10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2019.

Commission file number: 0-23336

AROTECH CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	95-4302784
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1229 Oak Valley Drive, Ann Arbor, Michigan	48108
(Address of principal executive offices)	(Zip Code)

800 281-0356

(Registrant’s telephone number, including area code)

______________________________________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	ARTX	The Nasdaq Stock Market LLC

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 x No ¨

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 such files). Yes x No ¨

Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer: ¨	Accelerated filer: x
Non-accelerated filer: ¨ (Do not check if a smaller reporting company)	Smaller reporting company: x
Emerging growth company: ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No x

The number of shares outstanding of the issuer’s common stock as ofMay 6, 2019 was 26,665,240.

SEC 1296 (05-19)

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.

TABLE OF CONTENTS

Item	Page
PART I - FINANCIAL INFORMATION
Item 1 – Financial Statements (Unaudited):	3
Condensed Consolidated Balance Sheets at March 31, 2019 and December 31, 2018	3
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018	4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018	5
Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2019 and 2018	6
Notes to the Interim Condensed Consolidated Financial Statements	7
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	19
Item 4 – Controls and Procedures	19
PART II - OTHER INFORMATION
Item 6 – Exhibits	20
SIGNATURES	21

PART I

ITEM 1.    FINANCIAL STATEMENTS (UNAUDITED)

AROTECH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(U.S. Dollars)

	March 31, 2019			December 31, 2018
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	4,523,949		$	4,222,246
Restricted collateral deposits	229,830			222,712
Trade receivables, net	11,801,182			16,259,809
Contract assets	22,319,968			17,867,896
Other accounts receivable and prepaid expenses	6,548,213			5,989,263
Inventories, net	9,452,464			9,912,748
Total current assets	54,875,606			54,474,674
LONG TERM ASSETS:
Contractual and Israeli statutory severance pay fund	3,637,590			3,427,705
Other long term receivables	541,139			543,205
Property and equipment, net	8,931,136			8,914,247
Right of use asset	6,035,660			—
Other intangible assets, net	4,841,152			4,465,778
Goodwill	46,138,036			46,138,036
Total long term assets	70,124,713			63,488,971
Total assets	$	125,000,319		$	117,963,645
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade payables	$	6,360,287		$	6,442,919
Other accounts payable and accrued expenses	4,689,993			6,498,045
Current portion of lease obligations	622,065			—
Current portion of long term debt	2,235,089			2,204,653
Short term bank credit	9,703,764			5,500,416
Contract liabilities	6,750,785			7,054,779
Total current liabilities	30,361,983			27,700,812
LONG TERM LIABILITIES:
Contractual and accrued Israeli statutory severance pay	4,465,209			4,125,675
Long term portion of lease obligations	5,714,132			—
Long term portion of debt	6,006,573			6,360,569
Deferred income tax liability	2,970,978			2,863,098
Other long term liabilities	46,800			137,774
Total long-term liabilities	19,203,692			13,487,116
Total liabilities	49,565,675			41,187,928
STOCKHOLDERS’ EQUITY:
Share capital –
Common stock – $0.01 par value each; Authorized: 50,000,000 shares as of March 31, 2019 and December 31, 2018; Issued and outstanding: 26,617,460 shares and 26,486,152 shares as of March 31, 2019 and December 31, 2018, respectively	266,175			264,862
Preferred shares – $0.01 par value each; Authorized: 1,000,000 shares as of March 31, 2019 and December 31, 2018; No shares issued or outstanding as of March 31, 2019 and December 31, 2018	—			—
Additional paid-in capital	251,572,736			251,551,001
Accumulated deficit	(177,905,070		)	(176,498,057		)
Notes receivable from stockholders	(908,054		)	(908,054		)
Accumulated other comprehensive income	2,408,857			2,365,965
Total stockholders’ equity	75,434,644			76,775,717
Total liabilities and stockholders’ equity	$	125,000,319		$	117,963,645

The accompanying notes are an integral part of the Interim Condensed Consolidated Financial Statements.

3

AROTECH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(U.S. Dollars, except share data)

	Three months ended March 31,
	2019			2018
Revenues	$	20,778,639		$	27,248,509
Cost of revenues	14,959,111			19,537,081
Research and development expenses	1,074,064			1,036,702
Selling and marketing expenses	2,152,557			1,878,073
General and administrative expenses	3,170,391			3,225,934
Amortization of intangible assets	370,203			514,911
Total operating costs and expenses	21,726,326			26,192,701
Operating income (loss)	(947,687		)	1,055,808
Other income (expense), net	(14		)	3
Financial expense, net	(298,431		)	(213,108		)
Total other expense	(298,445		)	(213,105		)
Income (loss) before income tax expense	(1,246,132		)	842,703
Income tax expense	160,881			247,114
Net income (loss)	(1,407,013		)	595,589
Other comprehensive income (loss), net of income tax:
Foreign currency translation adjustment	42,892			(24,260		)
Comprehensive income (loss)	$	(1,364,121	)	$	571,329
Income (loss) per share of common stock:
Basic net income (loss) per share	$	(0.05	)	$	0.02
Diluted net income (loss) per share	$	(0.05	)	$	0.02
Weighted average number of shares used in computing basic net income (loss) per share	26,387,285			26,447,090
Weighted average number of shares used in computing diluted net income (loss) per share	26,387,285			26,447,090

The accompanying notes are an integral part of the Interim Condensed Consolidated Financial Statements.

4

AROTECH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

(U.S. Dollars)

	Three months ended March 31,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(1,407,013	)	$	595,589
Adjustments required to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation	493,117			481,491
Amortization of intangible assets	370,203			514,911
Stock based compensation	135,969			108,495
Deferred tax provision	107,880			227,313
Changes in operating assets and liabilities:
Trade receivables	4,458,627			4,907,024
Contract assets	(4,452,072		)	(2,513,952		)
Other accounts receivable and prepaid expenses	(256,347		)	546,999
Inventories	460,927			(324,646		)
Severance pay, net	145,123			32,042
Trade payables	(82,634		)	(292,733		)
Other accounts payable and accrued expenses	(1,896,369		)	(1,489,424		)
Contract liabilities	(303,994		)	(278,267		)
Net cash (used in) provided by operating activities	$	(2,226,583	)	$	2,514,842
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	$	(510,006	)	$	(330,820	)
Additions to capitalized software	(745,577		)	—
Net cash used in investing activities	$	(1,255,583	)	$	(330,820	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt	220,264			—
Repayment of long term debt	(543,824		)	(563,591		)
Other financing activities	(112,921		)	(54,155		)
Change in short term bank credit	4,203,348			1,131,418
Net cash provided by financing activities	$	3,766,867		$	513,672
INCREASE IN CASH, RESTRICTED CASH, AND CASH EQUIVALENTS	$	284,701		$	2,697,694
CASH DIFFERENCES DUE TO EXCHANGE RATE DIFFERENCES	$	24,120		$	33,831
CASH, RESTRICTED CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD	$	4,444,958		$	5,488,754
CASH, RESTRICTED CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD	$	4,753,779		$	8,220,279
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid during the period	$	201,078		$	220,607
Taxes paid on income during the period	$	2,468		$	300

The accompanying notes are an integral part of the Interim Condensed Consolidated Financial Statements.

5

AROTECH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(U.S. Dollars)

	Common stock					Additional paid-in capital			Accumulated deficit			Notes receivable from stockholders			Accumulated other comprehensive income			Total stockholders’ equity
	Shares		Amount
Balance as of January 1, 2019	26,486,152		$	264,862		$	251,551,001		$	(176,498,057	)	$	(908,054	)	$	2,365,965		$	76,775,717
Stock based compensation	—		—			135,969			—			—			—			135,969
Restricted stock issued	24,000		240			(240		)	—			—			—			—
Restricted stock units vested, net of taxes	112,775		1,128			(114,049		)	—			—			—			(112,921		)
Restricted stock forfeitures	(5,467	)	(55		)	55			—			—			—			—
Foreign currency translation adjustment	—		—			—			—			—			42,892			42,892
Net Loss	—		—			—			(1,407,013		)	—			—			(1,407,013		)
Balance as of March 31, 2019	26,617,460		$	266,175		$	251,572,736		$	(177,905,070	)	$	(908,054	)	$	2,408,857		$	75,434,644
Balance as of January 1, 2018	26,395,048		$	263,951		$	250,826,873		$	(181,568,757	)	$	(908,054	)	$	2,479,205		$	71,093,218
Stock based compensation	—		—			108,495			—			—			—			108,495
Restricted stock issued	41,000		410			(410		)	—			—			—			—
Restricted stock units vested, net of taxes	49,747		497			(54,652		)	—			—			—			(54,155		)
Restricted stock forfeitures	(33,333	)	(333		)	333			—			—			—			—
Foreign currency translation adjustment	—		—			—			—			—			(24,260		)	(24,260		)
Net Income	—		—			—			595,589			—			—			595,589
Balance as of March 31, 2018	26,452,462		$	264,525		$	250,880,639		$	(180,973,168	)	$	(908,054	)	$	2,454,945		$	71,718,887

The accompanying notes are an integral part of the consolidated financial statements.

6

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1:    BASIS OF PRESENTATION

a.    Company:

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 multimedia interactive simulators/trainers, and lithium batteries and chargers. 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 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).

b.    Basis of Presentation:

The Company prepared the accompanying unaudited condensed consolidated financial statements of Arotech Corporation and all wholly-owned, majority owned or otherwise controlled subsidiaries on the same basis as its annual audited financial statements. The Company condensed or omitted certain information and footnote disclosures normally included in its annual audited financial statements, which it prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP), 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. The Company’s quarterly financial statements should be read in conjunction with its Annual Report on Form 10-K for the year ended December 31, 2018. 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 March 31, 2019, its operating results for the three months ended March 31, 2019 and 2018, its cash flows for the three months ended March 31, 2019 and 2018, and its statement of shareholders’ equity for the three months ended March 31, 2019 and 2018.

The results of operations for the three months ended March 31, 2019 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2019.

The condensed consolidated balance sheet at December 31, 2018 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, 2018.

c.    Reclassification:

From time to time the Company may reclassify amounts from prior periods to conform to the current year’s presentation.

d.    Commitments and contingencies:

The Company is involved in litigation from time to time in the regular course of its business. There are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.  In addition, the Company believes that adequate provisions for resolution of all contingencies have been made for probable losses that are reasonably estimable. These contingencies are subject to uncertainties, and, as a result, the Company is unable to estimate the amount or range of loss, if any, in excess of amounts accrued. The Company does not believe that the these contingencies will have a material adverse effect on the Company’s balance sheets, statements of operations and comprehensive income or statements of cash flows for the three months ended March 31, 2019. 

e.    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 the carrying value. The Training and Simulation and the Power Systems reporting units have goodwill.

As of its last annual impairment test at October 1, 2018, the Company determined that the goodwill for both reporting units was not impaired.

Consistent with previous interim reporting periods, the Company monitors qualitative and quantitative factors, including internal projections, periodic forecasts, and actual results of the reporting unit. Based upon this interim review, the Company does not believe that goodwill or its indefinite-lived intangible assets related to either reporting unit is impaired.

f.    New accounting pronouncements:

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard, effective January 1, 2019, requires virtually all leases to be recognized on the Consolidated Balance Sheets. Effective January 1, 2019, the Company adopted the standard using the modified retrospective method, under which it elected the package of practical expedients and transition provisions allowing it to bring its existing operating leases onto the Condensed Consolidated Balance Sheet without adjusting comparative periods.

7

The Company has operating leases for facilities and equipment, which are recorded as assets and liabilities for those leases with terms greater than 12 months. Lease-related assets, or right-of-use assets (“ROU”), are recognized at the lease commencement date at amounts equal to the respective lease liabilities, adjusted for prepaid lease payments, initial direct costs, and lease incentives received. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.

Upon adoption of the standard, the Company recorded approximately $6.3 million of ROU assets and $6.5 million of current and long term lease obligations in its Condensed Consolidated Balance Sheet. Refer to Note 2 “Significant Accounting Policy Update” for additional information.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new standard simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test and requires businesses to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The amendments are effective for annual periods beginning after December 15, 2019 with early adoption permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted this standard and it did not have an impact on its consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). The accounting standard allows for the optional reclassification of stranded tax effects within accumulated other comprehensive income to retained earnings that arise due to the enactment of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The amount of the reclassification would reflect the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment of the Tax Act and other income tax effects of the Tax Act on items remaining in accumulated other comprehensive income. The Company adopted the requirements of the new standard in the first quarter of 2019, as required by the new standard. The adoption of this ASU did not have a material impact on the consolidated financial statements.

In August 2018, the SEC issued Release No. 33-10532 that amends and clarifies certain financial reporting requirements. The principal change to the Company’s financial reporting is the inclusion of the annual disclosure requirement of changes in stockholders’ equity in Rule 3-04 of Regulation S-X to interim periods.

NOTE 2:    SIGNIFICANT ACCOUNTING POLICIES UPDATE

The Company’s significant accounting policies are detailed in “Note 2:  Significant Accounting Policies” of its Form 10-K for the year ended December 31, 2018.  Significant changes to the Company’s accounting policies as a result of adopting Accounting Standards Codification (“ASC”) 842 are discussed below:

Leases:

The Company determines if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded in the Condensed Consolidated Balance Sheets and the Company recognizes lease expense for these leases on a straight line basis over the lease term. Operating leases are included in operating lease ROU asset, current portion of lease obligations and long term portion of lease obligations on its Condensed Consolidated Balance Sheet. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities on its Condensed Consolidated Balance Sheet. As of March 31, 2019, the Company does not have any non-cancelable operating lease commitments that have not yet commenced.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. If a lease does not implicitly state a rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made in advance, any initial direct costs incurred and excludes any lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably assured that the Company will exercise that option. Lease expense for minimum lease payments are recognized on a straight-line basis over the lease term.

