UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transition period from _________________ to _________________
ICTS INTERNATIONAL N.V.
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(Exact Name of Registrant as specified in its charter)
Not Applicable
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(Translation of Registrant's name into English)
The Netherlands
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(Jurisdiction of incorporation or organization)
Walaardt Sacréstraat 425-5, 1117 BM Schiphol-Oost, The Netherlands
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(Address of principal executive offices)
Alon Raich, Tel: +31-20-3471077,
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(Name, Telephone, E-mail and/or Facsimile number
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:
Common Stock, par value 0.45 Euro per share
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(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
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(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: 35,433,333.
Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES ☐ NO ☒
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 ☐ NO ☒
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 ☒ NO ☐
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).
YES ☒ 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 ☐
|
Non-accelerated filer ☒
|
Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statements included in this filing:
|
U.S. GAAP ☒
|
International Financial Reporting Standards as issued Other ☐
|
by the International Accounting Standards Board ☐
|
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.
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 is
predominantly involved in the development and sale of authentication security software to financial and other institutions, predominantly in the United States of America and Europe.
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. In addition, 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 2020 cash flow. There have been proposed a number of Government Assistance programs and
the Company has applied to those that are applicable to its business.
The Company is evaluating the terms of additional programs and the
Company’s eligibility for those programs.
The Company’s business plan depends on the COVID-19 developments in the foreseen future and the recovery of the airline industry.
In July 2019, ABC Technologies B.V. and
Subsidiaries (
“ABC”), 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 ABC and 23.077% of the outstanding share capital of ABC on a fully diluted basis. ABC 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, ABC 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 ABC and
7.143% of the outstanding share capital of ABC on a fully diluted basis.
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|
(U.S. dollars in Thousands)
|
|
| |
|
|
|
| |
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Cash and cash equivalents
|
|
$
|
52,352
|
|
|
$
|
12,801
|
|
|
$
|
9,073
|
|
|
$
|
3,892
|
|
|
$
|
7,912
|
|
|
Total current assets
|
|
|
103,136
|
|
|
|
67,219
|
|
|
|
61,982
|
|
|
|
43,908
|
|
|
|
40,002
|
|
|
Total assets from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
306
|
|
|
|
853
|
|
|
|
-
|
|
|
Total assets
|
|
|
123,447
|
|
|
|
75,087
|
|
|
|
71,853
|
|
|
|
47,980
|
|
|
|
43,007
|
|
|
Total current liabilities
|
|
|
75,509
|
|
|
|
75,058
|
|
|
|
59,197
|
|
|
|
45,365
|
|
|
|
45,007
|
|
|
Total liabilities from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
41
|
|
|
|
536
|
|
|
|
-
|
|
|
Total liabilities
|
|
|
84,832
|
|
|
|
109,943
|
|
|
|
98,595
|
|
|
|
81,457
|
|
|
|
85,215
|
|
|
Redeemable non-controlling interests
|
|
|
74,300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Shareholders' deficit
|
|
|
35,685
|
|
|
|
34,856
|
|
|
|
26,742
|
|
|
|
33,477
|
|
|
|
42,208
|
|
| |
|
U.S. dollars in Thousands
|
|
| |
|
|
|
| |
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
333,307
|
|
|
$
|
345,221
|
|
|
$
|
297,682
|
|
|
$
|
255,576
|
|
|
$
|
187,022
|
|
|
Cost of revenue
|
|
|
290,461
|
|
|
|
311,994
|
|
|
|
254,728
|
|
|
|
223,486
|
|
|
|
167,959
|
|
|
GROSS PROFIT
|
|
|
42,846
|
|
|
|
33,227
|
|
|
|
42,954
|
|
|
|
32,090
|
|
|
|
19,063
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
5,060
|
|
|
|
3,657
|
|
|
|
2,683
|
|
|
|
2,660
|
|
|
|
2,565
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
1,563
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Selling, general and administrative
|
|
|
33,063
|
|
|
|
34,924
|
|
|
|
26,201
|
|
|
|
21,583
|
|
|
|
20,291
|
|
|
Total operating expenses
|
|
|
38,123
|
|
|
|
40,144
|
|
|
|
28,884
|
|
|
|
24,243
|
|
|
|
22,856
|
|
|
OPERATING INCOME (LOSS)
|
|
|
4,723
|
|
|
|
(6,917
|
)
|
|
|
14,070
|
|
|
|
7,847
|
|
|
|
(3,793
|
)
|
|
Equity Income from investment in affiliate
|
|
|
91
|
|
|
|
124
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other expenses, net
|
|
|
10,518
|
|
|
|
3,586
|
|
|
|
6,172
|
|
|
|
4,501
|
|
|
|
760
|
|
|
INCOME (LOSS) BEFORE INCOME TAX EXPENSES
|
|
|
(5,704
|
)
|
|
|
(10,379
|
)
|
|
|
7,898
|
|
|
|
3,346
|
|
|
|
(4,553
|
)
|
|
Income tax expenses
|
|
|
1,549
|
|
|
|
685
|
|
|
|
2,033
|
|
|
|
1,004
|
|
|
|
149
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
|
(7,253
|
)
|
|
|
(11,064
|
)
|
|
|
5,865
|
|
|
|
2,342
|
|
|
|
(4,702
|
)
|
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
289
|
|
|
|
95
|
|
|
|
-
|
|
|
|
-
|
|
|
NET INCOME (LOSS)
|
|
$
|
(7,253
|
)
|
|
$
|
(11,353
|
)
|
|
$
|
5,770
|
|
|
$
|
2,342
|
|
|
$
|
(4,702
|
)
|
|
Less: Net income (loss) attributable to non-controlling interests
|
|
|
789
|
|
|
|
(123
|
)
|
|
|
(50
|
)
|
|
|
-
|
|
|
|
-
|
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V.
