Proxy Statement - Merger or Acquistion (preliminary) (prem14a)

PROPOSAL 1—THE MERGER

This discussion of the merger is qualified in its entirety by reference to the merger agreement, which is attached as Annex A to this proxy statement. You should read the entire merger agreement carefully as it is the legal document that governs the merger.

Background of the Merger

The following chronology summarizes certain meetings and other events between representatives of Arotech and representatives of Greenbriar, during the period preceding the signing of the merger agreement. The following chronology does not purport to catalogue every conversation among Greenbriar, Arotech, and their respective representatives.

In the ordinary course of its business, our board, with the assistance of our senior management and our advisors, regularly reviews the near-term and long-term strategy, performance, positioning, and operating prospects of Arotech with a view toward enhancing stockholder value. These reviews have included, from time to time, discussions as to whether the continued execution of Arotech’s strategy as a public company, a possible business combination with a third party or a possible sale of Arotech to a third party, offered the best opportunity to enhance stockholder value, as well as a review of the potential benefits and risks associated with each such course of action.

During 2017, with the assistance of a financial advisor (not B. Riley), we engaged in a process to explore strategic alternatives. The process did not lead to any transactions and the engagement of the financial advisor was terminated in March 2018.

In May 2019, at a regularly scheduled meeting, our board discussed our potential cash flow difficulties and discussed various potential options, including seeking private equity and investment banking assistance. At that meeting, Jon B. Kutler, the chairman of our board, informed the board that he is a passive investor (with a less than one percent interest), in certain private equity funds controlled by Greenbriar. Mr. Kutler suggested that he could make an introduction to Greenbriar to discuss Arotech’s interest in exploring a minority financial investment to support a strategic acquisition by Arotech, or a buyer for our company. The board confirmed that Mr. Kutler should reach out to Greenbriar to assess Greenbriar’s interest in a potential transaction with us. Following that meeting, Mr. Kutler, as directed by the board, discussed with a managing partner at Greenbriar, Arotech’s potential interest in exploring a minority financial investment to support a strategic acquisition by Arotech, or a buyer for our company. Mr. Kutler received feedback that Greenbriar was not interested in a minority investment, but was interested in learning more about our company to consider an acquisition.

In mid May 2019, we entered a customary non-disclosure agreement (the “NDA”) with a term of one year with Greenbriar that included a customary standstill in favor of us. The NDA did not contain a “don’t ask, don’t waive” provision.

Although Mr. Kutler’s financial position in the Greenbriar fund was approximately 0.6%, out of an abundance of caution, Mr. Kutler recused himself from further discussions with Greenbriar and asked Larry Hagenbuch, an independent member of our board, to continue discussions with Greenbriar. On May 30, 2019, Mr. Hagenbuch, had a telephonic meeting with representatives of Greenbriar. The Greenbriar representatives expressed interest in learning more about Arotech and told Mr. Hagenbuch that Greenbriar would be interested in a meeting with our management team.

On June 11, 2019, members of our management team held an introductory meeting and discussed certain business diligence items with representatives of Greenbriar and one of Greenbriar’s consultants with specific knowledge and expertise in our industry.

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On June 24, 2019, a representative of Greenbriar spoke with Mr. Hagenbuch and informed him that Greenbriar would not be pursuing a transaction with us at that time, but noted that Greenbriar would continue to follow us and industry trends. Greenbriar followed this conversation with an email to Arotech’s management informing them of the same.

On July 15, 2019, a representative of Greenbriar called Mr. Hagenbuch and informed him that Greenbriar had completed a revised analysis and investment hypothesis regarding Arotech, and was interested in reopening discussions about a potential transaction with Arotech. On July 16, 2019, a Greenbriar representative requested additional information about Arotech and requested a call with members of our management team to discuss certain business diligence items. On July 19, 2019, Mr. Hagenbuch, Dean Krutty, our President and Chief Executive Officer, and Kelli Kellar, our Chief Financial Officer, held the requested business diligence call with representatives of Greenbriar. After the call, Mr. Hagenbuch provided an email update to the board about the call.

On July 22, 2019, Mr. Krutty and our board held a regularly scheduled business update related to Arotech’s operations. After the regular business update, although the board understood that Mr. Kutler was a passive investor in certain funds controlled by Greenbriar, Mr. Kutler proposed, and the board agreed, that Mr. Kutler would recuse himself for the remaining portion of the meeting. Mr. Hagenbuch then provided the board with an update regarding the status of conversations with Greenbriar.

On July 23, 2019, a Greenbriar representative called Mr. Hagenbuch and informed him of Greenbriar’s continued interest in Arotech and discussed the timing of a potential offer from Greenbriar. Mr. Hagenbuch relayed this information to the board and our management team.

On July 29, 2019, members of Arotech’s management team, including Yaakov Har-Oz, our General Counsel, and representatives of Greenbriar, along with representatives from Kirkland & Ellis LLP (“Kirkland”), legal counsel to Greenbriar, held a legal due diligence call.

On August 2, 2019, a representative from Greenbriar called Mr. Hagenbuch and discussed Greenbriar’s continued interest in a transaction with Arotech. The Greenbriar representative discussed various valuation methods Greenbriar had performed related to Arotech, which analyses included an offer price per share of $2.50 to acquire all of the outstanding capital stock of Arotech. Greenbriar provided those analyses to Mr. Hagenbuch in an email the same day and Mr. Hagenbuch shared this email with the other members of the board, including Mr. Kutler. Mr. Hagenbuch informed the Greenbriar representative that he would discuss these updates with the board at the board’s next regularly scheduled meeting in a few days.

On August 5, 2019, our board held a regularly scheduled quarterly meeting. All of the members of the board were in attendance, except for Mr. Kutler who was unable to attend for certain logistical reasons. Mr. Krutty provided the board with a regular business update. Mr. Hagenbuch then provided the board with an update regarding his recent discussions with Greenbriar. The board then discussed Greenbriar’s analysis included in the August 2, 2019 email from Greenbriar. After discussion, the board concluded that the potential offer price of $2.50 per share discussed by Greenbriar was too low.

On August 6, 2019, Mr. Hagenbuch received an offer letter (the “August 6 Offer”) from Greenbriar for an acquisition of all of the outstanding capital stock of Arotech, and on August 7, 2019, Mr. Hagenbuch shared that letter with the other members of our board, Mr. Krutty, Ms. Kellar, Mr. Har-Oz and representatives of Lowenstein Sandler LLP (“Lowenstein Sandler”), our outside legal counsel. The August 6 Offer indicated that Greenbriar was interested in acquiring 100% of our outstanding capital stock at an offer price of $2.50 per share, and requested exclusivity for Greenbriar for a period of 30 days.

On August 9, 2019, our board held a telephonic meeting to discuss the August 6 Offer. Mr. Krutty, Mr. Har-Oz and representatives from Lowenstein Sandler participated in the meeting. The board discussed the terms of the August 6 Offer, and during the meeting, Lowenstein Sandler provided an overview of the board’s fiduciary

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duties in evaluating a potential acquisition transaction for Arotech. Mr. Kutler and the board also again discussed Mr. Kutler’s passive interest in certain funds controlled by Greenbriar. After that discussion, Mr. Krutty and Mr. Har-Oz exited the meeting and the board held an executive session with representatives of Lowenstein Sandler present. During the executive session, the board continued the discussion related to Mr. Kutler’s passive interest and determined that they would reconvene and consider whether they should form a special committee of disinterested and independent directors to evaluate the potential Greenbriar transaction. The board also discussed engaging a financial advisor for purposes of evaluating the potential Greenbriar transaction, and authorized Mr. Hagenbuch to reach out to financial advisors to discuss a potential engagement.

On August 11, 2019, members of our board, excluding Mr. Kutler who had recused himself from the meeting, held a telephonic meeting to discuss the August 6 Offer and Mr. Kutler’s passive interest in certain funds controlled by Greenbriar. Mr. Har-Oz and representatives from Lowenstein Sandler participated in the meeting. The board determined that Mr. Kutler’s interest in the Greenbriar funds was immaterial but they also discussed the possibility that, because of such interests, Mr. Kutler may indirectly maintain some ownership in us if, and after, the potential Greenbriar transaction would be consummated. Although the board determined that Mr. Kutler’s passive interest in certain funds controlled by Greenbriar was immaterial, given the possibility of Mr. Kutler’s ongoing indirect equity ownership in the Company as a result of such interest if, and after, the potential Greenbriar transaction would be consummated, the board discussed the possibility and merits of forming a “special committee” of independent and disinterested directors to continue evaluating the potential Greenbriar transaction. Representatives of Lowenstein Sandler again discussed with the board their fiduciary duties and certain provisions that the board should consider in light of these duties, including go-shop and fiduciary out provisions in any definitive merger agreement. Also on August 11, 2019, the board authorized Mr. Hagenbuch to request formal proposals from two financial advisors to serve as financial advisor in connection with the potential Greenbriar transaction. The board received proposals from the two potential advisors on August 13, 2019 and August 15, 2019.

On August 16, 2019, our board held a telephonic meeting with Mr. Krutty, Mr. Har-Oz and representatives of Lowenstein Sandler participating. The board determined that it was in the best interest of the Company and its stockholders to form a special committee, composed entirely of independent and disinterested directors for purposes of evaluating the potential transaction with Greenbriar. The formation of the special committee, consisting of Mr. Hagenbuch, Kenneth W. Cappell and Adm. James J. Quinn, was approved during the meeting. Following the formation of the special committee, the board adjourned its meeting and the special committee held a meeting and invited Mr. Kutler to participate as an observer given his substantial investment banking expertise. The special committee discussed the proposals received from the two financial advisors and determined to engage B. Riley as its financial advisor for purposes of evaluating the potential Greenbriar transaction. The special committee selected B. Riley based on B. Riley’s competitive pricing, reputation in the industry and because the special committee believed B. Riley had relevant company and industry knowledge and expertise and the requisite experience to assist the special committee in evaluating the potential Greenbriar transaction.

On August 18, 2019, the special committee held a telephonic meeting. Mr. Kutler was invited to participate as an observer given his substantial investment banking expertise, and representatives from B. Riley and Lowenstein Sandler participated in the meeting. Representatives from B. Riley discussed the August 6 Offer and elements of the Company’s financial performance with the special committee. B. Riley also discussed a purchase price analysis with the special committee, including, among other things, an overview of various purchase prices as compared to the Company’s trailing stock price over the last twelve months and compared to the volume weighted average purchase price of the Company’s stock over the trailing 30, 60 and 90 day periods. The special committee posed questions to B. Riley and Lowenstein Sandler related to various acquisition processes, and B. Riley and Lowenstein Sandler provided an overview of alternatives, including a “go shop” process and the possibility to seek a reverse termination fee in favor of the Company. The special committee discussed whether they should enter exclusivity with Greenbriar or seek a counter proposal from Greenbriar. The special committee

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then authorized B. Riley to reach out to Greenbriar and request a revised offer at a higher price per share to the Company’s stockholders.

