UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 6-K
 
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE
SECURITIES EXCHANGE ACT OF 1934
 
For the month of
September 2019
 
RADA ELECTRONIC INDUSTRIES LIMITED
(Name of Registrant)
 
7 Giborei Israel Street, Netanya 4250407, Israel
(Address of Principal Executive Office)
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
 
Form 20-F ☒    Form 40-F ☐
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐
 
Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
 
Yes ☐ No ☒
 
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ____________
 
This Form 6-K and its exhibits are being incorporated by reference into the Registrant’s Form F-3 Registration Statements (File Nos. 333-212643, 333-216973, 333-220304, 333-226387) and Form S-8 (File No. 333-213284). 
 
 
RADA ELECTRONIC INDUSTRIES LTD.
 
EXPLANATORY NOTE
 
The following exhibits are attached:
 
99.1
Rada Electronic Industries Ltd. and Its Subsidiary Condensed Interim Consolidated Financial Statements as of June 30, 2019 (Unaudited)
 
 
99.2
Management’s Discussion and Analysis of Results of Operations for the Six Months ended June 30, 2019
 
SIGNATURE
 
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.
 
 
Rada Electronic Industries Ltd.
 
(Registrant)
 
 
 
 
By:
/s/ Dov Sella
 
 
Dov Sella
 
 
Chief Executive Officer
 
Date: September 26, 2019

 
EXHIBIT INDEX
 
EXHIBIT NO.
 
DESCRIPTION
 
 
 
 
 
 
 
 
 
 

Exhibit 99.1

RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2019

U.S. DOLLARS IN THOUSANDS

UNAUDITED

INDEX

 
Page
   
2 - 3
   
4
   
5
   
6
   
7 - 8
   
9 – 24



RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands

   
June 30,
2019
   
December 31, 2018
 
   
Unaudited
   
Audited
 
ASSETS
           
             
CURRENT ASSETS:
           
Cash and cash equivalents
 
$
14,949
   
$
20,814
 
Restricted cash
   
380
     
422
 
Trade receivables, net
   
14,263
     
13,382
 
Contract assets (Note 5)
   
1,396
     
899
 
Other accounts receivable and prepaid expenses
   
1,554
     
506
 
Inventories (Note 6)
   
16,065
     
11,244
 
Current assets related to discontinued operations (Note 1b)
   
-
     
1,524
 
                 
Total current assets
   
48,607
     
48,791
 
                 
NON CURRENT ASSETS:
               
Long-term receivable and other deposits
   
77
     
79
 
Property, plant and equipment, net (Note 7)
   
5,188
     
4,632
 
Operating lease right-of-use asset (Note 4)
   
1,904
     
-
 
                 
Total non-current assets
   
7,169
     
4,711
 
                 
Total assets
 
$
55,776
   
$
53,502
 

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

2

RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share and per share data)

   
June 30,
2019
   
December 31, 2018
 
   
Unaudited
   
Audited
 
             
LIABILITIES AND SHAREHOLDERS' EQUITY
           
             
CURRENT LIABILITIES:
           
Trade payables
 
$
5,685
   
$
5,650
 
Other accounts payable and accrued expenses
   
3,685
     
3,842
 
Advances from customers (Note 5)
   
867
     
727
 
Contract liabilities (Note 5)
   
554
     
366
 
Operating lease short-term liabilities (Note 4)
   
882
     
-
 
Current liabilities related to discontinued operations (Note 1b)
   
-
     
366
 
                 
Total current liabilities
   
11,673
     
10,951
 
                 
LONG-TERM LIABILITIES:
               
Accrued severance pay and other long-term liabilities
   
740
     
690
 
Operating lease long-term liabilities (Note 4)
   
1,022
     
-
 
                 
Total long-term liabilities
   
1,762
     
690
 
                 
SHAREHOLDERS EQUITY:
               
Share capital (Note 10) -
               
Ordinary shares of NIS 0.03 par value - Authorized: 100,000,000 shares at June 30, 2019 and December 31, 2018; Issued and outstanding: 38,067,024 at June 30, 2019 and 37,516,891 at December 31, 2018.
   
390
     
386
 
Additional paid-in capital
   
120,622
     
118,568
 
Accumulated other comprehensive income
   
-
     
220
 
Accumulated deficit
   
(78,010
)
   
(76,961
)
                 
Total RADA shareholders’ equity
   
43,002
     
42,213
 
Non-controlling interest
   
(661
)
   
(352
)
                 
Total shareholders’ equity
   
42,341
     
41,861
 
                 
Total liabilities and shareholders’ equity
 
$
55,776
   
$
53,502
 

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

3

RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

CONDENSED  INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
U.S. dollars in thousands (except share and per share data)

   
Six months ended
June 30,
 
   
2019
   
2018
 
   
Unaudited
 
Revenues:
           
Products
 
$
18,364
   
$
12,036
 
Services
   
350
     
560
 
     
18,714
     
12,596
 
Cost of revenues:
               
Products
   
11,899
     
7,896*
)
Services
   
76
     
86
 
     
11,975
     
7,982*
)
                 
Gross profit
   
6,739
     
4,614*
)
Operating expenses:
               
Research and development, net
   
3,040
     
1,339*
)
Marketing and selling
   
1,870
     
1,284
 
General and administrative
   
3,230
     
1,682
 
Total operating expenses
   
8,140
     
4,305*
)
                 
Operating income (loss)
   
(1,401
)
   
309
 
Total financial income, net (Note 11)
   
43
     
3
 
                 
Net income (loss) from continuing operations
   
(1,358
)
   
312
 
                 
Net loss from discontinued operations (Note 1b)
   
-
     
(97
)
Net income (loss)
   
(1,358
)
 
$
215
 
Net loss attributable to non controlling shareholders
 
$
(309
)
 
$
(55
)
                 
Net income (loss) attributable to RADA Electronic Industries' shareholders
 
$
(1,049
)
 
$
270
 
                 
Basic and diluted net income (loss) from continuing operations per ordinary shares
 
$
(0.03
)
 
$
0.01
 
Basic and diluted net income from discontinued operations per ordinary share
 
$
0.00
   
$
0.00
 
Basic and diluted net income (loss) per ordinary share
 
$
(0.03
)
 
$
0.01
 
Weighted average number of ordinary shares used for computing basic net income (loss) per share
   
