Annual report pursuant to Section 13 and 15(d)

NOTE 1: - GENERAL

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NOTE 1: - GENERAL
12 Months Ended
Dec. 31, 2014
Disclosure Text Block [Abstract]  
Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]
NOTE 1:–                        GENERAL

a.                 Corporate structure:

Arotech Corporation (“Arotech”) and its wholly-owned subsidiaries (the “Company”) provide defense and security products for the military, law enforcement, emergency services and homeland security markets, including advanced zinc-air and lithium batteries and chargers, and multimedia interactive simulators/trainers. The Company operates primarily through its wholly-owned subsidiaries FAAC Incorporated, a Michigan corporation located in Ann Arbor, Michigan (Training and Simulation Division) with locations in Royal Oak, Michigan and Orlando, Florida; Epsilor-Electric Fuel Ltd. (“Epsilor-EFL”), an Israeli corporation located in Beit Shemesh, Israel (between Jerusalem and Tel-Aviv) and in Dimona, Israel (in Israel’s Negev desert area) (Power Systems Division); UEC Electronics, LLC (“UEC”), a South Carolina limited liability company located in Hanahan, South Carolina (Power Systems Division); and Electric Fuel Battery Corporation (“EFB”), a Delaware corporation in the process of being relocated from Auburn, Alabama to UEC’s facilities in Hanahan, South Carolina (Power Systems Division). Pursuant to a management decision in the fourth quarter of 2011 and sale in 2012, the Company’s Armor Division, consisting of M.D.T. Protective Industries, Ltd., based in Lod, Israel, and MDT Armor Corporation, based in Auburn, Alabama, along with the trade name of Armour of America Incorporated, are reflected as discontinued operations for all periods presented.

b.                 Impairment of goodwill and other long-lived assets:

Goodwill and indefinite-lived intangible assets are tested for impairment at least annually and between annual tests in certain circumstances, and written down when impaired. Goodwill is tested for impairment by comparing the fair value of the Company’s reporting units with their carrying value. Both of the Company’s reporting units have goodwill. Fair value is determined using discounted cash flows. Significant estimates used in the methodologies include estimates of future cash flows, future short-term and long-term growth rates and weighted average cost of capital.

When testing goodwill for impairment, the Company has the option of performing a qualitative assessment in order to determine whether it needs to calculate the fair value of a reporting unit. If the Company determines, on the basis of qualitative factors, that it is more likely than not that the fair value of the reporting unit is greater than the carrying amount, the two-step impairment test would not be required.

In December 2014 and 2013, the Company determined, using qualitative factors, that the goodwill for the Training and Simulation reporting unit was not impaired. In December 2014 and 2013, the Company completed the first step of the quantitative analysis of the goodwill in the Power Systems reporting unit, in which it computed a fair value of that reporting unit. Because the fair value was greater than the carrying value of the reporting unit at each measurement date, the second step of the quantitative impairment assessment was not required and no goodwill was impaired. Although the valuation for Power Systems reporting unit exceeded the reporting unit’s carrying value by over 6% as of December 31, 2014, the Company will continue to monitor the actual results of the reporting unit versus the forecast used for the impairment review and reevaluate the goodwill if required.
The Company also considers its current market capitalization compared to the sum of the estimated fair values of its reporting units in conjunction with each impairment assessment.  As part of this consideration, management recognizes that the market capitalization of the Company may not be an accurate representation of the sum of the reporting unit fair values for the following reasons:

·
The long term horizon of the valuation process versus a short term valuation using current market conditions;

·
The valuation by individual business segments versus the market share value based on the Company as a whole, including unallocated corporate costs;

·
The Company’s stock is thinly traded and widely dispersed with minimal institutional ownership, and thus not followed by major market analysts, leading management to conclude that the market in the Company’s securities was not acting as an informationally efficient reflection of all known information regarding the Company and thereby serves to understate their value; and

·
Control premiums reflected in the reporting unit fair values but not in the Company’s stock price.

