NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
a. Company:
Arotech Corporation (“Arotech”) and its wholly-owned subsidiaries (the “Company”) provide defense and security products for the military, law enforcement, emergency services and homeland security markets, including multimedia interactive simulators/trainers, and lithium batteries and chargers. The Company operates primarily through its wholly-owned subsidiaries FAAC Incorporated, a Michigan corporation located in Ann Arbor, Michigan (Training and Simulation Division) with a location in Orlando, Florida; Epsilor-Electric Fuel Ltd. (“Epsilor-EFL”), an Israeli corporation located in Beit Shemesh, Israel (between Jerusalem and Tel-Aviv) and in Dimona, Israel (in Israel’s Negev desert area) (Power Systems Division); UEC Electronics, LLC (“UEC”), a South Carolina limited liability company located in Hanahan, South Carolina (Power Systems Division).
b. Basis of Presentation:
The Company prepared the accompanying unaudited condensed consolidated financial statements of Arotech Corporation and all wholly-owned, majority owned or otherwise controlled subsidiaries on the same basis as its annual audited financial statements. The Company condensed or omitted certain information and footnote disclosures normally included in its annual audited financial statements, which it prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP), with the instructions to Form 10-Q and with Article 10 of Regulation S-X, and include the accounts of Arotech Corporation and its subsidiaries. The Company’s quarterly financial statements should be read in conjunction with its Annual Report on Form 10-K for the year ended
December 31, 2018
. In the opinion of the Company, the unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of its financial position at
March 31, 2019
, its operating results for the
three months ended March 31, 2019
and
2018
, its cash flows for the
three months ended March 31, 2019
and
2018
, and its statement of shareholders’ equity for the
three months ended March 31, 2019
and
2018
.
The results of operations for the
three months ended March 31, 2019
are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending
December 31, 2019
.
The condensed consolidated balance sheet at
December 31, 2018
has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
.
c. Reclassification:
From time to time the Company may reclassify amounts from prior periods to conform to the current year’s presentation.
d. Commitments and contingencies:
The Company is involved in litigation from time to time in the regular course of its business. There are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject. In addition, the Company believes that adequate provisions for resolution of all contingencies have been made for probable losses that are reasonably estimable. These contingencies are subject to uncertainties, and, as a result, the Company is unable to estimate the amount or range of loss, if any, in excess of amounts accrued. The Company does not believe that the these contingencies will have a material adverse effect on the Company’s balance sheets, statements of operations and comprehensive income or statements of cash flows for the
three months ended March 31, 2019
.
e. Goodwill and other long-lived assets:
Goodwill and indefinite-lived intangible assets are tested for impairment at least annually and between annual tests in certain circumstances, and written down when impaired. Goodwill is tested for impairment by comparing the fair value of the Company’s reporting units with the carrying value. The Training and Simulation and the Power Systems reporting units have goodwill.
As of its last annual impairment test at October 1, 2018, the Company determined that the goodwill for both reporting units was not impaired.
Consistent with previous interim reporting periods, the Company monitors qualitative and quantitative factors, including internal projections, periodic forecasts, and actual results of the reporting unit. Based upon this interim review, the Company does not believe that goodwill or its indefinite-lived intangible assets related to either reporting unit is impaired.
f. New accounting pronouncements:
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. The new standard, effective January 1, 2019, requires virtually all leases to be recognized on the Consolidated Balance Sheets. Effective January 1, 2019, the Company adopted the standard using the modified retrospective method, under which it elected the package of practical expedients and transition provisions allowing it to bring its existing operating leases onto the Condensed Consolidated Balance Sheet without adjusting comparative periods.
The Company has operating leases for facilities and equipment, which are recorded as assets and liabilities for those leases with terms greater than 12 months. Lease-related assets, or right-of-use assets (“ROU”), are recognized at the lease commencement date at amounts equal to the respective lease liabilities, adjusted for prepaid lease payments, initial direct costs, and lease incentives received. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.
