I have identified myself here. You can verify who I am on the internet. My website is my law firm, of which I am the owner, lawrencefredella.com. I am a attorney in New York and have been practicing law for about 20 years now. I graduated from St. John's School of Law in 1994. I went to work immediately at the Kings County D.A.'s Office.
I am not an expert in the field of the stock market, but I can see a deliberate manipulation of a stock, like ARTX, by a short seller simply, done simply for his own financial gain. I write this article to rebut his findings.
I own shares of ARTX. I am long with this company because it is solid. I took a huge hit when this article came out hurting ARTX. So my disclaimer is just that. I want the company to do well, of course. This is not only for my own financial gain (well actually to get back what was unfairly taken from all stockholders). I do not know the actual or exact value the stock price should be. I
Based upon the companies financials that the stock is actually worth significantly more than $3.54 per share, where it sits today. Using simple, basic math below you will see that ARTX is worth approximately, at a minimum, $6.98 per share.
I base my conclusions herein on facts that were totally ignored by short seller machine.
Let us begin by discussing short selling a stock. When I first learned of this practice I was shocked and could not believe that this was legal. How could the SEC allow this practice to continue I asked myself. I looked at various foreign nations (France, Italy, Belgium, and Spain) that have outlawed short selling because it was destroying legitimate companies. The concept of short selling is completely foreign to anyone who does not delve in the stock market, and probably completely misunderstood by half the people who do operate in the market arena.
For some background, I found some disturbing articles on the big banks, short selling stock deliberately hurting the average joe investor; or related articles on short selling.
My background as a private stock investor really does not give me any expertise to write anything on the matter. However, I was a veteran prosecutor for more than 14 years. I also served as an Officer in the U.S. Army from 2002-2006. I was Honorably Discharged at the Rank of Captain. I have investigated and prosecuted hundreds of fraud cases, including various forms of theft and sophisticated welfare fraud, insurance fraud, and fake or forged check scheme cases. In the Army, I worked on various fiscal issues within the units I was assigned to, including contract issues with local Iraqis while I served a combat tour in Baghdad, Iraq.
I would argue here that short selling in and of itself should be illegal and unlawful. It is a tactic whereby anyone can sell stocks they do not actually possess. This is done at a higher price then when the stock falls the SHORT gets to buy it back at the lower price making a profit. I have reviewed and read all the arguments that short selling is good for evaluating the companies worth, keeping management in check, and curtailing elevated stock prices based on hype.
Yet, that is not what is truly happening in the market unfortunately. Shorts are profiting from inaccurate attacks on legitimate companies. Deliberately manipulating the market is ILLEGAL, but that is exactly what happened to ARTX this week. The SEC will do nothing about it unfortunately. It is not to say that the SEC does not care. They are overwhelmed with a massive market here.
The SEC did have concerns about the potential of short selling being inherently speculative. In its Amendments to Regulation SHO, dated February 26, 2010, for instance, the SEC reveals regulators' concerns: "We believe it is appropriate at this time to adopt a short sale-related circuit breaker because, when triggered, it will prevent short selling, including potentially manipulative or abusive short selling, from driving down further the price of a security that has already experienced a significant intra-day price decline, and will facilitate the ability of long sellers to sell first upon such a decline."
I can not think of any other "item" where someone can sell something they do not own or possess. Except when it is a fraud perpetrated on the buyer. One can only imagine how many times naked short selling occurs in this market.
So what happened Tuesday, April 22, 2014? In my humble opinion, based upon circumstantial and direct evidence, in order to manipulate the stock price of ARTX, this anonymous writer, Small Cap Machine, wrote an article crushing the company driving the price down. A close analysis of his article reveals several flaws.
He failed to acknowledge key facts in his article, thereby, seriously destroying his credibility in my humble opinion. Arotech information is listed below as background material.
"March 24, 2014 - Arotech Corporation (Nasdaq GM: ARTX), a provider of quality defense and security products for the military, law enforcement and homeland security markets, announced today that its Battery and Power Systems Division has received orders amounting to over $2 million for batteries and chargers. The orders were primarily from two leading defense companies and manufacturers of military equipment, which are existing customers of Arotech.
One of the orders was for the development and manufacture of Lithium-Ion based batteries as replacements for Lead-Acid batteries for use in military vehicles. Arotech's Lithium-Ion batteries together with its battery management technologies, provides a much higher energy density than similarly sized Lead-Acid batteries, with a high safety profile as well as low maintenance requirements."
I also wish to include the following: Arotech had these numbers for 2013: Full Year Results:
"Revenues for 2013 were $88.6 million, compared to $80.1 million for 2012, an increase of 11%.
Gross profit for 2013 was $24.1 million, or 27% of revenues, compared to $17.9 million, or 22% of revenues for 2012, a five point increase in the gross margin percentage. The reason for the increase was due to the product mix as well as a one-time event which lowered the cost of goods sold in one particular project." (ARTX financials)
I submit to you the reader that the value of the stock depends on how much the sellers want to sell and how much the buyers are willing to pay base on the company's prospectus.
For example, let us look at the company that this writer used to destroy ARTX, and that is TESLA. Tesla's price per share is $207.86 at the time of this article April 24, 2014. Tesla lists it's book value at $5.42. (Yahoo finance)
Tesla's 2013 assets are listed at $2,417 million. Liabilities are listed at $1,750 million, equals a ratio of 1.38.