|
|
$
|
(8,042
|
)
|
|
$
|
(11,230
|
)
|
|
$
|
5,820
|
|
|
$
|
2,342
|
|
|
$
|
(4,702
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) PER SHARE - BASIC AND DILUTED
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.26
|
|
|
$
|
(0.47
|
)
|
|
$
|
0.28
|
|
|
$
|
0.20
|
|
|
$
|
(0.58
|
)
|
|
Discontinued operations
|
|
|
-
|
|
|
|
(0.01
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net income (loss)
|
|
$
|
0.26
|
|
|
$
|
(0.48
|
)
|
|
$
|
0.28
|
|
|
$
|
0.20
|
|
|
$
|
(0.58
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
30,524,461
|
|
|
|
23,415,068
|
|
|
|
21,000,000
|
|
|
|
11,518,929
|
|
|
|
8,085,599
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 or magnitude of the adverse results of the outbreak and its effects on the business or results of operations at this time. 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 have a significant impact on revenue volume during
2020; 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, 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 and, requests to increase existing and getting new loans for
additional funding. Due to the unknown length of time of the pandemic, the Company cannot quantify its potential effect at this time.
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 canceled or not renewed
Our revenues are primarily provided from services pursuant to
contracts, which are cancelable 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. Few of
the Company’s
material contracts are expected to be tendered during the years 2020-2022. 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.
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 continuing operations
The Company incurred income (loss) from continuing operations of $(7.3) million, $(11.1) million and $5.9 million in 2019, 2018 and 2017, respectively.
The Company has a
shareholders’ deficit of $35.7 million and $34.9 million as of
December 31, 2019 and
2018, 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.
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 servicer 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.
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 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
Current 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.
Main shareholders
As of June 1st, 2020, the MacPherson Trust (including Ultimate Beneficial Owners) and Mr. M.J. Atzmon, own or control together approximately 75.3% of our issued and
outstanding common stock (excluding conversion rights). As a result of such ownership and conversion rights, the MacPherson Trust 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 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.
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.
Aviation Security and Other Aviation Services Business
In the wake of the events which occurred on
September 11, 2001, the Federal Government of the United States of America, in November 2001, enacted the Security Act Public Law
107-71. Under the Security Act, entities may provide aviation security services in the United States of America only if they are owned and controlled at least 75% by U.S. citizens. As a company organized under the laws of the Netherlands, ICTS is not
able to comply with the ownership requirements under the Security Act. The Security Act is administered through the Transportation Security Administration (
“TSA”).
In the fourth quarter of 2002, pursuant to the Security Act, the Federal government through the TSA, took over substantially all of the aviation security operations in U.S.
airports. As a result, ICTS, through its wholly-owned subsidiary, Huntleigh USA Corporation (“Huntleigh”), provides limited aviation security services in the United States of America.
In 2001 and 2002, ICTS sold substantially all of its European 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 its European operations, except for its operations in the Netherlands and Russia.
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 development and sale of authentication security software 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 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.
ABC, through AU10TIX Limited and its
subsidiaries (
“AU10TIX”) develops technological systems and authentication solutions for financial and other institutions.
Business Strategy
We are currently pursuing the following business strategy:
Aviation Security Operations in Europe and the Far East
Through the I-SEC
subsidiaries, we supply aviation security to airports, airlines and governments in Europe and the Far East. I-SEC is continuously looking for ways to extend its
operations in new and existing locations.
Other Aviation Related Services in the U.S.
We continue to provide limited security services and non-security aviation related services in the U.S. through our subsidiary, Huntleigh. Huntleigh is continuously looking for
ways to extend its operations in new and existing locations.
Developing Authentication Technology
We are focusing on selling and developing authentication technologies for financial and other markets all over the world through our subsidiary AU10TIX Limited (“AU10TIX”). AU10TIX
is continuously looking for ways to extend the services it provide, 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 and integrated 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.
I-SEC has operations in The Netherlands, Germany, Spain, Denmark, Italy, and Sweden, 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 local partner in Korea providing aviation security and training to airlines.
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 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 management team.
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 25 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.
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 analysing 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 specializes in the performance of airports 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 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 recommending steps that must be taken to ensure full compliance and suitability of the aviation
security system at all times.
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 becomes 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, 2019 Huntleigh provides limited aviation security services and other separate services at approximately 28 airports in 20 states.
The limited security services provided by Huntleigh involve the following:
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Private Charter Flight Screening for Airlines - which includes security check of passengers' body and carry-on items.
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Cargo Security Screening – for some international and domestic carriers.
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Catering Security Screening – for some international and domestic carriers.
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Aircraft Security Screening – for some international and domestic carriers.
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Aircraft Search – Search of the entire aircraft to detect dangerous objects.
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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.
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:
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Cleaning the aircraft interior
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Conducting cabin searches
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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 curbside 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.
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 is involved in the development and sales of the authentication technology listed below.
Front-end Identity Document Authentication and Management System (FDI)
FDI automates the capture, authentication and content retrieval from physical ID documents. FDI speeds up customer screening and enrollment while enhancing security and ID fraud
prevention. FDI is designed for security- sensitive and business-sensitive environments such as airports, border control, financial services, etc.
FDI solutions can be used with 3-illumination professional scanners for high security requirements or with regular TWAIN scanners and even mobile devices for standard security
requirements. It is thus usable in a broad range of markets and for a broad range of security requirements.
Key Features: Hi-Resolution document imaging, auto image optimization, auto-classification of documents up to version level, extraction of readable + encoded content incl. MRZ
lines and barcodes, cropping of face photograph, multi-factor identity authentication (according to scanner type), immediate detailed exception alerts, ability to integrate with chip readers and barcode readers, ability to integrate with biometric
inputs, ability to query date against databases or watch-lists and ability to operate in stand-alone or networked modes.
FDI is relevant for a broad range of commercial and government markets. Key markets for FDI are airports, airlines, border crossings, police, government agencies, bank branches,
insurance company HQs, car selling/financing dealerships, HR departments, etc.