The Company has lease agreements with lease and non-lease components, which are generally accounted for separately.

The Company has operating leases for its production and office facilities and certain office equipment. These leases have remaining lease terms of 2 years to 15 years, some of which include options to extend for up to 5 years. These options have been included in the Company’s calculation of the ROU asset and lease liability based upon the Company’s assessment of whether the option will be exercised.

The Company’s lease agreements do not contain any residual value guarantees or material restrictive covenants.

The Company rents or subleases certain real estate to third parties. The Company’s sublease portfolio consists of an operating lease within one of its facilities, resulting in approximately $27,000 of sublease income for the three months ended March 31, 2019.

8

The components of lease expense were as follows:

Three months ended March 31,	2019
Operating lease cost	$	280,246
Finance lease cost:
Amortization of right-of-use assets	$	3,166
Interest on lease liabilities	728
Total finance lease costs	$	3,894
Three months ended March 31,	2019
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	103,004
Operating cash flows from finance leases	728
Financing cash flows from finance leases	2,939
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	2,785,444
Finance leases	31,386
Weighted Average Remaining Lease Term
Operating leases	11 years
Finance leases	4 years
Weighted Average Discount Rate
Operating leases	7.47		%
Finance leases	6.86		%

The undiscounted annual future minimum lease payments are summarized by year in the table below:

Year Ending December 31,	Operating Leases			Finance Leases
2019 (excluding the three months ended March 31, 2019)	$	826,215		$	10,998
2020	1,106,944			14,664
2021	891,346			14,664
2022	805,432			12,276
2023	697,277			7,500
Thereafter	5,555,117			—
Total future minimum lease payments	9,882,331			60,102
Less imputed interest	(3,546,134		)	(8,128		)
Total:	$	6,336,197		$	51,974

9

Supplemental balance sheet information related to leases was as follows:

Operating Leases as of March 31,	2019
Right of use asset	$	6,035,660
Current portion of lease obligations	622,065
Long term portion of lease obligations	5,714,132
Total operating lease obligations	6,336,197
Financing Leases as of March 31,	2019
Property and Equipment, at cost	56,933
Accumulated depreciation	(5,295		)
Property and Equipment, net	51,638
Other accounts payable and accrued expenses	11,445
Other long term liabilities	40,529
Total financing lease liabilities	$	51,974

NOTE 3:    REVENUES

Revenue recognition:

The Company recognized revenues from (i) the sale and customization of interactive training systems (Training and Simulation Division); (ii) maintenance services in connection with such systems (Training and Simulation Division); (iii) the sale of batteries, chargers and adapters, and custom power solutions (Power Systems Division); and (iv) the sale of lifejacket lights (Power Systems Division).

The Company determines its revenue recognition through the following steps:

• Identification of the contract, or contracts, with a customer

• Identification of the performance obligations within the contract

• Determination of the transaction price

• Allocation of the transaction price to the performance obligations within the contract

• Recognition of revenue when, or as the performance obligation has been satisfied

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. In assessing the recognition of revenue, the Company evaluates whether two or more contracts should be combined and accounted for as one contract and if the combined or single contract should be accounted for as multiple performance obligations which could change the amount of revenue and profit (loss) recorded in a period. The majority of the Company’s contracts with customers are accounted for as one performance obligation, as the majority of tasks and services is part of a single project or capability. As these contracts are typically a customized customer-specific solution, the Company uses the expected cost plus margin approach to estimate the standalone selling price of each performance obligation.  For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract.

The Company also offers maintenance and support agreements (“warranties”) for many of its products.  The specific terms and conditions of those warranties vary depending upon the product sold and country in which the product was sold.  The warranty revenue is recognized on a straight-line basis over the term of the maintenance and support services.   The standalone selling price is determined based on the price charged when sold separately or upon renewal.

The Company’s performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for 90% and 94% of its revenue for the three-month period ended March 31, 2019 and 2018, respectively. Substantially all of the Company’s revenue in the Training and Simulation Division and the U.S. Power Systems Division is recognized over time. Typically, revenue is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Contract costs include labor, material, and overhead.

On March 31, 2019, the Company had $70.5 million of expected future revenue relating to performance obligations currently in progress, which it also refers to as total backlog. The Company expects to recognize approximately 68.1% its backlog as revenue in 2019, and the remaining 31.9% thereafter.

10

Contract Estimates. Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.

Contract estimates are based on various assumptions to project the outcome of future events that can exceed a year. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.

As a significant change in one or more of these estimates could affect the profitability of its contracts, the Company reviews and updates its contract-related estimates quarterly. The Company recognizes adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, the Company recognizes the total loss in the quarter it is identified.

The aggregate impact of adjustments in contract estimates to net income (loss) is presented below:

	Three months ended March 31,
	2019					2018
	Training and Simulation Division		Power Systems Division			Training and Simulation Division		Power Systems Division
Net income (loss)	$	146,278	$	(30,419	)	$	71,440	$	(119,778	)

Revenue by Category. As of March 31, 2019 and 2018 the Company’s portfolio of products and services consisted of 476 and 500 active contracts, respectively.

Revenue by major product line was as follows:

	Three months ended March 31,
	2019		2018
Product Revenue
Air Warfare Simulation	$	3,499,202	$	5,032,659
Vehicle Simulation	7,080,941		5,463,998
Use-of-Force	2,457,177		3,260,049
Service Revenue
Warranty	952,295		801,158
Total Training and Simulation Division	$	13,989,615	$	14,557,864
Contract Manufacturing	$	3,217,992	$	4,164,324
Power Distribution and Generation	250,700		3,275,380
Batteries	2,382,475		4,146,112
Engineering Services and Other	937,857		1,104,829
Total Power Division	$	6,789,024	$	12,690,645

The table below details the percentage of total recognized revenue by type of arrangement for the three months ended March 31, 2019 and 2018:

	Three months ended March 31,
Type of Revenue	2019		2018
Sale of products	92.1	%	96.4	%
Maintenance and support agreements	4.6	%	2.9	%
Long term research and development contracts	3.3	%	0.7	%
Total	100	%	100	%

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Revenue by contract type was as follows:

	Training and Simulation Division		Power Systems Division
Three months ended March 31, 2019
Fixed Price	$	10,971,102	$	6,169,657
Cost Reimbursement (Cost Plus)	1,349,345		431,050
Time and Materials	1,669,168		188,317
Total	$	13,989,615	$	6,789,024
Three months ended March 31, 2018
Fixed Price	$	12,209,969	$	12,072,168
Cost Reimbursement (Cost Plus)	1,338,951		388,749
Time and Materials	1,008,944		229,728
Total	$	14,557,864	$	12,690,645

Each of these contract types presents advantages and disadvantages. Typically, the Company assumes more risk with fixed-price contracts. However, these types of contracts offer additional profits when the Company completes the work for less than originally estimated. Cost-reimbursement contracts generally subject the Company to lower risk. Accordingly, the associated base fees are usually lower than fees earned on fixed-price contracts. Under time and materials contracts, the Company’s profit may fluctuate if actual labor-hour costs vary significantly from the negotiated rates.

Revenue by customer was as follows:

	Training and Simulation Division		Power Systems Division
Three months ended March 31, 2019
U.S. Government
Department of Defense (DoD)	$	4,893,803	$	441,033
Non-DoD	2,604,486		—
Foreign Military Sales (FMS)	642,269		—
Total U.S. Government	$	8,140,559	$	441,033
U.S. Commercial	$	4,771,042	$	3,167,221
Non-U.S. Government	241,553		291,965
Non-U.S. Commercial	836,462		2,888,805
Total Revenue	$	13,989,615	$	6,789,024
Three months ended March 31, 2018
U.S. Government
Department of Defense (DoD)	$	3,432,193	$	512,212
Non-DoD	2,738,807		—
Foreign Military Sales (FMS)	584,781		—
Total U.S. Government	$	6,755,781	$	512,212
U.S. Commercial	$	6,028,998	$	7,717,964
Non-U.S. Government	926,164		1,517,816
Non-U.S. Commercial	846,921		2,942,653
Total Revenue	$	14,557,864	$	12,690,645

Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. The majority of the Company’s contract amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Billing sometimes occurs subsequent to revenue recognition, resulting in contract assets. However, the Company sometimes receives advances or deposits from its customers,

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particularly on its international contracts, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period.

	March 31, 2019									December 31, 2018
	Training and Simulation Division			Power Systems Division			Total			Training and Simulation Division			Power Systems Division			Total
Contract Assets - Current	$	14,251,984		$	8,067,984		$	22,319,968		$	10,358,679		$	7,509,217		$	17,867,896
Contract Liabilities - Current	(6,076,744		)	(674,041		)	(6,750,785		)	(6,697,522		)	(357,257		)	(7,054,779		)
Net Contract Assets and Liabilities:	$	8,175,240		$	7,393,943		$	15,569,183		$	3,661,157		$	7,151,960		$	10,813,117

The $4.8 million increase in the Company’s net contract assets (liabilities) from December 31, 2018 to March 31, 2019 was due to the timing of milestone payments on certain U.S. Government and commercial contracts.

During the three months ended March 31, 2019 and 2018, the Company recognized $2.8 million and $3.0 million, respectively, in revenue related to the Company’s contract liabilities.

The Company did not record any provisions for impairment of its contract assets during the three months ended March 31, 2019 and 2018.

Trade Receivables

Trade receivables include amounts billed and currently due from customers. The amounts are recorded at net estimated realizable value.  The value of the Company’s trade receivables when appropriate includes an allowance for estimated uncollectible amounts.  The Company calculates an allowance based on its history of write-offs, the assessment of customer creditworthiness, and the age of the outstanding receivables.

As of March 31, 2019 and December 31, 2018, the Company’s trade receivables recorded in the consolidated balance sheets were $11.8 million and $16.3 million, respectively.  The Company had an immaterial provision for doubtful accounts at March 31, 2019 and December 31, 2018.  The Company believes its exposure to concentrations of credit risk is limited due to the nature of its operations, where a significant number of its contracts are typically a customized customer specific solution.

NOTE 4:    INVENTORIES

Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first in, first out (“FIFO”) method. The Company periodically evaluates the quantities on hand relative to current and historical selling prices and historical and projected sales volume and based on these evaluations, provisions are made in each period to write down inventory to its net realizable value.  For the three months ended March 31, 2019 and 2018 the Company wrote off approximately $41,600 and $154,000, respectively, of obsolete inventory, which has been included in the cost of revenues.

Inventories by component are as follows:

	March 31, 2019		December 31, 2018
Raw and packaging materials	$	7,977,195	$	7,912,883
Work in progress	1,054,467		1,626,960
Finished products	420,802		372,905
Total:	$	9,452,464	$	9,912,748

NOTE 5:    SEGMENT INFORMATION

a.    The Company and its subsidiaries operate in two business segments. The two segments are also treated by the Company as reporting units for goodwill impairment evaluation purposes. The goodwill amounts associated with the Training and Simulation Division and the Power Systems Division were determined and valued when the specific businesses were purchased. The Company and its subsidiaries operate in two continuing business segments and follow the requirements of FASB ASC 280-10.

The Company’s reportable 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 reportable segments are the same as those used by the Company in the preparation of its annual financial statements. The Company evaluates performance based on 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.

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b.    The following is information about reported segment revenues, income (losses) from operations, and total assets as of March 31, 2019 and 2018:

	Training and Simulation Division			Power Systems Division			Corporate Expenses			Total Company
Three months ended March 31, 2019
Revenues from outside customers	$	13,989,615		$	6,789,024		$	—		$	20,778,639
Depreciation and amortization(1)	(187,830		)	(675,490		)	—			(863,320		)
Direct expenses(2)	(11,695,059		)	(8,261,927		)	(906,020		)	(20,863,006		)
Segment operating income (loss)	$	2,106,726		$	(2,148,393	)	$	(906,020	)	$	(947,687	)
Financial expense	(43,007		)	(64,915		)	(190,523		)	(298,445		)
Income tax expense	(50,000		)	—			(110,881		)	(160,881		)
Net income (loss)	$	2,013,719		$	(2,213,308	)	$	(1,207,424	)	$	(1,407,013	)
Segment assets(3)(4)	57,291,042			64,085,613			3,623,664			125,000,319
Additions to long-lived assets	532,251			403,337			319,995			1,255,583
Three months ended March 31, 2018
Revenues from outside customers	$	14,557,864		$	12,690,645		$	—		$	27,248,509
Depreciation, amortization and impairment expenses(1)	(200,360		)	(796,042		)	—			(996,402		)
Direct expenses(2)	(11,872,231		)	(12,273,712		)	(1,050,353		)	(25,196,296		)
Segment operating income (loss)	$	2,485,273		$	(379,109	)	$	(1,050,353	)	$	1,055,811
Financial expense	(44,619		)	15,465			(183,954		)	(213,108		)
Income tax expense	(19,801		)	—			(227,313		)	(247,114		)
Net income (loss)	$	2,420,853		$	(363,644	)	$	(1,461,620	)	$	595,589
Segment assets(3)	51,690,905			60,995,921			3,119,613			115,806,439
Additions to long-lived assets	121,588			209,232			—			330,820

(1) Includes depreciation of property and equipment and amortization expenses of intangible assets.

(2) Including, inter alia, sales and marketing, general and administrative.

(3) Out of those amounts, goodwill in the Company’s Training and Simulation Division and Power Systems Division totaled $24,435,641 and $21,702,395, respectively, as of March 31, 2019 and 2018.

(4) Out of those amounts, right-of-use assets for the Company’s Training and Simulation Division and Power Systems Division totaled $519,496 and $5,516,164, respectively, as of March 31, 2019.