38,017,281
     
32,745,620
 
Weighted average number of ordinary shares used for computing diluted net income (loss) per share
   
38,570,290
     
33,269,376
 

*) Reclassified

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

4

RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
U.S. dollars in thousands (except share and per share data)

   
Six months ended
June 30,
 
   
2019
   
2018
 
   
Unaudited
 
             
Net income (loss)
 
$
(1,358
)
 
$
215
 
                 
Other comprehensive loss, net:
               
Change in foreign currency translation adjustment
   
-
     
(359
)
                 
Total comprehensive loss
   
(1,358
)
   
(144
)
                 
Comprehensive loss attributable to non-controlling interest
   
-
     
(127
)
                 
Comprehensive loss attributable to RADA Electronic Industries' shareholders
 
$
(1,358
)
 
$
(17
)

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

5

RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
U.S. dollars in thousands (except share data)

     
Number of Ordinary
           
Additional paid-in
   
Accumulated
other comprehensive
                   
       
Share
           
Accumulated
   
Non controlling
   
Total
 
   
shares
   
capital
   
capital
   
income (loss)
   
deficit
   
interest
   
equity
 
                                           
Balance at January 1, 2018
   
31,392,040
   
$
335
   
$
104,923
   
$
392
   
$
(77,124
)
 
$
659
   
$
29,185
 
Share-based compensation to employees
   
-
     
-
     
898
     
-
     
-
     
-
     
898
 
Exercise of warrants
   
1,454,546
     
13
     
787
     
-
     
-
     
-
     
800
 
Issuance of shares, net of issuance costs of $248
   
4,545,454
     
37
     
12,215
     
-
     
-
     
-
     
12,252
 
Exercise of option
   
124,851
     
1
     
(1
)
   
-
     
-
     
-
     
-
 
Net income (loss)
   
-
     
-
     
-
     
-
     
163
     
(386
)
   
(223
)
Transaction with non-controlling interest
   
-
     
-
     
(254
)
   
-
     
-
     
(546
)
   
(800
)
Other comprehensive loss
   
-
     
-
     
-
     
(172
)
   
-
     
(79
)
   
(251
)
                                                         
Balance at December 31, 2018
   
37,516,891
     
386
     
118,568
     
220
     
(76,961
)
   
(352
)
   
41,861
 
Share-based compensation to employees
   
-
     
-
     
558
     
-
     
-
     
-
     
558
 
Issuance of shares
   
550,133
     
4
     
1,496
     
-
     
-
     
-
     
1,500
 
Net loss
   
-
     
-
     
-
     
-
     
(1,049
)
   
(309
)
   
(1,358
)
Other
   
-
     
-
     
-
     
(220
)
   
-
     
-
     
(220
)
                                                         
Balance at June 30, 2019 (unaudited)
   
38,067,024
   
$
390
   
$
120,622
   
$
-
   
$
(78,010
)
 
$
(661
)
 
$
42,341
 

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

6
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
U.S. dollars in thousands

   
Six months ended
June 30,
 
   
2019
   
2018
 
   
Unaudited
 
Cash flows from operating activities:
           
Net income (loss)
 
$
(1,358
)
 
$
215
 
Adjustments required to reconcile net income to net cash used in operating activities:
               
Depreciation, amortization and impairment
   
539
     
614
 
Severance pay, net
   
50
     
23
 
Share-based compensation to employees
   
558
     
400
 
Decrease (increase) in trade receivables, net
   
(881
)
   
2,235
 
Increase in other accounts receivable and prepaid expenses
   
(178
)
   
(167
)
Increase in contract assets
   
(497
)
   
(48
)
Increase in contract liabilities
   
188
     
286
 
Decrease (increase) in inventories
   
(4,917
)
   
602
 
Decrease in trade payables
   
(401
)
   
(808
)
Increase (decrease) in other accounts payable and accrued expenses
   
142
     
(484
)
                 
Net cash provided by (used in) operating activities from continuing operations
  $
(6,755
)
  $
2,868
 
                 
Cash flows from investing activities:
               
Purchase of property, plant and equipment
   
(629
)
   
(529
)
Increase (decrease) in long-term receivables and deposits
   
(23
)
   
2
 
                 
Net cash by used in investing activities from continuing operations
  $
(652
)
  $
(527
)
                 
Cash flows from financing activities:
               
Issuance of shares
   
1,500
     
-
 
Exercise of warrants
   
-
     
800
 
                 
Net cash provided by financing activities from continuing operations
  $
1,500
    $
800
 
                 
Net cash provided by operating activities from discontinued operations
   
-
     
913
 
                 
Net cash used in investing activities from discontinued operations
   
-
     
(2
)
                 
Effect of exchange rate changes of discontinued operation on cash and cash equivalents
   
-
     
(399
)


7

RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
U.S. dollars in thousands

   
Six months ended
June 30,
 
   
2019
   
2018
 
   
Unaudited
 
             
Increase (decrease) in cash and cash equivalents and restricted cash
  $
(5,907
)
  $
3,653
 
Cash and cash equivalents and restricted cash at the beginning of the period
   
21,236
     
13,006
 
                 
Cash and cash equivalents and restricted cash at the end of the period
   
15,329
     
16,659
 
                 
Less cash and cash equivalents of discontinued operation at the end of the period
   
-
     
679
 
                 
Cash and cash equivalents of continued operation at the end of the period
 
$
15,329
   
$
15,980
 
                 
(a)  Supplemental disclosures of cash flow activities:
               
                 
       Net cash paid during the period for income taxes
 
$
11
   
$
8
 
                 
       Net cash paid during the period for interest
 
$
-
   
$
14
 
                 
(b)  Non-cash transactions
               
                 
       Purchase of property, plant and equipment in credit
 
$
436
   
$
131
 
                 
       Transfer of inventory to property, plant and equipment
 
$
30
   
$
271
 
                 
Proceeds from sale of discontinued operations, net
 
$
845
     
-
 
                 
Right-of-use assets ontained exchange for new operating lease liabilities
 
$
2,032
    $
-
 

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

8

RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL  STATEMENTS
U.S. dollars in thousands (except share data)

NOTE 1:-      GENERAL


a.
RADA Electronic Industries Ltd. (the "Company") is an Israeli based defense electronics contractor that specializes in the design, development, production and sales of tactical land radars for ground forces and border protection and avionics systems (including inertial navigation systems) for fighter aircraft and UAVs.