Back Office ID Authentication and Onboarding Automation Service (BOS)
BOS automates all essential building components of customer onboarding and KYC initiation in regulated markets including ID document authentication, face matching (Typically
Selfie-to-ID with additional use cases possible), Proof-Of-Address processing and identity data verification and screening (eIDVS).
Core service component is the handling of ID documents submitted typically via Customer Not Present (CNP) channels such as mobile devices, computers, etc.
BOS 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.
Another component is Selfie-to-ID face matching with liveness detection. These increase strengths of risk detection and fraud deterrence, and offer replacement to manual
video-conversations.
Proof-of-Address document processing is offered primarily with templated facilities such as utility bills, bank statements, or other collateral that is required in various markets
as source of address information, and as an additional customer identification and screening measure.
Identity data verification and screening (eIDV / eIDVS) can be seamlessly integrated into the ID authentication and POA handling components, enabling automated submission of
customer data to required person and address verification services, as well as screening services such as PEPs & Sanctions, watchlists, etc.
This portfolio of services enables service providers to automate customer onboarding and AML/ATF/KYC process.
BOS speeds up customer screening and enrollment using 2nd generation technology that offers 100% automated (Data entry free, back-office free) multi-factor
forensic-level forgery, counterfeiting and risk factor detection, higher conversion rates of borderline quality images, data-rich fast-response exception reporting, rapid processing (typically 8 seconds or less for the complete process),
multi-lingual document content support.
BOS development incorporates advanced AI algorithms that speed-up processing and increase the accuracy of analyzing images at a broad range of image quality levels.
BOS is designed to handle images that originate from any common imaging device including mobile phones, tablets, computer webcams, etc.
BOS is available as a cloud (SaaS) service as well as internal (on-premise) service.
BOS can be integrated with additional client or 3rd party augment services such as data referencing, address verification, etc.
BOS is relevant for a broad range of commercial and government markets many of which are required to comply with KYC regulations.
Key markets for BOS are financial services including banking, insurance, payments, wallets, money transfer, lending, remittance, online investments, trading & forex,
Cryptocurrencies, rental services, sharing economy, professional services, etc.
Marketing of Security Systems and Technology
We market our technologies by participating in Requests for Proposals, lead generation and approaching potential service providers such as airports, airlines, financial services
providers including banks, lenders, payments providers, money transfer providers, cryptocurrency platforms, leasing and car financing companies, telecom, and other existing and potential customers.
Investments
Artemis Therapeutics, Inc.
The Company suspended its use of the equity method to accounting for this investment in 2007 after its investment balance was reduced to zero.
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.
White Line B.V.
In March 2017,
the Company invested an amount of $2 million in White Line B.V., a limited company incorporated in the Netherlands. White Line is a holding and finance company.
Because White Line B.V. is a private, closely-held company, there is no active market for this investment. Therefore,
the Company has elected to measure the investment at cost minus impairment. In October 2017,
the Company invested additional amount
of $1.5 million in White Line. The total investment represented 10% of the issued and outstanding share capital of White Line.
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 at a minimum amount of $3.5 million. The guaranty is effective after three years of the date of purchase and terminates after five years.
In December 2018,
the Company reached into an agreement with the related party entity in order to preface the sale of the investment. The related party entity purchased the full
investment from
the Company in December 2018, for $3.5 million in exchange for reduction in the convertible notes payable to a related party.
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, 2019,
the Company’s investment is 381,332 KRW ($0.3 million as of
December 31, 2019 and
2018). For the years ended
December 31, 2019 and
2018,
the Company recognized a profit in its consolidated statements of operations of 105,092 KRW and 133,550 KRW, respectively ($0.1 million and $0.1 million, respectively) from
its investment in the JVC. In addition, each one of the partners, provided in June 2018 to the JVC a loan of 200,000 KRW in order to fund the working capital of the JVC. The loan bears interest of 1.3% per year. As of
December 31, 2019 and
2018, the
outstanding balance of the loan was 0 and 200,000 KRW respectively ($0 and $0.2 million as of
December 31, 2019 and
2018, respectively), shown in the consolidated balance sheets as other assets.
Mesh Technologies, Inc.
In January 2019,
the Company invested an amount of $0.1 million in Mesh Technologies, Inc. (
“Mesh”), a company incorporated in Delaware, USA. As of
December 31, 2019, the
investment represented 0.6% 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 has elected to measure the investment at cost minus impairment.
Arrow Ecology & Engineering Overseas (1999)
In December 2019,
the Company invested an amount of $1.7 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.
The Company uses the equity method for this investment. As the investment in Arrow was acquired at the end of December 2019,
the Company did not recognise profit or loss
regarding this investment for the year ended
December 31, 2019.
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.
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 2019, 2018 and 2017 totaled $137.2 million (41% of total revenue), $134.6 million (39% of total revenue) and $125.9 million (42% of total
revenue), respectively.
Revenue in The Netherlands
Our revenue in The Netherlands during the years 2019, 2018 and 2017 totaled $97.7 million (29% of total revenue), 121.5 million (35% of total revenue) and $103.9 million (35% of
total revenue), respectively.
During the year ended
December 31, 2018, Procheck was advised by its only customer, that its services are not required, its
contract would not be renewed and would end on
December
31, 2018, following a change in the governmental security concept in the Netherlands. Upon the expiration of the agreement Procheck will be closed. Procheck revenues during the years 2019, 2018 and 2017 totaled $0 million (0% of total revenue), $24.0
million (7% of total revenue) and $18.5 million (6% of total revenue), respectively.
Revenue in the U.S.
Our revenue in the United States of America during the years 2019, 2018 and 2017 totaled $73.7 million (22% of total revenue), $69.5 million (20% of total revenue) and $54.9
million (18% of total revenue), respectively.
Revenue in other locations
Our revenue in other locations during the years 2019, 2018 and 2017 totaled $24.7 million (8% of total revenue), $19.6 million (6% of total revenue) and $13.0 million (5% of total
revenue), respectively. Increase in revenue was primarily a result of increase in services provided to new and existing customers as part of the expansion of
the Company’s authentication technology segment.