Upon adoption of the standard, the Company recorded approximately
$6.3 million
of ROU assets and
$6.5 million
of current and long term lease obligations in its Condensed Consolidated Balance Sheet. Refer to Note 2 “Significant Accounting Policy Update” for additional information.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. The new standard simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test and requires businesses to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The amendments are effective for annual periods beginning after December 15, 2019 with early adoption permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted this standard and it did not have an impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02,
Income Statement-Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”)
. The accounting standard allows for the optional reclassification of stranded tax effects within accumulated other comprehensive income to retained earnings that arise due to the enactment of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The amount of the reclassification would reflect the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment of the Tax Act and other income tax effects of the Tax Act on items remaining in accumulated other comprehensive income. The Company adopted the requirements of the new standard in the first quarter of 2019, as required by the new standard. The adoption of this ASU did not have a material impact on the consolidated financial statements.
In August 2018, the SEC issued Release No. 33-10532 that amends and clarifies certain financial reporting requirements. The principal change to the Company’s financial reporting is the inclusion of the annual disclosure requirement of changes in stockholders’ equity in Rule 3-04 of Regulation S-X to interim periods.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES UPDATE
The Company’s significant accounting policies are detailed in “Note 2: Significant Accounting Policies” of its Form 10-K for the year ended December 31, 2018. Significant changes to the Company’s accounting policies as a result of adopting Accounting Standards Codification (“ASC”) 842 are discussed below:
Leases:
The Company determines if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded in the Condensed Consolidated Balance Sheets and the Company recognizes lease expense for these leases on a straight line basis over the lease term. Operating leases are included in operating lease ROU asset, current portion of lease obligations and long term portion of lease obligations on its Condensed Consolidated Balance Sheet. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities on its Condensed Consolidated Balance Sheet. As of
March 31, 2019
, the Company does not have any non-cancelable operating lease commitments that have not yet commenced.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. If a lease does not implicitly state a rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made in advance, any initial direct costs incurred and excludes any lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably assured that the Company will exercise that option. Lease expense for minimum lease payments are recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components, which are generally accounted for separately.
The Company has operating leases for its production and office facilities and certain office equipment. These leases have remaining lease terms of
2 years
to
15 years
, some of which include options to extend for up to
5 years
. These options have been included in the Company’s calculation of the ROU asset and lease liability based upon the Company’s assessment of whether the option will be exercised.
The Company’s lease agreements do not contain any residual value guarantees or material restrictive covenants.
The Company rents or subleases certain real estate to third parties. The Company’s sublease portfolio consists of an operating lease within
one
of its facilities, resulting in approximately
$27,000
of sublease income for the three months ended March 31, 2019.
The components of lease expense were as follows:
|
|
|
|
|
|
Three months ended March 31,
|
|
2019
|
Operating lease cost
|
|
$
|
280,246
|
|
|
|
|
Finance lease cost:
|
|
|
Amortization of right-of-use assets
|
|
$
|
3,166
|
|
Interest on lease liabilities
|
|
728
|
|
Total finance lease costs
|
|
$
|
3,894
|
|
|
|
|
Three months ended March 31,
|
|
2019
|
Supplemental Cash Flows Information
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
|
$
|
103,004
|
|
Operating cash flows from finance leases
|
|
728
|
|
Financing cash flows from finance leases
|
|
2,939
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
Operating leases
|
|
$
|
2,785,444
|
|
Finance leases
|
|
31,386
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
Operating leases
|
|
11 years
|
|
Finance leases
|
|
4 years
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
Operating leases
|
|
7.47
|
%
|
Finance leases
|
|
6.86
|
%
|
The undiscounted annual future minimum lease payments are summarized by year in the table below:
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
Operating Leases
|
|
Finance Leases
|
2019 (excluding the three months ended March 31, 2019)
|
|
$
|
826,215
|
|
|
$
|
10,998
|
|
2020
|
|
1,106,944
|
|
|
14,664
|
|
2021
|
|
891,346
|
|
|
14,664
|
|
2022
|
|
805,432
|
|
|
12,276
|
|
2023
|
|
697,277
|
|
|
7,500
|
|
Thereafter
|
|
5,555,117
|
|
|
—
|
|
Total future minimum lease payments
|
|
9,882,331
|
|
|
60,102
|
|
Less imputed interest
|
|
(3,546,134
|
)
|
|
(8,128
|
)
|
Total:
|
|
$
|
6,336,197
|
|
|
$
|
51,974
|
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
Operating Leases as of March 31,
|
|
2019
|
Right of use asset
|
|
$
|
6,035,660
|
|
|
|
|
Current portion of lease obligations
|
|
622,065
|
|
Long term portion of lease obligations
|
|
5,714,132
|
|
Total operating lease obligations
|
|
6,336,197
|
|
|
|
|
Financing Leases as of March 31,
|
|
2019
|
Property and Equipment, at cost
|
|
56,933
|
|
Accumulated depreciation
|
|
(5,295
|
)
|
Property and Equipment, net
|
|
51,638
|
|
|
|
|
Other accounts payable and accrued expenses
|
|
11,445
|
|
Other long term liabilities
|
|
40,529
|
|
Total financing lease liabilities
|
|
$
|
51,974
|
|
NOTE 3: REVENUES
Revenue recognition:
The Company recognized revenues from (i) the sale and customization of interactive training systems (Training and Simulation Division); (ii) maintenance services in connection with such systems (Training and Simulation Division); (iii) the sale of batteries, chargers and adapters, and custom power solutions (Power Systems Division); and (iv) the sale of lifejacket lights (Power Systems Division).
