OMB
APPROVAL
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|
OMB
Number:
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3235-0070
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Expires:
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August
31, 2008
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Estimated
average burden
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|
hours
per response
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192.00
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T
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED June
30, 2008 .
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AROTECH
CORPORATION
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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)
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Large
accelerated filer: £
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Accelerated
filer: £
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Non-accelerated
filer: £
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Smaller
reporting company: T
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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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PART
I - FINANCIAL INFORMATION
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3
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5
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6
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8
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15
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22
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23
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PART
II - OTHER INFORMATION
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25
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26
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26
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27
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ITEM 1.
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FINANCIAL
STATEMENTS (UNAUDITED)
|
June 30,
2008
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December 31,
2007
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|||||||
ASSETS
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(Unaudited)
|
|||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 1,714,056 | $ | 3,447,671 | ||||
Restricted
collateral deposits
|
179,194 | 320,454 | ||||||
Escrow
receivable
|
– | 1,479,826 | ||||||
Available-for-sale
marketable securities
|
54,856 | 47,005 | ||||||
Trade
receivables (net of allowance for doubtful accounts in the amount of zero
as of June 30, 2008 and $25,000 as of December 31, 2007)
|
7,881,720 | 14,583,213 | ||||||
Unbilled
receivables
|
3,257,644 | 3,271,594 | ||||||
Other
accounts receivable and prepaid expenses
|
1,526,841 | 1,614,614 | ||||||
Inventories
|
12,555,330 | 7,887,820 | ||||||
Total
current assets
|
27,169,641 | 32,652,197 | ||||||
SEVERANCE
PAY FUND
|
3,207,355 | 2,815,040 | ||||||
DEFERRED
TAX ASSETS
|
92,703 | 77,709 | ||||||
OTHER
LONG-TERM RECEIVABLES
|
272,986 | 309,190 | ||||||
PROPERTY
AND EQUIPMENT, NET
|
5,243,452 | 5,079,796 | ||||||
INVESTMENT
IN AFFILIATED COMPANY
|
236,082 | 352,168 | ||||||
OTHER
INTANGIBLE ASSETS, NET
|
8,097,347 | 7,837,076 | ||||||
GOODWILL
|
33,236,901 | 31,358,131 | ||||||
$ | 77,556,467 | $ | 80,481,307 |
June 30,
2008
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December 31,
2007
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|||||||
(Unaudited)
|
||||||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Trade
payables
|
$ | 5,414,414 | $ | 4,233,288 | ||||
Other
accounts payable and accrued expenses
|
3,790,503 | 4,889,729 | ||||||
Current
portion of capitalized leases
|