NOTE 6:    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, contract assets, inventories, prepaid and other assets, trade payables, accrued expenses, deferred revenues and other liabilities as of March 31, 2019 and December 31, 2018, approximate fair value because of the short maturity of these instruments. The carrying amounts of long term debt approximates the estimated fair values at March 31, 2019, based upon the Company’s ability to acquire similar debt at similar maturities.

NOTE 7:    BANK FINANCING

The Company maintains credit facilities with JPMorgan Chase Bank, N.A. (“Chase”), whereby Chase provides (i) a $15,000,000 revolving credit facility (“Revolver”), (ii) a $10,000,000 Term Loan (“Term Loan A”), (iii) a $1,730,895 Mortgage Loan (“Term Loan B”), (iv) a $1,358,000 Mortgage Loan (“Term Loan C”); collectively referred to as the “Credit Facilities.”

On April 22, 2019, the Company entered into a new amendment to the Credit Agreement (the “Eighth Amendment”), effective March 31, 2019. Pursuant to the terms of the Eighth Amendment, the parties have incorporated, among other changes, amended definitions of fixed charge coverage ratios and leverage ratios for specific quarters in 2019, and the Company has been given a second revolving line (“Revolver B”) in the amount of $6,000,000, reducing to $3,000,000 at the end of 2019 and due to be paid in full by February 28, 2020.

The maturity of the Revolver B is February 28, 2020. The Revolver B maintains an interest rate on a scale ranging from LIBOR plus 1.75% up to LIBOR plus 3.50%. At March 31, 2019 Revolver B was not available to the Company.

The maturity of the Revolver is March 11, 2021. The Revolver maintains an interest rate on a scale ranging from LIBOR plus 1.75% up to LIBOR plus 3.50%. The effective interest rate for the revolver at March 31, 2019 was 5.50%. The balance at March 31, 2019 and December 31, 2018 was $9.7 million and $5.5 million, respectively.

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The maturity of the Term Loan A is March 11, 2021.  Term Loan A maintains an interest rate on a scale ranging from LIBOR plus 2.0% up to LIBOR plus 3.25%. The repayment of Term Loan A consists of 60 consecutive monthly payments of principal plus accrued interest based on annual principal reductions of 10% during the first year, 20% during the second through fourth years, and 30% during the fifth year. The effective interest rate for the Term Loan at March 31, 2019 was 5.75%. The balance at March 31, 2019 and December 31, 2018 was $5.2 million and $5.7 million, respectively.

The maturities of Term Loans B and C are June 1, 2024 and maintain an interest rate on a scale identical to Term Loan A. The monthly payments on Term Loan B and Term Loan C are $7,212 and $5,660, respectively, in principal plus accrued interest, with balloon payments due on the maturity date. The effective interest rate for the Mortgage Loans at March 31, 2019 was 5.75%. The balance of both loans at March 31, 2019 and December 31, 2018 was $2.8 million and $2.8 million, respectively.

The Credit Facilities maintain certain reporting requirements, conditions precedent, affirmative covenants and financial covenants. The Company is required to maintain certain financial covenants. The Eighth Amendment to the credit facilities adjusted the financial covenant ratios for the Company’s reporting periods during fiscal year 2019. The amended Maximum Debt to EBITDA ratio is 3.75 to 1.00 for the period ended March 31, 2019, 5.50 to 1.00 for the period ended June 30, 2019, 6.25 to 1.00 for the period ended September 30, 2019, 4.00 to 1.00 for the period ended December 31, 2019 and 3.00 to 1.00 for periods ending after December 31, 2019. The amended Minimum Fixed Charge Coverage Ratio is 1.20 to 1.00 for the period ended March 31, 2019, 1.00 to 1.00 for the periods ended June 30, 2019 and September 30, 2019, and 1.20 to 1.00 for the periods ending after September 30, 2019. The Company was in compliance with its covenants at March 31, 2019.

The Credit Facilities are secured by the Company’s assets and the assets of the Company’s domestic subsidiaries.

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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.

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 company engaged in two business areas: interactive simulation, and batteries and charging systems.

ØWe develop, manufacture and market advanced high-tech multimedia and interactive digital solutions for engineering, use-of-force training and operator training of military, law enforcement, security, emergency services and other personnel through our Training and Simulation Division.

ØWe provide advanced battery solutions, innovative energy management and power distribution technologies and world-class product design and manufacturing services for the aerospace, defense, law enforcement and homeland security markets, and we manufacture and sell primary rechargeable batteries, for defense and security products and medical and industrial applications through our Power Systems Division.

Overview of Operating Performance and Backlog

Overall, our pre-tax loss for the three months ended March 31, 2019 was $(1.2) million on revenues of $20.8 million, compared to pre-tax profit of $843,000 on revenues of $27.2 million during the three months ended March 31, 2018. Our overall backlog at the end of the first quarter of 2019 totaled $70.5 million, compared to $64.8 million at the end of 2018.

In our Training and Simulation Division, revenues for the three months ended March 31, 2019 were $14.0 million, compared to $14.6 million during the three months ended March 31, 2018. As of March 31, 2019, our backlog for our Training and Simulation Division totaled $49.1 million, compared to $47.3 million at the end of 2018.

In our Power Systems Division, revenues for the three months ended March 31, 2019 were $6.8 million, compared to $12.7 million during the three months ended March 31, 2018. As of March 31, 2019, our backlog for our Power Systems Division totaled $21.5 million, compared to $17.6 million at the end of 2018.

The table below details the percentage of total recognized revenue by type of arrangement for the three months ended March 31, 2019 and 2018:

	Three months ended March 31,
Type of Revenue	2019		2018
Sale of products	92.1	%	96.4	%
Maintenance and support agreements	4.6	%	2.9	%
Long term research and development contracts	3.3	%	0.7	%
Total	100	%	100	%

Critical Accounting Policies

Please refer to our Form 10-K for the year ended December 31, 2018, for a discussion on our critical accounting policies and to Note 2 “Basis of Presentation” for an update to our critical accounting policies as of March 31, 2019.

Results of Operations

Three months ended March 31, 2019 compared to the three months ended March 31, 2018

Revenues. Revenues for the three months ended March 31, 2019 totaled $20.8 million compared to $27.2 million in the comparable period in 2018, a decrease of $(6.5) million or (23.7)%. In the first quarter of 2019, revenues were $14.0 million for the Training and Simulation Division as compared to $14.6 million in the first quarter of 2018, a decrease of $(568,000), or (3.9)%; revenues

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for the first quarter of 2019 in the Power Systems Division decreased by $(5.9) million, or (46.5)%, from $12.7 million in the first quarter of 2018 to $6.8 million in the first quarter of 2019, due primarily to the termination of our Amphibious Assault Vehicle program (“AAV”) by our customer Science Applications International Corporation (“SAIC”) as a result of the United States Marine Corps (“Marines”) termination for convenience with SAIC on October 3, 2018. In addition, there was a reduction in the manufacturing of certain batteries in our Israeli operations.

Cost of revenues.Cost of revenues totaled $15.0 million during the first quarter of 2019 as compared to $19.5 million in the first quarter of 2018, a decrease of $(4.6) million, or (23.4)%, consistent with lower sales in our Power Systems Division. Cost of revenues for the first quarter of 2019 was $8.6 million for the Training and Simulation Division as compared to $8.8 million in the first quarter of 2018, a decrease of $(200,000), or (2.1)%; and $6.3 million for the Power Systems Division in the first quarter of 2019 as compared to $10.7 million in the first quarter of 2018,a decrease of $(4.4) million, or (40.9)%, due primarily to the termination of the AAV contract in the fourth quarter of 2018, lower sales and the reduction in the manufacturing of certain batteries in our Israeli operations .

Research and development expenses. Research and development expenses totaled $1.1 million during the first quarter of 2019 as compared to $1.0 million for the first quarter of 2018, an increase of $37,000, or 3.6% relating to the timing of research and development projects.

Selling and marketing expenses. Selling and marketing expenses for the first quarter of 2019 were $2.2 million, compared to $1.9 million in the first quarter of 2018, an increase of $274,000, or 14.6%, due primarily to increased marketing efforts in our Power Systems Division.

General and administrative expenses. General and administrative expenses were $3.2 million for the comparative quarters.

Amortization of intangible assets. Amortization of intangible assets totaled $370,000 in the first quarter of 2019, compared to $515,000 in the first quarter of 2018, a decrease of $(145,000), or (28.1)%, due primarily to the higher amortization expense recognized in 2018 pertaining to shorter-lived intangible assets.

Other income (expense), net. Other expense in the first quarter of 2019 and 2018 was nil for the comparative periods.

Financial expense, net. Financial expense totaled $(298,000) in the first quarter of 2019, compared to financial expense of $(213,000) in the first quarter of 2018, an increase of $85,000, or 40.0%, due primarily to federal rate hikes that occurred during 2018.

Income taxes.We recorded $161,000 in tax expense in the first quarter of 2019, compared to $247,000 of tax expense in the first quarter of 2018, a decrease of $(86,000), or (34.9)%, due primarily to the reduction of the federal corporate income tax rate associated with the U.S. Tax Cuts and Jobs Act. This expense includes “naked” credits (“naked” credits occur when deferred tax liabilities that are created by indefinite-lived assets such as goodwill cannot be used as a source of taxable income to support the realization of deferred tax assets). This amount includes the required adjustment of taxes due to the deduction of goodwill “naked” credits for U.S. federal taxes, which totaled $108,000 and $228,000 in non-cash expenses in the first quarter of 2019 and 2018, respectively.

Net income (loss). Due to the factors cited above, we went from income of $596,000 in the first quarter of 2018 to a net loss of $(1.4) million in the first quarter of 2019, a decrease of $(2.0) million.

Liquidity and Capital Resources

As of March 31, 2019, we had $4.5 million in cash and $230,000 in restricted collateral deposits, as compared to December 31, 2018, when we had $4.2 million in cash and $223,000 in restricted collateral deposits. We also had $1.7 million in available, unused bank lines of credit with our main bank as of March 31, 2019, under a $15.0 million credit facility. On April 22, 2019 we have an additional $6.0 million available and unused bank line of credit under our Revolver B.

We maintain credit facilities with JPMorgan Chase Bank, N.A. (“Chase”), whereby Chase provides (i) a $15,000,000 revolving credit facility (“Revolver”), (ii) a $10,000,000 Term Loan (“Term Loan A”), (iii) a $1,730,895 Mortgage Loan (“Term Loan B”), and (iv) a $1,358,000 Mortgage Loan (“Term Loan C”); collectively referred to as the “Credit Facilities.”

On April 22, 2019, we entered into a new amendment to the Credit Agreement (the “Eighth Amendment”), effective March 31, 2019. Pursuant to the terms of the Eighth Amendment, the parties have incorporated, among other changes, amended definitions of fixed charge coverage ratios and leverage ratios for specific quarters in 2019, and we have been given a second revolving line (“Revolver B”) in the amount of $6,000,000, reducing to $3,000,000 at the end of 2019 and due to be paid in full by February 28, 2020.

The maturity of the Revolver B is February 28, 2020. The Revolver maintains an interest rate on a scale ranging from LIBOR plus 1.75% up to LIBOR plus 3.50%. At March 31, 2019 Revolver B was not available to us.

The maturity of the Revolver is March 11, 2021. The Revolver maintains an interest rate on a scale ranging from LIBOR plus 1.75% up to LIBOR plus 3.00%. The effective interest rate for the revolver at March 31, 2019 was 5.50%.

The maturity of Term Loan A is March 11, 2021. This Term Loan maintains an interest rate on a scale ranging from LIBOR plus 2.0% up to LIBOR plus 3.25%. The repayment of this Term Loan consists of 60 consecutive monthly payments of principal plus accrued interest based on annual principal reductions of 10% during the first year, 20% during the second through fourth years, and 30% during the fifth year. The effective interest rate for this Term Loan at March 31, 2019 was 5.75%.

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We have two Mortgage Loans (Term Loans B and C). The maturities of the Mortgage Loans are June 1, 2024 and maintain an interest rate on a scale identical to the Term Loan. The monthly payments on the Mortgage Loans are $12,872 in principal plus accrued interest, with balloon payments due at the maturity date. The effective interest rate for the Mortgage Loans at March 31, 2019 was 5.75%.

The Credit Facilities maintain certain reporting requirements, conditions precedent, affirmative covenants and financial covenants. We are required to maintain certain financial covenants. The Eighth Amendment to the credit facilities adjusted the financial covenant ratios for our reporting periods during fiscal year 2019. The amended Maximum Debt to EBITDA ratio is 3.75 to 1.00 for the period ended March 31, 2019, 5.50 to 1.00 for the period ended June 30, 2019, 6.25 to 1.00 for the period ended September 30, 2019, 4.00 to 1.00 for the period ended December 31, 2019 and 3.00 to 1.00 for periods ending after December 31, 2019. The amended Minimum Fixed Charge Coverage Ratio is 1.20 to 1.00 for the period ended March 31, 2019, 1.00 to 1.00 for the periods ended June 30, 2019 and September 30, 2019, and 1.20 to 1.00 for the periods ending after September 30, 2019. We were in compliance with our covenants at March 31, 2019.

The Credit Facilities are secured by our assets and the assets of our domestic subsidiaries.

We used available funds in the three months ended March 31, 2019 primarily for working capital needs and investment in fixed assets. Our net fixed assets amounted to $8.9 million at quarter end.

Net cash used in operating activities for the three months ended March 31, 2019 was $(2.2) million. Net cash provided by operating activities for the three months ended March 31, 2018 was $2.5 million, representing a net change year over year of $(4.7) million. The decrease in cash provided by operations is primarily attributable to $(1.9) million higher contract asset balance related to a long term contract that does not allow for milestone payments and a change from net income of $ 596,000 to a net loss of $(1.4) million primarily related to lower revenues associated with the termination of the AAV program on October 2, 2018.