On August 19, 2019, B. Riley contacted Greenbriar and informed Greenbriar that the special committee did not believe the $2.50 offer price to be a fair price. On August 20, 2019, Greenbriar called B. Riley and gave a verbal indication that they would consider increasing their offer price to $3.00 per share, but not higher than $3.00 per share. Greenbriar also indicated that the increased offer would be conditioned on a customary 30 day exclusivity period, and that they would be seeking a customary break-up fee, reimbursement for certain of their expenses, and that they would be willing to allow the Company to conduct a customary “go shop” process for up to 30 days. Greenbriar also indicated that they would not be seeking any third party financing in connection with the transaction and intended to finance the transaction exclusively through an equity contribution from certain affiliated funds controlled by Greenbriar pursuant to a customary equity commitment letter.

On August 20, 2019, the special committee held a telephonic meeting. Representatives from B. Riley and Lowenstein Sandler participated. B. Riley provided an overview to the special committee of its conversations with Greenbriar earlier that day. The special committee then authorized B. Riley to go back to Greenbriar and discuss a longer “go shop” period and a two-tier breakup fee, with a lower break-up fee payable to Greenbriar during the “go shop” period. On August 21, 2019, B. Riley held a call with Greenbriar and discussed the special committee’s requests.

On August 21, 2019, Greenbriar sent a revised offer letter (the “August 21 Offer”). The August 21 Offer included an increased offer price of $3.00 per share, provided for a “go shop” period of up to 30 days, and a breakup fee for Greenbriar in an amount of $2.4 million and reimbursement of expenses for Greenbriar up to $800,000. The August 21 Offer included the same financing elements as were discussed on the August 20, 2019 call and provided for a 30 day exclusivity period for Greenbriar.

On August 22, 2019, the special committee held a telephonic meeting to discuss the August 21 Offer. Mr. Krutty, Mr. Har-Oz and representatives from B. Riley and Lowenstein Sandler participated at the meeting. The special committee discussed the terms of the August 21 Offer and Lowenstein Sandler and B. Riley described Greenbriar’s requested break-up fee and discussed how a “go shop” process would proceed with the special committee. B. Riley also discussed with the special committee our recent financial performance. The special committee discussed how to respond to the August 21 Offer and determined that they would send a revised letter to Greenbriar. Later that day, B. Riley sent a revised draft of the August 21 Offer letter to Greenbriar. The revised letter included edits that confirmed the 30 day “go shop” period, requested a two tier break-up fee, with a lower break-up fee payable to Greenbriar during the “go shop” period, and a break-up fee payable to us in an amount of $3.2 million.

On August 22, 2019, Greenbriar sent a further revised offer letter (the “August 22 Offer”) in response to the special committee’s revised letter. The August 22 Offer was similar in all material respects to the August 21 Offer, except that it confirmed the 30 day “go shop” period and agreed to the break-up fee of $3.2 million payable to the Company. On August 23, 2019, the special committee held a meeting to discuss the August 22 Offer, with Mr. Har-Oz, representatives from B. Riley and representatives from Lowenstein Sandler participating. The special committee discussed the August 22 Offer and determined to accept the August 22 Offer. On August 23, 2019, we countersigned the August 22 Offer letter, granting Greenbriar exclusivity for a period of 30 calendar days. During the 30 day period commencing on August 23, 2019, we agreed that we would not (i) solicit, initiate, seek or knowingly encourage any inquiry, proposal or offer from, (ii) furnish any non-public information regarding us to, or (iii) participate in any discussions or negotiations with, any third parties regarding an acquisition of us. According to the terms of the August 22 Offer, the 30 day exclusivity would terminate if Greenbriar determined not to proceed with the transaction at a price of $3.00 per share.

In the evening on August 23, 2019, representatives from Lowenstein Sandler and Kirkland held a call and confirmed that a draft of the merger agreement would be prepared by Lowenstein Sandler consistent with the

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terms of the August 22 Offer. On August 30, 2019, Lowenstein Sandler circulated an initial draft of the merger agreement to Kirkland. On September 5, 2019, Kirkland circulated a revised draft of the merger agreement to Lowenstein Sandler. The revised draft indicated that Greenbriar would be requesting a customary voting agreement from Mr. Kutler and contained certain changes related to our representations and warranties and other legal items of the merger agreement. Representatives from Lowenstein Sandler discussed the request for a customary voting agreement with Mr. Kutler and Mr. Kutler indicated that he was amenable to such an agreement.

On September 6, 2019, representatives of Kirkland held a diligence call with our management team and representatives of Lowenstein Sandler to address certain legal diligence items. From September 6, 2019 through September 22, 2019, Kirkland continued to send, and we continued to respond to, various legal diligence requests. From September 8, 2019, through September 18, 2019, Lowenstein Sandler and Kirkland exchanged drafts of the merger agreement, voting agreement for Mr. Kutler and equity commitment letter and had numerous discussions to address certain legal aspects of the documents, including the status of our credit facility, the definition of a “material adverse event” and certain representations, warranties and operating covenants of the Company. During this period, representatives of Lowenstein Sandler had several conversations with members of the special committee to keep them apprised of the status of the drafts of the transaction documents.

On September 18, 2019, Lowenstein Sandler circulated a draft of the merger agreement to the board, including Mr. Kutler, and on September 19, 2019, Lowenstein Sandler circulated drafts of the equity commitment letter and voting agreement to the board, including Mr. Kutler, along with an executive summary that contained a detailed description of the provisions of the merger agreement, equity commitment letter and voting agreement. On the morning of September 21, 2019, the special committee received a draft of the fairness opinion and accompanying presentation from B. Riley.

On September 22, 2019, the special committee held a telephonic meeting, with Mr. Krutty, Ms. Kellar and Mr. Har-Oz present, as well as representatives of Lowenstein Sandler and B. Riley. Mr. Kutler also participated in the meeting by invitation of the special committee. Representatives of Lowenstein Sandler made a presentation regarding the director’s fiduciary duties in connection with the proposed Greenbriar transaction. Lowenstein Sandler then provided an overview of the negotiations that had transpired related to the merger agreement, equity commitment letter and voting agreement. Lowenstein Sandler then reviewed the final terms of the merger agreement, equity commitment letter and voting agreement, which had not changed materially from the drafts circulated on September 18, 2019 and September 19, 2019, including those provisions that afforded benefits to our executive officers and directors. Mr. Krutty then discussed the process undertaken in preparing the disclosure schedules that accompanied the merger agreement. Representatives from B. Riley then reviewed and discussed their financial analyses with respect to us and the proposed merger. Thereafter, at the request of the special committee, B. Riley rendered its oral opinion to the special committee (which was subsequently confirmed in writing by delivery of B. Riley’s written opinion addressed to the special committee dated of the same date) as to, as of September 22, 2019 and subject to the factors, limitations, qualifications and other matters set forth in its written opinion, the fairness, from a financial point of view, to the holders of Arotech common stock, of the merger consideration of $3.00 per share to be received by such holders in the merger pursuant to the terms of the merger agreement. Mr. Kutler, Mr. Krutty, Ms. Kellar and Mr. Har-Oz then exited the meeting. After considering the foregoing, and taking into consideration the factors described under “THE MERGER—Reasons for the Merger and Recommendation of the Special Committee and Our Board” beginning on page 25 of this proxy statement, the special committee unanimously approved the merger agreement and the transactions contemplated thereby and determined the merger agreement and the transactions contemplated thereby to be fair to and in the best interests of Arotech and its stockholders and recommended that our board: (i) determine that the terms and provisions of the merger agreement and the transactions contemplated thereby, including the merger, are fair to, advisable and in the best interests of us and our stockholders, (ii) approve and declare advisable the merger agreement and the transactions contemplated thereby, including the merger, (iii) determine that it is advisable and in the best interests of us and our stockholders to enter into the merger agreement and to consummate the transactions contemplated thereby, including the merger, and (iv) resolve to recommend the adoption of the

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merger agreement by our stockholders. Mr. Kutler then re-joined the meeting, and, upon recommendation by the special committee, and in consideration of the factors described under “THE MERGER—Reasons for the Merger and Recommendation of the Special Committee and Our Board” beginning on page 25 of this proxy statement, our board unanimously: (i) determined that the terms and provisions of the merger agreement and the transactions contemplated thereby, including the merger, are fair to, advisable and in the best interests of us and our stockholders, (ii) approved and declared advisable the merger agreement and the transactions contemplated thereby, including the merger, (iii) determined that it is advisable and in the best interests of us and our stockholders to enter into the merger agreement and to consummate the transactions contemplated thereby, including the merger, and (iv) resolved to recommend the adoption of the merger agreement by our stockholders.

During the evening of September 22, 2019, following the meeting of the special committee and our board, we and Greenbriar executed the merger agreement. On the morning of September 23, 2019, prior to market open on NASDAQ, we issued a press release announcing entry into the merger agreement and announcing the commencement of the “go shop” period.

Pursuant to the terms of the merger agreement, during the period beginning on the date of the merger agreement and continuing until 12:01 a.m. (New York City time) on October 22, 2019, we and our representatives had the right to, directly or indirectly: (i) initiate, solicit, facilitate, whether publicly or otherwise, and encourage any acquisition, (ii) provide access to non-public information to any person pursuant to an acceptable confidentiality agreement, and (iii) engage or enter into, continue or otherwise participate in any discussions or negotiations with any persons with respect to any acquisition proposal or otherwise cooperate with, or assist or participate in, or facilitate, any such discussions or negotiations or any effort or attempt to make any acquisition proposal. Promptly after execution of the merger agreement, at the request of management of the Company, representatives of B. Riley contacted approximately 39 strategic parties and approximately 12 financial parties about a potential transaction with us.

During the Go Shop Period, which expired at 12:01 a.m. Eastern Time on October 22, 2019, two potential bidders entered into an acceptable confidentiality agreement with us that included a six month standstill provision that allowed the counterparty to make confidential proposals to the board (or a committee thereof) at any time and were provided the opportunity to have access to our management team. One of the potential bidders was provided access to an online data room containing nonpublic information about us. As of the expiration of the Go Shop Period, we had not received any alternative acquisition proposals, including from either of the two potential bidders that were subject to acceptable confidentiality agreements, each of whom subsequently indicated they were not interested in pursuing an acquisition of us. Upon the expiration of the Go Shop Period and in accordance with the terms of the merger agreement, we ceased all activities and became subject to “no-shop” restrictions on our ability to solicit acquisition proposals from third parties (including by furnishing non-public information), or to participate in discussions or negotiations with third parties regarding any acquisition proposals, subject to certain exceptions to permit our board to comply with its fiduciary duties.