80,573 | 67,543 | ||||||
Current
portion of promissory notes due to purchase of
subsidiaries
|
– | 151,450 | ||||||
Current
portion of long-term debt
|
56,515 | 103,844 | ||||||
Short
term bank credit
|
2,308,350 | 4,557,890 | ||||||
Deferred
revenues
|
2,287,632 | 2,903,166 | ||||||
Total
current liabilities
|
13,937,987 | 16,906,910 | ||||||
Accrued
severance pay
|
5,455,273 | 4,853,231 | ||||||
Long-term
portion of capitalized leases
|
146,789 | 86,989 | ||||||
Long-term
portion of long-term debt
|
1,061,806 | 1,088,498 | ||||||
Other
long-term liabilities
|
150,513 | 110,255 | ||||||
Deferred
taxes
|
1,020,000 | 1,020,000 | ||||||
Total
long-term liabilities
|
7,834,381 | 7,158,973 | ||||||
MINORITY
INTEREST
|
– | 83,816 | ||||||
SHAREHOLDERS’
EQUITY:
|
||||||||
Share
capital –
|
||||||||
Common
stock – $0.01 par value each;
|
||||||||
Authorized:
250,000,000 shares as of June 30, 2008 and December 31, 2007; Issued and
outstanding: 13,637,639 and 13,544,819 shares as of June 30, 2008 and
December 31, 2007, respectively
|
136,377 | 135,448 | ||||||
Preferred
shares – $0.01 par value each;
|
||||||||
Authorized:
1,000,000 shares as of June 30, 2008 and December 31, 2007; No shares
issued and outstanding as of June 30, 2008 and December 31,
2007
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– | – | ||||||
Additional
paid-in capital
|
219,287,852 | 218,551,110 | ||||||
Accumulated
deficit
|
(165,441,787 | ) | (162,522,558 | ) | ||||
Notes
receivable from shareholders
|
(1,341,788 | ) | (1,333,833 | ) | ||||
Accumulated
other comprehensive loss
|
3,143,445 | 1,501,441 | ||||||
Total
shareholders’ equity
|
55,784,099 | 56,331,608 | ||||||
$ | 77,556,467 | $ | 80,481,307 |
Six months ended June 30,
|
Three months ended June 30,
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Revenues
|
$ | 25,857,582 | $ | 24,557,890 | $ | 12,607,006 | $ | 13,028,728 | ||||||||
Cost
of revenues, exclusive of amortization of intangibles
|
19,772,500 | 16,685,240 | 9,767,718 | 9,282,017 | ||||||||||||
Research
and development
|
832,872 | 922,255 | 225,778 | 424,170 | ||||||||||||
Selling
and marketing expenses
|
2,286,995 | 2,093,501 | 1,144,356 | 1,062,733 | ||||||||||||
General
and administrative expenses
|
6,825,780 | 6,349,404 | 3,293,320 | 2,625,114 | ||||||||||||
Amortization
of intangible assets
|
985,021 | 736,171 | 492,408 | 396,211 | ||||||||||||
Escrow
adjustment – credit
|
(1,448,074 | ) | – | – | – | |||||||||||
Total
operating costs and expenses
|
29,255,094 | 26,786,571 | 14,923,580 | 13,790,245 | ||||||||||||
Operating
loss
|
(3,397,512 | ) | (2,228,681 | ) | (2,316,574 | ) | (761,517 | ) | ||||||||
Other
income
|
659,149 | 69,118 | 122,777 | 57,174 | ||||||||||||
Financial
income (expenses), net
|
(52,952 | ) | (626,813 | ) | 137,061 | (502,733 | ) | |||||||||
Loss
before minority interest in earnings of a subsidiary, earnings from
affiliated company and income tax expenses
|
(2,791,315 | ) | (2,786,376 | ) | (2,056,736 | ) | (1,207,076 | ) | ||||||||
Income
tax credits (expenses)
|
(11,828 | ) | (174,906 | ) | 108,106 | (68,999 | ) | |||||||||
Loss
from affiliated company
|
(116,086 | ) | (112,179 | ) | – | (159,800 | ) | |||||||||
Minority
interest in earnings of subsidiaries
|
– | (110,330 | ) | – | (49,674 | ) | ||||||||||
Net
loss
|
$ | (2,919,229 | ) | $ | (3,183,791 | ) | $ | (1,948,630 | ) | $ | (1,485,549 | ) | ||||
Basic
and diluted net loss per share
|
$ | (0.23 | ) | $ | (0.28 | ) | $ | (0.15 | ) | $ | (0.13 | ) | ||||
Weighted
average number of shares used in computing basic and diluted net loss per
share
|
12,591,575 | 11,301,183 | 12,604,715 | 11,380,845 |
Six months ended June 30,
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||||||||
2008
|
2007
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (2,919,229 | ) | $ | (3,183,791 | ) | ||
Adjustments