Net cash used in investing activities for the three months ended March 31, 2019 was $(1.3) million. Net cash used in investing activities for the three months ended March 31, 2018 was $(331,000), representing a year over year change of $(925,000).

Net cash provided by (used in) financing activities for the three months ended March 31, 2019 and 2018 was $3.8 million and $513,000, respectively, representing an increase of $3.3 million. In 2019, we made payments on our term loans of $544,000 and increased our short-term borrowing on our line of credit by $4.2 million.

As of March 31, 2019, we had approximately $9.7 million in short-term bank debt under our credit facility and $8.2 million in long-term loans outstanding. This is in comparison to December 31, 2018, when we had $5.5 million in short-term bank debt under our credit facility and $8.6 million in long-term debt outstanding.

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 availability under our lines of credit should be sufficient to satisfy our current estimated cash requirements through the next twelve months. In this connection, we note that from time to time our working capital needs are partially dependent on our and/or our subsidiaries’ lines of credit.

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There have been no material changes to our exposures to market risk since December 31, 2018.

ITEM 4.    CONTROLS AND PROCEDURES.

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 our 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 our 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.

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PART II

ITEM 6.    EXHIBITS.

The following documents are filed as exhibits to or furnished with this report:

Exhibit Number	Description
10.1	Eighth Amendment to Credit Agreement between the Registrant and JPMorgan Chase Bank, N.A. dated April 22, 2019	Incorporated by Reference
10.2	Amended and Restated Employment Agreement between the Registrant and Corporation and Dean M. Krutty effective as of April 23, 2019	Incorporated by Reference
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed Herewith
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed Herewith
32.1	Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350), executed by Dean M. Krutty, President and Chief Executive Officer of Arotech Corporation	Furnished with this Report
32.2	Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350), executed by Kelli L. Kellar, Vice President – Finance and Chief Financial Officer of Arotech Corporation	Furnished with this Report
101.INS	XBRL Instance Document	Filed Herewith
101.SCH	XBRL Taxonomy Extension Schema Document	Filed Herewith
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed Herewith
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed Herewith
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed Herewith
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed Herewith

20

SIGNATURES

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: May 9, 2019

AROTECH CORPORATION
By:	/s/ Dean M. Krutty
	Name:	Dean M. Krutty
	Title:	President and Chief Executive Officer
		(Principal Executive Officer)
By:	/s/ Kelli L. Kellar
	Name:	Kelli L. Kellar
	Title:	Vice President – Finance and CFO
		(Principal Financial Officer)

21

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Dean M. Krutty, certify that:

1.       I have reviewed this quarterly report on Form 10-Q of Arotech Corporation;

2.       Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.       Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation; and

(d) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Dated:         May 9, 2019

/s/ Dean M. Krutty

Dean M. Krutty, President and Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Kelli L. Kellar, certify that:

1.       I have reviewed this quarterly report on Form 10-Q of Arotech Corporation;

2.       Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.       Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation; and

(d) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Dated:         May 9, 2019

/s/ Kelli L. Kellar

Kelli L. Kellar, Vice President – Finance and CFO

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Arotech Corporation (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2019 as filed with the Securities and Exchange Commission (the “Report”), I, Dean M. Krutty, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and,

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:         May 9, 2019

/s/ Dean M. Krutty

Dean M. Krutty, President and Chief Executive Officer

(Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Arotech Corporation (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2019 as filed with the Securities and Exchange Commission (the “Report”), I, Kelli L. Kellar, Vice President – Finance and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and,

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:         May 9, 2019

/s/ Kelli L. Kellar

Kelli L. Kellar, Vice President –

Finance and CFO

(Principal Financial Officer)

XML

Document And Entity Information - shares	3 Months Ended
	Mar. 31, 2019	May 06, 2019
Document And Entity Information [Abstract]
Entity Registrant Name	AROTECH CORPORATION
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding (in shares)		26,665,240
Amendment Flag	false
Entity Central Index Key	0000916529
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Document Period End Date	Mar. 31, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q1

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)	Mar. 31, 2019	Dec. 31, 2018
CURRENT ASSETS:
Cash and cash equivalents	$ 4,523,949	$ 4,222,246
Restricted collateral deposits	229,830	222,712
Trade receivables, net	11,801,182	16,259,809
Contract Assets - Current	22,319,968	17,867,896
Other accounts receivable and prepaid expenses	6,548,213	5,989,263
Inventories, net	9,452,464	9,912,748
Total current assets	54,875,606	54,474,674
LONG TERM ASSETS:
Contractual and Israeli statutory severance pay fund	3,637,590	3,427,705
Other long term receivables	541,139	543,205
Property and equipment, net	8,931,136	8,914,247
Right of use asset	6,035,660
Other intangible assets, net	4,841,152	4,465,778
Goodwill	46,138,036	46,138,036
Total long term assets	70,124,713	63,488,971
Total assets	125,000,319	117,963,645
CURRENT LIABILITIES:
Trade payables	6,360,287	6,442,919
Other accounts payable and accrued expenses	4,689,993	6,498,045
Current portion of lease obligations	622,065
Current portion of long term debt	2,235,089	2,204,653
Short term bank credit	9,703,764	5,500,416
Contract liabilities	6,750,785	7,054,779
Total current liabilities	30,361,983	27,700,812
LONG TERM LIABILITIES:
Contractual and accrued Israeli statutory severance pay	4,465,209	4,125,675
Long term portion of lease obligations	5,714,132
Long term portion of debt	6,006,573	6,360,569
Deferred income tax liability	2,970,978	2,863,098
Other long term liabilities	46,800	137,774
Total long-term liabilities	19,203,692	13,487,116
Total liabilities	49,565,675	41,187,928
STOCKHOLDERS’ EQUITY:
Common stock – $0.01 par value each; Authorized: 50,000,000 shares as of March 31, 2019 and December 31, 2018; Issued and outstanding: 26,617,460 shares and 26,486,152 shares as of March 31, 2019 and December 31, 2018, respectively	266,175	264,862
Preferred shares – $0.01 par value each; Authorized: 1,000,000 shares as of March 31, 2019 and December 31, 2018; No shares issued or outstanding as of March 31, 2019 and December 31, 2018	0	0
Additional paid-in capital	251,572,736	251,551,001
Accumulated deficit	(177,905,070)	(176,498,057)
Notes receivable from stockholders	(908,054)	(908,054)
Accumulated other comprehensive income	2,408,857	2,365,965
Total stockholders’ equity	75,434,644	76,775,717
Total liabilities and stockholders’ equity	$ 125,000,319	$ 117,963,645

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parentheticals) - $ / shares	Mar. 31, 2019	Dec. 31, 2018
Statement of Financial Position [Abstract]
Common stock - par value (in dollars per share)	$ 0.01	$ 0.01
Common stock - authorized (in shares)	50,000,000	50,000,000
Common stock - shares issued (in shares)	26,617,460	26,486,152
Common stock - shares outstanding (in shares)	26,617,460	26,486,152
Preferred shares - par value (in dollars per share)	$ 0.01	$ 0.01
Preferred shares - shares authorized (in shares)	1,000,000	1,000,000
Preferred shares - shares issued (in shares)	0	0
Preferred shares - shares outstanding (in shares)	0	0

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) - USD ($)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Income Statement [Abstract]
Revenues	$ 20,778,639	$ 27,248,509
Cost of revenues	14,959,111	19,537,081
Research and development expenses	1,074,064	1,036,702
Selling and marketing expenses	2,152,557	1,878,073
General and administrative expenses	3,170,391	3,225,934
Amortization of intangible assets	370,203	514,911
Total operating costs and expenses	21,726,326	26,192,701
Operating income (loss)	(947,687)	1,055,808
Other income (expense), net	(14)	3
Financial expense, net	(298,431)	(213,108)
Total other expense	(298,445)	(213,105)
Income (loss) before income tax expense	(1,246,132)	842,703
Income tax expense	160,881	247,114
Net income (loss)	(1,407,013)	595,589
Other comprehensive income (loss), net of income tax:
Foreign currency translation adjustment	42,892	(24,260)
Comprehensive income (loss)	$ (1,364,121)	$ 571,329
Income (loss) per share of common stock:
Basic net income (loss) per share (in dollars per shares)	$ (0.05)	$ 0.02
Diluted net income (loss) per share (in dollars per shares)	$ (0.05)	$ 0.02
Weighted average number of shares used in computing basic net income (loss) per share (in shares)	26,387,285	26,447,090
Weighted average number of shares used in computing diluted net income (loss) per share (in shares)	26,387,285	26,447,090

XML

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) - USD ($)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$ (1,407,013)	$ 595,589
Adjustments required to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation	493,117	481,491
Amortization of intangible assets	370,203	514,911
Stock based compensation	135,969	108,495
Deferred tax provision	107,880	227,313
Changes in operating assets and liabilities:
Trade receivables	4,458,627	4,907,024
Contract assets	(4,452,072)	(2,513,952)
Other accounts receivable and prepaid expenses	(256,347)	546,999
Inventories	460,927	(324,646)
Severance pay, net	145,123	32,042
Trade payables	(82,634)	(292,733)
Other accounts payable and accrued expenses	(1,896,369)	(1,489,424)
Contract liabilities	(303,994)	(278,267)
Net cash (used in) provided by operating activities	(2,226,583)	2,514,842
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(510,006)	(330,820)
Additions to capitalized software	(745,577)	0
Net cash used in investing activities	(1,255,583)	(330,820)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt	220,264	0
Repayment of long term debt	(543,824)	(563,591)
Other financing activities	(112,921)	(54,155)
Change in short term bank credit	4,203,348	1,131,418
Net cash provided by financing activities	3,766,867	513,672
INCREASE IN CASH, RESTRICTED CASH, AND CASH EQUIVALENTS	284,701	2,697,694
CASH DIFFERENCES DUE TO EXCHANGE RATE DIFFERENCES	24,120	33,831
CASH, RESTRICTED CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD	4,444,958	5,488,754
CASH, RESTRICTED CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD	4,753,779	8,220,279
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid during the period	201,078	220,607
Taxes paid on income during the period	$ 2,468	$ 300

XML

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) - USD ($)	Total	Common stock	Additional paid-in capital	Accumulated deficit	Notes receivable from stockholders	Accumulated other comprehensive income
Beginning balance at Dec. 31, 2017	$ 71,093,218	$ 263,951	$ 250,826,873	$ (181,568,757)	$ (908,054)	$ 2,479,205
Beginning balance (in shares) at Dec. 31, 2017		26,395,048
Stock based compensation	108,495		108,495
Restricted stock issued	0	$ 410	(410)
Restricted stock issued (in shares)		41,000
Restricted stock units vested, net of taxes	(54,155)	$ 497	(54,652)
Restricted stock units vested, net of taxes (in shares)		49,747
Restricted stock forfeitures	0	$ (333)	333
Restricted stock forfeitures (in shares)		(33,333)
Foreign currency translation adjustment	(24,260)					(24,260)
Net income (loss)	595,589			595,589
Ending balance at Mar. 31, 2018	71,718,887	$ 264,525	250,880,639	(180,973,168)	(908,054)	2,454,945
Ending balance (in shares) at Mar. 31, 2018		26,452,462
Beginning balance at Dec. 31, 2018	$ 76,775,717	$ 264,862	251,551,001	(176,498,057)	(908,054)	2,365,965
Beginning balance (in shares) at Dec. 31, 2018	26,486,152	26,486,152
Stock based compensation	$ 135,969		135,969
Restricted stock issued	0	$ 240	(240)
Restricted stock issued (in shares)		24,000
Restricted stock units vested, net of taxes	(112,921)	$ 1,128	(114,049)
Restricted stock units vested, net of taxes (in shares)		112,775
Restricted stock forfeitures	0	$ (55)	55
Restricted stock forfeitures (in shares)		(5,467)
Foreign currency translation adjustment	42,892					42,892
Net income (loss)	(1,407,013)			(1,407,013)
Ending balance at Mar. 31, 2019	$ 75,434,644	$ 266,175	$ 251,572,736	$ (177,905,070)	$ (908,054)	$ 2,408,857
Ending balance (in shares) at Mar. 31, 2019	26,617,460	26,617,460

XML

BASIS OF PRESENTATION

3 Months Ended

Mar. 31, 2019

Accounting Policies [Abstract]

BASIS OF PRESENTATION

BASIS OF PRESENTATION

a.    Company:

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 multimedia interactive simulators/trainers, and lithium batteries and chargers. 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 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).

b.    Basis of Presentation:

The Company prepared the accompanying unaudited condensed consolidated financial statements of Arotech Corporation and all wholly-owned, majority owned or otherwise controlled subsidiaries on the same basis as its annual audited financial statements. The Company condensed or omitted certain information and footnote disclosures normally included in its annual audited financial statements, which it prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP), 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. The Company’s quarterly financial statements should be read in conjunction with its Annual Report on Form 10-K for the year ended December 31, 2018. 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 March 31, 2019, its operating results for the three months ended March 31, 2019 and 2018, its cash flows for the three months ended March 31, 2019 and 2018, and its statement of shareholders’ equity for the three months ended March 31, 2019 and 2018.

The results of operations for the three months ended March 31, 2019 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2019.

The condensed consolidated balance sheet at December 31, 2018 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, 2018.

c.    Reclassification:

From time to time the Company may reclassify amounts from prior periods to conform to the current year’s presentation.

d.    Commitments and contingencies:

The Company is involved in litigation from time to time in the regular course of its business. There are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.  In addition, the Company believes that adequate provisions for resolution of all contingencies have been made for probable losses that are reasonably estimable. These contingencies are subject to uncertainties, and, as a result, the Company is unable to estimate the amount or range of loss, if any, in excess of amounts accrued. The Company does not believe that the these contingencies will have a material adverse effect on the Company’s balance sheets, statements of operations and comprehensive income or statements of cash flows for the three months ended March 31, 2019. 

e.    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 the carrying value. The Training and Simulation and the Power Systems reporting units have goodwill.