Reasons for the Merger and Recommendation of the Special Committee and Our Board

In the course of reaching its decision to recommend that our board approve and adopt the merger agreement and recommend that our stockholders adopt the merger agreement, the special committee consulted with senior management and our financial and legal advisors, and reviewed a significant amount of information and considered a number of factors, including the following:

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In the course of its deliberations, the special committee also considered a variety of risks and other countervailing factors, including:

In the course of reaching its decision to approve and adopt the merger agreement and recommend that our stockholders adopt the merger agreement, our board consulted with senior management and our financial and legal advisors, and reviewed a significant amount of information and considered a number of factors, including the following:

The foregoing discussion of the factors considered by the special committee and our board is not intended to be exhaustive, but does set forth all of the material factors considered by the special committee and our board. In

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light of the various factors described above and other factors that each director felt were appropriate, the special committee unanimously reached the conclusion to recommend that our board approve and adopt the merger agreement and that our board recommend that our stockholders adopt the merger agreement. Upon recommendation of the special committee, and in light of the various factors described above and other factors that each director felt were appropriate, our board also unanimously reached the conclusion to approve and adopt the merger agreement and recommend that our stockholders adopt the merger agreement. In view of the wide variety of factors considered in connection with the evaluation of the merger and the complexity of these matters, our directors did not consider it practical, and did not attempt to quantify, rank or otherwise assign relative weights to the specific factors it considered in reaching its decision and did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determinations made by the special committee and the board. Rather, the special committee and our board made their respective recommendations based on the totality of information presented to our directors and the investigation conducted by them. In considering the factors discussed above, individual directors may have given different weights to different factors.

After evaluating these factors and consulting with its legal counsel and its financial advisors, acting upon the unanimous recommendation of the special committee, our board unanimously (i) determined that the terms and provisions of the merger agreement and the transactions contemplated thereby, including the merger, are fair to, advisable and in the best interests of Arotech and its stockholders, (ii) approved and declared advisable the merger agreement and the transactions contemplated thereby, including the merger, (iii) declared that it is advisable and in the best interests of Arotech and its stockholders to enter into the merger agreement and to consummate the transactions contemplated thereby, including the merger, and (iv) recommended the adoption of the merger agreement by our stockholders . Accordingly, our board unanimously adopted and approved the merger agreement. Our board unanimously recommends that you vote “FOR” the adoption of the merger agreement.

Opinion of Financial Advisor

Arotech has retained B. Riley to act as Arotech’s financial advisor in connection with the transaction. B. Riley is an internationally recognized financial advisory firm that has substantial experience in the industry in which Arotech operates.

On September 22, 2019, at a meeting of our board held to evaluate the merger, B. Riley delivered to the special committee an oral opinion, which was confirmed by delivery of a written opinion dated September 22, 2019, to the effect that, as of the date of the opinion and based on and subject to various assumptions and limitations described in its opinion, the merger consideration in connection with the merger was fair to Arotech’s stockholders from a financial point of view.

The full text of B. Riley’s written opinion to the special committee, which describes, among other things, the assumptions made, procedures followed, factors considered and limitations on the review undertaken, is attached as Annex C to this proxy statement and is incorporated by reference herein in its entirety. The following summary of B. Riley’s opinion is qualified in its entirety by reference to the full text of the opinion. B. Riley delivered its opinion to the special committee for the benefit and use of the special committee and our board (in their capacity as such) in connection with and for purposes of their evaluation of the merger consideration from a financial point of view. B. Riley’s opinion did not address any other aspect of the merger or the underlying business decision of Arotech to effect the merger, and no opinion or view was expressed as to the relative merits of the merger in comparison to other strategies or transactions that might be available to Arotech or in which Arotech might engage. B. Riley’s opinion does not constitute a recommendation to any stockholder as to how to vote or act in connection with the proposed merger or any related matter.

In connection with rendering its opinion, B. Riley, among other things:

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For purposes of its analysis and opinion, B. Riley assumed and relied upon, without undertaking responsibility for independently verifying, and did not independently verify, the accuracy and completeness of the information reviewed by B. Riley, nor was B. Riley furnished with any such verification and B. Riley did not assume any responsibility or liability for the accuracy or completeness thereof. B. Riley did not make an independent evaluation or appraisal of the assets or the liabilities (contingent or otherwise) of Arotech including those that may arise from the merger, nor has B. Riley evaluated the solvency of Arotech under any state or federal laws. In addition, B. Riley did not undertake an independent analysis of any pending or threatened litigation, possible unasserted claims or other contingent liabilities to which Arotech is a party or may be subject, and B. Riley’s opinion does not make an assumption concerning, and therefore does not consider, the possible assertion of claims, outcomes or damages arising out of any such matters. B. Riley also relied, without assuming responsibility or liability for independent verification, upon the accuracy and completeness of all financial and other information available from public sources and all information provided to B. Riley or otherwise discussed with or reviewed by B. Riley.

With respect to the financial and other projections prepared by Arotech and the assumptions underlying those projections, including the amounts and the timing of all financial and other performance data, Arotech management advised B. Riley, and B. Riley assumed, that such items were reasonably prepared by Arotech in accordance with industry practice and reflected Arotech management’s best estimates and judgments as of their date of preparation. B. Riley expressed no view as to any such analyses or forecasts or the assumptions on which they were based. Further, B. Riley assumed that there had been no material change in the assets, financial condition, results of operations, business or prospects of Arotech since the respective dates of the most recent financial statements made available to B. Riley, and B. Riley relied upon the assurances of Arotech management that they were not aware of any facts that would make the information and projections provided by Arotech management materially inaccurate, incomplete or misleading.

For purposes of rendering its opinion, B. Riley assumed, with the consent of the special committee, that the executed form of the merger agreement would not differ in any material respect from the last draft provided to B. Riley, and that the consummation of the merger would be effected in accordance with the terms and

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conditions of the merger agreement, without waiver, modification or amendment of any material term, condition or agreement, and that, in the course of obtaining the necessary regulatory or third party consents and approvals (contractual or otherwise) for the merger, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on Arotech or the contemplated benefits of the merger. In addition, events occurring after September 22, 2019 could materially affect the assumptions used in preparing B. Riley’s opinion, but B. Riley has no obligation to reaffirm its opinion. B. Riley is not a legal, tax or regulatory advisor and relied upon, without independent verification, the assessment of Arotech and Arotech’s legal, tax and regulatory advisors with respect to such matters.

B. Riley’s opinion did not address the underlying business decision of Arotech to effect the merger and it is not a recommendation as to any action the special committee or our board should take with respect to the merger or any aspect thereof. B. Riley’s opinion is necessarily based on economic, market, monetary, regulatory and other conditions as they existed on and could be evaluated, and on the information made available to B. Riley, as of September 22, 2019. Subsequent developments may affect B. Riley’s opinion, and B. Riley has no obligation to update or revise its opinion after September 22, 2019.

B. Riley was not asked to opine upon, and expressed no opinion with respect to, any matter other than the fairness from a financial point of view, as of September 22, 2019, to the holders of Arotech common stock of the merger consideration to be received by such holders of Arotech common stock in the proposed merger. B. Riley did not express any view on, and its opinion does not address, any other aspect or implication of the merger agreement or merger or any aspect or implication of any other agreement or understanding entered into in connection with the merger or otherwise. B. Riley’s opinion is limited to the fairness, from a financial point of view, to the Arotech stockholders of the merger consideration in connection with the merger, and B. Riley expresses no opinion as to the fairness of (i) the merger to the holders of any other class of securities or options, creditors, or other constituencies of Arotech nor (ii) the amount or nature of the compensation to any of the officers, directors or employees of Arotech, or other class of such persons, relative to the merger consideration. B. Riley’s opinion does not address the prices or trading ranges at which the Arotech common stock will trade at any time prior to the consummation of the merger or the impact of the merger on the solvency or viability of Arotech or the ability of Arotech to pay its obligations when they become due before consummation of the merger.

The following is a summary of the material financial analyses presented by B. Riley to the special committee and our board in connection with rendering its opinion. The following summary, however, does not purport to be a complete description of the financial analyses performed by B. Riley. The order of the analyses described and the results of these analyses do not represent relative importance or weight given to these analyses by B. Riley. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before September 20, 2019, and is not necessarily indicative of current market conditions.

The following summary of financial analyses includes information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of B. Riley’s financial analyses.

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Selected Precedent Transactions Analysis

B. Riley reviewed publicly available information relating to the following selected transactions within the aerospace, defense and power industries announced since the beginning of 2011. For each target company, B. Riley calculated the implied enterprise value, which we refer to as EV, as a multiple of EBITDA for the trailing twelve-month, which we refer to as LTM, period prior to the close of the respective transaction, which we refer to below as EV/LTM EBITDA, and then calculated the mean and median for the transactions.

B. Riley chose the selected transactions for purposes of this analysis based on its professional judgment and experience, taking into account comparability to Arotech with respect to the industry of operation, business model, and geographic footprint. No transaction reviewed was directly comparable to the proposed merger.

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Accordingly, this analysis involved complex considerations and judgments concerning differences in financial and operating characteristics of Arotech relative to the targets in the selected transactions and other factors that would affect the acquisition values in the selected precedent transactions. B. Riley excluded certain potentially comparable transactions due to lack of transparency in transaction details (such as price, corresponding multiples paid and financial characteristics of the target company).

Based on B. Riley’s professional judgment taking into account the mean and median EV/LTM EBITDA multiples referenced above, B. Riley noted that, per the selected precedent transaction analysis, the merger consideration exceeded the implied equity value per share calculated by applying the mean and median valuation multiples to Arotech’s Adjusted EBITDA for the LTM period ended June 30, 2019. From this analysis, and using an Adjusted EBITDA multiple range of 9.0x to 12.0x (based on B. Riley’s professional judgment and informed by the mean and median multiples from relevant data sets used) and net debt of $15.8 million, B. Riley derived a range of implied equity value per share of Arotech common stock of $1.46 to $2.15.

For a discussion of Adjusted EBITDA, see “Summary of the Company’s Projections” beginning on page 36 of this proxy statement.

Selected Public Company Trading Comparables Analysis

B. Riley reviewed and compared certain financial information for Arotech to corresponding financial information for the following publicly traded companies, which, in the exercise of its professional judgment, B. Riley determined to be relevant to its analysis. In selecting comparable public companies, B. Riley focused on businesses with a similar business model, end-market exposure and gross margin profile. The selected companies were as follows:

B. Riley obtained financial metrics and projections for the selected companies from documents filed by such companies with the SEC and from S&P Capital IQ. In its public company trading comparables analysis, B. Riley conducted an EV analysis and derived and compared multiples for Arotech and the selected companies, calculated as follows:

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B. Riley then compared Arotech’s EV as a multiple of Adjusted EBITDA for the LTM period ended June 30, 2019, as a multiple of estimated Adjusted EBITDA for 2019, and as a multiple of estimated Adjusted EBITDA for 2020. A summary of this comparison is shown in the table below.

