arotech10q-2009q2.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2009 .
Commission file number: 0-23336
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(Exact name of registrant as specified in its charter) |
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Delaware |
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95-4302784 |
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(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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1229 Oak Valley Drive, Ann Arbor, Michigan |
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48108 |
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(Address of principal executive offices) |
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(Zip Code) |
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(800) 281-0356 |
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(Registrant’s telephone number, including area code) |
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(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.Yes TNo £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes TNo £
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer: £ Accelerated
filer: £
Non-accelerated filer: £ Smaller
reporting company: T
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No T
The number of shares outstanding of the issuer’s common stock as of August 12, 2009 was 13,980,700.
SEC 1296 (04-09)
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Potential persons who are to respond to the collection of
information contained in this form are not required to respond
unless the form displays a currently valid OMB control number.
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INDEX
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Item |
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Page |
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PART I - FINANCIAL INFORMATION |
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Item 1 – Financial Statements (Unaudited): |
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|
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Condensed Consolidated Balance Sheets at June 30, 2009 and December 31, 2008 |
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3 |
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Condensed Consolidated Statements of Operations for the Six and Three Months Ended June 30, 2009 and 2008 |
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5 |
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Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 |
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6 |
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Notes to the Interim Condensed Consolidated Financial Statements |
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8 |
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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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16 |
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Item 3 – Quantitative and Qualitative Disclosures about Market Risk |
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24 |
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Item 4T – Controls and Procedures |
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24 |
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PART II - OTHER INFORMATION |
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Item 1 – Legal Proceedings |
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25 |
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Item 1A – Risk Factors |
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26 |
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Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds |
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26 |
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Item 6 – Exhibits |
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26 |
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SIGNATURES |
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27 |
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ITEM 1. |
FINANCIAL STATEMENTS (UNAUDITED) |
(U.S. Dollars)
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June 30, 2009 |
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December 31, 2008 |
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(Unaudited) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
3,130,254 |
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$ |
4,301,359 |
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Restricted collateral deposits |
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295,781 |
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|
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381,586 |
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Available-for-sale marketable securities |
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48,313 |
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49,204 |
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Trade receivables (net of allowance for doubtful accounts in the amount of $5,000 as of June 30, 2009 and $19,000 as of December 31, 2008) |
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|
15,438,646 |
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19,346,084 |
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Unbilled receivables |
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2,622,055 |
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4,769,264 |
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Other accounts receivable and prepaid expenses |
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3,613,309 |
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3,625,955 |
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Inventories |
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11,364,866 |
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9,678,960 |
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Total current assets |
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36,513,224 |
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42,152,412 |
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LONG TERM ASSETS: |
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|
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|
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Deferred tax assets |
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65,294 |
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72,114 |
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Severance pay fund |
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3,179,507 |
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2,888,867 |
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Other long term receivables |
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|
377,970 |
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463,780 |
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Property and equipment, net |
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4,525,729 |
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5,058,263 |
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Investment in affiliated company |
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7,018 |
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40,987 |
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Other intangible assets, net |
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6,018,301 |
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6,867,873 |
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Goodwill |
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32,028,562 |
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32,250,503 |
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Total long term assets |
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46,202,381 |
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47,642,387 |
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Total assets |
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$ |
82,715,605 |
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$ |
89,794,799 |
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The accompanying notes are an integral part of the Interim Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. Dollars, except share data)
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June 30, 2009 |
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December 31, 2008 |
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(Unaudited) |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES: |
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Trade payables |
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$ |
6,493,919 |
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$ |
9,664,558 |
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Other accounts payable and accrued expenses |
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|
4,715,063 |
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5,858,959 |
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Current portion of capitalized leases |
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45,854 |
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62,833 |
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Current portion of long term debt |
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1,848,582 |
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1,861,187 |
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Short term bank credit |
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3,457,890 |
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3,607,890 |
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Deferred revenues |
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2,879,607 |
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3,789,020 |
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Total current liabilities |
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19,440,915 |
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|
|
24,844,447 |
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LONG TERM LIABILITIES:
Accrued severance pay |
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4,823,983 |
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5,161,448 |
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Long term portion of capitalized leases |
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|
98,527 |
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122,090 |
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Long term debt |
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|
2,979,060 |
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3,866,727 |
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Deferred tax liability |
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2,710,000 |
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2,430,000 |
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Other long term liabilities |
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680,974 |
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146,738 |
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Total long term liabilities |
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11,292,544 |
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11,727,003 |
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STOCKHOLDERS’ EQUITY: |
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Share capital – |
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Common stock – $0.01 par value each; |
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Authorized: 50,000,000 shares and 250,000,000 shares as of June 30, 2009 and December 31, 2008, respectively; Issued: 14,320,044 shares and 13,637,639 shares as of June 30, 2009 and December 31, 2008, respectively; Outstanding: 14,059,306 shares and 13,637,639 shares as of June 30, 2009 and December 31, 2008,
respectively |
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|
140,594 |
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136,377 |
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Preferred shares – $0.01 par value each; |
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Authorized: 1,000,000 shares as of June 30, 2009 and December 31, 2008; No shares issued and outstanding as of June 30, 2009 and December 31, 2008 |
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|
– |
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– |
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Additional paid-in capital |
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|
220,359,567 |
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|
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220,124,075 |
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Accumulated deficit |
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|
(168,066,914 |
) |
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|
(167,205,514 |
) |
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Treasury stock, at cost (common stock – 260,738 shares and no shares as of June 30, 2009 and December 31, 2008, respectively) |
|
|
(258,596 |
) |
|
|
– |
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Notes receivable from stockholders |
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|
(1,357,788 |
) |
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|
(1,357,788 |
) |
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Accumulated other comprehensive loss |
|
|
1,165,283 |
|
|
|
1,526,199 |
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Total stockholders’ equity |
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|
51,982,146 |
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|
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53,223,349 |
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Total liabilities and stockholders’ equity |
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$ |
82,715,605 |
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|
$ |
89,794,799 |
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The accompanying notes are an integral part of the Interim Condensed Consolidated Financial Statements.
4
(U.S. Dollars, except share data)
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Six months ended June 30, |
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Three months ended June 30, |
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| |
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2009 |
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2008 |
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|
2009 |
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|
2008 |
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Revenues |
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$ |
36,127,412 |
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$ |
25,857,582 |
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$ |
16,035,190 |
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$ |
12,607,006 |
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Cost of revenues, exclusive of amortization of intangibles |
|
|
26,595,444 |
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|
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19,772,500 |
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|
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11,763,982 |
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|
|
9,767,718 |
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Research and development |
|
|
735,575 |
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|
|
832,872 |
|
|
|
403,687 |
|
|
|
225,778 |
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Selling and marketing expenses |
|
|
2,317,455 |
|
|
|
2,286,995 |
|
|
|
1,171,363 |
|
|
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1,144,356 |
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General and administrative expenses |
|
|
5,548,527 |
|
|
|
6,825,780 |
|
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|
2,781,858 |
|
|
|
3,293,320 |
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Amortization of intangible assets |
|
|
746,626 |
|
|
|
985,021 |
|
|
|
374,029 |
|
|
|
492,408 |
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Escrow adjustment – credit |
|
|
– |
|
|
|
(1,448,074 |
) |
|
|
– |
|
|
|
– |
|
|
Total operating costs and expenses |
|
|
35,943,627 |
|
|
|
29,255,094 |
|
|
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16,494,919 |
|
|
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14,923,580 |
|
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Operating profit (loss) |
|
|
183,785 |
|
|
|
(3,397,512 |
) |
|
|
(459,729 |
) |
|
|
(2,316,574 |
) |
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Other income |
|
|
51,650 |
|
|
|
659,149 |
|
|
|
1,819 |
|
|
|
122,777 |
|
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Financial income (expenses), net |
|
|
(1,099,492 |
) |
|
|
(52,952 |
) |
|
|
(126,414 |
) |
|
|
137,061 |
|
|
Loss before earnings of affiliated company and income tax expenses |
|
|
(864,057 |
) |
|
|
(2,791,315 |
) |
|
|
(584,324 |
) |
|
|
(2,056,736 |
) |
|
Income tax credits (expenses) |
|
|
(468,644 |
) |
|
|
(11,828 |
) |
|
|
(272,354 |
) |
|
|
108,106 |
|
|
Gain (loss) from affiliated company |
|
|
– |
|
|
|
(116,086 |
) |
|
|
– |
|
|
|
– |
|
|
Net loss attributable to common stockholders |
|
$ |
(1,332,701 |
) |
|
$ |
(2,919,229 |
) |
|
$ |
(856,678 |
) |
|
$ |
(1,948,630 |
) |
|
Basic and diluted net loss per share |
|
$ |
(0.10 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.14 |
) |
|
Weighted average number of shares used in computing basic and diluted net loss per share |
|
|
13,802,821 |
|
|
|
13,503,705 |
|
|
|
14,028,757 |
|
|
|
13,533,966 |
|
The accompanying notes are an integral part of the Interim Condensed Consolidated Financial Statements.
