UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
OR
OR
OR
Date of event requiring this shell company report
For the transition period from _________________ to _________________
COMMISSION FILE NUMBER 0-28542
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(Exact Name of Registrant as specified in its charter)
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Not Applicable
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(Translation of Registrant's name into English)
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The
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(Jurisdiction of incorporation or organization)
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(Address of principal executive offices)
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and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each Class: None
Name of each exchange on which registered: None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
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Common Stock, par value 0.45 Euro per share
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(Title of Class)
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Securities for which there is a reporting obligation pursuant to |
Section 15(d) of the Act:
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None |
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 37,433,333 .
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES ☐ ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
YES ☐ ☒
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.
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 ☒ ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, am accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ☐
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Accelerated filer ☐
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Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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International Financial Reporting Standards as issued Other ☐
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by the International Accounting Standards Board ☐
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If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ☐ No ☒
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
YES ☐ NO ☐
When used in this Form 20-F, the words “may”, “will”, “expect”, “anticipate”, “continue”, “estimates”, “project”, “intend” and similar expressions are intended to identify Forward-Looking Statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, operating results and financial position. Prospective investors are cautioned that any Forward-Looking Statements are not guarantees of future performance and are subject to risks and uncertainties and those actual results may differ materially from those included within the Forward-Looking Statements as a result of various factors.
2
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Table of Contents |
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Part I |
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| 11 | |||
| 21 | |||
| 35 | |||
| 39 | |||
| 40 | |||
| 41 | |||
| 42 | |||
| 57 | |||
| 57 | |||
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Part II |
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| 58 | |||
| 58 | |||
| 58 | |||
| 58 | |||
| 58 | |||
| 58 | |||
| 59 | |||
| 59 | |||
| 59 | |||
| 59 | |||
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Part III |
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| 60 | |||
| 60 | |||
| 60 | |||
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Exhibits |
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3
PART I
Item
1.
Identity of Directors, Senior Management and Advisers
Not Applicable
Item
2.
Offer Statistics and Expected Timetable
Not Applicable
Item
3.
Key information
Operations
ICTS International N.V.
was registered at the Department of Justice in Amstelveen, Netherlands on October 9, 1992. ICTS International N.V. and Subsidiaries (collectively
referred to as “ICTS” or “Company”) operate in three reportable segments: (a) corporate (b) aviation security
and other aviation services and (c) authentication technology. The corporate segment does not generate revenue and contains primarily
non-operational expenses. The airport security and other aviation services business provide security and other services to airlines and
airport authorities, predominantly in Europe and the United States of America. The authentication technology segment provides authentication
security services to financial and other institutions, predominantly in the United States of America.
Selected
Financial Data
Selected data set forth
below have been derived from the ICTS Consolidated Financial Statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America (“US GAAP”). The Selected Consolidated Financial Data set forth below should
be read in conjunction with Item 5 - Operating and Financial Review and Prospects, the ICTS Consolidated Financial Statements and the
Notes to those Consolidated Financial Statements included in Item 18 in this Annual Report.
The COVID-19 outbreak
has developed rapidly in 2020, with a significant number of infections. The Company is dependent mostly in Europe and the United States
of America for its business on the airline industry. ICTS is an employee intensive company. As a result of flight restrictions, cancelled
flights and quarantine, many employees had to be laid off and / or ordered to stay home, all of which has affected the Company’s
2021 and 2020 cash flows. There have been number of Government Assistance programs and the Company has applied to those that are applicable
to its business. In 2021 and 2020, the United States of America government approved assistance of $15.9 million and $13.7 million for
the Company’s American subsidiary of which $16.9 million and $12.7 million were recognized as reduction of labor expenses for the
years ended December 31, 2021 and 2020, respectively. In the Netherlands, the Dutch government approved during 2021 and 2020 assistance
of €18.1 million and €17.6 million ($20.6 million and $21.6 million as of December 31, 2021 and 2020, respectively) for the
Company’s Dutch subsidiaries and additional assistance up to €4.6 million was approved during 2022. The governmental support
of both countries is subject to certain terms and conditions. The Company’s business plan for the airport security and other aviation
services segment, depends on the COVID-19 developments in the foreseen future and the recovery of the airline industry. The Company does
not expect those measures to be renewed or extended.
In July 2019, AU10TIX
Technologies B.V (together with its subsidiaries, “AU10TIX”, a subsidiary of ICTS issued preferred shares to an investor for
a subscription price of $60 million in cash representing 24% of the outstanding share capital of AU10TIX and 23.077% of the outstanding
share capital of AU10TIX on a fully diluted basis. AU10TIX will retain $20 million on the sale proceeds for general working capital purposes
and $40 million were transferred to its parent company, ICTS International N.V.
In July 2019, the Company
repaid $30 million to the entity related to the main shareholder who provided the Company loans as convertible notes.
In November 2019, AU10TIX
issued preferred shares to a new investor for a subscription price of $20 million in cash representing 7.401% of the outstanding share
capital of AU10TIX and 7.143% of the outstanding share capital of AU10TIX on a fully diluted basis.
On
June 28, 2021, TPG, Oak, GF GW LLC (“GF”) and AU10TIX, entered into a Sale and Purchase Agreement (the “SPA”),
pursuant to which Oak and GF purchased preferred shares in AU10TIX from TPG. In connection with the SPA, (i) such parties and ICTS
entered into an amended and restated shareholders agreement (the “SHA”) and an amended and restated registration rights agreement
(the “RRA”) and (ii) AU10TIX’s Articles of Association (the “Articles”) were amended by a deed of amendment.
Following the completion of the sales and purchases contemplated by the SPA: (i) ICTS owns 68.69% of the outstanding share capital of
AU10TIX in the form of Class B Ordinary Shares; (ii) Oak owns 12.87% of the outstanding share capital of AU10TIX in the form of New Series
A Preferred Shares; (iii) GF owned 10.93% of the outstanding share capital of AU10TIX in the form of New Series A Preferred Shares;
and (iv) TPG owns 7.51% of the outstanding share capital of AU10TIX in the form of New Series A Preferred Shares. In addition, AU10TIX
may issue up to 500,000 Class A Ordinary Shares under its existing employee stock option plan.
4
The following table summarizes certain balance
sheet data for the Company at December 31, 2021, 2020, 2019, 2018, and 2017:
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(U.S. dollars in Thousands) |
||||||||||||||||||||
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December 31, |
||||||||||||||||||||
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2021 |
2020 |
2019 |
2018 |
2017 |
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Cash and cash equivalents |
$ |
88,753 |
$ |
51,602 |
$ |
52,352 |
$ |
12,801 |
$ |
9,073 |
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Total current assets |
174,562 |
116,554 |
103,136 |
67,219 |
61,982 |
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Total assets from discontinued operations
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- |
- |
- |
- |
306 |
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Total assets |
195,880 |
140,388 |
123,447 |
75,087 |
71,853 |
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Total current liabilities |
60,887 |
59,334 |
75,509 |
75,058 |
59,197 |
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Total liabilities from discontinued operations |
- |
- |
- |
- |
41 |
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Total liabilities |
111,234 |
95,551 |
84,832 |
109,943 |
98,595 |
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Redeemable non-controlling interests
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90,478 |
75,322 |
74,300 |
- |
- |
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Shareholders' deficit |
$ |
5,832 |
$ |
30,485 |
$ |
35,685 |
$ |
34,856 |
$ |
26,742 |
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5
The following table summarizes
certain statement of operations data for the Company for the years ended December 31, 2021, 2020, 2019, 2018, and 2017:
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U.S. Dollars in Thousands Year ended December 31, |
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2021 |
2020 |
2019 |
2018 |
2017 |
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Revenue
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$ |
324,934 |
$ |
248,419 |
$ |
333,307 |
$ |
345,221 |
$ |
297,682 |
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Cost of revenue
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209,771 |
196,569 |
290,461 |
311,994 |
254,728 |
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GROSS PROFIT
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115,163 |
51,850 |
42,846 |
33,227 |
42,954 |
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Operating expenses: |
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Research and development
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12,114 |
6,541 |
5,060 |
3,657 |
2,683 |
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Selling, general and administrative
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50,882 |
37,239 |
33,063 |
34,924 |
26,201 |
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Goodwill impairment
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139 |
- |
- |
1,563 |
- |
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Total operating expenses
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63,135 |
43,780 |
38,123 |
40,144 |
28,884 |
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OPERATING INCOME (LOSS)
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52,028 |
8,070 |
4,723 |
(6,917 |
) |
14,070 |
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Equity Income (loss) from investment in affiliate |
(983 |
) |
(790 |
) |
91 |
124 |
- |
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Other expenses, net
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537 |
1,288 |
10,518 |
3,586 |
6,172 |
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INCOME (LOSS) BEFORE INCOME TAX EXPENSES |
50,508 |
5,992 |
(5,704 |
) |
(10,379 |
) |
7,898 |
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Income tax expenses
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9,220 |
590 |
1,549 |
685 |
2,033 |
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INCOME (LOSS) FROM CONTINUING OPERATIONS |
41,288 |
5,402 |
(7,253 |
) |
(11,064 |
) |
5,865 |
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Loss from discontinued operations
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- |
- |
- |
289 |
95 |
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NET INCOME (LOSS)
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$ |
41,288 |
$ |
5,402 |
$ |
(7,253 |
) |
$ |
(11,353 |
) |
$ |
5,770 |
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Net income (loss) attributable to non-controlling interests
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6,481 |
999 |
789 |
(123 |
) |
(50 |
) | |||||||||||||
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NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V.
|
$ |
34,807 |
$ |
4,403 |
$ |
(8,042 |
) |
$ |
(11,230 |
) |
$ |
5,820 |
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BASIC NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V.PER
SHARE |
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Income (loss) from continuing operations |
$ |
0.66 |
$ |
0.12 |
$ |
(0.26 |
) |
$ |
(0.47 |
) |
$ |
(0.28 |
) | |||||||
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Loss from discontinued operations
|
- |
- |
- |
(0.01 |
) |
- |
||||||||||||||
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Net income (loss)
|
$ |
0.66 |
$ |
0.12 |
$ |
(0.26 |
) |
$ |
(0.48 |
) |
$ |
(0.28 |
) | |||||||
|
Basic weighted average number of shares |
37,433,333 |
35,827,854 |
30,524,461 |
23,415,068 |
21,000,000 |
|||||||||||||||
|
DILUTED NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL
N.V. PER SHARE |
||||||||||||||||||||
|
Income (loss) from continuing operations |
$ |
0.61 |
$ |
0.11 |
$ |
(0.26 |
) |
$ |
(0.47 |
) |
$ |
(0.28 |
) | |||||||
|
Loss from discontinued operations
|
- |
- |
- |
(0.01 |
) |
- |
||||||||||||||
|
Net income (loss)
|
$ |
0.61 |
$ |
0.11 |
$ |
(0.26 |
) |
$ |
(0.48 |
) |
$ |
(0.28 |
) | |||||||
|
Diluted weighted average number of shares |
40,237,340 |
38,424,718 |
30,524,461 |
23,415,068 |
21,000,000 |
|||||||||||||||
6
Risk
Factors
You
should carefully consider the risks described below regarding the business and the ownership of our shares. If any of the risks are realized,
our business, financial condition or results of operations could be adversely affected, and the price of our common stock could decline
significantly.
COVID-19
In
March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, and any related
adverse public health developments, has adversely affected workforces, customers, economies, and financial markets globally, potentially
leading to an economic downturn. It has also disrupted the normal operations of many businesses, including the Company’s. It is
not possible for the Company to predict the duration and its effects on the future business or results of operations. Some governmental
authorities-imposed restrictions on non-essential activities, businesses suspended travel and popular leisure destinations temporarily
closed to visitors. These conditions have impacted the Company’s business operations and revenue, as seen with decrease in demand
of airport services among the airlines or airports as a result of decline in travel and reduced or cancelled flights, and adversely affect
the Company’s business. The Company expects the pandemic to continue having an impact on revenue volume during 2022; however, the
extent of the impact is uncertain and is largely dependent on the duration of the pandemic. As a result, the Company is taking actions
to identify additional sources of liquidity and reduce or defer costs thereby maximizing working capital and increasing financial flexibility.
These actions include the reduction of expenses by furloughing a significant portion of the Company’s workforce and matching the
hours worked to the current demand of airport services and the submission of an applications for financial assistance under the different
governments support plans to be used for the continuation of payment of employee wages, salaries and benefits.
Labor
Concerns
Several
of our subsidiaries operate in many different jurisdictions in Europe, the United States of America and Asia and are therefore subject
to the different labor laws of such jurisdictions. Any changes in such laws, as an example, the establishment or change of minimum wages,
could have an adverse effect on the business of the Company.
In
addition, some of our employees are covered by collective bargaining agreements with unions. Such collective agreement detail, inter
alia, financial and non-financial entitlements to our employees that effect our financial results. Relationship with unions, including
work stoppages or changes in work rules, could have an adverse impact on our financial results.
In
some jurisdictions and subject to legislation related to employees’ entitlements during sickness period, increase in employees’
sick rate could have an adverse impact on our financial results. Lack of manpower and/or employees’ turnover may lead to additional
costs, as an example, recruitment and training cost, and therefore, increase in employees’ turnover rate could have an adverse impact
on our financial results.
If
any of such changes and/or circumstances have a financial impact on the Company and the Company is not able to fully adjust its fees for
its services to accommodate such changes and/or circumstances, of which there is no assurance, there could be a material adverse effect
on our business.
Further,
escalating costs of providing employee benefits and other labor issues may lead to labor disputes and disruption of our business.
Potential
Liability Claims
From
time to time lawsuits have been commenced against the Company or its subsidiaries, usually claiming injury or damage to property. In addition,
labor related issues, as an example, employee dismissal, may lead to labor disputes. Most of these claims are covered by insurance. In
the event such claims are not covered by the insurance, there could be an adverse impact on the Company.
Our
Contracts with Airports or Airlines may be Cancelled or not Renewed
Our
revenues are primarily provided from services pursuant to contracts, which are cancellable on short notice at any time, with or without
cause. We cannot assure you that existing clients will decide not to terminate our contracts or fail to renew a contract. In some jurisdictions
and operations, contracts are subject to a tender detailing, inter alia, participation terms,
cap pricing and award criteria. In addition, consolidation in the airline industry could also result in a loss of customers. Any such
termination, failure to renew a contract with us and/or failure in tenders, could have a material adverse effect on our results of operations
and financial condition. If our relationships with our major customers are impaired, then there may be a material adverse effect on our
results of operations and financial condition. Our major customers include airports in Europe and major airlines servicing the United
States of America. The aviation industry might encounter difficulties and this may have a material adverse impact on our business.
7
Terrorism,
War or Risk of War
Our
business is affected by numerous factors outside of our control, such as terrorist attacks and acts of war. Future terrorist attacks against
the countries where the Company has a presence, rumors or threats of war, actual conflicts involving those countries or their allies,
or military or trade disruptions affecting customers may materially adversely affect operations. Our facilities, and equipment could be
direct targets or indirect casualties of terrorist attacks and acts of war. Strategic targets such as high-technology aviation security
assets, passenger terminals or aircrafts may be at greater risk of future terrorist attacks than other targets. It is possible that any,
or a combination, of these occurrences could have a material impact on the business of the Company, on cash flows, results of operations,
financial condition, business reputation, claims etc. In addition, insurance premiums for some or all of our current coverages could increase
dramatically, or certain coverages may not be available to us in the future.
Losses
from Operations
The
Company incurred net income (loss) of $41.3 million, $5.4 million and $(7.3) million in 2021, 2020 and 2019, respectively. The 2021 and
2020 profits include special grants provided by different governments as COVID-19 assistance to the company. The Company has a shareholders’
deficit of $5.8 million and $30.5 million as of December 31, 2021 and 2020, respectively. If we are unable to obtain new service contracts,
increase revenues, increase profitability and reduce the Company’s shareholders deficit, our financial condition and results of
operations might be affected and our share price may decline.
Loans
from Third Parties
Our
financing activities have consisted of loans from banks and other third parties. There is no assurance that those third parties will continue
providing loans to the Company and even if loans are made, there is no assurance that the terms will be favorable to the Company. In 2021
bank loans in the Netherlands and the United States of America expired and there is no assurance the Company will be able to obtain new
credit lines.
Key
Personnel
Our
success largely depends on the services of our senior management and executive personnel. The loss of the services of one or more of such
key personnel could have an adverse impact on our operations. Our success is also dependent upon our ability to hire and retain additional
qualified executive personnel. We cannot assure you that we will be able to attract, assimilate and retain personnel with the attributes
necessary to execute our strategy. We cannot assure you that one or more of our executives will not leave our employment and either work
for a competitor or otherwise compete with us.
Development
of New Technology
As
part of our technology business strategy, we develop technological solutions and systems for financial and other industries and seek other
revenue producing business and business opportunities. We cannot assure you that we will be able to develop new systems or develop systems
that are commercially viable. Our success in developing and marketing our systems will also depend on our ability to adapt to rapid technology
changes in the industry and to integrate such changes into our systems. We cannot assure you that we will be successful in our attempts
to change or implement our business strategy. We may not have the expertise to be successful in developing our business in areas that
are not related to the security industry. We compete in a highly competitive industry and our competitors may be more successful in developing
new technology and achieving market acceptance of their products.
Acquiring
or Investing in Other Businesses
From
time to time, the Company may seek to acquire or invest in other business, which may or may not be related to the business of the Company.
No assurance can be given that the Company will acquire or invest in any companies. If the Company decides to acquire or invest, no assurance
can be given that such acquisition or investment will be successful.
Cyber
Security Measures
We
rely on computer systems and information technology in our business and have established security programs for protection. We might be
the target of attempted cyber and other security threats and despite our security measures, our systems might be vulnerable to interruption
or damage from computer hackings, viruses, worms or other destructive or disruptive software, process breakdowns, denial of service attacks,
social engineering or other malicious activities or any combination of the foregoing. We must continuously monitor and develop our information
technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer
viruses and other events, that could have a security impact. Insider or employee cyber and security threats are increasingly a concern
for all companies, including ours. It is not possible to determine the cost to the Company in the event of a cyber security incident as
that will depend on the size and nature of the incident. For more information see item 5 – Operating and Financial Review and Prospects
in this 20F report for additional information on the 2022 cyber security incident.
8
Competition
Competition
in the aviation security and aviation related services industry as well as in the technology industry is intense. Many of our competitors
have greater financial, technical and marketing resources. Our competitors might develop and market alternative systems and technologies
that may have greater functionality or be more cost effective than the services we provide or the systems that we develop. If our competitors
develop such systems we may not be able to successfully market our systems. Even if we are able to develop systems with greater functionality,
which are more cost effective than those developed by our competitors, we may not be able to achieve market acceptance of our systems.
Operations
in International Environments Risk
The
Company is currently engaged in direct operations in numerous countries and is therefore subject to risks associated with international
operations (including economic and/or political instability, conflict and trade restrictions). Such risks can cause the Company to have
significant difficulties in connection with the sale or provision of its services in international markets and have a material impact
on the Company's consolidated financial position, results of operations and cash flows.
Governmental
Regulation
Industries
on which we operate, are subject to extensive governmental regulation, the impact of which is difficult to predict. The Aviation and Transportation
Security Act (the “Security Act”) has had a significant negative impact on our aviation security business in the USA. In addition,
our ability to successfully market new systems will be dependent upon government regulations over which we have no control. Any existing
or new regulation may cause us to incur increased expenses or impose substantial liability upon us. The likelihood of such new legislation
is difficult to predict.
Legislation
Designed to Protect Privacy Rights
From
time to time, personal identity databases and technologies utilizing such databases have been the focus of organizations and individuals
seeking to curtail or eliminate the use of personal identity information technologies on the grounds that personal information and these
technologies may be used to diminish personal privacy rights. In the event that such initiatives result in restrictive legislation, the
market for our products may be adversely affected. In addition, in the event that the Company fails as a result of legislation designed
to protect privacy rights, the market for our products may be adversely affected.
Licenses
for Operations
A
license to operate is required from the airport authority in the airports in which we currently operate. The loss of, or failure to obtain,
a license to operate in one or more of such airports could result in the loss of, or the inability to compete for, contracts in the airports
in which we have licenses.
Poor
Economic Conditions
Poor
economic conditions could adversely affect our business. Deterioration in the global economic environment may result in decreased demand
for our services. Weakening economic conditions could also affect our customers, which may result in redirection of their request for
our services.
Currency
Risk
A
substantial portion of our revenue is generated in foreign countries. We generally retain our income in local currency at the location
the funds are received. Since our financial statements are presented in United States dollars, any significant fluctuation in the currency
exchange rate between such currency and the United States dollar would affect our results of operations and financial condition.
Limitations
in Price Share
The
market price of our common stock may from time to time be significantly affected by a large number of factors, including, among others,
variations in our operating results, the depth and liquidity of the trading market for our shares, and differences between actual results
of operations and the results anticipated by investors and securities analysts. Many of the factors which affect the market price of our
common stock are outside of our control and may not even be directly related to us. The market price of our common stock may be volatile,
which may make it more difficult for you to resell your shares when you want at prices you find attractive.
9
Main
Shareholders
As
of May 1st, 2022, the MacPherson Trust, its beneficiaries and Mr. M.J. Atzmon, own or control together approximately 75.5% of our issued
and outstanding common stock (excluding conversion rights). As a result of such ownership and conversion rights, the MacPherson Trust
and its beneficiaries together with Mr. Atzmon are able to significantly influence and / or control all matters requiring shareholder
approval, including the election of directors and approval of significant corporate transactions. Such concentration may also have the
effect of delaying or preventing a change in control. Mr. Atzmon, the Chairman of the Supervisory Board, disclaims any benefit or interest
in the MacPherson Trust. Their interests could conflict with yours. In addition, significant sales of shares held by them could have a
negative effect on our stock price.
Dividends
We do not expect to
pay any cash dividends on our common stock in the foreseeable future.
The
Ability of Shareholders to Bring Action or Enforce Judgments Against the Company, the Managing Directors and the Supervisory Directors
may be Limited Since ICTS is a Foreign Company
The
ability of shareholders of ICTS (Shareholders) to bring actions against ICTS, the members of the management board of ICTS (Management
Board and its members Managing Directors) and the members of the supervisory board of ICTS (Supervisory Board and its members Supervisory
Directors) or to enforce liabilities predicated upon non-Dutch laws may be limited.
The
Company is a public company with limited liability (naamloze vennootschap met beperkte aansprakelijkheid) incorporated under the laws
of the Netherlands. The corporate affairs of ICTS are governed by the articles of association of ICTS (the Articles of Association) and
by the laws governing companies incorporated in the Netherlands. Significant number of ICTS’ assets and activities are located outside
the United States of America. In addition, Managing Directors and some of the Supervisory Directors are residents of countries other than
the United States of America.
The
United States of America and the Netherlands currently do not have a treaty providing for reciprocal recognition and enforcement of judgments,
other than arbitration awards, in civil and commercial matters. In addition, the countries of residence of the Managing Directors, the
Supervisory Directors and of the Company's employees may also not have a treaty providing for the reciprocal recognition and enforcement
of judgments. Consequently, a final judgment for payment given by a court in the United States of America, whether or not predicated solely
upon US securities laws, would not be enforceable in the Netherlands. Accordingly, a final judgment for payment rendered by a court in
the United States of America, whether or not predicated solely upon US securities laws, will not be recognized and enforced by the Dutch
courts. However, if a person has obtained a final and conclusive judgment for the payment of money rendered by a court in the United States
of America which is enforceable in the United States of America and files his claim with the competent Dutch court, the Dutch court will
generally give binding effect to such foreign judgment insofar as it finds that (i) the jurisdiction of the US court has been based on
a ground of jurisdiction that is generally acceptable according to international standards, (ii) the judgment by the US court was rendered
in legal proceedings that comply with the standards of the proper administration of justice that includes sufficient safeguards (behoorlijke
rechtspleging) and (iii) the judgment by the US court is not incompatible with a decision rendered between the same parties by a Dutch
court, or with a previous decision rendered between the same parties by a foreign court in a dispute that concerns the same subject and
is based on the same cause, provided that the previous decision qualifies for acknowledgement in the Netherlands and except to the extent
that the foreign judgment contravenes Dutch public policy (openbare orde). It is uncertain whether this practice extends to default judgments
as well. Dutch courts may deny the recognition and enforcement of punitive damages or other awards. Moreover, a Dutch court may reduce
the amount of damages granted by a US court and recognize damages only to the extent that they are necessary to compensate actual losses
or damages. Enforcement and recognition of judgments of US courts in the Netherlands are solely governed by the provisions of the Dutch
Civil Procedure Code (Wetboek van Burgerlijke Rechtsvordering).
ICTS
is a Dutch Public Limited Liability Company. The rights of the Shareholders may be Different from the Rights of Shareholders in Companies
Governed by the Laws of US Jurisdictions.
The
rights of Shareholders and the responsibilities of Managing Directors and Supervisory Directors may be different from the rights and obligations
of shareholders in companies governed by the laws of US jurisdictions. Such differences include, among others, voting requirements for
important shareholder resolutions regarding capital measures, corporate reorganizations and certain shareholder rights, such as assertion
of liability claims. In the performance of its duties, the Management Board and Supervisory Board are required by Dutch law to consider
the interests of the Company, the Shareholders, its employees and other stakeholders, in all cases with due observation of the principles
of reasonableness and fairness. It is possible that some of these parties will have interests that are different from, or in addition
to, the interests of the Shareholders.
10
Item 4.
Information on the Company
ICTS is a public limited liability company
organized under the laws of The Netherlands in 1992. Our offices are located at Walaardt Sacréstraat 425-5, 1117 BM Schiphol-Oost,
The Netherlands and its telephone number is +31-20-347-1077.
History and Development
of the Company:
Aviation
Security and Other Aviation Services Business
The Company provides
aviation security and other aviation services through its subsidiaries I-SEC and Huntleigh U.S.A.
In
2001 and 2002, ICTS sold substantially its European aviation security operations in two stages, for an aggregate purchase price of $103
million. As a result of the sale, ICTS fully divested itself at that time from most of its European operations.
In
February 2005 the Company decided to re-enter the European aviation security market. In March 2005, the Company established a wholly owned
subsidiary, I-SEC International Security B.V. and Subsidiaries (“I-SEC”), under which all the European aviation security activities
provided by ICTS are operated. Since then I-SEC established new subsidiaries throughout Europe and the Far East.
Authentication
Technology Business
Our
technology business is primarily involved in the services of authentication security to financial and other institutions, mainly in the
United States of America and Europe.
Business
Overview
General
ICTS provides the following
services through its subsidiaries as follows:
I-SEC supplies mainly
aviation security services at airports in Europe and the Far East.
Huntleigh provides
mostly non-security aviation related services in the United States of America.
AU10TIX develops technological
systems and authentication solutions for financial and other institutions.
Business
Strategy
We are currently pursuing
the following business strategy:
Aviation Security and
Critical Infrastructure Operations in Europe and the Far East
Through
the I-SEC subsidiaries, we supply aviation and other high-end security services to airports, airlines, governments and critical infrastructure
facilities in Europe and the Far East. Currently, I-SEC provide aviation security services to three out of the five biggest airports in
Europe. I- SEC is focusing on the critical infrastructure operations in the countries where we are present, next to our core business
(airports, airlines, cargo). I-SEC is continuously looking for ways to extend its operations in new and existing locations.
Other Aviation Related
Services in the U.S.
Through Huntleigh, we provide limited security services and non-security
aviation related services in the U.S. Huntleigh is continuously looking for ways to extend its operations in new and existing locations.
Developing Authentication Technologies
Through
AU10TIX, we are focusing on developing authentication technologies in order to provide authentication services to financial and other
markets all over the world. AU10TIX is continuously looking for ways to extend the services it provides, both to new and existing customers.
Services
Services
Offered in Europe and the Far East
I-SEC
specializes in the provision of advanced aviation security services worldwide. These include security consulting and security handling:
security screening, checkpoint screening, cargo screening, hold baggage screening (“HBS”), X-ray operator training, integrated
services and high-risk flight (HRF). I-SEC has also started diversifying its portfolio and started engaging in provision of security services
for Critical Infrastructure facilities and High-End guarding services.
The
Company benefits from the broad know-how and international operational experience it has acquired in more than two decades of intensive
activity in the field of aviation security.
I-SEC's
management and key personnel are widely recognized in the industry as developers of pioneering aviation security concepts, methods
and technologies, focusing on airport security and on high-risk environments. With its highly skilled and experienced professional staff,
supported by proprietary technological innovations, I-SEC is ideally positioned to deliver cost-effective aviation security solutions
and services to airlines and airports with varying operational volumes and needs.
11
I-SEC
has operations in The Netherlands, Germany, Spain, Denmark, Sweden, Finland and Norway and is continuing to expand to other countries
in Europe. Additionally, I-SEC currently operates at the five major airports in Japan and Joint venture with a local partner in Korea
providing aviation security and training to airlines as well as passenger handling services and secondary screening.
Building
on its management’s strong reputation and on its broad know-how and experience, I-SEC is committed to provide its clients with security
services at the highest professional level, while offering unprecedented cost savings, due, in part, to the integration of advanced, proprietary
technologies.
I-SEC
Aviation Security Services
Checkpoint
Screening
I-SEC provides trained
checkpoint operators and supervisors to airline and airport clients in many countries.
The
Company trains its staff to perform passenger screening at checkpoints, both efficiently and effectively, fully complying with international
and national regulatory requirements on the one hand, and focusing on hospitality customer service requirements, on the other hand.
Hold
Baggage Operation (HBS)
Regulatory
agencies in Europe and the USA require airlines and airports to perform 100% hold baggage screening. I-SEC provides the trained manpower
required to carry out these tasks, as well as training services for the airport's own staff.
Integrated
Services
I-SEC
provides a wide variety of integrated services, combining security with customer service. These integrated services which combine security
processing based on numerous years of experience and expertise, fully complying with all local, national and international regulatory
requirements, with a wide variety of customer service functions, enables airlines to improve customer services while reducing manpower
needs and operational costs.
Passengers
Security Screening
I-SEC's
unique passenger screening method, has been upgraded several times, and adapted to comply with amendments in regulatory requirements,
as well as with changes in the threat environment and developing needs.
Passenger
privacy and confidentiality are strictly maintained at all times, in accordance with all relevant regulations issued by both US and EU
regulators.
Cargo
Security
I-SEC provides a range
of services that focuses on cargo security.
Security program implementation:
Planning and implementation of a cargo security program; training the client's staff and management team and deploying of explosive detection
dogs.
Staff
training: Training the client's employees to operate in accordance with the relevant security requirements, while maintaining flexibility
with regard to course content, scope, duration, location and the number of trainees.
I-SEC
Aviation Security Training Services
Training
Programs and Seminars
I-SEC's
training programs are the product of over 30 years of expertise and experience in the development of training materials covering every
aspect of airline and airport security operations and their implementation worldwide.
Aviation
security and security awareness training courses are offered, within the framework of training programs that are modular in nature, and
are adapted to meet the specific needs of each client. The courses are constantly being updated to ensure that they cover all relevant
material relating to new regulations, new threats, etc. Many of the courses include simulations, role play, situational exercises, case
studies and on job training. Sophisticated training aids are employed to make the training experience more efficient and interesting,
thus ensuring optimal results.
12
I-SEC
Aviation Security Consulting Services
Risk
Analysis
A
comprehensive risk analysis is the essential, primary component of any security system. The identification of the risks relevant to the
particular site or operation, and their grading according to their potential damage and probability enables to develop the security concept
and design the security system that will effectively deal with these risks.
I-SEC
employs security experts specializing in the performance of risk analyses in a variety of threat environments. When analyzing risks, all
relevant factors relating to the client, the operation, the environment, and potentially hostile elements are taken into account, to ensure
the risks are fully and accurately mapped.
Security
Concept Development
In
order to enable the development of a cost-effective security system that optimally meets the client's specific needs, an aviation security
system must be constructed on the basis of a well-thought-out security concept, which takes into consideration all relevant aspects and
variables.
As
the development and implementation of a comprehensive security system requires substantial resources, it is crucial that these be invested
in the most productive way, in accordance with predetermined priorities.
When
developing the aviation security concept, I-SEC specialists take into account the results of the risk analysis and the developing and
anticipated changes and trends in the threat environment, to arrive at a concept that will be suitable for the predictable future, and
easy to adapt in later years.
Security
System Design
I-SEC
security experts possess broad experience in the design and development of modular, aviation security systems, customized to meet local
needs and complying with international standards. Designed systems are both flexible and dynamic in nature, ensuring that any adaptations
required to meet changes in the threat environment in the future can be carried out quickly, with minimal investment of effort and funds.
System
development also covers the definition of needs in the areas of manpower, technical means and advanced technologies, with the aim of attaining
the optimal balance, thus maximizing both efficiency and savings in operational and staffing costs. Our experts also assist the client
to determine priorities in implementation, as a function of the prioritized needs and the available resources. Assistance in the recruitment
of security managers and staff based on predefined standards is also offered.
Implementation
and Assimilation
For
over two decades, I-SEC specialists have been assisting their clients to implement and assimilate proven work methods and security solutions
designed on the basis of extensive know-how and experience, and tailored to meet their specific needs.
The
client's staff members, at all levels, are trained to perform their relevant tasks, and are provided with ongoing consulting and support
to ensure the smooth running of security operations.
Security
Surveys and Audits
I-SEC's
expert security consultants specialize in the performance of airport security surveys, the scope of which is determined together with
the client, and can range from individual aspects of airport security to comprehensive, all-encompassing surveys.
Special
attention is focused on verification of compliance with all applicable regulations and presentation of recommendations regarding any amendments
that may be required. Security surveys are particularly important as a step in the upgrading of an existing system – only by accurately
mapping the existing system, all its components, strengths and weaknesses, is it possible to determine the required modifications.
As
security systems are only effective if they continue to address existing and anticipated threats, and to fully comply with international,
national and local regulatory requirements, periodical aviation security audits are of vital importance. I-SEC experts possess vast international
experience in the performance of such audits, and recommend steps that must be taken to ensure full compliance and suitability of the
aviation security system at all times.
13
Explosive
Detection Dog Handling
In
2021 I-SEC acquired a dog handler company in Sweden specialized in the detection of Bed Bugs (BDD) for hotels and similar. Next to the
current business in BDD I-SEC has developed and deployed an Explosive Detection Dog Handling organization based in Sweden that can support
the group.
Critical
Infrastructure
I-SEC
was awarded a contract of guarding a critical infrastructure plant in The Netherlands, as a result of our scope to focus on additional
security fields in addition to the aviation-oriented businesses (airports, airlines and cargo). Aim is to focus next to our core business
(airports, airlines, cargo) on the critical infrastructure operations in the countries where we are present.
Aviation
Security Technology
In
the interest of enabling its client to maintain the required level of security while reducing operational costs, I-SEC utilizes several
innovative, proprietary means.
NAPS (New Advanced
Passenger Screening)
NAPS
is a sophisticated IT-system that enables pre-departure analysis of passenger information and is designed to help screen airline passengers
in a faster and more efficient manner. It was developed based on the extensive experience and knowledge accumulated by the Company’s
professionals and in accordance with European and US regulations, furthermore, the tool was updated recently to capture the new privacy
regulations.
I-Check
Extremely
fast and accurate travel document scanner. The I-Check document scan stand, together with the I-Check tablet app, turns a tablet into
an extremely fast and accurate passport and barcode scanner. Once the I-Check tablet app is connected to the I-Check infrastructure, a
wide variety of functionalities become available guiding the security agent and supervisors intuitively through the features and functionality.
SARA
(Security Airport Realtime Application)
SARA
gathers information out of multiple sources and presents them on a portable device or in any browser. SARA is a tool that provides the
missing link between HR and the operational daily business of running a security operation. SARA allows you to make an operational environment
paperless. You can create, sign update forms on the fly while viewing a live overview of the security situation. Employees can be tracked
on their trainings, certifications and overall performance. A comprehensive chat and task system is part of the SARA-suite.