This EV analysis yielded the following:

No selected company is identical to Arotech. Accordingly, B. Riley’s comparison of selected companies to Arotech and analysis of the results of such comparisons were not purely quantitative, but instead necessarily involved qualitative considerations and professional judgments concerning differences in financial and operating characteristics and other factors that could affect the relative value of Arotech. From this analysis and using a range of multiples from 10.0x to 13.0x applied to Arotech’s LTM 6/30/19 Adjusted EBITDA, B. Riley derived a range of implied equity value per share of Arotech common stock of $1.69 to $2.37. Similarly, from this analysis and using a range of multiples from 9.0x to 12.0x applied to Arotech’s estimated Adjusted EBITDA for 2019, B. Riley derived a range of implied equity value per share of Arotech common stock of $1.77 to $2.56. Similarly, from this analysis and using a range of multiples from 6.0x to 9.0x applied to Arotech’s estimated Adjusted EBITDA for 2020, B. Riley derived a range of implied equity value per share of Arotech common stock of $1.46 to $2.49. For each analysis, B. Riley used its professional judgment, informed by the mean and median multiples from relevant data sets used.

Discounted Cash Flow Analysis

B. Riley conducted an illustrative discounted cash flow analysis for Arotech on a stand-alone basis. B. Riley calculated a range of implied values of Arotech based on forecasts for calendar years 2019 through 2024 provided by Arotech management. B. Riley first calculated unlevered free cash flows (calculated as net profit after taxes, plus depreciation and amortization, less the amount of any increase or plus the amount of any decrease in net working capital and less capital expenditures) of Arotech for calendar years 2020 through 2024. Net profit after taxes was calculated as Adjusted EBITDA less depreciation and amortization, stock-based compensation and taxes. B. Riley also calculated terminal values for Arotech by applying exit multiples ranging

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from 9.5x-10.5x (which were selected based on B. Riley’s professional judgment, taking into account acquisition multiples paid in the selected precedent transactions referenced above, which were completed in differing phases of the macroeconomic cycle) to Arotech’s estimated 2024 calendar year Adjusted EBITDA. The unlevered free cash flows and terminal values were then discounted to present values using a weighted average cost of capital range of 14.0% to 16.0% (which range was selected based on B. Riley’s professional judgment and derived from an analysis of the estimated weighted average cost of capital using Arotech data, based on a capital asset pricing model, taking into account Arotech’s size, Arotech’s exposure to market risk and overall historical equity market returns) to calculate a range of implied values for Arotech. From this analysis, B. Riley derived a range of implied equity value per share of Arotech common stock of $2.32 to $2.83.

Premiums Paid Analysis

B. Riley also reviewed and analyzed the premiums paid in recent acquisitions of a group of publicly held companies, with data sourced from S&P Capital IQ and B. Riley investment banking analyses. The analysis examined the ratio between the acquisition price and the target company’s price per share one day, one week and one month prior to the announcement of the transaction. In selecting comparable transactions for the premiums paid analysis, B. Riley only included change-in-control transactions involving U.S. public company targets for the five-year period ending September 20, 2019. A total of 1,553 transactions were analyzed, 723 of which involved small-cap transactions (defined as transactions with a deal value of less than $500 million). The total transactions had a mean and median transaction size of $3,836.6 million and $432.9 million, respectively. The small-cap transactions had a mean and median transaction size of $119.4 million and $61.4 million, respectively. For these transactions, the median transaction premium paid: (i) based on the target company’s price per share one day prior to the announcement, ranged from 25.9% to 33.2%; (ii) based on the target company’s price per share one week prior to the announcement, ranged from 27.4% to 33.5%; and (iii) based on the target company’s price per share one month prior to the announcement, ranged from 30.8% to 33.5% (in each case where the low end of the range represented all transactions in aggregate and the high end of the range represented small-cap transactions). B. Riley noted that applying these metrics to Arotech’s closing stock prices generates implied per share price ranges for Arotech common stock of $2.84 to $3.01 (for one day prior comparison), $3.06 to $3.20 (for one week prior comparison) and $3.07 to $3.14 (for one month prior comparison). B. Riley further noted that the $3.00 per share cash consideration to be received by Arotech stockholders represented a 32.7% premium to the Arotech closing stock price of $2.26 on September 20, 2019.

Additional Information Provided to Special Committee and Board

B. Riley presented historical trading prices of Arotech common stock over the 52-week period ending September 20, 2019, calculated the volume-weighted average daily closing prices for Arotech common stock over various time periods and noted the closing stock price on selected dates prior to and including September 20, 2019, including the 52-week high and low closing stock prices. Arotech’s common stock price per share ranged from $1.61 to $3.66 over the 52-week period ended on September 20, 2019. This analysis indicated that the $3.00 per share cash consideration to be received by Arotech stockholders represented a premium of:

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General

The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of such methods to the particular circumstances and, therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying B. Riley’s opinion. In arriving at its fairness opinion, B. Riley considered the results of all of its analyses and, except as expressly stated above, did not attribute any particular weight to any factor or analysis considered by it. Rather, B. Riley made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction used in the above analyses as a comparison is directly comparable to Arotech or the merger. B. Riley prepared these analyses for purposes of providing its opinion to the special committee as to the fairness from a financial point of view, to the holders of shares of Arotech common stock of the merger consideration to be received by such holders in the merger. These analyses do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of Arotech, Greenbriar, Merger Sub, B. Riley or any other person assumes responsibility if future results are materially different from those forecast.

The merger consideration was determined through arm’s-length negotiations between Arotech and Greenbriar and was approved by our board by unanimous vote upon recommendation of the special committee following a presentation to our board. B. Riley, however, did not recommend any specific amount of consideration to the special committee or the board or that any specific amount of consideration constituted the only appropriate consideration for the merger. As described above, B. Riley’s opinion to the special committee was one of many factors taken into consideration by the special committee and our board in making its determination to approve the merger. The foregoing summary does not purport to be a complete description of the analyses performed by B. Riley in connection with the fairness opinion delivered to the special committee and is qualified in its entirety by reference to the written opinion of B. Riley, which is included as Annex C to this proxy statement and is incorporated by reference herein in its entirety.

B. Riley’s fairness opinion that was delivered to the special committee was approved by a fairness opinion committee of B. Riley professionals in accordance with established procedures.

During the past two years, Arotech has not engaged B. Riley to provide, and B. Riley has not provided, investment banking, financial advisory or other financial services to Arotech unrelated to the merger for which Arotech has paid or expects to pay fees to B. Riley. During the past two years, Greenbriar has not engaged B. Riley to provide, and B. Riley has not provided, investment banking, financial advisory or other financial services to Greenbriar for which Greenbriar has paid or expects to pay fees to B. Riley.

B. Riley and its affiliates are engaged in a broad range of securities activities and financial advisory services. B. Riley and its affiliates carry on a range of businesses for their own account and for their customers, including providing stock brokerage, investment advisory, investment management, proprietary financings and custodial services. In the ordinary course of business, B. Riley or its affiliates may actively trade or hold (for their own accounts or for the accounts of their customers) equity or debt securities, bank debt and/or other financial instruments, of (i) Arotech and affiliates of Arotech, (ii) Greenbriar and affiliates of Greenbriar, and (iii) any other company that may be involved in the merger as well as derivatives thereof, and, accordingly, may at any time hold long or short positions in such securities, bank debt, financial instruments and derivatives.

B. Riley has acted as exclusive financial advisor to the Arotech for purposes of issuing an opinion as to the fairness, from a financial point of view, of the merger consideration, to the special committee and, further, for

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purposes of providing advisory services in connection with a possible sale, transfer or other disposition, directly or indirectly, of all or a material portion of the equity securities, assets or business of Arotech or its subsidiaries, including assisting in the evaluation of Arotech’s strategic alternatives. The special committee selected B. Riley as its exclusive financial advisor because it is an internationally recognized financial advisory firm that has substantial experience in the industries in which Arotech operates.

B. Riley received an upfront retainer fee of $100,000 upon execution of its engagement agreement with Arotech. Additionally, B. Riley received a fee of $300,000 as a result of the delivery of its fairness opinion. No portion of the upfront retainer fee or fairness opinion fee was contingent upon the conclusions reached in the opinion or the closing of the merger. Additionally, if a sale transaction, including the merger, is consummated during the term of B. Riley’s engagement or within six months following the termination thereof, or if Arotech receives a proposal or enters into an agreement with respect to a potential sale transaction within six months after the termination of B. Riley’s engagement and such sale transaction is subsequently consummated at the same $3.00 per share acquisition price, then B. Riley will receive an advisory fee of $350,000. A sale transaction consummated at a higher price than $3.00 per share will generate an incentive fee payable to B. Riley equal to 4.0% of the incremental amount paid above $3.00 per share. Arotech has also agreed to reimburse B. Riley for certain expenses and to indemnify B. Riley, its controlling persons, representatives and agents against certain liabilities associated with the issuance of its opinion.

Summary of the Company’s Projections

We do not as a matter of course publicly disclose long-term forecasts or internal projections of our future performance, revenues, earnings, financial condition or other results due to, among other reasons, the uncertainty of the underlying assumptions and estimates. However, as part of the preparation for the board’s strategic review process, our management developed certain non-public, unaudited, stand-alone financial projections of the Company that were made available to the special committee, our board and to B. Riley in connection with its analyses described in “THE MERGER—Opinion of Financial Advisor” beginning on page 28 of this proxy statement.

A summary of the projections is provided below. The projections were not prepared with a view toward public disclosure. The projections are included in this proxy statement because they were, among other items, relied upon by B. Riley in its analyses described in “THE MERGER—Opinion of Financial Advisor” beginning on page 28 of this proxy statement. The projections are not an indication that the Company, the special committee, our board, or any advisor (including B. Riley) to or representative of any of the foregoing, or any other recipient of this information considered the projections to be material or necessarily predictive of actual future results, and the projections should not be relied upon as such.

Management’s internal financial forecasts and the assumptions upon which the projections were based are subjective in many respects and thus subject to interpretation. Although presented with numerical specificity in the summary below, the projections are based upon a significant number of estimates and assumptions made by management with respect to, among other matters, industry performance, general business, market and financial conditions, matters specific to the Company’s business and other matters, many of which are difficult to predict, are subject to significant economic and competitive uncertainties, and are beyond the Company’s control. In addition, since the projections cover multiple years, such information by its nature becomes less reliable with each successive year. As a result, there can be no assurance that the estimates and assumptions made in preparing the projections will prove accurate, that the projected results will be realized or that actual results will not materially vary from the projections.

The projections were not meant to comply with U.S. Generally Accepted Accounting Principles (“GAAP”), the published guidelines of the SEC regarding financial projections and the use of non-GAAP measures or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial projections and forecasts. The projections include financial metrics that were not prepared in

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accordance with GAAP. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP and non-GAAP financial measures as used by the Company may not be comparable to similarly titled GAAP measures in the Company’s historical financial statements or similarly titled amounts used by other companies.

