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Accounting Policies, by Policy (Policies)
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12 Months Ended | ||||||||||||||||||||
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Dec. 31, 2012
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| Use of Estimates, Policy [Policy Text Block] |
a. Use
of estimates:
The
preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
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| Foreign Currency Transactions and Translations Policy [Policy Text Block] |
b. Financial
statements in U.S. dollars:
A
majority of the revenues of the Company are generated in U.S.
dollars (“dollars”). In addition, a substantial
portion of the Company’s costs are incurred in dollars.
Management believes that the dollar is the primary currency
of the economic environment in which the Company operates.
Thus, the functional and reporting currency of the Company
including most of its subsidiaries is the dollar.
Accordingly, monetary accounts maintained in currencies other
than dollars are remeasured into dollars, with resulting
gains and losses reflected in the consolidated statements of
operations as financial income or expenses, as
appropriate.
The
majority of transactions of MDT (discontinued) and
Epsilor-EFL are in New Israel Shekels (“NIS”)
and a substantial portion of MDT’s and
Epsilor-EFL’s costs is incurred in NIS. Management
believes that the NIS is the functional currency of MDT and
Epsilor-EFL. Accordingly, the financial statements of MDT
and Epsilor-EFL have been translated into dollars. All
balance sheet accounts have been translated using the
exchange rates in effect at the balance sheet date.
Statement of operations amounts have been translated using
the weighted average exchange rate for the period. The
resulting translation adjustments are reported as a
component of accumulated other comprehensive income (loss)
in stockholders’ equity. All accumulated other
comprehensive income related to the Armor Division, in the
amount of $189,969, was recorded as an adjustment to the
loss on sale in discontinued operations. As of December 31,
2012, all accumulated other comprehensive income represents
foreign currency translation adjustments.
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| Consolidation, Policy [Policy Text Block] |
c. Principles
of consolidation:
The
consolidated financial statements include the accounts of
Arotech and its wholly owned subsidiaries. Intercompany
balances and transactions have been eliminated upon
consolidation.
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| Cash and Cash Equivalents, Policy [Policy Text Block] |
d. Cash
equivalents:
Cash
equivalents are short-term highly liquid investments that are
readily convertible to cash with maturities of three months
or less when acquired.
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| Cash and Cash Equivalents, Restricted Cash and Cash Equivalents, Policy [Policy Text Block] |
e. Restricted
collateral deposits:
Restricted
collateral deposits are primarily invested in highly liquid
deposits which are used as a security for the Company’s
performance guarantees at FAAC and Epsilor-EFL.
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| Marketable Securities, Policy [Policy Text Block] |
f. Marketable
securities:
The
Company determines the appropriate classification of its
investments in debt and equity securities at the time of
purchase and reevaluates such determinations at each balance
sheet date. Investment in securities are classified as
available-for-sale and stated at fair value, with unrealized
gains and losses reported in accumulated other comprehensive
income (loss), a separate component of stockholders’
equity. Realized gains and losses on sales of investments, as
determined on a specific identification basis, are included
in the consolidated statements of operations. The Company did
not hold any marketable securities at either December 21,
2012 or 2011.
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| Inventory, Policy [Policy Text Block] |
g. Inventories:
Inventories
are stated at the lower of cost or market value. Inventory
write-offs and write-down provisions are provided to cover
risks arising from slow-moving items or technological
obsolescence and for market prices lower than cost. The
Company periodically evaluates the quantities on hand
relative to current and historical selling prices and
historical and projected sales volume. Based on this
evaluation, provisions are made to write inventory down to
its market value. In 2012 and 2011, the Company wrote off
$57,000 and $145,000, respectively, of obsolete inventory,
which has been included in the cost of revenues.
Cost
is determined as follows:
Raw
and packaging materials – by the average cost method or
FIFO.
Work
in progress – represents the cost of manufacturing with
additions of allocable indirect and direct manufacturing
costs.
Finished
products – on the basis of direct manufacturing costs
with additions of allocable indirect manufacturing
costs.
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| Property, Plant and Equipment, Policy [Policy Text Block] |
h. Property
and equipment:
Property
and equipment are stated at cost net of accumulated
depreciation and investment grants received from the State of
Israel for investments in fixed assets under the Law for the
Encouragement of Capital Investments, 5719-1959 (the
“Investments Law”). The Company did not receive
any investment grants in 2012 and 2011.