ROM
(Realtime Operational Management)
ROM
transforms rigid and difficult day to day planning into flexible and structured planning. Through utilization of the OPS-system, we can
create a roster a week, a month or even a year in advance, which ideally should be as accurate as possible. In a turbulent environment
like an airport, the daily dispatch efficiency of your workforce is paramount to your operation.
Services
Offered in the United States of America
As
of December 31, 2021 Huntleigh, provides limited aviation security services and other separate services at approximately 30 airports in
22 states.
The limited security
services provided by Huntleigh involve the following:
| • |
Private Charter Flight Screening for Airlines - which includes security check of passengers' body andcarry-on items. |
| • |
Cargo Security Screening – for some international and domestic carriers. |
| • |
Catering Security Screening – for some international and domestic carriers. |
| • |
Aircraft Security Screening – for some international and domestic carriers. |
| • |
Aircraft Search – search of the entire aircraft to detect dangerous objects. |
Each of the non–
security services involve one of the following specific job classifications:
Agent
Services for Airlines
Agent
services include: passenger service, vendor behind counters, passenger service representative (PSR) and baggage service (BSO). Although
an agent is a Huntleigh employee, the employee is considered a representative of specific airlines.
14
Guard
Services
Guard
services involve guarding secured areas, including aircraft. Huntleigh also provides guard services to schools, places of worship, HOA’s,
events, etc. In addition, Huntleigh is offering and providing camera security monitoring services.
Queue
Monitors
Huntleigh provides
queue monitors assisting passengers before the checkpoint.
Aircraft
Cleaning
Huntleigh provides
employees who perform aircraft cleaning services such as the following:
| • |
Cleaning the aircraft interior |
| • |
Conducting cabin searches |
| • |
Waxing the aircraft exterior |
Janitorial
Huntleigh provides
janitorial services to airline airport offices, airline terminal areas, airline gates, police stations and office buildings.
Shuttle
Service
Huntleigh provides
shuttle services to airline crews between hotels and airports.
Skycap
Services Provider
A
skycap assists passengers with their luggage. Located at the curb side of the check-in at airports, a skycap checks in passengers' luggage
and meets security requirements established by the TSA to screen passengers. A skycap also assists arriving passengers with transporting
luggage from the baggage carousel to ground transportation or other designated areas.
A
skycap also may transport checked baggage from the curbside check-in to the airline counter. Concierge Service involves a skycap monitoring
the baggage carousel to ensure that passengers do not remove luggage not belonging to them.
Wheelchair
Attendants
Wheelchair
attendants transport passengers through the airport in airline and/or Company owned wheelchairs and may also operate electric carts for
transporting passengers through the airport. Working closely with the attendants are dispatch agents who monitor requests and assignments
for wheelchairs and dispatch the attendants as needed utilizing various wheelchair dispatch technologies.
Baggage
Handling Services
Huntleigh
provides employees who move passengers’ baggage from the check- in counter to screening machines and/or vice versa, as well as moving
oversized baggage from check-in to appropriate bag belts.
VIP
Meet and Greet Services
Huntleigh provides
VIP meet and greet services of assisting passengers with the transition through the airport on arrival and / or departure.
Equipment
for Passengers with Restricted Mobility
In
December 2019, Aviation Mobility Solutions Inc. was formed to find, evaluate and deliver new and innovative products for passengers with
restricted mobility.
Authentication
Systems and Solutions
AU10TIX,
an identity management company, is on a mission to obliterate fraud and further a more secure and inclusive world. The company provides
critical, modular solutions to verify and link physical and digital identities so businesses and their customers can confidently connect.
Over the past decade, AU10TIX has become the preferred partner of major global brands for customer onboarding and customer verification
automation—and continues to work on the edge of what’s next for identity’s role in society. AU10TIX’s proprietary
technology provides results in less than 8 seconds, enabling businesses to onboard customers faster while preventing fraud, meeting compliance
mandates and, importantly, promoting trust and safety.
15
Product
Technology
AU10TIX’s
modular SaaS offering for identity verification and fraud prevention automates the capture, authentication and content retrieval from
physical ID documents. AU10TIX speeds up customer screening and enrollment while enhancing security and ID fraud prevention with 100%
automated (i.e., no data entry or back-office dependencies) forensic-level forgery, counterfeiting and risk factor detection and higher
conversion rates of borderline quality images. AU10TIX technology handles all of this along with data-rich, fast-response exception reporting
and multi-lingual document content support while providing rapid processing (typically 8 seconds or less for the complete verification
process).
AU10TIX
technology is designed for security-sensitive and business-sensitive environments such as airports, border control, financial services,
etc. which require hi-resolution document imaging, auto image optimization, auto-classification of documents up to version level, extraction
of readable + encoded content including MRZ lines and barcodes. The automated technology provides real-time cropping of face photograph,
multi-factor identity authentication), immediate detailed exception alerts, ability to integrate with chip readers and barcode readers,
ability to integrate with biometric inputs, and ability to query date against databases or watch-lists.
AU10TIX’s
core engine along with new products like SECURE.ME, a white label identity verification experience, automates all essential components
of customer onboarding and KYC initiation in regulated markets including ID document authentication, face matching, Proof-Of-Address processing
and identity data verification and screening (eIDVS).
AU10TIX
enables fully automated ID image recognition and optimization, pre-screening, content retrieval, forgery, counterfeiting and collateral
risk flag detection, and exception reporting. Clients are also offered SDK packages to improve and control ID and face image capturing
by customers.
This portfolio of services
enables service providers to rapidly automate customer onboarding and AML/KYC processes.
AU10TIX
incorporates advanced AI algorithms that increase the accuracy of analyzing images at a broad range of image quality levels for various
types of official ID documents. The system is designed to handle images that originate from any common imaging device including mobile
phones, tablets, computer webcams, etc.
AU10TIX
is relevant for a variety of commercial and government markets many of which are required to comply with KYC regulations. The technology
can be integrated with additional Identity Data Verification and Screening (eIDV/eIDVS) as a client or 3rd party augmented service or
seamlessly integrated into AU10TIX’s ID authentication and POA handling components, enabling automated submission of customer data
to the required person and address verification services, as well as screening services such as PEPs Sanctions, watchlists, etc.
through a single API call.
Target
Markets
Key
markets for AU10TIX are financial services including banking, insurance, payments, wallets, money transfer, lending, remittance, online
investments, trading and forex, cryptocurrency exchanges, rental services, sharing economy, professional services, telecommunications
and social media, etc.
16
Investments
Artemis
Therapeutics, Inc.
As
of December 31, 2021, the Company owns 125,916 shares or 2.4% of the outstanding common stock of Artemis Therapeutics, Inc. (“ATMS”).
As of December 31, 2021, ATMS has no operating business.
The Company suspended
its use of the equity method to accounting for this investment in 2007 after its investment balance was reduced to zero.
As
of December 31, 2021 and 2020, the Company’s share of the underlying net assets of ATMS is equal to the Company’s carrying
value of its investment in ATMS ($0 and $0 at December 31, 2021 and 2020). The market value of the Company's investment in ATMS as of
December 31, 2021 and 2020 is $0.1 million and $0.1 million, respectively.
The
Company evaluated the stock price of ATMS but as ATMS share price is low, the number of shares that are being traded is low, and as ATMS
still does not have any revenue, the Company determined that the value of the investment is impaired and accordingly, valued the investment
at zero.
Freezone
I-SEC Korea Inc.
In
April 2018, the Company signed a Joint Venture Agreement with a South Korean Company in order to establish a Joint Venture Company (“JVC”)
and to provide aviation security and non-security services in South Korea. Each one of the parties holds 50% (fifty percent) of the JVC’s
equity. The Company uses the equity method for this investment. As of December 31, 2021, the Company’s investment is 322 million
KRW ($0.3 million as of December 31, 2021). For the years ended December 31, 2021, 2020 and 2019, the Company recognized a profit (loss)
in its consolidated statements of operations of (10.5) million KRW, (17.7) million KRW and 105 million KRW, respectively ($(0), $(0) million
and $0.1 million as of December 31, 2021, 2020 and 2019, respectively) from its investment in the JVC.
Mesh
Technologies, Inc.
In
January 2019, the Company invested an amount of $0.1 million in Mesh Technologies, Inc. (“Mesh”), a company incorporated in
the USA. As of December 31, 2021, the investment represented less than 1% of the issued and outstanding share capital of Mesh. Mesh is
a technology company providing cross border payments technology by innovating on the existing payment rails of established card networks
available in the market. As Mesh is a private, closely held company, there is no active market for this investment. Therefore, the Company
measures the investment at cost minus impairment. In December 2021 the Company sold approximately 25% of its investments for a total amount
of $0.2 million and recognized a profit of $0.2 million.
Arrow
Ecology Engineering Overseas (1999)
In
December 2019, the Company invested an amount of $1.8 million in Arrow Ecology Engineering Overseas (1999) Ltd (“Arrow”),
a limited company incorporated in Israel. Arrow develops and operates a sustainable green process to recycle mixed and sorted municipal
solid waste. The Company purchased few types of shares representing 23.3% of Arrow’s equity for an amount of $0 million and shareholders
loans were purchased for a price of $1.7 million ($4.1 million stated value less $2.4 million allowance for credit losses, which have
not changed since the acquisition). The Company uses the equity method for this investment. During the years ended December 31, 2021 and
2020, the Company recognized its estimated share in Arrow loss in the amount of $1.0 million and $0.8 million, respectively, from this
investment.
The
Company has an agreement with an entity related to its main shareholder, according to which, if the value of the investment decrease,
the related party entity has guaranteed to repurchase this full investment at a minimum amount of $1.8 million. The guarantee is effective
immediately as of the date of purchase and terminates after three years. Some Directors and managers of Arrow are related parties of the
Company.
GreenFox
Logistics LLC.
In
March 2020, the Company invested an amount of $0.1 million in GreenFox Logistics, LLC. (“GreenFox”), a company incorporated
in the USA. The investment was done as SAFE investment (Simple Agreement for Future Equity). GreenFox is an on-demand delivery/moving/transportation
company. As GreenFox is a private, closely held company, there is no active market for this investment. Therefore, the Company measures
the investment at cost minus impairment.
17
SardineAI
Corp.
In
August 2020, the Company invested an amount of $50 thousand in SardineAI Corp (“SardineAI”), a company incorporated in the
USA. In return the Company received preferred shares representing less than 1% of SardineAI equity. SardineAI is a Fraud Prevention-as-a-Service
(FaaS) platform for Digital businesses to detect frauds and financial crimes. As SardineAI is a private, closely held company, there is
no active market for this investment. Therefore, the Company measures the investment at cost minus impairment.
Silver
Circle One
In
December 2021, the Company invested an amount of $18 thousand in Silver Circle One, a capital fund which aims to invest in private emerging
companies with focus on consumer, commerce and technology companies.
The
Company committed to invest up to $0.1 million on the pool. As Silver Circle One is a private, closely held fund, there is no active market
for this investment. Therefore the Company measures the investment at cost minus impairment.
Justt
Fintech Ltd (previously Acrocharge Ltd)
In
December 2021, the Company invested an amount of $50 thousand in Justt Fintech Ltd (“Justt”), a company incorporated in Israel.
As of December 31, 2021, the investment represented less than 1% of the issued and outstanding share capital of Justt Fintech Ltd. Justt
is a technology company which fully automated chargeback disputes on behalf of online merchants. As Justt is a private, closely held company,
there is no active market for this investment. Therefore, the Company measures the investment at cost minus impairment.
Revenue
Revenue generated from
customers by geographical area based on the geographical location of the customers invoicing address is as following:
Revenue
in Germany
Our
revenue in Germany during the years 2021, 2020 and 2019 totaled $126.4 million (39% of total revenue), $119.5 million (48% of total revenue)
and $137.2 million (41% of total revenue), respectively.
Revenue
in the Netherlands
Our
revenue in The Netherlands during the years 2021, 2020 and 2019 totaled $52.2 million (16% of total revenue), $58.4 million (24% of total
revenue) and $97.7 million (29% of total revenue), respectively.
Revenue
in the U.S.
Our
revenue in the United States of America during the years 2021, 2020 and 2019 totaled $94.7 million (29% of total revenue), $45.3 million
(18% of total revenue) and $73.7 million (22% of total revenue), respectively.
Revenue
in Spain
Our
revenue in Spain during the years 2021, 2020 and 2019 totaled $30.9 million (10% of total revenue), $7.5 million (3% of total revenue)
and $3.1 million (1% of total revenue), respectively.
Revenue
in Other Locations
Our
revenue in other locations during the years 2021, 2020 and 2019 totaled $20.7 million (6% of total revenue), $17.7 million (7% of total
revenue) and $21.5 million (7% of total revenue), respectively.
Major
Customers
Revenue
from three customers represented 64% of total revenue during the year ended December 31, 2021, of which customer A accounted for 39%,
customer B accounted for 14% of total revenue and customer C accounted for 11% of total revenue. Accounts receivable from these three
customers represented 39% of total accounts receivable as of December 31, 2021.
Revenue
from two customers represented 70% of total revenue during the year ended December 31, 2020 of which customer A accounted for 48% and
customer B accounted for 22% of total revenue. Accounts receivable from these two customers represented 47% of total accounts receivable
as of December 31, 2020.
Revenue
from two customers represented 69% of total revenue during the year ended December 31, 2019 of which customer A accounted for 41% and
customer B accounted for 28% of total revenue. Accounts receivable from these two customers represented 57% of total accounts receivable
as of December 31, 2019.
Customers A and B mentioned above, have
been principle customers in the last three years.
18
Competition
Competition
in the aviation security and aviation related services industry as well as in the technology industry is intense. Many of our competitors
have greater financial, technical and marketing resources. Our competitors might develop and market alternative systems and technologies
that may have greater functionality or be more cost effective than the services we provide or the systems that we may develop. If our
competitors develop such systems we may not be able to successfully market our systems. Even if we are able to develop systems with greater
functionality, which are more cost effective than those developed by our competitors, we may not be able to achieve market acceptance
of our systems.
Aviation
Security Regulatory Matters
Our
aviation security activities are subject to various regulations imposed by authorities and various local and federal agencies having jurisdiction
in the serviced area. The Company, on behalf of its clients, is responsible for adherence to such regulations relating to certain security
aspects of their activities. The Company is also responsible to prevent passengers without proper travel documentation from boarding a
flight, thereby avoiding fines otherwise imposed on its clients by immigration authorities. We are subject to random periodic tests by
government authorities with regard to the professional level of its services and training. Any failure to pass such a test may result
in the loss of a contract or a license to perform services or a fine or both. In the airports in which we operate, a license to operate
is required from the respective airport authority. The Company currently holds the licenses required to operate in such locations.
Climate
Change Regulation
Our
business is not affected directly or indirectly in any way by existing and pending, local, state, regional, federal or international legal
requirements and agreements related to climate change.
19
Organizational
Structure
The following are the
active subsidiaries of ICTS as of December 31, 2021:
I-SEC Global Security
B.V. (The Netherlands - 100%) and its wholly-owned subsidiaries:
I-SEC International
Security B.V. (The Netherlands - 100%), which holds the shares of:
I-SEC Benelux Holdings
B.V. (Netherlands - 100%) which holds the shares of:
I-SEC
Nederland B.V. (Netherlands – 100%)
I-SEC
Nederland Security Services B.V. (Netherlands – 100%)
I-SEC
Belgium Aviation Security B.V. (Netherlands – 100%)
I-SEC Spain Holdings
B.V. (Netherlands - 100%) which holds the shares of:
I-SEC
Spain Services Management S.L. (Spain - 100%)
I-SEC
Spain Management S.L. (Spain – 100%)
I-SEC
Aviation Security S.L. (Spain – 100%)
I-SEC Nordic Holding
B.V. (Netherlands – 100%) which holds the shares of:
I-SEC
Denmark Aviation Security A.S (Denmark – 100%)
I-SEC
Norway Aviation Security A.S. (Norway – 100%)
I-SEC
Finland Aviation Security O.y (Finland – 100%)
I-SEC
Sweden Aviation Security A.B. (Sweden – 100%) which holds the shares of:
Quality
Detection Dogs Sweden A.B. (Sweden – 51%)
I-SEC German Holding
B.V. (Netherlands – 100%) which holds the shares of:
I-SEC
Security Services GmbH (Germany - 100%)
I-SEC German Aviation
Holdings 1 B.V.* (Netherlands – 100%) which holds the shares of:
I-SEC
Verwaltungs SE** (Germany – 100%)
I-SEC
Deutsche Luftsicherheit SECo.KG (Germany – 100%)
I-SEC German Special
Operations B.V. (Netherlands – 100%)
I-SEC Tech B.V. (Netherlands
– 100%)
I-SEC Italia s.r.l. (Italy
- 100%), which holds the shares of:
I-SEC
Services Italia s.r.l. (Italy – 100%)
ICTS
USA, Inc. (New York - 100%) which holds the shares of:
Huntleigh
USA Corporation (Missouri, USA - 100%)
Aviation
Mobility Solutions, Inc (Texas, USA – 100%)
AU10TIX
Technologies B.V. (The Netherlands – 69%,) which holds the shares of: AU10TIX Limited (Cyprus – 100%) which holds the shares
of:
AU10TIX B.V. (The
Netherlands – 100%) which holds the shares of:
AU10TIX
Ltd. (Israel – 100%), which holds the shares of:
AU10TIX
Services Inc. (Texas, USA – 100%)
I-SEC Japan K.K. (Japan
- 100%)
Freezone I-SEC Korea
Inc (South Korea – 50%)
*I-SEC German Aviation
Holdings 1 B.V. is a limited partner (100%) of I-SEC Deutsche Luftsicherheit SECo.KG (Germany).
** I-SEC Verwaltungs
SE is a general partner (0%) of I-SEC Deutsche Luftsicherheit SECo.KG (Germany).
20
Property,
Plant and Equipment
The
Company leases certain premises under various operating leases. Maturities of operating lease liabilities as of December 31, 2021 were
as follows (in millions):
|
Year ended December 31, |
||||
|
2022 |
$ |
3.8 |
||
|
2023 |
3.4 |
|||
|
2024 |
2.8 |
|||
|
2025 |
1.2 |
|||
|
2026 |
0.9 |
|||
|
Thereafter |
0.9 |
|||
|
$ |
13.0 |
|||
Rent
expense for the years ended December 31, 2021, 2020 and 2019 is $6.0 million, $5.5 million and $4.4 million, respectively.
Item
5. Operating and Financial Review and Prospects
This
section contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 concerning
our business, operations and financial condition. All statements other than statements of historical facts included in this annual report
on Form 20-F regarding ICTS's strategy, future operations, financial position, costs, prospects, plans and objectives of management are
forward-looking statements. When used in this annual report on Form 20-F the words “expect”, “anticipate”, “intend”,
“plan”, “believe”, “seek”, “estimate”, and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward- looking
statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking
statements for a number of important reasons, including those discussed under “Risk Factors” and elsewhere in this annual
report on Form 20-F.
We
cannot guarantee any future results, levels of activity, performance or achievements. The forward-looking statements contained in this
annual report on Form 20-F represent management's expectations as of the date of this annual report on Form 20-F and should not be relied
upon as representing ICTS's expectations as of any other date. Subsequent events and developments will cause management's expectations
to change. However, while we may elect to update these forward-looking statements, ICTS specifically disclaims any obligation to do so,
even if its expectations change.
Overview
The
Company operates in three reportable segments (a) corporate (b) airport security and other aviation services and (c) authentication technology.
The corporate segment does not generate revenue and contains primarily non-operational expenses. The airport security and other aviation
services segment provide security and other services to airlines and airport authorities, predominantly in Europe and the United States
of America. The authentication technology segment is predominantly involved in the development and sale of authentication security software
to financial and other institutions, predominantly in the United States of America. All inter-segment transactions are eliminated in consolidation.
The accounting policies of the segments are the same as the accounting policies of the Company as a whole.
Critical
Accounting Estimates
The
consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity
with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those estimates. Our critical accounting policies that require the use of judgment
and estimates are: (a) valuation allowance of deferred income taxes, (b) determination of future lease periods of existing lease contracts
and (c) determination of the estimated fair value of the AU10TIX preferred shares conversion. Please refer to Note 2 of ICTS’s consolidated
financial statements included in this Annual Report for the year ended December 31, 2021 for a summary of ICTS’s significant accounting
policies.
Leases
The
Company follows Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842)
The
standard provides a number of optional practical expedients in transition. The Company chose to apply the following permitted practical
expedients:
Not
to reassess its prior conclusions regarding lease identification, lease classification and initial direct costs under the new standard.
21
Short-term
lease recognition exemption for all leases with a term shorter than 12 months. This means, that for those leases, the Company does not
recognize Rights of Use (“ROU”) assets or lease liabilities.
Applying
the practical expedient to not separate lease and non-lease components for all of the Company’s leases as a lessee.
Leases
are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income
statement. A lease is a finance lease if it meets any one of the criteria below, otherwise the lease is an operating lease:
The
lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
The
lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
The
lease term is for the major part of the remaining economic life of the underlying asset.
The
present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease
payments equals or exceeds substantially all of the fair value of the underlying asset.
The
underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of lease term.
Based
on the criteria above, all of the Company's leases are classified as operating leases.
Operating
lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term,
while the ROU assets are also adjusted for any prepaid or accrued lease payments. The Company uses its incremental borrowing rate based
on the information available at the commencement date to determine the present value of the lease payments.
The
lease term is the non-cancellable period of the lease plus periods covered by an extension or termination option if it reasonably certain
that the Company will exercise the option.
After
lease commencement, the Company measures the lease liability at the present value of the remaining lease payments using the discount rate
determined at lease commencement (as long as the discount rate hasn’t been updated as a result of a reassessment event).
The
Company subsequently measures the ROU asset at the present value of the remaining lease payments, adjusted for the remaining balance of
any lease incentives received, any cumulative prepaid or accrued rent if relevant and any unamortized initial direct costs. Lease expenses
are recognized on a straight-line basis over the lease term. Lease terms will include options to extend or terminate the lease when it
is reasonably certain that the Company will exercise or not exercise the option to renew or terminate the lease.
Redeemable
Non-Controlling Interests
When
the Company or its subsidiaries issues preferred shares, it considers the provisions of Accounting Standards Codification (“ASC”)
480 –"Distinguishing Liabilities from Equity" (Topic 480) in order to determine whether the preferred share should be classified
as a liability. If the instrument is not within the scope of Topic 480, the Company or its subsidiaries further analyses the instruments
characteristics in order to determine whether it should be classified within temporary equity (mezzanine) or within permanent equity in
accordance with the provisions of Topic 480-10-S99. AU10TIX redeemable convertible preferred shares are not mandatorily or currently redeemable.
However, it includes a liquidation or deemed liquidation events that would constitute a redemption event that is outside of the Company’s
control. As such, all shares of redeemable preferred shares have been presented outside of permanent equity. The Company has not
adjusted the carrying values of the redeemable preferred shares to the deemed liquidation values of such shares since a liquidation event
was not probable at any of the balance sheet dates. Subsequent adjustments to increase or decrease the carrying values to the ultimate
liquidation values will be made only if and when it becomes probable that such a liquidation event will occur.
Following
the SPA on June 28, 2021, the Company has assessed whether the change in the terms of the AU10TIX Preferred Shares (“Preferred Shares”)
following the closing of the 2021 SPA constituted a modification or extinguishment for accounting purposes, by comparing the fair value
of these Preferred Shares immediately before and immediately after the closing of the 2021 SPA. An extinguishment occurs when the difference
in fair value exceeds 10%, while a modification occurs when such fair value difference is lower than 10%.
Additionally,
the carrying value of the Series A-1 Shares, which were previously presented among non-controlling interests, were reclassified to redeemable
non-controlling interests and initially recognized at their fair value, following their re-designation
as New Series A Preferred Shares.
22
Following
the modification and extinguishment of the Preferred Shares, and the reclassification of the Series A-1 Shares, the Company adjusted the
carrying value of the redeemable non-controlling interests by $9.1 million, with a corresponding decrease to additional paid-in capital
and non-controlling interests in the amounts of $10.1 million and $1.0 million, respectively.
Income Taxes
The
Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is
established when realization of net deferred tax assets is not considered more likely than not.
Uncertain income tax
positions are determined based upon the likelihood of the positions being sustained upon examination by taxing authorities. The benefit
of a tax position is recognized in the consolidated financial statements in the period during which management believes it is more likely
than not that the position will not be sustained. Income tax positions taken are not offset or aggregated with other positions. Income
tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of income tax benefit that is
more than 50 percent likely of being realized if challenged by the applicable taxing authority. The portion of the benefits associated
with income tax positions taken that exceeds the amount measured is reflected as income taxes payable.
Discussion
and Analysis of the Results of Operations
The
following table summarizes our results of operations for the years ended December 31, 2021, 2020 and 2019, however our discussion of the
results of operations excludes the comparison of the results for the years ended December 31, 2020 and 2019. Refer to item 5, Operating
and Financial Review and Prospects-Results of Operations in our Annual Report on Form 20-F for the year ended December 31, 2020 which
was filed with the SEC on May 14, 2021.
|
U.S. dollars in Thousands |
||||||||||||
|
Year ended December 31, |
||||||||||||
|
2021 |
2020 |
2019 |
||||||||||
|
Revenue |
$ |
324,934 |
$ |
248,419 |
$ |
333,307 |
||||||
|
Cost of revenue |
209,771 |
196,569 |
290,461 |
|||||||||
|
Gross profit |
115,163 |
51,850 |
42,846 |
|||||||||
|
Operating expenses: |
||||||||||||
|
Research and development
|
12,114 |
6,541 |
5,060 |
|||||||||
|
Selling, general and administrative
|
50,882 |
37,239 |
33,063 |
|||||||||
|
Goodwill impairment
|
139 |
- |
- |
|||||||||
|
Total operating expenses
|
63,135 |
43,780 |
38,123 |
|||||||||
|
OPERATING INCOME |
52,028 |
8,070 |
4,723 |
|||||||||
|
Equity income (loss) from investment in affiliate
|
(983 |
) |
(790 |
) |
91 |
|||||||
|
Other expenses, net |
(537 |
) |
(1,288 |
) |
(10,518 |
) | ||||||
|
INCOME (LOSS) BEFORE INCOME TAX EXPENSES
|
50,508 |
5,992 |
(5,704 |
) | ||||||||
|
Income tax expenses |
9,220 |
590 |
1,549 |
|||||||||
|
NET INCOME (LOSS) |
41,288 |
5,402 |
(7,253 |
) | ||||||||
|
Less: Net income attributable to non-controlling interests
|
6,481 |
999 |
789 |
|||||||||
|
NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V |
$ |
34,807 |
$ |
4,403 |
$ |
(8,042 |
) | |||||
23
The
following table sets forth, for the annual periods indicated, certain results of operations data as a percentage of revenue for the years
ended December 31, 2021, 2020 and 2019:
|
Year ended December 31, |
||||||||||||
|
2021 |
2020 |
2019 |
||||||||||
|
Revenue |
100.0 |
% |
100.0 |
% |
100.0 |
% | ||||||
|
Cost of revenue |
64.6 |
% |
79.2 |
% |
87.1 |
% | ||||||
|
Gross profit |
35.4 |
% |
20.8 |
% |
12.9 |
% | ||||||
|
Research and development |
3.7 |
% |
2.6 |
% |
1.5 |
% | ||||||
|
Selling, general and administrative |
15.7 |
% |
15.0 |
% |
9.9 |
% | ||||||
|
Goodwill impairment |
- |
% |
- |
% |
- |
% | ||||||
|
Total operating expenses |
19.4 |
% |
17.6 |
% |
11.4 |
% | ||||||
|
OPERATING INCOME (LOSS) |
16.0 |
% |
3.2 |
% |
1.5 |
% | ||||||
|
Equity loss from investment in affiliate
|
0.3 |
% |
0.3 |
% |
- |
% | ||||||
|
Other expenses, net |
0.2 |
% |
0.5 |
% |
3.2 |
% | ||||||
|
INCOME (LOSS) BEFORE INCOME TAX EXPENSES
|
15.5 |
% |
2.4 |
% |
(1.7 |
)% | ||||||
|
Income tax expenses |
2.8 |
% |
0.2 |
% |
0.5 |
% | ||||||
|
INCOME (LOSS) |
12.7 |
% |
2.2 |
% |
(2.2 |
)% | ||||||
|
NET INCOME (LOSS) |
12.7 |
% |
2.2 |
% |
(2.2 |
)% | ||||||
|
Less: Net income attributable to non-controlling interests
|
2.0 |
% |
0.4 |
% |
0.2 |
% | ||||||
|
NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V |
10.7 |
% |
1.8 |
% |
(2.4 |
)% | ||||||
The
following table sets forth, for the annual periods indicated, the Company’s revenues generated from customers by geographical area
based on the geographical location of the customers invoicing address:
|
(U.S. dollars in Thousands) |
||||||||||||
|
Year ended December 31, |
||||||||||||
|
2021 |
2020 |
2019 |
||||||||||
|
Germany |
$ |
126,367 |
$ |
119,500 |
$ |
137,207 |
||||||
|
Netherlands |
52,165 |
58,446 |
97,700 |
|||||||||
|
United States of America |
94,743 |
45,305 |
73,719 |
|||||||||
|
Spain |
30,946 |
7,465 |
3,138 |
|||||||||
|
Other |
20,713 |
17,703 |
21,543 |
|||||||||
|
Total Revenue |
$ |
324,934 |
$ |
248,419 |
$ |
333,307 |
||||||
Year
Ended December 31, 2021 Compared to Year Ended December 31, 2020
The
COVID-19 outbreak has developed rapidly in 2020 and 2021, with a significant number of infections. The Company is dependent mostly in
Europe and the United States of America for its business on the airline industry. In addition, the decisions taken by various governments
have affected economic activity and the Company’s business as following:
| • |
Decrease of travel by flights, reducing the demand for services the Company provide as part of its airport security and other aviation
services. As a result, our cumulative revenues of the airport security and other aviation services in the twelve months ended December
31, 2021 and 2020 were lower than our revenues for the twelve months ended December 31, 2019. Many of the Company’s employees were
laid off and / or ordered to stay home. |
| • |
Governments in some of the countries in which we operate have announced the implementation of government assistance measures, which
mitigated the impact of the COVID-19 outbreak on our results and liquidity. During 2021 and 2020, in the United States of America, the
government has approved a payroll support of $15.9 million and $13.7 million to the American subsidiary of the Company. Out of those amounts
the American subsidiary recognized amounts of $16.9 million and $12.7 million respectively, as reduction of labor expenses for the years
ended December 31, 2021 and 2020. In the Netherlands, the government has approved a support of €18.1 million and €17.6 million
($20.6 million and $21.6 million as of December 31, 2021 and 2020) for the years ended December 31, 2021 and 2020. The Dutch government
extended the support program until March, 2022. For the months January through March 2022, the Company was granted additional assistance
up to €4.6 million. In Germany, the employees are eligible for payroll support up to 60% of the employee’s payroll (on individual
basis) in case the employees meet the support plan requirements. Currently, the Company does not expect those governmental measures to
be renewed or extended. |
| • |
Depending on the duration of the COVID-19 crisis and continued negative impact on economic activity, the Company might experience
further negative results and liquidity restrains. The exact impact on our activities in the remainder of 2022 and thereafter cannot be
predicted. |
24
Revenue
Total
revenue increased from $248.4 million in 2020 to $324.9 million in 2021.
Revenue
generated in Germany was $126.4 million in 2021 compared to $119.5 million in 2020. As revenue in Germany is in Euro, it is being affected
also by exchange rate fluctuations as its being translated to USD. Revenue of 2020 according to the 2021 exchange rate would have been
$123.4 million. However, the 2020 revenue includes $9.2 million from Hannover Airport contract which ended in August 2020 which means
that a similar improvement was achieved in 2021 following the recovery of the aviation industry in 2021.
Revenue
generated in the Netherlands was $52.2 million in 2021 compared to $58.4 million in 2020. The decrease in revenue generated in the Netherlands
was a result of less services provided to our main customer in the Netherlands (Schiphol Airport). In December 2020 Schiphol Airport has
made some changes in its security structure which results in less services requested from the Company. As revenue in the Netherlands is
in Euro, it is being affected also by exchange rate fluctuations as it is being translated to USD. Revenue of 2020 according to the 2021
exchange rate would have been $60.4 million.
Revenue
generated in the United States of America was $94.7 million in 2021, compared to $45.3 million in 2020. The increase in revenue generated
in the United States of America was mostly a result of increase of services provided by the authentication technology segment to American
customers, which grew from $17.1 million in 2020 to $58.5 million in 2021. In addition, services provided by Huntleigh to its customers
in the United States of America increased from $28.2 million in 2020 to $36.2 million, following a recovery in the airline industry in
2021.
Revenue
generated in Spain was $30.9 million in 2021 compared to $7.5 million in 2020. The increase in revenue generated in Spain was a result
of new operations starting January 2021 following a new contract won in Adolfo Suarez Madrid Barajas Airport. As revenue in Spain is in
Euro, it is being affected also by exchange rate fluctuations as it is being translated to USD. Revenue of 2020 according to the 2021
exchange rate would have been $7.7 million.
Revenue
outside Germany, the Netherlands, Spain and the United States of America totaled $20.7 million in 2021 compared to $17.7 million in 2020.
Cost
of Revenue
Cost
of revenue was $209.8 million or 64.6%, compared to $19.6 million or 79.2% of revenue in 2020. The majority of cost of revenue relates
to payroll and related costs. Following the partial recovery of the airport security and other aviation services segment in 2021 and the
increase of revenues in the authentication technology segment, also the cost of revenue increased. Following the COVID-19 crisis some
countries provided financial assistance to the Company and its subsidiaries at the airport security and other aviation services segment,
the major ones were: (a) the Netherlands provided for the years 2021 and 2020 financial and payroll support to the Dutch companies in
the group of €14.9 million and €17.6 million ($16.9 million and $21.6 million as of December 31, 2021 and 2020), respectively
reducing the Company’s labor costs. (b) the United States of America provided in 2021 and 2020 to the Company payroll support of
$15.9 million and $13.7 million, respectively, of which $16.9 million and $12.7 million were used and recognized in 2021 and 2020, respectively,
reducing the Company’s labor costs in the United States of America. Those amounts were recorded in the Company’s books as
reduction of payroll expenses, which decreased the cost of revenue materially.
Research
and Development Expenses (“RD”)
Research
and development costs were $12.1 million or 3.7% of revenue, compared to $6.5 million or 2.6% of revenue in 2020. As the authentication
technology segment continues to increase its sales, developments and activities, the Company continued to increase the number of employees
in its Research and Development department, resulting mostly in increase of the RD payroll costs. In addition, the Company increased
its efforts to develop additional products in this segment.
25
Selling,
General and Administrative Expenses (“SGA”)
SGA expenses were
$50.9 million or 15.7% of revenue in 2021, compared to $37.2 million or 15.0% of revenue in 2020. The Company’s payroll, related
expenses and commissions increased by $4.1 million. Marketing expenses increased by $1.4 million. Both expenses increased mainly as part
of the authentication technology segment expansion and increase of sales. The Company’s legal and accounting expenses increased
by $4.0 million, that relates to due diligence preparations, costs that relate to new bids in 2021 and legal costs in regarding to legal
claims. Other increase in SGA expenses relate mostly to the authentication technology segment, following the increase in their revenue.
Equity
Income (Loss) from Investment in Affiliate
In December 2019, the
Company purchased 23.3% of Arrow Ecology Engineering Overseas (1999). The Company recognized its estimated share in Arrow loss in
the amount of $1.0 million and $0.8 million, respectively, from this investment for the years 2021 and 2020.
Goodwill
Impairment
In February 2021, the
Company acquired 51% of the outstanding shares of Quality Detection Dogs Sweden AB (“QDD”) and recorded goodwill of €0.1
million ($0.1 million as of December 31, 2021). As QDD’s revenue, operating profits and cash flows were lower than expected, an
impairment loss of $0.1 million was recognized.