Major Customers
Revenue from two customers represented 69% of total revenue during the year ended
December 31, 2019 of which one customer accounted for 41% and the other customer accounts for 28%
of total revenue. Accounts receivable from these two customers represented 57% of total accounts receivable as of
December 31, 2019.
Revenue from two customers represented 72% of total revenue during the year ended
December 31, 2018 of which one customer accounted for 38% and the other customer accounts for 34%
of total revenue. Accounts receivable from these two customers represented 55% of total accounts receivable as of
December 31, 2018.
Revenue from two customers represented 76% of total revenue during the year ended
December 31, 2017, of which one customer accounted for 42% and the other customer accounts for 34%
of total revenue. Accounts receivable from these two customers represented 53% of total accounts receivable as of
December 31, 2017.
Both customers mentioned above, have been the same principle customers in the last three years.
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.
Discontinued Operations
During the year ended
December 31, 2017,
the Company committed to a plan to cease the aviation security operations of its subsidiary in Cyprus. As of
December 31, 2019 and
2018,
the Company had no assets or liabilities in its balance sheet, that relate to the discontinued operations. Loss from discontinued operations for the years ended
December 31, 2019,
2018 and
2017, totaled $0 million, $0.3 million and $0.1 million,
respectively.
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.
Organizational Structure
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 Nederland B.V. (Netherlands - 100%)
I-SEC Advanced Systems B.V. (Netherlands - 100%)
I-SEC Spain Services Management S.L. (Spain - 100%)
I-SEC Spain Security Management S.L. (Spain - 100%) which holds the shares of:
I-SEC Aviation Security S.L. (Spain – 100%)
I-SEC Italia s.r.l. (Italy - 100%), which holds the shares of:
I-SEC Services Italia s.r.l. (Italy – 100%)
I-SEC Japan K.K. (Japan - 100%)
I-SEC India Security Services Private Limited (India – 67%)
I-SEC Denmark A/S (Denmark – 100%)
I-SEC Security Services GmbH (Germany – 100%)
I-SEC Aviation Security A.B. (Sweden – 100%)
I-SEC Norway AS (Norway – 100%)
I-SEC German Holding B.V.* (Netherlands – 100%) which holds the shares of:
I-SEC Verwaltungs SE* (Germany – 100%)
Freezone I-SEC Korea Inc (South Korea – 50%)
ICTS USA, Inc. (New York - 100%) which holds the shares of:
Huntleigh USA Corporation (New York, USA - 100%)
Aviation Mobility Solutions, Inc (Dallas USA – 100%)
Tech Marketing Services, Inc (Dallas USA – 100%)
ABC Technologies B.V. (The Netherlands – 100%) 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:
10TIX Authentication and Identification Advanced Systems Ltd. (Israel – 100%)
*I-SEC German Holding B.V. is a limited partner together with I-SEC Verwaltungs SE general partner of I-SEC Deutsche Luftsicherheit SE&Co.KG
Property, Plant and Equipment
The Company leases certain premises under various operating leases. Maturities of operating lease liabilities as of
December 31, 2019 were as follows (in millions):
|
|
|
|
|
|
|
|
|
$
|
3.1
|
|
|
2021
|
|
|
2.1
|
|
|
2022
|
|
|
1.7
|
|
|
2023
|
|
|
1.6
|
|
|
2024
|
|
|
1.3
|
|
|
Thereafter
|
|
|
2.1
|
|
| |
|
$
|
11.9
|
|
Rent expense for the years ended
December 31, 2019,
2018 and
2017 is $4.4 million, $5.0 million and $4.7 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 and Europe. 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 Policies
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 listed below. Please refer to Note 2 of ICTS’s consolidated financial statements included in this
Annual Report for the year ended
December 31, 2019 for a summary of ICTS’s significant accounting policies.
Discussion and Analysis of the Results of Operations
The following table summarizes our results of operations for the years ended
December 31, 2019,
2018 and
2017, however our discussion of the results of operations excludes the
comparison of the results for the years ended
December 31, 2018 and
2017. 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, 2018 which was filed with
the SEC on
May 9, 2019.
| |
|
U.S. dollars in Thousands
|
|
| |
|
|
|
| |
|
|
|
|
2018
|
|
|
2017
|
|
| |
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
333,307
|
|
|
$
|
345,221
|
|
|
$
|
297,682
|
|
|
Cost of revenue
|
|
|
290,461
|
|
|
|
311,994
|
|
|
|
254,728
|
|
|
Gross profit
|
|
|
42,846
|
|
|
|
33,227
|
|
|
|
42,954
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
5,060
|
|
|
|
3,657
|
|
|
|
2,683
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
1,563
|
|
|
|
-
|
|
|
Selling, general and administrative
|
|
|
33,063
|
|
|
|
34,924
|
|
|
|
26,201
|
|
|
Total operating expenses
|
|
|
38,123
|
|
|
|
40,144
|
|
|
|
28,884
|
|
|
OPERATING INCOME (LOSS)
|
|
|
4,723
|
|
|
|
(6,917
|
)
|
|
|
14,070
|
|
|
Equity income from investment in affiliate
|
|
|
91
|
|
|
|
124
|
|
|
|
-
|
|
|
Other expenses, net
|
|
|
(10,518
|
)
|
|
|
(3,586
|
)
|
|
|
(6,172
|
)
|
|
INCOME (LOSS) BEFORE INCOME TAX EXPENSES
|
|
|
(5,704
|
)
|
|
|
(10,379
|
)
|
|
|
7,898
|
|
|
Income tax expenses
|
|
|
1,549
|
|
|
|
685
|
|
|
|
2,033
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
|
(7,253
|
)
|
|
|
(11,064
|
)
|
|
|
5,865
|
|
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
(289
|
)
|
|
|
(95
|
)
|
|
NET INCOME (LOSS)
|
|
|
(7,253
|
)
|
|
|
(11,353
|
)
|
|
|
5,770
|
|
|
Less: Net income (loss) attributable to non-controlling interests
|
|
|
789
|
|
|
|
(123
|
)
|
|
|
(50
|
)
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V.
