Digital Power Corporation (DPW): Crypto-Thriller Turns Into Stockholder-Chiller

by Sonya Colberg, Senior Editor - 12/12/2017 11:42:41 AM

Digital Power Corporation (DPWstock had been pretty much ignored until a couple of weeks ago when the company whispered that investor-lovin’ word, “cryptocurrency.”

The market missed the fact that Digital is merely proposing an idea - it wants to launch a power system to support cryptocurrency mining - consequently, the stock shot upward.

With the stock price precariously high, Digital announced after the closing bell yesterday that it wants to sell stock ... a whopping 640,000 shares.

Now the company is watering down the value of stock owned by investors who bought in based on their misunderstanding that Digital is in the cryptocurrency space.

 

(Source: Company SEC document filed after market close December 11)

Check out the company’s viewpoint here.  Meanwhile, let's consider more looming dilutive actions, plus other reasons we think Digital Power is a powerfully poor investment:  

*1. Interesting Timing: Investors Dump DPW Stock

Last week, before the market opened Monday, Dec. 4, Digital announced its cryptocurrency idea.

After the market closed, Digital dropped the real news.

The company had filed to resell more than 2 million shares of stock for “selling stockholders,” basically those affiliated with Digital’s financial advisor Aegis Capital and major investor Bellridge Capital. Proceeds will not go to Digital.

 

(Source: Company SEC filing, TheStreetSweeper)

The Fremont, California company also filed notice that its officers and directors were granted options to sell 1.1 million shares at $1.38 per share.

And there’s more dicey news revealed in other recent SEC filings ...

*2. Other Institutions Prepare To Sell

Other investment firms had registered earlier to get out. Some of the company's biggest institutional investors are selling every last share … more than 3.6 million shares of Digital stock are heading out the door.

(Source: Company SEC filing, TheStreetSweeper)

Digital is no stranger to dilution. In fact, filings disclose that the company historically depends on selling stock and debt to fund what it calls a "risky" growth strategy. And shareholders are warned to expect a continuous string of stock selling, ripe with the potential to water down other people's percentage of stock ownership: 

"Until we are profitable, we will need to quickly raise additional capital..." 

*3. Financial Difficulties

As it consistently loses money, the company’s very survival depends on similar dilution situations.

Digital Power has lost money six out of the last nine years since hitting the stock exchange. Revenue captured back in the earlier days - when its electronic power products sold fairly well to European businesses and military – has dropped by 36%.

And the early years’ razor-thin profits have disintegrated into $1 million losses. 

Cash is low, while working capital is negative at $-4 million. The company is also finding it virtually impossible to address the $9.8 million pile of short-term liabilities. Even after some warrant exercises, further dilution appears imminent.

*4.  Guidance: Now More Reasons To Avoid Digital Power 

Why do we believe the enthusiasm is misplaced regarding recent guidance? Well...

*POOR. Cash remains low.

*INSUFFICIENT. Even 50% more revenue still will not cover overhead.

*NOT SALES. Improvement is heavily dependent on possibly reselling marketable securities,    NOT sales.

*NOT NEW. The guidance regarding anticipated defense orders refers to old news

*DISAPPOINTMENT. Guidance barely mentions cryptocurrency, the fuel (right or wrong) behind the rocket. Since announcing it “anticipates” making a power system for digital mining, the company evidently has not progressed beyond making plans. Plans are easy. Execution, not so much. 

*DOUBT. Digital's ability to stay in business remains doubtful (see “going concern” page 4).

*5. The Power Yawn

Meanwhile, Digital Power can barely draw a powerful yawn from better-known institutions. We like to see around 30% or more ownership from institutions but this stock has attracted interest of just 2%:

(Source: Nasdaq, TheStreetSweeper)

When the investment banks, big retirement funds and other institutions want nothing to do with a stock, neither do we.

We’ll also avoid any company featuring curious actions such as …

*6. Curious: CEO’s Daughter Gets Cute Israeli Home

What Digital recently presented to investors as new business quarters in Israel sounds like a sweetheart deal for the CEO’s daughter.

That’s right.

Last month, CEO Amos Kohn signed documents that indicated his daughter, Roni Kohn, could snag a very nice house for little money through the company’s subsidiary, Coolisys.

Sketchy details show Roni Kohn owns 72% interest and Coolisys owns 28%. What seems clear is this: if Mr. Kohn remains with Coolisys through August, daughter Roni, who is an Israeli citizen, will have the option to buy 100% of this cute home where she apparently resides, for …

Just $120.

"effective October 1, 2017, for each completed calendar month of employment of Kohn by Coolisys, Trustee shall have the right to purchase a twenty three and one-third one-thousandths (0.002333) interest of Coolisys’ Property Interest for $1.00. By way of example only, assuming that Kohn is employed by Coolisys for 120 calendar months, Trustee shall have the right to purchase 100% of the Coolisys Property Interest for $120.00.”

 

(Source: Google maps)

Yet the company filed documents stating the actual purpose of the property:

“The Property was purchased to serve as a residence/office facility for the Company in order to oversee its European operations and to expand its business in the hi-tech industry located in Israel.”

This seems curious to us, but investors will have to decide for themselves.

*7. Newbie Issues

Meanwhile, Digital Power calls itself an acquisition company. It designs power systems for servers and desktop adaptors, while  Coolisys was created by Digital about four months ago as a technology-focused holding company.

Last quarter alone, the combined company lost $2.17 million. It walks the fine line of continuing to operate versus financial fumbling and potentially getting kicked off the New York Stock Exchange.

Digital's effort to recast itself as a cryptocurrency contender seems questionable and risky. Can employees working part-time out of the CEO’s daughter’s house in Israel really be expected to build a European mini-empire with a new business in which leadership experience is limited, while trying to compete with nearly 1,000 crypto-based companies … many with much more money and know-how?

*8. Bitcoin Ban; US Kibosh

Meanwhile, reverberations from a gaming action last week likely stand to remove some of the shine of Digital and other wannabe cryptocurrency companies.

Steam announced it has stopped accepting Bitcoin payments.

Steam is a popular gaming website used by 65 million players. Steam’s developer, Valve Corporation, blames the bitcoin ban on “high fees and volatility.”

“At this point, it has become untenable to support Bitcoin as a payment option,” stated the Steam team blog announcement.

The ban is understandable. Bitcoin volatility had been creating an uproar with gamers and could have ultimately damaged Steam’s financial position.

Meanwhile, China, South Korea and Russia have set up cryptocurrency regulations and outright bans. The United States is also working on licensing and other regulations that could put the kibosh on bitcoin. Regulators want to provide stability and help stop prostitution, drug dealing and money laundering rings from using bitcoin.

Bottom Line Risk: As more businesses boot bitcoin and more governments set up regulations, the need for companies designed to support cryptocurrencies – such as Digital Power -  will crumble.

*Conclusion

Sometimes it pays when your dad’s the CEO. And it often pays when you’re an insider holding cheap shares while the stock is fetching crypto-bubble prices.

But it never pays when you’re one of the guys holding pricey stock, and most everyone decides to hit "sell."

TheStreetSweeper expects reality to take a 40% near-term bite out of this bitcoin wannabe stock.

For folks eager to get into bitcoin, this isn't the stock. Rather than buying Digital at the idea stage, consider Bitcoin Investment Trust (GBTC), an index fund, Nvidia (NVDA) or one of the other crypto-based stocks on the list below …. After conducting your own due diligence.

(Source: Coinmarketcap; TheStreetSweeper; click for full list)

* Important Disclosure: The owners of TheStreetSweeper hold a short position in DPW and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to streetsweepereditor@yahoo.com.

 
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