5
(U.S. Dollars)
| |
|
Six months ended June 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
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Net loss |
|
$ |
(1,332,701 |
) |
|
$ |
(2,919,229 |
) |
|
Adjustments required to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
Loss from affiliated company |
|
|
– |
|
|
|
116,086 |
|
|
Depreciation |
|
|
623,834 |
|
|
|
609,924 |
|
|
Amortization of intangible assets, capitalized software costs and impairment of intangible assets |
|
|
746,626 |
|
|
|
985,021 |
|
|
Amortization of debt discount |
|
|
147,103 |
|
|
|
– |
|
|
Increase in escrow receivable |
|
|
– |
|
|
|
(1,845,977 |
) |
|
Accrued (deferred) severance pay, net |
|
|
(628,105 |
) |
|
|
209,727 |
|
|
Stock issued in repayment of severance obligation |
|
|
440,000 |
|
|
|
– |
|
|
Compensation related to shares issued to employees, consultants and directors |
|
|
212,009 |
|
|
|
631,347 |
|
|
Adjustment to value of warrants and imbedded features on the senior convertible notes |
|
|
479,289 |
|
|
|
– |
|
|
Decrease in trade receivables |
|
|
3,907,438 |
|
|
|
6,894,307 |
|
|
Decrease in other accounts receivable and prepaid expenses |
|
|
98,456 |
|
|
|
24,309 |
|
|
Decrease (increase) in deferred taxes |
|
|
286,820 |
|
|
|
(14,994 |
) |
|
Increase in inventories |
|
|
(1,685,906 |
) |
|
|
(4,637,316 |
) |
|
Decrease in unbilled receivables |
|
|
2,147,209 |
|
|
|
79,251 |
|
|
Decrease in deferred revenues |
|
|
(909,413 |
) |
|
|
(615,534 |
) |
|
Increase (decrease) in trade payables |
|
|
(3,170,639 |
) |
|
|
1,170,166 |
|
|
Decrease in other accounts payable and accrued expenses |
|
|
(1,181,672 |
) |
|
|
(1,173,620 |
) |
|
Net cash provided by (used in) operating activities |
|
|
180,348 |
|
|
|
(486,544 |
) |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Purchase of property and equipment net of investment grants received from the State of Israel |
|
|
(91,300 |
) |
|
|
(664,555 |
) |
|
Additions of capitalized software development |
|
|
(17,193 |
) |
|
|
– |
|
|
Acquisition of subsidiary |
|
|
– |
|
|
|
(1,026,273 |
) |
|
Proceeds from escrow settlement |
|
|
– |
|
|
|
3,325,803 |
|
|
Acquisition of minority interest |
|
|
– |
|
|
|
(660,500 |
) |
|
Investment in affiliated company |
|
|
33,969 |
|
|
|
– |
|
|
Repayment of promissory notes related to acquisition of subsidiaries |
|
|
– |
|
|
|
(151,450 |
) |
|
Decrease in restricted cash |
|
|
86,696 |
|
|
|
133,409 |
|
|
Net cash provided by (used in) investing activities |
|
|
12,172 |
|
|
|
956,434 |
|
|
FORWARD |
|
$ |
192,520 |
|
|
$ |
469,890 |
|
The accompanying notes are an integral part of the Interim Condensed Consolidated Financial Statements.
6
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(U.S. Dollars)
| |
|
Six months ended June 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
FORWARD |
|
$ |
192,520 |
|
|
$ |
469,890 |
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Repayment of long term loans |
|
|
(936,193 |
) |
|
|
(74,021 |
) |
|
Decrease in short term bank credit |
|
|
(150,000 |
) |
|
|
(2,249,540 |
) |
|
Treasury stock purchased |
|
|
(258,596 |
) |
|
|
– |
|
|
Net cash provided by (used in) financing activities |
|
|
(1,344,789 |
) |
|
|
(2,323,561 |
) |
|
DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(1,152,269 |
) |
|
|
(1,853,671 |
) |
|
CASH ACCRETION (EROSION) DUE TO EXCHANGE RATE DIFFERENCES |
|
|
(18,836 |
) |
|
|
120,056 |
|
|
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD |
|
|
4,301,359 |
|
|
|
3,447,671 |
|
|
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD |
|
$ |
3,130,254 |
|
|
$ |
1,714,056 |
|
|
SUPPLEMENTARY INFORMATION ON NON-CASH TRANSACTIONS: |
|
|
|
|
|
|
|
|
|
Stock issued for acquisition |
|
$ |
– |
|
|
$ |
100,000 |
|
|
Assets recorded for capital lease addition |
|
$ |
– |
|
|
$ |
109,025 |
|
|
Interest paid during the period |
|
$ |
348,054 |
|
|
$ |
198,230 |
|
The accompanying notes are an integral part of the Interim Condensed Consolidated Financial Statements.
NOTE 1: BASIS OF PRESENTATION
a. Company:
Arotech Corporation (“Arotech” or the “Company”) and its wholly-owned subsidiaries provide defense and security products for the military, law enforcement and homeland security markets, including advanced zinc-air and lithium batteries and chargers, multimedia interactive simulators/trainers
and lightweight vehicle armoring. The Company operates primarily through its wholly-owned subsidiaries FAAC Corporation (“FAAC”), based in Ann Arbor, Michigan, and FAAC’s subsidiary Realtime Technologies, Inc. (“Realtime”), which is based in Royal Oak, Michigan; MDT Protective Industries, Ltd. (“MDT”), based in Lod, Israel; and MDT Armor Corporation (“MDT Armor”), based in Auburn, Alabama; Electric Fuel Battery Corporation (“EFB”), based in Auburn,
Alabama; Electric Fuel Ltd. (“EFL”), based in Beit Shemesh, Israel; Epsilor Electronic Industries, Ltd. (“Epsilor”), based in Dimona, Israel.
b. Basis of presentation:
The accompanying interim condensed consolidated financial statements have been prepared by Arotech Corporation in accordance with generally accepted accounting principles for interim financial information, 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. Certain information and footnote disclosures, normally included in complete financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted. 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 June 30, 2009, its operating results for the six- and three-month periods ended June 30, 2009
and 2008, and its cash flow for the six-month periods ended June 30, 2009 and 2008.
The results of operations for the six and three months ended June 30, 2009 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2009.
