In U.S. dollars
The accompanying notes are an integral part of the consolidated financial statements
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 1:– GENERAL
a. Corporate structure:
Arotech Corporation (“Arotech”) and its wholly-owned subsidiaries (the “Company”) provide defense and security products for the military, law enforcement, emergency services and homeland security markets, including advanced zinc-air and lithium batteries and chargers, and multimedia interactive simulators/trainers. The Company operates primarily through its wholly-owned subsidiaries FAAC Incorporated, a Michigan corporation located in Ann Arbor, Michigan (Training and Simulation Division) with a location in Orlando, Florida; Epsilor-Electric Fuel Ltd. (“Epsilor-EFL”), an Israeli corporation located in Beit Shemesh, Israel (between Jerusalem and Tel-Aviv), Dimona, Israel (in Israel’s Negev desert area) and Sderot, Israel (near the Gaza Strip) (Power Systems Division); UEC Electronics, LLC (“UEC”), a South Carolina limited liability company located in Hanahan, South Carolina (Power Systems Division).
b. Discontinued operations
Asset Held for Sale and Discontinued Operations
In August 2016, the Board approved a strategic shift to discontinue the Flow Battery segment (“the segment”) with an effective date of August 31, 2016. The principal activities of the Flow Battery segment were research and development related and were focused on developing a commercial application based upon the Iron Flow Storage concept. In connection with the discontinuance of the operations, management has developed a plan to sell the assets to a third party for future development. Management believes that the Company will be able to execute the plan in 2017.
The amounts presented in the consolidated statements of comprehensive income as discontinued operations represent research and development and general and administrative expenses. As the Flow Battery segment is reported within the Epsilor-EFL legal entity and the legal entity has net operating loss carryforwards for which the Company has recorded a valuation allowance, there is no tax impact. Included in the Flow Battery segment’s general and administrative expenses for the year ended December 31, 2016, is a contractual buyout associated with the termination of the Chairman of the Flow Battery segment of $524,052.
The impact of the discontinued operations on operating and investing activities within the consolidated statements of cash flows for the year ended December 31, 2016, 2015, and 2014 was ($1,337,751), ($879,428), and ($396,221); and ($252,064), ($22,075), and none, respectively.
The assets and liabilities of the Flow Battery segment have been classified as held for sale as of December 31, 2016 and 2015. These amounts consist of the following carrying values in each major class.
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
270,139
|
|
|
$
|
55,032
|
|
Long-term assets
|
|
|
–
|
|
|
|
13,269
|
|
Total assets
|
|
$
|
270,139
|
|
|
$
|
68,301
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Long term liabilities
|
|
|
–
|
|
|
|
19,295
|
|
Total liabilities
|
|
$
|
–
|
|
|
$
|
19,295
|
|
Unless otherwise indicated, discontinued operations are not included in the reported results. The Notes to the Consolidated Financial Statements relate to the Company’s continuing operations.
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 1:– GENERAL (Cont.)
c. Related parties
Note Receivable
Two former executives entered into non-recourse promissory notes whereby the Company provided the note to the executives and the executives in turn exercised stock options. The promissory notes originally accrued interest at an annual rate of 1% over the then federal funds rate. In 2008, the Company stopped accruing interest on the promissory notes. As of December 31, 2016 and 2015, the aggregate amount outstanding pursuant to this promissory note was $908,054.
UEC Facility Headquarters
On October 31, 2014, the Company entered into a lease agreement with UEC Properties, LLC, a company controlled by the former owners of UEC, and now consultants and shareholders of the Company, for land and buildings that represent the headquarters of UEC Electronics. The lease term with UEC Properties commenced on January 1, 2015 and it extends for ten years, expiring on December 31, 2024. The 2016 monthly lease payment is $29,585 and increases at a rate of 2.5% per year through the term of the lease. Lease expense recognized in 2016 and 2015 was $355,000 and $346,344, respectively. Upon written notice, the Company and UEC Properties, LLC, may elect to terminate the lease after five years.
Admiralty Partners
On February 2, 2016, the Company and Admiralty Partners (the “Investor”) entered into a Stock Purchase Agreement (the “Investment Agreement”) providing for the sale to the Investor of a total of 1,500,000 shares of the Company’s common stock at a price valued at $1.99 per share. As the Investor was also given the right to nominate a member of the Board of Directors pursuant to the terms of the Investment Agreement, and the shares were issued as a discount to the then market price, this resulted in additional stock compensation expense of $375,000.
Subsequently, on February 3, 2016, the Company entered into a consulting agreement with the Investor for a period of three years. In exchange, the Company pays an annual fee equal to the difference between total accrued compensation of the Board member and $125,000. The agreement can be terminated by either party upon sufficient written notice. Total compensation expense recognized in 2016 was $27,000.
NOTE 2:– SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).
a. Principles of consolidation:
The consolidated financial statements include the accounts of Arotech and its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated upon consolidation.
b. Financial Statements in U.S. Dollars:
A majority of the revenues of the Company are generated in U.S. dollars (“dollars”). In addition, a substantial portion of the Company’s costs are incurred in dollars. Management believes that the dollar is the primary currency of the economic environment in which the Company operates. Thus, the functional and reporting currency of the Company including most of its subsidiaries is the dollar. Accordingly, monetary accounts maintained in currencies other than dollars are re-measured into dollars, with resulting gains and losses reflected in the consolidated statements of comprehensive income as financial income or expenses, as appropriate.
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 2:– SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The majority of transactions of Epsilor-EFL are in New Israel Shekels (“NIS”) and a substantial portion of Epsilor-EFL’s costs is incurred in NIS. Management believes that the NIS is the functional currency of Epsilor-EFL. Accordingly, the financial statements of Epsilor-EFL have been translated into dollars. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Statement of comprehensive income amounts have been translated using the weighted average exchange rate for the period. The resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity.
c. Cash equivalents:
Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less when acquired.
d. Restricted collateral deposits:
Restricted collateral deposits are primarily invested in highly liquid deposits which are used as a security for the Company’s performance guarantees at FAAC and Epsilor-EFL.
e. Inventories:
Inventory costs include material, labor, and manufacturing overhead costs, including depreciation and amortization expense associated with the manufacture and distribution of the Company’s products. Inventories are stated at lower of cost or market and expense estimates are made for excess and obsolete inventories. Based on this evaluation, provisions are made to write inventory down to its market value. In 2016, 2015, and 2014, the Company wrote off approximately $359,000, $321,000, and $509,000 respectively, of obsolete inventory, which has been included in the cost of revenues. Cost is determined by first-in, first-out (“FIFO”) method.
f. Property and equipment:
Property and equipment are stated at cost net of accumulated depreciation and investment grants received from the State of Israel for investments in fixed assets under the Law for the Encouragement of Capital Investments, 5719-1959 (the “Investments Law”). The Company did not receive any investment grants in 2016, 2015, or 2014, respectively.
Depreciation is calculated by the straight-line method over the following estimated useful lives of the assets:
|
|
Depreciable life (in years)
|
|
|
|
|
|
Computers and related equipment
|
|
3 to 5
|
|
Motor vehicles
|
|
5 to7
|
|
Office furniture and equipment
|
|
3 to 5
|
|
Machinery, equipment and installations
|
|
5 to 10
|
|
Buildings
|
|
30
|
|
Land
|
|
Not depreciated
|
|
Leasehold improvements
|
|
Shorter of the term of the lease or the life of the asset
|
|
Demo inventory
|
|
3 to 5
|
|
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 2:– SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company tests long-lived asset groups for recoverability when changes in circumstances indicate the carrying value may not be recoverable, for example, when there are material adverse changes in projected revenues or expenses, significant underperformance relative to historical or projected operating results, or significant negative industry or economic trends. We also perform a test for recoverability when management has committed to a plan to sell or otherwise dispose of an asset group. We evaluate recoverability of an asset group by comparing its carrying value to the future net undiscounted cash flows that we expect will be generated by the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of carrying value over the estimated fair value. When we recognize an impairment loss for assets to be held and used, we depreciate the adjusted carrying amount of those assets over their remaining useful life.
g. Goodwill and Other Intangible Assets:
Goodwill may result from our business acquisitions. Goodwill is assigned to our reporting units based on the expected benefit from the synergies arising from each business combination, determined by using certain financial metrics, including the forecasted discounted cash flows associated with each reporting unit. As of December 31, 2016, we had recorded goodwill of $45.5 million. We allocate goodwill acquired in a business combination to the appropriate reporting unit as of the acquisition date. Our two reporting units, Training and Simulation and Power Systems Divisions are also our reportable segments. The associated goodwill was determined when the specific businesses were purchased. For the Training and Simulation Division and the Power Systems Division, we have recorded goodwill amounting to $24.4 million and $21.1 million, respectively.