As of its last annual impairment test at October 1, 2018, the Company determined that the goodwill for both reporting units was not impaired.

Consistent with previous interim reporting periods, the Company monitors qualitative and quantitative factors, including internal projections, periodic forecasts, and actual results of the reporting unit. Based upon this interim review, the Company does not believe that goodwill or its indefinite-lived intangible assets related to either reporting unit is impaired.

f.    New accounting pronouncements:

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard, effective January 1, 2019, requires virtually all leases to be recognized on the Consolidated Balance Sheets. Effective January 1, 2019, the Company adopted the standard using the modified retrospective method, under which it elected the package of practical expedients and transition provisions allowing it to bring its existing operating leases onto the Condensed Consolidated Balance Sheet without adjusting comparative periods.

The Company has operating leases for facilities and equipment, which are recorded as assets and liabilities for those leases with terms greater than 12 months. Lease-related assets, or right-of-use assets (“ROU”), are recognized at the lease commencement date at amounts equal to the respective lease liabilities, adjusted for prepaid lease payments, initial direct costs, and lease incentives received. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.

Upon adoption of the standard, the Company recorded approximately $6.3 million of ROU assets and $6.5 million of current and long term lease obligations in its Condensed Consolidated Balance Sheet. Refer to Note 2 “Significant Accounting Policy Update” for additional information.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new standard simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test and requires businesses to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The amendments are effective for annual periods beginning after December 15, 2019 with early adoption permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted this standard and it did not have an impact on its consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). The accounting standard allows for the optional reclassification of stranded tax effects within accumulated other comprehensive income to retained earnings that arise due to the enactment of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The amount of the reclassification would reflect the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment of the Tax Act and other income tax effects of the Tax Act on items remaining in accumulated other comprehensive income. The Company adopted the requirements of the new standard in the first quarter of 2019, as required by the new standard. The adoption of this ASU did not have a material impact on the consolidated financial statements.

In August 2018, the SEC issued Release No. 33-10532 that amends and clarifies certain financial reporting requirements. The principal change to the Company’s financial reporting is the inclusion of the annual disclosure requirement of changes in stockholders’ equity in Rule 3-04 of Regulation S-X to interim periods.

XML

SIGNIFICANT ACCOUNTING POLICIES UPDATE

3 Months Ended

Mar. 31, 2019

Accounting Policies [Abstract]

SIGNIFICANT ACCOUNTING POLICIES UPDATE

SIGNIFICANT ACCOUNTING POLICIES UPDATE

The Company’s significant accounting policies are detailed in “Note 2:  Significant Accounting Policies” of its Form 10-K for the year ended December 31, 2018.  Significant changes to the Company’s accounting policies as a result of adopting Accounting Standards Codification (“ASC”) 842 are discussed below:

Leases:

The Company determines if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded in the Condensed Consolidated Balance Sheets and the Company recognizes lease expense for these leases on a straight line basis over the lease term. Operating leases are included in operating lease ROU asset, current portion of lease obligations and long term portion of lease obligations on its Condensed Consolidated Balance Sheet. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities on its Condensed Consolidated Balance Sheet. As of March 31, 2019, the Company does not have any non-cancelable operating lease commitments that have not yet commenced.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. If a lease does not implicitly state a rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made in advance, any initial direct costs incurred and excludes any lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably assured that the Company will exercise that option. Lease expense for minimum lease payments are recognized on a straight-line basis over the lease term.

The Company has lease agreements with lease and non-lease components, which are generally accounted for separately.

The Company has operating leases for its production and office facilities and certain office equipment. These leases have remaining lease terms of 2 years to 15 years, some of which include options to extend for up to 5 years. These options have been included in the Company’s calculation of the ROU asset and lease liability based upon the Company’s assessment of whether the option will be exercised.

The Company’s lease agreements do not contain any residual value guarantees or material restrictive covenants.

The Company rents or subleases certain real estate to third parties. The Company’s sublease portfolio consists of an operating lease within one of its facilities, resulting in approximately $27,000 of sublease income for the three months ended March 31, 2019.

The components of lease expense were as follows:

Three months ended March 31,	2019
Operating lease cost	$	280,246
Finance lease cost:
Amortization of right-of-use assets	$	3,166
Interest on lease liabilities	728
Total finance lease costs	$	3,894
Three months ended March 31,	2019
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	103,004
Operating cash flows from finance leases	728
Financing cash flows from finance leases	2,939
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	2,785,444
Finance leases	31,386
Weighted Average Remaining Lease Term
Operating leases	11 years
Finance leases	4 years
Weighted Average Discount Rate
Operating leases	7.47		%
Finance leases	6.86		%

The undiscounted annual future minimum lease payments are summarized by year in the table below:

Year Ending December 31,	Operating Leases			Finance Leases
2019 (excluding the three months ended March 31, 2019)	$	826,215		$	10,998
2020	1,106,944			14,664
2021	891,346			14,664
2022	805,432			12,276
2023	697,277			7,500
Thereafter	5,555,117			—
Total future minimum lease payments	9,882,331			60,102
Less imputed interest	(3,546,134		)	(8,128		)
Total:	$	6,336,197		$	51,974

Supplemental balance sheet information related to leases was as follows:

Operating Leases as of March 31,	2019
Right of use asset	$	6,035,660
Current portion of lease obligations	622,065
Long term portion of lease obligations	5,714,132
Total operating lease obligations	6,336,197
Financing Leases as of March 31,	2019
Property and Equipment, at cost	56,933
Accumulated depreciation	(5,295		)
Property and Equipment, net	51,638
Other accounts payable and accrued expenses	11,445
Other long term liabilities	40,529
Total financing lease liabilities	$	51,974

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REVENUES

3 Months Ended

Mar. 31, 2019

Revenue from Contract with Customer [Abstract]

REVENUES

REVENUES

Revenue recognition:

The Company recognized revenues from (i) the sale and customization of interactive training systems (Training and Simulation Division); (ii) maintenance services in connection with such systems (Training and Simulation Division); (iii) the sale of batteries, chargers and adapters, and custom power solutions (Power Systems Division); and (iv) the sale of lifejacket lights (Power Systems Division).

The Company determines its revenue recognition through the following steps:

• Identification of the contract, or contracts, with a customer

• Identification of the performance obligations within the contract

• Determination of the transaction price

• Allocation of the transaction price to the performance obligations within the contract

• Recognition of revenue when, or as the performance obligation has been satisfied

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. In assessing the recognition of revenue, the Company evaluates whether two or more contracts should be combined and accounted for as one contract and if the combined or single contract should be accounted for as multiple performance obligations which could change the amount of revenue and profit (loss) recorded in a period. The majority of the Company’s contracts with customers are accounted for as one performance obligation, as the majority of tasks and services is part of a single project or capability. As these contracts are typically a customized customer-specific solution, the Company uses the expected cost plus margin approach to estimate the standalone selling price of each performance obligation.  For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract.

The Company also offers maintenance and support agreements (“warranties”) for many of its products.  The specific terms and conditions of those warranties vary depending upon the product sold and country in which the product was sold.  The warranty revenue is recognized on a straight-line basis over the term of the maintenance and support services.   The standalone selling price is determined based on the price charged when sold separately or upon renewal.

The Company’s performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for 90% and 94% of its revenue for the three-month period ended March 31, 2019 and 2018, respectively. Substantially all of the Company’s revenue in the Training and Simulation Division and the U.S. Power Systems Division is recognized over time. Typically, revenue is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Contract costs include labor, material, and overhead.

On March 31, 2019, the Company had $70.5 million of expected future revenue relating to performance obligations currently in progress, which it also refers to as total backlog. The Company expects to recognize approximately 68.1% its backlog as revenue in 2019, and the remaining 31.9% thereafter.

Contract Estimates. Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.

Contract estimates are based on various assumptions to project the outcome of future events that can exceed a year. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.

As a significant change in one or more of these estimates could affect the profitability of its contracts, the Company reviews and updates its contract-related estimates quarterly. The Company recognizes adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, the Company recognizes the total loss in the quarter it is identified.

The aggregate impact of adjustments in contract estimates to net income (loss) is presented below:

	Three months ended March 31,
	2019					2018
	Training and Simulation Division		Power Systems Division			Training and Simulation Division		Power Systems Division
Net income (loss)	$	146,278	$	(30,419	)	$	71,440	$	(119,778	)

Revenue by Category. As of March 31, 2019 and 2018 the Company’s portfolio of products and services consisted of 476 and 500 active contracts, respectively.

Revenue by major product line was as follows:

	Three months ended March 31,
	2019		2018
Product Revenue
Air Warfare Simulation	$	3,499,202	$	5,032,659
Vehicle Simulation	7,080,941		5,463,998
Use-of-Force	2,457,177		3,260,049
Service Revenue
Warranty	952,295		801,158
Total Training and Simulation Division	$	13,989,615	$	14,557,864
Contract Manufacturing	$	3,217,992	$	4,164,324
Power Distribution and Generation	250,700		3,275,380
Batteries	2,382,475		4,146,112
Engineering Services and Other	937,857		1,104,829
Total Power Division	$	6,789,024	$	12,690,645

The table below details the percentage of total recognized revenue by type of arrangement for the three months ended March 31, 2019 and 2018:

	Three months ended March 31,
Type of Revenue	2019		2018
Sale of products	92.1	%	96.4	%
Maintenance and support agreements	4.6	%	2.9	%
Long term research and development contracts	3.3	%	0.7	%
Total	100	%	100	%

Revenue by contract type was as follows:

	Training and Simulation Division		Power Systems Division
Three months ended March 31, 2019
Fixed Price	$	10,971,102	$	6,169,657
Cost Reimbursement (Cost Plus)	1,349,345		431,050
Time and Materials	1,669,168		188,317
Total	$	13,989,615	$	6,789,024
Three months ended March 31, 2018
Fixed Price	$	12,209,969	$	12,072,168
Cost Reimbursement (Cost Plus)	1,338,951		388,749
Time and Materials	1,008,944		229,728
Total	$	14,557,864	$	12,690,645

Each of these contract types presents advantages and disadvantages. Typically, the Company assumes more risk with fixed-price contracts. However, these types of contracts offer additional profits when the Company completes the work for less than originally estimated. Cost-reimbursement contracts generally subject the Company to lower risk. Accordingly, the associated base fees are usually lower than fees earned on fixed-price contracts. Under time and materials contracts, the Company’s profit may fluctuate if actual labor-hour costs vary significantly from the negotiated rates.

Revenue by customer was as follows:

	Training and Simulation Division		Power Systems Division
Three months ended March 31, 2019
U.S. Government
Department of Defense (DoD)	$	4,893,803	$	441,033
Non-DoD	2,604,486		—
Foreign Military Sales (FMS)	642,269		—
Total U.S. Government	$	8,140,559	$	441,033
U.S. Commercial	$	4,771,042	$	3,167,221
Non-U.S. Government	241,553		291,965
Non-U.S. Commercial	836,462		2,888,805
Total Revenue	$	13,989,615	$	6,789,024
Three months ended March 31, 2018
U.S. Government
Department of Defense (DoD)	$	3,432,193	$	512,212
Non-DoD	2,738,807		—
Foreign Military Sales (FMS)	584,781		—
Total U.S. Government	$	6,755,781	$	512,212
U.S. Commercial	$	6,028,998	$	7,717,964
Non-U.S. Government	926,164		1,517,816
Non-U.S. Commercial	846,921		2,942,653
Total Revenue	$	14,557,864	$	12,690,645

Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. The majority of the Company’s contract amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Billing sometimes occurs subsequent to revenue recognition, resulting in contract assets. However, the Company sometimes receives advances or deposits from its customers, particularly on its international contracts, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period.

	March 31, 2019									December 31, 2018
	Training and Simulation Division			Power Systems Division			Total			Training and Simulation Division			Power Systems Division			Total
Contract Assets - Current	$	14,251,984		$	8,067,984		$	22,319,968		$	10,358,679		$	7,509,217		$	17,867,896
Contract Liabilities - Current	(6,076,744		)	(674,041		)	(6,750,785		)	(6,697,522		)	(357,257		)	(7,054,779		)
Net Contract Assets and Liabilities:	$	8,175,240		$	7,393,943		$	15,569,183		$	3,661,157		$	7,151,960		$	10,813,117

The $4.8 million increase in the Company’s net contract assets (liabilities) from December 31, 2018 to March 31, 2019 was due to the timing of milestone payments on certain U.S. Government and commercial contracts.

During the three months ended March 31, 2019 and 2018, the Company recognized $2.8 million and $3.0 million, respectively, in revenue related to the Company’s contract liabilities.

The Company did not record any provisions for impairment of its contract assets during the three months ended March 31, 2019 and 2018.

Trade Receivables

Trade receivables include amounts billed and currently due from customers. The amounts are recorded at net estimated realizable value.  The value of the Company’s trade receivables when appropriate includes an allowance for estimated uncollectible amounts.  The Company calculates an allowance based on its history of write-offs, the assessment of customer creditworthiness, and the age of the outstanding receivables.

As of March 31, 2019 and December 31, 2018, the Company’s trade receivables recorded in the consolidated balance sheets were $11.8 million and $16.3 million, respectively.  The Company had an immaterial provision for doubtful accounts at March 31, 2019 and December 31, 2018.  The Company believes its exposure to concentrations of credit risk is limited due to the nature of its operations, where a significant number of its contracts are typically a customized customer specific solution.

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INVENTORIES

3 Months Ended

Mar. 31, 2019

Inventory Disclosure [Abstract]

INVENTORIES

INVENTORIES

Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first in, first out (“FIFO”) method. The Company periodically evaluates the quantities on hand relative to current and historical selling prices and historical and projected sales volume and based on these evaluations, provisions are made in each period to write down inventory to its net realizable value.  For the three months ended March 31, 2019 and 2018 the Company wrote off approximately $41,600 and $154,000, respectively, of obsolete inventory, which has been included in the cost of revenues.