Depreciation
is calculated by the straight-line method over the following
estimated useful lives of the assets:
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| Revenue Recognition, Policy [Policy Text Block] |
i.
Revenue recognition:
The
Company is a defense and security products and services
company, engaged in two business areas: interactive
simulation for military, law enforcement and commercial
markets; and batteries and charging systems for the military.
During 2012 and 2011, the Company recognized revenues (i)
from the sale and customization of interactive training
systems and from the maintenance services in connection with
such systems (Training and Simulation Division); (ii) from
the sale of batteries, chargers and adapters to the military,
and under certain development contracts with the U.S. Army
(Battery and Power Systems Division); and (iii)
from the sale of lifejacket lights (Battery and Power Systems
Division).
Revenues
from products sold by the Battery and Power Systems Division
are recognized when persuasive evidence of an agreement
exists, delivery has occurred, the fee is fixed or
determinable, collectability is probable, and no further
obligation remains. Typically revenue is recognized, per the
contract, when the transaction is entered into the U.S.
Government’s Wide Area Workflow system, which occurs
after the products have been accepted at the plant or when
shipped. Sales to other entities are recorded in accordance
with the contract, either when shipped or delivered.
Normally, in this division, there are no further obligations
that would preclude the recognition of revenue.
Revenues
from contracts in the Training and Simulation Division that
involve customization of the system to customer
specifications are recognized using contract accounting on a
percentage of completion method, in accordance with the
“Input Method.” The amount of revenue recognized
is based on the percentage to completion achieved. The
percentage to completion is measured by monitoring progress
using records of actual time, materials and other costs
incurred to date in the project compared to the total
estimated project requirement. Estimates of total project
requirements are based on prior experience of customization,
delivery and acceptance of the same or similar technology and
are reviewed and updated regularly by management. Provisions
for estimated losses on uncompleted contracts are made in the
period in which such losses are first determined, in the
amount of the estimated loss on the entire contract. Normally
there are no further obligations that would preclude the
recognition of revenue.
The
Company believes that the use of the percentage of completion
method is appropriate as the Company has the ability to make
reasonably dependable estimates of the extent of progress
towards completion, contract revenues and contract costs. In
addition, contracts executed include provisions that clearly
specify the enforceable rights regarding services to be
provided and received by the parties to the contracts, the
consideration to be exchanged and the manner and the terms of
settlement, including in cases of terminations for
convenience. In all cases, the Company expects to perform its
contractual obligations and its customers are expected to
satisfy their obligations under the contract.
Revenues
from simulators that do not require significant customization
are recognized when persuasive evidence of an agreement
exists, delivery has occurred, no significant obligations
with regard to implementation remain, the fee is fixed or
determinable and collectability is probable.
Maintenance
and support revenue included in multiple element arrangements
is deferred and recognized on a straight-line basis over the
term of the maintenance and support services. Revenues from
training are recognized when it is performed. The Vendor
Specific Objective Evidence (“VSOE”) of fair
value of the maintenance, training and support services is
determined based on the price charged when sold separately or
when renewed.
Unbilled
receivables include cost and gross profit earned in excess of
billing.
Deferred
revenues include unearned amounts received under maintenance
and support services, customer prepayments and billing in
excess of costs and estimated earnings on uncompleted
contracts.
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| Standard Product Warranty, Policy [Policy Text Block] |
j.
Warranty:
The
Company typically offers a one to two year warranty for most
of its products. The specific terms and conditions of those
warranties vary depending upon the product sold and country
in which the Company does business. The Company estimates the
costs that may be incurred under its basic limited warranty,
including parts and labor, and records deferred revenue in
the amount of such costs at the time product revenue is
recognized. Factors that affect the Company’s
warranty costs include the number of installed units,
historical and anticipated rates of warranty claims, and cost
per claim. The Company periodically assesses the adequacy of
its reserves and adjusts the amounts as necessary. (See Note
17.)
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| Research, Development, and Computer Software, Policy [Policy Text Block] |
k. Research
and development cost:
The
Company capitalizes certain software development costs,
subsequent to the establishment of technological feasibility.