The Company determines its revenue recognition through the following steps:
|
|
•
|
Identification of the contract, or contracts, with a customer
|
|
|
•
|
Identification of the performance obligations within the contract
|
|
|
•
|
Determination of the transaction price
|
|
|
•
|
Allocation of the transaction price to the performance obligations within the contract
|
|
|
•
|
Recognition of revenue when, or as the performance obligation has been satisfied
|
Performance Obligations.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. In assessing the recognition of revenue, the Company evaluates whether two or more contracts should be combined and accounted for as one contract and if the combined or single contract should be accounted for as multiple performance obligations which could change the amount of revenue and profit (loss) recorded in a period. The majority of the Company’s contracts with customers are accounted for as one performance obligation, as the majority of tasks and services is part of a single project or capability. As these contracts are typically a customized customer-specific solution, the Company uses the expected cost plus margin approach to estimate the standalone selling price of each performance obligation. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract.
The Company also offers maintenance and support agreements (“warranties”) for many of its products. The specific terms and conditions of those warranties vary depending upon the product sold and country in which the product was sold. The warranty revenue is recognized on a straight-line basis over the term of the maintenance and support services. The standalone selling price is determined based on the price charged when sold separately or upon renewal.
The Company’s performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for
90%
and
94%
of its revenue for the three-month period ended March 31, 2019 and 2018, respectively. Substantially all of the Company’s revenue in the Training and Simulation Division and the U.S. Power Systems Division is recognized over time. Typically, revenue is recognized over time using an input measure (
e.g.
, costs incurred to date relative to total estimated costs at completion) to measure progress. Contract costs include labor, material, and overhead.
On March 31, 2019, the Company had
$70.5 million
of expected future revenue relating to performance obligations currently in progress, which it also refers to as total backlog. The Company expects to recognize approximately
68.1%
its backlog as revenue in 2019, and the remaining
31.9%
thereafter.
Contract Estimates.
Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.
Contract estimates are based on various assumptions to project the outcome of future events that can exceed a year. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.
As a significant change in one or more of these estimates could affect the profitability of its contracts, the Company reviews and updates its contract-related estimates quarterly. The Company recognizes adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, the Company recognizes the total loss in the quarter it is identified.
The aggregate impact of adjustments in contract estimates to net income (loss) is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2019
|
|
2018
|
|
Training and Simulation Division
|
|
Power Systems Division
|
|
Training and Simulation Division
|
|
Power Systems Division
|
Net income (loss)
|
$
|
146,278
|
|
|
$
|
(30,419
|
)
|
|
$
|
71,440
|
|
|
$
|
(119,778
|
)
|
Revenue by Category.
As of March 31, 2019 and 2018 the Company’s portfolio of products and services consisted of
476
and
500
active contracts, respectively.
