digital mining and crypto currency. Bitcoin, Ethereum, and other digital currencies have created a demand for efficient low-cost low-power hardware and the two companies will pool their talents to create hardware solutions for both individuals and large pool operators. PoW Digital Mining expects to begin testing and evaluating equipment at the beginning of Q4 2017. 

The company has an agreement to purchase Power-Plus Technical Distributors by September 1, 2017. In 2016, Power-Plus had revenues of over $2M and was profitable. It adds valuable staff to Digital Power’s operation.

It is difficult to value Digital Power on a per share basis as the share count keeps expanding. If we were to value the company on enterprise value versus its peers we expect that using and industry average multiple of 1.6 times enterprise value to sales that would make the company worth of $16.5 million (taking out the 44% of sales from the portion of Microphase that isn’t owned.) With its current debt, that results in a market value calculated at $13.8 million. The question is, can the company grow to the projected $23.5 million in revenues in 2018 without even more dilution from the equity, warrants, options and convertible instruments already issued and needed to be issued in order to reach that goal?

Losses Ramp in Q2 As Digital Power Acquires Companies and Invests

Digital Power reported Q2 revenues of $1.8 million versus $2.1 million last year, below our expectations. Q2 2017 included only $223,000 of revenues from Microphase, which was acquired on June 2, 2017. Had the company owned Microphase for the entire quarter, revenues would have been $2.7 million, (which means Microphase generated $1.1 million in revenues in Q2 2017, the same as in Q1 2017.) The shortfall was in part due to an order that was not fulfilled as Digital Power awaits certification and approval from a large customer on a new generation product. That order slipped out of the quarter and has still not shipped. 

Operating expenses were slightly higher than expected at $2.2 million rather than the $2 million we expected. Included in the number are significant one-time expenses from things such as legal and audit fees related to acquisitions and capital raises that the company has not quantified but could be as high as $500,000. 

Interest expense was $407,000 versus income of $55,000 last year and up from the $207,000 in expense in Q1 2017. The company has borrowed to invest in new businesses and issued new notes and convertibles. 

Pretax income was a loss of $1.9 million versus a profit of $66,000 last year and a loss of $994,000 in Q1 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 an $112,000 reduction in losses from the 44% of Microphase that Digital Power does not own. We expect Microphase to reach profitability in Q3 as Digital Power has right sized the business, eliminated overhead redundancies, and begun to cross sell to customers. In addition, it has received meaningful new military orders now that it is under the auspices of Digital Power who has invested resources into the company and provided transparent financial stability.

Loss per share to common shareholders was $0.20 versus a profit of $0.01 last year. More meaningful was the increase in share count. This year primary shares were 10.5 million versus 6.8 million, an increase of 54%. As of June 30, 2017 there were an additional 2.8 million stock options, 7.4 million warrants, 1.3 million shares from convertible notes and 4.6 million from the conversion of preferred stock, totaling 16.2 million shares that will contribute to a fully diluted share count. Last year this number totaled only 1.1 million. The primary share count as of August 17, 2017 was 13.5 million shares.

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