|
|
$
|
(8,042
|
)
|
|
$
|
(11,230
|
)
|
|
$
|
5,820
|
|
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, 2019,
2018 and
2017:
| |
|
|
|
| |
|
|
|
|
2018
|
|
|
2017
|
|
|
Revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Cost of revenue
|
|
|
87.1
|
%
|
|
|
90.4
|
%
|
|
|
85.6
|
%
|
|
Gross profit
|
|
|
12.9
|
%
|
|
|
9.6
|
%
|
|
|
14.4
|
%
|
|
Research and development
|
|
|
1.5
|
%
|
|
|
1.1
|
%
|
|
|
0.9
|
%
|
|
Goodwill impairment
|
|
|
-
|
%
|
|
|
0.4
|
%
|
|
|
-
|
%
|
|
Selling, general and administrative
|
|
|
9.9
|
%
|
|
|
10.1
|
%
|
|
|
8.7
|
%
|
|
Total operating expenses
|
|
|
11.4
|
%
|
|
|
11.6
|
%
|
|
|
9.6
|
%
|
|
OPERATING INCOME (LOSS)
|
|
|
1.5
|
%
|
|
|
(2.0
|
)%
|
|
|
4.8
|
%
|
|
Equity income from investment in affiliate
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
Other expenses, net
|
|
|
(3.2
|
)%
|
|
|
(1.0
|
)%
|
|
|
(2.1
|
)%
|
|
INCOME (LOSS) BEFORE INCOME TAX EXPENSES
|
|
|
(1.7
|
)%
|
|
|
(3.0
|
)%
|
|
|
2.7
|
%
|
|
Income tax expenses
|
|
|
0.5
|
%
|
|
|
0.2
|
%
|
|
|
0.7
|
%
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
|
(2.2
|
)%
|
|
|
(3.2
|
)%
|
|
|
2.0
|
%
|
|
Loss from discontinued operations
|
|
|
-
|
%
|
|
|
(0.1
|
)%
|
|
|
-
|
%
|
|
NET INCOME (LOSS)
|
|
|
(2.2
|
)%
|
|
|
(3.3
|
)%
|
|
|
2.0
|
%
|
|
Less: Net income (loss) attributable to non-controlling interests
|
|
|
0.2
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V.
|
|
|
(2.4
|
)%
|
|
|
(3.3
|
)%
|
|
|
2.0
|
%
|
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)
|
|
| |
|
|
|
| |
|
|
|
|
2018
|
|
|
2017
|
|
|
Germany
|
|
$
|
137,207
|
|
|
$
|
134,646
|
|
|
$
|
125,896
|
|
|
Netherlands
|
|
|
97,700
|
|
|
|
121,465
|
|
|
|
103,862
|
|
|
United States of America
|
|
|
73,719
|
|
|
|
69,548
|
|
|
|
54,891
|
|
|
Other
|
|
|
24,681
|
|
|
|
19,562
|
|
|
|
13,033
|
|
|
Total
|
|
$
|
333,307
|
|
|
$
|
345,221
|
|
|
$
|
297,682
|
|
The year ended
December 31, 2018 was materially affected by a one-time loss regarding the
contract termination of Procheck. Procheck was advised by its only customer that its
contract would not be renewed and will end on
December 31, 2018, following a change in the governmental security concept in the Netherlands.
The Company incurred in total during the year ended
December 31, 2018 expenses of approximately €8.0 million
($9.2 million as of
December 31, 2018) regarding the
contract termination and a goodwill impairment of $0.3 million was recognized.
Revenue
Total revenue decreased from $345.2 million in 2018 to $333.3 million in 2019.
Revenue generated in Germany was $137.2 million in 2019 compared to $134.6 million in 2018. The increase in revenue generated in Germany was primarily a result of additional
services provided to our local customers (Frankfurt, Hamburg and Hannover Airports). Revenue was affected also by exchange rates as revenue is being translated from Euro to USD. Revenue of 2018 according to the 2019 exchange rate would have been
$127.7 million, representing a decrease of 5.1% in exchange rate.
Revenue generated in the Netherlands was $97.7 million in 2019 compared to $121.5 million in 2018. The 2018 revenues include also the Procheck revenues of $24.0 million, which its
contract was terminated in
December 31, 2018. Revenue was affected also by exchange rates as revenue is being translated from Euro to USD. Revenue of 2018 according to the 2019 exchange rate would have been $115.2 million, representing a decrease of
5.1% in exchange rate.
Revenue generated in the United States of America was $73.7 million in 2019, compared to $69.5 million in 2018. The increase in revenue generated in the United States of America
was a result of additional services provided to customers by our authentication technology segment by $6.4 million due to new customers and expended services for current customers. Revenue from other aviation services decreased by $2.2 million in
2019 compared to 2018, mostly due to termination of existing
contracts.
Revenue outside Germany, the Netherlands and the United States of America totaled $24.7 million in 2019 compared to $19.6 million in 2018. Increase in revenue was primarily a
result of increase of services provided to new and existing customers by our Aviation Security operations in Europe and the Far East, by $3.8 million. Our authentication technology segment also had increased services for existing and new customers of
approximately $1.3 million.
Cost of revenue
Cost of revenue was $290.5 million or 87.1% of revenue in 2019, compared to $312.0 million or 90.4% of revenue in 2018. Cost of revenue decreased in the airport security and other
aviation services segment, compared to previous year, mainly as 2018 figures include $22.3 million cost of revenue of Procheck. As that company had no operations in 2019, its cost of sales in 2019 was $0. The majority of cost of revenue relates to
payroll and related costs. Cost of revenue increased in the authentication technology segment compared to previous year, however the cost of revenue as a percentage of revenue has decreased as a result of the authentication technology segment higher
margin than the Airport Security and Other Aviation Services segment.