Inventories by component are as follows:

	March 31, 2019		December 31, 2018
Raw and packaging materials	$	7,977,195	$	7,912,883
Work in progress	1,054,467		1,626,960
Finished products	420,802		372,905
Total:	$	9,452,464	$	9,912,748

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SEGMENT INFORMATION

3 Months Ended

Mar. 31, 2019

Segment Reporting [Abstract]

SEGMENT INFORMATION

SEGMENT INFORMATION

a.    The Company and its subsidiaries operate in two business segments. The two segments are also treated by the Company as reporting units for goodwill impairment evaluation purposes. The goodwill amounts associated with the Training and Simulation Division and the Power Systems Division were determined and valued when the specific businesses were purchased. The Company and its subsidiaries operate in two continuing business segments and follow the requirements of FASB ASC 280-10.

The Company’s reportable 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 reportable segments are the same as those used by the Company in the preparation of its annual financial statements. The Company evaluates performance based on 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) from operations, and total assets as of March 31, 2019 and 2018:

	Training and Simulation Division			Power Systems Division			Corporate Expenses			Total Company
Three months ended March 31, 2019
Revenues from outside customers	$	13,989,615		$	6,789,024		$	—		$	20,778,639
Depreciation and amortization(1)	(187,830		)	(675,490		)	—			(863,320		)
Direct expenses(2)	(11,695,059		)	(8,261,927		)	(906,020		)	(20,863,006		)
Segment operating income (loss)	$	2,106,726		$	(2,148,393	)	$	(906,020	)	$	(947,687	)
Financial expense	(43,007		)	(64,915		)	(190,523		)	(298,445		)
Income tax expense	(50,000		)	—			(110,881		)	(160,881		)
Net income (loss)	$	2,013,719		$	(2,213,308	)	$	(1,207,424	)	$	(1,407,013	)
Segment assets(3)(4)	57,291,042			64,085,613			3,623,664			125,000,319
Additions to long-lived assets	532,251			403,337			319,995			1,255,583
Three months ended March 31, 2018
Revenues from outside customers	$	14,557,864		$	12,690,645		$	—		$	27,248,509
Depreciation, amortization and impairment expenses(1)	(200,360		)	(796,042		)	—			(996,402		)
Direct expenses(2)	(11,872,231		)	(12,273,712		)	(1,050,353		)	(25,196,296		)
Segment operating income (loss)	$	2,485,273		$	(379,109	)	$	(1,050,353	)	$	1,055,811
Financial expense	(44,619		)	15,465			(183,954		)	(213,108		)
Income tax expense	(19,801		)	—			(227,313		)	(247,114		)
Net income (loss)	$	2,420,853		$	(363,644	)	$	(1,461,620	)	$	595,589
Segment assets(3)	51,690,905			60,995,921			3,119,613			115,806,439
Additions to long-lived assets	121,588			209,232			—			330,820

(1) Includes depreciation of property and equipment and amortization expenses of intangible assets.

(2) Including, inter alia, sales and marketing, general and administrative.

(3) Out of those amounts, goodwill in the Company’s Training and Simulation Division and Power Systems Division totaled $24,435,641 and $21,702,395, respectively, as of March 31, 2019 and 2018.

(4) Out of those amounts, right-of-use assets for the Company’s Training and Simulation Division and Power Systems Division totaled $519,496 and $5,516,164, respectively, as of March 31, 2019.

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FAIR VALUE MEASUREMENT

3 Months Ended

Mar. 31, 2019

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENT

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, contract assets, inventories, prepaid and other assets, trade payables, accrued expenses, deferred revenues and other liabilities as of March 31, 2019 and December 31, 2018, approximate fair value because of the short maturity of these instruments. The carrying amounts of long term debt approximates the estimated fair values at March 31, 2019, based upon the Company’s ability to acquire similar debt at similar maturities.

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BANK FINANCING

3 Months Ended

Mar. 31, 2019

Debt Disclosure [Abstract]

BANK FINANCING

BANK FINANCING

The Company maintains credit facilities with JPMorgan Chase Bank, N.A. (“Chase”), whereby Chase provides (i) a $15,000,000 revolving credit facility (“Revolver”), (ii) a $10,000,000 Term Loan (“Term Loan A”), (iii) a $1,730,895 Mortgage Loan (“Term Loan B”), (iv) a $1,358,000 Mortgage Loan (“Term Loan C”); collectively referred to as the “Credit Facilities.”

On April 22, 2019, the Company entered into a new amendment to the Credit Agreement (the “Eighth Amendment”), effective March 31, 2019. Pursuant to the terms of the Eighth Amendment, the parties have incorporated, among other changes, amended definitions of fixed charge coverage ratios and leverage ratios for specific quarters in 2019, and the Company has been given a second revolving line (“Revolver B”) in the amount of $6,000,000, reducing to $3,000,000 at the end of 2019 and due to be paid in full by February 28, 2020.

The maturity of the Revolver B is February 28, 2020. The Revolver B maintains an interest rate on a scale ranging from LIBOR plus 1.75% up to LIBOR plus 3.50%. At March 31, 2019 Revolver B was not available to the Company.

The maturity of the Revolver is March 11, 2021. The Revolver maintains an interest rate on a scale ranging from LIBOR plus 1.75% up to LIBOR plus 3.50%. The effective interest rate for the revolver at March 31, 2019 was 5.50%. The balance at March 31, 2019 and December 31, 2018 was $9.7 million and $5.5 million, respectively.

The maturity of the Term Loan A is March 11, 2021.  Term Loan A maintains an interest rate on a scale ranging from LIBOR plus 2.0% up to LIBOR plus 3.25%. The repayment of Term Loan A consists of 60 consecutive monthly payments of principal plus accrued interest based on annual principal reductions of 10% during the first year, 20% during the second through fourth years, and 30% during the fifth year. The effective interest rate for the Term Loan at March 31, 2019 was 5.75%. The balance at March 31, 2019 and December 31, 2018 was $5.2 million and $5.7 million, respectively.

The maturities of Term Loans B and C are June 1, 2024 and maintain an interest rate on a scale identical to Term Loan A. The monthly payments on Term Loan B and Term Loan C are $7,212 and $5,660, respectively, in principal plus accrued interest, with balloon payments due on the maturity date. The effective interest rate for the Mortgage Loans at March 31, 2019 was 5.75%. The balance of both loans at March 31, 2019 and December 31, 2018 was $2.8 million and $2.8 million, respectively.

The Credit Facilities maintain certain reporting requirements, conditions precedent, affirmative covenants and financial covenants. The Company is required to maintain certain financial covenants. The Eighth Amendment to the credit facilities adjusted the financial covenant ratios for the Company’s reporting periods during fiscal year 2019. The amended Maximum Debt to EBITDA ratio is 3.75 to 1.00 for the period ended March 31, 2019, 5.50 to 1.00 for the period ended June 30, 2019, 6.25 to 1.00 for the period ended September 30, 2019, 4.00 to 1.00 for the period ended December 31, 2019 and 3.00 to 1.00 for periods ending after December 31, 2019. The amended Minimum Fixed Charge Coverage Ratio is 1.20 to 1.00 for the period ended March 31, 2019, 1.00 to 1.00 for the periods ended June 30, 2019 and September 30, 2019, and 1.20 to 1.00 for the periods ending after September 30, 2019. The Company was in compliance with its covenants at March 31, 2019.

The Credit Facilities are secured by the Company’s assets and the assets of the Company’s domestic subsidiaries.

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SIGNIFICANT ACCOUNTING POLICIES UPDATE (Policies)

3 Months Ended

Mar. 31, 2019

Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation:

The Company prepared the accompanying unaudited condensed consolidated financial statements of Arotech Corporation and all wholly-owned, majority owned or otherwise controlled subsidiaries on the same basis as its annual audited financial statements. The Company condensed or omitted certain information and footnote disclosures normally included in its annual audited financial statements, which it prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP), 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. The Company’s quarterly financial statements should be read in conjunction with its Annual Report on Form 10-K for the year ended December 31, 2018. 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 March 31, 2019, its operating results for the three months ended March 31, 2019 and 2018, its cash flows for the three months ended March 31, 2019 and 2018, and its statement of shareholders’ equity for the three months ended March 31, 2019 and 2018.

The results of operations for the three months ended March 31, 2019 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2019.

The condensed consolidated balance sheet at December 31, 2018 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, 2018.

Reclassification

Reclassification:

From time to time the Company may reclassify amounts from prior periods to conform to the current year’s presentation.

Commitments and Contingencies

Commitments and contingencies:

The Company is involved in litigation from time to time in the regular course of its business. There are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.  In addition, the Company believes that adequate provisions for resolution of all contingencies have been made for probable losses that are reasonably estimable. These contingencies are subject to uncertainties, and, as a result, the Company is unable to estimate the amount or range of loss, if any, in excess of amounts accrued. The Company does not believe that the these contingencies will have a material adverse effect on the Company’s balance sheets, statements of operations and comprehensive income or statements of cash flows for the three months ended March 31, 2019. 

Goodwill and Other Long-lived Assets

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 the carrying value. The Training and Simulation and the Power Systems reporting units have goodwill.

As of its last annual impairment test at October 1, 2018, the Company determined that the goodwill for both reporting units was not impaired.

Consistent with previous interim reporting periods, the Company monitors qualitative and quantitative factors, including internal projections, periodic forecasts, and actual results of the reporting unit. Based upon this interim review, the Company does not believe that goodwill or its indefinite-lived intangible assets related to either reporting unit is impaired.

New Accounting Pronouncements

New accounting pronouncements:

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard, effective January 1, 2019, requires virtually all leases to be recognized on the Consolidated Balance Sheets. Effective January 1, 2019, the Company adopted the standard using the modified retrospective method, under which it elected the package of practical expedients and transition provisions allowing it to bring its existing operating leases onto the Condensed Consolidated Balance Sheet without adjusting comparative periods.

The Company has operating leases for facilities and equipment, which are recorded as assets and liabilities for those leases with terms greater than 12 months. Lease-related assets, or right-of-use assets (“ROU”), are recognized at the lease commencement date at amounts equal to the respective lease liabilities, adjusted for prepaid lease payments, initial direct costs, and lease incentives received. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.

Upon adoption of the standard, the Company recorded approximately $6.3 million of ROU assets and $6.5 million of current and long term lease obligations in its Condensed Consolidated Balance Sheet. Refer to Note 2 “Significant Accounting Policy Update” for additional information.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new standard simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test and requires businesses to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The amendments are effective for annual periods beginning after December 15, 2019 with early adoption permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted this standard and it did not have an impact on its consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). The accounting standard allows for the optional reclassification of stranded tax effects within accumulated other comprehensive income to retained earnings that arise due to the enactment of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The amount of the reclassification would reflect the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment of the Tax Act and other income tax effects of the Tax Act on items remaining in accumulated other comprehensive income. The Company adopted the requirements of the new standard in the first quarter of 2019, as required by the new standard. The adoption of this ASU did not have a material impact on the consolidated financial statements.

In August 2018, the SEC issued Release No. 33-10532 that amends and clarifies certain financial reporting requirements. The principal change to the Company’s financial reporting is the inclusion of the annual disclosure requirement of changes in stockholders’ equity in Rule 3-04 of Regulation S-X to interim periods.

Revenue recognition

Revenue recognition:

The Company recognized revenues from (i) the sale and customization of interactive training systems (Training and Simulation Division); (ii) maintenance services in connection with such systems (Training and Simulation Division); (iii) the sale of batteries, chargers and adapters, and custom power solutions (Power Systems Division); and (iv) the sale of lifejacket lights (Power Systems Division).

The Company determines its revenue recognition through the following steps:

• Identification of the contract, or contracts, with a customer

• Identification of the performance obligations within the contract

• Determination of the transaction price

• Allocation of the transaction price to the performance obligations within the contract

• Recognition of revenue when, or as the performance obligation has been satisfied

Performance Obligations

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. In assessing the recognition of revenue, the Company evaluates whether two or more contracts should be combined and accounted for as one contract and if the combined or single contract should be accounted for as multiple performance obligations which could change the amount of revenue and profit (loss) recorded in a period. The majority of the Company’s contracts with customers are accounted for as one performance obligation, as the majority of tasks and services is part of a single project or capability. As these contracts are typically a customized customer-specific solution, the Company uses the expected cost plus margin approach to estimate the standalone selling price of each performance obligation.  For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract.

The Company also offers maintenance and support agreements (“warranties”) for many of its products.  The specific terms and conditions of those warranties vary depending upon the product sold and country in which the product was sold.  The warranty revenue is recognized on a straight-line basis over the term of the maintenance and support services.   The standalone selling price is determined based on the price charged when sold separately or upon renewal.

The Company’s performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for 90% and 94% of its revenue for the three-month period ended March 31, 2019 and 2018, respectively. Substantially all of the Company’s revenue in the Training and Simulation Division and the U.S. Power Systems Division is recognized over time. Typically, revenue is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Contract costs include labor, material, and overhead.

On March 31, 2019, the Company had $70.5 million of expected future revenue relating to performance obligations currently in progress, which it also refers to as total backlog. The Company expects to recognize approximately 68.1% its backlog as revenue in 2019, and the remaining 31.9% thereafter.