The balance sheet at December 31, 2008 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, 2008.
c. Accounting for stock-based compensation:
For the six months ended June 30, 2009 and 2008 the compensation expense recorded related to stock options and restricted shares was $212,009 and $631,347, respectively, of which $18,023 and $34,301, respectively, was for stock options and $193,986 and $597,046, respectively, was for restricted shares. The remaining
total compensation cost related to non-vested stock options and restricted share awards not yet recognized in the income statement as of June 30, 2009 was $926,412 of which $12,497 was for stock options and $913,915 was for restricted shares. The
weighted average period over which this compensation cost is expected to be recognized is approximately two years. Income tax expense was not impacted since the Company is in a net operating loss position. There were no new options issued in the first six months of 2009 and no options were exercised in the first six
months of 2009. The Company’s directors received their annual restricted stock grants on April 1, 2009 in accordance with the terms of the directors’ stock compensation plan.
d. Reclassification:
Certain comparative data in these financial statements have been reclassified to conform to the current year’s presentation.
e. Anti-dilutive shares for EPS calculation
All outstanding stock options and warrants have been excluded from the calculation of the diluted net loss per common share because all such securities are anti-dilutive for the periods presented. The total weighted average number of shares related to the outstanding options and warrants excluded from the calculations
of diluted net loss per share for the six-month periods ended June 30, 2009 and 2008 were 906,305 and 467,962, respectively. (Please see Note 12 which discusses our change in treatment of restricted stock in accordance with FSP EITF No. 03-6-1.)
f. Subsequent events
The Company has evaluated subsequent events through August 12, 2009, the date the financial statements were issued.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is determined using the average cost method or the FIFO method. The Company periodically evaluates the quantities on hand relative to current and historical selling prices and historical and projected sales volume. Based on these evaluations, provisions
are made in each period to write down inventory to its net realizable value. Inventory write-offs are provided to cover risks arising from slow-moving items, technological obsolescence, excess inventories, and for market prices lower than cost. Inventories are composed of the following:
| |
|
June 30, 2009 |
|
|
December 31, 2008 |
|
| |
|
(Unaudited) |
|
|
|
|
|
Raw materials |
|
$ |
7,351,243 |
|
|
$ |
6,798,662 |
|
|
Work-in-progress |
|
|
3,316,133 |
|
|
|
2,251,734 |
|
|
Finished goods |
|
|
697,490 |
|
|
|
628,564 |
|
|
Total: |
|
$ |
11,364,866 |
|
|
$ |
9,678,960 |
|
NOTE 3: IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. It requires the disclosure
of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS No. 165 is effective for interim or annual financial periods ending after June 15, 2009. The adoption of this standard did not have any impact on our results of operations or financial position for the six and three
months ended June 30, 2009.
We have evaluated subsequent events through the date the financial statements were issued see Note 13).
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles” — a replacement of FASB Statement No. 162. SFAS No. 168 establishes the FASB Accounting Standard Codification™ (Codification)
as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States (U.S. GAAP). All guidance contained in the Codification carries an equal level of authority. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative statements of U.S. GAAP by providing all the authoritative literature
related to a particular topic in one place. On the effective date of SFAS No. 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The implementation of SFAS No. 168 will not have any impact on our results of operations or financial
position.
For information about previous new accounting pronouncements and the potential impact on our Consolidated Financial Statements, see Note 2 of the Notes to Consolidated Financial Statements in our 2008 Form 10-K and Notes 8, 10 and 12 below.
NOTE 4: SEGMENT INFORMATION
a. General:
The Company and its subsidiaries operate primarily in three business segments and follow the requirements of SFAS No. 131.
The Company’s reportable operating 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 operating segments are the same as those used by the Company in the preparation of its annual financial
statement. The Company evaluates performance based upon 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) and total assets for the six and three months ended June 30, 2009 and 2008:
| |
|
Training and
Simulation |
|
|
Armor |
|
|
Battery and
Power Systems |
|
|
All Others |
|
|
Total |
|
|
Six months ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from outside customers |
|
$ |
21,304,763 |
|
|
$ |
6,441,692 |
|
|
$ |
8,380,957 |
|
|
$ |
– |
|
|
$ |
36,127,412 |
|
|
Depreciation, amortization and impairment expenses (1) |
|
|
(677,370 |
) |
|
|
(88,740 |
) |
|
|
(505,323 |
) |
|
|
(99,027 |
) |
|
|
(1,370,460 |
) |
|
Direct expenses (2) |
|
|
(17,910,521 |
) |
|
|
(7,075,326 |
) |
|
|
(7,668,992 |
) |
|
|
(2,335,322 |
) |
|
|
(34,990,161 |
) |
|
Segment income (loss) |
|
|
2,716,872 |
|
|
|
(722,374 |
) |
|
|
206,642 |
|
|
|
(2,434,349 |
) |
|
|
(233,209 |
) |
|
Financial income (expense) |
|
|
– |
|
|
|
(95,902 |
) |
|
|
(192,706 |
) |
|
|
(810,884 |
) |
|
|
(1,099,492 |
) |
|
Income (loss) from continuing operations |
|
$ |
2,716,872 |
|
|
$ |
(818,276 |
) |
|
$ |
13,936 |
|
|
$ |
(3,245,233 |
) |
|
$ |
(1,332,701 |
) |
|
Segment assets (3) |
|
$ |
44,974,286 |
|
|
$ |
11,077,850 |
|
|
$ |
23,116,763 |
|
|
$ |
3,546,706 |
|
|
$ |
82,715,605 |
|
|
Six months ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from outside customers |
|
$ |
14,719,907 |
|
|
$ |
5,820,154 |
|
|
$ |
5,317,521 |
|
|
$ |
– |
|
|
$ |
25,857,582 |
|
|
Depreciation, amortization and impairment expenses (1) |
|
|
(894,880 |
) |
|
|
(77,951 |
) |
|
|
(501,073 |
) |
|
|
(121,041 |
) |
|
|
(1,594,945 |
) |
|
Direct expenses (2) |
|
|
(12,282,600 |
) |
|
|
(7,419,598 |
) |
|
|
(5,837,195 |
) |
|
|
(1,589,521 |
) |
|
|
(27,128,914 |
) |
|
Segment income (loss) |
|
|
1,542,427 |
|
|
|
(1,677,395 |
) |
|
|
(1,020,747 |
) |
|
|
(1,710,562 |
) |
|
|
(2,866,277 |
) |
|
Financial income (expense) |
|
|
11,056 |
|
|
|
7,224 |
|
|
|
30,772 |
|
|
|
(102,004 |
) |
|
|
(52,952 |
) |
|
Income (loss) from continuing operations |
|
$ |
1,553,483 |
|
|
$ |
(1,670,171 |
) |
|
$ |
(989,975 |
) |
|
$ |
(1,812,566 |
) |
|
$ |
(2,919,229 |
) |
|
Segment assets (3) |
|
$ |
40,712,523 |
|
|
$ |
11,721,422 |
|
|
$ |
24,196,236 |
|
|
$ |
926,286 |
|
|
$ |
77,556,467 |
|
|
Three months ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from outside customers |
|
$ |
9,842,912 |
|
|
$ |
1,723,974 |
|
|
$ |
4,468,304 |
|
|
$ |
– |
|
|
$ |
16,035,190 |
|
|
Depreciation, amortization and impairment expenses (1) |
|
|
(339,722 |
) |
|
|
(44,626 |
) |
|
|
(248,400 |
) |
|
|
(49,339 |
) |
|
|
(682,087 |
) |
|
Direct income (expenses) (2) |
|
|
(8,143,462 |
) |
|
|
(2,582,587 |
) |
|
|
(4,183,005 |
) |
|
|
(1,174,313 |
) |
|
|
(16,083,367 |
) |
|
Segment income (loss) |
|
|
1,359,728 |
|
|
|
(903,239 |
) |
|
|
36,899 |
|
|
|
(1,223,652 |
) |
|
|
(730,264 |
) |
|
Financial income (expense) |
|
|
– |
|
|
|
32,043 |
|
|
|
160,346 |
|
|
|
(318,803 |
) |
|
|
(126,414 |
) |
|
Income (loss) from continuing operations |
|
$ |
1,359,728 |
|
|
$ |
(871,196 |
) |
|
$ |
197,245 |
|
|
$ |
(1,542,455 |
) |
|
$ |
(856,678 |
) |
|
Three months ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from outside customers |
|
$ |
7,185,310 |
|
|
$ |
3,211,211 |
|
|
$ |
2,210,485 |
|
|
$ |
– |
|
|
$ |
12,607,006 |
|
|
Depreciation, amortization and impairment expenses (1) |
|
|
(445,561 |
) |
|
|
(48,908 |
) |
|
|
(300,211 |
) |
|
|
(108,048 |
) |
|
|
(902,728 |
) |
|
Direct income (expenses) (2) |
|
|
(6,260,986 |
) |
|
|
(5,167,557 |
) |
|
|
(2,505,284 |
) |
|
|
143,858 |
|
|
|
(13,789,969 |
) |
|
Segment income (loss) |
|
|
478,763 |
|
|
|
(2,005,254 |
) |
|
|
(595,010 |
) |
|
|
35,810 |
|
|
|
(2,085,691 |
) |
|
Financial income (expense) |
|
|
116,720 |
|
|
|
29,418 |
|
|
|
29,848 |
|
|
|
(38,925 |
) |
|
|
137,061 |
|
|
Income (loss) from continuing operations |
|
$ |
595,483 |
|
|
$ |
(1,975,836 |
) |
|
$ |
(565,162 |
) |
|
$ |
(3,115 |
) |
|
$ |
(1,948,630 |
) |
(1) Includes depreciation of property and equipment, amortization expenses of intangible assets and impairment of goodwill and other intangible assets.