In January 2018, the Company incorporated RADA Sensors Inc., a fully owned subsidiary of the Company. As of June 30, 2019, RADA Sensors Inc. is the holder of 75% of the interests in RADA Technologies LLC, also organized in January 2018, together with SAZE Technologies LLC. During July 2019, after balance sheet date, RADA Sensors Inc purchased the remaining 25% interest from SAZE Technologies LLC (see Note 14). The Company is organized and operates as one operating segment.

The Company operated a test and repair shop using its Automated Test Equipment ("ATE") products in Beijing, China, through its Chinese subsidiary, Beijing Huari Aircraft Components Maintenance and Services Co. Ltd. ("CACS"). During 2019, the Company  completed the sale of CACS, see Note 1b.


b.
Discontinued operations:

In December 2016, the Company committed to a plan to sell its test and repair services activity (provided through CACS, the Company's 80% owned subsidiary) in order to focus on its core business. In October 2018, the Company entered into a transaction with the holder of the non-controlling interest and as a result, as of December 31, 2018, the Company owned 100% of CACS, which resulted in a $254 decrease in additional paid in capital.

In December 2018, the Company signed an agreement to sell its ownership interest in CACS for approximately $1,500 and as of December 31, 2018 the Company recorded a provision of $159 for the expected loss resulted from the sale, which was included in accrued expenses in the consolidated balance sheets as of December 31, 2018 and in the net loss from discontinued operations in the consolidated statements of operations for the year ended December 31, 2018.

In March 2019, the ownership was transferred to the buyer. In the period between December 31, 2018 and March 31, 2019, there was no material activity in CACS that impacted the financial statements. The net consideration of $845, which is currently held in a trust account in China, was recorded in other accounts receivable in the consolidated balance sheets as of June 30, 2019.


c.
Liquidity and Capital Resources:

Since incorporation, the Company has incurred an accumulated deficit of $78,010. As of June 30, 2019, the Company's cash position (cash and cash equivalents) totaled $14,949. Management believes that its cash and cash equivalents are sufficient for the Company to meet its obligations as they come due at least for a period of twelve months from the date of the consolidated financial statements.

9

RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL  STATEMENTS
U.S. dollars in thousands (except share data)

NOTE 2:-
UNAUDITED INTERIM FINANCIAL INFORMATION

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Article 10 of U.S. Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments except as otherwise discussed) considered necessary for a fair presentation have been included.

Operating results for the six month period ended June 30, 2019 are not  necessarily indicative of the results that may be expected for the year ending December 31, 2019.

NOTE 3:-
SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies followed in the preparation of these unaudited interim condensed consolidated financial statements are identical to those applied in the preparation of the latest annual financial statements of the Company as of December 31, 2018, set forth in the Company's Annual Report on Form 20-F as filed with the U.S. Securities and Exchange Commission on April 1, 2019, except as discussed below:


a.
Accounting for share-based compensation:

The Company accounts for share-based payment in accordance with ASC 718, "Compensation - Stock Compensation", which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's statement of operations.
 
10
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL  STATEMENTS
U.S. dollars in thousands (except share data)

NOTE 3:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The fair value for the Company's stock options granted to employees and directors was estimated using a Black-Scholes option-pricing model with the following weighted average assumptions:

   
Six months ended
June 30,
 
   
2019
   
2018
 
             
Dividend yield
   
0
%
   
0
%
Risk-free interest rate
   
2.44
%
   
2.60
%
Expected term (in years)
   
4.22
     
4.22
 
Volatility
   
66.69
%
   
77.03
%
Forfeiture rate
   
0
%
   
0
%

The dividend yield assumption is based on the Company's historical and expectation of future dividend payouts and may be subject to changes in the future.

The computation of expected volatility is based on realized historical share price volatility of the Company's share.

The risk-free interest rate assumption is the implied yield currently available on the U.S treasury yield zero-coupon issues with a remaining term equal to the expected life term of the Company's options.

The expected term of the options represents the period of time that the options are expected to be outstanding and is based on the simplified method, as allowed under Staff Accounting Bulletin No. 110, which is the mid point between the vesting date and the end of the contractual of the option.


b.
Recently issued and adopted accounting standards :

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, “Leases” ("ASC 842"), on the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for in a manner similar to the accounting under the prior guidance (ASC 840). The new standard requires lessors to account for leases using an approach that is substantially equivalent to ASC 840 guidance for sales-type leases, direct financing leases and operating leases. The new standard supersedes the previous leases standard, ASC 840, "Leases".

11

RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL  STATEMENTS
U.S. dollars in thousands (except share data)

NOTE 3:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company adopted the new standard as of January 1, 2019, using the modified retrospective approach. Consequently, prior period balances and disclosures have not been restated. The Company has elected to utilize the available package of practical expedients permitted under the transition guidance within the new standard which does not require it to reassess the prior conclusions about lease identification, lease classification and initial direct costs. As a result of the adoption of ASC 842, the Company included in its balance sheet operating right-of-use assets and operating lease liabilities of $2,032. The standard did not materially impact the Company's results of operations and cash flows. For additional information regarding the Company's accounting for leases, please refer to Note 4.

The Company elected the practical expedient to not separate lease and non-lease components for all its leases. This will result in the initial and subsequent measurement of the balances of the right-of-use asset and lease liability being greater than if the policy election was not applied.

Some leases include one or more options to renew. The exercise of lease renewal options is typically at the Company's sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our right of use assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluates the renewal options, and, when it is reasonably certain of exercise, it will include the renewal period in its lease term. New lease modifications result in remeasurement of the right of use asset and lease liability, which are not accounted as separate lease contract.

The right-of-use asset and lease liability are initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company's incremental borrowing rate based on the information available at the date of adoption in determining the present value of the lease payments. The Company's incremental borrowing rate is estimated to approximate the interest rate on similar terms and payments and in economic environments where the leased asset is located.

Some of the real estate leases contain variable lease payments, including payments based on an index or rate (CPI). Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease adoption. Additional payments based on the change in an index or rate are recorded as a period expense when incurred.