Revenue by major product line was as follows:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2019
|
|
2018
|
Product Revenue
|
|
|
|
Air Warfare Simulation
|
$
|
3,499,202
|
|
|
$
|
5,032,659
|
|
Vehicle Simulation
|
7,080,941
|
|
|
5,463,998
|
|
Use-of-Force
|
2,457,177
|
|
|
3,260,049
|
|
Service Revenue
|
|
|
|
Warranty
|
952,295
|
|
|
801,158
|
|
Total Training and Simulation Division
|
$
|
13,989,615
|
|
|
$
|
14,557,864
|
|
|
|
|
|
|
|
|
|
Contract Manufacturing
|
$
|
3,217,992
|
|
|
$
|
4,164,324
|
|
Power Distribution and Generation
|
250,700
|
|
|
3,275,380
|
|
Batteries
|
2,382,475
|
|
|
4,146,112
|
|
Engineering Services and Other
|
937,857
|
|
|
1,104,829
|
|
Total Power Division
|
$
|
6,789,024
|
|
|
$
|
12,690,645
|
|
The table below details the percentage of total recognized revenue by type of arrangement for the three months ended March 31, 2019 and 2018:
|
|
|
|
|
|
|
|
Three months ended March 31,
|
Type of Revenue
|
2019
|
|
2018
|
Sale of products
|
92.1
|
%
|
|
96.4
|
%
|
Maintenance and support agreements
|
4.6
|
%
|
|
2.9
|
%
|
Long term research and development contracts
|
3.3
|
%
|
|
0.7
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
Revenue by contract type was as follows:
|
|
|
|
|
|
|
|
|
|
Training and
Simulation
Division
|
|
Power Systems
Division
|
Three months ended March 31, 2019
|
|
|
|
Fixed Price
|
$
|
10,971,102
|
|
|
$
|
6,169,657
|
|
Cost Reimbursement (Cost Plus)
|
1,349,345
|
|
|
431,050
|
|
Time and Materials
|
1,669,168
|
|
|
188,317
|
|
Total
|
$
|
13,989,615
|
|
|
$
|
6,789,024
|
|
Three months ended March 31, 2018
|
|
|
|
Fixed Price
|
$
|
12,209,969
|
|
|
$
|
12,072,168
|
|
Cost Reimbursement (Cost Plus)
|
1,338,951
|
|
|
388,749
|
|
Time and Materials
|
1,008,944
|
|
|
229,728
|
|
Total
|
$
|
14,557,864
|
|
|
$
|
12,690,645
|
|
Each of these contract types presents advantages and disadvantages. Typically, the Company assumes more risk with fixed-price contracts. However, these types of contracts offer additional profits when the Company completes the work for less than originally estimated. Cost-reimbursement contracts generally subject the Company to lower risk. Accordingly, the associated base fees are usually lower than fees earned on fixed-price contracts. Under time and materials contracts, the Company’s profit may fluctuate if actual labor-hour costs vary significantly from the negotiated rates.
Revenue by customer was as follows:
|
|
|
|
|
|
|
|
|
|
Training and
Simulation
Division
|
|
Power Systems
Division
|
Three months ended March 31, 2019
|
|
|
|
U.S. Government
|
|
|
|
Department of Defense (DoD)
|
$
|
4,893,803
|
|
|
$
|
441,033
|
|
Non-DoD
|
2,604,486
|
|
|
—
|
|
Foreign Military Sales (FMS)
|
642,269
|
|
|
—
|
|
Total U.S. Government
|
$
|
8,140,559
|
|
|
$
|
441,033
|
|
|
|
|
|
U.S. Commercial
|
$
|
4,771,042
|
|
|
$
|
3,167,221
|
|
Non-U.S. Government
|
241,553
|
|
|
291,965
|
|
Non-U.S. Commercial
|
836,462
|
|
|
2,888,805
|
|
Total Revenue
|
$
|
13,989,615
|
|
|
$
|
6,789,024
|
|
Three months ended March 31, 2018
|
|
|
|
U.S. Government
|
|
|
|
Department of Defense (DoD)
|
$
|
3,432,193
|
|
|
$
|
512,212
|
|
Non-DoD
|
2,738,807
|
|
|
—
|
|
Foreign Military Sales (FMS)
|
584,781
|
|
|
—
|
|
Total U.S. Government
|
$
|
6,755,781
|
|
|
$
|
512,212
|
|
|
|
|
|
U.S. Commercial
|
$
|
6,028,998
|
|
|
$
|
7,717,964
|
|
Non-U.S. Government
|
926,164
|
|
|
1,517,816
|
|
Non-U.S. Commercial
|
846,921
|
|
|
2,942,653
|
|
Total Revenue
|
$
|
14,557,864
|
|
|
$
|
12,690,645
|
|
Contract Balances.