Other
Expenses, net
Other expenses, net,
were $0.5 million or 0.2% of revenues in 2021, compared to $1.3 million or 0.5% of revenues in 2020. Interest expenses reduced in 2021
following the increase of cash balances held by the Company and the repayment of notes payable-banks. During 2021 the line of credit in
the United States of America and the line of credit in the Netherlands expired and were not renewed by the Company. In addition in 2021
the Company recorded exchange rate income of $0.1 million compared to exchange rate expenses of $0.3 million in 2020.
Income
Tax Expenses
Income tax expenses were
$9.2 million or 2.8% of revenue in 2021 compared to $0.6 million or 0.2% of revenue in 2020. Income tax expenses relating to the authentication
technology segment were $4.8 million in 2021 compared to $0.7 million in 2020, as result of the increase in the authentication technology
segment revenue and profitability. Income tax expenses (benefit) relating to the airport security and other aviation services were $4.4
million in 2021 compared to $(0.1) million in 2020. Increase of income tax expenses in this segment reflects the partial recovery in the
aviation industry during 2021. In addition, the Company has received payroll support from different governments which reduced the labor
costs and increased the profitability. Although some of the subsidiaries of the Company were profitable, previous net operating losses
were utilized to reduce the current year income tax expenses.
Reportable
Segment
The following table sets
forth, for the annual periods indicated, certain financial data related to the Company’s reportable segments, however our discussion
of the reportable segments excludes the comparison for the year ended December 31, 2019. Refer to item 5, Operating and Financial Review
and Prospects – Results of Operations in our Annual Report on Form 20-F for the year ended December 31, 2020, which was filed with
the SEC on May 14, 2021.
26
|
U.S. Dollars in thousands |
||||||||||||||||
|
Corporate |
Airport Security and Other Aviation Services |
Authentication Technology |
Total |
|||||||||||||
|
Year ended December 31, 2021: |
||||||||||||||||
|
Revenue
|
$ |
- |
$ |
253,687 |
$ |
71,247 |
$ |
324,934 |
||||||||
|
Depreciation and amortization
|
75 |
1,106 |
880 |
2,061 |
||||||||||||
|
Net Income (loss)
|
(1,666 |
) |
21,558 |
21,396 |
41,288 |
|||||||||||
|
Goodwill
|
- |
690 |
- |
690 |
||||||||||||
|
Total assets |
10,349 |
112,425 |
73,106 |
195,880 |
||||||||||||
|
Year ended December 31, 2020: |
||||||||||||||||
|
Revenue
|
$ |
- |
$ |
222,654 |
$ |
25,765 |
$ |
248,419 |
||||||||
|
Depreciation and amortization
|
72 |
1,302 |
716 |
2,090 |
||||||||||||
|
Net Income (loss)
|
(3,853 |
) |
6,056 |
3,199 |
5,402 |
|||||||||||
|
Goodwill
|
- |
746 |
- |
746 |
||||||||||||
|
Total assets |
12,488 |
86,550 |
41,350 |
140,388 |
||||||||||||
|
Year ended December 31, 2019: |
||||||||||||||||
|
Revenue
|
$ |
- |
$ |
309,548 |
$ |
23,759 |
$ |
333,307 |
||||||||
|
Depreciation and amortization
|
46 |
1,328 |
314 |
1,688 |
||||||||||||
|
Net Income (loss)
|
(11,740 |
) |
(2,406 |
) |
6,893 |
(7,253 |
) | |||||||||
|
Goodwill
|
- |
681 |
- |
681 |
||||||||||||
|
Total assets |
23,381 |
64,647 |
35,419 |
123,447 |
||||||||||||
Corporate
Segment
The Company’s loss
in the corporate segment decreased from $3.9 million in 2020 to $1.7 million in 2021. During 2021 the corporate segment reduced its costs,
mostly payroll and related costs. As the corporate segment is located in the Netherlands, it was entitled to payroll support granted by
the Dutch government. In 2021 the Company had exchange rate income of $0.3 million compared to exchange rate expenses of $0.1 million
in 2020. In addition, in 2020 the Company incurred expenses of $0.5 million regarding due diligence projects compared to $0 in 2021.
Airport
Security and Other Aviation Services Segment
Increase in revenue from
airport security and other aviation services from $222.7 million in 2020 to $253.7 million in 2021 relates to the partial recovery of
the aviation industry from the COVID-19 crisis in 2021.
The Company’s income
from the airport security and other aviation services was $21.6 million in 2021 compared to $6.1 million in 2020. The main reasons for
the difference between 2021 and 2020 are: (a) in 2021 and 2020 the segment received financial and payroll support from the Dutch government
of €14.9 million and €17.6 million ($16.9 million and $21.6 million as of December 31, 2021 and 2020), respectively, which
was recorded as reduction of expenses. (b) In 2021 and 2020 the segment received payroll support from the United States of America government
of $15.9 million and $13.7 million, respectively, which $16.9 million and $12.7 million, respectively, was recorded as reduction of expenses,
and (c) partial recovery of the aviation industry in 2021 which increased the demand for our services and accordingly, the profitability.
Authentication
Technology Segment
Revenue in 2021 from
the authentication technology segment was $71.2 million compared to $25.8 million in 2020. The segment continued to increase its revenue
from existing customers in addition to new ones. The profit from this segment amounted $21.4 million in 2021 compared to $3.2 million
in 2020. Increase in profitability in 2021 was achieved following the material increase in revenue. The Company has increased also its
RD and SGA expenses during the year in order to develop additional products and in order to increase its revenue.
27
Liquidity
and Capital Resources
The Company’s most
significant expenditures consist of payroll, related costs, professional fees and interest. The Company has historically financed such
expenditures through cash flows from operations, funding received from lines of credit, loans with lenders in Europe, the United States
of America and borrowings from a convertible note arrangement with a related party.
As of December 31, 2021
and 2020, the Company had cash, cash equivalents and restricted cash of $103.5 million and $61.1 million, respectively. As of December
31, 2021 and 2020, restricted cash were $14.7 million and $9.5 million which consist of collateral for our letters of credit, derivative
instruments and restricted bank accounts in the Netherlands, which are restricted for payments to local tax authorities.
As of December 31, 2021
and 2020, the Company had a working capital of $113.7 million and $57.2 million, respectively and shareholders’ deficit of $5.8
million and $30.5 million, respectively. During the years ended December 31, 2021, 2020 and 2019, the Company incurred net income (loss)
of $41.3 million, $5.4 million and $(7.3) million, respectively, and cash flows provided by (used in) operating activities of $53.4 million,
$24.2 million and $(9.1) million, respectively.
As of December 31,
2020, the Company had a line of credit in the Netherlands up to €12 million ($14.7 million as of December 31, 2020), which expired
in March 2021, although it actually continued until May 2021 (except the line of credit for guarantees of €2.5 million which is
still in place) and additional line of credit in the United States of America up to $10 million, which expired in October 2021. As of
April 30, 2022, the only line of credit the company has is in Sweden up to 4,000 SEK ($0.4 million as of December 31, 2021).
In October 2020, the
Company extended the agreement with the entity related to the main shareholder to extend the period of the notes until January 2022. The
maximum amount of the notes will be $3.0 million, excluding interest, out of this amount $1.2 million are convertible into the Company’s
shares at a price of $0.4 per share. In December 2021 the agreement was extended until January 2024 and the maximum amount was reduced
to $2.0 million. Interest rate was reduced to 2.5%.
The Company’s business
plan, projects profit from operations in 2022, including the governmental assistance that was approved by the Dutch government until March
2022. The COVID-19 outbreak developed rapidly in 2021 and 2020, with a significant number of infections. The Company is dependent mostly
in Europe and the United States of America for its business on the airline industry. In addition, ICTS is an employee intensive company.
The Company’s business plan depends on the COVID-19 developments in the foreseen future and the recovery of the airline industry.
The decisions taken by
various governments have affected economic activity and the Company’s business as following:
| • |
Decrease of travel by flights, reducing the demand for services the Company provide as part of its airport security and other aviation
services. As a result, our cumulative revenues of the airport security and other aviation services are lower compared to the period before
the COVID-19 outbreak. Those revenues for the years ended December 31, 2021, 2020 and 2019 were $253.6 million, $222.7 million and $309.5
million, respectively. |
| • |
Governments in some of the countries in which we operate have announced the implementation of government assistance measures, which
mitigated the negative impact of the COVID-19 outbreak on our results and liquidity. In the United States of America, the government has
approved in 2021 and 2020 a payroll support of $15.9 and $13.7 million respectively, to the American subsidiary of the Company. In the
Netherlands, the government has approved a financial assistance of €18.1 and €17.6 million ($20.6 and $21.6 million as of
December 31, 2021 and 2020) and additional assistance up to €4.6 million for the period January through March 2022. In Germany,
the Company’s employees are eligible for payroll support up to 60% of the employee’s payroll (on individual basis) in case
the employees meet the support plan requirements. The Company pays to its German employees their full salary and the Company is being
reimbursed by the German government for the payroll support amount. The Company has applied for this support starting April 2020. These
available governmental support plans might be extended and/or changed according to the future COVID-19 developments although, currently,
the Company does not expect those measures to be renewed or extended. |
| • |
In the Netherlands wage tax, social security and VAT payments for the period March 2020 until September 2021 were postponed and will
have to be paid in 60 installments, starting March 2023, except for VAT payments starting October 2022. As of December 31, 2021 and 2020,
the Company accumulated debt of €33.5 million and €20.8 million ($38.0 million and $25.5 million as of December 31, 2021 and
2020), respectively, to the Dutch tax authorities. In Germany, the government postponed the payments of the VAT for the period February
through April, 2020. The Company accumulated €55 million ($6.7 million as of December 31, 2020) which was paid during the year 2021.
|
| • |
Depending on the duration of the COVID-19 crisis and continued negative impact on economic activity, the Company might experience
negative results and liquidity restrains. The exact impact on our activities in the remainder of 2022 and thereafter cannot be predicted.
|
28
The below analysis of
cash flows excludes discussions related to year ended December 31, 2019. Refer to items 5, operating and Financial review and Prospects-Liquidity
and Capital Resources in our Annual Report on Form 20-F for the year ended December 31, 2020, which was filed with the SEC on May 14,
2021.
Cash
Flows from Operating Activities
Our cash flows from operating
activities vary significantly from year to year, depending on our operating results, timing of cash receipts and disbursements on accounts
receivable, accounts payable, accrued expenses and other current liabilities.
Net cash provided by
operating activities for the year ended December 31, 2021 was $53.4 million. This provided cash resulted primarily from net income for
the year of $41.3 million offset by an increase in accounts receivables of $23.3 million following the aviation industry recovery and
the increase in revenues of the authentication technology segment. In addition there was an increase of $17.2 million in other liabilities,
following the postponement of wage tax and other payments to the Dutch government as part of the governmental assistance in the Netherlands.
Corporate income tax payable increased by $5.7 million following the increase in the Company’s profitability, especially in locations
without tax losses from previous years that could offset the tax liabilities, accrued expenses and other liabilities increased by $9.4
million due to increase in payroll and related costs following the partial recovery in the Company’s operations. The VAT payable
decreased by $4.8 million following repayment of VAT debt in Germany from previous year. The Company’s accounts payable increased
by $2.3 million with an offset of $2.2 million cash received from a related party. A non-cash charge of $2.1 million for depreciation
and amortization was recognized in 2021.
Cash
Flows from Investing Activities
Net cash used in investing
activities for the year ended December 31, 2021 was $2.4 million and consisted primarily of capital expenditures of $1.4 million and capitalization
of software costs of $1.0 million.
Net cash used in investing
activities for the year ended December 31, 2020 was $3.1 million and consisted primarily of capital expenditures of $2.2 million and capitalization
of software costs of $0.6 million.
Cash
Flows from Financing Activities
Net cash used in financing
activities for the year ended December 31, 2021 was $7.2 million which consisted of repayments under the lines of credit, net of $7.2
million.
Net cash used in financing
activities for the year ended December 31, 2020 was $16.5 million which consisted of primarily repayment of $13.1 million under the lines
of credit, repayment of $1.5 million loan payable to a related party and repayment of $1.1million loan payable.
Borrowings
United
States of America
The Company’s U.S.
subsidiary was a party to a credit facility with a commercial lender, which provided a maximum borrowing capacity up to $10.0 million,
subject to a borrowing base limitation. The borrowing base limitation was equivalent to: (i) 85% of eligible accounts receivable, as defined,
plus (ii) 80% of eligible unbilled receivables, as defined, plus (iii) 95% of a $0.5 million standby letter of credit that was provided
to the lender by an entity related to the main Shareholder. Borrowings under the credit facility were secured by the U.S. subsidiary’s
accounts receivable, unbilled receivables, equipment, cash and the $0.5 million letter of credit that was provided to the lender by the
Company. The line of credit expired in October 2021.
Europe
The Company had a credit
arrangement with a commercial bank, to provide it with up to €12.0 million in borrowings which was renewed in May 2020 through March
2021. The line of credit was secured by accounts receivable of ten of the Company’s European subsidiaries, tangible fixed assets
and a bank guarantee of €2.0 million ($2.3 million as of December 31, 2021) provided by the parent company, ICTS International N.V.
The line of credit expired in May 2021.
In addition to the line
of credit arrangement, a guarantee facility of €2.5 million ($2.8 million as of December 31, 2021) was provided to the Company by
the same commercial bank, which was renewed until March 2022. The line of credit expired in March 2022.
The Company has an additional
credit arrangement in Sweden to provide it with up to 4.0 million SEK ($0.4 million as of December 31, 2021) in borrowings. Borrowings
under the line of credit bear annual interest of 2.8% and subject to annual extension by the financial institution. The line of credit
is secured by accounts receivable of the Swedish subsidiary. As of December 31, 2021 and 2020, the Company had 1.8 million SEK and 1.6
million SEK ($0.2 million and $0.2 million as of December 31, 2021 and 2020) respectively in outstanding borrowings under the line of
credit facility.
29
Related
Parties Financing
Convertible
Notes Payable to a Related Party
The Company had an agreement
with an entity related to its main shareholder, to provide it with up to $37.0 million in revolving loans through June 30, 2020. The term
of the arrangement can be automatically extended for four additional six-month periods at the option of the holder. Loans received under
the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the interest rate of LIBOR plus 7% for U.S.
dollar-denominated loans and the Company’s European commercial bank interest base rate plus 3% for Euro-denominated loans. The arrangement
is secured by a 26% interest in one of the Company's European subsidiaries. In connection with the arrangement, the holder was granted
an option to convert the outstanding principal notes payable under the arrangement into the Company's common stock at a price of $1.50
per share and the unpaid accrued interest at a price of $0.75 per share.
In May 2019, the Company
granted this entity, the option to convert up to $2.0 million of the loan into the Company’s shares at a price of $0.40 per share,
and all other conversion rights for the balance of the debt except $2.6 million, which is convertible at a price of $0.75 per share, would
eliminate. In December 2019, this entity converted the $2.6 million accrued interest into 3,480,968 shares at a price of $0.75 per share.
In October 2020, the entity converted $0.8 million into 2,000,000 shares.
In October 2020, the
loan was extended until January 2022, the loan amount was reduced to $3.0 million after the Company repaid 30 million of the debt in 2019
and the pledge of 26% interest in one of the Company's European subsidiaries was terminated. In December 2021 the loan was extended until
January 2024 and the maximum amount was reduced to $2.0 million. Interest rate was reduced to 2.5%.
The Company’s weighted
average interest during the years ended December 31, 2021, 2020 and 2019 is 7.1%, 7.6% and 8.3%, respectively.
As of December 31, 2021
and 2020, convertible notes payable to this related party consist of $1.2 million and $1.2 million, respectively.
Sale
of AU10TIX Technologies B.V. Preferred Shares
On
July 3, 2019, AU10TIX entered into a Series A Preferred Subscription Agreement (the "Agreement") with TPG Lux 2018 SC I, S.a.r.l ("TPG"),
according to which AU10TIX issued 3,000,000 Series A Preferred Shares ("Series A Shares") to TPG for a subscription price of US$60.0 million
in cash representing approximately 24% of the outstanding share capital of AU10TIX and 23.077% of the fully-diluted share capital of AU10TIX
(see note 16). Transaction costs totaled $4.5 million and were deducted from the redeemable non-controlling interests balance.
On
November 7, 2019, AU10TIX entered into a Series A and Series A-1 Preferred Subscription Agreement with Oak HC/FT Partners II, L.P. ("Oak"),
according to which AU10TIX issued 1,000,000 Series A Preferred Shares and 23,622 Series A-1 Preferred Shares ("Series A-1 Shares" and
together with Series A Shares – "the Preferred Shares") to Oak for a subscription price of US$20.0 million in cash representing
approximately 7.401% of the outstanding share capital of AU10TIX and 7.143% of the fully-diluted share capital of AU10TIX. For accounting
purposes, the investment was allocated to the Series A and Series A-1 Preferred Shares on a relative fair value basis: $19.5 and $0.5
million, respectively. Transaction costs totaled $1.5 million and were deducted from the respective investment amounts.
Following
the Oak investment, on November 7, 2019, TPG subscribed for 307,087 Series A-1 Shares at nominal value (US$0.001 per share) (“Bonus
Issue Series A-1 Shares”) in order to preserve its 23.077% ownership interest in the fully diluted share capital of AU10TIX.
The
Preferred Shares Rights
Liquidation
Preference: The holders of Series A Shares (“Series A Holders”) are entitled to a liquidation preference upon the occurrence
of a sale, initial public offering (“IPO”), merger, consolidation, reorganization, winding-up, dissolution or liquidation
of AU10TIX, pursuant to which the Series A Holders are entitled, on the occurrence of such event and in priority to the ordinary shares,
to receive the greater of: (a) an amount equal to the initial subscription price for the Series A Shares, plus all accrued but unpaid
dividends in respect of the Series A Shares, less all dividends previously paid on the Series A Shares, and (b) the proceeds distributable
in respect of the Series A Shares had they been converted into ordinary shares. The initial subscription price for the Series A
Shares (and calculations derived therefrom) are subject to customary adjustments as set forth in the agreements executed in connection
with the Sale.
Conversion
Rights: The Series A Shares are subject to conversion into ordinary shares of AU10TIX: (a) on the written request by any Series
A Shareholder; and (b) immediately prior to a qualifying IPO of AU10TIX (being an IPO where the net aggregate gross proceeds to AU10TIX
exceed US$75 million and where the subscription price per share paid by the public is not less than 150% of the initial subscription price
paid for the Series A Shares). Pursuant to these conversion arrangements, the Series A Shares will convert into ordinary shares on a 1:1
basis (subject to certain agreed upon adjustments).
30
Anti-Dilution
Protection: The Shareholders Agreements contain customary broad-based weighted average anti-dilution protection whereby, if further
shares are issued by AU10TIX at a price per new security that is less than the initial subscription price paid for the Series A Shares,
then the Series A Holders shall be entitled to receive additional Series A Shares (at no further cost) on a weighted-average basis, reflecting
the value of equity in AU10TIX as determined based on the subscription price paid in the new issue of securities.
Pre-emption
Rights: The Shareholders Agreements contain a restriction on issuing any securities ranking senior to or on party with the Series
A Shares for as long as TPG and/or any subsequent investor holds at least one third of the overall number of Series A Shares in issue
as at the date of completion of the Sale. In addition, each shareholder holding in excess of 3% of the shares of AU10TIX has the right
to participate in any new issuance of securities by the AU10TIX, subject to customary exceptions.
Exit
Rights: At any time from and after the fifth (5th) anniversary of completion of the issuance, upon written request by TPG, AU10TIX
is required to use reasonable endeavors to facilitate the sale by TPG of the Preferred Shares (or, following conversion, ordinary shares)
to a third party at a price in excess of 150% of the initial subscription price paid for the Series A Shares and subject to a right of
first refusal in favor of the Company. In the event that, three (3) months thereafter, a sale of the Preferred Shares held by TPG has
not been consummated, upon written request by TPG, AU10TIX is required to facilitate a sale of AU10TIX within six (6) months after such
written request, and thereafter, TPG has the right to require AU10TIX to facilitate a sale or IPO of AU10TIX. On the exercise of such
rights, each other shareholder (including the Company) is required to cooperate with TPG regarding such sale or IPO and TPG has the right
to exercise drag rights over the shares held by other shareholders in order to facilitate such exit event.
The
Exit Right is part of the issuance of the Series A Shares, and was not entered into separately from the transaction that created the non-controlling
interests. The Exit Right is not legally detachable from the non-controlling interests because it is non-transferrable (i.e., the instrument
cannot be transferred without the underlying preferred shares). Thus, the Exit Right would not be separately exercisable from the non-controlling
interests shares because the non-controlling interests shares will be settled when the Exit Right is exercised. As a result, the Exit
Right would be considered embedded in the Series A Shares held by TPG.
Shares
of redeemable convertible preferred stock are not mandatorily or currently redeemable. However, the Exit Right would constitute a
contingent redemption event that is outside of the Company’s control. As such, Series A Shares have been presented outside of permanent
equity as redeemable non-controlling interests. The Company has adjusted the carrying value of the redeemable non-controlling interests
to adjust for the non-controlling interests share in AU10TIX's profits and Other Comprehensive Income (Loss). The Company has not adjusted
the carrying values of the redeemable non-controlling interests to the deemed liquidation values of such shares since a liquidation event
was not probable at any of the balance sheet dates. Subsequent adjustments to increase or decrease the carrying values to the ultimate
liquidation values will be made only if and when it becomes probable that such a liquidation event will occur.
The
Series A-1 Preferred Shares do not entitle their holders to any liquidation or exit rights as the Series A Preferred Shares, and therefore
are classified within permanent equity, as non-controlling interests.
The
anti-dilution provisions cited above have not been bifurcated from the host contract since they are to be settled into AU10TIX's non-traded
shares, thus the "net settlement" criteria is not met.
On
June 28, 2021, TPG, Oak, GF GW LLC (“GF”) and the Company, entered into a Sale and Purchase Agreement (the “SPA”),
pursuant to which Oak and GF purchased preferred shares in the Company from TPG. In connection with the SPA, (i) such parties and
the Registrant entered into an amended and restated shareholders agreement (the “SHA”) and an amended and restated registration
rights agreement (the “RRA”) and (ii) The Company’s Articles of Association (the “Articles”) were amended
by a deed of amendment (the “Deed of Amendment”).
Pursuant
to the SPA, OAK purchased 755,906 AU10TIX Series A Preferred shares from TPG and GF purchased 1,511,811 AU10TIX Series A preferred Shares
from TPG. In connection with such purchases, all outstanding AU10TIX’s Series A Preferred Shares and Series A-1 Preferred Shares
were re-designated as New Series A Preferred Shares and the Ordinary Shares owned by ICTS were re-designated as Class B Ordinary Shares,
as described below.
In
consideration of the benefits to the Company of Oak increasing its shareholding and GF becoming a shareholder, The Company provided certain
customary warranties to Oak and GF concerning The Company and its business. In addition, the Company agreed to be primarily liable
to Oak and GF for any breaches by TPG of its customary fundamental warranties given to Oak and GF (including that TPG owns the Company
Series A Preferred Shares being sold to Oak and GF); provided, that, TPG has agreed to indemnify and hold The Company harmless for any
losses incurred by the Company in relation to such fundamental warranties given by TPG.
31
Following
the completion of the sales and purchases contemplated by the SPA on June 28, 2021: (i) the Registrant owned 68.69% of the outstanding
share capital of the Company in the form of Class B Ordinary Shares; (ii) Oak owned 12.87% of the outstanding share capital of A the Company
in the form of New Series A Preferred Shares; (iii) GF owned 10.93% of the outstanding share capital of the Company in the form
of New Series A Preferred Shares; and (iv) TPG owned 7.51% of the outstanding share capital of the Company in the form of New Series A
Preferred Shares. In addition, The Company may issue up to 500,000 Class A Ordinary Shares under its existing employee stock option
plan.
The
SHA and the Articles (as amended by the Deed of Amendment) provide for the following material matters in respect of the rights attaching
to the New Series A Preferred Shares and the Ordinary Shares and the ongoing governance of the Company:
General:
The New Series A Preferred Shares are entitled to one vote per share and rank equally with the Ordinary Shares in regards to dividends.
The Ordinary Shares are divided into two classes: Class A Ordinary Shares and Class B Ordinary Shares, which rank equally as to dividends.
The Class A Ordinary Shares are entitled to one vote per share. The Class B Ordinary Shares are entitled to three votes per share
and may only be held by the Registrant and its permitted transferees.
Liquidation
Preference: the holders of New Series A Preferred Shares (“Series A Holders”) are entitled to a liquidation preference upon
the occurrence of a (i) sale, initial public offering, which term includes certain business combinations with a SPAC (an “IPO”),
merger, consolidation or reorganization, which results in change of control of the Company, and (ii) winding-up, dissolution or liquidation
of the Company, pursuant to which the Series A Holders are entitled, on the occurrence of such event and in priority to the Ordinary Shares,
to receive the greater of: (a) US$26.5 million per share, subject to adjustments for certain events affecting the capital of The Company
(the “Starting Price”) plus all accrued but unpaid dividends in respect of the New Series A Preferred Shares, less all dividends
previously paid on the New Series A Preferred Shares, and (b) the proceeds distributable in respect of the New Series A Preferred
Shares had they been converted into Class A Ordinary Shares. The Ordinary Shares rank equally in liquidation.
Conversion
Rights: The New Series A Preferred Shares are subject to conversion into Class A Ordinary Shares on a 1:1 basis (subject to adjustments
for certain events affecting the capital of The Company): (a) upon the written request by any Series A Holder; and (b) immediately prior
to a qualifying IPO of the Company (being an IPO where each Class A Ordinary Share is valued at not less than 150% of the Starting Price
at the completion of the IPO, subject to adjustments for certain events affecting the capital of The Company) (a "Qualifying IPO").
The Class B Ordinary Shares are convertible into Class A Ordinary Shares at any time upon the written request of a holder of Class B Ordinary
Shares on a 1:1 basis, subject to adjustments for certain events affecting the capital of The Company.
Anti-Dilution
Protection: The SHA contains customary broad-based weighted average anti-dilution protection whereby, if further shares are issued by
The Company at a price per new security that is less than the Starting Price, then the Series A Holders shall be entitled to receive additional
Class A Ordinary Shares (at no further cost) on a weighted-average basis, reflecting the value of the equity in The Company, as determined
based on the subscription price paid in the new issue of securities.
Transfers:
Subject to certain customary exceptions, including a transfer to a permitted transferee, any shareholder (other than TPG, Oak and GF)
wishing to transfer any of the shares held by it shall first offer such shares to each shareholder holding 3% or more of The Company’s
outstanding share capital at the same price and on the same terms at which the selling shareholder wishes to transfer such shares.
New
Issuances: Subject to certain customary exceptions, each shareholder holding 3% or more of The Company’s outstanding share capital
has the right to participate in any new issuance of securities by The Company.
Information
Rights: Subject to certain exceptions, each shareholder holding 3% or more of The Company’s outstanding share capital is entitled
to receive certain financial information regarding The Company including budgets, annual and quarterly accounts and details of any third
party offer for the stock or assets of The Company, as well as certain inspection rights.
Exit
Rights: At any time from and after July 3, 2026, upon written request by Series A Holders holding at least 60% of the then outstanding
New Series A Preferred Shares (the “Preferred Majority”), The Company is required to use reasonable endeavors to facilitate
a sale of The Company within six months after such written request, and, thereafter, the Preferred Majority has the right to step-in and
require The Company to facilitate a sale or IPO. On the exercise of such step-in right, each other shareholder (including the Registrant)
is required to cooperate with the Preferred Majority regarding such sale or IPO and the Preferred Majority has the right to exercise drag
rights over the shares held by other shareholders in order to facilitate such exit event.
Board
Arrangements: The Shareholders Agreement and Articles provide that the board of directors of The Company shall be constituted by up to
six directors: (i) four of whom will be appointed by the holder of a majority of the Class B Ordinary Shares (i.e., currently the
Registrant); (ii) one of whom will be appointed by Oak (for so long as Oak holds at least 50% of the New Series A Preferred
Shares held on the date of the closing of the transactions contemplated by the SPA, subject to adjustments for certain events affecting
the capital of The Company); and (iii) one of whom will be appointed by GF (for so long as GF holds at least 50% of the New Series
A Preferred Shares held on the date of the closing of the transactions contemplated by the SPA, subject to adjustments for certain
events affecting the capital of The Company). As a general matter, the board of The Company is able to pass resolutions by a simple
majority, subject to the consent rights of the Preferred Majority set out below.
32
Preferred
Majority Consent Rights: For as long as the Series A Holders hold, in the aggregate, at least 25% of the New Series A Shares
Preferred Shares held on the date of the closing of the transactions contemplated by the SPA, subject to adjustments for certain events
affecting the capital of The Company, the consent of the Preferred Majority is required for the following actions (i) amending the SHA
or the Articles in a manner that would adversely affect the rights, preferences or privileges of the New Series A Preferred Shares; (ii)
issuing new securities ranking senior to or pari passu with the New Series A Preferred Shares; (iii) making of any dividend or distribution
other than a dividend or distribution that is pro rata to the Series A Holders and the holders of the Ordinary Shares; (iv) redeeming
any Ordinary Shares; (v) incurring debt in excess of 4.0x The Company’s consolidated EBITDA in the 12-month period ending on the
last day of the month preceding the month in which the debt was incurred; (vi) consummating an IPO other than a Qualifying IPO; (vii)
making certain changes to the size of the Company’s board; (viii) making any fundamental change in the nature of the business of
The Company and its subsidiaries; (ix) entering into related party transactions, unless such transaction is commercially reasonable and
on an arm’s-length basis; and (x) either amending the Company’s existing stock option plan or creating a new stock option
plan to allow for the issuance of more than 500,000 additional Class A Common Shares.
Tag
Rights: Following completion of the procedures on transfers set out above, each Series A Holder holding 3% or more of AU10TIX’s
outstanding shares will have the right to participate proportionately in any third-party share sale by another shareholder other than
a Series A Holder (subject to certain customary exceptions).
Drag
Rights: The Company has the right to drag other shareholders into an exit event subject to certain requirements being satisfied (including
either (i) holders of New Series A Shares receiving the greater of: (a) the Starting Price and (b) the proceeds distributable in
respect of the New Series A Preferred Shares had they been converted into Class A Ordinary Shares, in each case with the approval of the
Board, the Preferred Majority and the holders of a majority of the shares or (ii) a minimum value per New Series A Share of 150% of the
Starting Price approved by the Board and holders of a majority of the shares, in each case subject to adjustments for certain events affecting
the capital of The Company) in relation to such exit transaction.
Termination:
The SHA terminates upon (i) the agreement of The Company, the Preferred Majority and a majority of the holders of the Ordinary Shares
or (ii) the closing of a Qualifying IPO.
Tax
Matters: The Company is required to provide the Series A Holders with certain customary information for U.S. federal tax reporting purposes.
Confidentiality
and Public Announcements: The SHA provides for customary confidentiality protections and limitations on public announcements without consent.
The
RRA provides the Series A Holders (and in certain cases the holders of the Class B Ordinary Shares) with a limited number of customary
long-form and short-form demand registration rights, shelf registration rights and the right to participate under certain conditions if
The Company determines to register its shares. In addition, The Company has undertaken to (i) take certain actions to facilitate
the rights of the parties under the RRA; (ii) provide customary indemnification; (iii) not agree to further registration rights superior
to those granted under the RRA; and (iv) limit issuances of its shares under certain circumstances set out in the RRA.
Pre-emption
Rights: The Shareholders Agreement contains a restriction on issuing any securities senior to or pari passu with the New Series A Preferred
Shares for so long as the holders of the New Series A Preferred Shares on June 28, 2021 (or their transferees in accordance with the terms
of the Shareholders Agreement) continue to collectively hold at least 25% of such number (appropriately adjusted for certain
corporate events) of New Series A Preferred Shares. In addition, each shareholder holding in excess of 3% of the Company’s outstanding
shares has the right to participate in any new issuance of securities by the Company, subject to customary exceptions.
The
Company has assessed whether the change in the terms of the Preferred Shares following the closing of the 2021 SPA constituted a modification
or extinguishment for accounting purposes, by comparing the fair value of these Preferred Shares immediately before and immediately after
the closing of the 2021 SPA. An extinguishment occurs when the difference in fair value exceeds 10%, while a modification occurs when
such fair value difference is lower than 10%.
Additionally,
the carrying value of the Series A-1 Shares, which were previously presented among non-controlling interests, were reclassified to redeemable
non-controlling interests and initially recognized at their fair value, following their re-designation
as New Series A Preferred Shares.
Following the modification
and extinguishment of the Preferred Shares, and the reclassification of the Series A-1 Shares, the Company adjusted the carrying value
of the redeemable non-controlling interests by $9.1 million, with a corresponding decrease to additional paid-in capital and non-controlling
interests in the amounts of $10.1 million and $1.0 million, respectively.
33
Research
and Development Costs
Research and development
costs are expensed as incurred and consist primarily of payroll and related costs. Research and development costs are $12.1 million, $6.5
million and $5.1 million during the years ended December 31, 2021, 2020 and 2019, respectively.
Trend
Information
Labor market conditions
may require the Company to increase its prices when possible according to the contracts with customers. Cost of labor is the main variable
in determining any cost increases.
The Company might be
affected by a worldwide economic slowdown, which might affect the aviation industry. As the Company is a service provider to this industry,
such trends can affect the results of the Company. As of 2021 and 2020 the company has been materially affected by the COVID-19 crisis
as mentioned before.
Off-Balance
Sheet Arrangements
The Company is a party
to a consulting arrangement and agency agreements, in addition, the Company has no unconsolidated special purpose entities.
Future
Contractual Obligations
The following table summarizes
our future contractual obligations as of December 31, 2021:
|
Contractual Obligations |
Payments due by Period (U.S. Dollars in Thousands) |
|||||||||||||||||||
|
Total |
Less than 1 Year |
1-3 years |
4-5 years |
more than 5 years |
||||||||||||||||
|
Consulting
agreements |
$ |
1,020 |
$ |
170 |
$ |
510 |
$ |
340 |
$ |
- |
||||||||||
|
Convertible notes payable - related party |
1,261 |
- |
1,261 |
- |
- |
|||||||||||||||
|
Operating lease
obligations |
12,962 |
3,752 |
7,406 |
1,490 |
314 |
|||||||||||||||
|
Governmental payments in the Netherlands (VAT, social security and wage tax) |
38,011 |
774 |
22,804 |
14,433 |
- |
|||||||||||||||
|
$ |
53,254 |
$ |
4,696 |
$ |
31,981 |
$ |
16,263 |
$ |
314 |
|||||||||||
The
following table summarizes the Company’s other future commercial obligations as of December 31, 2021:
|
Contractual Obligations |
Payments due by Period (U.S. Dollars in Thousands) |
|||||||||||||||||||
|
Total |
Less than 1 Year |
1-3 years |
4-5 years |
more than 5 years |
||||||||||||||||
|
Guarantees |
$ |
1,161 |
$ |
- |
$ |
1,161 |
$ |
- |
$ |
- |
||||||||||
|
Letters of credit
|
3,250 |
275 |
2,975 |
- |
- |
|||||||||||||||
|
$ |
4,411 |
$ |
275 |
$ |
4,136 |
$ |
- |
$ |
- |
|||||||||||
Cyber
security
On
May 2nd 2022, one of the subsidiaries of ICTS, I-SEC International
Security B.V., has experienced a data breach incident. This was a ransomware incident that involved the exposure of information in the
Company’s possession including human resources data of current and former employees. The Company has taken steps in an effort to
address the incident. The Company estimates at this point of time that the immediate expenses following the incident are approximately
$0.8 million. In addition, the Company will continue upgrading its technological systems and expects additional costs to be approximately
$0.3 million in the coming year. The Company does not expect the incident to affect its relationships with its customers or any third
parties.
34
Item
6.