Research and Development expenses
Research and development costs were $5.1 million or 1.5% of revenue, compared to $3.7 million or 1.1% in 2018. As the authentication technology segment continues to increase its
sales and activities,
the Company increased the number of employees in its Research and Development department, resulting in increase of the R&D costs.
Goodwill impairment
At December 2018,
the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting units exceeded its
carrying value, including goodwill. 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 included 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 $1.6 million for the year ended
December 31, 2018.
The facts and circumstances that led to the impairment of goodwill are as following:
Procheck was advised by its only customer, that its services are not required, its
contract would not be renewed and will end on December 31. 2018, following a change in the
governmental security concept in the Netherlands upon the expiration of the agreement, Procheck will be closed and the employment of its employees was terminated. The closing costs totaled €8.0 million ($9.2 million as of
December 31, 2018). A
goodwill impairment loss of $0.3 million was recognized.
In January 2018,
the Company acquired 100% of the outstanding shares of Abydos Consultores de Sistemas S.L.U and recorded goodwill of €0.2 million ($0.2 million as of
December 31,
2018). The purpose of the acquisition was to increase
the Company’s activities in Spain. As
the Company did not win in any of the main bids on which it participated during 2018, revenue, operating profits and cash flows were lower than expected in
2018. The earnings forecast for the next four years was revised and an impairment loss of €0.2 million ($0.2 million as of
December 31, 2018) was recognized. The fair value of Abydos Consultores de Sistemas S.L.U. was estimated using the expected
present value of future cash flows.
In July 2018,
the Company acquired 100% of the outstanding shares of Detact Security Solution AB and recorded goodwill of 9.0 million SEK ($1.0 million as of
December 31, 2018).
The purpose of the acquisition was to penetrate the Swedish market. After the acquisition, a major customer has terminated the
contract with
the Company. As a result, the revenue, operating profits and cash flows will be lower than expected. The
earnings forecast for the next four years was revised and an impairment loss of 9.0 million SEK ($1.0 million as of
December 31, 2018) was recognized. The fair value of Detact Security Solution AB was estimated using the expected present value of
future cash flows.
Selling, General and Administrative Expenses (“SG&A”)
SG&A expenses were $33.1 million or 9.9% of revenue in 2019, compared to $34.9 million or 10.1% of revenue in 2018, which included $3.0 million SG&A expenses of Procheck.
On the other hand, the authentication technology segment, increased in total its SG&A costs by $1.5 million in 2019 as part of its expansion and increase of sales in 2019, primarily for payroll and related expenses of $0.8 million and marketing
expenses of $0.3 million.
Equity income from investment in affiliate
In April 2018,
the Company signed a Joint Venture Agreement with a South Korean Company, in order to provide aviation security and non-security services in South Korea. Equity
income from investment in affiliate relates to this Joint Venture and totaled in 2019 $0.1 million, as in previous year.
Other expenses, net
Other expenses, net, were $10.5 million or 3.2% of revenues in 2019, compared to $3.6 million or 1.0% of revenues in 2018. During 2019,
the Company paid a one-time compensation for
exchange rate and related losses in the amount of $8.1 million to the entity related to the main shareholder who provided
the Company loans as convertible notes. Additionally,
the Company repaid $30 million of the convertible notes, which reduced the
interest expense during the second half of the year. Interest expense to related parties totaled $1.2 million in 2019 compared to $2.7 million in 2018. Total foreign currency loss in 2019 was $0.1 million compared to gain of $0.4 million in 2018.
Other interest expenses and other bank charges were $1.5 million in 2019 compared to $1.3 million in 2018. Increase relates to the increase of usage of the line of credit in
Europe, following the payment of €8.0 million ($9.2 million) expenses in Procheck.
Income Tax Expenses
Income tax expenses were $1.5 million or 0.5% of revenue in 2019 compared to $0.7 million or 0.5% of revenue in 2018. Income tax expenses relating to the authentication technology
segment were $1.3 million in 2019 compared to $0.6 million in 2018, an increase following the authentication technology segment increase of operations and profitability. Income tax expenses relating to the airport security and other aviation services
were $0.2 million in 2019 compared to $0.1 million in 2018.
Loss from discontinued operations
Loss from discontinued operations was $0 million in 2019, compared to $0.3 million in 2018, which related to the operations in
the Company’s subsidiary in Cyprus.
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, 2017. 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, 2018, which was filed with
the SEC on
May 9, 2019.