12
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL  STATEMENTS
U.S. dollars in thousands (except share data)

NOTE 3:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)


c.
Recently Issued Accounting Pronouncements Not Yet Adopted:

In January 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses on Financial Instruments”, which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available for sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available for sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective for interim and annual periods beginning after January 1, 2020, and early adoption is permitted. The Company is currently evaluating the potential effect of this standard on its consolidated financial statements.

NOTE 4:-      LEASES

The Company has various operating leases for office space and vehicles that expire through 2022. Its lease agreements do not contain any material residual value guarantees or material restrictive covenants. Below is a summary of the Company's operating right-of-use assets and operating lease liabilities as of June 30, 2019:

   
June 30, 2019
 
 
 
(Unaudited)
 
 Operating right-of-use assets
 
$
1,904
 
 
       
 Operating lease liabilities, current
   
882
 
 Operating lease liabilities long-term
   
1,022
 
Total operating lease liabilities
 
$
1,904
 

Minimum lease payments for the Company's right of use assets over the remaining lease periods as of June 30, 2019, are as follows:

13
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL  STATEMENTS
U.S. dollars in thousands (except share data)

NOTE 4:-    LEASES (Cont.)

   
June 30, 2019
 
 
 
(unaudited)
 
2019
 
$
463
 
2020
   
797
 
2021
   
604
 
2022
   
108
 
 
       
 Total undiscounted lease payments
 
$
1,972
 
 
       
 Less: Interest
   
(68
)
 
       
 Present value of lease liabilities
 
$
1,904
 

The weighted average remaining lease terms and discount rates for all of operating leases were as follows as of June 30, 2019:

   
June 30, 2019
 
   
(unaudited)
 
Remaining lease term and discount rate:
     
Weighted average remaining lease term (years)
   
3
 
Weighted average discount rate
   
2.41
%

In April 2019, a subsidiary of the Company entered into an agreement to lease offices in Germantown, Marylanr (U.S.). The lessor is currently preparing the property for use.. The lease is expected to commence in October 2019. In June 2019, the Company entered into a lease agreement of additional offices in Israel. The lease commenced in September 2019, after balance sheet date. The new agreements are not included in the lease liabilities and in the ROU assets.

Total rent expenses for the six months ended June 30, 2019 and 2018 were $574 and $523, respectively. Cash paid for lease expenses during the six months ended June 30, 2019 was $548.

14
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL  STATEMENTS
U.S. dollars in thousands (except share data)

NOTE 5:-
REVENUES

In accordance with ASC 606 "Revenue From Contracts With Customers", unbilled accounts receivable were reclassified as contract assets and advance payments and billings in excess of revenue were reclassified as contract liabilities as of June 30, 2019 and December 31, 2018, none of which resulted in a change to total current assets or total current liabilities.

The following table presents the significant changes in the advances from customers balance during the six months ended June 30, 2019:

   
Six months ended June 30, 2019
 
   
Unaudited
 
Balance, beginning of the period
 
$
727
 
New performance obligations
   
224
 
Reclassification to revenue as a result of satisfying performance obligation
   
(84
)
Balance, end of the period
 
$
867
 

The following table summarizes our contract assets and liabilities balances:

   
2019
 
   
Unaudited
 
       
Contract assets at January 1, 2019
 
$
899
 
Contract assets at June 30, 2019
 
$
1,396
 
         
Change in contract assets - increase
 
$
497
 
         
Contract liabilities at January 1, 2019
 
$
366
 
Contract liabilities at June 30, 2019
 
$
554
 
         
Change in contract liabilities - increase
 
$
188
 
         
Net change
 
$
309
 

For the six months ended June 30, 2019, 59% of the amount that was previously included in the beginning balance of contract liabilities was recognized.

The Company’s unsatisfied performance obligations as of June 30, 2019 and the estimated revenue expected to be recognized in the future related to long-term fixed price contracts amounts to $1,042. The Company expect to recognize approximately 80% of this amount as revenues during the next 12 months and the rest thereafter.

For information regarding disaggregated revenues, please refer to Note 13.

15
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL  STATEMENTS
U.S. dollars in thousands (except share data)

NOTE 6:-
INVENTORIES

   
June 30,
   
December 31,
 
   
2019
   
2018
 
   
Unaudited
       
             
Raw materials and components
 
$
8,314
   
$
5,605
 
Work in progress, net
   
4,614
     
3,558
 
Finished goods
   
3,137
     
2,081
 
                 
   
$
16,065
   
$
11,244
 

NOTE 7:-       PROPERTY, PLANT AND EQUIPMENT, NET

   
June 30,
   
December 31,
 
   
2019
   
2018
 
Cost:
 
Unaudited
       
             
Factory building
 
$
2,081
   
$
2,081
 
Machinery and equipment *)
   
11,478
     
10,723
 
Office furniture and equipment
   
857
     
838
 
Leasehold improvements
   
776
     
455
 
                 
     
15,192
     
14,097
 
Accumulated depreciation:
               
                 
Factory building
   
2,019
     
2,006
 
Machinery and equipment
   
7,447
     
6,948
 
Office furniture and equipment
   
362
     
345
 
Leasehold improvements
   
176
     
166
 
                 
     
10,004
     
9,465
 
                 
Depreciated cost
 
$
5,188
   
$
4,632
 


*)
As of June 30, 2019 and December 31, 2018, $224 and $1,044 relate to construction-in-process of production infrastructure, respectively.

Depreciation expense amounted to $539 and $227 for the six months period ended June 30, 2019 and 2018, respectively. During the six months period ended June 30, 2018, the Company recorded $387 as impairment loss.

16
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL  STATEMENTS
U.S. dollars in thousands (except share data)

NOTE 8:-
FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company measures its financial instruments at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:


Level 1 -
Valuations based on quoted prices in active markets for identical assets that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.


Level 2 -
Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.


Level 3 -
Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The availability of observable inputs can vary from investment to investment and is affected by a wide variety of factors, including, for example, the type of investment, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment and the investments are categorized as Level 3.

The carrying amount of cash and cash equivalents, restricted deposits, trade receivables, other accounts receivable, bank credit and current maturities of long term loans, trade payables and other accounts payable approximate their fair value due to the short-term maturity of these instruments.

Foreign currency derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.