Based on the Company’s product development process,
technological feasibility is established upon the completion
of a working model or a detailed program design. Research and
development costs incurred in the process of developing
product improvements or new products are generally charged to
expenses as incurred. Significant costs incurred by the
Company between completion of the working model or a detailed
program design and the point at which the product is ready
for general release have been capitalized. Capitalized
software costs will be amortized by the greater of the amount
computed using: (i) the ratio that current gross revenues
from sales of the software bears to the total of current and
anticipated future gross revenues from sales of that
software, or (ii) the straight-line method over the estimated
useful life of the product (one to three years). The Company
assesses the net realizable value of this intangible asset on
a regular basis by determining whether the amortization of
the asset over its remaining life can be recovered through
undiscounted future operating cash flows from the specific
software product sold. Based on its most recent analyses,
management believes that no impairment of capitalized
software development costs exists as of December 31,
2012.
In
2012 and 2011, the Training and Simulation Division
capitalized approximately $335,000 and $406,000,
respectively, in software development costs that will be
amortized on a straight-line method over 2 years, the useful
life of the software.
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| Income Tax, Policy [Policy Text Block] |
l. Income
taxes:
The
Company accounts for income taxes under the asset and
liability method, whereby deferred tax assets and liability
account balances are determined based on tax credit
carryforwards and differences between the financial reporting
and the tax basis of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company
provides a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable
value.
The
Company has adopted the provisions of the FASB ASC 740-10.
FASB ASC 740-10 prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken in a tax return. The
Company must determine whether it is
“more-likely-than-not” that a tax position will
be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the
technical merits of the position. Once it is determined that
a position meets the more-likely-than-not recognition
threshold, the position is measured to determine the amount
of benefit to recognize in the financial statements.
Uncertain tax positions require determinations and estimated
liabilities to be made based on provisions of the tax law
which may be subject to change or varying interpretation. If
the Company’s determinations and estimates prove to be
inaccurate, the resulting adjustments could be material to
the Company’s future financial statements.
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| Concentration Risk, Credit Risk, Policy [Policy Text Block] |
m. Concentrations
of credit risk:
Financial
instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
cash equivalents, restricted collateral deposits and trade
receivables. Cash and cash equivalents are invested mainly in
U.S. dollar deposits with major Israeli and U.S. banks. Such
deposits in the U.S. may be in excess of insured limits and
are not insured in other jurisdictions. Management believes
that the financial institutions that hold the Company’s
investments are financially sound and, accordingly, minimal
credit risk exists with respect to these investments.
The
trade receivables of the Company are mainly derived from
sales to customers located primarily in the United States and
Israel along with the countries listed in footnote 16.c.
Management believes that credit risks are moderated by the
diversity of its end customers and geographical sales areas.
The Company performs ongoing credit evaluations of its
customers’ financial condition. An allowance for
doubtful accounts is determined with respect to those
accounts that the Company has determined to be doubtful of
collection.
The
Company had no off-balance-sheet concentration of credit risk
such as foreign exchange contracts, option contracts or other
foreign hedging arrangements.
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| Earnings Per Share, Policy [Policy Text Block] |
n. Basic
and diluted net loss per share:
Basic
net loss per share is computed based on the weighted average
number of shares of common stock outstanding during each
year. Diluted net loss per share is computed based on the
weighted average number of shares of common stock outstanding
during each year, plus dilutive common stock equivalents
related to outstanding stock options, non-vested restricted
stock, warrants and convertible debt. All common stock
equivalents have been excluded from the calculation of the
diluted net loss per common share because all such securities
are anti-dilutive for all periods presented. The total
weighted average number of shares related to the outstanding
common stock equivalents excluded from the calculations of
diluted net loss per share was 614,968 and 701,411 for the
years ended December 31, 2012 and 2011, respectively.
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| Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block] |
o. Accounting
for stock-based compensation:
Stock-based
awards to employees are recognized as compensation expense
based on the calculated fair value on the date of grant. The
Company determines the fair value of options using the
Black-Scholes option pricing model. This model requires
subjective assumptions, including future stock price
volatility and expected term.
The
Company did not grant any options in 2012 or 2011. The
Company assumed a 20% forfeiture rate on existing options for
both years. The Company typically uses a 5-10% forfeiture
rate for restricted stock and restricted stock units and
adjusts both forfeiture rates based on historical
forfeitures. Each
restricted stock unit is equal to one share of Company stock
and is redeemable only for stock.