Neither our independent registered public accounting firm nor any other independent registered public accounting firm has examined, compiled or performed any procedures with respect to the projections, and, accordingly, neither our independent registered public accounting firm nor any other public accounting firm expresses an opinion or any other form of assurance with respect to the projections. Reports of our independent registered public accounting firm that are incorporated by reference into this proxy statement relate solely to our historical financial information. They do not extend to the prospective financial information and should not be read to do so.

The projections are forward-looking statements and were based on numerous variables and assumptions that are inherently uncertain. You are encouraged to review our most recent SEC filings for a description of our reported results of operations and financial condition during the fiscal year ended December 31, 2018 and for the first and second quarters of 2019. See “SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS” and “WHERE YOU CAN FIND MORE INFORMATION” beginning on pages 16 and 76, respectively, of this proxy statement. The projections reflect assumptions that are difficult to predict and subject to change and may not reflect current prospects for our business, changes in general business or economic conditions including recessions or expansions, or any other transaction or event that has occurred or that may occur and that was not anticipated when the projections were prepared. There can be no assurance that the projections will be realized or that our future financial results will not materially vary from the projections.

No one has made or makes any representation regarding the information included in the projections. Readers of this proxy statement are advised not to rely unduly, if at all, on the projections. Some or all of the assumptions that have been made regarding, among other things, the timing or occurrence of certain occurrences or effects, may have changed since the date the projections were prepared. We have not updated and do not intend to update or otherwise revise or reconcile the projections to reflect circumstances existing after the date when made or to reflect the occurrence or non-occurrence of future events, even if any or all of the assumptions on which the projections were based are shown to be in error. Except as may be required by applicable securities laws, we do not intend to make publicly available any update or other revision to these management projections, even in the event that any or all of the assumptions are shown to be in error. We have made no representation to Parent or Merger Sub in the merger agreement or otherwise concerning the projections.

A summary of the projections are set forth below (in thousands):

In preparing the projections, management analyzed industry data and made assumptions regarding future results that management believed to be common in assessing risks in our industry. The projections take into account certain financial, operating and commercial assumptions solely using the information available to our management at the time that the projections were prepared.

The projections were based on actual results through July, 2019 and estimated results for the remainder of the current calendar year and for each of the years ending December 31, 2020, 2021, 2022, 2023 and 2024.

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Certain Effects of the Merger

If the merger agreement is approved by our stockholders and the other conditions to the closing of the merger are either satisfied or waived, Merger Sub will be merged with and into us, and we will be the surviving corporation. When the merger is completed, we will cease to be a publicly traded company and will instead become a wholly-owned subsidiary of Parent.

Upon completion of the merger, each share of our common stock issued and outstanding immediately prior to the effective time of the merger (other than shares owned by Parent, Merger Sub or any wholly-owned subsidiary of Parent or Arotech) will be cancelled and converted into the right to receive the merger consideration of $3.00 per share in cash, net of applicable tax withholding, without interest. Our current stockholders will cease to have ownership interests in Arotech or rights as our stockholders. Therefore, our current stockholders will not participate in any of our future earnings or growth and will not benefit from any appreciation in our value.

Our common stock is currently registered under the Exchange Act, and is listed on NASDAQ under the symbol “ARTX.” As a result of the merger, we will no longer be a publicly traded company, and there will be no public market for our common stock. After the merger, our common stock will cease to be listed on NASDAQ, and price quotations with respect to sales of shares of common stock in the public market will no longer be available. In addition, registration of our common stock under the Exchange Act will be terminated. This termination will make certain provisions of the Exchange Act, such as the requirement of furnishing a proxy or information statement in connection with stockholders’ meetings, no longer applicable to us. After the effective time of the merger, we will also no longer be required to file periodic reports with the SEC on account of our common stock.

The directors of Merger Sub immediately prior to the effective time of the merger shall be the initial directors of the surviving corporation.

At the effective time of the merger, our certificate of incorporation and our bylaws will be amended in their entirety to be as set forth in the exhibits to the merger agreement.

Effects on Arotech if the Merger is Not Completed

In the event that the merger agreement is not adopted by our stockholders or if the merger is not completed for any other reason, our stockholders will not receive any payment for their shares in connection with the merger. Instead, we will remain an independent public company and our common stock will continue to be listed on NASDAQ.

In addition, if the merger is not completed, we expect that our business will be operated by our management in a manner similar to the manner in which it is being operated today and that our stockholders will continue to be subject to the same risks and opportunities as they currently are, including, among other things, general industry, economic and market conditions. Accordingly, if the merger is not consummated, there can be no assurance as to the effect of these risks and opportunities on the future value of your shares of our common stock.

In the event the merger is not completed, our board will continue to evaluate and review our business operations, properties, dividend policy and capitalization, among other things, make such changes as are deemed appropriate and continue to evaluate strategic alternatives to maximize stockholder value. If the merger agreement is not approved by our stockholders or if the merger is not consummated for any other reason, there can be no assurance that any other transaction acceptable to us will be offered or that our business, prospects or results of operations will not be materially and adversely impacted.

If the merger agreement is terminated under certain circumstances described in “THE MERGER AGREEMENT—Termination Fee” beginning on page 61 of this proxy statement, we may be obligated to pay a termination fee, including legal expenses, of up to $3,200,000 to Parent.

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Delisting and Deregistration of Arotech Common Stock

If the merger is consummated, our common stock will be delisted from NASDAQ and deregistered under the Exchange Act, and we will no longer file periodic reports with the SEC. There will be no further public market for shares of our common stock.

Interests of Certain Persons in the Merger

In considering the recommendation of our board with respect to the merger agreement, holders of shares of our common stock should be aware that our executive officers and directors may have interests in the merger that may be different from, or in addition to, those of our stockholders generally. These interests may create potential conflicts of interest. The special committee and our board were each aware of these potential conflicts of interest and considered them, among other matters, in reaching its decision to approve the merger agreement and to recommend that our stockholders vote in favor of adopting the merger agreement.

Such interests include the following:

Mr. Kutler, the chairman of our board, is a limited partner, and has a less than 1% passive interest, in certain funds controlled by Greenbriar.

See “THE MERGER AGREEMENT—Stockholdings and Stock Awards” beginning on page 39 of this proxy statement for information detailing the shares of common stock, restricted stock awards and RSUs held by our executive officers and non-employee directors.

Stockholdings and Stock Awards

The following table shows the aggregate number of shares of our common stock held by each person who served as a director or executive officer of us at any time since the beginning of our last fiscal year, the aggregate number of shares of restricted stock awarded to such persons that will be vested in full at the effective time of the merger, and the aggregate number of shares of common stock underlying RSUs awarded to such persons.

Our current executive officers are Dean M. Krutty, President and Chief Executive Officer, and Kelli L. Kellar, Vice President—Finance and Chief Financial Officer. Both such executive officers are our named executive officers in our most recent annual report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 7, 2019.

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No equity awards, other than restricted stock awards and RSUs, are held by any person who served as a director or officer of the Company at any time since the beginning of our last fiscal year.

Employment Agreements

Dean M. Krutty, our President and Chief Executive Officer, and Kelli L. Kellar, our Vice President—Finance and Chief Financial Officer, are entitled to certain severance benefits pursuant to the terms of their existing employment agreements with us, the terms of which are described below.

Dean M. Krutty Employment Agreement

The employment agreement entered into between us and Mr. Krutty (the “Krutty Agreement”) provides that if Mr. Krutty’s employment is terminated by us (other than for cause as defined in the Krutty Agreement), or if Mr. Krutty terminates his employment by reason of his death or disability or within 60 days following a reduction in his salary, any material uncured breach by us of any material provision of the Krutty Agreement, or the change in control of the Company (as defined in the Krutty Agreement), then Mr. Krutty will be entitled to (i) severance equal to one years’ base salary, (ii) a bonus for the year of termination equal to the annual bonus he would have been entitled to under the Krutty Agreement for the year of termination based on the assumption that the Company’s budgeted results for the year would be equal to an annualized version of budgeted results attained through the termination (but in no event may annualized budgeted results be less than 100% of the budgeted figure for the year), and pro rated based on the number of days he is employed during the year of termination,

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and (iii) continued health insurance coverage for a period of twelve months following the date of termination. The merger, if and when consummated, will constitute a change of control for purposes of the Krutty Agreement.

Kelli L. Kellar Employment Agreement

The employment agreement entered into between us and Ms. Kellar (the “Kellar Agreement”) provides that if Ms. Kellar’s employment is terminated by us (other than for cause as defined in the Kellar Agreement), including due to non-renewal of the employment term, then Ms. Kellar will be entitled to severance equal to six months’ base salary (based on the highest rate of base salary in effect during the 90-day period preceding termination) and any unpaid bonus earned for the year preceding her date of termination.

Indemnification of Officers and Directors

The merger agreement requires that, for six years from and after the effective time of the merger, the surviving corporation will, and Parent will cause the surviving corporation to, indemnify and hold harmless all of our and our subsidiaries’ past and present directors and officers (the “Covered Persons”) to the same extent such persons were indemnified as of the date of the merger agreement by us pursuant to our certificate of incorporation and bylaws (the “Existing Indemnification Arrangements”) arising out of acts or omissions in their capacity as directors, officers or agents of us or any of our subsidiaries occurring at or prior to the effective time of the merger. Additionally, from and after the effective time of the merger, the merger agreement provides that the surviving corporation will, and that Parent will cause the surviving corporation to (i) indemnify and hold harmless the Covered Persons to the fullest extent permitted by law for acts or omissions occurring in connection with the process resulting in and the adoption of merger agreement and the consummation of the transactions contemplated by the merger agreement and (ii) advance expenses (including reasonable legal fees and expenses) incurred in the defense of any actual or threatened proceeding or investigation with respect to the matters subject to indemnification pursuant to the applicable indemnification provisions of the merger agreement in accordance with the procedures (if any) set forth in the Existing Indemnification Arrangements. The merger agreement also provides that if any proceeding or investigation (whether arising before, at or after the effective time of the merger) is made or threatened against such persons with respect to matters subject to indemnification or advancement pursuant to the applicable indemnification provisions of the merger agreement on or prior to the sixth anniversary of the effective time of the merger, the applicable indemnification provisions of the merger agreement shall continue in effect until the final disposition of such proceeding or investigation.

In addition, the merger agreement provides that, for not less than seven years from and after the effective time of the merger, the certificate of incorporation and bylaws of the surviving corporation and the organizational documents of each subsidiary of the Company will contain provisions no less favorable with respect to exculpation, indemnification of and advancement of expenses to Covered Persons for periods at or prior to the effective time than are set forth in the amended and restated certificate of incorporation and amended and restated bylaws to be adopted as the certificate of incorporation and bylaws of the surviving corporation at the effective time of the merger, pursuant to the merger agreement. To the extent permitted by applicable law, indemnification agreements, if any, in existence on the date of the merger agreement with any directors, officers and employees that have been made available to Parent are required to continue in full force and effect in accordance with their terms following the effective time of the merger.