As of the December 31, 2014 valuation date, the Company’s market capitalization was $56.9 million, which did not, in management’s view, suggest that the fair value estimates used in its impairment assessment required any adjustment.

The Company’s long-lived assets and amortizable identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the carrying amount of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by use of the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

c.                 Related parties

The Company has had a consulting agreement with Sampen Corporation since 2005. Sampen is a New York corporation owned by members of the immediate family of one of the Company’s executive officers, and this executive officer is an employee of both the Company and of Sampen. In 2014, the term of this consulting agreement was extended until December 31, 2017, unless either Sampen or the Company terminates the agreement sooner.

Pursuant to the terms of the Company’s agreement with Sampen, Sampen provides one of its employees to the Company for such employee to serve as our President and Chief Executive Officer of the Company. The Company pays Sampen $8,960 per month, plus an annual bonus, on a sliding scale, in an amount equal to a minimum of 25% of Sampen’s annual base compensation then in effect, up to a maximum of 75% of its annual base compensation then in effect if the results the Company actually attained for the year in question are 110% or more of the amount the Company budgeted at the beginning of the year. The Company also pays Sampen to cover the cost of the Company’s use of Sampen’s offices as an ancillary New York office and the attendant expenses and insurance costs, an amount equal to 16% of each monthly payment of base compensation.

During the years ended December 31, 2014 and 2013, the Company incurred a total of $124,720 and $148,723, respectively, related to Sampen.

On February 9, 2000, Mr. Ehrlich, the Company’s Executive Chairman of the Board, exercised 9,404 stock options. Mr. Ehrlich paid the exercise price of the stock options and certain taxes that the Company paid on his behalf by giving the Company a non-recourse promissory note due in 2025 in the amount of $329,163, bearing annual interest at 1% over the then-current federal funds rate announced from time to time by the Wall Street Journal, secured by the shares of the Company’s common stock acquired through the exercise of the options and certain compensation due to Mr. Ehrlich upon termination. As of December 31, 2014 and 2013, the aggregate amount outstanding pursuant to this promissory note was $452,995. Additionally, there is a former employee with the same arrangement with an outstanding promissory note of $455,059.

On June 10, 2002, Mr. Ehrlich exercised 3,571 stock options. Mr. Ehrlich paid the exercise price of the stock options by giving the Company a non-recourse promissory note due in 2012 in the amount of $36,500, bearing simple annual interest at a rate equal to the lesser of (i) 5.75%, and (ii) 1% over the then-current federal funds rate announced from time to time, secured by the shares of the Company’s common stock acquired through the exercise of the options. As of December 31, 2012, the aggregate amount outstanding pursuant to this promissory note was $46,593, which was not repaid and was charged to paid in capital in the fourth quarter of 2012. Pursuant to the terms of the note, the shares of stock securing the note were returned to the Company and retired in 2013 when the loan was not repaid.

d.                 Discontinued operations

In December 2011, the Company’s Board of Directors approved management’s plan to sell the Armor Division. The sale of the assets was completed in June 2012 at a cash purchase price of $50,000. Unless otherwise indicated, discontinued operations are not included in the Company’s reported results and amounts and disclosures throughout the Notes to Consolidated Financial Statements relate only to the Company’s continuing operations.

The operations in 2013 primarily represent the completion of certain contracts that were not assumed by the buyer of the Armor Division and include revenues of $2,009, operating costs of $118,323 and other costs of $62,067.

The Company retained the facility used by the Armor operations and currently leases it to the buyer of those operations under a three year operating lease for approximately $9,300 per month.  As of December 31, 2014, the Company was marketing the facility for sale, and it had no recorded book value. The Company remained responsible for the outstanding mortgage on this facility, which was transferred to Arotech in 2013.

On February 10, 2015, the Company completed the sale of the building to the existing tenant for a price of $925,000.  The existing mortgage was transferred to the purchaser.