| |
|
U.S. Dollars in thousands
|
|
| |
|
|
|
|
Airport
|
|
|
|
|
|
|
|
| |
|
|
|
|
Security
|
|
|
|
|
|
|
|
| |
|
|
|
|
and Other
|
|
|
|
|
|
|
|
| |
|
|
|
|
Aviation |
|
|
Authentication |
|
|
|
|
| |
|
Corporate
|
|
|
Services
|
|
|
Technology
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
309,548
|
|
|
$
|
23,759
|
|
|
$
|
333,307
|
|
|
Depreciation and amortization
|
|
|
46
|
|
|
|
1,328
|
|
|
|
314
|
|
|
|
1,688
|
|
|
Income (loss) from continuing operations
|
|
|
(11,740
|
)
|
|
|
(2,406
|
)
|
|
|
6,893
|
|
|
|
(7,253
|
)
|
|
Goodwill
|
|
|
-
|
|
|
|
681
|
|
|
|
-
|
|
|
|
681
|
|
|
Total assets from continuing operations
|
|
|
23,381
|
|
|
|
64,647
|
|
|
|
35,419
|
|
|
|
123,447
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
329,150
|
|
|
$
|
16,071
|
|
|
$
|
345,221
|
|
|
Depreciation and amortization
|
|
|
45
|
|
|
|
1,756
|
|
|
|
96
|
|
|
|
1,897
|
|
|
Income (loss) from continuing operations
|
|
|
(6,205
|
)
|
|
|
(9,163
|
)
|
|
|
4,304
|
|
|
|
(11,064
|
)
|
|
Goodwill
|
|
|
|
|
|
|
695
|
|
|
|
|
|
|
|
695
|
|
|
Total assets from continuing operations
|
|
|
329
|
|
|
|
66,373
|
|
|
|
8,385
|
|
|
|
75,087
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
292,393
|
|
|
$
|
5,289
|
|
|
$
|
297,682
|
|
|
Depreciation and amortization
|
|
|
46
|
|
|
|
1,333
|
|
|
|
37
|
|
|
|
1,416
|
|
|
Income (loss) from continuing operations
|
|
|
(9,569
|
)
|
|
|
16,078
|
|
|
|
(644
|
)
|
|
|
5,865
|
|
|
Goodwill
|
|
|
|
|
|
|
1,044
|
|
|
|
|
|
|
|
1,044
|
|
|
Total assets from continuing operations
|
|
|
4,089
|
|
|
|
63,742
|
|
|
|
3,536
|
|
|
|
71,367
|
|
Corporate Segment
The Company’s loss from continuing operations in the corporate segment increased from $6.2 million in 2018 to $11.7 million in 2019. In 2019,
the Company had the one-time expense
compensation of $8.1 million for exchange rate and related losses as noted above. During 2018 the corporate segment had consultancy expenses of $1.2 million as part of its examination of bringing new investors to the group.
Airport Security and Other Aviation Services Segment
Decrease in revenue from airport security and other aviation services from $329.2 million in 2018 to $309.5 million in 2019 relates primarily to the termination of the Procheck
contract as of
December 31, 2018. Revenues of Procheck during the year ended
December 1, 2018 were $24.0 million.
The Company’s losses from continuing operations related to airport security and other aviation services were $2.4 million in 2019 compared to loss of $9.2 million in 2018. The main
reasons for the difference in losses between 2018 and 2019 are: (a) in 2018 the segment recognized expenses of $9.2 million for closing and severance costs related to the closure of Procheck, (b) As Procheck used to be a profitable company, adding
to the segment’s profitability (excluding one-time expenses regarding the closing), in 2019, there have been no profits from Procheck which increased the segments losses in 2019, (c) in 2018 the segment incurred $1.6 millions of goodwill impairment
relating to Procheck, Abydos Consultores S.L.U. (currently named I-SEC Aviation Security S.L.) and Detact Security Solution A.B., all wholly owned
subsidiaries of
the Company, (d) during the year 2019, the segment’s operational costs as training,
increase in sick rate and overtime payments to employees continued to increase which reduced the profitability of the segment
Authentication Technology Segment
Revenue in 2019 from the authentication technology segment was $23.8 million compared to $16.1 million in 2018. The segment continued to increase its revenue from existing
customers in addition to new ones. The profit from continuing operations in this segment amounted to $6.9 million in 2019 compared to $4.3 million in 2018.
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, Israel and borrowings from a convertible note arrangement with a related party.
As of
December 31, 2019 and
2018,
the Company had cash, cash equivalents and restricted cash of $54.8 million and $15.9 million, respectively. As of
December 31, 2019 and
2018
restricted cash were $2.5 million and $3.1 million which consist of collateral for our letters of credit in the United States of America and restricted bank accounts in the Netherlands, which are restricted for payments to local tax authorities.
As of
December 31, 2019 and
2018,
the Company had a working capital (deficit) of $27.6 million and $(7.8) million, respectively and shareholders’ deficit of $35.7 million and $34.9
million, respectively. During the years ended
December 31, 2019,
2018 and
2017,
the Company incurred net income (loss) from continuing operations of $(7.3) million, $(11.1) million and $5.9 million, respectively, and cash flows provided by (used in)
operating activities of $(9.1) million, $7.4 million and $9.1 million, respectively.
The Company has a line of credit in the Netherlands up to €12 million ($13.2 million as of
June 1, 2020), which will expire in March 2021 and additional line of credit in the
United States of America up to $10 million, which will expire in October 2021. As of
May 31, 2020,
the Company’s borrowings under the line of credit in Netherlands were approximately €11.5 million ($12.7 million) and had approximately €15.9
million ($17.5 million) in cash, resulting in availability of €16.4 million ($18.0 million), but
the Company was in default of certain financial covenants.
The Company is currently working with this lender in regards with this default. The
Company anticipates that it will be able to extend its lines of credit.
In June 2020,
the Company amended the agreement with the entity related to the main shareholder to extend the period of the notes until
June 30, 2021. The maximum amount of the notes will be $3.5
million, excluding interest.
The Company’s business plan project losses from operations in 2020 following the COVID-19 outbreak. The COVID-19 outbreak 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. 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 in the first four months at 2020 was approximately
$8.3 million lower than our 2019 revenues in the same period with the major negative impact identified in March and April, which has been continuing in May and June, so far. Many of the Company’s employees were laid off and / or ordered
to stay home. The Company’s operating results have declined significantly in 2020 and our liquidity has been negatively impacted. |
|
• |
Governments in some of the countries in which we operate have also announced the implementation of government assistance measures, which may mitigate 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 $13.7 million to the American subsidiary of the Company. In the Netherlands, the government has approved a support of €8.3 million
($9.1 million as of June 1, 2020) for the period April 1, 2020 until June 30, 2020 under the NOW program. In addition, once the current support period will expire, the Company is entitled to request additional support for the
period July 1, 2020 until October 31, 2020 and is expecting to get €6.9 million ($7.6 million as of June 1, 2020). In Germany, the Company is 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 has already applied for this support starting from April 2020. These available governmental support plans might be extended and/or changed according to the future
COVID-19 developments. In addition the Dutch and the German governments are providing through local banks long term loans up to 10 years to companies that meet certain requirements. The Company is evaluating the terms of those
loans and its eligibility to such loans.
|
|
• |
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 2020 and thereafter cannot be predicted.
|
Alternate Sources of Liquidity
In July 2019, ABC issued preferred shares to an investor for a subscription price of $60 million in cash representing 24% of the outstanding share capital of ABC and 23.077% of
the outstanding share capital of ABC and its subsidiary on a fully diluted basis. ABC 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, ABC 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 ABC and
7.143% of the outstanding share capital of ABC and its
subsidiaries on a fully diluted basis.