|
(2) |
Including, inter alia, sales and marketing, general and administrative and tax expenses. |
|
(3) |
Out of those amounts, goodwill in our Training and Simulation, Armor and Battery and Power Systems Divisions stood at $24,435,641, $1,757,041 and $5,835,880, respectively, as of June 30, 2009 and $24,424,030, $1,989,836 and $6,823,035, respectively, as of June 30, 2008. |
NOTE 5: COMPREHENSIVE LOSS
Comprehensive loss for the six and three months ended June 30, 2009 and 2008 is summarized below:
| |
|
Six Months Ended June 30, |
|
|
Three Months Ended June 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Net loss |
|
$ |
(1,332,701 |
) |
|
$ |
(2,919,229 |
) |
|
$ |
(856,678 |
) |
|
$ |
(1,948,630 |
) |
|
Foreign currency translation |
|
|
(360,916 |
) |
|
|
1,642,004 |
|
|
|
738,013 |
|
|
|
699,777 |
|
|
Total comprehensive loss |
|
$ |
(1,693,637 |
) |
|
$ |
(1,277,225 |
) |
|
$ |
(118,665 |
) |
|
$ |
(1,248,853 |
) |
NOTE 6: ACQUISITIONS
Purchase of the Minority Interest in MDT Israel and MDT Armor
In January 2008, the Company purchased the minority stockholder’s 24.5% interest in MDT Protective Industries Ltd. (“MDT Israel”) and the 12.0% interest in MDT Armor Corporation (“MDT Armor”), as well as settling all outstanding disputes regarding severance payments, in exchange for a total
of $1.0 million that was paid in cash. The purchase was treated as a step acquisition using the purchase method of accounting. The Company evaluated the purchase price and identified $607,100 in goodwill and workforce intangibles with an indefinite life. The Company also identified $53,400 as an intangible asset related to its customer list with a useful life of four years. The purchase price included a payment of $241,237 to the former president of MDT Israel as compensation for a right granted to him by MDT
Armor that potentially would have given him the right to receive 5% of MDT Armor’s annual profit. The payment for this right was recorded as general and administrative expense in the first quarter of 2008.
Purchase of Realtime Technologies, Inc.
In February 2008 the Company’s FAAC subsidiary acquired all of the outstanding stock of Realtime Technologies, Inc. (RTI), a privately-owned corporation headquartered in Royal Oak, Michigan, for a total of $1,387,000, including $1,250,000 in cash, $100,000 in Company stock (54,348 shares) and approximately $37,000
in legal fees along with a contingent earnout of $250,000 that was earned in 2008 and recorded as compensation expense. RTI specializes in multi-body vehicle dynamics modeling and graphical simulation solutions. RTI’s product portfolio provides FAAC with the opportunity to economically add new features to the driver training products marketed by FAAC. RTI’s operating results are included in the Company’s Training and Simulation Division as
of January 1, 2008.
Listed below is the purchase price allocation:
|
Current assets acquired, net of liabilities |
|
$ |
433,389 |
|
|
Technology and patents - 7 year life |
|
|
663,000 |
|
|
Trademark/trade names - 10 year life |
|
|
28,000 |
|
|
Customer relationships - 10 year life |
|
|
62,000 |
|
|
Goodwill - indefinite life |
|
|
200,222 |
|
|
Equity value |
|
$ |
1,386,611 |
|
NOTE 7: ARBITRATION
In connection with the Company’s acquisition of AoA, the Company had a contingent earnout obligation in an amount equal to the revenues AoA realized from certain specific programs that were identified by the Company and the seller of AoA (“Seller”) as appropriate targets for revenue increases. As of
December 31, 2006, the Company had reduced the $3.0 million escrow held by the Seller by approximately $1,520,000 for a putative claim against such escrow in respect of such earnout obligation.
On March 20, 2007, the Company filed a Demand for Arbitration with the American Arbitration Association against the Seller. In February 2008, the arbitration panel issued a decision denying the Seller’s counterclaims, granting the Seller’s counterclaim for $70,000 in compensation, awarding the Company the
entire $3.0 million escrow (less the $70,000 in compensation (with simple interest but without statutory penalties)), awarding the Company $135,000 in attorneys’ fees, and interest of approximately $325,000. This award was paid to the Company in April 2008. In the first quarter of 2008, the Company adjusted the escrow receivable to reflect the updated amount of the escrow due to the arbitration panel’s decision and final resolution of the remaining legal questions.
NOTE 8: CONVERTIBLE NOTES AND DETACHABLE WARRANTS
a. 10% Senior Convertible Notes due August 15, 2011
Pursuant to the terms of a Securities Purchase Agreement dated August 14, 2008, the Company issued and sold to a group of institutional investors 10% senior convertible notes in the aggregate principal amount of $5.0 million due August 15, 2011. These notes are convertible at any time prior to August 15, 2011 at a conversion
price of $2.24 per share. As part of our analysis of the convertible debt and related warrants, we reviewed and followed the guidance of SFAS No. 150 and EITF Issues No. 00-19, 00-27 and 05-2.
As part of the securities purchase agreement, the Company issued to the purchasers of its 10% senior convertible notes due August 15, 2011, warrants to purchase an aggregate of 558,036 shares of common stock at any time prior to August 15, 2011 at a price of $2.24 per share. The warrants were classified in 2008 as equity
based on relative fair value. The relative fair value of these warrants was determined in 2008 using the Black-Scholes pricing model, assuming a risk-free interest rate of 2.78%, a volatility factor 75%, dividend yields of 0% and a contractual life of 3.0 years.
In connection with the original accounting for these convertible notes, the Company recorded a deferred debt discount on the balance sheet of $412,000 in 2008. The beneficial conversion feature and the discount arising from fair value allocation of the warrants according to APB No. 14 is being amortized from the
date of issuance to the stated redemption date – August 15, 2011.
On January 1, 2009 the Company adopted Emerging Issues Task Force consensus 07-05, “Determining Whether an Instrument is Indexed to an Entity’s Own Stock” (EITF 07-05), due to the reset provision in the convertible notes. EITF 07-05 requires the Company to re-evaluate the warrants issued with the convertible
notes and to also re-evaluate the embedded conversion option and embedded put options within the notes to determine if the previous accounting for these items would change. Upon this re-evaluation, the Company was required to reclassify the warrants along with the value of the embedded conversion feature from equity to a derivative liability. The embedded put options remained classified as derivative liabilities. The Company again used the Black-Scholes valuation model to determine the value of the warrants,
the value of the embedded conversion feature and the value of the embedded put options associated with the convertible notes as of January 1, 2009. In accordance with the guidance of EITF 07-05, a cumulative adjustment increasing January 1, 2009 retained earnings by $1,287,000 was made in the first quarter to reflect
this new accounting. The Company re-valued this amount in the second quarter of 2009 based on a revised valuation of the derivative liability. This resulted in a debt discount balance in the amount of approximately $325,000, which is included
in Long Term Debt on the balance sheet, and a revised cumulative adjustment to retained earnings of $471,000.