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. The majority of the Company’s contract amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (
e.g.
, biweekly or monthly) or upon achievement of contractual milestones. Billing sometimes occurs subsequent to revenue recognition, resulting in contract assets. However, the Company sometimes receives advances or deposits from its customers,
particularly on its international contracts, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Training and Simulation Division
|
|
Power Systems Division
|
|
Total
|
|
Training and Simulation Division
|
|
Power Systems Division
|
|
Total
|
Contract Assets - Current
|
$
|
14,251,984
|
|
|
$
|
8,067,984
|
|
|
$
|
22,319,968
|
|
|
$
|
10,358,679
|
|
|
$
|
7,509,217
|
|
|
$
|
17,867,896
|
|
Contract Liabilities - Current
|
(6,076,744
|
)
|
|
(674,041
|
)
|
|
(6,750,785
|
)
|
|
(6,697,522
|
)
|
|
(357,257
|
)
|
|
(7,054,779
|
)
|
Net Contract Assets and Liabilities:
|
$
|
8,175,240
|
|
|
$
|
7,393,943
|
|
|
$
|
15,569,183
|
|
|
$
|
3,661,157
|
|
|
$
|
7,151,960
|
|
|
$
|
10,813,117
|
|
The
$4.8
million increase in the Company’s net contract assets (liabilities) from December 31, 2018 to March 31, 2019 was due to the timing of milestone payments on certain U.S. Government and commercial contracts.
During the three months ended March 31, 2019 and 2018, the Company recognized
$2.8 million
and
$3.0 million
, respectively, in revenue related to the Company’s contract liabilities.
The Company did not record any provisions for impairment of its contract assets during the three months ended March 31, 2019 and 2018.
Trade Receivables
Trade receivables include amounts billed and currently due from customers. The amounts are recorded at net estimated realizable value. The value of the Company’s trade receivables when appropriate includes an allowance for estimated uncollectible amounts. The Company calculates an allowance based on its history of write-offs, the assessment of customer creditworthiness, and the age of the outstanding receivables.
As of
March 31, 2019
and
December 31, 2018
, the Company’s trade receivables recorded in the consolidated balance sheets were
$11.8 million
and
$16.3 million
, respectively. The Company had an immaterial provision for doubtful accounts at
March 31, 2019
and
December 31, 2018
. The Company believes its exposure to concentrations of credit risk is limited due to the nature of its operations, where a significant number of its contracts are typically a customized customer specific solution.
NOTE 4: INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first in, first out (“FIFO”) method. The Company periodically evaluates the quantities on hand relative to current and historical selling prices and historical and projected sales volume and based on these evaluations, provisions are made in each period to write down inventory to its net realizable value. For the
three months ended March 31, 2019
and
2018
the Company wrote off approximately
$41,600
and
$154,000
, respectively, of obsolete inventory, which has been included in the cost of revenues.
Inventories by component are as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Raw and packaging materials
|
$
|
7,977,195
|
|
|
$
|
7,912,883
|
|
Work in progress
|
1,054,467
|
|
|
1,626,960
|
|
Finished products
|
420,802
|
|
|
372,905
|
|
Total:
|
$
|
9,452,464
|
|
|
$
|
9,912,748
|
|
NOTE 5: SEGMENT INFORMATION
a. The Company and its subsidiaries operate in
two
business segments. The two segments are also treated by the Company as reporting units for goodwill impairment evaluation purposes. The goodwill amounts associated with the Training and Simulation Division and the Power Systems Division were determined and valued when the specific businesses were purchased. The Company and its subsidiaries operate in two continuing business segments and follow the requirements of FASB ASC 280-10.