The merger agreement also requires that, for a period of six years from the effective time of the merger, the surviving corporation shall maintain in effect policies of directors’ and officers’ liability insurance and fiduciary liability insurance that collectively provide coverage for matters arising on or before the effective time of the merger (the “D&O Insurance”) that is substantially equivalent to and not less favorable in the aggregate than our existing policies and our subsidiaries or, if substantially equivalent insurance coverage is unavailable, the best available coverage; provided, however, that after the effective time of the merger, the surviving corporation shall not be required to pay annual premiums for the D&O Insurance in excess of 300% of the last annual premium paid by the Company prior to the date of the merger agreement, but in such case shall purchase as much coverage

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as reasonably practicable for such amount. The merger agreement provides that, in lieu of the foregoing, we may purchase, prior to the effective time of the merger, at prevailing market rates, a six year prepaid “tail” policy on terms and conditions providing substantially equivalent benefits as the current policies of directors’ and officers’ liability insurance and fiduciary liability insurance maintained by us with respect to matters arising on or before the effective time of the merger, covering without limitation the transactions contemplated by the merger agreement and full prior acts coverage for all acts or omissions taking place before the tail policy becomes effective.

Finally, the merger agreement provides that, in the event that Parent or the surviving corporation (i) consolidates with or merges into any other person or entity and shall not be the continuing or surviving corporation or (ii) transfers all or substantially all of its properties and assets to any person or entity, then proper provision shall be made so that such continuing or surviving corporation or entity or transferee of such assets shall assume all of the obligations set forth in the applicable indemnification provisions of the merger agreement.

Golden Parachute Compensation—Quantification of Potential Payments to the Company’s Named Executive Officers in Connection with the Transactions

This section sets forth the information required by Item 402(t) of Regulation S-K, which requires disclosure of information regarding the compensation for each of our “named executive officers” whose compensation was disclosed in the Definitive Proxy Statement on Schedule 14A filed by us on March 22, 2019, that is based on or otherwise relates to the merger. This compensation is referred to as “golden parachute” compensation by the applicable SEC disclosure rules, and in this section we use such term to describe the merger-related compensation payable to our named executive officers.

To the extent that any of our named executive officers’ compensation arrangements are described in “THE MERGER—Employment Agreements” beginning on page 40 of this proxy statement, the descriptions of such arrangements are incorporated herein by reference. The amounts set forth in the table below, which represent an estimate of each named executive officer’s golden parachute compensation as of October 22, 2019, calculated in accordance with the SEC’s rules on disclosing golden parachute compensation, assume the following:

The amounts in the table below do not include any value received in respect of equity awards held by the named executive officer that are vested prior to the consummation of the merger.

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Other Employee Benefits

Pursuant to the merger agreement, during the one-year period immediately following the effective time of the merger (or until the termination of the relevant employee, if sooner), the surviving corporation shall provide, to each of our, or our subsidiaries’, employees who continue to be employed (collectively, the “Company Employees”), (i) base salary or base hourly wage rate, if applicable, and annual cash incentive compensation opportunities (excluding long-term or equity-based awards, deferred compensation, severance or any change in control or retention bonuses) that, in each case, are substantially similar to those that were provided to the Company Employees immediately before the effective time of the merger, and (ii) employee benefits (other than long-term or equity-based awards, deferred compensation, severance change in control or retention bonuses, and defined benefit, non-qualified or post-termination or retiree health or welfare arrangements) that are substantially comparable to those that were provided to the Company Employees immediately before September 22, 2019.

Pursuant to the merger agreement, following the effective time of the merger, subject to applicable laws and tax qualification requirements, the surviving corporation shall cause any employee benefit or health or welfare plans (other than any plans providing for equity or equity-based, nonqualified deferred compensation, defined benefit pension, or post-termination or retiree health or welfare benefits) sponsored or maintained by Parent or the surviving corporation or their subsidiaries in which the Company Employees are eligible to participate following the effective time of the merger (collectively, the “Post-Closing Plans”) to recognize the service of each Company Employee with us or our subsidiaries (and any predecessor thereto) prior to the effective time of the merger that is reflected in our books and records, for purposes of eligibility, vesting and (for vacation/paid-time off and severance benefits only) level of benefits under such Post-Closing Plans to the same extent and for the same purpose as such service was credited under our analogous benefit plan, except to the extent that recognizing such service would result in a duplication of benefits or compensation and provided that such recognition of service will not apply for purposes of benefit accrual under any Post-Closing Plan that is a defined benefit retirement plan. With respect to any Post-Closing Plan that provides medical, dental or vision insurance benefits, for the plan year in which the effective time of the merger occurs, to the extent permitted by applicable law and any insurer or service provider under the applicable Post-Closing Plan, Parent is required to (i) cause any preexisting condition limitations or eligibility waiting periods under such plan to be waived with respect to such Company Employee to the extent such limitation would have been waived or satisfied under our benefit plan in which such Company Employee participated immediately prior to the effective time of the merger and (ii) credit

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each Company Employee for any co-payments or deductibles incurred by such Company Employee in such plan year for purposes of any applicable deductible and annual out-of-pocket expense requirements under any such Post-Closing Plan. Such credited expenses will also count toward any annual or lifetime limits, treatment or visit limits or similar limitations that apply under the terms of the applicable plan.

The provisions of the merger agreement described under this heading will not confer upon any Company Employee or other service provider any right to continue in the employ or service (or to any term or condition of employment or service) of Parent, the surviving corporation, or any affiliate of Parent, nor will the provisions of the merger agreement described under this heading create any third-party beneficiary rights in any Company Employee or any of our, or any of our subsidiaries’, current or former service providers (or any beneficiaries or dependents thereof). The merger agreement provides that it is not intended to limit the ability of Parent or the surviving corporation or any of their affiliates to modify or terminate any benefit or compensation arrangement, or their right to terminate the employment or service of any Company Employee or other person.

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REGULATORY MATTERS

Except for the filing of a certificate of merger with the Secretary of State of the State of Delaware on or before the effective date of the merger, we are unaware of any material federal, state or foreign regulatory requirements or approvals required for the execution of the merger agreement or completion of the merger.

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

The following discussion summarizes the material U.S. federal income tax consequences of the merger to holders of our common stock. This discussion is based upon the provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), the Treasury Regulations promulgated under the Code, and judicial and administrative rulings in effect as of the date of this proxy statement, all of which are subject to change or varying interpretation, possibly with retroactive effect. Any such changes could affect the accuracy of the statements and conclusions set forth herein.

This discussion does not address all aspects of U.S. federal income taxation that may be relevant to a holder of our common stock in light of the stockholder’s particular circumstances, nor does it discuss the special considerations applicable to those holders of our common stock subject to special rules, such as stockholders whose functional currency is not the U.S. dollar, stockholders subject to the alternative minimum tax, stockholders who are financial institutions or broker-dealers, mutual funds and other regulated investment companies, partnerships or other pass-through entities for U.S. federal income tax purposes, real estate investment trusts, S corporations, tax-exempt organizations, insurance companies, dealers in securities or foreign currencies, traders in securities who elect the mark-to-market method of accounting, individual retirement or other tax-deferred accounts, controlled foreign corporations, passive foreign investment companies, expatriates, stockholders subject to the anti-inversion rules of the Code, stockholders who acquired their common stock through the exercise of options or similar derivative securities or stockholders who hold their common stock as part of a hedge, straddle, constructive sale or conversion transaction. This discussion also does not address the U.S. federal income tax consequences to holders of our common stock who acquired their shares through stock option or stock purchase plan programs or through other compensatory arrangements or who do not vote in favor of the proposal to adopt the merger agreement and who properly exercise and perfect their demand for appraisal of their shares in accordance with Section 262. This discussion assumes that holders of our common stock hold their shares as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment). No party to the merger will seek an opinion of counsel or a ruling from the Internal Revenue Service with respect to the U.S. federal income tax consequences discussed herein and accordingly there can be no assurance that the Internal Revenue Service will agree with the positions described in this proxy statement.

We intend this discussion to provide only a general summary of the material U.S. federal income tax consequences of the merger. We do not intend it to be a complete analysis or description of all potential U.S. federal income tax consequences of the merger. This summary does not address non-U.S., state or local tax consequences of the merger or any U.S. tax consequences (e.g., estate or gift tax) other than U.S. federal income tax consequences of the merger; nor does it address any consequences under the unearned income Medicare contribution tax on net investment income. We urge you to consult your own tax advisor to determine the particular tax consequences to you (including the application and effect of any state, local or non-U.S. income and other tax laws) of the receipt of cash in exchange for shares of our common stock pursuant to the merger, in light of your individual circumstances.

If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds our common stock, the tax treatment of a partner will generally depend on the status of the partner and activities of the partner and partnership. If you are a partner of a partnership holding our common stock, you should consult your own tax advisor.

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For purposes of this discussion, we use the term “U.S. holder” to mean a beneficial owner of our common stock that is:

A “non-U.S. holder” is a beneficial owner (other than a partnership) of our common stock that is not a U.S. holder.

U.S. Holders

The receipt of cash in exchange for shares of our common stock pursuant to the merger will be a taxable transaction to U.S. holders for U.S. federal income tax purposes. A U.S. holder will generally recognize gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount of cash received and the U.S. holder’s adjusted tax basis for the shares surrendered. Generally, such gain or loss will be capital gain or loss. Gain or loss will be determined separately for each block of shares (i.e., shares acquired at the same cost in a single transaction) that is surrendered for cash pursuant to, or in connection with, the merger.

Capital gain recognized from the disposition of our common stock held for more than one year will be long-term capital gain and may be subject in the case of certain non-corporate U.S. holders, including individuals, to preferential rates. The deductibility of capital losses is subject to limitations.

Under the Code, a U.S. holder of our common stock may be subject, under certain circumstances, to information reporting on the cash received pursuant to the merger unless such U.S. holder is a corporation or other exempt recipient. In addition, the exchange agent generally is required to and will withhold (currently at a rate of 24%) on all payments to which a stockholder or other payee is entitled, unless the stockholder or other payee (i) is a corporation or comes within other exempt categories and demonstrates this fact or (ii) provides its correct tax identification number (social security number, in the case of an individual, or employer identification number, in the case of other stockholders), certifies under penalties of perjury that the number is correct (or properly certifies that it is awaiting a taxpayer identification number), certifies as to no loss of exemption from backup withholding and otherwise complies with the applicable requirements of the backup withholding rules. Each of our U.S. holders and, if applicable, each other payee, should complete, sign and return to the exchange agent for the merger the Internal Revenue Service Form W-9 that each stockholder will receive with the letter of transmittal following completion of the merger to provide the information and certification necessary to avoid backup withholding, unless an applicable exemption exists and is proved in a manner satisfactory to the exchange agent. Backup withholding is not an additional tax. Generally, any amounts withheld under the backup withholding rules described above can be refunded or credited against a payee’s U.S. federal income tax liability, if any, provided that the required information is furnished to the Internal Revenue Service in a timely manner. You should consult your own tax advisor as to the qualifications for exemption from backup withholding and the procedures for obtaining such exemption.