When testing goodwill for impairment we have the option of performing a qualitative assessment before calculating the fair value of a reporting unit. If the Company determines, on the basis of qualitative factors, that it is more likely than not that the fair value of the reporting unit is greater than the carrying amount, the two-step impairment test would not be required. If we cannot determine on the basis of qualitative factors that goodwill is not impaired, goodwill is then tested for impairment by using a discounted cash flow analysis. This type of analysis requires us to make assumptions and estimates regarding industry economic factors and the profitability of future business strategies. Significant estimates used in the methodologies include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples for the reportable units. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations. In assessing the recoverability of our goodwill, we may be required to make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. This process is subjective and requires judgment at many points throughout the analysis. If our estimates or their related assumptions change in subsequent periods or if actual cash flows are below our estimates, we may be required to record impairment charges for these assets not previously recorded.
The Company also maintains other indefinite-lived intangible assets and definite-lived intangible assets. The indefinite-lived intangible assets are not amortized but are tested for impairment on at least an annual basis or when determined to have a finite useful life. Substantially all of the indefinite-lived intangible assets are trademarks. Definite-lived intangible assets are reviewed for recoverability when changes in circumstances indicate the carrying value may not be recoverable, for example, when there are material adverse changes in projected revenues or expenses, significant underperformance relative to historical or projected operating results, or significant negative industry or economic trends. If the comparison indicates that the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of carrying value over the estimated fair value.
h. Revenue recognition:
The Company is a defense and security products and services company, engaged in two business areas: interactive simulation for military, law enforcement and commercial markets; and power systems and batteries for the military, commercial and medical markets. During 2016, 2015, and 2014, the Company recognized revenues (i) from the sale and customization of interactive training systems and from the maintenance services in connection with such systems (Training and Simulation Division); (ii) from the sale of batteries, chargers and adapters, and under certain development contracts with the U.S. Army (Power Systems Division); and (iii) from the sale of lifejacket lights (Power Systems Division).
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 2:– SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Revenues from certain products sold by the Power Systems Division are recognized when persuasive evidence of an agreement exists, delivery has occurred, the fee is fixed or determinable, collectability is probable, and no further obligation remains. Typically revenue is recognized, per the contract, when the transaction is entered into the U.S. Government’s Wide Area Workflow system, which occurs after the products have been accepted at the plant or when shipped. Sales to other entities are recorded in accordance with the contract, either when shipped or delivered. Normally there are no further obligations that would preclude the recognition of revenue. Additionally, certain contracts are recognized using contract accounting on a percentage of completion method.
Revenues from contracts in the Training and Simulation Division and Power Systems Division that involve customization of the system to customer specifications are recognized using contract accounting on a percentage of completion method, in accordance with the “Input Method.” The amount of revenue recognized is based on the percentage to completion achieved. The percentage to completion is measured by monitoring progress using records of actual time, materials and other costs incurred to date in the project compared to the total estimated project requirement. Estimates of total project requirements are based on prior experience of customization, delivery and acceptance of the same or similar technology and are reviewed and updated regularly by management. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contract. Normally there are no further obligations that would preclude the recognition of revenue.
The Company believes that the use of the percentage of completion method is appropriate for certain contracts as the Company has the ability to make reasonably dependable estimates of the extent of progress towards completion, contract revenues and contract costs. In addition, contracts executed include provisions that clearly specify the enforceable rights regarding services to be provided and received by the parties to the contracts, the consideration to be exchanged and the manner and the terms of settlement, including in cases of terminations for convenience. In all cases, the Company expects to perform its contractual obligations and its customers are expected to satisfy their obligations under the contract.
Revenues from products that do not require significant customization are recognized when persuasive evidence of an agreement exists, delivery has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable and collectability is probable.
Maintenance and support revenue included in multiple element arrangements is deferred and recognized on a straight-line basis over the term of the maintenance and support services. Revenues from training are recognized when it is performed. The Vendor Specific Objective Evidence (“VSOE”) of fair value of the maintenance, training and support services is determined based on the price charged when sold separately or when renewed.
i. Trade receivables
The Company records trade accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the trade accounts receivable balances and charged to the provision for doubtful accounts. The Company calculates this allowance based on its history of write-offs, the level of past-due accounts based on the contractual terms of the receivables, and its relationships with, and the economic status of, its customers. During the years ended December 31, 2016 and 2015, the Company made no provisions or had any recoveries of doubtful accounts and had no reserves at either year end. The Company believes its exposure to concentrations of credit risk is limited due to the nature of its operations.
Unbilled receivables include cost and gross profit earned in excess of billing.
Deferred revenues include unearned amounts received under maintenance and support services, customer prepayments and billing in excess of costs and estimated earnings on uncompleted contracts.
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 2:– SIGNIFICANT ACCOUNTING POLICIES (Cont.)
j. Warranty:
The Company typically offers a one to two year warranty for many of its products. The specific terms and conditions of those warranties vary depending upon the product sold and country in which the Company does business. The Company estimates the costs that may be incurred under its basic limited warranty, including parts and labor, and records deferred revenue in the amount of such costs at the time product revenue is recognized in the Training and Simulation Division. In the Power Systems Division, warranty costs are estimated, accrued and recorded on the balance sheet in deferred revenues. Factors that affect the Company’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its reserves and adjusts the amounts as necessary. (See Note 16.)
k. Research and development cost:
The Company capitalizes certain software development costs, subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon the completion of a working model or a detailed program design. Research and development costs incurred in the process of developing product improvements or new products are generally charged to expenses as incurred. Significant costs incurred by the Company between completion of the working model or a detailed program design and the point at which the product is ready for general release have been capitalized. Capitalized software costs will be amortized by the greater of the amount computed using: (i) the ratio that current gross revenues from sales of the software bears to the total of current and anticipated future gross revenues from sales of that software, or (ii) the straight-line method over the estimated useful life of the product (one to three years). The Company assesses the net realizable value of this intangible asset on a regular basis by determining whether the amortization of the asset over its remaining life can be recovered through undiscounted future operating cash flows from the specific software product sold. Based on its most recent analyses, management believes that no impairment of capitalized software development costs exists as of December 31, 2016.
In 2016 and 2015, the Training and Simulation Division capitalized approximately $364,000 and $538,000, respectively, in software development costs that will be amortized on a straight-line method over 2 years, the useful life of the software.
l. Income taxes:
The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liability account balances are determined based on tax credit carryforwards and differences between the financial reporting and the tax basis 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 provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.
The Company has adopted the provisions of the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASC 740-10, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. The Company must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. Uncertain tax positions require determinations and estimated liabilities to be made based on provisions of the tax law which may be subject to change or varying interpretation. If the Company’s determinations and estimates prove to be inaccurate, the resulting adjustments could be material to the Company’s future financial statements.
m. Concentrations of credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, restricted collateral deposits and trade receivables. Cash and cash equivalents are invested mainly in U.S. dollar deposits with major Israeli and U.S. banks. Such deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments.
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 2:– SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The trade receivables of the Company are mainly derived from sales to customers located primarily in the United States and Israel along with the countries listed in footnote 15.c. Management believes that credit risks are moderated by the diversity of its end customers and geographical sales areas. The Company performs ongoing credit evaluations of its customers’ financial condition.