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| Fair Value of Financial Instruments, Policy [Policy Text Block] |
p. Fair
value of financial instruments:
The
following methods and assumptions were used by the Company in
estimating their fair value disclosures for financial
instruments using the required three-tier value hierarchy,
which prioritizes the inputs used in measuring fair value as
follows: (Level 1) observable inputs such as quoted prices in
active markets; (Level 2) inputs other than the quoted prices
in active markets that are observable either directly or
indirectly; and (Level 3) unobservable inputs in which there
is little or no market data, which may require the Company to
develop its own assumptions.
The
carrying amounts of cash and cash equivalents, restricted
collateral deposits, trade and other receivables, short-term
bank credit, and trade payables approximate their fair value
due to the short-term maturity of such instruments.
The
fair value of available for sale securities was based on the
quoted market price.
The
fair values of long-term promissory notes are estimated by
discounting the future cash flows using current interest
rates for loans of similar terms and maturities. The carrying
amount of the long-term liabilities approximates their fair
value (Level 3).
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| Severance Pay Policy [Text Block] |
q. Severance
pay:
The
Company’s liability for severance pay for its Israeli
employees is calculated pursuant to Israeli severance pay law
based on the most recent salary of the employees multiplied
by the number of years of employment as of the balance sheet
date. Israeli employees are entitled to one month’s
salary for each year of employment, or a portion thereof. The
Company’s liability for all of its Israeli employees is
fully provided by monthly deposits with severance pay funds
held by insurance companies on behalf of the employees,
insurance policies and by accrual. The fair value of these
funds, which are considered Level 2 fair value measurements,
is recorded as an asset in the Company’s balance
sheet.
In
addition, according to certain employment agreements, the
Company is obligated to provide for a special severance pay
in addition to amounts due to certain employees pursuant to
Israeli severance pay law. As of December 31, 2012, the
Company had made a provision of $217,733 for this special
severance pay. As of December 31, 2012 and 2011, the unfunded
severance pay in that regard amounted to $1,267,844 and
$1,050,111, respectively.
Pursuant
to the terms of the respective employment agreements between
the Company and its Chief Executive Officer and its
President, funds to secure payment of their respective
contractual severance amounts are to be deposited for their
benefit, with payments to be made pursuant to an agreed-upon
schedule. These funds continue to be owned by the Company,
which benefits from all gains and bears the risk of all
losses resulting from investments of these funds.
The
deposited funds include profits and losses accumulated up to
the balance sheet date. The deposited funds may be withdrawn
only upon the fulfillment of the obligation pursuant to
Israeli severance pay law or labor agreements. The fair value
of the deposited funds is based on the cash surrender value
of these policies and includes immaterial profits.
In
April 2009, the Company, with the agreement of its Chief
Executive Officer and its President, funded an
additional portion of their severance security by means
of issuing to them, in trust, restricted stock having a value
(based on the closing price of the Company’s stock on
the Nasdaq Stock Market on the date on which the executives
and the Company’s board of directors agreed to this
arrangement) of $440,000, a total of 602,740 shares. The
Company agreed with the executives that the economic risk of
gain or loss on these shares is to be borne by them. Should
they leave the Company’s employ under circumstances in
which they are not entitled to their severance package
(primarily, termination for Cause as defined in their
employment agreement), these shares would be returned to the
Company for cancellation and because of this, these shares
are not included in the basic EPS calculation.
Severance
expenses for continuing operations for the years ended
December 31, 2012 and 2011 amounted to $19,216 and $249,010,
respectively.
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| Advertising Costs, Policy [Policy Text Block] |
r. Advertising
costs:
The
Company records advertising costs as incurred. Advertising
expense for the years ended December 31, 2012 and 2011 was
approximately $155,887 and $166,701, respectively.
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| New Accounting Pronouncements, Policy [Policy Text Block] |
s. New
accounting pronouncements:
Effective
January 1, 2011, the Company adopted ASU 2009-13,
“Revenue Recognition (Accounting Standards Codification
ASC 605 – Multiple-Deliverable Revenue
Arrangements”) and ASU 2009-14, “Software ASC 985
– Certain Revenue Arrangements That Include Software
Elements.” ASU 2009-13 modifies the requirements that
must be met for an entity to recognize revenue from the sale
of a delivered item that is part of a multiple-element
arrangement when other items have not yet been delivered. ASU
2009-13 eliminates the requirement that all undelivered
elements must have either: i) VSOE or ii) third-party
evidence (“TPE”), before an entity can recognize
the portion of an overall arrangement consideration that is
attributable to items that already have been delivered. In
the absence of VSOE or TPE of the standalone selling price
for one or more delivered or undelivered elements in a
multiple-element arrangement, entities are required to
estimate the selling prices of those elements. Overall
arrangement consideration is allocated to each element (both
delivered and undelivered items) based on their relative
selling prices, regardless of whether those selling prices
are evidenced by VSOE or TPE or are based on the
entity’s estimated selling price. The residual method
of allocating arrangement consideration has been eliminated.