On June 30, 2009, the Company revalued its warrants, their embedded conversion options and their embedded put options and recorded an expense of approximately $283,000 in the second quarter as financial expense. The year-to-date financial expense associated with this transaction is $479,000. The table below lists the variables used in the Black-Scholes calculation and the resulting values.
|
Variables |
|
January 1, 2009 |
|
|
June 30, 2009 |
|
|
Stock price |
|
$ |
0.41 |
|
|
$ |
1.76 |
|
|
Risk free interest rate |
|
|
1.00 |
% |
|
|
1.64 |
% |
|
Volatility |
|
|
81.40 |
% |
|
|
83.6 |
% |
|
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
Contractual life |
|
2.6 years |
|
|
2.1 years |
|
|
|
|
|
|
|
|
|
|
|
|
Values |
|
January 1, 2009 |
|
|
June 30, 2009 |
|
|
Warrants |
|
$ |
29,171 |
|
|
$ |
394,899 |
|
|
Conversion option |
|
|
8,013 |
|
|
|
122,962 |
|
|
Puts |
|
|
14,997 |
|
|
|
13,609 |
|
|
Total value |
|
$ |
52,181 |
|
|
$ |
531,470 |
|
|
|
|
|
|
|
|
|
|
|
|
Change in value – charged to financial expense |
|
|
$ |
479,289 |
|
Principal payments are due on the convertible notes as follows:
|
Year |
|
Amount |
|
|
2009 |
|
$ |
909,090 |
|
|
2010 |
|
|
1,818,180 |
|
|
2011 |
|
|
1,363,640 |
|
| |
|
$ |
4,090,910 |
|
NOTE 9: FINANCING ACTIVITIES
Concurrent with the Securities Purchase Agreement dated August 14, 2008, the Company purchased a $2,500,000 Senior Subordinated Convertible Note from an unaffiliated company, DEI Services Corporation (“DEI”). This 10% Senior Subordinated Convertible Note is due December 31, 2009. The note is convertible
at maturity at the Company’s option into such number of shares of DEI’s common stock, no par value per share, as shall be equal at the time of conversion to twelve percent (12%) of DEI’s outstanding common stock.
Interest on the outstanding principal amount of this note commenced accruing on the issuance date and is payable quarterly, in arrears. The remaining interest payments are due on August 15 and November 15 of this year with the final payment due on December 31, 2009.
Interest on this note will be recognized as a reduction of financial expenses and will be shown on an accrual basis. Related fees and costs will be recorded as general and administrative expense.
NOTE 10: 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, unbilled receivables, inventories, prepaid and other assets, trade payables, accrued expenses, deferred revenues and other
liabilities as of June 30, 2009 and December 31, 2008, approximate fair value because of the short maturity of these instruments. The carrying amounts of long term debt approximates the estimated fair values at June 30, 2009, based upon the Company’s ability to acquire similar debt at similar maturities.
NOTE 11: COMMON STOCK REPURCHASE PROGRAM
In February of 2009, the Company authorized, for a period of one year, the repurchase in the open market or in privately negotiated transactions of up to $1 million of its common stock. Pursuant to this plan, the Company through June 30, 2009 had repurchased 260,738 shares of its common stock for $258,596, all of which
was purchased in the second quarter of 2009. Shares repurchased are carried on the Company’s books as treasury stock. At June 30, 2009, the Company had remaining authorization for the repurchase of up to $746,897 in shares of its common stock. The repurchase program is subject to the discretion of the Company’s management.
NOTE 12: LOSS PER SHARE
On January 1, 2009 the Company adopted FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP No. EITF 03-6-1), which classifies unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) as participating securities and requires them to be included in the computation of earnings per share using the two class method. The Company has determined that the unvested restricted stock issued to our employees and directors are “participating securities” and as such, are included, net of estimated forfeitures, in the total shares used to calculate the Company’s basic and diluted loss per share. Due to this change, the reported loss per share for the
three months ended June 30, 2008 has been updated from $(0.15) per share to $(0.14) per share and the six months ended June 30, 2008 has been updated from $(0.23) per share to $(0.22) per share.
NOTE 13: SUBSEQUENT EVENTS
a. Amendment to the 2007 Revolving Line of Credit Loan Agreement
On July 23, 2009, the Company and the Company’s primary bank entered into an amendment (the “Amendment”), which increased the Company’s line of credit facility by $2.5 million, from a maximum line balance of $7.5 million to a maximum line balance of $10.0 million, with a variable interest rate
of prime plus 1.75%. The Amendment also amended the existing Borrowing Base Formula to increase the available credit from Unbilled Accounts Receivable to a maximum of 50% of $3.0 million, an increase of $1.5 million from the original formula of 50% of $1.5 million. The loan is collateralized by all assets of the Company. The Amendment also limits the annual distribution to affiliates of the Company up to an aggregate amount of $4.0 million on a quarterly trailing basis. The Company incurred approximately
$3,000 in fees and expenses related to the Amendment.
|
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This report contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. When used in this discussion, the words “believes,” “anticipated,”
“expects,” “estimates” and similar expressions are intended to identify such forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may
be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those set forth elsewhere in this report. Please see “Risk Factors” in our Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission.
Arotech™ is a trademark and Electric Fuel® is a registered trademark of Arotech Corporation. All company and product names mentioned may be trademarks or registered trademarks of their respective holders. Unless
the context requires otherwise, all references to us refer collectively to Arotech Corporation and its subsidiaries.
We make available through our internet website free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to such reports and other filings made by us with the SEC, as soon as practicable after we electronically file such reports and filings
with the SEC. Our website address is www.arotech.com. The information contained in this website is not incorporated by reference in this report.
The following discussion and analysis should be read in conjunction with the interim financial statements and notes thereto appearing elsewhere in this Quarterly Report. We have rounded amounts reported here to the nearest thousand, unless such amounts are more than 1.0 million, in which event we have rounded such
amounts to the nearest hundred thousand.
Executive Summary
We are a defense and security products and services company, engaged in three business areas: interactive simulation for military, law enforcement and commercial markets (Training and Simulation Division); high-level armoring for military,
paramilitary and commercial vehicles (Armor Division); batteries and charging systems for the military (Battery and Power Systems Division):
Overview of Results of Operations
Acquisitions
In acquisition of subsidiaries, part of the purchase price is allocated to intangible assets and goodwill. Amortization of intangible assets related to acquisition of subsidiaries is recorded based on the estimated expected life of the assets. In the case of goodwill, the assets recorded as
goodwill are not amortized. We are required to review intangible assets and goodwill for impairment at least annually or whenever events or changes in circumstances indicate that carrying amount of the assets may not be recoverable. If we determine, through the impairment review process, that goodwill has been impaired,
we must record the impairment charge in our statement of operations.
Financings and Issuances of Warrants
During the third quarter of 2008 and pursuant to the terms of a Securities Purchase Agreement dated August 14, 2008, we issued and sold to a group of institutional investors 10% senior convertible notes in the aggregate principal amount of $5.0 million due August 15, 2011. These notes are convertible at any time prior
to August 15, 2011 at a conversion price of $2.24 per share. As part of our analysis of the convertible debt and related warrants, we reviewed and followed the guidance of SFAS No. 150 and EITF Issues No. 00-19, 00-27 and 05-2.