required to reconcile net loss to net cash provided by (used
in) operating activities:
|
||||||||
Minority
interest in loss of subsidiary
|
– | 110,330 | ||||||
Loss
from affiliated company
|
116,086 | 112,179 | ||||||
Depreciation
|
609,921 | 1,183,948 | ||||||
Amortization
of intangible assets, capitalized software costs and impairment of
intangible assets
|
985,018 | 736,171 | ||||||
Accrued
severance pay, net
|
209,727 | 92,742 | ||||||
Compensation
related to shares issued to employees, consultants and
directors
|
631,347 | 1,032,702 | ||||||
Amortization
relating to warrants issued to the holders of convertible debentures and
beneficial conversion feature
|
– | 226,437 | ||||||
Amortization
of deferred charges related to convertible debenture
issuance
|
– | 58,498 | ||||||
Capital
loss from sale of property and equipment
|
– | 3,232 | ||||||
Decrease
in escrow receivable
|
1,479,826 | – | ||||||
Decrease
(increase) in trade receivables
|
6,894,307 | (1,481,220 | ) | |||||
Decrease
in other accounts receivable and prepaid expenses
|
24,309 | 267,866 | ||||||
Increase
in deferred tax assets
|
(14,994 | ) | (10,988 | ) | ||||
Increase
in inventories
|
(4,637,316 | ) | (1,144,679 | ) | ||||
Decrease
in unbilled receivables
|
79,251 | 1,131,990 | ||||||
Decrease
in deferred revenues
|
(615,534 | ) | (2,735 | ) | ||||
Increase
in trade payables
|
1,170,166 | 2,243,515 | ||||||
Decrease
in other accounts payable and accrued expenses
|
(1,173,626 | ) | (1,840,175 | ) | ||||
Net
cash provided by (used in) operating activities
|
2,839,259 | (452,990 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase
of property and equipment
|
(664,555 | ) | (511,183 | ) | ||||
Acquisition
of subsidiary, net of cash acquired
|
(1,026,273 | ) | – | |||||
Acquisition
of minority interest
|
(660,500 | ) | – | |||||
Repayment
of promissory notes related to acquisition of subsidiaries
|
(151,450 | ) | (151,450 | ) | ||||
Decrease
in restricted cash
|
133,409 | 279,308 | ||||||
Net
cash used in investing activities
|
(2,369,369 | ) | (383,325 | ) | ||||
FORWARD
|
$ | 469,890 | $ | (836,315 | ) |
Six months ended June 30,
|
||||||||
2008
|
2007
|
|||||||
FORWARD
|
$ | 469,890 | $ | (836,315 | ) | |||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from exercise of options
|
– | 37,642 | ||||||
Repayment
of long-term loans
|
(74,021 | ) | (29,373 | ) | ||||
Decrease
in short term bank credit
|
(2,249,540 | ) | (118,092 | ) | ||||
Net
cash used in financing activities
|
(2,323,561 | ) | (109,823 | ) | ||||
DECREASE
IN CASH AND CASH EQUIVALENTS
|
(1,853,671 | ) | (946,138 | ) | ||||
CASH
ACCRETION (EROSION) DUE TO EXCHANGE RATE DIFFERENCES
|
120,056 | (54,103 | ) | |||||
CASH
AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD
|
3,447,671 | 2,368,872 | ||||||
CASH
AND CASH EQUIVALENTS AT THE END OF THE PERIOD
|
$ | 1,714,056 | $ | 1,368,631 | ||||
SUPPLEMENTARY
INFORMATION ON NON-CASH TRANSACTIONS:
|
||||||||
Stock
issued for acquisition
|
$ | 100,000 | $ | – | ||||
Assets
recorded for capital lease addition
|
$ | 109,025 | $ | – | ||||
Assets
recorded in association with seller financed debt
|
$ | – | $ | 1,115,000 | ||||
Payment
of principal installment of convertible debenture in
shares
|
$ | – | $ | 1,458,333 |
NOTE
1:
|
BASIS
OF PRESENTATION
|
a.
|
Company:
|
b.
|
Basis
of presentation:
|
c.
|
Accounting
for stock-based compensation:
|
d.
|
Reclassification:
|
e.
|
Anti-dilutive
shares for EPS calculation
|
NOTE
2:
|
INVENTORIES
|
June 30,
2008
|
December 31,
2007
|
|||||||
(Unaudited)
|
||||||||
Raw
and packaging materials
|
$ | 8,563,674 | $ | 6,043,170 | ||||
Work-in-progress
|
3,532,450 | 1,583,790 | ||||||
Finished
goods
|
459,206 | 260,860 | ||||||
$ | 12,555,330 | $ | 7,887,820 |
NOTE
3:
|
IMPACT
OF RECENTLY ISSUED ACCOUNTING
STANDARDS
|
NOTE
4:
|
SEGMENT
INFORMATION
|
a.