Directors, Senior Management and Employees
The following table
lists the directors and executive officers of ICTS:
|
Age |
Position | |||
|
Menachem Atzmon
|
77 |
Chairman of the Supervisory Board | ||
|
Ron Atzmon
|
48 |
Member of the Supervisory Board and Managing Director of AU10TIX
| ||
|
Gil Atzmon
|
46 |
Member of the Supervisory Board | ||
|
Philip M. Getter
|
85 |
Member of the Supervisory Board, Chairman of the Audit Committee
| ||
|
David W. Sass
|
86 |
Member of the Supervisory Board | ||
|
Gail F. Lieberman
|
78 |
Member of the Supervisory Board, Member of the Audit Committee
and Chairman of the Compensation Committee | ||
|
Gordon Hausmann
|
76 |
Member of the Supervisory Board, Member of the Audit Committee
and member of the Compensation Committee Committee and Member of the Audit Committee | ||
|
Alon Raich
|
46 |
Joint Managing Director and Chief Financial Officer |
||
|
Rom Shaked
|
39 |
Joint Managing Director |
Menachem
J. Atzmon is a CPA (Isr). Since 1976 Mr. Atzmon serves as director and chairman of Spencer Corporation. From 1996 until 2012 Mr. Atzmon
has been the managing director of Albermale Investment Ltd., an investment company. Since 1998 until 2012 he has served as the Chairman
of the Management Board of Seehafen Rostock, Umschlagsgesellschaft GmbH and its Holding Company. Mr. Atzmon has been a member of the Supervisory
Board of ICTS since 1999 and acts as the Chairman of the Supervisory Board since 2004. Since 2010 he serves as the Chairman of Arrow Ecology
Engineering Overseas (1999) Ltd, an advance recycling company. During 2014 Mr. Atzmon was appointed in addition to his role of Chairman
of the Supervisory Board to CEO of the Arrow Ecology Engineering Overseas Ltd.
Ron
Atzmon is the Managing Director of the AU10TIX Group since September 2008. Mr. Atzmon was the CEO and founder of 1ST2C.com between April
2005 and January 2009. Mr. Atzmon holds an MA in Business Administration from the College of Management Academic, Israel and an MBA from
the Imperial College London, UK.
Gil
Atzmon is the CEO of Arrow Ecology since February 2017. Mr. Atzmon was a Director of Sales at S. Juwal Co from 2002 to 2017. Mr.
Atzmon holds a BA in Business Administration and Management from IDC Herzliya, Israel and an MBA from the London Metropolitan University,
UK.
Philip
M. Getter has been managing member of GEMPH Development LLC since 1985. Mr. Getter has more than 30 years of corporate finance
experience. From 2000 to 2005 he was president of DAMG Capital, LLC Investment Bankers. Prior thereto he was head of Investment
Banking and a member of the board of directors of Prime Charter, Ltd. After graduation from Cornell University he served as Administrative
Assistant to the Director of United States Atomic Energy Commission. From 1960 to 1969 he was a partner with Shearson, Hammill and from 1969
to 1975 Senior Partner of Devon Securities, an international investment-banking boutique. From 1975 to 1984 he was Chairman/CEO of
Generics Corporation of America, then one of the largest generic drug companies in the United States of America. As President and CEO
of Wolins Pharmacal (1977 to 1984) he led the reorganization and restructuring of this distributor of medical supplies. Mr. Getter
was Chairman of Inksure Technologies, Inc.a manufacturer of RFID and security inks. He was a founder of KIDSRx an all-natural pharmaceutical
company and chairman of TCI College of Technology. Mr. Getter has been a member of The Broadway League [League of American Theatres and
Producers] Executive Vice Chairman of The Kurt Weill Foundation for Music, and Trustee of the American Theatre Wing. He has been
involved in most aspects of the entertainment industry and has produced for Broadway, television and film. His productions have earned
Pulitzer Prize, Tony and Grammy Awards.
David
W. Sass for the past 61 years has been a practicing attorney in New York City and is currently a Special Council in the law firm of McLaughlin
Stern, LLP. Mr. Sass is also licensed in the State of Texas. Mr. Sass has been a director of ICTS since 2002 and is also a director
of several privately held corporations. Mr. Sass is an Honorary Trustee of Ithaca College.
Gail
F. Lieberman is the founder and Managing Partner of Rudder Capital, LLC, which provides financial and strategic advisory services for
middle-market companies in the services technology sectors. Previously, she was the Chief Financial Officer for Thomson Corporation’s
Financial Professional Publishing division, Moody’s Investor Service, Inc. and Scali, McCabe, Sloves, Inc. (Ogilvy Group).
Ms. Lieberman is a director of Thesys Group, a private financial technology company and a board member and Chairman of the Audit
Finance Committee of WL Gore associates. Mrs. Lieberman is a board member of Equilend, a financial technology company, where she
chairs the risk committee. Formerly Mrs. Lieberman served as board member for the South-Central Connecticut Regional Water Authority, board
member, Compensation Committee Chair and Audit Committee Member for Dara Biosciences (NASDAQ: DARA), board member and Audit Committee
Chair for I-Trax Inc. (Amex: DMX), board member and Audit and Governance Committee Member for TriPath Imaging Inc. (NASDAQ: TPTH) and
board member and Audit Committee Chair for Breeze-Eastern Corporation (Amex: BZC). She also served on the board of FTEN, a financial technology
company. Ms. Lieberman holds a BA in Mathematics and Physics and an MBA in Finance from Temple University.
35
Gordon
Hausmann is the senior partner of his own law firm, founded in London over 35 years ago. He specializes, amongst other things, in corporate
and commercial law, including business finance and banking law, litigation and representation of several substantial family offices. Mr.
Hausmann holds office as a board member of numerous companies and institutions, including listed companies in the UK Israel and elsewhere.
These include an international airline, some Embassies, finance companies (including a company associated with a private Swiss banking
group) and other well-known and governmental entities. Mr. Hausmann also holds office and advises a number of charities, including Governor
of the Hebrew University.
Alon
Raich is a CPA (Isr). From 2001 to 2002, Mr. Raich worked in the accounting firm Kesselman Kesselman, PriceWaterhouseCoopers (PWC).
Mr. Raich joined ICTS in September 2005 as Financial Controller and became Chief Financial Officer (CFO) of ICTS in 2008. Since February
2020, Mr. Raich is a joint Managing Director and CFO of the Company. Mr. Raich holds a BA degree in economics and accounting and a MA
degree in law from Bar Ilan University, Israel.
Rom
Shaked is a CPA (Isr.) and an attorney at law (Isr.). Mr. Shaked joined ICTS in 2015 as an Internal Auditor. From April 2019 until December
2021 Mr. Shaked was nominated as Deputy CEO of I-SEC International Security B.V. and was responsible for I-SEC’s Quality Assurance,
Corporate HR, and was providing support in project management in different areas. As of January 1st
2022 Mr. Shaked is the CEO of I-SEC International Security B.V. As of February 2020, Mr. Shaked is a joint Managing Director of the Company
and for I-SEC International. Before joining ICTS Mr. Shaked was working as a financial auditor and in the Israeli Securities Authority
(ISA).
36
Summary
Compensation Table
The following table sets
forth compensation earned by the Company’s highest paid executive during the years 2019 through 2021 (U.S. Dollars in thousands):
|
Principal Position |
Year |
Salary |
Sales Commission |
All Other Compensations |
Non-equity Incentive Plan Compensation |
Nonqualified Deferred Compensation Earnings |
Number of Option Award |
Number of Stock Awards |
Total |
|||||||||||||||||||||||||
| $ | $ | $ | $ |
$ | $ | |||||||||||||||||||||||||||||
|
Managing |
2021 |
204 |
1,397 |
109 |
- |
- |
- |
- |
1,700 |
|||||||||||||||||||||||||
|
Director
of a |
2020 |
192 |
459 |
90 |
- |
- |
- |
- |
741 |
|||||||||||||||||||||||||
|
Subsidiary
|
2019 |
185 |
529 |
87 |
- |
- |
- |
- |
801 |
|||||||||||||||||||||||||
Each
member of the Supervisory Board who is not an employee of the Company receives an annual fee of $30 thousands and a fee for each Supervisory
Board or committee meeting attended of $2 thousands. The Chairman of the Audit Committee receives an additional $20 thousands per year.
The Chairman of the Board receives an annual fee of $50 thousands. Managing Directors are being employed by the Company and the total
expenses regarding the employment of the current Managing Directors for the year ended December 31, 2021 was $0.6 million.
The
following table sets forth information concerning the aggregate compensation paid or accrued on behalf of all of our directors and executive
officers as a group for the year ended December 31, 2021:
|
Salaries, fees, |
Pension, retirement |
|||||||
|
commissions |
and other |
|||||||
|
and bonuses |
similar benefits |
|||||||
|
(in thousands) |
||||||||
|
Supervisory Directors as a group (7 persons)
|
$ |
304 |
$ |
- |
||||
|
Officers as a group (6 persons)
|
$ |
2,671 |
$ |
332 |
||||
Background
and Compensation Philosophy
Our
Compensation Committee consists of Gail Lieberman, Chairman and Gordon Hausmann, all independent directors. The Compensation Committee
and, prior to its establishment our Supervisory Board of Directors determined the compensation to be paid to our executive officers based
on our financial and operating performance and prospects, the level of compensation paid to similarly situated executives in comparably
sized companies, and contributions made by the officers to our success. Each of the named officers will be measured by a series of performance
criteria by the Supervisory Board of directors, or the compensation committee on a yearly basis. Such criteria will be set forth based
on certain objective parameters such as job characteristics, required professionalism, management skills, interpersonal skills, related
experience, personal performance and overall corporate performance.
Our
Supervisory Board of Directors and Compensation Committee have not adopted or established a formal policy or procedure for determining
the amount of compensation paid to our executive officers. The Compensation Committee makes an independent evaluation of appropriate compensation
of key employees, with input from management. The Compensation
Our
compensation program for our executive officers and all other employees is designed such that it will not incentivize unnecessary risk-taking.
The base salary component of our compensation program is a fixed amount and does not depend on performance. Our cash incentive program
takes into account multiple metrics, thus diversifying the risk associated with any single performance metric, and we believe it does
not incentivize our executive officers to focus exclusively on short-term outcomes. Our equity awards are limited by the terms of our
equity plans to a fixed maximum specified in the plan, and are subject to vesting to align the long-term interests of our executive officers
with those of our stockholders.
Elements
of Compensation
We
provide our executive officers with a base salary and certain bonuses and commissions as well as equity awards in some cases to compensate
them for services rendered during the year. The Compensation Committee determines the composition and amount of director and key employee
compensation. When the annual award consists of equity purchases, it is only permitted at a price equal or above market.
37
Board
Practices
We
have a Supervisory Board and a Management Board. The Supervisory Board has the primary responsibility for supervising the policies of
the Management Board and the general course of corporate affairs and recommending the adoption of the annual financial statements of ICTS
by its shareholders. The Management Board is responsible for the day-to-day operations of ICTS. Members of the Supervisory Board and the
Management Board are appointed by the shareholders for a term of one year. Non-executive officers are appointed by and serve at the satisfaction
of the Management Board.
The
members of the Supervisory Board as of December 31, 2021 and the initial year they joined the Supervisory Board are as follows: Menachem
Atzmon (1999), Ron Atzmon (2018), Gil Atzmon (2018), David W. Sass (2002), Philip M. Getter (2003), Gordon Hausmann (2005) and Gail F.
Lieberman (2010).
The
Audit Committee consists of Philip M. Getter, Chairman, Gail F. Lieberman and Gordon Hausmann, all of whom are independent. Mr. Getter
and Ms. Lieberman have financial expertise. The audit committee evaluates ICTS's accounting policies and practices and financial reporting
and internal control structures, selects independent auditors to audit the Company’s financial statements and confers with the auditors
and the officers. The Audit Committee has an Operating Charter as well. We do not have a Nominating Committee. The members of the Audit
Committee and Compensation Committee are all independent and were never officers or employees of the Company.
The
Supervisory Board of the Company has adopted a Code of Ethics for principal Executive Officers, Directors and senior financial officers.
The
Articles of Association of ICTS require at least one member of both the Management Board and the Supervisory Board, but do not specify
a maximum number of members for such boards. The general meeting of shareholders determines the exact number of members of both the Management
Board and the Supervisory Board. Under the laws of the Netherlands and the Articles of Association, each member of the Supervisory Board
and Management Board holds office until such member's resignation, death or removal, with or without cause, by the shareholders.
Employees
As
of December 31, 2021, the Company has 6,290 employees, of which 4,698 employees are located in Europe, Far East and Israel and 1,592 are
located in the United States of America.
Share
Ownership
See
tables under Item 7: "Major Shareholders" and "Related Party Transactions" below.
Options
to Purchase Securities
In
June 2016, AU10TIX Limited adopted a Stock Option Plan and reserved 500,000 shares of common stock for that subsidiary’s future
issuance. As of December 31, 2021, the subsidiary has 13,000,000 authorized shares of which 12,500,000 shares are issued and outstanding.
Under the stock option plan, stock options may be granted to that subsidiary’s employees, officers, directors, consultants and service
providers of the subsidiary at an exercise price as determined by the subsidiary’s board of directors with expiration terms of not
more than ten years after the date such option is granted. Options granted under the plan generally vest over a period of four years.
In
August 2020, AU10TIX’s board of directors agreed to move the option plan from AU10TIX Limited to AU10TIX, which is still in process.
During the year ended December 31, 2021, 30,000 options were granted by AU10TIX of which 22,500 options are fully vested as of December
31, 2021. The weighted average exercise price was $26.46 and the weighted average remaining contractual term as of December 31, 2021 is
5.2 years.
As
of December 31, 2021, there are 222,375 options outstanding and exercisable.
38
Item
7.
Major Shareholders and Related Party Transactions
Major
Shareholders
The
following table sets forth certain information regarding ownership of the Company's Common Shares as of December 31, 2021 with respect
to:
Each
person who is known by the Company to own beneficially more than 5% of the Company's outstanding Common Shares.
All directors and officers
as a group.
|
Percent of |
||||||||
|
Amount Beneficially |
Common shares |
|||||||
|
Name Shareholders Holding Five Percent or More |
Owned (a) |
Outstanding (a) |
||||||
|
MacPherson Trust and its Ultimate Beneficial Owners (b)
|
62.6 |
% |
23,418,861 |
|||||
|
Menachem J. Atzmon
|
13.0 |
% |
4,850,000 |
|||||
|
Igal Tabori |
5.3 |
% |
2,002,483 |
|||||
|
All officers and directors as a group (9 persons), the MacPherson Trust and its Ultimate
Beneficial Owners |
84.1 |
% |
31,480,721 |
|||||
(a) The amounts
include common shares owned by each of the above, directly or indirectly.
(b)
1. The MacPherson Trust (“Trust”) was created for the benefit of the family of Mr. Menachem J. Atzmon. The Trust owns Spencer
Corporation, Limited, which holds together with the Trust and its Ultimate Beneficial Owners approximately 62.6% of the issued and outstanding
Common Shares. Mr. Atzmon disclaims any beneficial interest in the MacPherson Trust. Spencer Corporation Limited and the MacPherson Trust
and its Ultimate Beneficial Owners together with Mr. Atzmon are able to appoint all the directors of ICTS and control the affairs of ICTS.
2.
As of December 31, 2021 the Company has convertible notes payable to a related party in the total amount of $1.2 million, convertible
at a rate of $0.40 per share. The calculation above does not take into consideration the conversion of convertible notes.
Related
Party Transactions
An
entity related to one of the Company’s Supervisory Board members provide legal services to the Company. Legal expense related to
these services is $0.1million, $46 and $46 thousand for the years ended December 31, 2021, 2020 and 2019, respectively.
The
Company engages the services of a related party to provide certain selling and management services to the authentication technology segment.
The Company incurred expenses of $1.7, $0.7 and $0.8 million for such services for the years ended December 31, 2021, 2020 and 2019, respectively.
As of December 31, 2021, and 2020 the outstanding balances due for these services were $0.3 and $0.1 million, respectively, included in
accrued expenses and other current liabilities. In addition, since April 2018, the related party serves as a board member of the Company
and was paid an amount of $38, $38 and $28 thousand as board fees, for the years ended December 31, 2021, 2020 and 2019, respectively.
The
Company engages the services of a related party to provide certain selling services to its authentication technology segment. The Company
incurred expenses of $0.1, $0.1 and $0.1 million for such services for the years ended December 31, 2021, 2020 and 2019, respectively.
The
Company engaged the services of a related party to provide internal audit services. As of February 2020, the related party acts as a Managing
Director of the Company. The Company incurred expenses of $0.3, $0.2 and $0.2 million for such services for the years ended December 31,
2021, 2020 and 2019, respectively.
The
chairman of the board, a related party, receives annual compensation of $0.1 million for his services as chairman. In addition, in 2021
and 2020, the Company incurred salary expenses of $0.1 and $0.1 million, respectively for the services he provides to AU10TIX.
In
August 2017, the Company engaged the services of a related party to provide certain selling and administrative services to its authentication
technology segment. The Company incurred expenses of $0, $0 and $39 thousand for such services for the years ended December 31, 2021,
2020 and 2019, respectively. In addition, the related party serves as a board member of the Company, and was paid an amount of $38, $38
and $30 thousand as board fees, for the years ended December 31, 2021, 2020 and 2019, respectively.
39
In
May 2018, the Company engaged the services of a related party to provide certain administration services. The Company incurred expenses
of $0.1, $0.1 and $0.1 million for such services for the years ended December 31, 2021, 2020 and 2019, respectively.
In
May 2019, the Company engaged the services of Arrow (see note 6) to provide some administrative services. The Company incurred expenses
of $0.3, $0.1 and $0.6 million for such services for the years ended December 31, 2021, 2020 and 2019, respectively.
In
June 2019, the Company issued 3,000,000 shares to certain directors and officers of the Company for a purchase price of $0.40 per share.
The Compensation Committee determines the composition and amount of director and key employee compensation. When the annual award consists
of equity purchases, it is only permitted at a price equal or above market.
In
December 2019, the Company purchased shares and shareholders debt of Arrow for $1.8 million.
In
May 2020, an entity related to the Company’s main shareholder provided a letter of credit of €2.0 million ($2.3 million as
of December 31, 2021) to a commercial bank to guarantee a borrowing arrangement on behalf of one of the Company’s subsidiaries.
The Company provided to the related party a deposit of $2.2 million against the letter of credit which was paid back to the Company after
the letter of credit was cancelled.
The
Company has debt to related parties as described before in section “Related Parties Financing”.
Item
8.
Financial Information
The
Consolidated Financial Statements and Financial Statement Schedule are included herein on pages F-1 through F-38.
Legal
Proceedings
General
The
Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary
course of its business activities. These claims are primarily related to grievances filed by current and former employees for unfair labor
practices or discrimination, and for passenger aviation claims. Management recognizes a liability for any matter when the likelihood of
an unfavorable outcome is deemed to be probable and the amount is able to be reasonably estimated. Management has concluded that such
claims, in the aggregate, would not have a material adverse effect on the Company’s consolidated financial position, results of
operations, or cash flows.
Inquiry
Proceedings
On
June 24, 2021 a minority shareholder of the Company initiated inquiry proceedings before the Enterprise Chamber of the Amsterdam Court
of Appeal (the “Court”) which is a specialized court dedicated to resolving corporate disputes. The shareholder has requested
the Court to appoint an investigator on behalf of the Court in accordance with Dutch law, to investigate certain activities of the Company
that have been previously disclosed by the Company in its periodic filings with the SEC for the fiscal years ended December 31, 2020 and
2019. The shareholder has not requested the Court to order preliminary relief, but has requested the Court to order the registrant to
pay the costs of the proceedings. The Company expects that the Court will grant its judgement in June 2022.
White
Line
In
2017, the company invested $3,500 in White Line B.V., a limited Company incorporated in the Netherlands, representing 10% of the issued
and outstanding share capital of White Line B.V.
The
Company had an agreement with an entity related to its main shareholder, according to which, if the value of this investment decrease,
the related party entity has guaranteed to repurchase this full investment in minimum amount of $3,500. In December 2018, the related
party entity purchased the full investment from the Company for $3,500. In 2021, the Company has a dispute with White Line B.V. as certain
items disclosed in White Line B.V. financials appeared questionable. As the economical ownership is not within the Company any more, the
Company has no financial exposure on this dispute.
Agency
Agreements
In
April 2013, prior to the purchase of one of the current subsidiaries in Europe, the Company entered into an agency agreement with a third
party to assist it with this transaction. According to the agreement, in the event that the operations in that country are sold in the
future, the third-party agent is entitled to a payment of €3.0 million ($3.4 million as of December 31, 2021).
In
March 2016, the Company entered into an agreement with a third party to assist the Company with the possible sale of one of the Company’s
subsidiaries (see note 13). The fees depend on the outcome of the assignment and are between 2% - 5% of the sale consideration but not
less than $4.0 million In February 2019 the agreement was amended. According to the amendment, in case that less than 50% of the voting
stock or majority of the subsidiary assets are being sold the transaction fee will be 5% of the sale consideration but not lower than
$3.0 million. In January 2022, the agreement was amended so that the fees will be 2%-3% of the sale consideration but not less than
$4.0 million and with a cap of $20.0 million. In case that less than 50% of the voting stock or majority of the subsidiary assets
are being sold the transaction fee will be 5% of the sale consideration but not lower than $4.0 million.
In August 2017, the Company entered into an agreement with a third
party to assist the Company with a possible sale of one of the Company’s subsidiaries. The fees depend on the outcome of the assignment
and are between 2% - 10% of the sale consideration but not less than € 2.0 million ($2.3 million as of December 31, 2021). The agreement
was terminated in June 2021, although the third party is entitled to the consideration in case that subsidiary will be sold before December
2022.
40
Item
9. The
Offer and Listing
Our
shares of common stock are currently traded on the OTC under the symbol ICTSF.
The reported high and
low closing sales prices per shares during the last five years were as follows:
|
Year |
High |
Low |
||||||
|
2017
|
$ |
1.30 |
$ |
0.45 |
||||
|
2018
|
$ |
1.09 |
$ |
0.40 |
||||
|
2019
|
$ |
3.00 |
$ |
0.15 |
||||
|
2020
|
$ |
4.09 |
$ |
1.34 |
||||
|
2021
|
$ |
10.00 |
$ |
4.00 |
||||
The reported high and
low closing sales prices per share during each quarter for the last 3 years were as follows:
|
2021 |
High |
Low |
||||||
|
First quarter
|
$ |
6.00 |
$ |
4.00 |
||||
|
Second quarter
|
$ |
10.00 |
$ |
5.00 |
||||
|
Third quarter
|
$ |
10.00 |
$ |
6.00 |
||||
|
Fourth quarter
|
$ |
9.10 |
$ |
6.25 |
||||
|
2020 |
High |
Low |
||||||
|
First quarter
|
$ |
4.09 |
$ |
2.40 |
||||
|
Second quarter
|
$ |
3.00 |
$ |
1.34 |
||||
|
Third quarter
|
$ |
3.35 |
$ |
2.56 |
||||
|
Fourth quarter
|
$ |
4.00 |
$ |
2.31 |
||||
|
2019 |
High |
Low |
||||||
|
First quarter
|
$ |
0.26 |
$ |
0.25 |
||||
|
Second quarter
|
$ |
0.25 |
$ |
0.15 |
||||
|
Third quarter
|
$ |
1.45 |
$ |
0.19 |
||||
|
Fourth quarter
|
$ |
3.00 |
$ |
1.05 |
||||
41
Item
10.
Additional Information
Memorandum
and Articles of Association
Introduction
ICTS
is a public company with limited liability (naamloze vennootschap met beperkte aansprakelijkheid) incorporated under Dutch law on October
9, 1992. ICTS’ statutory seat is in Amstelveen, the Netherlands, and its registered office address at Schiphol, the Netherlands.
ICTS is registered with the trade register of the Dutch Chamber of Commerce under number 33279300.
As
a Dutch public company with limited liability, ICTS is subject to certain requirements not generally applicable to corporations organized
under the laws of jurisdictions within the United States of America. Set forth below is a summary of the material provisions of the articles
of association of ICTS as lastly amended on January 4, 2021 (the Articles of Association) and Dutch law, where appropriate. This
summary does not purport to be complete and is qualified in its entirety by reference to the Articles of Association. All references in
this summary to the Netherlands and Dutch law are to the European part of the Netherlands and its law, respectively, only.
Corporate
Objects
The
objectives of ICTS are described in Article 2 of the Articles of Association and include, without limitation, to manage and finance businesses,
extend loans and invest capital.
Share
Capital
The
shares of ICTS are subject to, and have been created under, the laws of the Netherlands. ICTS’ share capital is divided into
common shares (Shares).
All
Shares are in registered form (op naam) and are only available in the form of an entry in ICTS’ shareholders’ register.
Under
Dutch law, ICTS’ authorized share capital sets out the maximum amount and number of shares that it may issue without amending its
Articles of Association. The Articles of Association provide for an authorized share capital in an amount of EUR 67,500,000 divided into
150,000,000 Shares, each Share with a nominal value of EUR 0.45.
As
of December 31, 2021, 37,433,333 Shares were issued and outstanding.
Issue
of Shares and Pre-Emptive Rights
The
General Meeting is authorized to issue Shares or to grant rights to subscribe for Shares and to restrict and/or exclude statutory pre-emptive
rights in relation to the issuance of Shares or the granting of rights to subscribe for Shares. The General Meeting may designate another
body of ICTS competent to issue Shares (or grant rights to subscribe for Shares) and to determine the issue price and other conditions
of the issue for a specified period not exceeding five years (which period can be extended from time to time for further periods not exceeding
five years) so long as the maximum number of Shares which may be issued is specified. Shares may not be issued at less than their nominal
value and must be fully paid-up upon issue. A resolution by the General Meeting to issue Shares (or grant rights to subscribe for Shares)
or to designate another body as the competent corporate body requires an absolute majority of the votes cast. Such resolution was adopted
in December 2019 for a period of five years until December 2024. Designation by resolution of the General Meeting cannot be withdrawn
unless determined otherwise at the time of designation. No resolution is required for the issue of Shares pursuant to the exercise of
a previously-granted right to subscribe for Shares.
Under
Dutch law and the Articles of Association, each Shareholder has a pre-emptive right in proportion to the aggregate nominal value of their
shareholding upon the issue of Shares (or the granting of rights to subscribe for Shares). Exceptions to this pre-emptive right include
the issue of Shares (or the granting of rights to subscribe for Shares): (i) to employees of ICTS or another member of its Group; (ii)
against payment in kind (contribution other than in cash) and (iii) to persons exercising a previously-granted right to subscribe for
Shares. The pre-emptive rights in respect of newly issued Shares or the granting of rights to subscribe for Shares may be restricted or
excluded by a resolution of the General Meeting. The General Meeting may designate another corporate body as competent to resolve upon
the restriction or exclusion of the pre-emptive rights if such other corporate body has also been designated as the competent body to
resolve upon the issue of Shares for a specified period not exceeding five years (which period can be extended from time to time for further
periods not exceeding five years). A resolution of the General Meeting to exclude or restrict pre-emptive rights, or to authorize another
corporate body to exclude or restrict pre-emptive rights, requires a majority of at least two thirds of the votes cast, if less than half
of the issued share capital of ICTS is present or represented at the General Meeting. Such resolution was adopted in December 2019 for
a period of five years until December 2024. The resolution by with the pre-emptive rights are excluded or limited needs to be filed with
the Netherlands Chamber of Commerce within eight days of such resolution. A resolution designating another corporate body to resolve upon
the restriction or exclusion of the pre-emptive rights cannot be withdrawn unless provided otherwise in such resolution.
42
Acquisition
of Own Shares
ICTS
cannot subscribe for Shares in its own capital at the time Shares are issued. Subject to the certain provisions of the Articles of Association,
ICTS may acquire fully paid-up Shares provided no consideration is given or provided, (i) its shareholders’ equity less the payment
required to make the acquisition, does not fall below the sum of called-up and paid-in share capital and any reserves to be maintained
by Dutch law and/or the Articles of Association, (ii) ICTS and its subsidiaries would thereafter not hold Shares or hold a pledge over
Shares with an aggregate nominal value exceeding 50% of ICTS’ issued share capital and (iii) the Management Board has been authorized
thereto by the General Meeting. Any acquisition by ICTS of Shares that are not fully paid-up shall be null and void.
The
General Meeting’s authorization to the Management Board to acquire own Shares is valid for a maximum of 18 months. As part of the
authorization, the General Meeting must specify the number of Shares that may be repurchased, the manner in which the Shares may be acquired
and the price range within which the Shares may be acquired. The authorization is not required for the acquisition of Shares for employees
of the Company, under a scheme applicable to such employees. In 2020, the shareholders approved to amend the articles of association,
so that the Company will be entitle to buy back up to 20% of the issued shares.
Shares
held by the Company in its own share capital do not carry a right to any distribution. Furthermore, no voting rights may be exercised
for any of the Shares held by the Company or its subsidiaries unless such Shares are subject to the right of usufruct or to a pledge in
favour of a person other than the Company or its subsidiaries and the voting rights were vested in the pledgee or usufructuary before
the Company or its subsidiaries acquired such Shares. The Company or its subsidiaries may not exercise voting rights in respect of Shares
for which the Company or its subsidiaries have a right of usufruct or a pledge.
Reduction
of Share Capital
The
General Meeting may resolve to reduce the issued share capital by (i) cancelling Shares or (ii) amending the Articles of Association to
reduce the nominal value of the Shares of ICTS. In either case, this reduction would be subject to provisions of Dutch law and the Articles
of Association. Only Shares held by ICTS or Shares for which it holds the depositary receipts may be cancelled. Under Dutch law, a resolution
of the General Meeting to reduce the number of Shares must designate the shares to which the resolution applies and must lay down rules
for the implementation of the resolution. A resolution by the General Meeting to reduce the issued share capital of ICTS must be approved
by at least a two third majority of the votes cast, in a meeting in which holders of more than half of ICTS’ issued and outstanding
share capital is present or represented.
Dividends
Pursuant
to Dutch law and the Articles of Association, the distribution of profits will take place following the adoption of ICTS’ annual
accounts by the General Meeting, from which ICTS will determine whether such distribution is permitted. ICTS may make distributions to
the Shareholders, whether from profits or from its freely distributable reserves, only insofar as its shareholders’ equity exceeds
the sum of the paid-up and called-up share capital plus the reserves required to be maintained by Dutch law or pursuant to the Articles
of Association.
Subject
to Dutch law and the Articles of Association, the Supervisory Board may determine which part of ICTS’ profits as per its financial
statements for the relevant financial year will be added to the reserves. The remaining part of the profits will be at the disposal of
the General Meeting.
Subject
to Dutch law and the Articles of Association, the Management Board, with the prior approval of the Supervisory Board, may resolve to distribute
an interim dividend if it determines such interim dividend to be justified by ICTS’ profits. For this purpose, the Management Board
must prepare an interim statement of assets and liabilities. Such interim statement shall show the financial position of ICTS not earlier
than on the first day of the third month before the month in which the resolution to make the interim distribution is announced. An interim
dividend can only be paid if (a) an interim statement of assets and liabilities is drawn up showing that the funds available for distribution
are sufficient, and (b) ICTS’ shareholders’ equity exceeds the sum of the paid-up and called-up share capital plus the reserves
required to be maintained by Dutch law.
An
entitlement to any dividend distribution shall be barred five years after the date on which those dividends were released for payment.
43
General
Meeting of Shareholders
Annual
General Meeting
The
General Meeting will be held at least once a year and no later than six months from the end of the preceding financial year of ICTS. The
purpose of the annual General Meeting is to discuss, amongst other things, the annual report, the adoption of the annual accounts, allocation
of profits (including the proposal to distribute dividends), release of the Managing Directors from liability for their management and
the Supervisory Directors from liability for their supervision thereon, filling of any vacancies and other proposals brought up for discussion
by the Management Board and the Supervisory Board.
Convocation
Notice and Agenda
A
General Meeting can be convened by the Management Board or the Supervisory Board by a convening notice. Notices convening a general meeting
will be mailed to holders of registered shares at least 15 days before the General Meeting and will be published in a national newspaper
in the Netherlands and otherwise in other countries as required pursuant to the relevant laws where ICTS’ Shares have been admitted
to trading on a trading facility.
Extraordinary
General Meeting
Other
General meetings may be held as often as deemed necessary by the Management Board and Supervisory Board and must be held if one or more
Shareholders or other persons entitled to attend the general meeting jointly representing at least 10% of ICTS’ issued share capital
make a written request to the Management Board or the Supervisory Board that a meeting must be held and specifying in detail the business
to be dealt with at such meeting.
Agenda
Under
Dutch law, one or more Shareholders representing solely or jointly at least 3% of the ICTS’ issued and outstanding
share capital in value are entitled to request the Management Board to include items on the agenda of the General Meeting.
Place
General Meeting
General
Meetings are held in Amstelveen, the Netherlands (the place of the statutory seat of ICTS) or in Amsterdam, Rotterdam,
Schiphol Oost or The Hague, the Netherlands.
Admission
All shareholders of
ICTS, and each usufructuary and pledgee to whom the right to vote on Shares accrues, are entitled, in person or represented by a
proxy authorized in writing, to attend and address the General Meeting and exercise voting rights pro rata to their shareholding.
In
order to attend, address and vote at the General Meeting, the holders of ICTS’ registered shares must notify it in writing of their
intention to attend the meeting and holders of ICTS’ Shares admitted to trading on a trading facility must direct the depository
to their Shares, each as specified in the published notice. However, Shareholders and other persons entitled to attend the General Meeting
may be represented by proxies with written authority.
Voting
Rights
Each
Share confers the right on the holder to cast one vote at the General Meeting. Resolutions are passed by an absolute majority of the votes
cast provided a quorum of at least 50% of the outstanding share capital is represented, unless Dutch law or the Articles of Association
prescribe a larger majority. Under Dutch law, no votes may be cast at a General Meeting in respect of Shares which are held by ICTS itself.
44
Management
Structure
ICTS
has a two-tier board structure comprising of the Management Board (bestuur) and the Supervisory Board (raad van commissarissen).
The
Management Board is collectively responsible for ICTS’ general affairs and is in charge of the day-to-day management, formulating
strategies and policies, and setting and achieving ICTS’ objectives. The Supervisory Board supervises the Management Board and the
general affairs of ICTS and the business connected with it and provides the Management Board with advice.
Management
Board
Powers,
Responsibilities and Function
The
Management Board is the executive body of ICTS, collectively responsible for, among other things, defining and attaining ICTS’ objectives,
determining ICTS’ strategy and risk management policy, the day-to-day management, the ICTS’ general affairs and ICTS’
representation, subject to the supervision of the Supervisory Board. The Management Board may perform all acts necessary or useful for
achieving ICTS’ objectives, with the exception of those acts that are prohibited by law or by the Articles of Association. The Management
Board may allocate its responsibilities and powers to its individual members. All Managing Directors remain collectively responsible for
proper management regardless of the allocation of tasks. In performing their duties, the Managing Directors must carefully consider and
shall act in accordance with the interests of ICTS and the business connected with it, taking into consideration the interests of all
corporate stakeholders, such as Shareholders, creditors, employees, customers, patient populations and suppliers.
Subject
to certain statutory exceptions, the Management Board as a whole is authorized to represent ICTS. In addition, should the Management Board
be comprised of two or more members, two Managing Directors acting jointly are also authorized to represent ICTS.
Composition,
Appointment, Term of Appointment and Dismissal
The
Articles of Association provide that the Management Board shall consist of one or more members and that the General Meeting determines
the exact number of Managing Directors.
The
General Meeting appoints the Managing Directors. Managing Directors are appointed by the General meeting for an indefinite
period.
The
General Meeting and the Supervisory Board may suspend Managing Directors at any time, and the General Meeting may remove Managing Directors
at any time. A General Meeting must be held within three months after a suspension of a Managing Director has taken effect, in which meeting
a resolution must be adopted to either terminate or extend the suspension, provided that in the case that such suspension is not terminated,
the suspension does not last longer than three months in aggregate. The suspended Managing Director must be given the opportunity to account
for his or her actions at that meeting. If neither such resolution is adopted nor the General Meeting has resolved to dismiss the Managing
Director, the suspension will cease after the period of suspension has expired.