The Company’s reportable segments have been determined in accordance with the Company’s internal management structure, which is organized based on operating activities. The accounting policies of the reportable segments are the same as those used by the Company in the preparation of its annual financial statements. The Company evaluates performance based on two primary factors, one is the segment’s operating income and the other is the segment’s contribution to the Company’s future strategic growth.
b. The following is information about reported segment revenues, income (losses) from operations, and total assets as of
March 31, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Training and
Simulation
Division
|
|
Power Systems
Division
|
|
Corporate
Expenses
|
|
Total
Company
|
Three months ended March 31, 2019
|
|
|
|
|
|
|
|
Revenues from outside customers
|
$
|
13,989,615
|
|
|
$
|
6,789,024
|
|
|
$
|
—
|
|
|
$
|
20,778,639
|
|
Depreciation and amortization(1)
|
(187,830
|
)
|
|
(675,490
|
)
|
|
—
|
|
|
(863,320
|
)
|
Direct expenses(2)
|
(11,695,059
|
)
|
|
(8,261,927
|
)
|
|
(906,020
|
)
|
|
(20,863,006
|
)
|
Segment operating income (loss)
|
$
|
2,106,726
|
|
|
$
|
(2,148,393
|
)
|
|
$
|
(906,020
|
)
|
|
$
|
(947,687
|
)
|
Financial expense
|
(43,007
|
)
|
|
(64,915
|
)
|
|
(190,523
|
)
|
|
(298,445
|
)
|
Income tax expense
|
(50,000
|
)
|
|
—
|
|
|
(110,881
|
)
|
|
(160,881
|
)
|
Net income (loss)
|
$
|
2,013,719
|
|
|
$
|
(2,213,308
|
)
|
|
$
|
(1,207,424
|
)
|
|
$
|
(1,407,013
|
)
|
Segment assets(3)(4)
|
57,291,042
|
|
|
64,085,613
|
|
|
3,623,664
|
|
|
125,000,319
|
|
Additions to long-lived assets
|
532,251
|
|
|
403,337
|
|
|
319,995
|
|
|
1,255,583
|
|
Three months ended March 31, 2018
|
|
|
|
|
|
|
|
Revenues from outside customers
|
$
|
14,557,864
|
|
|
$
|
12,690,645
|
|
|
$
|
—
|
|
|
$
|
27,248,509
|
|
Depreciation, amortization and impairment expenses(1)
|
(200,360
|
)
|
|
(796,042
|
)
|
|
—
|
|
|
(996,402
|
)
|
Direct expenses(2)
|
(11,872,231
|
)
|
|
(12,273,712
|
)
|
|
(1,050,353
|
)
|
|
(25,196,296
|
)
|
Segment operating income (loss)
|
$
|
2,485,273
|
|
|
$
|
(379,109
|
)
|
|
$
|
(1,050,353
|
)
|
|
$
|
1,055,811
|
|
Financial expense
|
(44,619
|
)
|
|
15,465
|
|
|
(183,954
|
)
|
|
(213,108
|
)
|
Income tax expense
|
(19,801
|
)
|
|
—
|
|
|
(227,313
|
)
|
|
(247,114
|
)
|
Net income (loss)
|
$
|
2,420,853
|
|
|
$
|
(363,644
|
)
|
|
$
|
(1,461,620
|
)
|
|
$
|
595,589
|
|
Segment assets(3)
|
51,690,905
|
|
|
60,995,921
|
|
|
3,119,613
|
|
|
115,806,439
|
|
Additions to long-lived assets
|
121,588
|
|
|
209,232
|
|
|
—
|
|
|
330,820
|
|
|
|
(1)
|
Includes depreciation of property and equipment and amortization expenses of intangible assets.
|
|
|
(2)
|
Including,
inter alia
, sales and marketing, general and administrative.
|
|
|
(3)
|
Out of those amounts, goodwill in the Company’s Training and Simulation Division and Power Systems Division totaled
$24,435,641
and
$21,702,395
, respectively, as of
March 31, 2019
and
2018
.
|
|
|
(4)
|
Out of those amounts, right-of-use assets for the Company’s Training and Simulation Division and Power Systems Division totaled
$519,496
and
$5,516,164
, respectively, as of
March 31, 2019
.
|
NOTE 6: FAIR VALUE MEASUREMENT
The carrying value of short term assets and liabilities in the accompanying Condensed Consolidated Balance Sheets for cash and cash equivalents, restricted collateral deposits, trade receivables, contract assets, inventories, prepaid and other assets, trade payables, accrued expenses, deferred revenues and other liabilities as of
March 31, 2019
and
December 31, 2018
, approximate fair value because of the short maturity of these instruments. The carrying amounts of long term debt approximates the estimated fair values at
March 31, 2019
, based upon the Company’s ability to acquire similar debt at similar maturities.