|
General:
|
Training and Simulation
|
Battery and
Power Systems
|
Armor
|
All Others
|
Total
|
||||||||||||||||
Six
months ended June 30, 2008
|
||||||||||||||||||||
Revenues
from outside customers
|
$ | 14,719,907 | $ | 5,317,521 | $ | 5,820,154 | $ | – | $ | 25,857,582 | ||||||||||
Depreciation,
amortization and impairment expenses (1)
|
(894,880 | ) | (501,073 | ) | (77,951 | ) | (121,041 | ) | (1,594,945 | ) | ||||||||||
Direct
expenses (2)
|
(12,282,600 | ) | (5,837,195 | ) | (7,419,598 | ) | (1,589,521 | ) | (27,128,914 | ) | ||||||||||
Segment
income (loss)
|
1,542,427 | (1,020,747 | ) | (1,677,395 | ) | (1,710,562 | ) | (2,866,277 | ) | |||||||||||
Financial
income (expense)
|
11,056 | 30,772 | 7,224 | (102,004 | ) | (52,952 | ) | |||||||||||||
Income
(loss) from continuing operations
|
$ | 1,553,483 | $ | (989,975 | ) | $ | (1,670,171 | ) | $ | (1,812,566 | ) | $ | (2,919,229 | ) | ||||||
Segment
assets (3),
(4)
|
$ | 40,712,523 | $ | 24,196,236 | $ | 11,721,422 | $ | 926,286 | $ | 77,556,467 | ||||||||||
Six
months ended June 30, 2007
|
||||||||||||||||||||
Revenues
from outside customers
|
$ | 9,395,747 | $ | 5,084,528 | $ | 10,077,615 | $ | – | $ | 24,557,890 | ||||||||||
Depreciation,
amortization and impairment expenses (1)
|
(995,700 | ) | (479,786 | ) | (326,455 | ) | (118,178 | ) | (1,920,119 | ) | ||||||||||
Direct
expenses (2)
|
(8,081,468 | ) | (4,718,414 | ) | (8,456,540 | ) | (3,938,327 | ) | (25,194,749 | ) | ||||||||||
Segment
income (loss)
|
318,579 | (113,672 | ) | 1,294,620 | (4,056,505 | ) | (2,556,978 | ) | ||||||||||||
Financial
income (expense)
|
424 | (53,436 | ) | (4,313 | ) | (569,488 | ) | (626,813 | ) | |||||||||||
Income
(loss) from continuing operations
|
$ | 319,003 | $ | (167,108 | ) | $ | 1,290,307 | $ | (4,625,993 | ) | $ | (3,183,791 | ) | |||||||
Segment
assets (3),
(4)
|
$ | 42,108,094 | $ | 18,477,947 | $ | 11,453,677 | $ | 2,520,941 | $ | 74,560,659 | ||||||||||
Three
months ended June 30, 2008
|
||||||||||||||||||||
Revenues
from outside customers
|
$ | 7,185,310 | $ | 2,210,485 | $ | 3,211,211 | $ | – | $ | 12,607,006 | ||||||||||
Depreciation,
amortization and impairment expenses (1)
|
(445,561 | ) | (300,211 | ) | (48,908 | ) | (108,048 | ) | (902,728 | ) | ||||||||||
Direct
income (expenses) (2)
|
(6,260,986 | ) | (2,505,284 | ) | (5,167,557 | ) | 143,858 | (13,789,969 | ) | |||||||||||
Segment
income (loss)
|
478,763 | (595,010 | ) | (2,005,254 | ) | 35,810 | (2,085,691 | ) | ||||||||||||
Financial
income (expense)
|
116,720 | 29,848 | 29,418 | (38,925 | ) | 137,061 | ||||||||||||||
Income
(loss) from continuing operations
|
$ | 595,483 | $ | (565,162 | ) | $ | (1,975,836 | ) | $ | (3,115 | ) | $ | (1,948,630 | ) | ||||||
Three
months ended June 30, 2007
|
||||||||||||||||||||
Revenues
from outside customers
|
$ | 5,179,738 | $ | 2,545,396 | $ | 5,303,594 | $ | – | $ | 13,028,728 | ||||||||||
Depreciation,
amortization and impairment expenses (1)
|
(596,824 | ) | (241,866 | ) | (137,495 | ) | (58,876 | ) | (1,035,061 | ) | ||||||||||
Direct
expenses (2)
|
(4,870,676 | ) | (2,097,171 | ) | (4,530,786 | ) | (1,477,850 | ) | (12,976,483 | ) | ||||||||||
Segment
income (loss)
|
(287,762 | ) | 206,359 | 635,313 | (1,536,726 | ) | (982,816 | ) | ||||||||||||
Financial
expense
|
(24,369 | ) | (41,601 | ) | (19,424 | ) | (417,339 | ) | (502,733 | ) | ||||||||||
Income
(loss) from continuing operations
|
$ | (312,131 | ) | $ | 164,758 | $ | 615,889 | $ | (1,954,065 | ) | $ | (1,485,549 | ) |
(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)
|
Consisting
of all assets.