The Company had no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign currency hedging arrangements as of December 31, 2016 and 2015.
n. Basic and diluted net income per share:
Basic net income per share is computed based on the weighted average number of shares of common stock and participating securities outstanding during each year. Diluted net income per share includes the dilutive effect of additional potential common stock issuable under our share-based compensation plans, using the “treasury stock” method. Unvested restricted stock issued to our employees and directors are “participating securities” and as such, are included, net of estimated forfeitures, in the total shares used to calculate the Company’s basic and diluted net income per share. In the event of a net loss, unvested restricted stock awards are excluded from the calculation of both basic and diluted net loss per share. The total weighted average number of shares related to the outstanding common stock equivalents excluded from the calculations of diluted net income per share were none, 602,740, and none for the years ended December 31, 2016, 2015, and 2014, respectively.
o. Accounting for stock-based compensation:
Stock-based awards to employees are recognized as compensation expense based on the calculated fair value on the date of grant. The costs are amortized over the straight line vesting period. The Company granted restricted stock and restricted stock units in 2016, 2015, and 2014. The Company typically uses a 5-10% forfeiture rate for restricted stock and restricted stock units and adjusts both forfeiture rates based on historical forfeitures. Each restricted stock unit is equal to one share of Company stock and is redeemable only for stock.
p. Fair value of financial instruments:
The following methods and assumptions were used by the Company in estimating their fair value disclosures for financial instruments using the required three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which may require the Company to develop its own assumptions.
The carrying amounts of cash and cash equivalents, restricted collateral deposits, trade and other receivables, short-term bank credit, and trade payables approximate their fair value due to the short-term maturity of such instruments (Level 1).
The fair values of long-term promissory notes are estimated by discounting the future cash flows using current interest rates for loans of similar terms and maturities. The carrying amount of the long-term debt and contractual severance approximates the estimated fair values at December 31, 2016, based upon the Company’s ability to acquire similar debt or fulfill similar obligations at similar maturities (Level 3).
q. Severance pay:
The Company’s liability for severance pay for its Israeli employees is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date. Israeli employees are entitled to one month’s salary for each year of employment, or a portion thereof. The Company’s liability for all of its Israeli employees is fully provided for by monthly deposits into severance pay funds held by insurance companies on behalf of the employees, insurance policies and by accrual. The fair value of these funds, which are considered Level 2 fair value measurements, is recorded as an asset in the Company’s consolidated balance sheet.
In addition, according to certain employment agreements, the Company is obligated to provide for a special severance pay in addition to amounts due to certain employees pursuant to Israeli severance pay law. During the years ended December 31, 2016, 2015 and 2014, the Company had made provisions of $1,022,000, $143,000, and $124,000, respectively, for this special severance pay.
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 2:– SIGNIFICANT ACCOUNTING POLICIES (Cont.)
As of December 31, 2016 and 2015 the unfunded severance pay in that regard amounted to $2,130,000 and $1,387,000, respectively.
Severance expenses from continuing operations for the years ended December 31, 2016, 2015, 2014, amounted to $1,389,000, $625,000, and $779,000, respectively.
In December 2016, the Company and its former Chief Executive Officer (“former Executive”) signed an agreement whereby the Company and the former Executive agreed to early termination of the former Executive’s employment agreement. The additional expense and accrual, included above, related to this termination, were approximately $925,000 and $2,050,000, respectively.
r. Advertising costs:
The Company records advertising costs as incurred. Advertising expense for the years ended December 31, 2016, 2015, and 2014 was approximately $72,000, $159,000, and $111,000, respectively.
s. New accounting pronouncements:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification (“ASC”) Topic 606. The new revenue recognition standard relates to revenue from contracts with customers, which, along with amendments issued in 2015 and 2016, will supersede nearly all current U.S. GAAP guidance on this topic and eliminate industry-specific guidance. The underlying principle is to use a five-step analysis of transactions to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The Company has formed a task force to review material contracts from our respective business segments. The task force is currently evaluating those contracts to determine the impact on the Company’s consolidated financial position or results of operations. The standard, as amended, will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. We expect to adopt the standard on a modified retrospective basis in 2018.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Upon adoption, the Company expects that the ROU asset and lease liability will be recognized in the balance sheets in amounts that will be material.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The new standard introduces targeted amendments intended to simplify the accounting for stock compensation. Among other things, the ASU requires all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement. The amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the impact of its pending adoption of the new standard on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15 (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments provide guidance on eight specific cash flow issues for which the current accounting framework does not provide specific guidance. The amendments are effective for annual periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of its pending adoption of the new standard on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new standard simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test and requires businesses to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The amendments are effective for annual periods beginning after December 15, 2019 with early adoption permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of its pending adoption of the new standard on its consolidated financial statements.
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 2:– SIGNIFICANT ACCOUNTING POLICIES (Cont.)
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. The amendments provide a more robust framework to use in determining when a set of assets and activities is a business. The amendments are effective for annual periods beginning after December 15, 2017 with a limited scope of early adoption. The Company is currently evaluating the impact of its pending adoption of the new standard on its consolidated financial statements.
u. Use of estimates:
The preparation of financial statements in conformity with U.S. GAAP requires 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.
v. Reclassification:
Prior period amounts are reclassified, when necessary, to conform to the current period presentation.
w. Business Combinations:
The Company recognizes the assets acquired and liabilities assumed in business combinations on the basis of their fair values at the date of acquisition. We assess the fair value of assets, including intangible assets, using a variety of methods and each asset is measured at fair value from the perspective of a market participant. The method used to estimate the fair values of intangible assets incorporates significant assumptions regarding the estimates a market participant would make in order to evaluate an asset, including a market participant’s use of the asset and the appropriate discount rates for a market participant. Assets recorded from the perspective of a market participant that are determined to not have economic use for us are expensed immediately. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. Transaction costs and restructuring costs associated with a business combination are expensed as incurred.
NOTE 3:– RESTRICTED COLLATERAL DEPOSITS
The following is a summary of restricted collateral deposits as of December 31, 2016 and 2015:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Deposits in connection with Epsilor/EFL projects
|
|
$
|
268,980
|
|
|
$
|
89,985
|
|
Total restricted collateral deposits
|
|
$
|
268,980
|
|
|
$
|
89,985
|
|
NOTE 4:– OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
The following is a summary of other accounts receivable and prepaid expenses as of December 31, 2016 and 2015:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Government authorities
|
|
$
|
877,670
|
|
|
$
|
307,339
|
|
Israeli statutory severance pay fund
|
|
|
455,172
|
|
|
|
–
|
|
Employees
|
|
|
60,296
|
|
|
|
65,990
|
|
Prepaid expenses
|
|
|
761,257
|
|
|
|
625,511
|
|
Other
|
|
|
2,501
|
|
|
|
8,518
|
|
Total
|
|
$
|
2,156,896
|
|
|
$
|
1,007,358
|
|
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 5:– INVENTORIES
The following is a summary of inventories as of December 31, 2016 and 2015:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw and packaging materials
|
|
$
|
8,512,006
|
|
|
$
|
8,184,476
|
|
Work in progress
|
|
|
917,582
|
|
|
|
760,585
|
|
Finished products
|
|
|
888,433
|
|
|
|
662,775
|
|
Total
|
|
$
|
10,318,021
|
|
|
$
|
9,607,836
|
|
NOTE 6:– PROPERTY AND EQUIPMENT, NET
a. Composition of property and equipment is as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cost:
|
|
|
|
|
|
|
Computers and related equipment
|
|
$
|
2,733,722
|
|
|
$
|
2,703,721
|
|
Motor vehicles
|
|
|
717,543
|
|
|
|
831,925
|
|
Office furniture and equipment
|
|
|
1,571,364
|
|
|
|
1,512,663
|
|
Machinery, equipment and installations
|
|
|
7,760,341
|
|
|
|
7,221,351
|
|
Buildings
|
|
|
1,716,924
|
|
|
|
1,603,374
|
|
Land
|
|
|
300,000
|
|
|
|
300,000
|
|
Leasehold improvements
|
|
|
2,172,253
|
|
|
|
1,982,552
|
|
Demo inventory
|
|
|
1,791,751
|
|
|
|
2,288,031
|
|
|
|
|
18,763,898
|
|
|
|
18,443,617
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
|
Computers and related equipment
|
|
|
2,415,842
|
|
|
|
2,222,724
|
|
Motor vehicles
|
|
|
248,248
|
|
|
|
298,881
|
|
Office furniture and equipment
|
|
|
1,356,671
|
|
|
|
1,237,923
|
|
Machinery, equipment and installations
|
|
|
5,805,540
|
|
|
|
5,257,976
|
|
Buildings
|
|
|
408,194
|
|
|
|
300,196
|
|
Leasehold improvements
|
|
|
1,219,113
|
|
|
|
1,012,810
|
|
Demo inventory
|
|
|
1,395,050
|
|
|
|
1,727,869
|
|
|
|
|
12,848,658
|
|
|
|
12,058,379
|
|
Property and equipment, net
|
|
$
|
5,915,240
|
|
|
$
|
6,385,238
|
|
b. Depreciation expense amounted to $1,752,084, $1,851,982, and $1,558,506 for the years ended December 31, 2016, 2015 and 2014, respectively.