NOTE 7: BANK FINANCING
The Company maintains credit facilities with JPMorgan Chase Bank, N.A. (“Chase”), whereby Chase provides (i) a
$15,000,000
revolving credit facility (“Revolver”), (ii) a
$10,000,000
Term Loan (“Term Loan A”), (iii) a
$1,730,895
Mortgage Loan (“Term Loan B”), (iv) a
$1,358,000
Mortgage Loan (“Term Loan C”); collectively referred to as the “Credit Facilities.”
On April 22, 2019, the Company entered into a new amendment to the Credit Agreement (the “Eighth Amendment”), effective March 31, 2019. Pursuant to the terms of the Eighth Amendment, the parties have incorporated, among other changes, amended definitions of fixed charge coverage ratios and leverage ratios for specific quarters in 2019, and the Company has been given a second revolving line (“Revolver B”) in the amount of
$6,000,000
, reducing to
$3,000,000
at the end of 2019 and due to be paid in full by February 28, 2020.
The maturity of the Revolver B is
February 28, 2020
. The Revolver B maintains an interest rate on a scale ranging from LIBOR plus
1.75%
up to LIBOR plus
3.50%
. At
March 31, 2019
Revolver B was not available to the Company.
The maturity of the Revolver is
March 11, 2021
. The Revolver maintains an interest rate on a scale ranging from LIBOR plus
1.75%
up to LIBOR plus
3.50%
. The effective interest rate for the revolver at
March 31, 2019
was
5.50%
. The balance at
March 31, 2019
and
December 31, 2018
was
$9.7 million
and
$5.5 million
, respectively.
The maturity of the Term Loan A is
March 11, 2021
. Term Loan A maintains an interest rate on a scale ranging from LIBOR plus
2.0%
up to LIBOR plus
3.25%
.
The repayment of Term Loan A consists of 60 consecutive monthly payments of principal plus accrued interest based on annual principal reductions of 10% during the first year, 20% during the second through fourth years, and 30% during the fifth year.
The effective interest rate for the Term Loan at
March 31, 2019
was
5.75%
. The balance at
March 31, 2019
and
December 31, 2018
was
$5.2 million
and
$5.7 million
, respectively.
The maturities of Term Loans B and C are
June 1, 2024
and maintain an interest rate on a scale identical to Term Loan A.
The monthly payments on Term Loan B and Term Loan C are $7,212 and $5,660, respectively, in principal plus accrued interest, with balloon payments due on the maturity date.
The effective interest rate for the Mortgage Loans at
March 31, 2019
was
5.75%
. The balance of both loans at
March 31, 2019
and
December 31, 2018
was
$2.8 million
and
$2.8 million
, respectively.
The Credit Facilities maintain certain reporting requirements, conditions precedent, affirmative covenants and financial covenants. The Company is required to maintain certain financial covenants. The Eighth Amendment to the credit facilities adjusted the financial covenant ratios for the Company’s reporting periods during fiscal year 2019. The amended Maximum Debt to EBITDA ratio is 3.75 to 1.00 for the period ended March 31, 2019, 5.50 to 1.00 for the period ended June 30, 2019, 6.25 to 1.00 for the period ended September 30, 2019, 4.00 to 1.00 for the period ended December 31, 2019 and 3.00 to 1.00 for periods ending after December 31, 2019. The amended Minimum Fixed Charge Coverage Ratio is 1.20 to 1.00 for the period ended March 31, 2019, 1.00 to 1.00 for the periods ended June 30, 2019 and September 30, 2019, and 1.20 to 1.00 for the periods ending after September 30, 2019.
The Company was in compliance with its covenants at
March 31, 2019
.
The Credit Facilities are secured by the Company’s assets and the assets of the Company’s domestic subsidiaries.