|
(4)
|
Out
of those amounts, goodwill in our Training and Simulation, Battery and
Power Systems and Armor Divisions stood at $24,424,030, $6,823,035 and
$1,989,836, respectively, as of June 30, 2008 and $24,235,419, $5,413,210
and $1,066,596, respectively, as of June 30,
2007.
|
NOTE
5:
|
COMPREHENSIVE
INCOME (LOSS)
|
Six Months Ended June 30,
|
Three Months Ended June 30,
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Net
loss
|
$ | (2,919,229 | ) | $ | (3,183,791 | ) | $ | (1,948,630 | ) | $ | (1,485,549 | ) | ||||
Foreign
currency translation
|
1,642,004 | (206,891 | ) | 699,777 | (291,698 | ) | ||||||||||
Total
comprehensive loss
|
$ | (1,277,225 | ) | $ | (3,390,682 | ) | $ | (1,248,853 | ) | $ | (1,777,247 | ) |
NOTE
6:
|
ACQUISITIONS
|
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(1)
|
188,611 | |||
Equity
Value
|
$ | 1,375,000 | ||
(1)
The full amount of the goodwill is expected to be deductible for U.S. tax
purposes.
|
NOTE
7:
|
ARBITRATION
|
ITEM 2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
Ø
|
we
develop, manufacture and market advanced high-tech multimedia and
interactive digital solutions for use-of-force and driving training of
military, law enforcement, security and other personnel (our Training
and Simulation Division);
|
|
Ø
|
we
provide aviation armor kits and we utilize sophisticated lightweight
materials and advanced engineering processes to armor vehicles (our Armoring
Division); and
|
|
Ø
|
we
develop, manufacture and market primary Zinc-Air batteries, rechargeable
batteries and battery chargers for defense and security products and other
military applications (our Battery and
Power Systems Division).
|
|
Ø
|
FAAC
and RTI recognized revenues from the sale of multimedia interactive
simulators, interactive use-of-force training systems, and from the
provision of maintenance services in connection with such
systems.
|
|
Ø
|
MDT,
MDT Armor and AoA recognized revenues from payments under vehicle armoring
contracts, for service and repair of armored vehicles, and on the sale of
armoring products.
|
|
Ø
|
EFB
and Epsilor recognized revenues from the sale of batteries, chargers and
adapters to the military, and under certain development contracts with the
U.S. Army.
|
|
Ø
|
EFL
recognized revenues from the sale of water-activated battery (WAB)
lifejacket lights.
|
|
Ø
|
FAAC
and RTI recognized revenues from the sale of multimedia interactive
simulators, interactive use-of-force training systems, and from the
provision of maintenance services in connection with such
systems.
|
|
Ø
|
MDT,
MDT Armor and AoA recognized revenues from payments under vehicle armoring
contracts, for service and repair of armored vehicles, and on the sale of
armoring products.
|
|
Ø
|
EFB
and Epsilor recognized revenues from the sale of batteries, chargers and
adapters to the military, and under certain development contracts with the
U.S. Army.
|
|
Ø
|
EFL
recognized revenues from the sale of water-activated battery (WAB)
lifejacket lights.
|
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
ITEM 4T.
|
CONTROLS
AND PROCEDURES.
|
ITEM 1.
|
LEGAL
PROCEEDINGS.
|
ITEM 1A.
|
RISK
FACTORS.
|
EXHIBITS.
|
Exhibit
Number
|
Description
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
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
|
AROTECH
CORPORATION
|
||||
By:
|
/s/ Robert S. Ehrlich
|
|||
Name:
|
Robert
S. Ehrlich
|
|||
Title:
|
Chairman
and CEO
|
|||
(Principal
Executive Officer)
|
By:
|
/s/ Thomas J. Paup
|
||
Name:
|
Thomas
J. Paup
|
||
Title:
|
Vice
President – Finance and CFO
|
||
(Principal
Financial Officer)
|
Exhibit
Number
|
Description
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
||
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
||
Certification
of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
||
Certification
of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|