NOTE 7:– GOODWILL AND OTHER INTANGIBLE ASSETS, NET
a. Goodwill
The Company allocates goodwill acquired in a business combination to the appropriate reporting unit as of the acquisition date. Currently, the Company’s reporting units are also its reportable segments and the associated goodwill was determined when the specific businesses in the reportable segments were purchased.
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 7:– GOODWILL AND OTHER INTANGIBLE ASSETS, NET (Cont.)
A summary of the goodwill by business segment is as follows:
|
|
December 31,
2015
|
|
|
Additions
|
|
|
Adjustments
(currency)
|
|
|
December 31,
2016
|
|
Training and Simulation Division
|
|
$
|
24,435,641
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
24,435,641
|
|
Power Systems Division
|
|
|
21,027,386
|
|
|
|
–
|
|
|
|
26,490
|
|
|
|
21,053,876
|
|
Total
|
|
$
|
45,463,027
|
|
|
$
|
–
|
|
|
$
|
26,490
|
|
|
$
|
45,489,517
|
|
The Company completed its annual goodwill impairment review using the financial results as of the quarter ended December 31, 2016, using its forecasted plan developed in the fourth quarter.
With respect to its Training and Simulation Division, the Company determined, using qualitative factors, that goodwill was not impaired.
For its Power Systems Division, the Company determined that it was necessary to perform a quantitative assessment of goodwill for the purpose of determining whether an impairment existed at December 31, 2016. When conducting this analysis, the Company engaged third party valuation experts with a detailed understanding of its Power Systems Division to perform a valuation of the Power Systems Division on a going concern basis. The Company also evaluated its historic financial performance in light of its planned financial performance over the period evaluated by its third party experts. Finally, the Company prepared a discounted cash flow analysis over a five year period so as to derive a reasonable view of the cash flows that the Power Systems Division are projected to generate from 2017-2021.
Key valuation assumptions – Power Systems Division
Inherent in a valuation of a firm is the reliance on key assumptions, including, but not limited to, the cash flows of the reporting unit, weighted average cost of capital (“WACC”), and terminal growth rates of the Company. In evaluating its key variables, the Company concluded that the WACC and terminal growth rates of the Power Systems Division were approximately 13% and 3%, respectively.
As part of its annual budget process and in light of the operating losses of the reporting unit in 2016, the Power Systems Division prepared its 2017 budget and provided a prospective view of their various businesses, including key products, new and existing markets and customers, production processes, and insight into the future growth of the business. To the extent that there is a significant economic downturn, a freeze in military spending, a loss of a major contract or customer, or a significant shift of pre-existing customer arrangements to future years, the Company may need to evaluate goodwill for impairment in between the annual measurement period if events and circumstances indicate that it is more likely than not the asset is impaired.
As a result of its quantitative analysis, in which the Company computed the fair value of the Power Systems Division, the Company concluded that the fair value of the reporting unit exceeded the reporting unit’s carrying value by approximately 37%. The Company will continue to monitor the actual results of the reporting unit against its plan and re-evaluate goodwill as required in between the annual measurement period if events and circumstances indicate that it is more likely than not the asset is impaired.
The Company also considered its current market capitalization compared to the sum of the estimated fair values of its reporting units in conjunction with each impairment assessment.
As of the December 31, 2016 valuation date, its market capitalization was approximately $92.5 million, which did not, in management’s view, suggest that the fair value estimates used in its impairment assessment required any adjustment.
As a result of these analyses, the Company concluded that the goodwill recorded in relation to the Power Systems Division was not impaired at December 31, 2016.
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 7:– GOODWILL AND OTHER INTANGIBLE ASSETS, NET (Cont.)
b. Other intangible assets:
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Original Useful life
|
|
Cost
|
|
|
Net book value
|
|
|
Cost
|
|
|
Net book value
|
|
Technology
|
4 - 8 years
|
|
$
|
9,988,000
|
|
|
$
|
1,617,000
|
|
|
$
|
9,988,000
|
|
|
$
|
2,377,250
|
|
Capitalized software costs
|
1 - 3 years
|
|
|
4,974,105
|
|
|
|
542,220
|
|
|
|
4,609,946
|
|
|
|
630,230
|
|
Trademarks
|
10 years
|
|
|
28,000
|
|
|
|
2,800
|
|
|
|
28,000
|
|
|
|
5,600
|
|
Backlog/customer relationship
|
1 - 10 years
|
|
|
2,844,000
|
|
|
|
8,826
|
|
|
|
2,844,000
|
|
|
|
38,650
|
|
Covenant not to compete
|
6 years
|
|
|
400,000
|
|
|
|
172,000
|
|
|
|
400,000
|
|
|
|
304,000
|
|
Customer list
|
2 - 10 years
|
|
|
14,173,645
|
|
|
|
3,681,500
|
|
|
|
14,173,645
|
|
|
|
5,180,000
|
|
|
|
|
|
32,407,750
|
|
|
$
|
6,024,346
|
|
|
|
32,043,591
|
|
|
$
|
8,535,730
|
|
Less - accumulated amortization
|
|
|
|
(26,383,404
|
)
|
|
|
|
|
|
|
(23,507,861
|
)
|
|
|
|
|
Amortized cost
|
|
|
|
6,024,346
|
|
|
|
|
|
|
|
8,535,730
|
|
|
|
|
|
Trademarks (indefinite lives)
|
|
|
|
799,000
|
|
|
|
|
|
|
|
799,000
|
|
|
|
|
|
Net book value
|
|
|
$
|
6,823,346
|
|
|
|
|
|
|
$
|
9,334,730
|
|
|
|
|
|
Amortization expense amounted to $2,875,543, $3,043,536, and $2,696,740 for the years ended December 31, 2016, 2015 and 2014, respectively, including amortization of capitalized software costs of $88,010, $255,000, and $378,000, respectively.
c. Estimated amortization expenses, using both straight line and accelerated amortization methods, for the years shown is as follows:
Year ending December 31,
|
|
2017
|
|
$
|
2,210,624
|
|
2018
|
|
|
1,415,221
|
|
2019
|
|
|
885,000
|
|
2020
|
|
|
574,500
|
|
2021
|
|
|
291,500
|
|
Thereafter
|
|
|
647,501
|
|
Total
|
|
$
|
6,024,346
|
|
Goodwill and other intangible assets are adjusted on a quarterly basis for any change due to currency fluctuations and any variation is included in the accumulated other comprehensive income on the consolidated balance sheets.
NOTE 8:– LOANS
On March 11, 2016, the Company entered into a Credit Facilities agreement (the “Chase Agreement”) with JPMorgan Chase Bank, N.A. (“Chase”), whereby Chase agreed to provide (i) a $15,000,000 revolving credit facility (“Revolver”), (ii) a $10,000,000 Term Loan (the “Term Loan”), and (iii) a $1,000,000 Mortgage Loan (the “Mortgage Loan” and, together with the Revolver and the Term Loan, the “Credit Facilities”) in respect of certain property located in Ann Arbor, Michigan.