As part of the securities purchase agreement, we issued to the purchasers of its 10% senior convertible notes due August 15, 2011, warrants to purchase an aggregate of 558,036 shares of common stock at any time prior to August 15, 2011 at a price of $2.24 per share. The warrants were classified in 2008 as equity based
on relative fair value. The relative fair value of these warrants was determined in 2008 using the Black-Scholes pricing model, assuming a risk-free interest rate of 2.78%, a volatility factor 75%, dividend yields of 0% and a contractual life of 3.0 years.
In connection with the original accounting for these convertible notes, we recorded a deferred debt discount on the balance sheet of $412,000 in 2008. The beneficial conversion feature and the discount arising from fair value allocation of the warrants according to APB No. 14 is being amortized from the date of
issuance to the stated redemption date – August 15, 2011.
On January 1, 2009 we adopted Emerging Issues Task Force consensus 07-05, “Determining Whether an Instrument is Indexed to an Entity’s Own Stock” (EITF 07-05), due to the reset provision in the convertible notes. EITF 07-05 requires us to re-evaluate the warrants issued with the convertible notes
and to also re-evaluate the embedded conversion option and embedded put options within the notes to determine if the previous accounting for these items would change. Upon this re-evaluation, we were required to reclassify the warrants along with the value of the embedded conversion feature from equity to a derivative liability. The embedded put options remained classified as derivative liabilities. We again used the Black-Scholes valuation model to determine the value of the warrants, the value of the embedded
conversion feature and the value of the embedded put options associated with the convertible notes as of January 1, 2009. In accordance with the guidance of EITF 07-05, a cumulative adjustment increasing January 1, 2009 retained earnings by $1,287,000 was made in the first quarter to reflect this new accounting. We
re-valued this amount in the second quarter of 2009 based on a revised valuation of the derivative liability. This resulted in a debt discount balance in the amount of approximately $325,000, which is included in Long Term Debt on the balance sheet, and a revised cumulative adjustment to retained earnings of $471,000.
On June 30, 2009, we revalued these warrants, their embedded conversion option and their embedded put options and recorded an expense of approximately $283,000 in the second quarter as financial expense. The year to date financial expense associated with this transaction is approximately $479,000. The table
below lists the variables used in the Black-Scholes calculation and the resulting values.
|
Variables |
|
January 1, 2009 |
|
|
June 30, 2009 |
|
|
Stock price |
|
$ |
0.41 |
|
|
$ |
1.76 |
|
|
Risk free interest rate |
|
|
1.00 |
% |
|
|
1.64 |
% |
|
Volatility |
|
|
81.40 |
% |
|
|
83.60 |
% |
|
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
Contractual life |
|
2.6 years |
|
|
2.1 years |
|
|
|
|
|
|
|
|
|
|
|
|
Values |
|
January 1, 2009 |
|
|
June 30, 2009 |
|
|
Warrants |
|
$ |
29,171 |
|
|
$ |
394,899 |
|
|
Conversion option |
|
|
8,013 |
|
|
|
122,962 |
|
|
Puts |
|
|
14,997 |
|
|
|
13,609 |
|
|
Total value |
|
$ |
52,181 |
|
|
$ |
531,470 |
|
|
|
|
|
|
|
|
|
|
|
|
Change in value – charged to financial expense |
|
|
$ |
479,289 |
|
Principal payments are due on the convertible notes as follows:
|
Year |
|
Amount |
|
|
2009 |
|
$ |
909,090 |
|
|
2010 |
|
|
1,818,180 |
|
|
2011 |
|
|
1,363,640 |
|
| |
|
$ |
4,090,910 |
|
Concurrent with the Securities Purchase Agreement dated August 14, 2008, we purchased a $2,500,000 Senior Subordinated Convertible Note from an unaffiliated company, DEI Services Corporation (“DEI”). This 10% Senior Subordinated Convertible Note is due December 31, 2009. The note is convertible at maturity
at our option into such number of shares of DEI’s common stock, no par value per share, as shall be equal at the time of conversion to twelve percent (12%) of DEI’s outstanding common stock.
Interest on the outstanding principal amount of this note commenced accruing on the issuance date and is payable quarterly, in arrears. The remaining interest payments are due on August 15 and November 15 of this year with the final payment due on December 31, 2009. Interest on this note will be recognized as a reduction
of financial expenses and will be shown on an accrual basis. Related fees and costs will be recorded as general and administrative expense.
We incurred non-cash expenses related to our financings in the amount of $626,000 (as discussed above) during the first six months of 2009.
Restricted Shares and Options
In accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payments,” we incurred, for the six months ended June 30, 2009 and 2008, compensation expense related to stock options and restricted shares of approximately $212,000 and $631,000, respectively, of which
$18,000 and $34,000, respectively, was for stock options and $194,000 and $597,000, respectively, was for restricted shares.
On June 29, 2009, the executive officers of the company were granted restricted stock and restricted stock units totaling 378,334 shares at a grant price of $1.67 per share (the closing price on the date of grant) as authorized by our compensation committee. These shares will vest 50% six months after the
date of grant and 50% twelve months after the date of grant and will be expensed over the vesting period.
Overview of Operating Performance and Backlog
Overall, our net loss before earnings from affiliated company and tax expenses for the six months ended June 30, 2009 was $864,000 on revenues of $36.1 million, compared to a net loss of $2.8 million on revenues of $25.9 million during the six months ended June 30, 2008. As of June 30, 2009, our overall backlog totaled
$42.9 million.
In our Training and Simulation Division, revenues increased from approximately $14.7 million in the first six months of 2008 to $21.3 million in the first six months of 2009. As of June 30, 2009, our backlog for our Training and Simulation Division totaled $17.6 million.
In our Armor Division, revenues increased from $5.8 million during the first six months of 2008 to $6.4 million during the first six months of 2009. As of June 30, 2009, our backlog for our Armor Division totaled $15.4 million.
In our Battery and Power Systems Division, revenues increased from approximately $5.3 million in the first six months of 2008 to approximately $8.4 million in the first six months of 2009. As of June 30, 2009, our backlog for our Battery and Power Systems Division totaled $9.8 million.
Common Stock Repurchase Program
In February of 2009, we authorized, for a period of one year, the repurchase in the open market or in privately negotiated transactions of up to $1 million of our common stock. Pursuant to this plan, through June 30, 2009 we have repurchased 260,738 shares of our common stock for $258,596, all of which was purchased
in the second quarter of 2009. Shares repurchased are carried on our books as treasury stock. At June 30, 2009, we had remaining authorization for the repurchase of up to $741,404 in shares of our common stock. The repurchase program is subject to the discretion of our management.
Recent Developments
We have learned that on May 6, 2009, a purported shareholders derivative complaint (the “Complaint”) was apparently filed in the United States District Court for the Eastern District of
New York against us and certain of our officers and directors. The Complaint is based on the same facts as the class action litigation currently pending against us in the same district, and primarily relates to our acquisition of Armour of America in 2005 and certain public statements made by us with respect to our
business and prospects during the Period. The Complaint seeks an unspecified amount of damages.
Although the ultimate outcome of this matter cannot be determined with certainty, we believe that the allegations stated in the Complaint are without merit and we and our officers and directors named in the Complaint intend to defend ourselves vigorously against such allegations
Functional Currency
We consider the United States dollar to be the currency of the primary economic environment in which we and our Israeli subsidiary EFL operate and, therefore, both we and EFL have adopted and are using the United States dollar as our functional currency. Transactions and balances originally denominated in U.S. dollars
are presented at the original amounts. Gains and losses arising from non-dollar transactions and balances are included in net income.
The majority of financial transactions of our Israeli subsidiaries MDT and Epsilor is in New Israel Shekels (“NIS”) and a substantial portion of MDT’s and Epsilor’s costs is incurred in NIS. Management believes that the NIS is the functional currency of MDT and Epsilor. Accordingly, the financial
statements of MDT and Epsilor have been translated into U.S. dollars. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Statement of operations amounts have been translated using the average exchange rate for the period. The resulting translation adjustments are reported as a component of accumulated other comprehensive loss in stockholders’ equity.