ARTX assets are listed at $81 million; and liabilities listed at $33 million, that equals a ratio of 2.45. ARTX has a better Asset to liability ratio.
So a simple math equation indicates that ($207.86/5.42= 38.35x). That price is 38.35x the book value of $5.42.
Now take ARTX. If one were to apply the same simple math it reveals a very different number than the current value of the stock at $3.54.
ARTX book value listed on there December 31, 2013, 10K filing with the SEC is $2.00. 38.35 x 2.00 = $76.70. Thus, ARTX could be $76.70 right now according to that math. Yet ARTX is a smaller company so we need to find the proper ratio to determine its true value.
Tesla at $2417 million has 29.8 times greater assets than ARTX at $81 million. But Tesla also has 53.3 times greater liabilities (1750/33).
If we underestimate ARTX value using the 29.8 figure; indicating that Tesla is a bigger company, generating larger revenues with greater assets:
29.8 times ARTX. Tesla's price being $207.86 divided by 29.8 equals $6.98. Thus, at a minimum ARTX should be valued at $6.98 per share. (Note: because Tesla's liability ratio is much greater than ARTX, ARTX price value could actually be more than $6.98).
This rationale is more reliable than SHORT writer's evaluation of the stock being at $2.00.
Why compare ARTX to Tesla? Because both of them have the same prospectus TSLA(NYSE:EV), ARTX(lithium-ion battery and the ion flow battery).
As far as ARTX losing money in 2012, a quick review of Tesla will reveal an amazing fact. Tesla, lost a staggering $1,098,602,000 from 2006 to 2013.
Review this excerpt from Arotech's 10K filing with the SEC for the year 2103. (ARTX SEC Form 10K the annual report for 2013)
"Our Vehicle Simulation group focuses on the development and delivery of complete driving simulations for a wide range of vehicle types - such as trucks, automobiles, subway trains, buses, fire trucks, police cars, ambulances, airport ground vehicles, and military vehicles not including the U.S. Army's Virtual Clearance Training Suite (VCTS) program. In 2013, our Vehicle Simulations group accounted for approximately 9.5% of our Training and Simulation Division's revenues.
We believe that we have held a dominant market share in U.S. military wheeled vehicle operator driver training simulators since 1999 and that we are currently one of three significant participants in the U.S. municipal wheeled vehicle simulators market.
In the area of Military Operations, we believe we are a premier developer of validated, high fidelity analytical models and simulations of tactical air and land warfare systems for all branches of the Department of Defense and its related industrial contractors. (italics and emphasis added by author)
Our simulations are found in systems ranging from instrumented air combat and maneuver training ranges (such as Top Gun), full task training devices such as the F-18 Weapon Tactics Trainer, and in the on-board computer of many fighter jet aircraft. We supply on-board software to support weapon launch decisions for the F-15, F-16, F-18, F-22 and Joint Strike Fighter (JSF) fighter aircraft. Additionally, FAAC is a prime contractor in respect of the VCTS program. In 2013, our Military Operations group (including VCTS) accounted for 75.4% of our Training and Simulation Division's revenues. Our VCTS project accounted for 40.7% of our Training and Simulation Division's revenues.
Marketing and Customers
We have long term relationships, many of over ten years' duration, with the U.S. Air Force, U.S. Navy, U.S. Army, U.S. Marine Corps, Department of Homeland Security, and most major Department of Defense training and simulation prime contractors and related subcontractors. The quality of our customer relationships is illustrated by the multiple program contract awards we have earned from many of our customers."
As you can see Arotech is solid company with strong ties to the US military and Department of Defense. The companies financials are strong. Is ARTX worth what Tesla is worth? Probably not, but if Tesla is 29.8 times greater in value, priced at $207.86 then ARTX's true price should be $6.98 per share. Yes this is basic, I know, but it is extremely more reliable than SHORTs evaluation.
If I were in a courtroom, i would sum up by saying, ladies and gentlemen of the jury, I submit that beyond a reasonable doubt, ARTX has $81 million in assets and only $33 million in liabilities, lucrative contracts with US DOD and other law enforcement agencies, the value of ARTX stock is at a minimum of $6.98 per share.
Disclaimer: I have absolutely no training as a broker or financial advisor. You should not rely on anything I have written here as being accurate or as advice to you as to buying ARTX. I am long on ARTX because I believe in the company, but the market is unpredictable and she can slide up or down at any time and at a whim in my opinion. ARTX could tank or rise - I do not know. Do not base your investments on me. My article is a simple rebuttal to what I perceived was Small Cap Machine's unfair manipulation of the stock price trying to drive it down. When it appeared to me that it truly should be valued higher.
I AM LONG ON ARTX and I MAY SELL PORTIONS or ALL of MY SHARES AT ANY TIME. Please do not buy or sell ARTX due to my comments herein.
Disclosure: I am long ARTX.
Additional disclosure: I have not been paid for this article. I write it simply to rebut a short sellers article that hurt ARTX's price. I am a private investor and an attorney in NY. I may sell all or portions of my ARTX shares at any time in the future. DO NOT RELY ON MY ASSESSMMENT to invest in ARTX