The maturity of the Revolver is five years from the date of the Chase Agreement. The Revolver maintains an interest rate on a scale ranging from LIBOR plus 1.75% up to LIBOR plus 3.00%. The effective interest rate for the revolver at December 31, 2016 was 4.0%.
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 8:– LOANS (Cont.)
The maturity of the Term Loan is five years from the date of the Chase Agreement. The Term Loan maintains an interest rate on a scale ranging from LIBOR plus 2.0% up to LIBOR plus 3.25%. The repayment of the Term Loan will consist of 60 consecutive monthly payments of principal plus accrued interest based on annual principal reductions of 10% during the first year, 20% during the second through fourth years, and 30% during the fifth year. The Revolver and Term Loan are secured by the assets of the Company. The effective interest rate for the Term Loan at December 31, 2016 was 4.25%.
The maturity of the Mortgage Loan is five years from the date of the Chase Agreement and maintains an interest rate on a scale identical to the Term Loan. The monthly payments on the Mortgage Loan are $5,555 in principal plus accrued interest, with a balloon payment due at the end of month 60. The effective interest rate for the mortgage at December 31, 2016 was 4.25%.
The Credit Facilities maintain certain reporting requirements, conditions precedent, affirmative covenants and financial covenants. The financial covenants include that the Company must maintain both a Maximum Debt to EBITDA ratio of 3.00 to 1.00 and a Minimum Fixed Charge Coverage Ratio of 1.20 to 1.00. The company was in compliance with its covenants at December 31, 2016.
The Credit Facilities are secured by the Company’s assets and the assets of the Company’s domestic subsidiaries.
Minimum loan payments for the Term and Mortgage Loans are as follows:
Minimum loan payments
|
|
December 31,
|
|
2017
|
|
$
|
1,828,840
|
|
2018
|
|
|
2,151,040
|
|
2019
|
|
|
2,115,583
|
|
2020
|
|
|
2,747,460
|
|
2021
|
|
|
1,056,284
|
|
Thereafter
|
|
|
633,369
|
|
Total
|
|
$
|
10,532,576
|
|
NOTE 9:– OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following is a summary of other accounts payable and accrued expenses as of December 31, 2016 and 2015:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Employees and payroll accruals
|
|
$
|
3,068,035
|
|
|
$
|
3,310,170
|
|
Accrued vacation pay
|
|
|
958,160
|
|
|
|
1,073,348
|
|
Accrued expenses
|
|
|
808,284
|
|
|
|
829,240
|
|
Government authorities
|
|
|
763,079
|
|
|
|
347,282
|
|
Total
|
|
$
|
5,597,558
|
|
|
$
|
5,560,040
|
|
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 10:– COMMITMENTS AND CONTINGENT LIABILITIES
a. Royalty commitments:
Under Epsilor-EFL’s research and development agreements with the Office of the Chief Scientist (“OCS”), and pursuant to applicable laws, Epsilor-EFL is required to pay royalties at the rate of 3%-3.5% of net sales of products developed with funds provided by the OCS, up to an amount equal to 100% of research and development grants received from the OCS. Amounts due in respect of projects approved after 1999 also bear interest at the LIBOR rate. Epsilor-EFL is obligated to pay royalties only on sales of products in respect of which OCS participated in their development. Should the project fail, Epsilor-EFL will not be obligated to pay any royalties or refund the grants. During 2016, 2015 and 2014, Epsilor-EFL received grants in the total amount of $612,249, $322,820, and $177,918, respectively.
No royalties were expensed for 2016, 2015 and 2014, respectively.
b. Lease commitments:
The Company rents its facilities under various operating lease agreements, which expire on various dates through 2019. The minimum rental payments under non-cancelable operating leases are as follows:
December 31
|
|
Minimum rental payments
|
|
2017
|
|
$
|
1,060,954
|
|
2018
|
|
|
648,202
|
|
2019
|
|
|
382,296
|
|
2020
|
|
|
–
|
|
2021
|
|
|
–
|
|
Thereafter
|
|
|
–
|
|
Total
|
|
$
|
2,091,452
|
|
Total rent expense for the years ended December 31, 2016, 2015, and 2014 were $1,418,136, $1,404,183 and $1,366,192, respectively.
c. Guarantees:
The Company obtained bank guarantees in the amount of $649,260 in connection with (i) obligations of one of the Company’s subsidiaries to the Israeli customs authorities, and (ii) the obligation of one of the Company’s subsidiaries to secure the return of products loaned to the Company from one of its customers.
d. Liens:
As security for compliance with the terms related to the investment grants from the State of Israel, Epsilor-EFL has registered floating liens (that is, liens that apply not only to assets owned at the time but also to after-acquired assets) on all of its assets, in favor of the State of Israel.
The Company does not have any credit liens collateralized by the assets of the Company and guaranteed by the Company.
Epsilor-EFL has recorded a lien on all of its assets in favor of its banks to secure overdraft protection. In addition Epsilor-EFL has a specific pledge on assets in respect of which government guaranteed loans were given.
e. Litigation and other claims:
As of the date of this filing, there were no material pending legal proceedings against the Company.
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 11:– COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Billings in excess of costs generated under the percentage-of-completion method are recorded as deferred revenues until the revenue recognition criteria are met. Deferred revenues include unearned amounts received under maintenance and support services and customer deposits of $0 and $251,925 for 2016 and 2015, respectively, and billings in excess of costs and estimated earnings on uncompleted contracts.
The following is a summary of the costs and estimated earnings on contracts as of December 31, 2016 and 2015. Open contracts are expected to be completed in the following year. The billings in excess of costs are included in the deferred revenues line on the balance sheet:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Costs incurred on contracts
|
|
$
|
153,324,167
|
|
|
$
|
158,113,695
|
|
Estimated earnings
|
|
|
20,754,754
|
|
|
|
26,759,019
|
|
|
|
|
174,078,921
|
|
|
|
184,872,714
|
|
Less billings to date
|
|
|
(166,017,018
|
)
|
|
|
(175,971,136
|
)
|
Total
|
|
$
|
8,061,903
|
|
|
$
|
8,901,578
|
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings
|
|
$
|
10,981,577
|
|
|
$
|
12,132,484
|
|
Billings in excess of costs and estimated earnings (included in deferred revenues)
|
|
|
(2,919,674
|
)
|
|
|
(3,230,906
|
)
|
Total
|
|
$
|
8,061,903
|
|
|
$
|
8,901,578
|
|
NOTE 12:– STOCK-BASED COMPENSATION
a. Stockholders’ rights:
The Company’s shares confer upon the holders the right to receive notice to participate and vote in the general meetings of the Company and right to receive dividends, if and when declared.
b. The Company has adopted the following stock award plans, whereby options may be granted for purchase of shares of the Company’s common stock and where restricted shares and restricted stock units may be granted if approved by the Board of Directors. Each restricted stock unit is equal to one share of Company stock and is redeemable only for stock. Under the terms of the award plans, the Board of Directors or the designated committee grants options, restricted stock and restricted stock units. The Board of Directors or the designated committee also determines the vesting period and the exercise terms.
1. 2007 Non-Employee Director Equity Compensation Plan – 750,000 shares reserved for issuance, of which 162,987 were available for future grants to outside directors as of December 31, 2016.
2. 2009 Equity Incentive Plan – 5,000,000 shares reserved for issuance, of which 2,589,269 were available for future grants to employees and consultants as of December 31, 2016.
3. Under these plans, restricted shares and restricted stock units generally vest after one to three years or pursuant to defined performance criteria; in the event that employment is terminated within that period, unvested restricted shares and restricted stock units generally revert back to the Company.
4. Stock compensation expense is recorded ratably over the vesting period of the option or the restriction period of the restricted shares and restricted stock units. The stock compensation expense that has been charged in the consolidated statements of comprehensive income in respect of restricted shares and restricted stock units to employees and directors in 2016, 2015, and 2014 was $878,000, $622,000, and $1,412,000, respectively.
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 12:– STOCKHOLDERS’ EQUITY (Cont.)