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SIGNIFICANT ACCOUNTING POLICIES UPDATE (Tables)

3 Months Ended

Mar. 31, 2019

Accounting Policies [Abstract]

Components of Lease Expense

The components of lease expense were as follows:

Three months ended March 31,	2019
Operating lease cost	$	280,246
Finance lease cost:
Amortization of right-of-use assets	$	3,166
Interest on lease liabilities	728
Total finance lease costs	$	3,894
Three months ended March 31,	2019
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	103,004
Operating cash flows from finance leases	728
Financing cash flows from finance leases	2,939
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	2,785,444
Finance leases	31,386
Weighted Average Remaining Lease Term
Operating leases	11 years
Finance leases	4 years
Weighted Average Discount Rate
Operating leases	7.47		%
Finance leases	6.86		%

Maturities of Operating Lease Liabilities

The undiscounted annual future minimum lease payments are summarized by year in the table below:

Year Ending December 31,	Operating Leases			Finance Leases
2019 (excluding the three months ended March 31, 2019)	$	826,215		$	10,998
2020	1,106,944			14,664
2021	891,346			14,664
2022	805,432			12,276
2023	697,277			7,500
Thereafter	5,555,117			—
Total future minimum lease payments	9,882,331			60,102
Less imputed interest	(3,546,134		)	(8,128		)
Total:	$	6,336,197		$	51,974

Maturities of Finance Lease Liabilities

The undiscounted annual future minimum lease payments are summarized by year in the table below:

Year Ending December 31,	Operating Leases			Finance Leases
2019 (excluding the three months ended March 31, 2019)	$	826,215		$	10,998
2020	1,106,944			14,664
2021	891,346			14,664
2022	805,432			12,276
2023	697,277			7,500
Thereafter	5,555,117			—
Total future minimum lease payments	9,882,331			60,102
Less imputed interest	(3,546,134		)	(8,128		)
Total:	$	6,336,197		$	51,974

Supplemental Lease Information

Supplemental balance sheet information related to leases was as follows:

Operating Leases as of March 31,	2019
Right of use asset	$	6,035,660
Current portion of lease obligations	622,065
Long term portion of lease obligations	5,714,132
Total operating lease obligations	6,336,197
Financing Leases as of March 31,	2019
Property and Equipment, at cost	56,933
Accumulated depreciation	(5,295		)
Property and Equipment, net	51,638
Other accounts payable and accrued expenses	11,445
Other long term liabilities	40,529
Total financing lease liabilities	$	51,974

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REVENUES (Tables)

3 Months Ended

Mar. 31, 2019

Revenue from Contract with Customer [Abstract]

Contracts

	March 31, 2019									December 31, 2018
	Training and Simulation Division			Power Systems Division			Total			Training and Simulation Division			Power Systems Division			Total
Contract Assets - Current	$	14,251,984		$	8,067,984		$	22,319,968		$	10,358,679		$	7,509,217		$	17,867,896
Contract Liabilities - Current	(6,076,744		)	(674,041		)	(6,750,785		)	(6,697,522		)	(357,257		)	(7,054,779		)
Net Contract Assets and Liabilities:	$	8,175,240		$	7,393,943		$	15,569,183		$	3,661,157		$	7,151,960		$	10,813,117

The aggregate impact of adjustments in contract estimates to net income (loss) is presented below:

	Three months ended March 31,
	2019					2018
	Training and Simulation Division		Power Systems Division			Training and Simulation Division		Power Systems Division
Net income (loss)	$	146,278	$	(30,419	)	$	71,440	$	(119,778	)

Disaggregation of Revenue

Revenue by customer was as follows:

	Training and Simulation Division		Power Systems Division
Three months ended March 31, 2019
U.S. Government
Department of Defense (DoD)	$	4,893,803	$	441,033
Non-DoD	2,604,486		—
Foreign Military Sales (FMS)	642,269		—
Total U.S. Government	$	8,140,559	$	441,033
U.S. Commercial	$	4,771,042	$	3,167,221
Non-U.S. Government	241,553		291,965
Non-U.S. Commercial	836,462		2,888,805
Total Revenue	$	13,989,615	$	6,789,024
Three months ended March 31, 2018
U.S. Government
Department of Defense (DoD)	$	3,432,193	$	512,212
Non-DoD	2,738,807		—
Foreign Military Sales (FMS)	584,781		—
Total U.S. Government	$	6,755,781	$	512,212
U.S. Commercial	$	6,028,998	$	7,717,964
Non-U.S. Government	926,164		1,517,816
Non-U.S. Commercial	846,921		2,942,653
Total Revenue	$	14,557,864	$	12,690,645

Revenue by major product line was as follows:

	Three months ended March 31,
	2019		2018
Product Revenue
Air Warfare Simulation	$	3,499,202	$	5,032,659
Vehicle Simulation	7,080,941		5,463,998
Use-of-Force	2,457,177		3,260,049
Service Revenue
Warranty	952,295		801,158
Total Training and Simulation Division	$	13,989,615	$	14,557,864
Contract Manufacturing	$	3,217,992	$	4,164,324
Power Distribution and Generation	250,700		3,275,380
Batteries	2,382,475		4,146,112
Engineering Services and Other	937,857		1,104,829
Total Power Division	$	6,789,024	$	12,690,645

The table below details the percentage of total recognized revenue by type of arrangement for the three months ended March 31, 2019 and 2018:

	Three months ended March 31,
Type of Revenue	2019		2018
Sale of products	92.1	%	96.4	%
Maintenance and support agreements	4.6	%	2.9	%
Long term research and development contracts	3.3	%	0.7	%
Total	100	%	100	%

Revenue by contract type was as follows:

	Training and Simulation Division		Power Systems Division
Three months ended March 31, 2019
Fixed Price	$	10,971,102	$	6,169,657
Cost Reimbursement (Cost Plus)	1,349,345		431,050
Time and Materials	1,669,168		188,317
Total	$	13,989,615	$	6,789,024
Three months ended March 31, 2018
Fixed Price	$	12,209,969	$	12,072,168
Cost Reimbursement (Cost Plus)	1,338,951		388,749
Time and Materials	1,008,944		229,728
Total	$	14,557,864	$	12,690,645

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INVENTORIES (Tables)

3 Months Ended

Mar. 31, 2019

Inventory Disclosure [Abstract]

Inventories by Component

Inventories by component are as follows:

	March 31, 2019		December 31, 2018
Raw and packaging materials	$	7,977,195	$	7,912,883
Work in progress	1,054,467		1,626,960
Finished products	420,802		372,905
Total:	$	9,452,464	$	9,912,748

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SEGMENT INFORMATION (Tables)

3 Months Ended

Mar. 31, 2019

Segment Reporting [Abstract]

Schedule of Segment Reporting Information, by Segment

The following is information about reported segment revenues, income (losses) from operations, and total assets as of March 31, 2019 and 2018:

	Training and Simulation Division			Power Systems Division			Corporate Expenses			Total Company
Three months ended March 31, 2019
Revenues from outside customers	$	13,989,615		$	6,789,024		$	—		$	20,778,639
Depreciation and amortization(1)	(187,830		)	(675,490		)	—			(863,320		)
Direct expenses(2)	(11,695,059		)	(8,261,927		)	(906,020		)	(20,863,006		)
Segment operating income (loss)	$	2,106,726		$	(2,148,393	)	$	(906,020	)	$	(947,687	)
Financial expense	(43,007		)	(64,915		)	(190,523		)	(298,445		)
Income tax expense	(50,000		)	—			(110,881		)	(160,881		)
Net income (loss)	$	2,013,719		$	(2,213,308	)	$	(1,207,424	)	$	(1,407,013	)
Segment assets(3)(4)	57,291,042			64,085,613			3,623,664			125,000,319
Additions to long-lived assets	532,251			403,337			319,995			1,255,583
Three months ended March 31, 2018
Revenues from outside customers	$	14,557,864		$	12,690,645		$	—		$	27,248,509
Depreciation, amortization and impairment expenses(1)	(200,360		)	(796,042		)	—			(996,402		)
Direct expenses(2)	(11,872,231		)	(12,273,712		)	(1,050,353		)	(25,196,296		)
Segment operating income (loss)	$	2,485,273		$	(379,109	)	$	(1,050,353	)	$	1,055,811
Financial expense	(44,619		)	15,465			(183,954		)	(213,108		)
Income tax expense	(19,801		)	—			(227,313		)	(247,114		)
Net income (loss)	$	2,420,853		$	(363,644	)	$	(1,461,620	)	$	595,589
Segment assets(3)	51,690,905			60,995,921			3,119,613			115,806,439
Additions to long-lived assets	121,588			209,232			—			330,820

(1) Includes depreciation of property and equipment and amortization expenses of intangible assets.

(2) Including, inter alia, sales and marketing, general and administrative.

(3) Out of those amounts, goodwill in the Company’s Training and Simulation Division and Power Systems Division totaled $24,435,641 and $21,702,395, respectively, as of March 31, 2019 and 2018.

(4) Out of those amounts, right-of-use assets for the Company’s Training and Simulation Division and Power Systems Division totaled $519,496 and $5,516,164, respectively, as of March 31, 2019.

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BASIS OF PRESENTATION (Details) - USD ($)	Mar. 31, 2019	Jan. 01, 2019
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Right-of-use assets	$ 6,035,660
Total:	$ 6,336,197
ASU 2016-02
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Right-of-use assets		$ 6,300,000
Total:		$ 6,500,000

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SIGNIFICANT ACCOUNTING POLICIES UPDATE - Narrative (Details)	3 Months Ended
	Mar. 31, 2019 USD ($)
Lessee, Lease, Description [Line Items]
Sublease income	$ 27,000
Facilities and Equipment
Lessee, Lease, Description [Line Items]
Lease renewal term	5 years
Facilities and Equipment | Minimum
Lessee, Lease, Description [Line Items]
Lease term	2 years
Facilities and Equipment | Maximum
Lessee, Lease, Description [Line Items]
Lease term	15 years

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SIGNIFICANT ACCOUNTING POLICIES UPDATE - Components of Lease Expense (Details)	3 Months Ended
	Mar. 31, 2019 USD ($)
Lease, Cost [Abstract]
Operating lease cost	$ 280,246
Amortization of right-of-use assets	3,166
Interest on lease liabilities	728
Total finance lease costs	3,894
Supplemental Cash Flows Information
Operating cash flows from operating leases	103,004
Operating cash flows from finance leases	728
Financing cash flows from finance leases	2,939
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	2,785,444
Finance leases	$ 31,386
Weighted Average Remaining Lease Term
Operating leases	11 years
Finance leases	4 years
Weighted Average Discount Rate
Operating leases	7.47%
Finance leases	6.86%

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SIGNIFICANT ACCOUNTING POLICIES UPDATE - Maturities of Operating and Finance Lease Liabilities (Details) - USD ($)	Mar. 31, 2019	Mar. 31, 2018
Operating Leases
2019 (excluding the three months ended March 31, 2019)	$ 826,215
2020	1,106,944
2021	891,346
2022	805,432
2023	697,277
Thereafter	5,555,117
Total future minimum lease payments	9,882,331
Less imputed interest	(3,546,134)
Total:	6,336,197
Finance Leases
2019 (excluding the three months ended March 31, 2019)	10,998
2020	14,664
2021	14,664
2022	12,276
2023	7,500
Thereafter	0
Total future minimum lease payments	60,102
Less imputed interest	(8,128)
Total:	$ 51,974	$ 51,974

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SIGNIFICANT ACCOUNTING POLICIES UPDATE - Operating and Finance Leases Supplemental Information (Details) - USD ($)	Mar. 31, 2019	Mar. 31, 2018
Leases, Operating [Abstract]
Right of use asset	$ 6,035,660
Current portion of lease obligations	622,065
Long term portion of lease obligations	5,714,132
Total operating lease obligations	6,336,197
Leases, Finance [Abstract]
Property and Equipment, at cost		$ 56,933
Accumulated depreciation		(5,295)
Property and Equipment, net		51,638
Other accounts payable and accrued expenses		11,445
Other long term liabilities		40,529
Total financing lease liabilities	$ 51,974	$ 51,974

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REVENUES - Narrative (Details)	3 Months Ended
	Mar. 31, 2019 USD ($) contract	Mar. 31, 2018 USD ($) contract	Dec. 31, 2018 USD ($)
Disaggregation of Revenue [Line Items]
Concentration risk, percentage	100.00%	100.00%
Number of active contracts | contract	476	500
Increase (decrease) in net contract assets and liabilities	$ 4,800,000
Contract with customer, liability, revenue recognized	2,800,000	$ 3,000,000
Trade receivables, net	$ 11,801,182		$ 16,259,809
Transferred over Time
Disaggregation of Revenue [Line Items]
Concentration risk, percentage	90.00%	94.00%

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REVENUES - Performance Obligation (Details) - USD ($) $ in Millions	Mar. 31, 2019	Dec. 31, 2018
Revenue from Contract with Customer [Abstract]
Revenue, remaining performance obligation, amount	$ 70.5
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2019-01-01
Revenue from Contract with Customer [Abstract]
Revenue, remaining performance obligation, percentage	68.10%
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Revenue, remaining performance obligation, period		1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2020-01-01
Revenue from Contract with Customer [Abstract]
Revenue, remaining performance obligation, percentage	31.90%
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Revenue, remaining performance obligation, period

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REVENUES - Schedule of Adjustments in Contract Estimates (Details) - USD ($)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Training and Simulation Division
Revenue from External Customer [Line Items]
Net income (loss)	$ 146,278	$ 71,440
Power Systems Division
Revenue from External Customer [Line Items]
Net income (loss)	$ (30,419)	$ (119,778)