The following table presents the Company's liabilities measured at fair value on a recurring basis at June 30, 2019 and 2018:

   
June 30, 2019
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
                       
Other accounts receivable and prepaid expenses:
                       
Foreign currencies derivatives
 
$
-
   
$
14
   
$
-
   
$
14
 
                                 
Total
 
$
-
   
$
14
   
$
-
   
$
14
 

   
June 30, 2018
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial liabilities:
                       
Other accounts payable and accrued expenses:
                       
Foreign currencies derivatives
 
$
-
   
$
(57
)
 
$
-
   
$
(57
)
                                 
Total
 
$
-
   
$
(57
)
 
$
-
   
$
(57
)

17
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL  STATEMENTS
U.S. dollars in thousands (except share data)

NOTE 9:-
COMMITMENTS AND CONTINGENT LIABILITIES


a.
The Company's research and development efforts have been partially financed through royalty-bearing programs sponsored by the Israel Innovation Authority ("IIA"). In return for the IIA's participation, the Company is committed to pay royalties at a rate ranging from 3% to 5% of sales of the products whose research was supported by grants received from the IIA, up to 100% of the amount of such participation received linked to the U.S. dollar. The obligation to pay these royalties is contingent on actual sales of the products  and in the absence of such sales, no payment is required. As of June 30, 2019, the Company received total grants from the IIA in the amount of $5,543.

The total amount of royalties charged to operations for the period ended June 30, 2019 and 2018 was approximately $0 and $44, respectively. As of June 30, 2019, the Company's contingent liability for royalties, net of royalties paid or accrued, totaled approximately $347.


b.
The Company provides bank guarantees to some of its customers and others in the ordinary course of business. The guarantees which are provided to customers are to secure advances received at the commencement of a project or to secure performance of operational milestones. The total amount of bank guarantees provided to customers and others as of June 30, 2019, is approximately $380.

NOTE 10:-
SHAREHOLDERS' EQUITY


a.
Share capital:

Ordinary Shares confer upon their holders voting rights, the right to receive cash dividends and the right to share in excess assets upon liquidation of the Company.

In June 2018, the Company's shareholders approved an increase of the Company's authorized share capital by NIS 1,875,000 and as a result the authorized share capital is equal to NIS 3,000,000 divided into 100,000,000 Ordinary Shares, par value NIS 0.03 each.

In November 2018, the Company entered into agreements with several Israeli institutional investors to purchase 4,545,454 Ordinary shares at price per share of $2.75, for a total consideration of $12,500. Offering costs amounted to $248.

In January 2019, the Company’s shareholders approved the sale of 545,454 Ordinary Shares to the controlling shareholder at a price per share of $2.75, approximately $1,500 in the aggregate.


b.
Stock option plans:

In April 2015, the Company's Board of Directors adopted the "2015 Share Option Plan" (the "Plan"), which authorized the grant of options to purchase up to an aggregate of 1,500,000 Ordinary Shares to officers, directors, consultants and key employees of the Company and its subsidiaries. Options granted under the Plan expire within a maximum of ten years from adoption of the plan.

18

RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL  STATEMENTS
U.S. dollars in thousands (except share data)

NOTE 10:-
SHAREHOLDERS' EQUITY (Cont.)

In April 2018, the Company granted options to its CEO to purchase a total of 500,000 Ordinary Shares at an exercise price of $2.32 per share. The options will vest as follows: 25% of the options granted will vest in April 2019; and 75% of the options will vest in twelve equal quarterly installments of 6.25% each until April 2022. These options will be exercisable for 48 months following the date of vesting.

On June 7, 2018, the Company’s shareholders approved the U.S. Taxpayers Appendix to its 2015 Share Option Plan and to reserve 1,000,000 of our Ordinary Shares for issuance thereunder. On August 15, 2018, the Company’s Board of Directors approved an increase in the framework of the Plan to 3,750,000 options.
 
On August 15 and 23, 2018, the Company granted options to its officers and employees to purchase a total of 732,500 and 35,000 Ordinary Shares, respectively, at exercise prices of $2.93 and $2.81 per share, respectively. The options will vest as follows: 25% will vest in August 2019; and 75% will vest in twelve equal quarterly installments of 6.25% each until August 2022. These options will be exercisable for 48 months following the date of vesting.
 
In November 2018, the Company granted options to one of its officers to purchase a total of 217,500 Ordinary Shares at an exercise price of $2.81 per share. The options will vest as follows: 25% will vest in November 2019; and 75% will vest in twelve equal quarterly installments of 6.25% each until November 2022. These options will be exercisable for 48 months following the date of vesting.

In January 2019, the Company granted options to its employees to purchase a total of 60,000 Ordinary Shares at an exercise price range $2.76 - $2.85 per share. The options will vest as follows: 25% will vest in January 2020; and 75% will vest in twelve equal quarterly installments of 6.25% each until January 2023. These options will be exercisable for 48 months following the date of vesting.

In March  2019, the Company granted options to its officers and employees to purchase a total of 75,000 Ordinary Shares at an exercise price of $2.73 per share. The options will vest as follows: 25% will vest in March 2020; and 75% will vest in twelve equal quarterly installments of 6.25% each until March 2023. These options will be exercisable for 48 months following the date of vesting.



19
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL  STATEMENTS
U.S. dollars in thousands (except share data)

NOTE 10:-
SHAREHOLDERS' EQUITY (Cont.)

In May 2019, the Company granted options to one of its employee to purchase a total of 7,500 Ordinary Shares at an exercise price of $3.11 per share. The options will vest as follows: 25% will vest in May 2019; and 75% will vest in twelve equal quarterly installments of 6.25% each until May 2023. These options will be exercisable for 48 months following the date of vesting.

As of June 30, 2019, options to purchase 191,250 Ordinary Shares are available for future grant under the Plan.

