Annual report pursuant to Section 13 and 15(d)

GENERAL

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GENERAL
12 Months Ended
Dec. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
GENERAL
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, 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 a location in Orlando, Florida; Epsilor-Electric Fuel Ltd. (“Epsilor-EFL”), an Israeli corporation located in Beit Shemesh, Israel (between Jerusalem and Tel-Aviv), and Dimona, Israel (in Israel’s Negev desert area) (Power Systems Division); and UEC Electronics, LLC (“UEC”), a South Carolina limited liability company located in Hanahan, South Carolina (Power Systems Division).
b.
Discontinued operations
Asset Held for Sale and Discontinued Operations
In August 2016, the Board approved a strategic shift to discontinue the Flow Battery segment (“the segment”) with an effective date of August 31, 2016. The principal activities of the Flow Battery segment were research and development related and were focused on developing a commercial application based upon the Iron Flow Storage concept. The assets of the Flow Battery segment of $270,139 were classified as held for sale as of December 31, 2016. During the fourth quarter of 2017, it was determined that the Company was not able to execute its plan to sell the assets associated with the Flow Battery segment. As a result, assets in the amount of $270,139 were reclassified on the consolidated balance sheet into property and equipment. These assets are being used in operations and therefore not considered to be impaired as of December 31, 2018.
The amounts presented in the Consolidated Statements of Operations and Comprehensive Income as discontinued operations in 2016 represented research and development and general and administrative expenses. As the Flow Battery segment was reported within the Epsilor-EFL legal entity and the legal entity has net operating loss carryforwards for which the Company has recorded a valuation allowance, there was no tax impact. Included in the Flow Battery segment’s general and administrative expenses for the year ended December 31, 2016, was a contractual buyout associated with the termination of the former Chairman of the Flow Battery segment of $524,052.
The impact of the discontinued operations on operating and investing activities within the consolidated statements of cash flows for the year ended December 31, 2016 was ($1,337,751) and ($252,064), respectively.
Unless otherwise indicated, discontinued operations are not included in the reported results. The Notes to the Consolidated Financial Statements relate to the Company’s continuing operations.
c.
Related parties
Note Receivable
On February 9, 2000, two former executives entered into non-recourse promissory notes whereby the Company provided the notes to the executives and the executives in turn exercised stock options. The promissory notes originally accrued interest at an annual rate of 1% over the then federal funds rate and are due in 2025. As of December 31, 2018 and 2017, the aggregate amount outstanding pursuant to these promissory notes was $908,054.
UEC Facility Headquarters
On October 31, 2014, the Company entered into a lease agreement with UEC Properties, LLC, a company controlled by the former owners of UEC, and now consultants and shareholders of the Company, for land and buildings that represent the headquarters of UEC Electronics. The lease term with UEC Properties commenced on January 1, 2015 and it extends for ten years, expiring on December 31, 2024. The lease provides for both the Company and UEC Properties, LLC with a one-time right to terminate the lease as of December 31, 2019, provided a written notice and a termination fee of $100,000 is delivered at or before December 31, 2018. On December 31, 2018, the Company notified UEC Properties, LLC, that it intends to terminate the lease at the end of 2019 and paid and expensed the termination fee of $100,000 at time of notice.
The 2018 monthly lease payment was $31,081 and increases at a rate of 2.5% per year through the term of the lease. Lease expense recognized in 2018, 2017, and 2016 was $472,972, $363,875, and $355,000, respectively.
Admiralty Partners
On February 2, 2016, the Company and Admiralty Partners (the “Investor”) entered into a Stock Purchase Agreement (the “Investment Agreement”) providing for the sale to the Investor of a total of 1,500,000 shares of the Company’s common stock at a price valued at $1.99 per share. As the Investor was also given the right to nominate a member of the Board of Directors pursuant to the terms of the Investment Agreement, and the shares were issued at a discount to the then market price, this resulted in additional stock compensation expense of $375,000.
Subsequently, on February 3, 2016, the Company entered into a consulting agreement with the Investor for a period of three years. In exchange, the Company pays an annual fee equal to the difference between total accrued compensation of the Board member and $125,000. The agreement can be terminated by either party upon sufficient written notice. During the fourth quarter of 2018 the investor and the Company agreed that the current agreement should not be renewed in 2019 and therefore the agreement will expire in accordance with its terms in February 2019. Total compensation expense recognized in 2018, 2017, and 2016 was $58,000, $49,000, and $26,750, respectively.