Decision-Making
In
a meeting of the Management Board, each Managing Director is entitled to cast one vote. All resolutions by the Management Board are adopted
by the favorable vote of a majority of the Managing Directors present or represented at the meeting (and in respect of whom no conflict
of interest exists).
The
Supervisory Board may also adopt resolutions outside a meeting, in writing or otherwise, provided that the proposal concerned is submitted
to all Managing Directors then in office (and in respect of whom no conflict of interest exists) and provided that none of them objects
to such decision-making process. Resolutions in writing shall be adopted by written statements from all relevant Managing Directors then
in office in respect of whom no conflict of interest exists.
Conflicts
of Interests
A
Managing Director shall not participate in any discussions and decision-making process if he or she has a direct or indirect personal
interest conflicting with the interests of the Company. Such a conflict of interest only exists if in the situation at hand the Managing
Director is deemed to be unable to serve the Company’s interest and its connected business with the required level of integrity
and objectivity. If for this reason no resolution can be taken by the Managing Directors, the Supervisory Board will resolve on the matter.
45
Supervisory
Board
Powers,
Responsibilities and Function
The
role of the Supervisory Board is to supervise the conduct and policies of the Management Board and the general affairs of ICTS and the
business connected with it as well as to provide the Management Board with advice. The Supervisory Directors are not authorized to represent
ICTS. In performing their duties, the Supervisory Directors are required to be guided by the interests of ICTS and the business connected
with it, and shall consider the interests of the ICTS’ stakeholders, which include but are not limited to its shareholders, creditors,
employees, customers and suppliers. The Supervisory Board may, at ICTS’ expense, seek the advice which it deems desirable for the
correct performance of its duties.
Composition,
Appointment, Term of Appointment and Dismissal
The
Articles of Association provide that the Supervisory Board shall consist of one or more members and that the General Meeting determines
the exact number of Supervisory Directors.
The
members of the Supervisory Board are appointed by the General Meeting for a term of one year.
The
General Meeting may suspend and remove Supervisory Directors at any time. A General Meeting must be held within three months after a suspension
of a Supervisory Director has taken effect, in which meeting a resolution must be adopted to either terminate or extend the suspension,
provided that in the case that such suspension is not terminated, the suspension does not last longer than three months in aggregate.
The suspended Supervisory Director must be given the opportunity to account for his or her actions at that meeting. If neither such resolution
is adopted nor the General Meeting has resolved to dismiss the Supervisory Director, the suspension will cease after the period of suspension
has expired.
Decision-Making
In
a meeting of the Supervisory Board, each Supervisory Director is entitled to cast one vote. A Supervisory Director may grant a written
proxy to another Supervisory Director (if in office) to represent him at a meeting. All resolutions by the Supervisory Board are adopted
by the favorable vote of a majority of the Supervisory Directors present or represented at the meeting (and in respect of whom no conflict
of interest exists).
The
Supervisory Board may also adopt resolutions outside a meeting, in writing or otherwise, provided that the proposal concerned is submitted
to all Supervisory Directors then in office (and in respect of whom no conflict of interest exists) and provided that none of them objects
to such decision-making process. Adoption of resolutions in writing shall be adopted by written statements from all relevant Supervisory
Directors then in office in respect of whom no conflict of interest exists.
Conflicts
of Interests
A
Supervisory Director shall not participate in any discussions and decision-making process if he or she has a direct or indirect personal
interest conflicting with the interests of the Company. Such a conflict of interest only exists if in the situation at hand the Supervisory
Director is deemed to be unable to serve the Company’s interest and its connected business with the required level of integrity
and objectivity. If for this reason no resolution can be taken by the Supervisory Directors, the General Meeting will resolve on the matter.
Financial
Year and Annual Accounts
The
financial year of ICTS coincides with the calendar year. Annually within five months after the end of the financial year, the Management
Board prepares the annual accounts. The annual accounts must be accompanied by the Report of Independent Registered Public Accounting
Firm, an annual report, a report by the Management Board and a report by the Supervisory Board and certain other information required
under Dutch law. All Managing Directors and Supervisory Board sign the annual accounts and if one of them does not so sign, the reason
for this omission must be stated. The Management Board must make the annual accounts, the annual report and other information required
under Dutch law available for inspection by the Shareholders and other persons entitled to attend and address the General Meeting at the
offices of ICTS from the day of the notice convening the annual General Meeting. The annual accounts must be adopted by the General Meeting
at the annual General Meeting.
46
Contrary
to what is provided in Article 19 paragraph 4 of the Articles of Association, approval of the annual accounts by the Shareholders does
not discharge the Managing Directors and the Supervisory Board from liability for the performance of their respective duties for the past
financial year. In order to discharge the Managing Directors and Supervisory Board from liability a separate resolution thereto needs
to be adopted by the General Meeting (which resolution can be adopted in the same meeting in which the annual accounts will be adopted).
Under Dutch law, this discharge is not absolute and will not be effective with respect to matters which are not disclosed to the Shareholders.
Amendment
of Articles of Association
Only
the General Meeting may resolve to amend the Articles of Association. A proposal to amend the Articles of Association must be included
in the notice convening the General Meeting. A copy of the proposal containing the verbatim text of the proposed amendment must be available
at ICTS for inspection by every shareholder of ICTS and every holder of meeting right until the end of the General Meeting.
A
resolution by the General Meeting to amend the Articles of Association must be approved by at least a two third majority of the votes
cast, in a meeting in which holders of more than half of ICTS’ issued and outstanding share capital is present or represented.
Dissolution
and Liquidation
A
proposal to dissolve ICTS must be included in the notice convening the General Meeting. A resolution by the General Meeting to dissolve
ICTS must be approved by at least a two third majority of the votes cast, in a meeting in which holders of more than half of ICTS’
issued and outstanding share capital is present or represented.
If
the General Meeting has resolved to dissolve ICTS, the Managing Directors will be charged with the liquidation of the business of ICTS
in accordance with Dutch law and the Articles of Association under supervision of the Supervisory Board. During liquidation, the provisions
of the Articles of Association will remain in force as far as possible.
Any
surplus remaining after settlement of all debts and liquidation costs will be distributed to the Shareholders in proportion to the nominal
value of their shareholdings.
Material
contracts
For
material contracts See “Item 8 - Financial Information”.
Exchange
controls
There
are no governmental laws, decrees or regulations in The Netherlands, ICTS’ jurisdiction of organization, that restrict ICTS’
export or import of capital in any material respect, including, but not limited to, foreign exchange controls.
There
are no limitations imposed by Dutch law or ICTS’ charter documents on the right of non-resident or foreign owners to hold or vote
Shares.
Taxation
The
following discussion summarizes the material anticipated U.S. federal income tax consequences of the acquisition, ownership and disposition
of shares by a U.S. Holder (as defined below). This summary deals only with shares held as capital assets and does not deal with the tax
consequences applicable to all categories of investors some of which (such as tax-exempt entities, banks, broker-dealers, investors who
hold shares as part of hedging or conversion transactions and investors whose functional currency is not the U.S. dollar) may be subject
to special rules.
The
summary does not purport to be a complete analysis or listing of all the potential tax consequences of holding shares, nor does it purport
to furnish information in the same detail or with the attention to an investor's specific tax circumstances that would be provided by
an investor's own tax adviser. Accordingly, U.S. holders of shares are advised to consult their own tax advisers with respect to their
particular circumstances and with respect to the effects of U.S. federal, state, local, or other laws to which they may be subject.
47
As
used herein, the term "U.S. Holder" means a beneficial owner of shares that is (i) for United States federal income tax purposes a citizen
or resident of the United States of America, (ii) a corporation or other entity created or organized in or under the laws of the United
States or any political subdivision thereof, (iii) a trust if a court within the United States of America is able to exercise primary
supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions
of the trust, or (iv) an estate, the income of which is subject to United States federal income taxation regardless of its source.
The
summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), judicial decisions, administrative pronouncements, and
existing and proposed Treasury Department regulations, changes to any of which after the date of this Annual Report on Form 20-F could
apply on a retroactive basis and affect the tax consequences described herein.
Taxation
of Dividends
For
U.S. federal income tax purposes, the gross amount of distributions, if any, (including any withholding tax thereon) made by the Company
out of its current or accumulated earnings and profits (as determined under U.S. federal income tax principles) will be included in the
gross income of a direct U.S. Holder as foreign source dividend income on the date of receipt but in the case of a U.S. Holder that is
a corporation, generally will not be eligible for a dividends received deduction if the Company constitutes a so-called “specified
10%-owned foreign corporation” with respect to such a U.S. Holder.
Subject
to the discussion below regarding passive foreign investment companies, the Company should be considered to be a “qualified foreign
corporation” so that such dividends should be eligible to be taxed as net capital gains (at a maximum U.S. federal rate of 20 percent
in the hands of a non-corporate U.S. Holder) plus potentially a net investment income tax (for non-corporate U.S. Holders) at a maximum
rate of 3.8%.
Distributions
in excess of the earnings and profits of the Company will be treated, for U.S. federal income tax purposes, first as non-taxable to the
extent of the U.S. Holder's basis in the shares (thereby increasing the amount of any gain and decreasing the amount of any loss realized
on the subsequent disposition of such shares) and then as a gain from the sale or exchange of the shares. The amount of any dividend paid
in Euros generally will be determined based on the U.S. dollar value of the Euro on the date of receipt regardless of whether the U.S.
Holder converts the payment into U.S. dollars.
The
declaration of dividends will be at the discretion of the Company’s Supervisory Board of directors and will depend upon the Company’s
earnings, capital requirements, financial position, general economic conditions, and other pertinent factors. The Company cannot assure
Holders that dividends will be paid in the future.
Foreign
Tax Credits
U.S.
Holders will generally be entitled to claim a credit against their United States federal income tax liability for the amount of Netherlands
dividend withholding tax imposed on dividends paid to U.S. Holders.
See
Netherlands Dividend Withholding Tax. U.S. Holders who are entitled to the benefits of a reduced rate of Netherlands dividend withholding
tax under the tax treaty between the United States of America and the Netherlands will be allowed a credit for only the amount of withholding
tax provided for under the U.S. Tax Treaty (generally 15%).
However,
the full amount of the dividend, including any withheld amounts, generally will be subject to current United States federal income taxation
whether or not such Holder the benefit of a credit for the amount withheld. In the event the Company pays a dividend to a U.S. Holder
out of the earnings of a non-Dutch subsidiary, however, it is possible that under certain circumstances that such U.S. Holder would not
be entitled to claim a credit for a portion of any Dutch taxes withheld by the Company from such dividend. Based on historic economics,
the portion of Dutch withholding tax that may not be creditable in this instance should equal a maximum of 3% of the gross amount of such
dividend (or 20% of the Dutch taxes withheld in the case of a U.S. Holder entitled to claim a 15% withholding rate under the U.S. Tax
Treaty). This limitation would potentially apply only under circumstances where the Company pays dividends on the shares.
48
Depending
on the particular circumstances of the U.S. Holder, dividends accrued from shares will generally be classified, for foreign tax credit
purposes, as passive income. A U.S. Holder who finds it more advantageous because of such limitations to claim the Netherlands dividend
withholding tax as a deduction instead of a credit may do so, but only for a year for which such Holder does not claim a credit for any
foreign taxes. If the U.S. Holder is a U.S. partnership, trust, or estate, any tax credit is available only to the extent that the income
derived by such partnership, trust, or estate is subject to U.S. tax on the income of a resident either in its hands or in the hands of
its partners or beneficiaries, as the case may be.
Taxation
on Sale or Disposition of Shares
Subject
to the discussion below regarding passive foreign investment companies, U.S. Holders will recognize capital gain or loss for U.S. federal
income tax purposes on the sale or other disposition of shares in an amount equal to the difference between the U.S. dollar value of the
amount realized and the U.S. Holder's adjusted tax basis in the shares. In general, a U.S. Holder's adjusted tax basis in the shares will
be equal to the amount paid by the U.S. Holder for such shares reduced by any distribution in excess of the earnings and profits of the
Company.
For
shares held for one year or less, any such gain or loss will generally be treated as short-term gain or loss. Short-term capital gains
are taxed at the same rate as ordinary income.
If
the shares have been held for more than a year, any such gain or loss will generally be treated as long-term capital gain or loss. U.S.
Holders are advised to consult a competent tax adviser regarding applicable capital gains tax provisions and sourcing of capital gains
and losses for foreign tax credit purposes.
Gift
and Estate Tax
An
individual U.S. Holder may be subject to U.S. gift and estate taxes on shares in the same manner and to the same extent as on other types
of personal property.
Backup
Withholding and Information Reporting
Payments
in respect of the shares may be subject to information reporting to the IRS and to a 24% U.S. backup withholding tax. Backup withholding
generally will not apply, however, to a Holder who furnishes a correct U.S. taxpayer identification number or certificate of foreign status
and makes any other required certification or who is otherwise exempt from backup withholding. Generally, a U.S. Holder will provide such
certification on Form W-9 (Request for Taxpayer Identification Number and Certification) and a non-US Holder will provide such certification
on a version of Form W-8 (Certificate of Foreign Status).
Passive
Foreign Investment Company
Management
has determined that the Company has not been a passive foreign investment company (“PFIC”) for United States federal income
tax purposes for prior taxable years and believes that the Company will not be treated as a PFIC for the current and future taxable years,
but this conclusion is a factual determination made annually and thus subject to change. The Company would be a PFIC with respect to a
U.S. Holder if, for any taxable year in which such U.S. Holder held shares, either (i) at least 75% of the Company’s gross income
for the taxable year is passive income, or (ii) at least 50% of the Company’s assets are assets that produce or are held for the
production of passive income. Under a “look-through” rule, a corporation takes into account a pro rata share of the income
and the assets of any corporation in which it owns, directly or indirectly, 25% or more of the stock by value.
Passive
income generally includes dividends, interest, royalties, rents (other than rents and royalties derived from the active conduct of a trade
or business and not derived from a related person), annuities, and gains from assets that produce passive income. The 50% asset test would
apply to the Company based on fair market values.
If
the Company is a PFIC for any taxable year during which a U.S. Holder holds shares, the U.S. Holder will be subject to special tax
rules with respect to any “excess distribution” that the U.S. Holder receives on shares, and any gain the U.S. Holder realizes
from a sale or other disposition (including a pledge) of the shares unless the U.S. Holder makes a “qualified electing fund”
or “mark-to-market” election as discussed below.
49
Distributions
the U.S. Holder receives in a taxable year that are greater than 125% of the average annual distributions the U.S. Holder received during
the shorter of the three preceding taxable years or the U.S. Holder’s holding period for the shares will be treated as an excess
distribution. Under these special tax rules:
| • |
The excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period
for the shares, |
| • |
The amount allocated to the current taxable year, and any taxable year prior to the first taxable year
in which the Company was a PFIC, will be treated as ordinary income, and |
| • |
The amount allocated to each other year will be subject to tax at the highest tax rate in effect for
that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each
such year. |
The
tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by
any net operating losses, and gains (but not losses) realized on the sale of the shares cannot be treated as capital, even if the U.S.
Holder holds the shares as capital assets.
If
the Company were to become a PFIC, a U.S. Holder may avoid taxation under the excess distribution rules discussed above by making a “qualified
electing fund” election to include the U.S. Holder’s share of the Company’s income on a current basis. However, a U.S.
Holder may make a qualified electing fund election only if the Company, as a PFIC, agrees to furnishes the shareholder annually with certain
tax information. Management has not decided whether, under such circumstances, the Company would prepare or provide such information.
Alternatively, if the Company were to become a PFIC, a U.S. Holder might, depending on the volume of trading of our stock, make a mark-to-market
election to elect out of the excess distribution rules discussed above.
If
a U.S. Holder made a mark-to-market election for the shares, the U.S. Holder would include in income each year an amount equal to the
excess, if any, of the fair market value of the shares as of the close of the U.S. Holder’s taxable year over the U.S. Holder’s
adjusted basis in such shares. A U.S. Holder is allowed a deduction for the excess, if any, of the adjusted basis of the shares over their
fair market value as of the close of the taxable year only to the extent of any net mark-to-market gains on the shares included in the
U.S. Holder’s income for prior taxable years. Amounts included in a U.S. Holder’s income under a mark-to-market election,
as well as gain on the actual sale or other dispositions of the shares are treated as ordinary income. Ordinary loss treatment also applies
to the deductible portion of any mark-to-market loss on the shares, as well as to any loss realized on the actual sale or disposition
of the shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such shares.
A U.S. Holder’s basis in the shares will be adjusted to reflect any such income or loss amounts.
The
mark-to-market election is available only for stock which is regularly traded on a national securities exchange that is registered with
the Securities and Exchange Commission, or the national market system established pursuant to section 11A of the Exchange Act, or any
exchange or market that the IRS has determined has rules sufficient to carry out the purposes of the income tax rules. There can be no
assurance that the Company will continue to satisfy the requirements of the mark-to-market election.
Taxes
in the Netherlands
Corporate
Income Tax – General
We
are incorporated under the laws of the Netherlands and are therefore subject to Netherlands corporate income tax. As of 2020, the
standard corporate income tax rate is 15% on profits up to €0.245 million and 25% on the excess. In 2021, the statutory corporate
income tax rates will be lowered further to 15% and 25%, respectively. In 2022 the statutory corporate income tax rates will be 15% on
profits up to €0.4 million and 25%, on the excess.
ICTS
and a number of our Netherlands resident subsidiaries form a fiscal unity for Netherlands corporate income tax purposes. As a result,
corporate income tax is levied from these entities on a consolidated basis at the level of ICTS.
For
Netherlands corporate income tax purposes, affiliated entities should calculate their profits on an “at arm’s length”
basis. In case transactions between such affiliated entities are made or imposed on conditions (transfer prices) which differ from those
conditions which would have been made or imposed between independent entities in the free market, the profits of those entities are determined
as if the “at arm’s length” conditions had been agreed.
50
Participation
Exemption
Pursuant
to the Netherlands participation exemption, income and capital gains derived from the investment by a parent company in a qualifying subsidiary
are exempt from corporate income tax provided that the parent company meets the 5 per cent threshold test, and the participation is not
considered to be a portfolio investment. The 5 per cent threshold test requires that the parent company (i) owns at least 5 per cent of
the nominal share capital in the subsidiary, or (ii) is shareholder in and related to the subsidiary, whilst an entity related to the
parent owns at least 5 per cent of the nominal share capital in the subsidiary, or (iii) has owned for an uninterrupted period of at least
one year at least 5 per cent of the nominal share capital in subsidiary and three years have not yet passed after the shareholding by
the parent in the subsidiary dropped below 5 per cent.
If
the parent company holds its participation in the subsidiary as a portfolio investment, the participation exemption is not applicable,
unless it qualifies as a “qualifying portfolio investment”. A portfolio investment is a shareholding in a subsidiary that
is held by the parent with the intent of realizing a return on investment that can be expected from normal, active asset management
activities. This is a subjective facts and circumstances test. The specific purpose for making the investment in the subsidiary must be
analyzed on a case-by-case basis taking into account all of the relevant facts and circumstances.
A
parent company would generally not be considered to hold the participation in the subsidiary company as a portfolio investment, if the
business carried on by the subsidiary company is in line with the business carried on by the parent company. This should normally also
apply to a holding company, which, based on its activities on a managerial, policy-making or financial level, performs a material function
for the benefit of the group of companies that it forms part of, or to an intermediate holding company in case this company plays a linking
role between the business activities of its parent company and the business activities of its subsidiary companies.
The
subsidiary would be deemed to be held as a portfolio investment by the parent company if (i) the assets of the subsidiary usually
consist, on a consolidated basis, for more than 50 per cent of shareholdings (and similar rights) of less than 5 per cent in other entities
or (ii) the subsidiary company’s activities consist for more than 50% of group financing activities. Group financing includes loans,
credit instruments and also leasing of equipment, intangibles and other assets.
If
the parent company would (be deemed to) hold the participation in the subsidiary as a portfolio investment, such portfolio investment
may still qualify for the application of the participation exemption if (i) the subsidiary is subject to an income/profits tax resulting
in an effective tax burden that is realistic under Netherlands principles, or (ii) the assets of the subsidiary, directly or indirectly,
usually consist for less than 50 per cent of low-taxed free investments.
Apart
from special provisions in relation to certain liquidation losses, capital losses incurred in relation to qualifying participations are
not deductible for Netherlands corporate income tax purposes
Costs
related to the acquisition of qualifying participations are generally not deductible. Costs related to the disposal of qualifying participations
are also generally not deductible. Other expenses relating to participations (e.g. the cost of financing) are in principle deductible,
subject to possible interest deduction limitations.
The
participation exemption does not apply to accrued payments (of dividend, interest, or other) that are tax-deductible in the country of
the debtor, whereas the corresponding income is exempt under the scope of the participation exemption. This will be the case e.g. if the
country of the debtor qualifies the distribution as an interest expense, whereas the Netherlands qualifies the income as a dividend.
In
case the participation exemption is applicable, income in the hands of ICTS arising from dividends paid by subsidiaries or capital gains
from the disposal of its shares in such subsidiaries are exempt from corporate income tax in the Netherlands.
If
the participation exemption is not applicable, income derived by ICTS from a subsidiary will be taxed at the statutory corporate income
tax rates.
Controlled
Foreign Company Regulations
As
per 1 January 2019, the Netherlands has implemented the Controlled Foreign Company (“CFC”) regulations provided for in the
EU Anti-Tax Avoidance Directive (“ATAD”) into domestic law. Based on these regulations, subject to conditions, certain
types of passive income generated by qualifying CFC’s that are resident in low-tax jurisdictions (i.e., countries with a statutory
profit tax rate lower than 9%) or jurisdictions that are included on the EU list of non-cooperative jurisdictions, are taxable at the
level of the parent company against the regular Dutch corporate income tax rates mentioned above.
51
Interest
Deduction Limitations
As
of 1 January 2019, the Netherlands has implemented the generic interest stripping rule provided for in the EU Anti-Tax Avoidance Directive
(“ATAD”) into domestic law. The earnings stripping rule limits the possibility to deduct “excess” interest costs
(i.e. the balance of interest costs and interest income) to 30% of a taxpayer’s EBITDA. As of January 1, 2022, the before mentioned
percentage has been reduced from 30% to 20%. The earnings stripping rule provides for a €1.0 million threshold, which means that
the deduction of excess interest costs up to €1.0 million will not be restricted.
Besides
the earnings stripping rule, Netherlands tax law includes other anti-abuse provisions in relation to the deductibility of interest. In
addition, interest deductions may be disallowed based on the abuse of law doctrine (“fraud legis”).
Loss
Compensation
According
to Netherlands tax law, losses incurred may be carried back for one year. As of 1 January 2019, the possibility to carry forward losses
was limited from nine years to six years. As from 1 January 2022, losses can be carried forward indefinitely. The yearly utilization of
carry forward losses will be limited to €1.0 million, plus 50% of taxable income above €1.0 million. The new rules are also
applicable to already existing carry forward losses as per 1 January 2022 (i.e., carry forward losses from 2013 and subsequent years).
Depreciation
Limitations
For
Netherlands corporate income tax purposes, restrictions apply to the depreciation of goodwill, real estate and other business assets.
The maximum yearly depreciation charge for acquired goodwill is 10% of its cost price. Depreciation of real estate property is not allowed
in case the book value of the property falls below 100% of the value used for purposes of the Valuation of Immovable Property Act (“WOZ
value”). The maximum yearly depreciation charge for other business assets is 20% of the cost price of such assets. In certain situations,
it should still, however, be possible to value assets at lower going-concern value.
Netherlands
Tax Considerations of Holding Shares
The
following summary outlines certain Netherlands tax consequences in connection with the acquisition, ownership and disposal of Shares. All
references in this summary to the Netherlands and Dutch law are to the European part of the Netherlands and its law, respectively, only.
The summary does not purport to present any comprehensive or complete picture of all Netherlands tax aspects that could be of relevance
to the acquisition, ownership and disposal of Shares by a (prospective) holder of Shares who may be subject to special tax treatment under
applicable law. The summary is based on the tax laws and practice of the Netherlands as in effect on the date of this Prospectus,
which are subject to changes that could prospectively or retrospectively affect the Netherlands tax consequences.
For
purposes of Netherlands income and corporate income tax, Shares legally owned by a third party such as a trustee, foundation or similar
entity or arrangement (a Third Party), may under certain circumstances have to be allocated to the (deemed) settlor, grantor or similar
originator (the Settlor) or, upon the death of the Settlor, his/her beneficiaries (the Beneficiaries) in proportion to their
entitlement to the estate of the Settlor of such trust or similar arrangement (the Separated Private Assets).
The
summary does not address the tax consequences of a holder of Shares who is an individual and who has a substantial interest in ICTS. Generally,
a holder of Shares will have a substantial interest in ICTS if such holder of Shares, whether alone or together with his spouse or partner
and/or certain other close relatives, holds directly or indirectly, or as Settlor or Beneficiary of Separated Private Assets (i) the ownership
of, or certain other rights, such as usufruct, over, or rights to acquire (whether or not already issued), shares representing 5% or more
of the total issued and outstanding capital (or the issued and outstanding capital of any class of shares) of ICTS or (ii) the ownership
of, or certain other rights, such as usufruct over, profit participating certificates (winstbewijzen) that relate to 5% or more of the
annual profit of ICTS or to 5% or more of the liquidation proceeds of ICTS.
In
addition, a holder of Shares has a substantial interest in ICTS if he, whether alone or together with his spouse or partner and/or certain
other close relatives, has the ownership of, or other rights over, shares in, or profit certificates issued by, ICTS that represent less
than 5% of the relevant aggregate that either (a) qualified as part of a substantial interest as set forth above and where shares, profit
certificates and/or rights there over have been, or are deemed to have been, partially disposed of, or (b) have been acquired as part
of a transaction that qualified for non-recognition of gain treatment.
This
summary does not address the tax consequences of a holder of Shares who:
(a) receives
income or realizes capital gains in connection with his or her employment activities or in his/her capacity as (former) Management Board
member and/or (former) Supervisory Board member; or
(b) is
a resident of any non-European part of the Netherlands; or
(c)
for whom the Shares form part of a “lucrative interest” (see further below).
Prospective
holders of Shares should consult their own professional adviser with respect to the tax consequences of any acquisition, ownership or
disposal of Shares in their individual circumstances.
52
Dividend
Withholding Tax
General
ICTS
is generally required to withhold dividend withholding tax imposed by the Netherlands at a rate of 15% on dividends distributed by ICTS
in respect of Shares. The expression “dividends distributed by ICTS” as used herein includes, but is not limited to:
(a)
distributions in cash or in kind, deemed and constructive distributions and repayments of paid-in capital (“gestort kapitaal”)
not recognized for Netherlands dividend withholding tax purposes;
(b)
liquidation proceeds, proceeds of redemption of Shares or, as a rule, consideration for the repurchase of Shares by ICTS in excess of
the average paid-in capital recognized for Netherlands dividend withholding tax purposes;
(c)
the par value of Shares issued to a holder of Shares or an increase of the par value of Shares, to the extent that it does not appear
that a contribution, recognized for Netherlands dividend withholding tax purposes, has been made or will be made; and
(d)
partial repayment of paid-in capital, recognized for Netherlands dividend withholding tax purposes, if and to the extent that there are
net profits (zuivere winst), unless (i) the General Meeting has resolved in advance to make such repayment and (ii) the par value of the
Shares concerned has been reduced by an equal amount by way of an amendment of the Articles of Association of ICTS.
Holders
of Shares Resident in the Netherlands
A
holder of Shares that is resident or deemed to be resident in the Netherlands is generally entitled, subject to the anti-dividend stripping
rules described below, to a full credit against its (corporate) income tax liability, or a full refund, of the Netherlands dividend withholding
tax. As from 1 January 2022, corporate taxpayers can only claim a credit for Netherlands dividend withholding tax for at maximum the amount
of their corporate income tax liability in any given year. Non-credited dividend withholding tax can be carried forward indefinitely and
be credited against the taxpayer’s tax liability in future years.
Holders
of Shares Resident Outside the Netherlands
A
holder of Shares that is resident in a country with which the Netherlands has a double taxation convention in effect, may, depending on
the terms of such double taxation convention and subject to the anti-dividend stripping rules described below, be eligible for a full
or partial exemption from, or full or partial refund of, Netherlands dividend withholding tax on dividends received.
A
holder of Shares that is a legal entity (a) resident in (i) a Member State of the European Union, (ii) Iceland, Norway or Liechtenstein,
or (iii) a country with which the Netherlands has concluded a tax treaty that includes an article on dividends and (b) that is in its
state of residence under the terms of a double taxation agreement concluded with a third state, not considered to be resident for tax
purposes in a country with which the Netherlands has not concluded a tax treaty that includes an article on dividends (not being a Member
State of the European Union, Iceland, Norway or Liechtenstein), is generally entitled, subject to the anti-abuse rules and the anti-dividend
stripping rules described below, to a full exemption from Netherlands dividend withholding tax on dividends received if it holds an interest
of at least 5% (in shares or, in certain cases, in voting rights) in ICTS or if it holds an interest of less than 5%, in either case where,
had the holder of Shares been a Netherlands resident, it would have had the benefit of the participation exemption (this may include a
situation where another related party holds an interest of 5% or more in the company).
The
full exemption from Netherlands dividend withholding tax on dividends received by a holder of Shares that is a legal entity (a) resident
in (i) a Member State of the European Union, (ii) Iceland, Norway or Liechtenstein, or (iii) a country with which the Netherlands has
concluded a tax treaty that includes an article on dividends is not granted if the interest held by such holder (i) is held with the avoidance
of Netherlands dividend withholding tax of another person as (one of) the main purpose(s) and (ii) forms part of an artificial structure
or series of structures (such as structures which are not put into place for valid business reasons reflecting economic reality).
A
holder of Shares that is an entity resident in (i) a Member State of the European Union, or (ii) Iceland, Norway or Liechtenstein, or
(iii) in a jurisdiction which has an arrangement for the exchange of tax information with the Netherlands (and such holder as described
under (iii) holds the Shares as a portfolio investment, i.e., such holding is not acquired with a view to the establishment or maintenance
of lasting and direct economic links between the holder of Shares and ICTS and does not allow the holder of Shares to participate effectively
in the management or control of ICTS), which is exempt from tax in its country of residence and does not have a similar function to a
qualifying investment institution (fiscale beleggingsinstelling) or a qualifying exempt investment institution (vrijgestelde beleggingsinstelling),
and that would have been exempt from Netherlands corporate income tax if it had been a resident of the Netherlands, is generally entitled,
subject to the anti-dividend stripping rules described below, to a full refund of Netherlands dividend withholding tax on dividends received.
This full refund will in general benefit certain foreign pension funds, government agencies and certain government controlled commercial
entities.
53
According
to the anti-dividend stripping rules, no exemption, reduction, credit or refund of Netherlands dividend withholding tax will be granted
if the recipient of the dividend paid by the company is not considered the beneficial owner (uiteindelijk gerechtigde) of the dividend
as defined in these rules. A recipient of a dividend is not considered the beneficial owner of the dividend if, as a consequence of a
combination of transactions, (i) a person (other than the holder of the dividend coupon), directly or indirectly, partly or wholly benefits
from the dividend, (ii) such person directly or indirectly retains or acquires a comparable interest in Shares, and (iii) such person
is entitled to a less favorable exemption, refund or credit of dividend withholding tax than the recipient of the dividend distribution.
The term “combination of transactions” includes transactions that have been entered into in the anonymity of a regulated stock
market, the sole acquisition of one or more dividend coupons and the establishment of short-term rights or enjoyment on Shares (e.g.,
usufruct).
As
from 2024, the new Conditional Withholding Tax Rule (CWTR) will enter into force. Based on the CWTR, a withholding tax will be levied
on (i) dividend payments to corporate shareholders resident in low-tax jurisdictions (i.e., countries with a statutory profit tax rate
lower than 9%), (ii) dividend payments to jurisdictions that are included on the EU list of non-cooperative jurisdictions and (iii) dividend
payments to hybrid entities and artificial structures intended to avoid Dutch withholding tax on dividends (i.e. abuse situations). The
rate of the CWHT on dividends is linked to the highest rate of the Dutch corporate income tax (currently being 25.8%). The proposed CWHT
on dividend payments will be a new tax that will exist next to the regular Dividend Withholding Tax (rate: 15%). As a result, these taxes
may apply simultaneously on the same dividend payment under certain circumstances. For these situations, the new CWHT rule provides for
an anti-accumulation scheme that could be applied so that effectively a maximum rate of 25.8% is applied
Holders
of Shares Resident in the U.S.
Dividends
paid to U.S. resident holders of Shares that are eligible for benefits under the Convention between the Netherlands and the United States
of America for the avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes and Income, dated 18 December
1992 as amended by the protocol of 8 March 2004 (the U.S. Tax Treaty) are generally subject to a reduced dividend withholding tax rate
of 5% in case of certain U.S. corporate shareholders owning at least 10% of ICTS’ total voting power. Certain U.S. pension funds
and tax-exempt organizations may qualify for a complete exemption from Netherlands dividend withholding tax.
Under
the U.S. Tax Treaty such benefits are generally available to U.S. residents if such resident is the beneficial owner of the dividends,
provided that such shareholder does not have an enterprise or an interest in an enterprise that is, in whole or in part, carried on through
a permanent establishment or permanent representative in the Netherlands and to which enterprise or part of an enterprise Shares are attributable.
A person may, however, not claim the benefits of the U.S. Tax Treaty if such person’s entitlement to such benefits is limited by
the provisions of Article 26 (the limitation on benefits provision) of the U.S. Tax Treaty. The reduced dividend withholding tax rate
can generally be applied at source upon the distribution of the dividends, provided that the proper forms have been filed in advance of
the distribution. In the case of certain tax-exempt organizations, as a general rule, the so-called refund method applies; only when certain
administrative conditions have been fulfilled may such tax-exempt organization use the exemption method.
Irrespective
of meeting the conditions of the relevant provisions of U.S. Tax Treaty, dividends distributed by the company to a U.S. resident holder
(i) who is a legal entity resident in the U.S. and (ii) that is in the U.S. under the terms of a double taxation agreement with a third
state not considered to be resident for tax purposes in a country with which the Netherlands has not concluded a tax treaty that includes
an article on dividends (not being a Member State of the European Union, Iceland, Norway or Liechtenstein), are generally, subject to
the anti-abuse rules and the anti-dividend stripping rules described above, fully exempt from Netherlands dividend withholding tax if
the U.S. resident holder of Shares holds an interest of at least 5% (in shares or, in certain cases, in voting rights) in ICTS or if it
holds an interest of less than 5%, in either case where, had the holder of Shares been a Netherlands resident, it would have had the benefit
of the participation exemption (this may include a situation where another related party holds an interest of 5% or more in ICTS).
Taxes
on Income and Capital Gains
Holders
of Shares Resident in the Netherlands: Individuals
A
holder of Shares who is an individual resident or deemed to be resident in the Netherlands will be subject to regular Netherlands income
tax on the income derived from Shares and the gains realized upon the acquisition, redemption and/or disposal of Shares by the holder
thereof, if:
(a)
such holder of Shares has an enterprise or an interest in an enterprise, to which enterprise Shares are attributable; and / or
54
(b)
such income or capital gain forms “a benefit from miscellaneous activities” (“resultaat uit overige werkzaamheden”)
which, for instance, would be the case if the activities with respect to Shares exceed “normal active asset management” (“normaal,
actief vermogensbeheer”) or if income and gains are derived from the holding, whether directly or indirectly, of (a combination
of) shares, debt claims or other rights (together, a lucratief belang) that the holder thereof has acquired under such circumstances that
such income and gains are intended to be remuneration for work or services performed by such holder (or a related person), whether within
or outside an employment relation, where such lucrative interest provides the holder thereof, economically speaking, with certain benefits
that have a relation to the relevant work or services.
If
either of the abovementioned conditions (a) or (b) applies, income derived from Shares and the gains realized upon the acquisition, redemption
and/or disposal of Shares will in general be subject to Netherlands income tax at the progressive rates up to 49.5%.