A summary of the Company’s activity for options granted to employees and directors under the Plan is as follows:

   
Six months ended
June 30, 2019
 
   
Unaudited
 
   
Number of options
   
Weighted average exercise price
   
Weighted average remaining contractual term
   
Aggregate Intrinsic Value Price
 
                         
 Outstanding at the beginning of the period
   
3,229,375
   
$
2.25
     
8.82
   
$
1,617
 
Granted
   
142,500
     
2.79
     
-
     
-
 
Exercised
   
(8,750
)
   
1.26
     
-
     
-
 
Canceled
   
(47,500
)
   
2.93
     
-
     
-
 
                                 
Outstanding at the end of the period
   
3,315,625
   
$
2.32
     
8.37
   
$
3,226
 
                                 
Exercisable
   
1,029,219
   
$
1.63
     
7.62
   
$
1,712
 

Intrinsic value of exercisable options (the difference between the closing share price of the Company’s Ordinary Shares on the last trading day in the period and the exercise price, multiplied by the number of in-the-money options) represents the amount that would have been received by the employees and directors option holders had all option holders exercised their options on June 30, 2019. This amount changes based on the fair market value of the Company’s Ordinary share.

As of June 30, 2019, unamortized compensation expenses related to employees and directors stock options to be recognized over an average time of approximately 4 years is approximately $2,954.

20
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL  STATEMENTS
U.S. dollars in thousands (except share data)

NOTE 10:-     SHAREHOLDERS' EQUITY (Cont.)

During the six months period ended June 30, 2019, the Company recognized compensation expenses related to employees and service providers stock option in the amount of $558, as follows:

   
Six months
ended June 30,
 
   
2019
   
2018
 
   
Unaudited
 
             
Cost of revenues
 
$
76
   
$
18*
)
Research and development
   
115
     
55*
)
Marketing and selling
   
20
     
94
 
General and administrative
   
347
     
233
 
   
$
558
   
$
400
 

*) Reclassified


c.
Warrants:

On May 18, 2016, the Company issued warrants to an investor to purchase: (i) 4,255,319 Ordinary Shares at an exercise price per share of $0.47 (having an aggregate exercise price of $2,000), exercisable for a period of 24 months following the date of the investor’s initial investment and (ii) 3,636,363 Ordinary Shares at an exercise price per share of $0.55 (having an aggregate exercise price of $2,000), exercisable for a period of 48 months following the date of the initial investment. During 2016, the investor exercised warrants to purchase 2,659,575 Ordinary Shares at an exercise price per share of $0.47 for an aggregate total consideration of $1,250. During 2017, the investor exercised warrants to purchase 1,595,744 Ordinary Shares at an exercise price per share of $0.47 for an aggregate total consideration of $750, and warrants to purchase 2,181,818 Ordinary Shares at an exercise price per share of $0.55 for an aggregate total consideration of $1,200. In January 2018, the investor exercised warrants to purchase 1,454,545 Ordinary Shares at an exercise price per share of $0.55 in consideration of $800.

As of June 30, 2019, no warrants were Outstanding.
 
21
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL  STATEMENTS
U.S. dollars in thousands (except share data)
 
NOTE 11:-
FINANCIAL EXPENSES, NET

   
Six months ended
June 30,   
 
   
2019
   
2018
 
   
Unaudited
 
Income:
           
             
Foreign currency exchange differences
 
$
79
   
$
28
 
Interest on cash equivalents and restricted deposits
   
259
     
83
 
                 
     
338
     
111
 
Expenses:
               
                 
Bank commissions and others
   
49
     
29
 
Foreign currency exchange differences
   
246
     
78
 
Interest on loans from banks and other credit balances
   
-
     
1
 
                 
     
(295
)
   
(108
)
Total financial income, net
 
$
43
    $ 3
 

NOTE 12:-
RELATED PARTY BALANCE AND TRANSACTIONS

In January 2017, the Company's shareholders approved that in addition to the directors' fees to be paid to all of the Company's directors commencing as of January 1, 2017, the Company will pay the Company’s controlling shareholder approximately $4.6 (NIS 17.5) for time devoted to the Company by the Executive Chairman of the Board of Directors, who is also a co-owner of the Company’s controlling shareholder. In 2017 the Company's consolidated audited financial statements reflected net income (before taxes), which required the monthly payments to increase to approximately $9 (NIS 35,000) going forward.

In addition, the Company's shareholders approved a new engagement letter with a director of the Company, according to which such director will be entitled to receive a commission of 2.5% of the net revenues received by the Company with respect to specific transactions introduced to the Company by him, subject to a detailed agreement to be entered into by him and the Company and the prior approval of any such transactions by the Company and the Audit Committee. As of June 30, 2019 no revenues were generated as a result of this agreement, therefore no commission was paid.

In addition, the Company's shareholders approved a new engagement letter with a director of the Company according to which such director will be entitled to receive monthly retainer fees for his consulting services . As of June 30, 2019, a total of  $17 had been paid for his services.


22
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL  STATEMENTS
U.S. dollars in thousands (except share data)

NOTE 12:-
RELATED PARTY BALANCE AND TRANSACTIONS (Cont.)

Balances with related parties:

   
June 30,
   
December 31,
 
   
2019
   
2018
 
             
Accrued expenses
 
$
48
   
$
43
 

Related parties’ expenses:

   
Six months ended
June 30,
 
   
2019
   
2018
 
   
Unaudited
 
             
Directors and management fees
 
$
94
   
$
92
 

NOTE 13:-
MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION


a.
In accordance with Statement of ASC 280, "Segment Reporting", the Company is organized and operates as one business segment, which develops, manufactures and sells tactical land radars for ground forces and border protection and avionics systems (including inertial navigation systems) for fighter aircraft and UAVs (see also Note 1a).


b.
Revenues by geographic areas:

Revenues are attributed to geographic area based on the location of the end customers as follows:

   
Six months ended
 
   
June 30,
 
   
2019
   
2018
 
   
Unaudited
 
             
Israel
 
$
6,184
   
$
3,593
 
Asia
   
1,838
     
2,540
 
North America
   
7,876
     
5,528
 
Latin America
   
759
     
214
 
Europe
   
2,057
     
721
 
                 
Total
 
$
18,714
   
$
12,596
 


23
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL  STATEMENTS
U.S. dollars in thousands (except share data)

NOTE 13:-
MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION (Cont.)


c.
Major customers:

Revenues from single customers that exceed 10% of the total revenues in the reported years as a percentage of total revenues are as follows:

   
Six months ended
 
   
June 30,
 
   
2019
   
2018
 
   
Unaudited
 
   
%
 
             
Customer A
   
13
     
11
 
Customer B
   
11
     
7
 
Customer C
   
7
     
20
 
Customer D
   
15
     
3
 
Customer E
   
7
     
10
 
Customer F
    0       11  

NOTE 14:-
SUBSEQUENT EVENTS

During July 2019,  RADA Sensors Inc purchased the remaining 25% interest in RADA Technologies LLC from SAZETechnologies LLC for total consideration of $500.