5. A summary of the status of the Company’s restricted shares and restricted stock units granted as of December 31, 2016 and 2015, and changes during the years ended on those dates, is presented below:
Restricted Shares and Restricted Stock Units
:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Shares
|
|
|
Weighted
average fair value at grant date
|
|
|
Shares
|
|
|
Weighted
average fair value at grant date
|
|
|
Shares
|
|
|
Weighted
average fair value at grant date
|
|
Non-vested at the beginning of the year
|
|
|
516,952
|
|
|
$
|
2.94
|
|
|
|
920,678
|
|
|
$
|
2.99
|
|
|
|
584,746
|
|
|
$
|
2.52
|
|
Changes during year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
|
310,735
|
|
|
$
|
2.39
|
|
|
|
57,028
|
|
|
$
|
2.89
|
|
|
|
341,861
|
|
|
$
|
2.60
|
|
Restricted units granted
|
|
|
150,500
|
|
|
$
|
2.31
|
|
|
|
–
|
|
|
$
|
–
|
|
|
|
163,175
|
|
|
$
|
2.48
|
|
Vested
|
|
|
(220,630
|
)
|
|
$
|
2.86
|
|
|
|
(451,122
|
)
|
|
$
|
3.15
|
|
|
|
(166,110
|
)
|
|
$
|
2.23
|
|
Forfeited
|
|
|
(275,259
|
)
|
|
$
|
2.96
|
|
|
|
(9,632
|
)
|
|
$
|
2.38
|
|
|
|
(2,994
|
)
|
|
$
|
3.65
|
|
Non-vested at the end of the year
|
|
|
482,298
|
|
|
$
|
2.41
|
|
|
|
516,952
|
|
|
$
|
2.94
|
|
|
|
920,678
|
|
|
$
|
2.99
|
|
Restricted shares vested at end of year
|
|
|
3,626,580
|
|
|
$
|
1.86
|
|
|
|
3,405,960
|
|
|
$
|
2.22
|
|
|
|
2,954,838
|
|
|
$
|
2.07
|
|
6. The remaining total compensation cost related to non-vested restricted share and restricted stock unit awards not yet recognized (before applying a forfeiture rate) in the income statement as of December 31, 2016 was $188,000. The weighted average period over which this compensation cost is expected to be recognized is approximately one and a half years.
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 13:– INCOME TAXES
a. General:
As of December 31, 2016, Arotech has net operating loss (“NOL”) carryforwards for U.S. federal income tax purposes of $46.9 million, which are available to offset future taxable income, if any, expiring in 2021 through 2037. Utilization of U.S. net operating losses is subject to substantial annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.
At December 31, 2016, the Company had net deferred tax assets before valuation allowance of $43.0 million. The deferred tax assets are primarily composed of federal, state and foreign tax NOL carryforwards. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation allowance has been established to offset its net deferred tax asset. Additionally, the future utilization of the Company’s NOL carryforwards to offset future taxable income is subject to a substantial annual limitation as a result of IRC Section 382 changes that have occurred. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance.
The Company has indefinite-lived intangible assets consisting of trademarks and goodwill. These intangible assets are not amortized for financial reporting purposes. However, these assets are tax deductible, and therefore amortized over 15 years for tax purposes. As such, deferred income tax expense and a deferred tax liability arise as a result of the tax-deductibility of these assets. The resulting deferred tax liability, which is expected to continue to increase over time, will have an indefinite life, resulting in what is referred to as a “naked tax credit.” This deferred tax liability could remain on the Company’s balance sheet permanently unless there is an impairment of the related assets (for financial reporting purposes), or the business to which those assets relate were to be disposed of. Due to the fact that the aforementioned deferred tax liability could have an indefinite life, it is not netted against the Company’s deferred tax assets when determining the required valuation allowance. Doing so would result in the understatement of the valuation allowance and related deferred income tax expense.
The Company has also evaluated its income tax positions under FASB ASC 740-10 as of December 31, 2016 and the Company believes that it has no material uncertain tax positions and therefore has no uncertain tax position reserves and does not expect to provide for any such reserves. The Company does not believe that the unrecognized tax benefits will change within 12 months of this reporting date. It is the Company’s policy that any assessed penalties and interest on uncertain tax positions would be charged to income tax expense.
The Company does not provide for U.S. federal income taxes on the undistributed earnings of its foreign subsidiaries because such earnings, if any, are re-invested and, in the opinion of management, will continue to be re-invested indefinitely.
The Company files income tax returns, including returns for its subsidiaries, with federal, state, local and foreign jurisdictions. The Company is currently under examination by the IRS for 2014. The Company is no longer subject to IRS examination for periods prior to 2013 although carryforward losses that were generated prior to 2013 may still be adjusted by the IRS if they are used in a future period. Additionally, the Company is no longer subject to examination in Israel for periods prior to 2014.
The Company files consolidated tax returns for its U.S. entities.
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 13:– INCOME TAXES (Cont.)
b. Israeli subsidiary (Epsilor-EFL):
Epsilor-EFL’s tax rate was 25% for 2016 and 26.5% for 2015 and 2014, respectively. In addition, dividends paid from the profits of Epsilor-EFL are subject to tax at the rate of 15% in the hands of their recipient. Management has indicated that it has no intention of declaring a dividend.
The Israeli government has established certain development zones so as to incentivize business development and export activities. Companies that reside in this zone and meet certain criteria are subject to a favorable tax rates. Epsilor-EFL is located in an approved development zone, however, currently does not meet the criteria established by the government to obtain the tax incentives.
As of December 31, 2016, the Company has tax loss carryforwards, generated by the predecessor of Epsilor-EFL, of $82.1 million, which is available indefinitely to offset future taxable income. Due to the 2009 merger of EFL-Epsilor, the utilization of the tax loss carryforward is subject to annual limitations.
c. Consolidated deferred income taxes:
Deferred income taxes reflect tax credit carryforwards and the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
U.S. operating loss carryforward
|
|
$
|
16,869,205
|
|
|
$
|
14,814,390
|
|
Foreign operating loss carryforward
|
|
|
19,696,756
|
|
|
|
20,228,547
|
|
Total operating loss carryforward
|
|
|
36,565,961
|
|
|
|
35,042,937
|
|
|
|
|
|
|
|
|
|
|
Temporary differences:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
2,417,056
|
|
|
|
2,417,056
|
|
Warranty reserves
|
|
|
1,263,499
|
|
|
|
1,394,672
|
|
Foreign temporary differences
|
|
|
1,112,113
|
|
|
|
735,948
|
|
All other temporary differences
|
|
|
1,704,555
|
|
|
|
2,327,485
|
|
Total temporary differences
|
|
|
6,497,223
|
|
|
|
6,875,161
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset before valuation allowance
|
|
|
43,063,184
|
|
|
|
41,918,098
|
|
Valuation allowance
|
|
|
(43,063,184
|
)
|
|
|
(41,918,098
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability – intangible assets
|
|
$
|
7,868,123
|
|
|
$
|
7,031,564
|
|
The Company provided valuation allowances for the deferred tax assets resulting from tax loss carryforwards and other temporary differences. At present, management currently believes that it is more likely than not that the deferred tax assets related to the operating loss carryforwards and other temporary differences will not be realized.