Non-U.S. Holders

Any gain realized on the receipt of cash pursuant to the merger by a non-U.S. holder generally will not be subject to U.S. federal income tax unless:

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Information reporting and, depending on the circumstances, backup withholding (currently at a rate of 24%) will apply to the cash received pursuant to the merger, unless the non-U.S. holder certifies under penalties of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that the holder is a United States person as defined under the Code) or such holder otherwise establishes an exemption. Each non-U.S. holder should complete, sign and return to the exchange agent a certification of foreign status on the applicable Internal Revenue Service Form W-8 (including all attachments) to provide the information and certification necessary to avoid backup withholding, unless an applicable exemption exists and is proved in a manner satisfactory to the exchange agent. Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules may be refunded or credited against a non-U.S. holder’s U.S. federal income tax liability, if any, provided that such non-U.S. holder furnishes the required information to the Internal Revenue Service in a timely manner. You should consult your own tax advisor as to the qualifications for exemption from backup withholding and the procedures for obtaining such exemption.

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THE MERGER AGREEMENT

This section of the proxy statement describes the material provisions of the merger agreement but does not purport to describe all the provisions of the merger agreement. The following summary is qualified in its entirety by reference to the complete text of the merger agreement, which is included as Annex A to this proxy statement and is incorporated by reference herein in its entirety. We urge you to read the full text of the merger agreement because it is the legal document that governs the merger. The merger agreement has been included to provide you with information regarding its terms. It is not intended to provide you with any other factual information about us. Such information can be found elsewhere in this proxy statement and in the other public filings we make with the SEC, which are available without charge at www.sec.gov.

Structure of the Merger

On September 22, 2019, we entered into the merger agreement with Parent and Merger Sub, providing for the acquisition of us by Parent. If all of the conditions to the merger are satisfied or waived in accordance with the merger agreement, Merger Sub will merge with and into us. Upon consummation of the merger, the separate corporate existence of Merger Sub will cease, and we will continue as the surviving corporation and become a wholly-owned subsidiary of Parent.

Effective Time of the Merger

The merger will become effective upon the filing of a certificate of merger with the Secretary of State of the State of Delaware or such later time as agreed upon by Parent and us and specified in the certificate of merger. The closing of the merger will occur on a date specified by us and Parent, which will be no later than the third business day after the conditions to effect the merger set forth in the merger agreement have been satisfied or waived, or such other date as Parent and we may select. Although we expect to complete the merger within the first calendar quarter of 2020, and in any event, before March 13, 2020, we cannot specify when, or assure you that, we, Parent and Merger Sub will satisfy or waive all conditions to the merger.

Certificate of Incorporation and Bylaws

At the effective time of the merger, our certificate of incorporation and bylaws will be amended in their entirety to be as set forth in the exhibits to the merger agreement.

Board and Officers of the Surviving Corporation

The directors of Merger Sub immediately prior to the effective time of the merger will be the initial directors of the surviving corporation. Our currently-serving directors will cease to serve as directors of the surviving corporation as of the effective time of the merger. Our officers will be the initial officers of the surviving corporation.

Consideration to Be Received in the Merger

At the effective time of the merger, each share of our common stock issued and outstanding immediately prior to the effective time of the merger will automatically be cancelled and converted into the right to receive $3.00 in cash, net of applicable tax withholding, without interest, other than (a) shares of common stock owned by us (as treasury stock or otherwise), Parent or Merger Sub, or any of our or their respective direct or indirect wholly-owned subsidiaries, immediately prior to the effective time of the merger, all of which will be cancelled without any payment and (b) shares held by our stockholders who have properly exercised their statutory rights of appraisal in accordance with Section 262. See “APPRAISAL RIGHTS” beginning on page 66 of this proxy statement.

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Parent and the surviving corporation will be entitled to deduct and withhold from the consideration otherwise payable to any holder of shares of our common stock such amounts as may be required to be deducted and withheld with respect to making such payment under the Code and the applicable Treasury Regulations issued pursuant thereto, or any other applicable state, local or foreign tax law. Any consideration payable with respect to certain securities issued to employees of our Israeli subsidiaries will be delivered to an Israeli trustee to be held or released in accordance with Israeli tax law.

Payment Procedures

Parent will deposit, or cause to be deposited, with a paying agent reasonably acceptable to us concurrently with the effective time of the merger to which this proxy statement relates, such funds which, when taken together with a portion of the cash available on our balance sheet (after taking into account our outstanding expenses and subject to approval of our lenders) is sufficient to pay the aggregate merger consideration to be paid by Parent at the closing of the merger.

As promptly as reasonably practicable after the effective time of the merger, but in no event later than the third business day after the effective time of the merger, Parent shall cause the paying agent to send, to each holder of record of shares of our common stock as of the effective time of the merger, a letter of transmittal and instructions for use in the exchange of such shares for the merger consideration. Each holder will be entitled to receive the merger consideration specified in the merger agreement, upon surrender to the paying agent of the stock certificates representing such shares together with a valid letter of transmittal or, in the case of book-entry shares, upon receipt by the paying agent of an “agent’s message” with respect to such shares. No interest will be paid or will accrue on the cash payable upon the surrender or transfer of any stock certificate or book-entry share to the paying agent. Any portion of such funds that remains unclaimed by the holders of shares of our Common Stock twelve months after the effective time of the merger will be returned to Parent upon demand.

You should not send your Arotech stock certificates to the paying agent until you have received transmittal materials from the paying agent. Please do not return your Arotech stock certificates with the enclosed proxy, and please do not forward your stock certificates to the paying agent without a letter of transmittal.

If any of your certificates which immediately prior to the effective time represented outstanding shares of our common stock have been lost, stolen or destroyed, you will be entitled to obtain the merger consideration after you make an affidavit of that fact and, if required by Parent or the paying agent, post a bond.

If you hold shares of our common stock through a broker or other nominee, you must follow the procedures provided by your broker or other nominee in order to receive the merger consideration in respect of such shares.

Restricted Stock Awards and RSUs

At the effective time of the merger, all restrictions and vesting requirements with respect to each share of restricted stock granted that is outstanding immediately prior to the effective time, including those held by our directors, shall at the effective time, lapse and all such shares of restricted stock shall be vested in full. Each holder of shares of our restricted stock will be treated as a holder of shares of our common stock and receive the merger consideration, or $3.00 in cash, for such shares, net of applicable tax withholding, without interest, for each share of the underlying common stock.

At the effective of the merger, each RSU in respect of shares that is outstanding immediately prior to the effective time, including those held by our executive officers, shall fully vest (including RSUs subject to performance-based vesting) and shall be cancelled and converted automatically into the right to receive, as soon as reasonably practicable after the effective time of the merger (but no later than the first regularly scheduled payroll date that is at least five business days after the effective time), an amount in cash without interest, equal to the product of (i) the merger consideration, or $3.00, and (ii) the total number of our shares underlying such RSU, net of applicable tax withholding.

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The paying agent will deliver any consideration payable with respect to certain securities issued to employees of our Israeli subsidiaries to a trustee to be held or released in accordance with Israeli tax law.

Representations and Warranties

The merger agreement contains representations and warranties that we made to Parent and Merger Sub regarding, among other things:

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In addition, Parent and Merger Sub made representations and warranties to us regarding, among other things:

Many of our representations and warranties are qualified by a Material Adverse Effect standard. Pursuant to the merger agreement, a “Material Adverse Effect” means, with respect to us, any change, effect, event, occurrence, circumstance, condition or development that, individually or in the aggregate, (x) has or would reasonably be expected to prevent or materially impair or delay our ability to consummate the transactions contemplated by the merger agreement or (y) has or would reasonably be expected to have a Material Adverse Effect on the business, assets, properties, liabilities, results of operations or financial condition of the Company and its Subsidiaries taken as a whole, except that, for the purposes of clause (y), a Material Adverse Effect will not be deemed to include changes, effects, events, occurrences, circumstances, conditions or developments arising out of, relating to or resulting from:

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This description of the representations and warranties is included to provide investors with information regarding the terms of the merger agreement. It is not intended to provide any other factual information about us. The assertions embodied in the representations and warranties are qualified by information in a confidential disclosure letter that we provided to Parent in connection with signing the merger agreement. The disclosure letter contains information that modifies, qualifies and creates exceptions to the representations and warranties. Accordingly, you should not rely on the representations and warranties as characterizations of the actual state of facts at the time they were made or otherwise.

Covenants Relating to the Conduct of Our Business

From September 22, 2019, until the effective time of the merger, except as expressly contemplated by the merger agreement or as required by applicable law, or with the prior written consent of Parent (which Parent has agreed to not unreasonably withhold, condition or delay), we have agreed, and have agreed to cause our subsidiaries, to use commercially reasonable effects to conduct our business in the ordinary course of business consistent with past practice in all material respects and to comply in all material respects with applicable law.

We have also agreed that, subject to certain exceptions, from September 22, 2019, until the effective time of the merger, we will not, and will not permit any of our subsidiaries to, do any of the following without the prior written consent of Parent (which Parent has agreed to not unreasonably withhold, condition or delay):

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Go Shop Period

Between the date of the merger agreement and continuing until 12:01 a.m. New York City time on October 22, 2019 (the “Solicitation Period End Time”), we had the right to, directly or indirectly:

Pursuant to the merger agreement, Parent was required not to, and was required to cause its respective affiliates not to, intentionally or materially interfere with or prevent such negotiations and discussions.

Pursuant to the merger agreement, an “acquisition proposal” means any inquiry, proposal or offer from any person or group of persons (other than Parent, Merger Sub or their respective affiliates) relating to, in a single transaction or series of related transactions:

Go Shop End Time. At the Solicitation Period End Time (or, with respect to any Excluded Party (as defined below), until 12:01 A.M. New York City time on November 6, 2019 (the “Cut-Off Time”)),

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No later than 24 hours after the Solicitation Period End Time, we are required to provide Parent with a written summary of all material terms of any then-pending acquisition proposals that were made in writing by any Excluded Party. An “Excluded Party” is any person from which we receive, prior to the Solicitation Period End Time, a written acquisition proposal that remains pending as of the Solicitation Period End Time, provided, that the special committee determines in good faith such acquisition proposal constitutes a superior proposal or that such acquisition proposal is reasonably likely to lead to a superior proposal.

No Shop. From the Solicitation Period End Time (or, in the case of an Excluded Party, the Cut-Off Time) until the earlier of the effective time of the merger or the valid termination of the merger agreement, except as expressly permitted by the merger agreement, we are required not to (and will not publicly announce any intention to), directly or indirectly:

From the date of the merger agreement until the earlier of the effective time of the merger and the valid termination of the merger agreement, except as expressly permitted by the merger agreement, we are required not to (and may not publicly announce any intention to), directly or indirectly, (x) execute or enter into any letter of intent, agreement in principle, merger agreement, acquisition agreement or other agreement, understanding or arrangement relating to any acquisition proposal or any contract requiring us to abandon, terminate or fail to consummate the merger or the other transactions contemplated by the merger agreement, or (y) resolve or agree to take any of the foregoing actions.