24
Exhibit 99.2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OPERATIONS AND FINANCIAL
CONDITION
 
The discussion and analysis which follows contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to future events and financial results. These include statements regarding our earnings, projected growth and forecasts, and similar matters which are not historical facts. We remind shareholders that forward-looking statements are merely predictions and therefore are inherently subject to uncertainties and other factors which could cause the actual future events or results to differ materially from those described in the forward-looking statements.
 
The interim condensed consolidated financial statements appearing elsewhere in this report should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 20-F for the year ended December 31, 2018. The results of operations for the six months ended June 30, 2019 are not necessarily indicative of the operating results for the full fiscal year.

Overview
 
Our activity is primarily focused on the defense electronics market. Our aim is to provide not only state-of-the-art products, but to also provide comprehensive solutions for one or more systems. Our current product lines are:

 
•
Tactical radars for maneuver forces and border protection systems (land based); and
 
 
•
Military avionics (data/video recorders, core avionics and inertial navigation systems for aircraft and UAVs).

We were incorporated under the laws of the State of Israel on December 8, 1970.  We are a public limited liability company under the Israeli Companies Law 1999-5759, or the Israeli Companies Law, and operate under this law and associated legislation.   

Recent Financings

In November 2018, the Company entered into agreements with several Israeli institutional investors to purchase 4,545,454 Ordinary shares at price per share of $2.75, for a total consideration of $12.5 million. Offering costs amounted to $248,000.

In January 2019, the Company’s shareholders approved the sale of 545,454 Ordinary Shares to the Company’s controlling shareholder (“DBSI”) at a price per share of $2.75 for a total consideration of $1.5 million.

Currently, DBSI is the beneficial owner of 6,817,928 Ordinary shares, constituting 17.8% of the issued and outstanding Ordinary shares.

General
 
Our interim condensed consolidated financial statements, appearing in this report, are prepared in dollars and in accordance with U.S. GAAP.  Transactions and balances originally denominated in dollars are presented at their original amounts.  Transactions and balances in other currencies are remeasured into dollars in accordance with the principles set forth in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC 830.  The majority of our sales are made outside of Israel and a substantial part of them are in dollars.  In addition, a substantial portion of our costs are incurred in dollars.  Since the dollar is the primary currency of the economic environment in which we operate, the dollar is our functional and reporting currency and, accordingly, monetary accounts maintained in currencies other than the dollar are remeasured using the foreign exchange rate at the balance sheet date.  Operational accounts and non-monetary balance sheet accounts are measured and recorded at the exchange rate in effect at the date of the transaction.  All monetary balance sheet accounts have been remeasured using the exchange rates in effect at the balance sheet date. Statement of operations amounts have been remeasured using the average exchange rate for the period.  The financial statements of our foreign subsidiary, whose functional currency is not the dollar, have been translated into dollars.  All balance sheet amounts have been translated using the exchange rates in effect at balance sheet date.  Statement of operation amounts have been translated using the average exchange rate prevailing during the year.  Such translation adjustments are reported as a component of accumulated other comprehensive loss in shareholders' equity.
Discussion of Critical Accounting Policies and Estimations
 
Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the notes to our consolidated financial statements. These policies have been consistently applied in all material respects. While the estimates and judgments associated with the application of these policies may be affected by different assumptions or conditions, we believe the estimates and judgments associated with the reported amounts are appropriate under the circumstances. We believe the following accounting policies are the most critical in fully understanding and evaluating our financial condition and results of our operations under U.S. GAAP.
 
Revenue Recognition. We account for revenue recognition when (or as) it satisfies performance obligations by transferring promised goods or services to its customers in an amount that reflects the consideration the Company expects to receive. In order to achieve that core principle, we apply the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.

The Company generally satisfies performance obligations at a point in time, once the customer has obtained the legal title to the items purchased or service provided. Revenues from long-term and short-term fixed price contracts are usually recognized over time based on the cost-to-cost input method that best depicts the transfer of control over the performance obligation to the customer. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.

Impairment of Long-Lived Assets. We are required to assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We assess the impairment of our assets based on a number of factors, including any significant changes in the manner of our use of the respective assets or the strategy of our overall business and significant negative industry or economic trends. Upon determination that the carrying value of a long-lived asset may not be recoverable, based upon a comparison of expected undiscounted future cash flows to the carrying amount of the asset, an impairment charge is recorded in the amount of the carrying value of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. As of December 31, 2018 and 2017, no impairment losses have been identified. 

Accounting for Income Taxes. On January 1, 2007, we adopted FASB ASC 740-10 “Income Taxes,” which contains a twostep approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740-10. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement ASC 740-10. We provided a valuation allowance in respect to the deferred tax assets resulting from operating loss carryforwards and other temporary differences. Our management currently believes that since our company has a history of losses, it is more likely than not that the deferred tax regarding the loss carryforwards and other temporary differences will not be realized in the foreseeable future.

Inventory Valuation. The majority of our inventory consists of work in progress, raw materials and components. Inventories are valued at the lower of cost or market. Cost of finished goods is determined on the basis of direct manufacturing costs plus allocable indirect costs representing allocable operating overhead expenses and manufacturing costs. Raw material is valued using the “FIFO” method. We assess the valuation of our inventory on a quarterly basis and periodically write down the value for different finished goods and raw material items based on their potential utilization. If we consider specific inventory to be damaged, we write such inventory down to zero. Inventory write-offs are provided to cover risks arising from slow-moving items, discontinued products, and excess inventories. The process for evaluating these write-offs often requires us to make subjective judgments and estimates concerning the future utilization of the inventory items. Inventory write-offs were $39,000, $122,000 and $144,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
Allowance for Doubtful Accounts. Our trade receivables are derived from sales to customers all over the world. We perform ongoing credit evaluations of our customers. In certain circumstances, we may require letters of credit or prepayments. We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments that we have determined to be doubtful of collection. We determine the adequacy of this allowance by regularly reviewing our accounts receivable and evaluating individual customers’ receivables, considering customers’ financial condition, credit history and other current economic conditions. If a customer’s financial condition were to deteriorate which might impact its ability to make payment, then additional allowances may be required. Provisions for doubtful accounts are recorded in general and administrative expenses. Our allowance for doubtful accounts was $2,000, $14,000, $14,000 for six months ended June 30, 2019 and the years ended December 31, 2018 and 2017, respectively.