Results of Operations
Three months ended June 30, 2009 compared to the three months ended June 30, 2008.
Revenues. Revenues for the three months ended June 30, 2009 totaled $16.0 million, compared to $12.6 million in the comparable period in 2008, an increase of $3.4 million, or 27.2%. In
the second quarter of 2009, revenues were $9.8 million for the Training and Simulation Division (compared to $7.2 million in the second quarter of 2008, an increase of $2.6 million, or 37.0%, due primarily to increased sales of military vehicle simulators and use of force simulators); $1.7 million for the Armor Division (compared to $3.2 million in the second quarter of 2008, a decrease of
$1.5 million, or 46.3%, due primarily to decreased revenues from MDT and MDT Armor, mostly as a result of the previous completion of most of the remaining outstanding orders for the “David” Armored Vehicle); and $4.5 million for the Battery and Power Systems Division (compared to $2.2 million in the second quarter of 2008, an increase of $2.3 million, or 102.1%, due primarily to
increased sales of our battery products at Epsilor and EFB).
Cost of revenues. Cost of revenues totaled $11.8 million during the second quarter of 2009, compared to $9.8 million in the second quarter of 2008, an
increase of $2.0 million, or 20.4%, due primarily to increased sales in all our divisions.
Direct expenses for our three divisions during the second quarter of 2009 were $8.1 million for the Training and Simulation Division (compared to $6.3 million in the second quarter of 2008, an increase of $1.8 million, or 30.1%, due
primarily to increased revenues at FAAC partially offset by increased materials costs); $2.6 million for the Armor Division (compared to $5.2 million in the second quarter of 2008, a decrease of $2.6 million, or 50.0%, due primarily to decreased production of the “David” Armored Vehicle); and $4.2 million for the Battery and Power Systems Division (compared to $2.5 million in the
second quarter of 2008, an increase of $1.7 million, or 67.0%, due primarily to increased revenues at Epsilor and EFL).
Amortization of intangible assets. Amortization of intangible assets totaled $374,000 in the second quarter of 2009, compared to $492,000 in the second quarter of 2008, a decrease of $118,000,
or 24.0%, due primarily to intangible assets in our Training and Simulation division that are now fully amortized.
Research and development expenses. Research and development expenses for the second quarter of 2009 were $404,000, compared to $226,000 during the second quarter of 2008, an increase of
$178,000, or 78.8%. This increase was primarily attributable to increased expense in our Training and Simulation Division offset by decreased expense in our Battery Division.
Selling and marketing expenses. Selling and marketing expenses for the second quarter of 2009 were $1.2 million, compared to $1.1 million in the second quarter of 2008, an increase of
$27,000, or 2.4%. Expenses were essentially unchanged for the quarter and expenses in each division did not vary significantly.
General and administrative expenses. General and administrative expenses for the second quarter of 2009 were $2.8 million, compared to $3.3 million in the second quarter of 2008, a decrease
of $511,000, or 15.5%. This decrease was primarily attributable to a reduction in stock compensation expense, mandated severance expense in Israel and corporate audit expense.
Financial income (expenses), net. Financial expenses totaled $(126,000) in the second quarter of 2009, compared to financial income of $137,000 in the second quarter of 2008, an increase
in expense of $263,000, or 192.2%. The difference was due primarily to expenses relating to our debt discount, currency fluctuations and expenses for the mark-to-market adjustment related to our convertible debt
Income taxes. We and certain of our subsidiaries incurred net operating losses during the three months ended June 30, 2009 and accordingly, no provision for income taxes was recorded
in this quarter. With respect to some of our subsidiaries that operated at a net profit during 2009, we were able to offset federal taxes against our accumulated loss carry forward. We recorded a total of $(272,000) in tax expense in the second quarter of 2009, compared to $108,000 in tax expense in the second quarter of 2008, an increase of $380,000, or 351.9%, mainly concerning state and local taxes along with the required adjustment of taxes due to the deduction of goodwill for U.S. federal taxes, which totaled
$140,000 in the second quarter of 2009.
Net loss. Due to the factors cited above, net loss decreased from $1.9 million in the second quarter of 2008 to $857,000 in the second quarter of 2009, a decrease of $1.1 million, or 56.0%.
Six months ended June 30, 2009 compared to the six months ended June 30, 2008.
Revenues. Revenues for the six months ended June 30, 2009 totaled $36.1 million, compared to $25.9 million in the comparable period in 2008, an increase of $10.3 million, or 39.7%. In
the first six months of 2009, revenues were $21.3 million for the Training and Simulation Division (compared to $14.7 million in the first six months of 2008, an increase of $6.6 million, or 44.7%, due primarily to increased sales of military vehicle simulators and use of force simulators); $6.4 million for the Armor Division (compared to $5.8 million in the first six months of 2008, an increase
of $622,000, or 10.7%, due primarily to increased revenues from MDT and MDT Armor, mostly in respect of the completion of orders in the first quarter for the “David” Armored Vehicle); and $8.4 million for the Battery and Power Systems Division (compared to $5.3 million in the first six months of 2008, an increase of $3.1 million, or 57.6%, due primarily to increased sales of our
battery products at Epsilor and EFL).
Cost of revenues. Cost of revenues totaled $26.6 million during the first six months of 2009, compared to $19.8 million in the first six months of 2008, an
increase of $6.8 million, or 34.5%, due primarily to increased sales in all our divisions.
Direct expenses for our three divisions during the first six months of 2009 were $17.9 million for the Training and Simulation Division (compared to $12.3 million in the first six months of 2008, an increase of $5.6 million, or 45.8%, due
primarily to increased revenues at FAAC partially offset by increased materials costs); $7.1 million for the Armor Division (compared to $7.4 million in the first six months of 2008, a decrease of $344,000, or 4.6%, due primarily to decreased production of the “David” Armored Vehicle in the first quarter offset by increased labor and material costs); and $7.7 million for the Battery
and Power Systems Division (compared to $5.8 million in the first six months of 2008, an increase of $1.8 million, or 31.4%, due primarily to increased revenues at Epsilor and EFL offset by a reduction in material costs).
Amortization of intangible assets. Amortization of intangible assets totaled $747,000 in the first six months of 2009, compared to $985,000 in the first six months of 2008, a decrease
of $238,000, or 24.2%, due primarily to intangible assets in our Training and Simulation Division that are now fully amortized.
Research and development expenses. Research and development expenses for the first six months of 2009 were $736,000, compared to $833,000 during the first six months of 2008, a decrease
of $97,000, or 11.7%. This decrease was primarily attributable to decreased expenses in our Armor Division.
Selling and marketing expenses. Selling and marketing expenses for the first six months of 2009 were $2.3 million, compared to $2.3 million in the first six months of 2008, an increase
of $30,000, or 1.3%. Expenses were essentially unchanged for the quarter and expenses in each division did not vary significantly.
General and administrative expenses. General and administrative expenses for the first six months of 2009 were $5.5 million, compared to $6.8 million in the first six months of 2008, a
decrease of $1.3 million, or 18.7%. This decrease was primarily attributable to a reduction in stock compensation and other corporate expenses along with the expenses recorded in 2008 for
the minority interest buyout in the amount of $339,000. The decrease was partially offset by an increase in expenses in the Training and Simulation Division.
Escrow adjustment – credit. An escrow adjustment – credit of $1.4 million in the first six months of 2008 represents the first quarter 2008 adjustment to operating expenses resulting from the completion of the escrow arbitration.
This was a contingent earnout obligation that was identified by us when AoA was purchased. There was no corresponding adjustment in 2009.
Financial income (expenses), net. Financial expenses totaled $1.1 million in the first six months of 2009, compared to $53,000 in the first six months of 2008, an increase in expense of
$1.0 million, or 1,976.4%. The difference was due primarily to expenses relating to our debt discount, currency fluctuations and expenses for the mark-to-market adjustment related to our convertible debt.