ASU 2009-14 modifies the software revenue recognition
guidance to exclude from its scope tangible products that
contain both software and non-software components that
function together to deliver a product’s essential
functionality. Additionally, ASU 2009-14 provides
guidance on how a vendor should allocate arrangement
consideration to deliverables in an arrangement that includes
both tangible products and software that is not essential to
the product’s functionality.
ASU 2009-14 requires the same expanded disclosures
that are included within ASU 2009-13. The impact of
adoption did not have a significant impact on the
Company’s consolidated financial statements.
In
June 2011, the FASB issued ASU No. 2011-05,
“Comprehensive Income (Topic 220) — Presentation
of Comprehensive Income.” ASU 2011-05 eliminates the
current option to report other comprehensive income and its
components in the statement of changes in stockholders’
equity and requires that all non-owner changes in
stockholders’ equity be presented either in a single
continuous statement of comprehensive income or in two
separate but consecutive statements. The Company adopted the
disclosure standard in January 2012.
In
July 2012, the FASB issued ASU 2012-02 “Intangibles
- Goodwill and Other (Topic 350): Testing Indefinite-Lived
Intangible Assets for Impairment”
(“ASU 2012-02”). ASU 2012-02 permits entities to
first assess qualitative factors to determine whether it is
more likely than not that the fair value of an
indefinite-lived intangible asset is impaired as a basis for
determining whether it is necessary to perform the
quantitative impairment test. Under the amendments in ASU
2012-02, an entity is not required to calculate the fair
value of an indefinite-lived intangible asset unless it
determines that it is more likely than not that the fair
value of the asset is less than its carrying amount. An
entity also will have the option to bypass the qualitative
assessment for any indefinite-lived intangible asset in any
period and proceed directly to performing the quantitative
impairment test. ASU 2012-02 is effective for interim and
annual indefinite-lived intangible asset impairment tests
performed for fiscal years beginning on or after September
15, 2012, with early adoption permitted. The Company’s
adoption of ASU 2012-02 is not expected to have a material
impact on its consolidated financial statements.
In
February 2013, the FASB issued ASU 2013-02, Comprehensive
Income (Topic 220): Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income. This ASU is intended
to improve the reporting of reclassifications out of
accumulated other comprehensive income. The ASU requires an
entity to report, either on the face of the statement where
net income is presented or in the notes to the financial
statements, the effect of significant reclassifications out
of accumulated other comprehensive income on the respective
line items in net income if the amount being reclassified is
required under U.S. GAAP to be reclassified in their entirety
to net income. For other amounts that are not required under
U.S. GAAP to be reclassified in their entirety to net income
in the same reporting period, an entity is required to
cross-reference other disclosures required under U.S. GAAP
that provide additional detail about those amounts. The
amendments in this ASU apply to all entities that issue
financial statements that are presented in conformity with
U.S. GAAP and that report items of other comprehensive
income. For public entities, the amendments in this ASU are
effective prospectively for reporting periods beginning after
December 15, 2012. The impact of adoption of this ASU by the
Company is not expected to be material.
No
other new accounting
pronouncements issued or effective
during 2012 have had or are expected to have a significant
impact on the Company’s consolidated financial
statements.
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| Repurchase Agreements, Valuation, Policy [Policy Text Block] |
t. Share
repurchase:
In
February 2009, the Company’s Board of Directors
authorized the repurchase in the open market or in privately
negotiated transactions of up to $1,000,000 of the
Company’s common stock. Through December 31, 2012, the
Company repurchased 638,611 shares for a total of $869,931.
The repurchase program, which expires on August 13, 2013, is
subject to management’s discretion.
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| Reclassification, Policy [Policy Text Block] |
u.
Reclassification:
Prior
period amounts are reclassified, when necessary, to conform
to the current period presentation.
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