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 13:– INCOME TAXES (Cont.)
d. Income from continuing operations before taxes on income are as follows:
|
|
Year ended December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Domestic
|
|
$
|
(2,133,486
|
)
|
|
$
|
(3,071,694
|
)
|
|
$
|
4,455,370
|
|
Foreign
|
|
|
1,437,332
|
|
|
|
2,181,671
|
|
|
|
451,649
|
|
|
|
$
|
(696,154
|
)
|
|
$
|
(890,023
|
)
|
|
$
|
4,907,019
|
|
e. Taxes on income were comprised of the following:
|
|
Year ended December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current federal taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
183,758
|
|
Current state and local taxes
|
|
|
(24,634
|
)
|
|
|
246,403
|
|
|
|
316,444
|
|
Deferred taxes
|
|
|
836,561
|
|
|
|
914,543
|
|
|
|
598,500
|
|
Taxes in respect of prior years
|
|
|
(28,507
|
)
|
|
|
–
|
|
|
|
(74,865
|
)
|
Expense
|
|
$
|
783,420
|
|
|
$
|
1,160,946
|
|
|
$
|
1,023,837
|
|
f. A reconciliation between the theoretical tax expense, assuming all income is taxed at the U.S. federal statutory tax rate applicable to income of the Company and the actual tax expense as reported in the Statements of Comprehensive Income is as follows:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Income (loss) from continuing operations before taxes
|
|
$
|
(696,154
|
)
|
|
$
|
(890,023
|
)
|
|
$
|
4,907,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory tax rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
Theoretical income tax on the above amount at the U.S. statutory tax rate
|
|
$
|
(236,692
|
)
|
|
$
|
(302,608
|
)
|
|
$
|
1,668,386
|
|
Deferred taxes for which valuation allowance was provided
|
|
|
589,912
|
|
|
|
1,413,567
|
|
|
|
(969,983
|
)
|
Non-deductible expenses
|
|
|
22,746
|
|
|
|
31,841
|
|
|
|
66,720
|
|
State taxes, net of federal benefit
|
|
|
(16,258
|
)
|
|
|
181,771
|
|
|
|
269,508
|
|
Foreign income in tax rates other than U.S. rate
|
|
|
452,219
|
|
|
|
(163,625
|
)
|
|
|
(119,687
|
)
|
Taxes in respect of prior years
|
|
|
(28,507
|
)
|
|
|
–
|
|
|
|
(74,865
|
)
|
Alternative minimum tax for which valuation allowance was not provided
|
|
|
–
|
|
|
|
–
|
|
|
|
183,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual tax expense
|
|
$
|
783,420
|
|
|
$
|
1,160,946
|
|
|
$
|
1,023,837
|
|
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 14:– SELECTED STATEMENTS OF COMPREHENSIVE INCOME
DATA
Financial income (expense), net:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Financial expenses:
|
|
|
|
|
|
|
|
|
|
Interest, bank charges and fees
|
|
$
|
(927,390
|
)
|
|
$
|
(1,202,224
|
)
|
|
$
|
(1,333,895
|
)
|
Foreign currency transaction differences, net
|
|
|
(47,873
|
)
|
|
|
–
|
|
|
|
(173,594
|
)
|
Total financial expenses
|
|
|
(975,263
|
)
|
|
|
(1,202,224
|
)
|
|
|
(1,507,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency transaction differences, net
|
|
|
–
|
|
|
|
50,103
|
|
|
|
–
|
|
Total financial income
|
|
|
–
|
|
|
|
50,103
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expense, net
|
|
$
|
(975,263
|
)
|
|
$
|
(1,152,121
|
)
|
|
$
|
(1,507,489
|
)
|
NOTE 15:– SEGMENT INFORMATION
a. General:
The Company operates in two continuing business segments (see Note 1.a. for a brief description of the Company’s business).
The Company’s reportable segments have been determined in accordance with the Company’s internal management structure, which is organized based on operating activities. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on two primary factors: the segment’s operating income and the segment’s contribution to the Company’s future strategic growth.
b. The following is information about reportable segment gains, losses and assets and are presented after the elimination of intra-segment revenues and expenses:
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 15:– SEGMENT INFORMATION (Cont.)
|
|
Training and
Simulation
Division
|
|
|
Power Systems
Division
|
|
|
Corporate
|
|
|
Total
Company
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from outside customers
|
|
$
|
46,358,794
|
|
|
$
|
46,616,958
|
|
|
$
|
–
|
|
|
$
|
92,975,752
|
|
Depreciation and amortization expenses (1)
|
|
|
(1,113,001
|
)
|
|
|
(3,531,851
|
)
|
|
|
(19,732
|
)
|
|
|
(4,664,584
|
)
|
Direct expenses (2)
|
|
|
(37,637,110
|
)
|
|
|
(43,682,708
|
)
|
|
|
(6,712,241
|
)
|
|
|
(88,032,059
|
)
|
Segment income (loss)
|
|
|
7,608,683
|
|
|
|
(597,601
|
)
|
|
|
(6,731,973
|
)
|
|
|
279,109
|
|
Financial expense
|
|
|
(41,397
|
)
|
|
|
(87,371
|
)
|
|
|
(846,495
|
)
|
|
|
(975,263
|
)
|
Income tax (expense) benefit
|
|
|
24,634
|
|
|
|
28,507
|
|
|
|
(836,561
|
)
|
|
|
(783,420
|
)
|
Net income (loss)
|
|
$
|
7,591,920
|
|
|
$
|
(656,465
|
)
|
|
$
|
(8,415,029
|
)
|
|
$
|
(1,479,574
|
)
|
Segment assets (4)
|
|
$
|
43,740,316
|
|
|
$
|
58,955,828
|
|
|
$
|
6,444,053
|
|
|
$
|
109,140,197
|
|
Additions to long-lived assets
|
|
$
|
586,068
|
|
|
$
|
1,081,815
|
|
|
$
|
–
|
|
|
$
|
1,667,883
|
|
|
|
Training and
Simulation
Division
|
|
|
Power Systems
Division
|
|
|
Corporate
|
|
|
Total
Company
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from outside customers
|
|
$
|
54,617,611
|
|
|
$
|
41,956,336
|
|
|
$
|
–
|
|
|
$
|
96,573,947
|
|
Depreciation and amortization expenses (1)
|
|
|
(912,930
|
)
|
|
|
(3,957,368
|
)
|
|
|
(25,220
|
)
|
|
|
(4,895,518
|
)
|
Direct expenses (2)
|
|
|
(44,711,979
|
)
|
|
|
(41,863,776
|
)
|
|
|
(4,840,578
|
)
|
|
|
(91,416,331
|
)
|
Segment income (loss)
|
|
|
8,992,702
|
|
|
|
(3,864,808
|
)
|
|
|
(4,865,798
|
)
|
|
|
262,098
|
|
Financial expense
|
|
|
(59,791
|
)
|
|
|
21,432
|
|
|
|
(1,113,762
|
)
|
|
|
(1,152,121
|
)
|
Income tax expense
|
|
|
(233,106
|
)
|
|
|
–
|
|
|
|
(927,840
|
)
|
|
|
(1,160,946
|
)
|
Net income (loss)
|
|
$
|
8,699,805
|
|
|
$
|
(3,843,376
|
)
|
|
$
|
(6,907,400
|
)
|
|
$
|
(2,050,969
|
)
|
Segment assets
|
|
$
|
57,433,489
|
|
|
$
|
59,498,304
|
|
|
$
|
492,922
|
|
|
$
|
117,424,715
|
|
Additions to long-lived assets
|
|
$
|
1,139,074
|
|
|
$
|
1,374,354
|
|
|
$
|
4,501
|
|
|
$
|
2,540,005
|
|
2014
|
|
Training and
Simulation
Division
|
|
|
Power Systems
Division
|
|
|
Corporate
|
|
|
Total
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from outside customers
|
|
$
|
56,404,498
|
|
|
$
|
47,157,851
|
|
|
$
|
–
|
|
|
$
|
103,562,349
|
|
Depreciation and amortization expenses (1)
|
|
|
(756,939
|
)
|
|
|
(3,477,855
|
)
|
|
|
(20,452
|
)
|
|
|
(4,255,246
|
)
|
Direct expenses (2)
|
|
|
(45,313,956
|
)
|
|
|
(40,704,521
|
)
|
|
|
(6,874,118
|
)
|
|
|
(92,892,595
|
)
|
Segment income (loss)
|
|
|
10,333,603
|
|
|
|
2,975,475
|
|
|
|
(6,894,570
|
)
|
|
|
6,414,508
|
|
Financial expense
|
|
|
(50,975
|
)
|
|
|
(203,902
|
)
|
|
|
(1,252,612
|
)
|
|
|
(1,507,489
|
)
|
Income tax benefit (expense)
|
|
|
(133,692
|
)
|
|
|
61,777
|
|
|
|
(951,922
|
)
|
|
|
(1,023,837
|
)
|
Net income (loss)
|
|
$
|
10,148,936
|
|
|
$
|
2,833,350
|
|
|
$
|
(9,099,104
|
)
|
|
$
|
3,883,182
|
|
Segment assets
|
|
$
|
58,090,953
|
|
|
$
|
65,781,686
|
|
|
$
|
866,708
|
|
|
$
|
124,739,347
|
|
Additions to long-lived assets (3)
|
|
$
|
1,533,371
|
|
|
$
|
29,159,805
|
|
|
$
|
13,344
|
|
|
$
|
30,706,520
|
|
(1) Includes depreciation of property and equipment and amortization expenses of intangible assets.