Superior Proposal. The merger agreement further provides that if, after the Solicitation Period End Time (or, in the case of an Excluded Party, the Cut-Off Time), but prior to obtaining stockholder approval of the merger, we or our board receive a bona fide written acquisition proposal that did not result from a material breach of the terms of our non-solicitation obligations under the merger agreement and the special committee determines in good faith, after consultation with its financial advisors and outside legal counsel, that (i) such acquisition proposal constitutes a superior proposal (as defined below) or would reasonably be expected to lead to a superior proposal and (ii) the failure to take the actions described in the list immediately below would be inconsistent with our special committee’s fiduciary duties to our stockholders, the merger agreement will not prevent us or our board from:

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Pursuant to the merger agreement, a “superior proposal” means any written acquisition proposal (with all of the percentages included in the definition of acquisition proposal increased from 20% to 50%) that our board or special committee in good faith determines would, if consummated on its terms, result in a transaction that is more favorable to our stockholders than the transactions contemplated in the merger agreement (taking into account any changes to the terms of the merger and the merger agreement proposed by Parent) and that is reasonably likely to be consummated in accordance with its terms, taking into account all financial, legal, regulatory and other aspects and contingencies of the proposal that our board or special committee determines to be relevant.

From and after the Solicitation Period End Time (or, in the case of any Excluded Party, the Cut-Off Time) until effective time of the merger, we are required to, within 24 hours after receiving an acquisition proposal or any inquiry or request that could reasonably be expected to lead to an acquisition proposal, (i) notify Parent in writing of such acquisition proposal or such inquiry or request, including the material terms and conditions of the acquisition proposal and (ii) deliver to Parent copies of all written proposals, letters of interest, term sheets, commitment letters, proposed definitive documents or similar documents relating to any acquisition proposal received by us from any such offeror. From and after the Solicitation Period End Time (or, in the case of any Excluded Party, the Cut-Off Time) until effective time of the merger, we are required to keep Parent reasonably informed in all material respects of any material developments with respect to any such acquisition proposal (and any subsequent amendments or modifications thereto) and deliver copies of revised or newly received documents received by us from any such offeror to Parent within 24 hours of receipt. We are required to, within 24 hours following a determination by the special committee that an acquisition proposal is a superior proposal, notify Parent of such determination.

Except as set forth in the merger agreement, prior to obtaining stockholder approval of the merger, neither our board nor the special committee thereof is permitted to make an “Adverse Company Board Recommendation Change”, meaning that they shall not do any of the following:

Notwithstanding the foregoing restrictions, if we receive any bona fide written acquisition proposal at any time prior to stockholder approval of the merger, that does not result from a material breach of our non-solicitation

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obligations under the merger agreement and that the special committee has determined in good faith, after consultation with its financial advisors and outside legal counsel, if accepted, is a superior proposal and that its failure to recommend that the board effect an Adverse Company Board Recommendation Change with respect to such acquisition proposal or terminate the merger agreement in order to enter into a definitive agreement with respect to such acquisition proposal, would reasonably be expected to be inconsistent with its fiduciary duties to our stockholders, our board may, at any time prior to stockholder approval of the merger, make an Adverse Company Board Recommendation Change with respect to such acquisition proposal or recommend any such acquisition proposal and terminate the merger agreement to enter into a definitive agreement with respect to such acquisition proposal, if all of the following conditions are met:

Intervening Events. In addition, notwithstanding the foregoing restrictions, upon the occurrence of any intervening event (as defined below), our board (at the recommendation of the special committee) may, at any time prior to stockholder approval of the merger, make an Adverse Company Board Recommendation Change with respect to the intervening event, if all of the following conditions are met:

Pursuant to the merger agreement, “intervening event” means any positive material event or development or material change in circumstances with respect to the Company, that (i) was not actually known or reasonably foreseeable to the special committee or our board as of, or prior to, the date of the merger agreement and (ii) does not relate to any acquisition proposal or superior proposal; in each case other than (A) an effect resulting from a breach of the merger agreement by us; (B) changes in the market price or trading volume of shares of our common stock, in and of itself; or (C) the fact that we meet or exceed any internal or published projections,

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forecasts, budgets, plans for any period, in and of itself; provided, that in no event shall the receipt, existence or terms of an acquisition proposal be taken into account in determining whether an intervening event has occurred.

Stockholders Meeting

Subject to the provisions described under “Go Shop Period” above, the merger agreement requires us, as soon as reasonably practicable, to take all action necessary to duly call, give notice of, convene and hold a meeting of our stockholders to vote to adopt the merger agreement.

Nothing prevents us from postponing or adjourning the special meeting if (i) there are holders of an insufficient number of shares present or represented by proxy at the special meeting to constitute a quorum at the special meeting or to adopt this Agreement or (ii) the special committee has determined in good faith after consultation with its outside legal counsel that it is required to postpone or adjourn the special meeting by applicable law, order or a request from the SEC; provided, that, without the prior written consent of Parent (such consent not to be unreasonably withheld, conditioned or delayed), the special meeting will not be postponed or adjourned by more than ten days unless a lengthier period is required by applicable law, order or a request from the SEC.

Publicity

Neither we nor Parent will issue or cause the publication of any press release or other public announcement with respect to the merger agreement or the transactions contemplated by the merger agreement without the prior consent of the other party, unless (i) such statements are (A) required by applicable law or stock exchange rules, (B) not inconsistent with previously made joint statements, or (C) ordinary course communications made by Parent, Merger Sub or their affiliates regarding the merger agreement and the transactions contemplated thereby to their existing or prospective partners, equity holders, members, managers or investors of any affiliates thereof who are subject to confidentiality restrictions, or (ii) the press release or other public announcement (A) relates to an acquisition proposal, a superior proposal, an Adverse Company Board Recommendation Change or an intervening event, or (B) relates to a dispute between the parties regarding the merger agreement or the transactions contemplated thereby.

Indemnification and Insurance

The merger agreement provides that, for six years from and after the effective time of the merger, all rights to indemnification, advancement and exculpation existing as of September 22, 2019, in favor of our current and former directors and officers, as provided in our charter documents or certain specified contracts, will be assumed by the surviving corporation and will remain in full force and effect in accordance with their terms. Additionally, from and after the effective time of the merger, Parent and the surviving corporation will indemnify, to the fullest extent permitted under applicable law, our current and former directors and officers with respect to all acts or omissions by them in their capacities as our directors or officers in connection with the process resulting in and the adoption of the merger agreement and the consummation of the transactions contemplated thereby, and will advance, subject to certain conditions, and reimburse to such persons certain costs and expenses incurred in connection with the investigation and defense of certain legal claims.

In addition, with respect to claims for wrongful acts which occurred before or at the effective time of the merger (including in connection with the transactions contemplated by the merger agreement), Parent has agreed to cause the surviving corporation to maintain in effect, for no less than six years after the merger, our current directors and officers liability insurance policy (provided that the surviving corporation may substitute policies containing materially the same coverage, amounts and key terms and conditions that are not less advantageous to our directors and officers than our current policy). However, if the total premiums of such insurance coverage exceed 300% of the last annual premium, Parent and the surviving corporation will not be required to pay the excess, and will be obligated to obtain a policy with the greatest coverage available for a cost not exceeding such amount. In lieu thereof, we may purchase, prior to the effective time of the merger, a six-year prepaid “run-off”

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or “tail policy” with a claims period of six years from the effective time of the merger, with at least the same coverage and amounts and containing terms and conditions that are not less advantageous to our directors and officers than our current policy with respect to similar claims and full prior acts coverage for all acts and omissions taking place before the tail becomes effective.

Conditions to the Merger

Our and Parent’s and Merger Sub’s obligations to effect the merger are subject to the satisfaction (or waiver, if permissible under applicable law) of the following conditions:

In addition, the obligations of Parent and Merger Sub to effect the merger are subject to the satisfaction or waiver of the following conditions:

In addition, our obligation to effect the merger is subject to the satisfaction or waiver of the following conditions:

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Neither we, Parent nor Merger Sub can provide assurance that all of the conditions of the merger will be satisfied or waived by the party permitted to do so.

Financing

The consummation of the merger is not subject to any financing condition. Concurrently with the execution of the merger agreement, Greenbriar Equity Fund IV, L.P., and certain of its affiliated investment funds provided an Equity Commitment Letter to Parent, pursuant to which they have committed to provide to Parent, on the terms and subject to the conditions set forth in the Equity Commitment Letter, at or immediately prior to the closing of the merger, an equity contribution of an aggregate amount up to $84,500,000. We are a third party beneficiary to the Equity Commitment Letter.

Termination

The merger agreement may be terminated at any time prior to the effective time of the merger:

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Termination Fee

In general, all fees and expenses incurred by a party to the merger agreement will be paid by the party incurring such fees and expenses, provided that, if the merger agreement is terminated in certain circumstances described below, we will be required to pay to Parent a termination fee as follows:

The merger agreement also provides that Parent will pay us a fee of $3,200,000 if we terminate the merger agreement because (i) Parent or Merger Sub has breached or failed to perform any of its representations, warranties, covenants, or agreements under the merger agreement such that a closing condition is not satisfied or (ii) Parent fails to close the merger when required to do so under the merger agreement.

Amendment and Waiver

The parties may amend the merger agreement at any time before or after our stockholders vote to adopt the merger agreement. However, after our stockholder approval has been obtained, the parties may not amend the merger agreement without obtaining further approval by our stockholders if, by law or NASDAQ regulation, such amendment would require further stockholder approval.

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Specific Performance

The parties to the merger agreement agreed that they will be entitled to an injunction, specific performance and other equitable relief to prevent breaches of the merger agreement and to enforce and specifically the terms and provisions of the merger agreement, this being in addition to any other remedy to which they are entitled at law or in equity.

Governing Law

The merger agreement is governed by the laws of the State of Delaware.

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VOTING AGREEMENT

The following is a summary of the material terms of a voting agreement entered into in connection with the execution of the merger agreement. The following summary is qualified in its entirety by reference to the complete text of such agreement, a copy of which is included as Annex B to this proxy statement. You should carefully read the complete text of the voting agreement.

In connection with the execution of the merger agreement, on September 22, 2019, Jon B. Kutler, the chairman of our board, in his capacity as the beneficial owner of 1,887,897 shares of Arotech common stock representing approximately 7.1% of the shares outstanding as of September 22, 2019, entered into a voting agreement with Parent and us pursuant to which he agreed to vote shares beneficially owned by him in favor of the adoption of the merger agreement and against any alternative acquisition proposal other than the merger, and not to transfer his shares during the pendency of the merger. The voting agreement terminates upon the termination of the merger agreement.

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