Stock-based Compensation. We account for stock-based compensation in accordance with the provisions of ASC 718, “Compensation - Stock Compensation.” Under the fair value recognition provisions of ASC 718, stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. We estimate the fair value of stock options granted using the Black-Scholes-Merton option-pricing model. The fair value of an award is affected by our stock price on the date of grant and other assumptions, including the estimated volatility of our stock price over the term of the awards and the estimated period of time that we expect employees to hold their stock options.

Discontinued Operations. Under ASC 205, “Presentation of Financial Statements - Discontinued Operation” when a component of an entity, as defined in ASC 205, has been disposed of or is classified as held for sale, the results of its operations, including the gain or loss on its component are classified as discontinued operations and the assets and liabilities of such component are classified as assets and liabilities attributed to discontinued operations; that is, provided that the operations, assets and liabilities and cash flows of the component have been eliminated from the company’s consolidated operations and the company will have no significant continuing involvement in the operations of the component. Subsequent to our determination to sell our interest in CACS, CACS’ results are accounted as discontinued operation and appear in this annual report in a separate line item as “Discontinued Operations.” In December 2018, the Company signed an agreement to sell its ownership interest in CACS and in March 2019, the ownership was transferred to the buyer.

Recently Issued Accounting Standards
 
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, “Leases” ("ASC 842"), on the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for in a manner similar to the accounting under the prior guidance (ASC 840). The new standard requires lessors to account for leases using an approach that is substantially equivalent to ASC 840 guidance for sales-type leases, direct financing leases and operating leases. The new standard supersedes the previous leases standard, ASC 840, "Leases".
 
The Company adopted the new standard as of January 1, 2019, using the modified retrospective approach. Consequently, prior period balances and disclosures have not been restated. The Company has elected to utilize the available package of practical expedients permitted under the transition guidance within the new standard which does not require it to reassess the prior conclusions about lease identification, lease classification and initial direct costs. As a result of the adoption of ASC 842, the Company included in its balance sheet operating right-of-use assets and operating lease liabilities of $2 million. The standard did not materially impact the Company's results of operations and cash flows for the six months ended June 30, 2019.
Explanation of Key Income Statement Items
 
Revenues. Our revenues are mainly derived from sales of defense electronics and their supporting ground systems.
 
Cost of Revenues. Cost of revenues consists primarily of salaries, raw materials, subcontractor expenses, related
 
depreciation costs, inventories write-downs and overhead allocated to cost of revenues activities.
 
Research and Development Expenses, net. Research and development expenses consist primarily of salaries for research and development personnel, use of subcontractors and other costs incurred in the process of developing product prototypes.
 
Marketing and Selling Expenses. Marketing and selling expenses consist primarily of salaries for marketing and business development personnel, marketing activities, public relations, promotional materials, travel expenses, trade shows and exhibitions expenses, and success fees to business development consultants.
 
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related
 
expenses for executive, accounting, legal, administrative personnel, professional fees, provisions for doubtful accounts and other general corporate expenses.
 
Financial Expenses, Net. Financial expenses consist of interest and bank expenses, interest on convertible note and loans, amortization expenses of discount on convertible note, deferred charges and currency re-measurement losses. Financial income consists of interest on cash and cash equivalent balances and currency re-measurement gains. 
 
Results of Operations
 
Revenues.  Our revenues for the six months ended June 30, 2019 increased by $6.1 million, or 49%, to $18.7 million from $12.6 million for the six months ended June 30, 2018.

Cost of Revenues.  Cost of revenues increased by 50% to $12.0 million for the six months ended June 30, 2019 from $8.0 million for the six months ended June 30, 2018.  The increase in our cost of revenues was mainly attributable to the increase in revenues.

Gross Profit.  Our gross profit increased to $6.7 million in the six months ended June 30, 2019 from $4.6 million in the six months ended June 30, 2018.  The increase in our gross profit in 2019 was mainly attributable to the increase in revenues.
 
Our operating expenses were $8.1 million in the first six months of 2019 and $4.3 million in the first six months of 2018.

Financial Expenses, Net.  We had net financial income of $43,000 in first six months of 2019 compared to net financial income of $3,000 in the first six months of 2018.

Net Income/Loss. Our net loss in first six months of 2019 was $1.0 million compared with net income of $0.3 million in the first six months of 2018.
Liquidity and Capital Resources
 
As of June 30, 2019, our cash position (cash and cash equivalents) totaled $15.3 million compared with  $21.2 million in cash and cash equivalents as of December 31, 2018.

Net cash used in operating activities for the first six months of 2019 was $6.8 million. This was primarily due to the increase in inventory. For the first six months of 2018, net cash provided by operating activities was $2.9 million.
 
Net cash used by investing activities during the first six months of 2019 was $652,000. This was primarily due to the purchase of property, plant and equipment. Net cash used by investing activities during the first six months of 2018 was $527,000.
 
Net cash provided by financing activities during the first six months of 2019 was $1.5 million, reflecting proceeds received in this period from shares purchased by DBSI. During the first six months of 2018  $800,000 was  provided by financing activities.

Corporate Tax Rate
 
Israeli companies were generally subject to corporate tax at a rate of 23% in 2018 and 2019.

Impact of Currency Fluctuation and of Inflation
 
A significant portion of the cost of our Israeli operations, primarily personnel and facility-related, is incurred in NIS.  Therefore, our NIS related costs, as expressed in dollars, are influenced by the exchange rate between the dollar and the NIS.  In addition, if the rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to the dollar, or if the timing of such devaluations were to lag considerably behind inflation, our cost as expressed in dollars may increase.  NIS linked balance sheet items, may also create foreign exchange gains or losses, depending upon the relative dollar values of the NIS at the beginning and end of the reporting period, affecting our net income and earnings per share.  Although we may use hedging techniques, we may not be able to eliminate the effects of currency fluctuations.  Therefore, exchange rate fluctuations could have a material adverse impact on our operating results and share price.