(2) Including,
inter alia
, sales and marketing, general and administrative, research and development and other income.
(3) Includes intangible assets associated with the acquisition of UEC.
(4)
Cash balances previously reported in the Training and Simulation Division in 2015 are reported in Corporate in 2016.
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 15:– SEGMENT INFORMATION (Cont.)
c. Summary information about geographic areas:
The following discloses total revenues according to the locations of the Company’s end customers and long-lived assets as of and for the years ended December 31, 2016, 2015, and 2014:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Total
revenues
|
|
|
Long-lived
Assets
|
|
|
Total
revenues
|
|
|
Long-lived
Assets
|
|
|
Total
revenues
|
|
|
Long-lived
assets
|
|
U.S.A.
|
|
$
|
72,645,752
|
|
|
$
|
49,883,172
|
|
|
$
|
77,715,872
|
|
|
$
|
52,938,660
|
|
|
$
|
83,739,406
|
|
|
$
|
55,970,370
|
|
Israel
|
|
|
13,944,078
|
|
|
|
8,308,931
|
|
|
|
14,114,688
|
|
|
|
8,299,367
|
|
|
|
11,428,427
|
|
|
|
7,755,163
|
|
Canada
|
|
|
2,435,134
|
|
|
|
–
|
|
|
|
587,516
|
|
|
|
–
|
|
|
|
651,846
|
|
|
|
–
|
|
Taiwan
|
|
|
690,080
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Mexico
|
|
|
590,919
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,300
|
|
|
|
–
|
|
India
|
|
|
228,449
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
14,865
|
|
|
|
–
|
|
Japan
|
|
|
182,996
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Germany
|
|
|
115,509
|
|
|
|
–
|
|
|
|
1,076,872
|
|
|
|
–
|
|
|
|
1,117,094
|
|
|
|
–
|
|
Australia
|
|
|
75,513
|
|
|
|
–
|
|
|
|
109,041
|
|
|
|
–
|
|
|
|
459,153
|
|
|
|
–
|
|
Korea
|
|
|
–
|
|
|
|
–
|
|
|
|
875,593
|
|
|
|
–
|
|
|
|
1,994,634
|
|
|
|
–
|
|
Saudi Arabia
|
|
|
–
|
|
|
|
–
|
|
|
|
548,837
|
|
|
|
–
|
|
|
|
2,469,988
|
|
|
|
–
|
|
China
|
|
|
–
|
|
|
|
–
|
|
|
|
154,803
|
|
|
|
–
|
|
|
|
305,800
|
|
|
|
–
|
|
U.A.E.
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
518,634
|
|
|
|
–
|
|
Hong Kong
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
48,331
|
|
|
|
–
|
|
Other
|
|
|
2,067,322
|
|
|
|
–
|
|
|
|
1,390,725
|
|
|
|
–
|
|
|
|
811,871
|
|
|
|
–
|
|
|
|
$
|
92,975,752
|
|
|
$
|
58,192,103
|
|
|
$
|
96,573,947
|
|
|
$
|
61,238,027
|
|
|
$
|
103,562,349
|
|
|
$
|
63,725,533
|
|
d. Revenues from major customers (as a percentage of consolidated revenues):
Other than for sales to various branches of the United States Military, which accounted for 41%, 48%, and 56% of consolidated continuing revenues for 2016, 2015 and 2014, respectively, no single customer accounted for more than 10% of revenues for any of the three years presented.
e. Revenues from major products:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Simulators
|
|
$
|
46,358,794
|
|
|
$
|
54,617,611
|
|
|
$
|
56,404,498
|
|
Batteries and charging systems
|
|
|
42,574,102
|
|
|
|
37,331,372
|
|
|
|
42,930,497
|
|
Water activated batteries
|
|
|
4,042,856
|
|
|
|
4,624,964
|
|
|
|
4,227,354
|
|
Total
|
|
$
|
92,975,752
|
|
|
$
|
96,573,947
|
|
|
$
|
103,562,349
|
|
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 16:– WARRANTY
The following is a summary of the deferred warranty revenue in the Simulation Division included in total deferred revenue as of December 31, 2016 and 2015:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of period
|
|
$
|
3,358,866
|
|
|
$
|
4,300,602
|
|
Deferred revenue
|
|
|
3,344,498
|
|
|
|
4,323,821
|
|
Revenue recognized
|
|
|
(4,000,749
|
)
|
|
|
(5,265,557
|
)
|
Balance at end of period
|
|
$
|
2,702,615
|
|
|
$
|
3,358,866
|
|
The following is a summary of the warranty liability in the Power Systems Division that is also included in deferred revenue as of December 31, 2016 and 2015:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of period
|
|
$
|
380,904
|
|
|
$
|
386,202
|
|
New reserves
|
|
|
136,668
|
|
|
|
187,969
|
|
Costs incurred
|
|
|
(315,143
|
)
|
|
|
(193,267
|
)
|
Balance at end of period
|
|
$
|
202,429
|
|
|
$
|
380,904
|
|
NOTE 17:– ACQUISITION OF UEC ELECTRONICS, LLC
In April 2014, the Company entered into a stock purchase agreement pursuant to the terms of which the Company purchased all of the outstanding membership interests of UEC Electronics, LLC (“UEC”) from the seller of UEC, a company owned by UEC’s two top managers (the “Acquisition”) for total consideration of $36.7 million. The Acquisition provided an expanded Power Systems Division footprint for the Company.
The Acquisition was accounted for under the acquisition method accounting. Accordingly, all assets and liabilities acquired, were recorded at their estimated fair market values as of the date of acquisition. Goodwill of $15.1 million was recorded as the purchase premium after adjusting for the fair value of net assets acquired and represents the accretive and synergistic value of the acquisition to the Company.
The revenue and net income of UEC from the date of acquisition through December 31, 2014 was $27,193,926 and $2,544,315, respectively. Acquisition related expenses of approximately $813,000 were recognized as general and administrative expenses in the year ended December 31, 2014.
Pro forma revenue and net income for the year ended December 31, 2014 for the Company was $116,113,345 and $7,026,327, respectively. Pro forma results presented reflect: (1) amortization relating to fair value estimates of intangible assets; (2) elimination of UEC expenses that were not part of the transaction; and (3) incremental interest expense on new long term debt incurred in connection with the transaction as though the transaction occurred as of January 1, 2013.
AROTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
NOTE 18:– QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
(in thousands, except per share data)
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Fiscal year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
25,406
|
|
|
$
|
21,780
|
|
|
$
|
24,301
|
|
|
$
|
21,489
|
|
Gross profit
|
|
|
7,694
|
|
|
|
6,995
|
|
|
|
7,864
|
|
|
|
5,597
|
|
Net (loss) income
|
|
|
(382
|
)
|
|
|
(569
|
)
|
|
|
1,505
|
|
|
|
(2,034
|
)
|
Basic net income/(loss) per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income/(loss) per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
Fiscal year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
24,227
|
|
|
$
|
21,644
|
|
|
$
|
23,289
|
|
|
$
|
27,414
|
|
Gross profit
|
|
|
6,897
|
|
|
|
6,223
|
|
|
|
7,035
|
|
|
|
7,963
|
|
Net (loss) income
|
|
|
(483
|
)
|
|
|
(2,243
|
)
|
|
|
(618
|
)
|
|
|
399
|
|
Basic net income/(loss) per common share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income/(loss) per common share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.02
|
|
F-33