Income taxes. We and certain of our subsidiaries incurred net operating losses during the six months ended June 30, 2009 and accordingly, no provision for income taxes was recorded
in this quarter. With respect to some of our subsidiaries that operated at a net profit during 2009, we were able to offset federal taxes against our accumulated loss carry forward. We recorded a total of $469,000 in tax expense in the first six months of 2009, compared to $12,000 in tax expense in the first six months of 2008, an increase of $457,000, or 3,862.2%, mainly concerning state and local taxes along with the required adjustment of taxes due to the deduction of goodwill for U.S. federal taxes, which
totaled $280,000 in the first six months of 2009.
Net loss. Due to the factors cited above, net loss decreased from $2.9 million in the first half of 2008 to $1.3 million in the first half of 2009, a decrease of $1.6 million, or 54.3%.
Liquidity and Capital Resources
As of June 30, 2009, we had $3.1 million in cash, $296,000 in restricted collateral securities and restricted held-to-maturity securities due within one year, and $48,000 in available-for-sale marketable securities, as compared to December 31, 2008, when we had $4.3 million in cash, $382,000 in restricted collateral
securities and $49,000 in available-for-sale marketable securities.
We used available funds in the six months ended June 30, 2009 primarily for sales and marketing, continued research and development expenditures, and other working capital needs. We purchased approximately $131,000 of fixed assets during the six months ended June
30, 2009 and also received a fixed asset grant in the first quarter of approximately $40,000 that was credited to fixed assets at the then-current exchange rate. Our net fixed assets amounted to $4.5 million at quarter end.
Net cash provided by operating activities from continuing operations for the six months ended June 30, 2009 and 2008 was $180,000 and $(487,000), respectively, an increase of $595,000. This increase in cash provided was primarily the result of changes in working capital.
Net cash provided by investing activities for the six months ended June 30, 2009 and 2008 was $12,000 and $956,000, a decrease of $944,000. This change was primarily the result of the acquisition activities and the escrow settlement that took place in 2008.
Net cash used in financing activities for the six months ended June 30, 2009 and 2008 was $1.3 million and $2.3 million, respectively, a decrease of $979,000, primarily due to the change in short term debt and the repayment of long term debt.
As of June 30, 2009, we have approximately $3.5 million in bank debt and $4.2 million in principal, in long term debt outstanding. This is in comparison to $3.6 million in bank debt and $5.7 million in principal, in long term debt outstanding, as of December 31, 2008.
Subject to all of the reservations regarding “forward-looking statements” set forth above, we believe that our present cash position, anticipated cash flows from operations and lines of credit should be sufficient to satisfy our current estimated cash requirements through the remainder of the year.
|
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Interest Rate Risk
It is our policy not to enter into interest rate derivative financial instruments, except for hedging of foreign currency exposures discussed below. We do not currently have any significant interest rate exposure.
Foreign Currency Exchange Rate Risk
Since a significant part of our sales and expenses are denominated in U.S. dollars, we have experienced only insignificant foreign exchange gains and losses to date, and do not expect to incur significant gains and losses in 2009. Certain of our research, development and production activities are carried out by our
Israeli subsidiary, EFL, at its facility in Beit Shemesh, and accordingly we have sales and expenses in NIS. Additionally, our MDT and Epsilor subsidiaries operate primarily in NIS. However, the majority of our sales are made outside Israel in U.S. dollars, and a substantial portion of our costs are incurred in U.S. dollars. Therefore, our functional currency is the U.S. dollar.
While we conduct our business primarily in U.S. dollars, some of our agreements are denominated in foreign currencies, which could have an adverse effect on the revenues that we incur in foreign currencies. We do not hold or issue derivative financial instruments for trading or speculative purposes.
As of the end of the period covered by this report, an evaluation was carried out by the Company's management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange
Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II
Class Action Litigation
In May 2007, two purported class action complaints (the “Class Action Complaint”) were filed in the United States District Court for the Eastern District of New York against us and certain of our officers and directors. These two cases were consolidated in June 2007. The Class Action Complaint seeks class
status on behalf of all persons who purchased our securities between November 9, 2004 and November 14, 2005 (the “Period”) and alleges violations by us and certain of our officers and directors of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, primarily related to our acquisition of Armour of America in 2005 and certain public statements made by us with respect to our business and prospects during the Period. The Class Action Complaint also alleges that
we did not have adequate systems of internal operational or financial controls, and that our financial statements and reports were not prepared in accordance with GAAP and SEC rules. We have filed our answer to the Class Action Complaint, and the case is now proceeding to the discovery phase.
Additionally, we have learned that on May 6, 2009, a purported shareholders derivative complaint (the “Derivative Complaint”) was apparently filed in the United States District Court for the Eastern District of New York against us and certain of our officers and directors. Although we have yet to be served
with a copy of the Derivative Complaint, the Derivative Complaint appears to be based on the same facts as the class action litigation currently pending against us in the same district, and primarily relates to our acquisition of Armour of America in 2005 and certain public statements made by us with respect to our business and prospects during the Period. The Derivative Complaint seeks an unspecified amount of damages.
Although the ultimate outcome of these matters cannot be determined with certainty, we believe that the allegations stated in the Class Action Complaint and the Derivative Complaint are without merit and we and our officers and directors named in these Complaints intend to defend ourselves vigorously against such allegations.
NAVAIR Litigation
In December 2004, AoA filed an action in the United States Court of Federal Claims against the United States Naval Air Systems Command (NAVAIR), seeking approximately $2.2 million in damages for NAVAIR’s alleged improper termination of a contract for the design, test and manufacture of a lightweight armor replacement
system for the United States Marine Corps CH-46E rotor helicopter. NAVAIR, in its answer, counterclaimed for approximately $2.1 million in alleged reprocurement and administrative costs. Trial in this matter has concluded and closing briefs (but not certain supplemental briefs) have been filed, but no decision has yet been rendered. We are unable to make any prediction or assessment as to what the ultimate outcome of this case will be.
For information regarding our risk factors, please refer to Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2008. We do not believe that there have been any material changes in the risk factors disclosed in the Annual Report on Form 10-K.
|
ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
In February of 2009, we authorized, for a period of one year, the repurchase in the open market or in privately negotiated transactions of up to $1 million of our common stock. The following table shows information relating to the repurchase of our common stock during the three months ended June 30, 2009:
|
Period |
|
Total Number of Shares Purchased |
|
|
Average Price Paid Per Share(1) |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
|
Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans |
|
|
Cumulative through March 31, 2009 |
|
|
– |
|
|
$ |
– |
|
|
|
– |
|
|
$ |
1,000,000 |
|
|
April 1, 2009 through April 30, 2009 |
|
|
110,647 |
|
|
$ |
0.82 |
|
|
|
110,647 |
|
|
$ |
911,247 |
|
|
May 1, 2009 through May 31, 2009 |
|
|
86,812 |
|
|
$ |
1.01 |
|
|
|
86,812 |
|
|
$ |
825,058 |
|
|
June 1, 2009 through June 30, 2009 |
|
|
63,279 |
|
|
$ |
1.26 |
|
|
|
63,279 |
|
|
$ |
746,897 |
|
|
TOTAL |
|
|
260,738 |
|
|
|
|
|
|
|
260,738 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1)Average price paid per share includes commissions and is rounded to the nearest two decimal places. |
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The repurchase program is subject to our management’s discretion.
The following documents are filed as exhibits to this report:
|
Exhibit Number |
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Description |
| |
31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
31.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
32.1 |
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
32.2 |
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 14, 2009
| |
AROTECH CORPORATION |
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By: |
/s/ Robert S. Ehrlich |
| |
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Name: |
Robert S. Ehrlich |
| |
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Title: |
Chairman and CEO |
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|
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(Principal Executive Officer) |
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By: |
/s/ Thomas J. Paup |
| |
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Name: |
Thomas J. Paup |
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Title: |
Vice President – Finance and CFO |
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|
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(Principal Financial Officer)
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