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REVENUES - Revenue from External Customers by Products and Services (Details) - USD ($)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Revenue from External Customer [Line Items]
Revenues	$ 20,778,639	$ 27,248,509
Training and Simulation Division
Revenue from External Customer [Line Items]
Revenues	13,989,615	14,557,864
Training and Simulation Division | Air Warfare Simulation
Revenue from External Customer [Line Items]
Revenues	3,499,202	5,032,659
Training and Simulation Division | Vehicle Simulation
Revenue from External Customer [Line Items]
Revenues	7,080,941	5,463,998
Training and Simulation Division | Use-of-Force
Revenue from External Customer [Line Items]
Revenues	2,457,177	3,260,049
Training and Simulation Division | Warranty
Revenue from External Customer [Line Items]
Revenues	952,295	801,158
Power Systems Division
Revenue from External Customer [Line Items]
Revenues	6,789,024	12,690,645
Power Systems Division | Contract Manufacturing
Revenue from External Customer [Line Items]
Revenues	3,217,992	4,164,324
Power Systems Division | Power Distribution and Generation
Revenue from External Customer [Line Items]
Revenues	250,700	3,275,380
Power Systems Division | Batteries
Revenue from External Customer [Line Items]
Revenues	2,382,475	4,146,112
Power Systems Division | Engineering Services and Other
Revenue from External Customer [Line Items]
Revenues	$ 937,857	$ 1,104,829

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REVENUES - Schedule of Principal Transactions Revenue (Details)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Revenue from External Customer [Line Items]
Concentration risk, percentage	100.00%	100.00%
Sale of products
Revenue from External Customer [Line Items]
Concentration risk, percentage	92.10%	96.40%
Maintenance and support agreements
Revenue from External Customer [Line Items]
Concentration risk, percentage	4.60%	2.90%
Long term research and development contracts
Revenue from External Customer [Line Items]
Concentration risk, percentage	3.30%	0.70%

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REVENUES - Disaggregation of Revenue (Details) - USD ($)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Disaggregation of Revenue [Line Items]
Revenues	$ 20,778,639	$ 27,248,509
Training and Simulation Division
Disaggregation of Revenue [Line Items]
Revenues	13,989,615	14,557,864
Training and Simulation Division | Fixed Price
Disaggregation of Revenue [Line Items]
Revenues	10,971,102	12,209,969
Training and Simulation Division | Cost Reimbursement (Cost Plus)
Disaggregation of Revenue [Line Items]
Revenues	1,349,345	1,338,951
Training and Simulation Division | Time and Materials
Disaggregation of Revenue [Line Items]
Revenues	1,669,168	1,008,944
Power Systems Division
Disaggregation of Revenue [Line Items]
Revenues	6,789,024	12,690,645
Power Systems Division | Fixed Price
Disaggregation of Revenue [Line Items]
Revenues	6,169,657	12,072,168
Power Systems Division | Cost Reimbursement (Cost Plus)
Disaggregation of Revenue [Line Items]
Revenues	431,050	388,749
Power Systems Division | Time and Materials
Disaggregation of Revenue [Line Items]
Revenues	$ 188,317	$ 229,728

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REVENUES - Schedule of Revenue by Major Customers by Reporting Segments (Details) - USD ($)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Revenue, Major Customer [Line Items]
Revenues	$ 20,778,639	$ 27,248,509
Training and Simulation Division
Revenue, Major Customer [Line Items]
Revenues	13,989,615	14,557,864
Power Systems Division
Revenue, Major Customer [Line Items]
Revenues	6,789,024	12,690,645
Department of Defense (DoD) | Training and Simulation Division
Revenue, Major Customer [Line Items]
Revenues	4,893,803	3,432,193
Department of Defense (DoD) | Power Systems Division
Revenue, Major Customer [Line Items]
Revenues	441,033	512,212
Non-DoD | Training and Simulation Division
Revenue, Major Customer [Line Items]
Revenues	2,604,486	2,738,807
Non-DoD | Power Systems Division
Revenue, Major Customer [Line Items]
Revenues	0	0
Foreign Military Sales (FMS) | Training and Simulation Division
Revenue, Major Customer [Line Items]
Revenues	642,269	584,781
Foreign Military Sales (FMS) | Power Systems Division
Revenue, Major Customer [Line Items]
Revenues	0	0
Total U.S. Government | Training and Simulation Division
Revenue, Major Customer [Line Items]
Revenues	8,140,559	6,755,781
Total U.S. Government | Power Systems Division
Revenue, Major Customer [Line Items]
Revenues	441,033	512,212
U.S. Commercial | Training and Simulation Division
Revenue, Major Customer [Line Items]
Revenues	4,771,042	6,028,998
U.S. Commercial | Power Systems Division
Revenue, Major Customer [Line Items]
Revenues	3,167,221	7,717,964
Non-U.S. Government | Training and Simulation Division
Revenue, Major Customer [Line Items]
Revenues	241,553	926,164
Non-U.S. Government | Power Systems Division
Revenue, Major Customer [Line Items]
Revenues	291,965	1,517,816
Non-U.S. Commercial | Training and Simulation Division
Revenue, Major Customer [Line Items]
Revenues	836,462	846,921
Non-U.S. Commercial | Power Systems Division
Revenue, Major Customer [Line Items]
Revenues	$ 2,888,805	$ 2,942,653

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REVENUES - Contract with Customer, Assets and Liabilities (Details) - USD ($)	Mar. 31, 2019	Dec. 31, 2018
Contract with Customer Assets and Liabilities [Line Items]
Contract Assets - Current	$ 22,319,968	$ 17,867,896
Contract Liabilities - Current	(6,750,785)	(7,054,779)
Net Contract Assets and Liabilities:	15,569,183	10,813,117
Training and Simulation Division
Contract with Customer Assets and Liabilities [Line Items]
Contract Assets - Current	14,251,984	10,358,679
Contract Liabilities - Current	(6,076,744)	(6,697,522)
Net Contract Assets and Liabilities:	8,175,240	3,661,157
Power Systems Division
Contract with Customer Assets and Liabilities [Line Items]
Contract Assets - Current	8,067,984	7,509,217
Contract Liabilities - Current	(674,041)	(357,257)
Net Contract Assets and Liabilities:	$ 7,393,943	$ 7,151,960

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INVENTORIES - Narrative (Details) - USD ($)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Inventory Disclosure [Abstract]
Inventory write-down	$ 41,600	$ 154,000

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INVENTORIES - Schedule of Inventory (Details) - USD ($)	Mar. 31, 2019	Dec. 31, 2018
Inventory Disclosure [Abstract]
Raw and packaging materials	$ 7,977,195	$ 7,912,883
Work in progress	1,054,467	1,626,960
Finished products	420,802	372,905
Total:	$ 9,452,464	$ 9,912,748

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SEGMENT INFORMATION - Narrative (Details)	3 Months Ended
	Mar. 31, 2019 USD ($) segment	Dec. 31, 2018 USD ($)	Mar. 31, 2018 USD ($)
Segment Reporting Information [Line Items]
Number of business segments | segment	2
Goodwill	$ 46,138,036	$ 46,138,036
Right-of-use assets	6,035,660
Training and Simulation Division
Segment Reporting Information [Line Items]
Goodwill	24,435,641		$ 24,435,641
Right-of-use assets	519,496
Power Systems Division
Segment Reporting Information [Line Items]
Goodwill	21,702,395		$ 21,702,395
Right-of-use assets	$ 5,516,164

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SEGMENT INFORMATION - Schedule of Segment Reporting Information (Details) - USD ($)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018	Dec. 31, 2018
Segment Reporting Information [Line Items]
Revenues	$ 20,778,639	$ 27,248,509
Financial expense	(298,431)	(213,108)
Income tax benefit (expense)	(160,881)	(247,114)
Net income (loss)	(1,407,013)	595,589
Segment assets	(125,000,319)		$ (117,963,645)
Training and Simulation Division
Segment Reporting Information [Line Items]
Revenues	13,989,615	14,557,864
Depreciation, amortization and impairment expenses	(187,830)	(200,360)
Direct expenses	(11,695,059)	(11,872,231)
Segment operating income (loss)	2,106,726	2,485,273
Financial expense	(43,007)	(44,619)
Income tax benefit (expense)	(50,000)	(19,801)
Net income (loss)	2,013,719	2,420,853
Segment assets	57,291,042	51,690,905
Additions to long-lived assets	532,251	121,588
Power Systems Division
Segment Reporting Information [Line Items]
Revenues	6,789,024	12,690,645
Depreciation, amortization and impairment expenses	(675,490)	(796,042)
Direct expenses	(8,261,927)	(12,273,712)
Segment operating income (loss)	(2,148,393)	(379,109)
Financial expense	(64,915)	15,465
Income tax benefit (expense)	0	0
Net income (loss)	(2,213,308)	(363,644)
Segment assets	64,085,613	60,995,921
Additions to long-lived assets	403,337	209,232
Corporate Expenses
Segment Reporting Information [Line Items]
Revenues	0	0
Depreciation, amortization and impairment expenses	0	0
Direct expenses	(906,020)	(1,050,353)
Segment operating income (loss)	(906,020)	(1,050,353)
Financial expense	(190,523)	(183,954)
Income tax benefit (expense)	(110,881)	(227,313)
Net income (loss)	(1,207,424)	(1,461,620)
Segment assets	3,623,664	3,119,613
Additions to long-lived assets	319,995	0
Total Company
Segment Reporting Information [Line Items]
Revenues	20,778,639	27,248,509
Depreciation, amortization and impairment expenses	(863,320)	(996,402)
Direct expenses	(20,863,006)	(25,196,296)
Segment operating income (loss)	(947,687)	1,055,811
Financial expense	(298,445)	(213,108)
Income tax benefit (expense)	(160,881)	(247,114)
Net income (loss)	(1,407,013)	595,589
Segment assets	125,000,319	115,806,439
Additions to long-lived assets	$ 1,255,583	$ 330,820

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BANK FINANCING (Details)	3 Months Ended	6 Months Ended	9 Months Ended	12 Months Ended
	Mar. 31, 2019 USD ($) payment	Jun. 30, 2019	Sep. 30, 2019	Dec. 31, 2020	Dec. 31, 2019 USD ($)	Dec. 31, 2018 USD ($)
Debt Instrument [Line Items]
Short term bank credit	$ 9,703,764					$ 5,500,416
Revolving Credit Facility
Debt Instrument [Line Items]
Revolver, maximum borrowing capacity	$ 15,000,000
Expiration date	Mar. 11, 2021
Revolver, effective interest rate	5.50%
Covenant terms	The Credit Facilities maintain certain reporting requirements, conditions precedent, affirmative covenants and financial covenants. The Company is required to maintain certain financial covenants. The Eighth Amendment to the credit facilities adjusted the financial covenant ratios for the Company’s reporting periods during fiscal year 2019. The amended Maximum Debt to EBITDA ratio is 3.75 to 1.00 for the period ended March 31, 2019, 5.50 to 1.00 for the period ended June 30, 2019, 6.25 to 1.00 for the period ended September 30, 2019, 4.00 to 1.00 for the period ended December 31, 2019 and 3.00 to 1.00 for periods ending after December 31, 2019. The amended Minimum Fixed Charge Coverage Ratio is 1.20 to 1.00 for the period ended March 31, 2019, 1.00 to 1.00 for the periods ended June 30, 2019 and September 30, 2019, and 1.20 to 1.00 for the periods ending after September 30, 2019.
Maximum Debt to EBITDA ratio	3.75
Minimum Fixed Charge Coverage ratio	1.20
Collateral	The Credit Facilities are secured by the Company’s assets and the assets of the Company’s domestic subsidiaries.
Revolver B
Debt Instrument [Line Items]
Revolver, maximum borrowing capacity	$ 6,000,000
Expiration date	Feb. 28, 2020
Mortgage Loan
Debt Instrument [Line Items]
Loans, maturity date	Jun. 01, 2024
Loans, payment terms	The monthly payments on Term Loan B and Term Loan C are $7,212 and $5,660, respectively, in principal plus accrued interest, with balloon payments due on the maturity date.
Loans, effective interest rate	5.75%
Loan balance	$ 2,800,000					2,800,000
Term Loan A
Debt Instrument [Line Items]
Loans, face amount	$ 10,000,000
Loans, maturity date	Mar. 11, 2021
Loans, payment terms	The repayment of Term Loan A consists of 60 consecutive monthly payments of principal plus accrued interest based on annual principal reductions of 10% during the first year, 20% during the second through fourth years, and 30% during the fifth year.
Number of monthly payments | payment	60
Assumed principal reduction in year one	10.00%
Assumed principal reduction in year two	20.00%
Assumed principal reduction in year three	20.00%
Assumed principal reduction in year four	20.00%
Assumed principal reduction in year five	30.00%
Loans, effective interest rate	5.75%
Loan balance	$ 5,200,000					$ 5,700,000
Term Loan B | Mortgage Loan
Debt Instrument [Line Items]
Loans, face amount	1,730,895
Loans, monthly payment	7,212
Term Loan C | Mortgage Loan
Debt Instrument [Line Items]
Loans, face amount	1,358,000
Loans, monthly payment	$ 5,660
Minimum | London Interbank Offered Rate (LIBOR) | Revolving Credit Facility
Debt Instrument [Line Items]
Interest rate, basis spread	1.75%
Minimum | London Interbank Offered Rate (LIBOR) | Revolver B
Debt Instrument [Line Items]
Interest rate, basis spread	1.75%
Minimum | London Interbank Offered Rate (LIBOR) | Term Loan A
Debt Instrument [Line Items]
Interest rate, basis spread	2.00%
Maximum | London Interbank Offered Rate (LIBOR) | Revolving Credit Facility
Debt Instrument [Line Items]
Interest rate, basis spread	3.50%
Maximum | London Interbank Offered Rate (LIBOR) | Revolver B
Debt Instrument [Line Items]
Interest rate, basis spread	3.50%
Maximum | London Interbank Offered Rate (LIBOR) | Term Loan A
Debt Instrument [Line Items]
Interest rate, basis spread	3.25%
Forecast | Revolving Credit Facility
Debt Instrument [Line Items]
Maximum Debt to EBITDA ratio		5.50	6.25	3.00	4.00
Minimum Fixed Charge Coverage ratio		1.00	1.20		1.20
Forecast | Revolver B
Debt Instrument [Line Items]
Revolver, maximum borrowing capacity					$ 3,000,000