If
the abovementioned conditions (a) and (b) do not apply, a holder of Shares who is an individual, resident or deemed to be resident in
the Netherlands will not be subject to taxes on actual income and capital gains in the Netherlands. Instead, such individual is generally
taxed at a flat rate of 30% on deemed income from “savings and investments” (“sparen en beleggen”), which deemed
income is determined on the basis of the amount included in the individual’s “yield basis” (“rendementsgrondslag”)
at the beginning of the calendar year minus a tax-free threshold. The tax-free threshold for 2021 is €50,000 (2022: €50,650).
Following recent case law from the Supreme Court of the Netherlands, the systematics of determining the deemed income from savings and
investments was changed by the Dutch government retro-actively to 2017. Based on these changes, the deemed income from portfolio investments
(such as investments in Shares) is determined based on the multiple-years weighted average realized with investments in bonds, shares
and real estate. For the years 2017-2021, the percentage was set between 5.28% and 5.69%. Given the current developments, resident individual
holders of Shares are recommended to consult their own tax adviser to determine the potential effect of the above changes in their specific
situation.
Holders
of Shares Resident in the Netherlands: Corporate Entities
A
holder of Shares that is resident or deemed to be resident in the Netherlands for corporate income tax purposes, and that is:
| • |
a corporation; |
| • |
another entity with a capital divided into shares; |
| • |
a cooperative (association); or |
| • |
another legal entity that has an enterprise or an interest in an enterprise to which the Shares are attributable,
|
but
which is not:
| • |
a qualifying pension fund; |
| • |
a qualifying investment fund (fiscale beleggingsinstelling) or a qualifying exempt investment Institution
(“vrijgestelde beleggingsinstelling”); or |
| • |
another entity exempts from corporate income tax, |
will in general be
subject to regular corporate income tax, against the regular Dutch income tax rates mentioned above over income derived from Shares and
the gains realized upon the acquisition, redemption and/or disposal of Shares, unless, and to the extent that, the participation exemption
(“deelnemingsvrijstelling”) applies.
Holders
of Shares Resident Outside the Netherlands: Individuals
A
holder of Shares who is an individual, not resident or deemed to be resident in the Netherlands will not be subject to any Netherlands
taxes on income derived from Shares and the gains realized upon the acquisition, redemption and/or disposal of Shares (other than the
dividend withholding tax described above), unless:
| (a) |
such holder has an enterprise or an interest in an enterprise that is, in whole or in part, carried on
through a permanent establishment (“vaste inrichting”) or a permanent representative (“vaste vertegenwoordiger”)
in the Netherlands and to which enterprise or part of an enterprise, as the case may be, Shares are attributable; or |
| (b) |
such income or capital gain forms a “benefit from miscellaneous activities in the Netherlands”
(“resultaat uit overige werkzaamheden in Nederland”) which would for instance be the case if the activities in the Netherlands
with respect to Shares exceed “normal active asset management” (“normaal, actief vermogensbeheer” or if such income
and gains are derived from the holding, whether directly or indirectly, of (a combination of) shares, debt claims or other rights (together,
a “lucrative interest” (“lucratief belang”)) that the holder thereof has acquired under such circumstances that
such income and gains are intended to be remuneration for work or services performed by such holder (or a related person), in whole or
in part, in the Netherlands, whether within or outside an employment relation, where such lucrative interest provides the holder thereof,
economically speaking, with certain benefits that have a relation to the relevant work or services. |
55
If
either of the above-mentioned conditions (a) or (b) applies, income or capital gains in respect of dividends distributed by ICTS or in
respect of any gains realized upon the acquisition, redemption and/or disposal of Shares will in general be subject to Netherlands income
tax at the progressive rates up to 51.75%.
Holders
of Shares Resident Outside the Netherlands: Legal and Other Entities
A
holder of Shares that is a legal entity, another entity with a capital divided into shares, an association, a foundation or a fund or
trust, not resident or deemed to be resident in the Netherlands for corporate income tax purposes, will not be subject to any Netherlands
taxes on income derived from Shares and the gains realized upon the acquisition, redemption and/or disposal of Shares (other than the
dividend withholding tax described above), unless:
|
(a) |
such holder has an enterprise or an interest in an enterprise
that is, in whole or in part, carried on through a permanent establishment (“vaste inrichting”) or a permanent representative
(“vaste vertegenwoordiger”) in the Netherlands and to which enterprise or part of an enterprise, as the case may be,
Shares are attributable; or |
|
(b) |
such holder has a substantial interest in ICTS, that (i) is held with
the avoidance of Netherlands income tax as (one of) the main purpose(s) and (ii) forms part of an artificial structure or series
of structures (such as structures which are not put into place for valid business reasons reflecting economic reality).
|
If
one of the above-mentioned conditions applies, income derived from Shares and the gains realized upon the acquisition, redemption
and/or disposal of Shares will, in general, be subject to corporate income tax against the regular Dutch corporate income tax
rates mentioned above, unless, and to the extent that, with respect to a holder as described under (a), the participation exemption
(“deelnemingsvrijstelling”) applies.
Gift,
Estate and Inheritance Taxes
Holders
of Shares Resident in the Netherlands
Gift
tax may be due in the Netherlands with respect to an acquisition of Shares by way of a gift by a holder of Shares who is resident or deemed
to be resident of the Netherlands.
Inheritance
tax may be due in the Netherlands with respect to an acquisition or deemed acquisition of Shares by way of an inheritance or bequest on
the death of a holder of Shares who is resident or deemed to be resident of the Netherlands, or by way of a gift within 180 days before
his death by an individual who is resident or deemed to be resident in the Netherlands at the time of his death.
For
purposes of Netherlands gift and inheritance tax, an individual with the Netherlands nationality will be deemed to be resident in the
Netherlands if he has been resident in the Netherlands at any time during the ten years preceding the date of the gift or his death. For
purposes of Netherlands gift tax, an individual not holding the Netherlands nationality will be deemed to be resident of the Netherlands
if he has been resident in the Netherlands at any time during the twelve months preceding the date of the gift.
Holders
of Shares Resident Outside the Netherlands
No
gift, estate or inheritance taxes will arise in the Netherlands with respect to an acquisition of Shares by way of a gift by, or on the
death of, a holder of Shares who is neither resident nor deemed to be resident of the Netherlands, unless, in the case of a gift of Shares
by an individual who at the date of the gift was neither resident nor deemed to be resident in the Netherlands, such individual dies within
180 days after the date of the gift, while being resident or deemed to be resident in the Netherlands.
Certain
Special Situations
For
purposes of Netherlands gift, estate and inheritance tax, (i) a gift by a Third Party will be construed as a gift by the Settlor, and
(ii) upon the death of the Settlor, as a rule his/her Beneficiaries will be deemed to have inherited directly from the Settlor. Subsequently,
such Beneficiaries will be deemed the settlor, grantor or similar originator of the Separated Private Assets for purposes of Netherlands
gift, estate and inheritance tax in case of subsequent gifts or inheritances.
56
For
the purposes of Netherlands gift and inheritance tax, a gift that is made under a condition precedent is deemed to have been made at the
moment such condition precedent is satisfied. If the condition precedent is fulfilled after the death of the donor, the gift is deemed
to be made upon the death of the donor.
Value
Added Tax
No
Netherlands value added tax will arise in respect of or in connection with the subscription, issue, placement, allotment or delivery of
the Shares.
Other
Taxes and Duties
No
Netherlands registration tax, capital tax, customs duty, transfer tax, stamp duty or any other similar documentary tax or duty, other
than court fees, will be payable in the Netherlands in respect of or in connection with the subscription, issue, placement, allotment
or delivery of the Shares.
Residency
A
holder of Shares will not be treated as a resident, or a deemed resident, of the Netherlands by reason only of the acquisition, or the
holding, of Shares or the performance by ICTS under the Shares.
Documents
on Display
We
are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements,
the Company files reports and other information with the United States Securities and Exchange Commission (“SEC”). These materials
may be inspected at the Company’s office in Schiphol-Oost, The Netherlands. Documents filed with the SEC may also be read and copied
at the SEC’s public reference room at 100 F Street N.E. Room 1580 Washington, DC 20549 USA. For further information please call
the SEC at 1-800-SEC-0330. All the SEC filings made electronically by ICTS are available to the public on the SEC web site at http://www.sec.gov
(commission file number 0-28542). Those reports are also available free of charge at www.ictsintl.com.
Subsidiary
Information
Not
applicable
Item 11.
Quantitative
and Qualitative Disclosure About Market Risk
Foreign
Currency Exchange Risk - applies to our operations outside the USA. In 2021, approximately 29% of the Company’s revenues were derived
in the United States of America, and approximately 71% was derived in Europe and the Far East. The Company is subject to market risks
associated with foreign currency exchange rate fluctuations. We utilize some derivative instruments to manage the exposure to currency
risk relating salaries in Israel. As such, significant foreign currency exchange rate fluctuations can have a material impact of the Company’s
financial position, results of operations, and cash flows.
Interest
Rate Risk - We are subject to changes in interest rates based on Federal Reserve actions and general market conditions. The Company does
not utilize derivative instruments to manage its exposure to interest rate risk. An increase of 1% in the interest rate would have increased
the Company’s interest expense for bank loans, convertible notes payable to a related party and other parties, by approximately
$0.1 million in the year ended December 31, 2021.
Item 12.
Description of Securities Other than Equity Securities
Not
applicable.
57
PART II
Item 13.
Defaults, Dividend Arrearages and Delinquencies
Not
applicable.
Item 14.
Material
Modifications to the Rights of Security Holders and Use of Proceeds
Not applicable
Item
15.
Controls and Procedures
Management’s
report on internal control over financial reporting
(a)
Our management, including our Managing Directors and Chief Financial Officer have evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(d) and 15d-15(d) of the Exchange Act) as of the end of the period covered by this
annual report (the “Evaluation Date”).
Based
on such evaluation, the Managing Directors and Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s
disclosure controls and procedures are effective.
(b)
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined
in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our management, including our Managing Directors and Chief Financial Officer, conducted
an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in
Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
as of the end of the period covered by this report. Based on that evaluation, our management has concluded that our internal control over
financial reporting was effective as of December 31, 2021. Notwithstanding the foregoing, there can be no assurance that our internal
control over financial reporting will detect or uncover all failures of persons within the Company to comply with our internal procedures,
as all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be
effective may not prevent or detect misstatements.
This
annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the
SEC that permit us to provide only management’s report in this annual report.
(c)
On the evaluation conducted by our Managing Directors and Chief Financial Officer pursuant to Rules 13a-15(d) and 15d-15(d) under the
Exchange Act, our management has concluded that there was no change in our internal control over financial reporting that occurred during
the year ended December 31, 2021 that materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Item
16A
Audit Committee Financial Experts
The
members of the Audit Committee consist of Philip M. Getter, Gordon Hausmann and Gail F. Lieberman. All members are independent, with no
relationship with management. Mr. Getter and Ms. Lieberman have financial expertise. Mr. Getter is the Chairman of the Audit Committee.
Item
16B
Code of Ethics
The
Company has adopted a Code of Ethics for principal’s executive officers and senior financial officers.
Item
16C
Principal Accountant Fees and Services
The
following table sets forth the aggregate fees billed by our independent registered public accounting firm, Mayer Hoffman McCann CPAs,
the New York Practice of Mayer Hoffman McCann P.C. (“MHM”), for services rendered to us during the years ended December 31,
2021 and 2020.
The
audit committee has considered whether the provision of these services is compatible with maintaining the principal accountant’s
independence and has concluded that such services are compatible. All fees were reviewed and pre-approved by the audit committee (U.S.
Dollars in thousands).
|
2021 |
2020 |
|||||||
|
Audit fees
|
$ |
268 |
$ |
257 |
||||
|
Audit related fees
|
- |
- |
||||||
|
Tax fees |
- |
- |
||||||
|
Total fees
|
$ |
268 |
$ |
257 |
||||
Substantially all of
MHM’s personnel, who work under the control of MHM shareholders, are employees of wholly- owned subsidiaries of CBIZ, Inc., which
provides personnel and various services to MHM in an alternative practice structure.
58
Item
16D Exemptions
from the Listing Standards for Audit committees
Not
applicable.
Item
16E. Purchase
of Equity Securities by the Issuer and Affiliated Purchasers
Not
applicable.
Item
16F. Change
in Registrant’s Certifying Accountant
On
April 27, 2022, the Company was informed by MHM, its auditor, that they have decided to decline to stand for re-appointment after completion
of the current audit. In connection therewith, the Company provides that:
|
1. |
The audit report of MHM on the financial statements of the Company
as of and for the years ended December 31, 2020 and 2019 did not contain any adverse opinion or disclaimer of opinion, nor was it qualified
or modified as to uncertainty, audit scope or accounting principles. |
|
2. |
During the years ended December 31, 2020 and 2019 and during
the period from January 1, 2021 to the present, there were no disagreements with MHM on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures that, if not resolved to MHM satisfaction, would have caused MHM to make
reference in connection with its opinion to the subject matter of the disagreement. |
|
3. |
No “reportable events”, as that term is described
in Item 16F(a)(1)(v)(A)-(D) of this form 20-F, occurred within the years ended December 31, 2020 and 2019 and subsequently up to date
hereof. |
The audit committee
of the company has accepted MHM’s decision not to stand for re-appointment.
We provided a copy
of this disclosure to MHM and requested that MHM furnish us with a letter addressed to the SEC stating whether it agrees with the above
statements, and if not, stating the respects in which it does not agree. A copy of the letter of MHM addressed to the SEC, dated April
29, 2022, was filed as Exhibit D to the report 6-K filed with the SEC on April 29, 2022.
Item
16G. Corporate
Governance
There
are no significant differences between the corporate governance practices in the Netherlands and the U.S. The Company has adopted the
U.S. practices.
59
PART
III
Item
17.
Financial Statements
See
Item 18.
Item
18.
Financial Statements
The
Consolidated Financial Statements and Financial Statement Schedule of the Company as of December 31, 2021 and 2020 and for each of the
three years in the period ended December 31, 2021, including the report of our independent registered public accounting firm thereon are
set forth on pages F-1 to F-38.
Item
19.
Exhibits
| * |
Incorporated by reference to the Company’s fillings. |
60
SIGNATURES
The
registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
ICTS
INTERNATIONAL N.V. AND SUBSIDIARIES
|
By: |
/s/ Rom Shaked |
|
|
Name: |
Rom Shaked |
|
|
Title: |
Managing Director |
|
|
Date: |
May 16, 2022 |
|
|
By: |
/s/ Alon Raich |
|
|
Name: |
Alon Raich |
|
|
Title: |
Managing Director and Chief Financial Officer |
|
|
Date: |
May 16, 2022 |
61
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
2021 ANNUAL REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
Consolidated Financial Statements:
|
|
|
Report of Independent Registered Public Accounting Firm (PCAOB ID No.
|
F-2
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-8
|
|
|
Financial Statement Schedule:
|
|
|
F-38
|
To the Supervisory Board of Directors and Stockholders of ICTS International N.V. and Subsidiaries:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ICTS International N.V. and Subsidiaries (“Company”) as of December 31, 2021 and 2020 and the related consolidated statements of operations and comprehensive income (loss), shareholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters.
/s/ Mayer Hoffman McCann CPAs
(The New York Practice of Mayer Hoffman McCann P.C.)
(The New York Practice of Mayer Hoffman McCann P.C.)
We have served as the Company’s auditor since 2007.
New York, New York
May 16, 2022
May 16, 2022
F - 2
(In thousands, except share data)
|
December 31,
|
||||||||
|
|
2021
|
2020
|
||||||
|
ASSETS
|
||||||||
|
CURRENT ASSETS:
|
||||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
||||
|
Restricted cash
|
|
|
||||||
|
Accounts receivable, net
|
|
|
||||||
|
Receivable from a related party
|
|
|
||||||
|
Prepaid expenses and other current assets
|
|
|
||||||
|
Total current assets
|
|
|
||||||
|
Deferred tax assets, net
|
|
|
||||||
|
Investments
|
|
|
||||||
|
Property and equipment, net
|
|
|
||||||
|
Operating lease right of use assets
|
|
|
||||||
|
Goodwill
|
|
|
||||||
|
Other assets
|
|
|
||||||
|
Total assets
|
$
|
|
$
|
|
||||
|
LIABILITIES AND SHAREHOLDERS' DEFICIT
|
||||||||
|
CURRENT LIABILITIES:
|
||||||||
|
Notes payable-banks
|
$
|
|
$
|
|
||||
|
Accounts payable
|
|
|
||||||
|
Accrued expenses and other current liabilities
|
|
|
||||||
|
Value added tax (VAT) payable
|
|
|
||||||
|
Income taxes payable
|
|
|
||||||
|
Operating lease liabilities, current
|
|
|
||||||
|
Total current liabilities
|
|
|
||||||
|
Convertible notes payable to a related party
|
|
|
||||||
|
Operating lease liabilities, non-current
|
|
|
||||||
|
Other liabilities
|
|
|
||||||
|
Total liabilities
|
|
|
||||||
|
COMMITMENTS AND CONTINGENCIES (NOTE 18)
|
||||||||
|
REDEEMABLE NON-CONTROLLING INTERESTS (NOTE 13)
|
|
|
||||||
|
SHAREHOLDERS' DEFICIT:
|
||||||||
|
Common stock, €
|
|
|
||||||
|
Additional paid-in capital
|
|
|
||||||
|
Accumulated deficit
|
(
|
)
|
(
|
)
|
||||
|
Accumulated other comprehensive loss
|
(
|
)
|
(
|
)
|
||||
|
Non-controlling interests in subsidiaries
|
(
|
)
|
(
|
)
|
||||
|
Total shareholders' deficit
|
(
|
)
|
(
|
)
|
||||
|
Total liabilities and shareholders' deficit
|
$
|
|
$
|
|
||||
See accompanying notes to the consolidated financial statements.
F - 3
(In thousands, except share data)
|
For the Years Ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
Revenue
|
$
|
|
$
|
|
$
|
|
||||||
|
Cost of revenue
|
|
|
|
|||||||||
|
GROSS PROFIT
|
|
|
|
|||||||||
|
Operating expenses:
|
||||||||||||
|
Research and development
|
|
|
|
|||||||||
|
Selling, general and administrative
|
|
|
|
|||||||||
|
Goodwill impairment
|
|
|
|
|||||||||
|
Total operating expenses
|
|
|
|
|||||||||
|
OPERATING INCOME
|
|
|
|
|||||||||
|
Equity income (loss) from investment in affiliates
|
(
|
)
|
(
|
)
|
|
|||||||
|
Other expenses, net
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
INCOME (LOSS) BEFORE INCOME TAX EXPENSES
|
|
|
(
|
)
|
||||||||
|
Income tax expenses
|
|
|
|
|||||||||
|
NET INCOME (LOSS)
|
|
|
(
|
)
|
||||||||
|
Net income attributable to non-controlling interests
|
|
|
|
|||||||||
|
NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V.
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
|
BASIC AND DILUTED NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V. PER SHARE
|
||||||||||||
|
Net income (loss) attributable to ICTS International N.V.
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
|
Less deemed dividend attributable to redeemable non-controlling interests
|
|
|
|
|||||||||
|
Net income (loss) available to ICTS International N.V. shareholders
|
|
|
(
|
)
|
||||||||
|
Basic weighted average number of shares
|
|
|
|
|||||||||
|
Net income (loss) per share attributable to ICTS International N.V. - basic
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
|
Diluted weighted average number of shares
|
|
|
|
|||||||||
|
Net income (loss) per share attributable to ICTS International N.V. - diluted
|
$
|
|
$
|
|
(
|
)
|
||||||
|
COMPREHENSIVE INCOME (LOSS)
|
||||||||||||
|
Net income (loss)
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
|
Other Comprehensive Income (loss) - Translation adjustments
|
(
|
)
|
|
|
||||||||
|
Unrealized gains on derivative instruments
|
32
|
-
|
-
|
|||||||||
|
Comprehensive income (loss)
|
|
|
(
|
)
|
||||||||
|
Comprehensive income attributable to non-controlling interests
|
|
|
|
|||||||||
|
COMREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V.
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
See accompanying notes to the consolidated financial statements.
F - 4
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
(In thousands, except share data)
|
Common Stock
|
Additional
Paid-In |
Accumulated
|
Accumulated
Other Comprehensive |
Non-Controlling
|
Total
Shareholders' |
|||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Loss
|
Interests
|
Deficit
|
||||||||||||||||||||||
|
BALANCE AT DECEMBER 31, 2018
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
||||||||||||
|
Net income (loss)
|
-
|
|
|
(
|
)
|
|
|
(
|
)
|
|||||||||||||||||||
|
Issuance of common stock
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Sale of AU10TIX Technologies B.V. preferred shares, series A-1, net
|
-
|
|
|
|
|
(
|
)
|
|
||||||||||||||||||||
|
Translation adjustment
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||
|
BALANCE AT DECEMBER 31, 2019
|
|
|
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
|||||||||||||||||
|
Issuance of common stock
|
|
|
(
|
)
|
|
|
|
|
||||||||||||||||||||
|
Net income
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Translation adjustment
|
-
|
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||
|
BALANCE AT DECEMBER 31, 2020
|
|
|
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
|||||||||||||||||
|
Conversion of preferred shares A and A-1 in AU10TIX Technologies B.V. to new series A
|
|
(
|
)
|
|
|
|
(
|
)
|
||||||||||||||||||||
|
Net income
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Stock-based compensation – AU10TIX Technologies B.V.
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Translation adjustment
|
-
|
|
|
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||||||||||
|
Unrealized gains on derivatives instruments
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||
|
BALANCE AT DECEMBER 31, 2021
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||||||||
See accompanying notes to the consolidated financial statements.
F - 5
(In thousands, except share data)
|
Year Ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
CASH FLOW FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net income (loss)
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
||||||||||||
|
Depreciation and amortization
|
|
|
|
|||||||||
|
Goodwill impairment
|
|
|
|
|||||||||
|
Gain from sale of investment
|
(
|
)
|
|
|
||||||||
|
Bad debt expense
|
|
|
|
|||||||||
|
Deferred income taxes
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Loss on disposal of property and equipment
|
|
|
|
|||||||||
|
Equity loss (income) from investment in affiliates
|
|
|
(
|
)
|
||||||||
|
Stock-based compensation
|
|
|
|
|||||||||
|
Revaluation and related costs reimbursed to related party
|
|
|
|
|||||||||
|
Changes in assets and liabilities:
|
-
|
-
|
-
|
|||||||||
|
Accounts receivable, net
|
(
|
)
|
|
|
||||||||
|
Receivable from related party
|
|
(
|
)
|
|
||||||||
|
Prepaid expenses and other current assets
|
|
(
|
)
|
|
||||||||
|
Other assets
|
(
|
)
|
|
(
|
)
|
|||||||
|
Accounts payable
|
|
(
|
)
|
(
|
)
|
|||||||
|
Accrued expenses and other current liabilities
|
|
(
|
)
|
(
|
)
|
|||||||
|
VAT payable
|
(
|
)
|
|
(
|
)
|
|||||||
|
Income taxes payable
|
|
|
(
|
)
|
||||||||
|
Operating lease accounts, net
|
(
|
)
|
|
(
|
)
|
|||||||
|
Other liabilities
|
|
|
(
|
)
|
||||||||
|
Net cash provided by (used in) operating activities
|
|
|
(
|
)
|
||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Purchase of property and equipment
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Purchase of company in Sweden
|
(
|
)
|
|
|
||||||||
|
Capitalization of software costs
|
(
|
)
|
(
|
)
|
|
|||||||
|
Proceeds from sale of property and equipment
|
|
|
|
|||||||||
|
Proceeds from sale of investment
|
|
|
|
|||||||||
|
Investments
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Deposits at (withdraws from) insurance companies
|
(
|
)
|
(
|
)
|
|
|||||||
|
Repayments from an affiliate
|
|
|
|
|||||||||
|
Net cash used in investing activities
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
F - 6
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
|
Year Ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
CASH FLOW FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Borrowings (repayments) under lines of credit, net
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
||||
|
Repayments of convertible notes payable to a related party
|
(
|
)
|
|
(
|
)
|
|||||||
|
Proceeds from a related party
|
|
|
|
|||||||||
|
Repayments of loan payable to a related party
|
|
(
|
)
|
(
|
)
|
|||||||
|
Repayment of loan payable
|
|
(
|
)
|
(
|
)
|
|||||||
|
Proceeds from sale of a subsidiary's preferred shares
|
|
|
|
|||||||||
|
Transaction costs
|
|
|
(
|
)
|
||||||||
|
Decrease in bank overdrafts
|
|
(
|
)
|
(
|
)
|
|||||||
|
Net cash provided by (used in) financing activities
|
(
|
)
|
(
|
)
|
|
|||||||
|
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
(
|
)
|
|
(
|
)
|
|||||||
|
INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|||||||||
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH BEGINNING OF YEAR
|
|
|
|
|||||||||
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH END OF YEAR
|
$
|
|
$
|
|
$
|
|
||||||
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
||||||||||||
|
Stock issuance as reduction against convertible notes payable to related party
|
$
|
|
$
|
|
$
|
|
||||||
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
|
||||||||||||
|
Cash paid during the year for:
|
||||||||||||
|
Interest
|
$
|
|
$
|
|
$
|
|
||||||
|
Income taxes
|
$
|
|
$
|
|
$
|
|
||||||
See accompanying notes to the consolidated financial statements.
F - 7
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
(In thousands, except share data)
NOTE 1 – ORGANIZATION
Description of Business
ICTS International N.V. (“ICTS”) was registered at the Department of Justice in Amstelveen, Netherlands on October 9, 1992. ICTS and subsidiaries (collectively referred to as “ICTS” or the "Company") operate in three reportable segments: (a) corporate (b) airport security and other aviation services and (c) authentication technology. The corporate segment does not generate revenue and contains primarily non-operational expenses. The airport security and other aviation services segment provides security and other services to airlines and airport authorities, predominantly in Europe and the United States of America. The authentication technology segment provide authentication services to financial and other institutions, predominantly in the United States of America.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The significant accounting policies are as follows:
Functional Currency
The accompanying consolidated financial statements are presented in United States dollars. The Company has determined that the functional currency of its foreign subsidiaries is the local currency, which is predominantly the Euro. For financial reporting purposes, the assets and liabilities of such subsidiaries are translated into United States dollars using exchange rates in effect at the balance sheet date. The revenue and expenses of such subsidiaries are translated into United States dollars using average exchange rates in effect during the reporting period. Resulting translation adjustments are presented as a separate category in shareholders' deficit called accumulated other comprehensive loss.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
The most significant estimates and assumptions included in these consolidated financial statements consist of the: (a) calculation of the allowance for doubtful accounts, (b) determination of the fair value of stock options, (c) recognition of contingent liabilities (d) valuation allowance of deferred income taxes, (e) determination of goodwill impairment (f) determination of future lease periods of existing lease contracts, (g) determination of interest rates used in order to calculate the present value of the operating lease liabilities and (h) determination of the estimated fair value of the AU10TIX preferred shares conversion.
Principles of Consolidation
The consolidated financial statements include the accounts of ICTS International N.V. and its wholly-owned and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash and cash equivalents.
Restricted Cash
Restricted cash as of December 31, 2021 consists of: (a) $3,350 held in bank accounts that serve as cash collateral for outstanding letters of credit ,(b) $10,599 held in several bank accounts in the Netherlands, which is restricted for payments to local tax authorities (see note 5) and (c) $750 secured for derivative instruments.
Restricted cash as of December 31, 2020 consists of: (a) $3,991 held in bank accounts that serve as cash collateral for outstanding letters of credit and (b) $5,481 held in several bank accounts in the Netherlands, which is restricted for payments to local tax authorities.
| F - 8 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Restricted Cash (continued)
The following table provides a reconciliation of cash and restricted cash reported on the balance sheet that sum to the total of the same such amounts shown in the statements of cash flows.
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
||||
|
Restricted cash
|
|
|
||||||
|
Total cash, cash equivalents and restricted cash
|
||||||||
|
shown in the statement of cash flows
|
$
|
|
$
|
|
||||
Accounts Receivable
Accounts receivable represent amounts due to the Company for services rendered and are recorded net of an allowance for doubtful accounts. The allowance for credit losses is based on historical collection experience, factors related to specific customers and current economic trends. The Company writes off accounts receivable when determined to be uncollectible and are recognized as a reduction to the allowance for credit losses. As of December 31, 2021, and 2020, the allowance for doubtful accounts is $991 and $690 , respectively.
Fair Value Measurements
The Company follows Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 820, “Fair Value Measurement”. Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value should be based on assumptions that market participants would use.
In determining the fair value, the Company assesses the inputs used to measure fair value using a three-tier hierarchy, as follows:
| Level 1 - |
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Companies have the ability to access at the measurement date.
|
| Level 2 - |
Inputs to the valuation methodology include:
|
| • |
Quoted prices for similar assets or liabilities in active markets;
|
| • |
Quoted prices for identical or similar assets or liabilities in inactive markets;
|
| • |
Inputs other than quoted prices that are observable for the asset or liability;
|
| • |
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
| Level 3 - |
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
Investments
The Company accounts for investments in the equity securities of companies which represent an ownership interest of 20 % to 50 % and the ability to exercise significant influence, provided that ability does not represent control, using the equity method. The equity method requires the Company to recognize its share of the net income (loss) of its investees in the consolidated statement of operations until the carrying value of the investment is zero.
The Company records investments in the equity securities of privately held companies which represent an ownership interest of less than 20% at cost minus impairment.
| F - 9 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivative instruments
Derivative instruments are measured at their fair value and recorded as either assets or liabilities. Changes in the fair value of derivatives designated as cash flow hedging instruments are initially recorded in other comprehensive income and a corresponding amount is reclassified out of other comprehensive income into earnings when the underlying transactions are recognized in the consolidated statements of operations and comprehensive income.
The Company maintains a risk management strategy that may incorporate the use of put options and forward exchange contracts, to minimize significant fluctuation in cash flows and/or earnings that are caused by exchange rate or interest rate volatility.
Property and Equipment
Equipment and furniture, internal-use software, leasehold improvements and vehicles are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives used in determining depreciation are as follows:
|
Years
|
||
|
Equipment and facilities
|
|
|
|
Internal- use software
|
|
|
|
Vehicles
|
|
|
Leasehold improvements are amortized using the straight-line method over the shorter of the total term of the lease or the estimated useful lives of the assets.
Capitalized Internal-Use Software Costs
The Company capitalizes certain costs incurred in developing internal-use software when capitalization requirements have been met. Costs prior to meeting the capitalization requirements are expensed as incurred. Costs, such as maintenance and training are also expensed as incurred. Capitalized costs are included in property and equipment, and amortized on a straight-lined basis over the estimated useful life of the software. Amortization expense, which is included in depreciation expense, amounted to $374 , $147 and $0 during the years ended December 31, 2021, 2020 and 2019, respectively.
Goodwill
Goodwill represents the excess purchase price over the fair value of the net tangible and intangible assets of an acquired business. Goodwill is assessed for impairment by reporting unit on an annual basis or when events or changes in circumstances indicate that the carrying value may not be recoverable. The Company would record a goodwill impairment charge for the difference between the carrying value and the fair value of the goodwill, not to exceed the carrying amount of the goodwill. During the years ended December 31, 2021, 2020 and 2019, the Company recorded goodwill impairment charge of $139 , $0 and $0 , respectively on its goodwill.
Long-Lived Assets
The Company reviews long-lived assets, other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the fair value of the asset as compared to its carrying value. During the years ended December 31, 2021, 2020, and 2019, the Company did not record any impairment charges on its long-lived assets.
| F - 10 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Employee Rights Upon Retirement
The Company is required to make severance payments to its Israeli employees upon dismissal of an employee or upon a termination of employment in certain circumstances. The Israeli pension and severance pay liability to the employees is covered mainly by deposits made at insurance companies. For its employees who are employed under the Section 14 of the Israeli Severance Pay Law, 1963 (“Section 14”), the Company makes deposits with certain insurance companies for accounts controlled by each applicable employee in order to secure the employees’ rights upon termination. In addition, the related obligation and amounts deposited on behalf of the applicable employees for such obligations are not presented on the Company’s consolidated balance sheets, as the amounts funded are not under the control of management of the Company and the Company is legally released from the obligation to pay any severance payments to the employees once the required deposits amounts have been paid.
For employees not under Section 14, severance liabilities are recorded based on the length of service and their latest monthly salary. The Company’s liabilities for the Israeli employees amounted to $1,631 and $1,556 as of December 31, 2021 and 2020, respectively and are included in other liabilities in the Company’s consolidated balance sheets. The deposits made at insurance companies to cover these liabilities amounted to $1,346 and $1,391 as of December 31, 2021 and 2020, respectively and are included in other assets in the Company’s consolidated balance sheets.
Leases
The Company follows Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842).
The standard provides a number of optional practical expedients in transition. The Company chose to apply the following permitted practical expedients:
Not to reassess its prior conclusions regarding lease identification, lease classification and initial direct costs under the new standard.
Short-term lease recognition exemption for all leases with a term shorter than 12 months. This means, that for those leases, the Company does not recognize Rights of Use (“ROU”) assets or lease liabilities.
Applying the practical expedient to not separate lease and non-lease components for all of the Company’s leases as a lessee.
The Company as a lessee
Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. A lease is a finance lease if it meets any one of the criteria below, otherwise the lease is an operating lease:
The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
The lease term is for the major part of the remaining economic life of the underlying asset.
The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all of the fair value of the underlying asset.
The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of lease term.
Based on the criteria above, all of the Company's leases are classified as operating leases.
Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, while the ROU assets are also adjusted for any prepaid or accrued lease payments. The Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of the lease payments.
The lease term is the non-cancellable period of the lease plus periods covered by an extension or termination option if it reasonably certain that the Company will exercise the option.
After lease commencement, the Company measures the lease liability at the present value of the remaining lease payments using the discount rate determined at lease commencement (as long as the discount rate hasn’t been updated as a result of a reassessment event).
| F - 11 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Leases (Continued)
The Company as a lessee (continued)
The Company subsequently measures the ROU asset at the present value of the remaining lease payments, adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if relevant and any unamortized initial direct costs. Lease expenses are recognized on a straight-line basis over the lease term. Lease terms will include options to extend or terminate the lease when it is reasonably certain that the Company will exercise or not exercise the option to renew or terminate the lease.
Variable lease payments that depend on an index or a rate
On the commencement date, the lease payments shall include variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), initially measured using the index or rate at the commencement date.
The Company does not remeasure the lease liability for changes in future lease payments arising from changes in an index or rate unless the lease liability is remeasured for another reason. Therefore, after initial recognition, such variable lease payments are recognized in profit or loss as they are incurred.
Convertible Debt Instruments
The Company evaluates convertible debt instruments to determine whether the embedded conversion option needs to be bifurcated from the debt instrument and accounted for as a freestanding derivative instrument or considered a beneficial conversion option. An embedded conversion option is considered to be a freestanding derivative when: (a) the economic characteristics and risks of the embedded conversion option are not clearly and closely related to the economic characteristics and risks of the host instrument, (b) the hybrid instrument that embodies both the embedded conversion option and the host instrument is not re-measured at fair value under otherwise applicable US GAAP with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded conversion option would be considered a derivative instrument subject to certain requirements (except when the host instrument is deemed to be conventional).
When it is determined that an embedded conversion option should not be bifurcated from its host instrument, the embedded conversion option is evaluated to determine whether it contains any intrinsic value which needs to be discounted from the carrying value of the convertible debt instrument.
The intrinsic value of an embedded conversion option is considered to be the difference between the fair value of the underlying security on the commitment date of the debt instrument and the effective conversion price embedded in the debt instrument.
Contingent Liabilities
The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the normal course of its business activities. Liabilities for such contingencies are recognized when: (a) information available prior to the issuance of the consolidated financial statements indicates that it is probable that a liability had been incurred at the date of the consolidated financial statements and (b) the amount of loss can reasonably be estimated.
Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
The Company's comprehensive income (loss) consists mostly of the Company’s net income (loss), foreign currency translation adjustments and changes in fair value of derivative instruments as cash flow instruments. Accumulated other comprehensive loss consist of the Company’s accumulated foreign exchange currency translation adjustments, and changes in fair value of derivative instruments.
Stock-Based Compensation
Stock-based compensation to employees and non-employees, including stock options, are measured at the fair value of the award on the date of grant based on the estimated number of awards that are ultimately expected to vest. The compensation expense resulting from stock-based compensation to management and administrative employees is recorded over the vesting period of the award in selling, general and administrative expense on the accompanying consolidated statements of operations and comprehensive income (loss). Compensation expense resulting from stock-based compensation to operational employees is recorded over the vesting period of the award in cost of revenue.
| F - 12 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Non-Controlling Interests
The Company’s non-controlling interests represent the minority shareholder’s ownership interests related to the Company’s subsidiaries. The Company reports its non-controlling interests in subsidiaries as a separate component of equity in the consolidated balance sheets and reports net income (loss) attributable to the non-controlling interests in the consolidated statements of operations.
Redeemable Non-Controlling Interests
When the Company or its subsidiaries issues preferred shares, it considers the provisions of FASB ASC 480 –"Distinguishing Liabilities from Equity" (Topic 480) in order to determine whether the preferred share should be classified as a liability. If the instrument is not within the scope of Topic 480, the Company or its subsidiaries further analyses the instruments characteristics in order to determine whether it should be classified within temporary equity (mezzanine) or within permanent equity in accordance with the provisions of Topic 480-10-S99. AU10TIX redeemable convertible preferred shares are not mandatorily or currently redeemable. However, it includes a liquidation or deemed liquidation events that would constitute a redemption event that is outside of the Company’s control. As such, all shares of redeemable preferred shares have been presented outside of permanent equity. The Company has not adjusted the carrying values of the redeemable preferred shares to the deemed liquidation values of such shares since a liquidation event was not probable at any of the balance sheet dates. Subsequent adjustments to increase or decrease the carrying values to the ultimate liquidation values will be made only if and when it becomes probable that such a liquidation event will occur.
Revenue Recognition
Revenue is recognized when the promised services are performed for our clients, and the amount that reflects the consideration we are entitled to receive in exchange for those services is determined. The Company’s revenues are recorded net of any sales taxes.
In order to determine the revenue, we (1) identify the contract with the client, (2) identify the performance obligations, usually it’s based on the hours spent, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligation and (5) we recognize revenue as performance obligation is satisfied.
A performance obligation is a promise in a contract to transfer a distinct service to the client, and it is the unit of account for revenue recognition. The majority of our contracts have a single performance obligation as the promise to transfer the individual services is not separately identifiable from other promises in our contracts and, therefore, is not distinct.
The following table presents the Company’s revenues according to the Company’s segments:
|
Year ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
Airport Security and Other Aviation Services
|
$
|
|
$
|
|
$
|
|
||||||
|
Authentication Technology
|
|
|
|
|||||||||
|
Total revenue
|
$
|
|
$
|
|
$
|
|
||||||
The following table presents the Company’s revenues generated from customers by geographical area based on the geographical location of the customers invoicing address:
|
Year ended December 31,
|
||||||||||||||||||||||||
|
2021
|
2020
|
2019
|
||||||||||||||||||||||
|
Germany
|
$
|
|
|
%
|
$
|
|
|
%
|
$
|
|
|
%
|
||||||||||||
|
The Netherlands
|
|
|
%
|
|
|
%
|
|
|
%
|
|||||||||||||||
|
United States
|
|
|
%
|
|
|
%
|
|
|
%
|
|||||||||||||||
|
Spain
|
|
|
%
|
|
|
%
|
|
|
%
|
|||||||||||||||
|
Other countries
|
|
|
%
|
|
|
%
|
|
|
%
|
|||||||||||||||
|
Total revenue
|
$
|
|
|
%
|
$
|
|
|
%
|
$
|
|
|
%
|
||||||||||||
| F - 13 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Airport Security and Other Aviation Services Segment
In the airport security and other aviation services, for performance obligations that we satisfy over time, revenues are recognized by consistently applying a method of measuring hours spent on that performance obligation. We generally utilize an input measure of time (hours and attendance for specific time framed service like specific flights) of the service provided. Performance obligations are satisfied over the course of each month and continue to be performed until the contract has been terminated or cancelled.
Pricing and Reduction to Revenues
We generally determine standalone selling prices based upon the prices included in the client contracts, using expected costs plus margin, or other observable prices. The price as specified in our client contracts is generally considered the standalone selling price as it is an observable input that depicts the price as if sold to a similar client in similar circumstances. Certain client contracts have variable consideration, including quality thresholds or other similar items that could reduce the transaction price. These amounts may be constrained and revenue is recorded to the extent we do not expect a significant reversal or when the uncertainty associated with the variable consideration is resolved. Our variable consideration amounts, if any, are not material, and we do not expect significant changes to our estimates.
Contracts
Our client contracts generally include standard payment terms acceptable in each of the countries, states and territories in which we operate. The payment terms vary by the type and location of our clients and services offered. Client payments are typically due in 30 to 60 days after invoicing, but may be a shorter or longer term depending on the contract. Our contracts with main customers are generally long-term contracts, between two to five years. The timing between satisfaction of the performance obligation, invoicing and payment is not significant.
Practical Expedients and Exemptions
Because nearly all our contracts are based on input measure of time of service provided (as hours or attendance) no exemptions need to be made. We have no material contracts with material revenues expected to be recognized subsequent to December 31, 2021 related to remaining performance obligations.
Revenue Service Types
The following is a description of our revenue service types, including Airport Security, Airline Security, Cargo Security, Other Airport Services, General Security Services and Other.
Airport Security
Staffing or manning for specialized airport security are usually based on long term contract issued via a public tender procedure. We recognize revenue given the unit of measure (hours) provided in the given time period and the specific price for specific hours agreed upon in the contracts. Quality and criteria of staffing are described in the contracts and are measured in the given time period. Deviations, if any, are discussed with the customer before invoicing and will be reflected in the invoice showing the approved hours and other cost elements as agreed upon price.
Most contracts have an hourly rate that reflects an all-in tariff based on a full cost price calculation. In some of the contracts the hourly rates are split between a component based on hours and a component based on specific costs in a specific time period but always linked to the service provided in given time period. Revenue is recognized at the time period set in the contract.
Airline Security
Staffing or manning for airline security are usually based on long term contracts issued via a public tender procedure. We recognize revenue according to the unit of measure provided (usually attendance for specific time framed service like specific flights). The time framed specialized security services are in this case are the executed number of flights. When the manning for the security of these flights are delivered, the Company invoices the customer according to the agreed flight tariff.
| F - 14 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Cargo Security
Staffing or manning for specialized cargo security are usually based on long term contract, sometimes publicly tendered. Contracts are based on hourly planned and executed screening services. Revenue is recognized based on the realized screening hours and contractually agreed upon hourly rate.
Other Airport Services
Airport Services include wheelchair attendants, pre-departure skycaps, bag-runners, agents, guards, charter security screening, janitorial, and cabin cleaning to major U.S. and foreign carriers in airports throughout the United States of America. Our contracts may include either single or multiple performance obligations and vary by airport and airline. We recognize revenue given the unit of measure (usually hours) provided in the given time period and the specific price for specific hours or attendance for specific event, time framed service as agreed upon in the contracts.
General Security Services
Security Services include providing armed and un-armed guards to private schools and places of worship, video surveillance and patrol. Contracts for security services generally include only a single performance obligation. We recognize revenue for security guard services given the unit of measure (hours) provided in the given time period. Revenue from video surveillance and patrol is recognized based upon a fixed monthly rate.
Other Services
Other services include revenues from (incidental) specialized security manning services, training services and ad hoc work performed on and off airports. Revenue is recognized over time as services are being performed, using the input of service delivered during the time period, according to the contractual agreed price.
Authentication Technology Segment
In the authentication technology segment, the Company offers authentication services on a cost per click basis, with a minimum yearly commitment which means the customer pays the Company according to the higher of (a) number of times the customer used the system in order to authenticate IDs or (b) according to the yearly minimum commitment. According to the agreement with the customers, each chargeable click has an agreed price and revenue is being recognized accordingly.
Pricing and Reduction to Revenues
The company determines standalone selling prices based upon the prices included in the client contracts, using expected costs plus margin, or other observable prices. The price as specified in our client contracts is considered the selling price as agreed with the customer. The Company’s variable consideration, if any, amounts are not material, and we do not expect significant changes to our estimates. The Company does not expect a significant reversal or when the uncertainty associated with the variable consideration is resolved. A customer might be offering a tier-based pricing scheme, or not, and in any event of usage above the committed amount, the pricing will remain unchanged.
Contracts
Client contracts generally include standard payment terms acceptable in each of the countries, states and territories in which the company operates, and are typically set to a three-year deal duration. The payment terms vary by the type and location of our clients and services offered. The minimum commitment is usually being paid in advance. Client payments are typically due in 30 days after invoicing, but may be a shorter or longer term depending on the contract. Client contracts are usually range from one to three years, with a convenience exit every twelve months period, and at the end of the contract there is a renewal option. The timing between satisfaction of the performance obligation, invoicing and payment is not significant.
| F - 15 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Deferred Revenues
The Company records deferred revenues when cash payments are received or due in advance of our performance. Deferred revenues at December 31, 2021 and 2020 were $2,239 and $2,143 , respectively shown as part of the accrued expenses and other current liabilities and $1,030 and $263 shown as other liabilities. Revenue recognized for the years ended December 31, 2021, 2020 and 2019 that was included in the deferred revenue at the beginning of each year was $2,049 , $1,879 and $2,001 , respectively.
Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant.
Capitalized Contract Costs
As part of obtaining contracts with certain customers in the authentication technology segment, the Company incurs upfront costs such as sales commissions. The Company capitalizes these costs which are subsequently amortized on a straight-line basis over the estimated life of the relationship with the customer. The Company applies the practical expedient that allows it to determine this estimate for a portfolio of contracts that have similar characteristics in terms of type of service, contract term and pricing. This estimate is reviewed by management at the end of each reporting period as additional information becomes available.
Cost of Revenue
Cost of revenue represents primarily payroll and employee related costs associated with employees who provide services under the terms of the Company’s contractual arrangements, insurance and depreciation and amortization.
Research and Development Costs
Research and development costs are expensed as incurred and consist primarily of payroll and related costs, professional services, consulting services and non-capitalized cost associated with the development of technologies.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs during the years ended December 31, 2021, 2020 and 2019 are $2,150 , $735 and $828 , respectively.
Value Added Tax
Certain of the Company’s operations are subject to Value Added Tax (“VAT”) applied on the services sold in those respective countries. The Company is required to remit the VAT collected to the tax authorities, but may deduct the VAT paid on certain eligible purchases.
Income Taxes
The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities resulting from a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is established when realization of net deferred tax assets is not considered more likely than not.
| F - 16 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes (Continued)
Uncertain income tax positions are determined based upon the likelihood of the positions being sustained upon examination by taxing authorities. The benefit of a tax position is recognized in the consolidated financial statements in the period during which management believes it is more likely than not that the position will not be sustained. Income tax positions taken are not offset or aggregated with other positions. Income tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of income tax benefit that is more than 50 percent likely of being realized if challenged by the applicable taxing authority. The portion of the benefits associated with income tax positions taken that exceeds the amount measured is reflected as income taxes payable.
Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share is determined in the same manner as basic income (loss) per share, except that the number of shares is increased to include potentially dilutive securities using the treasury stock method.
The Company had net income for the years ended December 31, 2021 and 2020. For the year ended December 31, 2021 the net income of the Company was adjusted by $10,102 deemed dividends following the conversion of preferred shares A and A-1 in AU10TIX Technologies B.V. to new Series A. Potentially dilutive securities were included in the computation of diluted income per share as the conversion rate of the convertible note payable to related party was lower than the weighted average computed price of the Company’s stock for the year 2021 and 2020.
The Company had a net loss for the year ended December 31, 2019. For periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all dilutive potential common share is anti-dilutive due to the net loss in 2019. Potentially dilutive securities were excluded from the computation of diluted loss per share as the conversion rate of the convertible note payable to related party was higher than the market price of the Company’s common stock as of December 31, 2019, and the effect of including them is anti-dilutive.
The number of shares of common stock attributable to potentially dilutive securities for the years ended December 31, 2021, 2020 and 2019 were 2,978,843 , 3,000,000 and 5,000,000 shares. Those shares were issuable upon conversion of convertible notes payable to related party at price of $0.40 .
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities, income taxes payable, VAT payable, notes payable-banks, long-term loan payable and loan payable to related party approximate their carrying values due to the short-term nature of the instruments. The carrying values of the convertible notes payable to a related party and other liabilities are not readily determinable because: (a) these instruments are not traded and, therefore, no quoted market prices exist upon which to base an estimate of fair value and (b) there were no readily determinable similar instruments on which to base an estimate of fair value.
Concentration of Credit Risk
Financial instruments which are subject to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash and accounts receivable.
The Company maintains cash and cash equivalents and restricted cash in accounts with financial institutions in the United States of America, Europe, Japan and Israel. As of December 31, 2021, accounts at financial institutions located in the United States of America are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250 per institution. As of December 31, 2021, cash, cash equivalents and restricted cash of $17,522 is being held in the United States of America, of which $17,063 is uninsured. Bank accounts located in Europe, Japan and Israel, totaling $85,930 as of December 31, 2021, are uninsured.
| F - 17 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Credit Risk (continued)
The Company renders services to a limited number of airlines and airports through service contracts and provides credit without collateral. Some of these airlines and airports may have difficulties in meeting their financial obligations, which can have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows. To mitigate this risk, the Company regularly reviews the creditworthiness of its customers through its credit evaluation process.
Revenue from three customers represented 64 % of total revenue during the year ended December 31, 2021, of which customer A accounted for 39 %, customer B accounted for 14 % of total revenue and customer C accounted for 11 % of total revenue. Accounts receivable from these three customers represented 39 % of total accounts receivable as of December 31, 2021.
Revenue from two customers represented 70 % of total revenue during the year ended December 31, 2020, of which customer A accounted for 48 % and customer B accounted for 22 % of total revenue. Accounts receivable from these two customers represented 47 % of total accounts receivable as of December 31, 2020.
Revenue from two customers represented 69 % of total revenue during the year ended December 31, 2019, of which customer A accounted for 41 % and customer B accounted for 28 % of total revenue. Accounts receivable from these two customers represented 57 % of total accounts receivable as of December 31, 2019.
Customers A and B mentioned above, have been principle customers in the last three years.
Risks and Uncertainties
The Company is currently engaged in direct operations in numerous countries and is therefore subject to risks associated with international operations (including economic and/or political instability and trade restrictions). Such risks can cause the Company to have significant difficulties in connection with the sale or provision of its services in international markets and have a material impact on the Company’s consolidated financial position, results of operations and cash flows.
The Company is subject to changes in interest rates based on Central Banks Federal Reserve actions and general market conditions. The Company does not utilize derivative instruments to manage its exposure to interest rate risk.
Furthermore, as a result of its international operations, the Company is subject to market risks associated with foreign currency exchange rate fluctuations. The Company does not utilize derivative instruments to manage its exposure to such market risk except in one of its subsidiaries. As such, significant foreign currency exchange rate fluctuations can have a material impact on the Company’s consolidated financial position, results of operations and cash flows.
Reclassification
Certain amounts have been reclassified in prior years balance sheets and statements of cash flows to conform with current period presentation.
Recently Issued Accounting Pronouncements
Accounting Standards Update 2021-10
In November 2021, the FASB issued an update for Government Assistance (Topic 832); Disclosures by Business Entities about Government Assistance. The amendment requires annual disclosures about transactions with a government that are accounted for as information about the nature of the transactions and the related accounting policy used, the line items on the balance sheet and income statement that are affected by the transactions and the significant terms and conditions of the transactions. The amendment is affective for financial statements issued for annual periods beginning after December 15, 2021. The Company has early adopted ASU 2021-10 and has provided the disclosures on Government Assistance in Note 14.
Accounting Standards Update 2021-08
In October 2021, the FASB issued an update for Business Combinations (Topic 805): Accounting for Contract Assets and Contract liabilities from Contracts with customers. This ASU requires entities to apply Topic 606, Revenue from Contracts with Customers to recognize and measure contract asset and contract liabilities in a business combination. The amendment is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within that fiscal year. The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.
| F - 18 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements (continued)
Accounting Standards Update 2020-06
In August 2020, the FASB issued an update for Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Own Equity (Subtopic 815-40): Accounting for Convertible instruments and Contracts in an Entity’s Own Equity. This ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S.GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instruments with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. The amendment is effective for public business entity for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.
NOTE 3 – BUSINESS COMBINATION
Acquisition in Sweden
In February 2021 the Company acquired 51 % of the outstanding shares of Quality Detection Dogs Sweden AB (“QDD”). The purpose of the acquisition was to have a company with experience in training detection dogs in order to train dogs to detect explosive materials. Consideration of the acquisition was 1,250 SEK ($150 as of the purchase date), payment was done at closing.
The acquisition was accounted for as a purchase and accordingly a purchase price was allocated to the assets acquired and liabilities assumed at their fair value.
The following represents the allocation of the purchase price as of the purchase date in SEK and the translation to United States Dollars as of the purchase date:
|
SEK
|
U.S.
Dollars |
|||||||
|
Current assets
|
|
|
||||||
|
Goodwill
|
|
|
||||||
|
Total identifiable assets acquired
|
|
|
||||||
|
Current liabilities
|
|
|
||||||
|
Total liabilities assumed
|
|
|
||||||
|
|
|
|||||||
Goodwill associated with the acquisition of QDD was 1,178 SEK ($139 as of December 31, 2021) and deductible for income tax purposes. The goodwill consists principally of the expectations of future earnings and profits from expanding this business. In December 2021, the Company evaluated the goodwill and concluded the goodwill should be fully impaired (see note 8).
| F - 19 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets are as following:
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Receivable from the Dutch tax authorities (1)
|
$
|
|
$
|
|
||||
|
Receivable from the German authorities – COVID-19 (2)
|
|
|
||||||
|
Dutch Governmental support – COVID-19 (3)
|
|
|
||||||
|
Other
|
|
|
||||||
|
Total prepaid expenses and other current assets
|
$
|
|
$
|
|
||||
| (1) |
The Company is obligated to hold restricted cash in the Netherlands, which is restricted for payments to the tax authorities. From time to time the Company is allowed to make a request to release the money from the restricted account into the regular bank account. As part of the process the Company transfers the requested amount to the Dutch tax authorities, who pay it back after a few weeks into the Company’s regular bank account.
|
| (2) |
In Germany, the employees are eligible for payroll support. The Company pays to its German employees their full salary and the Company is being reimbursed by the German government for the payroll support amount.
|
| (3) |
In the Netherlands, the Company is eligible for support following the COVID-19 crisis.
|
NOTE 5 – INVESTMENTS
Artemis Therapeutics, Inc.
As of December 31, 2021, the Company owns
The Company suspended its use of the equity method to accounting for this investment in 2007 after its investment balance was reduced to zero.
As of December 31, 2021 and 2020, the Company’s share of the underlying net assets of ATMS is equal to the Company’s carrying value of its investment in ATMS ($0 and $0 at December 31, 2021 and 2020). The market value of the Company's investment in ATMS as of December 31, 2021 and 2020 is $120 and $79 , respectively.
The Company evaluated the stock price of ATMS but as ATMS share price is low, the number of shares that are being traded is low, and as ATMS still does not have any revenue, the Company determined that the value of the investment is impaired and accordingly, valued the investment at zero.
Freezone I-SEC Korea Inc.
In April 2018, the Company signed a Joint Venture Agreement with a South Korean Company in order to establish a Joint Venture Company (“JVC”) and to provide aviation security and non-security services in South Korea. Each one of the parties holds 50 % (fifty percent) of the JVC’s equity. The Company uses the equity method for this investment. As of December 31, 2021, the Company’s investment is 322,224 KRW ($271 ). For the years ended December 31, 2021, 2020 and 2019, the Company recognized a profit (loss) in its consolidated statements of operations of (10,491 ) KRW, (17,742 ) KRW and 105,092 KRW, respectively $(8 ), $(15 ) and $91 as of December 31, 2021, 2020 and 2019, respectively) from its investment in the JVC.
Mesh Technologies, Inc.
In January 2019, the Company invested an amount of $
| F - 20 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 5 – INVESTMENTS (CONTINUED)
Arrow Ecology & Engineering Overseas (1999)
In December 2019, the Company invested an amount of $1,750 in Arrow Ecology & Engineering Overseas (1999) Ltd (“Arrow”), a limited company incorporated in Israel. Arrow develops and operates a sustainable green process to recycle mixed and sorted municipal solid waste. The Company purchased few types of shares representing 23.3 % of Arrow’s equity for an amount of $22 and shareholders loans were purchased for a price of $1,728 ($4,146 stated value less $2,418 allowance for credit losses, which have not changed since the acquisition). The Company uses the equity method for this investment. During the years ended December 31, 2021 and 2020, the Company recognized its share in Arrow loss in the amount of $975 and $775 , respectively, from this investment.
The Company has an agreement with an entity related to its main shareholder, according to which, if the value of the investment decrease, the related party entity has guaranteed to repurchase this full investment at a minimum amount of $1,750 . The guarantee is effective immediately as of the date of purchase and terminates after three years. Some Directors and managers of Arrow are related parties of the Company.
GreenFox Logistics LLC.
In March 2020, the Company invested an amount of $100 in GreenFox Logistics, LLC. (“GreenFox”), a company incorporated in the USA. The investment was done as SAFE investment (Simple Agreement for Future Equity). GreenFox is an on-demand delivery/moving/transportation company. As GreenFox is a private, closely held company, there is no active market for this investment. Therefore, the Company measures the investment at cost minus impairment.
SardineAI Corp.
In August 2020, the Company invested an amount of $50 in SardineAI Corp (“SardineAI”), a company incorporated in the USA. In return the Company received preferred shares representing less than 1% of SardineAI equity. SardineAI is a Fraud Prevention-as-a-Service (FaaS) platform for Digital businesses to detect frauds and financial crimes. As SardineAI is a private, closely held company, there is no active market for this investment. Therefore, the Company measures the investment at cost minus impairment.
Silver Circle One
In December 2021, the Company invested an amount of $18 in Silver Circle One, a capital fund which aims to invest in private emerging companies with focus on consumer, commerce and technology companies.
The company committed to invest up to $100 on the pool. As Silver Circle One is a private, closely held fund, there is no active market for this investment. Therefore the company measures the investment at cost minus impairment.
Justt Fintech Ltd (previously Acrocharge Ltd)
In December 2021, the Company invested an amount of $50 in Justt Fintech Ltd ("Justt"), a company incorporated in Israel. As of December 31, 2021, the investment represented less than 1% of the issued and outstanding share capital of Justt Fintech Ltd. Justt is a technology company which fully automated chargeback disputes on behalf of online merchants. As Justt is a private, closely held company, there is not active market for this investment. Therefore, the Company measures the investment at cost minus impairment.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment is as follows:
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Office, equipment and facilities
|
$
|
|
$
|
|
||||
|
Internal-use software
|
|
|
||||||
|
Vehicles
|
|
|
||||||
|
Leasehold improvements
|
|
|
||||||
|
|
|
|||||||
|
Less: accumulated depreciation and amortization
|
|
|
||||||
|
Total property and equipment, net
|
$
|
|
$
|
|
||||
Depreciation and amortization expenses are $2,061 , $2,090 and $1,688 for the years ended December 31, 2021, 2020 and 2019 respectively.
| F - 21 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 7 - LEASES
Lessee Arrangements
The Company enters into leases in the normal course of business primarily as part of its operations in the different airports, back office operations, research and development offices and headquarters offices.
The table below presents the effects on the amounts relating to the Company’s total lease cost:
|
Year ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
Operating lease cost
|
$
|
|
$
|
|
$
|
|
||||||
|
Short-term lease cost
|
|
|
|
|||||||||
|
Total lease cost
|
$
|
|
$
|
|
$
|
|
||||||
|
Other information:
|
||||||||
|
Cash paid for amounts included in the measurement of Lease liabilities:
|
||||||||
|
Operating cash flows from operating leases
|
$
|
|
$
|
|
||||
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
$
|
|
$
|
|
||||
|
Weighted-average remaining lease term - operating leases
|
|
|
||||||
|
Weighted-average discount rate - operating leases
|
|
%
|
|
%
|
||||
Supplemental balance sheet information related to operating leases was as follows:
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Operating lease ROU assets
|
$
|
|
$
|
|
||||
|
Other current liabilities
|
$
|
|
$
|
|
||||
|
Operating lease liabilities
|
|
|
||||||
|
Total operating lease liabilities
|
$
|
|
$
|
|
||||
Future undiscounted lease payments for operation leases with initial terms of more than one year as of December 31, 2021 are as follows:
|
Year ending December 31,
|
||||
|
2022
|
|
|||
|
2023
|
|
|||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
Thereafter
|
|
|||
|
Total future minimum lease payments
|
|
|||
|
Less: imputed interest
|
|
|||
|
Total
|
$
|
|
||
| F - 22 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 8 – GOODWILL
All the Company’s goodwill relates to its airport security and other aviation services segment. The change in goodwill during the year is as follows:
|
2021
|
2020
|
|||||||
|
Balance as of the beginning of the year:
|
||||||||
|
Goodwill
|
$
|
|
$
|
|
||||
|
Accumulated impairment losses
|
(
|
)
|
(
|
)
|
||||
|
|
|
|||||||
|
Goodwill acquired during the year
|
|
|
||||||
|
Impairment losses
|
(
|
)
|
|
|||||
|
Exchange rate effect
|
(
|
)
|
|
|||||
|
|
|
|||||||
|
Balance as of the end of the year:
|
||||||||
|
Goodwill
|
|
|
||||||
|
Accumulated impairment losses
|
(
|
)
|
(
|
)
|
||||
|
$
|
|
$
|
|
|||||
At December 31, 2021, the qualitative assessment indicated that it was more likely than not that the carrying value of the reporting unit exceeded fair value. The quantitative impairment test includes comparing the carrying value of the reporting unit, including the existing goodwill and intangible assets, to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, a goodwill impairment charge is recorded for the amounts in which the carrying value of the reporting unit exceeds the fair value of the reporting unit, up to the amount of goodwill attributed to the reporting unit. After performing the quantitative testing, it was determined that the carrying amount exceeds the reporting unit’s fair value, resulting in an impairment charge of $139 for the year ended December 31, 2021.
At December 31, 2020, the Company performed qualitative assessments to determine if it was more likely than not that the fair value of the reporting units exceeded its carrying values, including goodwill. The qualitative assessments indicated that it was more likely than not that the fair value exceeded the carrying value of the reporting unit.
During the years ended on December 31, 2021, 2020 and 2019, the Company recognized impairment charges of $139 , $0 and $0 , respectively.
The facts and circumstances that led to the impairment of goodwill during the year ended December 31, 2021 are as follows:
In February 2021, the Company acquired 51 % of the outstanding shares of Quality Detection Dogs Sweden AB (see note 3) and recorded goodwill of €122 ($146 as of the purchase date). The purpose of the acquisition was to have a company with experience on detection dogs in order to train dogs to detect explosive materials. QDD’s revenue, operating profits and cash flows were lower than expected. The earnings forecast for the next year was revised and an impairment loss of €122 ($139 as of December 31, 2021) was recognized.
| F - 23 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 9 – NOTES PAYABLE – BANKS
United States of America
The Company’s U.S. subsidiary was a party to a credit facility with a commercial lender, which provided a maximum borrowing capacity up to $10,000 , subject to a borrowing base limitation. The borrowing base limitation was equivalent to: (i) 85 % of eligible accounts receivable, as defined, plus (ii) 80 % of eligible unbilled receivables, as defined, plus (iii) 95 % of a $500 standby letter of credit. Borrowings under the credit facility are secured by the U.S. subsidiary’s accounts receivable, unbilled receivables, equipment, cash and the $500 letter of credit that was provided to the lender by the Company. The credit facility expired on October 2021.
As of December 31, 2020, the Company did not have any outstanding balance under the line of credit arrangement.
Borrowings made under the credit facility bore interest, which was payable monthly, at LIBOR plus 3 % per annum.
The Company’s weighted average interest rate in the United States of America during the years ended December 31, 2020 and 2019 was 4.42 % and 5.44 % respectively.
Europe
The Company had a credit arrangement with a commercial bank, to provide it with up to €12,000 in borrowings which was renewed in May 2020 through March 2021. Borrowings under the line of credit bore interest at one-month EURIBOR plus 4.8 % with a minimum of 4.8 % per annum. The Company was also subject to unused line fee of 0.75 % per annum, which was payable quarterly. The line of credit was secured by accounts receivable of ten of the Company’s European subsidiaries, tangible fixed assets and a bank guarantee of €2,000 ($2,457 as of December 31, 2020) provided by the parent company, ICTS International N.V. The line of credit could not exceed 70 % of the borrowing base. The line of credit includes certain financial covenants. The line of credit expired in March 2021.
As of December 31, 2020, the Company had €6,432 ($7,902 as of December 31, 2020), in outstanding borrowings under the line of credit arrangement.
In addition to the line of credit arrangement, a guarantee facility of €2,500 ($2,841 as of December 31, 2021) is provided to the Company by the same commercial bank, which was renewed until March 2022, with an interest of 2.5 % per annum and an unused line fee of 0.75 % per annum which is payable quarterly. As of December 31, 2021 and 2020, the Company had €1,022 and €973 ($1,161 and $1,195 as of December 31, 2021 and 2020), respectively, of outstanding guarantees under the guarantee facility, which related to leases and performance guarantees for contracts. The guarantee facility expired in March 2022.
The guarantee facility is secured by the accounts receivables of ten of the Company’s European subsidiaries.
The Company’s weighted average interest rate in Europe during the years ended December 31, 2021, 2020 and 2019, is 4.8 %, 4.4 % and 3.5 % respectively.
The Company has an additional credit arrangement in Sweden to provide it with up to 4,000 SEK ($442 as of December 31, 2021) in borrowings. Borrowings under the line of credit bear annual interest of 2.8 % and subject to annual extension by the financial institution. The line of credit is secured by accounts receivable of the Swedish subsidiary. As of December 31, 2021 and 2020, the Company had 1,800 SEK and 1,648 SEK ($199 and $202 as of December 31, 2021 and 2020) respectively in outstanding borrowings under the line of credit facility.
NOTE 10 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are as follows:
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Accrued payroll and related costs
|
$
|
|
$
|
|
||||
|
Accrued vacation
|
|
|
||||||
|
Labor union contribution
|
|
|
||||||
|
Deferred revenue
|
|
|
||||||
|
Payroll support program funding
|
|
|
||||||
|
Other
|
|
|
||||||
|
Total accrued expenses and other current liabilities
|
$
|
|
$
|
|
||||
| F - 24 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 11 – DEBT TO RELATED PARTIES
Convertible Notes Payable to a Related Party
The Company has an agreement with an entity related to its main shareholder, to provide it with up to $37,000 in revolving loans through June 30, 2020. The term of the arrangement can be automatically extended for four additional six-month periods at the option of the holder. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the interest rate of LIBOR plus 7 % for U.S. dollar-denominated loans and the Company’s European commercial bank interest base rate plus 3 % for Euro-denominated loans. The arrangement is secured by a 26 % interest in one of the Company's European subsidiaries. In connection with the arrangement, the holder was granted an option to convert the outstanding principal notes payable under the arrangement into the Company's common stock at a price of $1.50 per share and the unpaid accrued interest at a price of $0.75 per share.
In January 2019, the entity related to the main shareholder converted $
In May 2019, the Company granted this entity, the option to convert up to $2,000 of the loan into the Company’s shares at a price of $0.40 per share, and all other conversion rights for the balance of the debt except $2,611 , which were converted into 3,480,968 shares in December 2019. In October 2020, the entity converted $800 into 2,000,000 shares.
In June 2019, the Board of Directors approved a one-time compensation of $
In October 2020, the loan was extended until January 2022, the loan amount was reduced to $3,000 and the pledge of 26 % interest in one of the Company's European subsidiaries was terminated.
In December 2021, the loan was extended until January 2024, the loan amount was reduced to $
The Company’s weighted average interest during the years ended December 31, 2021, 2020 and 2019 is 7.10 %, 7.60 % and 8.30 % , respectively.
As of December 31, 2021 and 2020, convertible notes payable to this related party consist of $1,192 and $1,200 , respectively.
Total interest expense related to the note is $
NOTE 12 – OTHER LIABILITIES
Other liabilities are as follows:
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Severance pay liability
|
$
|
|
$
|
|
||||
|
Deferred revenue
|
|
|
||||||
|
Deferred VAT (1)
|
|
|
||||||
|
Deferred wage tax and social security (1)
|
|
|
||||||
|
Other (2)
|
|
|
||||||
|
Total other liabilities
|
$
|
|
$
|
|
||||
| (1) |
|
| (2) |
|
| F - 25 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 13 – REDEEMABLE NON-CONTROLLING INTERESTS
On July 3, 2019, AU10TIX entered into a Series A Preferred Subscription Agreement (the "Agreement") with TPG Lux 2018 SC I, S.a.r.l ("TPG"), according to which AU10TIX issued
On November 7, 2019, AU10TIX entered into a Series A and Series A-1 Preferred Subscription Agreement with Oak HC/FT Partners II, L.P. ("Oak"), according to which AU10TIX issued
Following the Oak investment, on November 7, 2019, TPG subscribed for 307,087 Series A-1 Shares at nominal value (US$0.001 per share) (“Bonus Issue Series A-1 Shares”) in order to preserve its 23.077 % ownership interest in the fully diluted share capital of AU10TIX.
The Preferred Shares Rights
Liquidation Preference: The holders of Series A Shares (“Series A Holders”) are entitled to a liquidation preference upon the occurrence of a sale, initial public offering (“IPO”), merger, consolidation, reorganization, winding-up, dissolution or liquidation of AU10TIX, pursuant to which the Series A Holders are entitled, on the occurrence of such event and in priority to the ordinary shares, to receive the greater of: (a) an amount equal to the initial subscription price for the Series A Shares, plus all accrued but unpaid dividends in respect of the Series A Shares, less all dividends previously paid on the Series A Shares, and (b) the proceeds distributable in respect of the Series A Shares had they been converted into ordinary shares. The initial subscription price for the Series A Shares (and calculations derived therefrom) are subject to customary adjustments as set forth in the agreements executed in connection with the Sale.
Conversion Rights: The Series A Shares are subject to conversion into ordinary shares of AU10TIX: (a) on the written request by any Series A Shareholder; and (b) immediately prior to a qualifying IPO of AU10TIX (being an IPO where the net aggregate gross proceeds to AU10TIX exceed US$75 million and where the subscription price per share paid by the public is not less than 150 % of the initial subscription price paid for the Series A Shares). Pursuant to these conversion arrangements, the Series A Shares will convert into ordinary shares on a 1:1 basis (subject to certain agreed upon adjustments).
Anti-Dilution Protection: The Shareholders Agreements contain customary broad-based weighted average anti-dilution protection whereby, if further shares are issued by AU10TIX at a price per new security that is less than the initial subscription price paid for the Series A Shares, then the Series A Holders shall be entitled to receive additional Series A Shares (at no further cost) on a weighted-average basis, reflecting the value of equity in AU10TIX as determined based on the subscription price paid in the new issue of securities.
Pre-emption Rights: The Shareholders Agreements contain a restriction on issuing any securities ranking senior to or on party with the Series A Shares for as long as TPG and/or any subsequent investor holds at least one third of the overall number of Series A Shares in issue as at the date of completion of the Sale. In addition, each shareholder holding in excess of 3 % of the shares of AU10TIX has the right to participate in any new issuance of securities by the AU10TIX, subject to customary exceptions.
Exit Rights: At any time from and after the fifth (5th) anniversary of completion of the issuance, upon written request by TPG, AU10TIX is required to use reasonable endeavors to facilitate the sale by TPG of the Preferred Shares (or, following conversion, ordinary shares) to a third party at a price in excess of 150 % of the initial subscription price paid for the Series A Shares and subject to a right of first refusal in favor of AU10TIX. In the event that, three (3) months thereafter, a sale of the Preferred Shares held by TPG has not been consummated, upon written request by TPG, AU10TIX is required to facilitate a sale of AU10TIX within six (6) months after such written request, and thereafter, TPG has the right to require AU10TIX to facilitate a sale or IPO of AU10TIX. On the exercise of such rights, each other shareholder (including AU10TIX) is required to cooperate with TPG regarding such sale or IPO and TPG has the right to exercise drag rights over the shares held by other shareholders in order to facilitate such exit event.
| F - 26 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 13 – REDEEMABLE NON-CONTROLLING INTERESTS (CONTINUED)
The Preferred Shares Rights (Continued)
The Exit Right is part of the issuance of the Series A Shares, and was not entered into separately from the transaction that created the non-controlling interests. The Exit Right is not legally detachable from the non-controlling interests because it is non-transferrable (i.e., the instrument cannot be transferred without the underlying preferred shares). Thus, the Exit Right would not be separately exercisable from the non-controlling interests shares because the non-controlling interests shares will be settled when the Exit Right is exercised. As a result, the Exit Right would be considered embedded in the Series A Shares held by TPG.
Shares of redeemable convertible preferred stock are not mandatorily or currently redeemable. However, the Exit Right would constitute a contingent redemption event that is outside of AU10TIX’s control. As such, Series A Shares have been presented outside of permanent equity as redeemable non-controlling interests. AU10TIX has adjusted the carrying value of the redeemable non-controlling interests to adjust for the non-controlling interests share in AU10TIX's profits and Other Comprehensive Income (Loss). AU10TIX has not adjusted the carrying values of the redeemable non-controlling interests to the deemed liquidation values of such shares since a liquidation event was not probable at any of the balance sheet dates. Subsequent adjustments to increase or decrease the carrying values to the ultimate liquidation values will be made only if and when it becomes probable that such a liquidation event will occur.
The Series A-1 Preferred Shares do not entitle their holders to any liquidation or exit rights as the Series A Preferred Shares, and therefore are classified within permanent equity, as non-controlling interests.
The anti-dilution provisions cited above have not been bifurcated from the host contract since they are to be settled into AU10TIX's non-traded shares, thus the "net settlement" criteria is not met.
On June 28, 2021, TPG, Oak, GF GW LLC (“GF”) and AU10TIX, entered into a Sale and Purchase Agreement (the “SPA”), pursuant to which Oak and GF purchased preferred shares in AU10TIX from TPG. In connection with the SPA, (i) such parties and ICTS entered into an amended and restated shareholders agreement (the “SHA”) and an amended and restated registration rights agreement (the “RRA”) and (ii) AU10TIX’s Articles of Association (the “Articles”) were amended by a deed of amendment (the “Deed of Amendment”).
Pursuant to the SPA, Oak purchased 755,906 AU10TIX Series A Preferred shares from TPG and GF purchased 1,511,811 AU10TIX Series A Preferred Shares from TPG. In connection with such purchases, all outstanding AU10TIX’s Series A Preferred Shares and Series A-1 Preferred Shares were re-designated as New Series A Preferred Shares and the Ordinary Shares owned by ICTS were re-designated as Class B Ordinary Shares, as described below.
In consideration of the benefits to Oak increasing its shareholding and GF becoming a shareholder, AU10TIX provided certain customary warranties to Oak and GF concerning AU10TIX and its business. In addition, AU10TIX agreed to be primarily liable to Oak and GF for any breaches by TPG of its customary fundamental warranties given to Oak and GF (including that TPG owns AU10TIX Series A Preferred Shares being sold to Oak and GF); provided, that, TPG has agreed to indemnify and hold AU10TIX harmless for any losses incurred by AU10TIX in relation to such fundamental warranties given by TPG.
Following the completion of the sales and purchases contemplated by the SPA on June 28, 2021: (i) ICTS owns 68.69 % of the outstanding share capital of AU10TIX in the form of Class B Ordinary Shares; (ii) Oak owns 12.87 % of the outstanding share capital of AU10TIX in the form of New Series A Preferred Shares; (iii) GF owned 10.93 % of the outstanding share capital of AU10TIX in the form of New Series A Preferred Shares; and (iv) TPG owns 7.51 % of the outstanding share capital of AU10TIX in the form of New Series A Preferred Shares. In addition, AU10TIX may issue up to 500,000 Class A Ordinary Shares under its existing employee stock option plan.
The SHA and the Articles (as amended by the Deed of Amendment) provide for the following material matters in respect of the rights attaching to the New Series A Preferred Shares and the Ordinary Shares and the ongoing governance of AU10TIX:
General: The New Series A Preferred Shares are entitled to one vote per share and rank equally with the Ordinary Shares in regards to dividends. The Ordinary Shares are divided into two classes: Class A Ordinary Shares and Class B Ordinary Shares, which rank equally as to dividends. The Class A Ordinary Shares are entitled to one vote per share. The Class B Ordinary Shares are entitled to three votes per share and may only be held by ICTS and its permitted transferees.
| F - 27 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 13 – REDEEMABLE NON-CONTROLLING INTERESTS (CONTINUED)
The Preferred Shares Rights (Continued)
Liquidation Preference: the holders of New Series A Preferred Shares (“Series A Holders”) are entitled to a liquidation preference upon the occurrence of a (i) sale, initial public offering, which term includes certain business combinations with a SPAC (an “IPO”), merger, consolidation or reorganization, which results in change of control of AU10TIX, and (ii) winding-up, dissolution or liquidation of AU10TIX, pursuant to which the Series A Holders are entitled, on the occurrence of such event and in priority to the Ordinary Shares, to receive the greater of: (a) US$26.4583 per share, subject to adjustments for certain events affecting the capital of AU10TIX (the “Starting Price”) plus all accrued but unpaid dividends in respect of the New Series A Preferred Shares, less all dividends previously paid on the New Series A Preferred Shares, and (b) the proceeds distributable in respect of the New Series A Preferred Shares had they been converted into Class A Ordinary Shares. The Ordinary Shares rank equally in liquidation.
Conversion Rights: The New Series A Preferred Shares are subject to conversion into Class A Ordinary Shares on a 1:1 basis (subject to adjustments for certain events affecting the capital of AU10TIX): (a) upon the written request by any Series A Holder; and (b) immediately prior to a qualifying IPO of AU10TIX (being an IPO where each Class A Ordinary Share is valued at not less than 150 % of the Starting Price at the completion of the IPO, subject to adjustments for certain events affecting the capital of AU10TIX) (a "Qualifying IPO"). The Class B Ordinary Shares are convertible into Class A Ordinary Shares at any time upon the written request of a holder of Class B Ordinary Shares on a 1:1 basis, subject to adjustments for certain events affecting the capital of AU10TIX.
Anti-Dilution Protection: The SHA contains customary broad-based weighted average anti-dilution protection whereby, if further shares are issued by AU10TIX at a price per new security that is less than the Starting Price, then the Series A Holders shall be entitled to receive additional Class A Ordinary Shares (at no further cost) on a weighted-average basis, reflecting the value of the equity in AU10TIX, as determined based on the subscription price paid in the new issue of securities.
Transfers: Subject to certain customary exceptions, including a transfer to a permitted transferee, any shareholder (other than TPG, Oak and GF) wishing to transfer any of the shares held by it shall first offer such shares to each shareholder holding 3 % or more of AU10TIX’s outstanding share capital at the same price and on the same terms at which the selling shareholder wishes to transfer such shares.
New Issuances: Subject to certain customary exceptions, each shareholder holding 3% or more of AU10TIX’s outstanding share capital has the right to participate in any new issuance of securities by AU10TIX.
Information Rights: Subject to certain exceptions, each shareholder holding 3% or more of AU10TIX’s outstanding share capital is entitled to receive certain financial information regarding AU10TIX including budgets, annual and quarterly accounts and details of any third party offer for the stock or assets of AU10TIX, as well as certain inspection rights.
Exit Rights: At any time from and after July 3, 2026, upon written request by Series A Holders holding at least 60 % of the then outstanding New Series A Preferred Shares (the “Preferred Majority”), AU10TIX is required to use reasonable endeavors to facilitate a sale of AU10TIX within six months after such written request, and, thereafter, the Preferred Majority has the right to step-in and require AU10TIX to facilitate a sale or IPO. On the exercise of such step-in right, each other shareholder (including ICTS) is required to cooperate with the Preferred Majority regarding such sale or IPO and the Preferred Majority has the right to exercise drag rights over the shares held by other shareholders in order to facilitate such exit event.
Board Arrangements: The Shareholders Agreement and Articles provide that the board of directors of AU10TIX shall be constituted by up to six directors: (i) four of whom will be appointed by the holder of a majority of the Class B Ordinary Shares (i.e., currently ICTS); (ii) one of whom will be appointed by Oak (for so long as Oak holds at least 50 % of the New Series A Preferred Shares held on the date of the closing of the transactions contemplated by the SPA, subject to adjustments for certain events affecting the capital of AU10TIX); and (iii) one of whom will be appointed by GF (for so long as GF holds at least 50 % of the New Series A Preferred Shares held on the date of the closing of the transactions contemplated by the SPA, subject to adjustments for certain events affecting the capital of AU10TIX). As a general matter, the board of AU10TIX is able to pass resolutions by a simple majority, subject to the consent rights of the Preferred Majority set out below.
| F - 28 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 13 – REDEEMABLE NON-CONTROLLING INTERESTS (CONTINUED)
The Preferred Shares Rights (Continued)
Preferred Majority Consent Rights: For as long as the Series A Holders hold, in the aggregate, at least 25 % of the New Series A Shares Preferred Shares held on the date of the closing of the transactions contemplated by the SPA, subject to adjustments for certain events affecting the capital of AU10TIX, the consent of the Preferred Majority is required for the following actions (i) amending the SHA or the Articles in a manner that would adversely affect the rights, preferences or privileges of the New Series A Preferred Shares; (ii) issuing new securities ranking senior to or pari passu with the New Series A Preferred Shares; (iii) making of any dividend or distribution other than a dividend or distribution that is pro rata to the Series A Holders and the holders of the Ordinary Shares; (iv) redeeming any Ordinary Shares; (v) incurring debt in excess of 4.0x AU10TIX’s consolidated EBITDA in the 12-month period ending on the last day of the month preceding the month in which the debt was incurred; (vi) consummating an IPO other than a Qualifying IPO; (vii) making certain changes to the size of AU10TIX’s board; (viii) making any fundamental change in the nature of the business of AU10TIX and its subsidiaries; (ix) entering into related party transactions, unless such transaction is commercially reasonable and on an arm’s-length basis; and (x) either amending AU10TIX’s existing stock option plan or creating a new stock option plan to allow for the issuance of more than 500,000 additional Class A Common Shares.
Tag Rights: Following completion of the procedures on transfers set out above, each Series A Holder holding 3 % or more of AU10TIX’s outstanding shares will have the right to participate proportionately in any third-party share sale by another shareholder other than a Series A Holder (subject to certain customary exceptions).
Drag Rights: AU10TIX has the right to drag other shareholders into an exit event subject to certain requirements being satisfied (including either (i) holders of New Series A Shares receiving the greater of: (a) the Starting Price and (b) the proceeds distributable in respect of the New Series A Preferred Shares had they been converted into Class A Ordinary Shares, in each case with the approval of the Board, the Preferred Majority and the holders of a majority of the shares or (ii) a minimum value per New Series A Share of 150 % of the Starting Price approved by the Board and holders of a majority of the shares, in each case subject to adjustments for certain events affecting the capital of AU10TIX) in relation to such exit transaction.
Termination: The SHA terminates upon (i) the agreement of AU10TIX, the Preferred Majority and a majority of the holders of the Ordinary Shares or (ii) the closing of a Qualifying IPO.
Tax Matters: AU10TIX is required to provide the Series A Holders with certain customary information for U.S. federal tax reporting purposes.
Confidentiality and Public Announcements: The SHA provides for customary confidentiality protections and limitations on public announcements without consent.
The RRA provides the Series A Holders (and in certain cases the holders of the Class B Ordinary Shares) with a limited number of customary long-form and short-form demand registration rights, shelf registration rights and the right to participate under certain conditions if AU10TIX determines to register its shares. In addition, AU10TIX has undertaken to (i) take certain actions to facilitate the rights of the parties under the RRA; (ii) provide customary indemnification; (iii) not agree to further registration rights superior to those granted under the RRA; and (iv) limit issuances of its shares under certain circumstances set out in the RRA.
Pre-emption Rights: The Shareholders Agreement contains a restriction on issuing any securities senior to or pari passu with the New Series A Preferred Shares for so long as the holders of the New Series A Preferred Shares on June 28, 2021 (or their transferees in accordance with the terms of the Shareholders Agreement) continue to collectively hold at least 25 % of such number (appropriately adjusted for certain corporate events) of New Series A Preferred Shares. In addition, each shareholder holding in excess of 3% of AU10TIX’s outstanding shares has the right to participate in any new issuance of securities by AU10TIX, subject to customary exceptions.
| F - 29 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 13 – REDEEMABLE NON-CONTROLLING INTERESTS (CONTINUED)
The Preferred Shares Rights (Continued)
The Company has assessed whether the change in the terms of the Preferred Shares following the closing of the 2021 SPA constituted a modification or extinguishment for accounting purposes, by comparing the fair value of these Preferred Shares immediately before and immediately after the closing of the 2021 SPA. An extinguishment occurs when the difference in fair value exceeds 10%, while a modification occurs when such fair value difference is lower than 10%.
Additionally, the carrying value of the Series A-1 Shares, which were previously presented among non-controlling interests, were reclassified to redeemable non-controlling interests and initially recognized at their fair value, following their re-designation as New Series A Preferred Shares.
Following the modification and extinguishment of the Preferred Shares, and the reclassification of the Series A-1 Shares, the Company adjusted the carrying value of the redeemable non-controlling interests by $9,057 , with a corresponding decrease to additional paid-in capital and non-controlling interests in the amounts of $10,102 and $1,045 , respectively.
The following table sets forth for the movement in the redeemable non-controlling interests:
|
Year Ended December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Balance as of the beginning of the year
|
$
|
|
$
|
|
||||
|
Net Income
|
|
|
||||||
|
Other Comprehensive Income - Translation adjustment
|
(
|
)
|
|
|||||
|
Conversion of AU10TIX shares A-1 into new series A
|
|
|
||||||
|
Stock-based compensation
|
|
|
||||||
|
Balance as of the end of the year
|
$
|
|
$
|
|
||||
NOTE 14 – GOVERNMENTAL SUPPORT
During 2021 and 2020, governments in some of the countries in which we operate have announced the implementation of government assistance measures, which mitigated the impact of the COVID-19 outbreak on our results and liquidity. In the United States of America, the government has approved a payroll support of $15,918 and $13,680 , respectively to the American subsidiary of the Company. Out of those amounts, the American subsidiary recognized amounts of $16,925 and $12,672 as reduction of labor expenses for the years ended December 31, 2021 and 2020, respectively. During the years ended December 31, 2021 and 2020, the Dutch government has provided financial assistance of €18,135 and €17,619 ($22,608 and $21,645 as of December 31, 2021 and 2020), respectively. The Dutch government extended the support program until March, 2022 and will not extended it beyond. For the months January through March 2022, the Company was granted additional assistance up to €4,556 . In Germany, the employees are eligible for payroll support up to 60 % of the employee’s payroll (on individual basis) in case the employees meet the support plan requirements. The Company pays to its German employees their full salary and the Company is being reimbursed by the German government for the payroll support amount. The Company applied for this support starting from April 2020 to June 2021. These available governmental support plans might be extended and/or changed according to the future COVID-19 developments, although currently the Company does not expect those measures to be renewed or extended.
In the Netherlands wage tax, social security and VAT payments for the period March 2020 until September 2021 were postponed and will have to be paid in 60 installments, starting March 2023, except for VAT payments starting October 2022. As of December 31, 2021 and 2020, the Company accumulated debt of €33,456 and €20,796 ($38,011 and $25,548 as of December 31, 2021 and 2020), respectively to the Dutch tax authorities. In Germany, the government postponed the payment of the VAT for the period February through April, 2020. The Company accumulated €5,462 ($6,710 as of December 31, 2020) which was paid during the year 2021.
NOTE 15 – STOCK-BASED COMPENSATION
AU10TIX’s Limited, AU10TIX’s subsidiary, has a Stock Option Plan which has reserved 500,000 shares of its common stock for its future issuance. As of December 31, 2021, the subsidiary has 18,000,000 authorized shares of which 12,500,000 four years .
| F - 30 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 15 – STOCK-BASED COMPENSATION (CONTINUED)
The following is a summary of the AU10TIX Limited stock options issued and outstanding:
|
Number of options
|
Weighted average exercise price
|
Weighted average remaining contractual term
|
||||||||||
|
Options outstanding as of December 31, 2020
|
|
$
|
|
|||||||||
|
Options granted
|
|
|
||||||||||
|
Options exercised
|
|
|
||||||||||
|
Forfeited
|
|
|
||||||||||
|
Options outstanding , end of the year
|
|
$
|
|
|
||||||||
|
Options exercisable, as of December 31, 2021
|
|
$
|
|
|
||||||||
There are no non-vested options in AU10TIX Limited.
In August 2020, AU10TIX’s board agreed to move the option plan from AU10TIX Limited to AU10TIX Technologies B.V., which is still in process.
The following is a summary of the AU10TIX Technologies B.V. stock options issued and outstanding:
|
Number of options
|
Weighted average exercise price
|
Weighted average remaining contractual term
|
|||||||
|
Options outstanding as of December 31, 2020
|
|
$
|
|
||||||
|
Options granted
|
|
|
|||||||
|
Options exercised
|
|
|
|||||||
|
Forfeited
|
|
|
|||||||
|
Options outstanding , end of the year
|
|
$
|
|
|
|||||
|
Options exercisable, as of December 31, 2021
|
|
$
|
|
|
|||||
During the years ended December 31, 2021, 2020 and 2019, there were $350 , $0 and $0 compensation expenses.
As of December 31, 2021, the Company has $116 of unrecognized compensation cost related to stock options.
| F - 31 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 16 – OTHER EXPENSES, NET
Other expense is summarized as follows:
|
Year ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
Interest expense to related parties (see Note 11)
|
$
|
(
|
)
|
$
|
(
|
) |
$
|
(
|
)
|
|||
|
Interest expense and other bank charges
|
(
|
)
|
(
|
) |
(
|
)
|
||||||
|
Interest income
|
|
|
|
|||||||||
|
Revaluation and related costs reimbursed to related party
|
|
|
(
|
)
|
||||||||
|
Foreign currency gain (loss)
|
|
(
|
) |
|
||||||||
|
Gain from sale of Mesh shares (see Note 5) _
|
|
|
|
|||||||||
|
Other income (expense)
|
|
(
|
) |
|
||||||||
|
Total other income (expense), net
|
$
|
(
|
)
|
$
|
(
|
) |
$
|
(
|
)
|
|||
NOTE 17 – INCOME TAXES
The components of income (loss) before income tax benefit (expense) from continuing operations are as follows:
|
Year Ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
The Netherlands
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
||||
|
Subsidiaries outside of the Netherlands
|
|
|
|
|||||||||
|
Income (loss) before income tax expenses
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
The current income tax expense from subsidiaries outside of the Netherlands is $8,937 , $1,345 and $1,492 , for the years ended December 31, 2021, 2020 and 2019, respectively. There was no current income tax expense or benefit for the Netherlands for the years ended December 31, 2021, 2020 and 2019.
The deferred income tax benefit from subsidiaries outside of the Netherlands is $331 , $676 and $29 , for the years ended December 31, 2021, 2020 and 2019, respectively. There was no deferred income tax expense for the Netherlands for the years ended December 31, 2021, 2020 and 2019.
Additionally, tax expenses (benefits) from subsidiaries outside the Netherlands include $614 , $(79 ) and $86 , for the years ended December 31, 2021, 2020 and 2019, respectively, of tax related to previous years. There were no tax expenses related to previous years in the Netherlands for the years ended December 31, 2021, 2020 and 2019.
The components of deferred tax assets and liabilities are as follows:
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Deferred tax assets:
|
||||||||
|
Operating loss carryforwards
|
$
|
|
$
|
|
||||
|
Capital loss carryforwards
|
|
|
||||||
|
Allowance for doubtful accounts
|
|
|
||||||
|
Tax credit carryforwards
|
|
|
||||||
|
Accrued expenses and other
|
|
|
||||||
|
Research and development expenses, net
|
|
|
||||||
|
Total deferred tax assets
|
|
|
||||||
|
Deferred tax liabilities:
|
||||||||
|
Depreciation of property and equipment
|
(
|
)
|
(
|
)
|
||||
|
|
|
|||||||
|
Valuation allowance
|
(
|
)
|
(
|
)
|
||||
|
Deferred tax assets, net
|
$
|
|
$
|
|
||||
| F - 32 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 17 – INCOME TAXES (CONTINUED)
The ultimate realization of the net deferred tax assets in each jurisdiction the Company does business in is dependent upon the generation of future taxable income in that jurisdiction during the periods in which net operating loss carry forwards are available and items that gave rise to the net deferred tax assets become deductible. At present, the Company does not have a sufficient history of generating taxable income in the various jurisdictions it does business in, or positive expected core earnings to conclude that it is more likely than not that the Company will be able to realize its net deferred tax assets in the near future and, therefore, a valuation allowance was established for the carrying value of the net deferred tax assets, with the exception of few locations, which are currently generating taxable income. A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion of the valuation allowance in other jurisdictions.
As of December 31, 2021, the Company has net operating losses carry forwards of $22,056 in the Netherlands. These losses can be carried forward and do not expire but starting 2022 the yearly utilization is limited to one million Euro per year, plus 50% of the excess taxable income. As of December 31, 2021, the Company has net operating loss carry forwards of $6,300 in the United States of America, which will expire in 2031 through 2037. In Israel, the Company has net carry forward losses of $7,060 which do not expire. The ultimate utilization of such net operating loss carry forwards is limited in certain situations.
As of December 31, 2021, the Company has capital loss carry forwards of $715 in Israel. Such capital loss carry forwards do not expire and can be offset against future capital gains generated in Israel.
As of December 31, 2021, the Company has $560 in tax credits for the welfare to work and work opportunity programs in the United States of America that expire in 2024 through 2029.
During the years ended December 31, 2021 and 2020 the valuation allowance decreased by $5,815 and $3,601 , respectively.
The Company’s effective income tax rate differs from the Netherlands’ statutory rate of 25
|
Year Ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
Effective loss (income) tax benefit from continuing operations at statutory rate
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
||||
|
Rate differential
|
|
|
|
|||||||||
|
Non-deductible expenses
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Adjustments to prior year tax losses
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Changes in valuation allowance
|
|
|
(
|
)
|
||||||||
|
Other
|
(
|
)
|
|
(
|
)
|
|||||||
|
Income tax expense from continuing operations
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
Uncertain tax positions
The Company is subject to income taxes in the Netherlands, and numerous foreign jurisdictions. Significant judgment is required in evaluating the Company’s tax positions and determine its provision for income taxes. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax related uncertainties based on estimates of whether and the extent to which additional taxes will be due. These reserves are established when the Company believes that certain positions might be challenged despite evidence supporting the position. The Company adjust this reserve in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve positions and changes to reserves that are considered probable.
As of December 31, 2021 and 2020, there are $688 and $0 of unrecognized tax benefits, respectively, that if recognized would reduce the effective tax rate. Interest and penalties assessed by taxing authorities on an underpayment of income taxes are included as components of income tax provision in the consolidated statements of operations and comprehensive income.
| F - 33 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 17 – INCOME TAXES (continued)
A reconciliation of the Company’s unrecognized tax benefits is as follows:
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Balance at beginning of year
|
$
|
|
$
|
|
||||
|
Additions based on tax positions taken in prior years
|
|
|
||||||
|
Additions based on tax positions taken in the current year
|
|
|
||||||
|
Reduction based on tax positions taken in prior years
|
|
|
||||||
|
Balance at end of year
|
$
|
|
$
|
|
||||
The Company files income tax returns in the Netherlands and other foreign jurisdictions. Income tax returns for the years since 2015 are subject to examination in the Netherlands. In the United States of America, income tax returns for the years since 2018 are subject to examination. Income tax returns for the tax years since 2016 are subject to examination in foreign jurisdictions.
NOTE 18 - RELATED PARTY TRANSACTIONS
An entity related to one of the Company’s Supervisory Board members provide legal services to the Company. Legal expense related to these services is $59 , $46 and $46 for the years ended December 31, 2021, 2020 and 2019, respectively.
The Company engages the services of a related party to provide certain selling and management services to the authentication technology segment. The Company incurred expenses of $1,710 , $741 and $801 for such services for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, and 2020 the outstanding balances due for these services were $311 and $114 , respectively, included in accrued expenses and other current liabilities. In addition, since April 2018, the related party serves as a board member of the Company and was paid an amount of $38 , $38 and $28 as board fees, for the years ended December 31, 2021, 2020 and 2019, respectively.
The Company engages the services of a related party to provide certain selling services to its authentication technology segment. The Company incurred expenses of $148 , $87 and $106 for such services for the years ended December 31, 2021, 2020 and 2019, respectively.
The Company engaged the services of a related party to provide internal audit services. As of February 2020, the related party acts as a Managing Director of the Company. The Company incurred expenses of $286 , $182 and $170 for such services for the years ended December 31, 2021, 2020 and 2019, respectively.
The chairman of the board, a related party, receives annual compensation of $50 117 and $125 , respectively for the services he provides to AU10TIX.
In August 2017, the Company engaged the services of a related party to provide certain selling and administrative services to its authentication technology segment. The Company incurred expenses of $0 , $0 and $39 for such services for the years ended December 31, 2021, 2020 and 2019, respectively. In addition, the related party serves as a board member of the Company, and was paid an amount of $38 , $38 and $30 as board fees, for the years ended December 31, 2021, 2020 and 2019, respectively.
In May 2018, the Company engaged the services of a related party to provide certain administration services. The Company incurred expenses of $141 , $118 and $98 for such services for the years ended December 31, 2021, 2020 and 2019, respectively.
In May 2019, the Company engaged the services of Arrow (see note 5) to provide some administrative services. The Company incurred expenses of $286 , $115 and $62 for such services for the years ended December 31, 2021, 2020 and 2019, respectively.
In June 2019, the Company issued 3,000,000 shares to certain directors and officers of the Company for a purchase price of $0.40 per share. The Compensation Committee determines the composition and amount of director and key employee compensation. When the annual award consists of equity purchases, it is only permitted at a price equal or above market.
In December 2019, the Company purchased shares and shareholders debt of Arrow for $1,750 (see note 5).
| F - 34 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 18 - RELATED PARTY TRANSACTIONS (CONTINUED)
In May 2020, an entity related to the Company’s main shareholder provided a letter of credit of €2,000 ($2,273 as of December 31, 2021) to a commercial bank to guarantee a borrowing arrangement on behalf of one of the Company’s subsidiaries. The Company provided to the related party a deposit of $2,200 against the letter of credit which was paid back to the Company after the letter of credit was cancelled.
The Company has debt to related parties (see note 11).
NOTE 19 - COMMITMENTS AND CONTINGENCIES
Letters of Credit and Guarantees
As of December 31, 2021, the Company has $
As of December 31, 2021, the Company has €
Legal Proceedings
General
The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. These claims are primarily related to grievances filed by current and former employees for unfair labor practices or discrimination, and for passenger aviation claims. Management recognizes a liability for any matter when the likelihood of an unfavorable outcome is deemed to be probable and the amount is able to be reasonably estimated. Management has concluded that such claims, in the aggregate, would not have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows.
Inquiry Proceedings
On June 24, 2021 a minority shareholder of the Company initiated inquiry proceedings before the Enterprise Chamber of the Amsterdam Court of Appeal (the “Court”) which is a specialized court dedicated to resolving corporate disputes. The shareholder has requested the Court to appoint an investigator on behalf of the Court in accordance with Dutch law, to investigate certain activities of the Company that have been previously disclosed by the Company in its periodic filings with the SEC for the fiscal years ended December 31, 2020 and 2019. The shareholder has not requested the Court to order preliminary relief, but has requested the Court to order the registrant to pay the costs of the proceedings. The Company expects that the Court will grant its judgement in June 2022.
White Line
In 2017, the company invested $
The Company had an agreement with an entity related to its main shareholder, according to which, if the value of this investment decreased, the related party entity has guaranteed to repurchase this full investment in minimum amount of $
Agency Agreements
In April 2013, prior to the purchase of one of the current subsidiaries in Europe, the Company entered into an agency agreement with a third party to assist it with this transaction. According to the agreement, in the event that the operations in that country are sold in the future, the third-party agent is entitled to a payment of €3,000 ($3,409 as of December 31, 2021).
| F - 35 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 19 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Agency Agreements (continued)
In March 2016, the Company entered into an agreement with a third party to assist the Company with the possible sale of one of the Company’s subsidiaries (see note 13). The fees depend on the outcome of the assignment and are between
In August 2017, the Company entered into an agreement with a third party to assist the Company with a possible sale of one of the Company’s subsidiaries. The fees depend on the outcome of the assignment and are between
NOTE 20 – SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates in three reportable segments: (a) corporate (b) airport security and other aviation services and (c) authentication technology. The corporate segment does not generate revenue and contains primarily non-operational expenses. The airport security and other aviation services segment provides security and other aviation services to airlines and airport authorities, predominantly in the United States of America. The authentication technology segment provides authentication services to financial and other institutions, predominantly in Europe and the United States of America. All inter-segment transactions are eliminated in consolidation. The accounting policies of the segments are the same as the accounting policies of the Company as a whole.
The operating results of these reportable segments are regularly reviewed by the chief operating decision.
|
Corporate
|
Airport Security
and Other Aviation Services |
Authentication
Technology |
Total
|
|||||||||||||
|
Year ended December 31, 2021:
|
||||||||||||||||
|
Revenue
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Depreciation and amortization
|
|
|
|
|
||||||||||||
|
Net income (loss)
|
(
|
)
|
|
|
|
|||||||||||
|
Goodwill
|
|
|
|
|
||||||||||||
|
Total assets
|
|
|
|
|
||||||||||||
|
Year ended December 31, 2020:
|
||||||||||||||||
|
Revenue
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Depreciation and amortization
|
|
|
|
|
||||||||||||
|
Net income (loss)
|
(
|
)
|
|
|
|
|||||||||||
|
Goodwill
|
|
|
|
|
||||||||||||
|
Total assets
|
|
|
|
|
||||||||||||
|
Year ended December 31, 2019:
|
||||||||||||||||
|
Revenue
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Depreciation and amortization
|
|
|
|
|
||||||||||||
|
Net income (loss)
|
(
|
)
|
(
|
)
|
|
(
|
)
|
|||||||||
|
Goodwill
|
|
|
|
|
||||||||||||
|
Total assets
|
|
|
|
|
||||||||||||
| F - 36 |
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 20 – SEGMENT AND GEOGRAPHICAL INFORMATION (CONTINUED)
The following table sets forth, for the periods indicated, revenue generated from customers by geographical area based on the geographical location of the customer’s invoicing address:
|
Year Ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
Germany
|
$
|
|
$
|
|
$
|
|
||||||
|
The Netherlands
|
|
|
|
|||||||||
|
United States
|
|
|
|
|||||||||
|
Spain
|
|
|
|
|||||||||
|
Other countries
|
|
|
|
|||||||||
|
Total revenue
|
$
|
|
$
|
|
$
|
|
||||||
The following table sets forth, for the periods indicated, property and equipment, net of accumulated depreciation and amortization, by country:
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Germany
|
$
|
|
$
|
|
||||
|
The Netherlands
|
|
|
||||||
|
United States
|
|
|
||||||
|
Spain
|
|
|
||||||
|
Other countries
|
|
|
||||||
|
Total property and equipment, net
|
$
|
|
$
|
|
||||
Property and equipment, net, in other countries include $3,956 and $3,179 property and equipment in Israel, as of December 31, 2021 and 2020, respectively.
F - 37
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
FINANCIAL STATEMENTS SCHEDULE
(In thousands, except share data)
Valuation and Qualifying Accounts
(US $in thousands)
|
Beginning
of year |
Charges
to Costs and Expenses |
Charges
to other accounts |
Deductions
|
End of
Year |
||||||||||||||||
|
Allowance for doubtful accounts (1):
|
||||||||||||||||||||
|
Year ended December 31, 2019
|
$
|
|
|
(
|
)
|
|
$
|
|
||||||||||||
|
Year ended December 31, 2020
|
$
|
|
|
(
|
)
|
|
$
|
|
||||||||||||
|
Year ended December 31, 2021
|
$
|
|
|
(
|
)
|
|
$
|
|
||||||||||||
|
Allowance for net deferred tax assets:
|
||||||||||||||||||||
|
Year ended December 31, 2019
|
$
|
|
|
|
|
$
|
|
|||||||||||||
|
Year ended December 31, 2020
|
$
|
|
|
|
(
|
)
|
$
|
|
||||||||||||
|
Year ended December 31, 2021
|
$
|
|
|
|
(
|
)
|
$
|
|
||||||||||||
(1) Write-off net of recoveries for the allowance for doubtful accounts.
F - 38
TABLE OF CONTENTS
Part IItem 1. Identity Of Directors, Senior Management and AdvisersItem 2. Offer Statistics and Expected TimetableItem 3. Key InformationItem 4. Information on The CompanyItem 5. Operating and Financial Review and ProspectsItem 6. Directors, Senior Management and EmployeesItem 7. Major Shareholders and Related Party TransactionsItem 8. Financial InformationItem 9. The Offer and ListingItem 10. Additional InformationItem 11. Quantitative and Qualitative Disclosure About Market RiskItem 12. Description Of Securities Other Than Equity SecuritiesPart II Item 13. Defaults, Dividend Arrearages and Delinquencies Not ApplicablePart II Item 13. Defaults, Dividend Arrearages and DelinquenciesPart IIItem 13. Defaults, Dividend Arrearages and DelinquenciesItem 14. Material Modifications To The Rights Of Security Holders and Use Of ProceedsItem 15. Controls and ProceduresItem 16A Audit Committee Financial ExpertsItem 16B Code Of EthicsItem 16C Principal Accountant Fees and ServicesItem 16D Exemptions From The Listing Standards For Audit CommitteesItem 16E. Purchase Of Equity Securities By The Issuer and Affiliated PurchasersItem 16F. Change in Registrant S Certifying AccountantItem 16G. Corporate GovernancePart III Item 17. Financial StatementsPart IIIItem 17. Financial StatementsItem 18. Financial StatementsItem 19. ExhibitsNote 1 OrganizationNote 2 - Significant Accounting PoliciesNote 2 - Significant Accounting Policies (continued)Note 2 Significant Accounting Policies (continued)Note 2 - Significant Accounting Policies (continued) Recently Issued Accounting Pronouncements (continued)Note 3 Business CombinationNote 4 Prepaid Expenses and Other Current AssetsNote 5 InvestmentsNote 5 Investments (continued)Note 6 - Property and EquipmentNote 7 - LeasesNote 8 GoodwillNote 9 Notes Payable BanksNote 10 - Accrued Expenses and Other Current LiabilitiesNote 11 Debt To Related PartiesNote 12 Other LiabilitiesNote 13 Redeemable Non-controlling InterestsNote 13 Redeemable Non-controlling Interests (continued)Note 14 Governmental SupportNote 15 Stock-based CompensationNote 15 Stock-based Compensation (continued)Note 16 Other Expenses, NetNote 17 Income TaxesNote 17 Income Taxes (continued)Note 17 Income Taxes (continuedNote 18 - Related Party TransactionsNote 18 - Related Party Transactions (continued)Note 19 - Commitments and ContingenciesNote 19 - Commitments and Contingencies (continued)Note 20 Segment and Geographical InformationNote 20 Segment and Geographical Information (continued)