The Company’s business plan for twelve months from the issuance of this report projects income from operations, positive cash flows and includes the
receipt of governmental funding from the United States of America and the Netherlands discussed above. In the event that one of the lenders recall the loan,
the Company has other current available liquidity to ensure the financing of its
operations. If the impact of COVID-19 negatively impacts
the Company beyond its current forecast,
the Company could also receive additional funding in the Netherlands under the NOW program and from Germany. Furthermore,
the Company has
alternate sources of liquidity that it could access to ensure its ability to continue as a going concern. There can be no assurance that management will be successful in achieving its business plan.
The below analysis of cash flows excludes discussions related to year ended
December 31, 2017. 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, 2018, which was filed with the SEC on
May 9, 2019.
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 used in operating activities for the year ended
December 31, 2019 was $9.1 million. This cash used in, resulted primarily from decrease in accrued expenses and other
current liabilities of $7.1 million relating to the payment of Procheck’s termination costs, decrease of income taxes payable of $1.8 million following the lower profitability in the European operations of the aviation security, decrease of VAT
payable of $4.7 million, mostly as a result of time difference between the actual dates of payment and the fact that the VAT as of
December 31, 2019,does not include VAT for the operations of Procheck, and net loss of $7.3 million. This was offset
mainly by one-time charge of $8.1 million revaluation and related costs reimbursed to a related party, decrease of income tax receivable of $1.3 million, decrease of accounts receivable, net, of $0.7 million and non-cash charge of $1.7 million for
depreciation and amortization.
Net cash provided by operating activities for the year ended
December 31, 2018 was $7.4 million. This provided cash resulted primarily from increase in accrued expenses and other
current liabilities of $12.4 million, including an accrual for severance pay of $7.7 million to the Procheck employees, increase in VAT payable of $4.5 million as a result of time difference between the actual dates of payment, increase of non-cash
accrued interest convertible notes payable to related party of $2.7 million, non-cash charge of $1.9 million for depreciation and amortization and non-cash charge for goodwill impairment of $1.6 million following impairment test done in
December 31,
2018 by
the Company. This was offset mainly by net loss of $11.4 million, increase of prepaid expenses and other current assets of $2.2 million and decrease of income taxes payable of $1.0 million.
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended
December 31, 2019 was $3.4 million and consisted primarily of capital expenditures of $1.9 million and investments in Arrow
Ecology & Engineering Overseas (1999) of $1.8 million.
Net cash used in investing activities for the year ended
December 31, 2018 was $4.7 million and consisted primarily of capital expenditures of $2.9 million and purchase of two
companies in Spain and Sweden for total of $1.2 million.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year ended
December 31, 2019, was $51.9 million which consisted primarily of $80.0 million proceeds from sale of ABC’s preferred
shares and additional borrowings under lines of credit, net, of $8.1 million, increase following the severance payments done in 2019 to the Procheck employees following their employment termination totaling more then $7.7 million. This was offset
mostly by repayment of the convertible notes payable to a related party of $29.6 million, repayment of loan payable of $1.1 million, and payment of $6.1 million of transaction costs related to the sale of ABC’s preferred shares.
Net cash used in financing activities for the year ended
December 31, 2018 was $0.1 million which consisted of primarily repayment of $2.4 million of the convertible notes to a
related party and repayment of $1.2 million loan payable to related party. This was offset by increase of borrowings under the lines of credit of $1.5 million, and net proceeds from loans payable of $1.2 million.
Borrowings
United States of America
The Company’s U.S. subsidiary is a party to a credit facility with a commercial lender, which provides a maximum borrowing capacity up to $10 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 are 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 an entity related to the main Shareholder.
In December 2019,
the Company replaced the $0.5 million stand by letter of credit which was provided to the lender by an entity related to
the Company’s main shareholder to a
letter of credit, provided by
the Company and with the same terms.
Borrowings made under the credit facility bear interest, which is payable monthly, at LIBOR plus 3% per annum (4.76% as of
December 31, 2019).
The Company’s weighted average interest rate in the United States of America during the years ended
December 31, 2019,
2018 and
2017 is 6.51%, 6.0% and 5.64% respectively. The
Company is required to maintain a minimum fixed charge coverage ratio. The credit facility expires in October 2021. During the year ended
December 31, 2019,
the Company was not in compliance of certain financial covenants and a waiver was obtained
from the commercial lender.
Europe
The Company has a credit arrangement with a commercial bank, to provide it with up to €12.0 million ($13.5 million as of
December 31, 2019) in borrowings until further notice.
Borrowings under the line of credit bear interest at one-month EURIBOR plus 3.5% with a minimum of 3.5% per annum (3.5% as of
December 31, 2019).
The Company is also subject to an unused line fee of 0.75% per annum, which is payable quarterly. The
line of credit is secured by accounts receivable of five of
the Company’s European
subsidiaries and tangible fixed assets of three of
the Company’s European
subsidiaries. The line of credit cannot exceed 80% of the borrowing base. As of
December 31,
2019 and
2018,
the Company had €11.9 million and €2.2 million ($13.3 million and $2.5 million as of
December 31, 2019 and
2018), respectively, in outstanding borrowings under the line of credit arrangement.
In April 2019,
the Company amended the line of credit agreement with the commercial bank in order to temporarily increase the line of credit up to €16.0 million ($17.9 million as
of
December 31, 2019) under the same terms and conditions through September 2019.
The line of credit agreement expired in
December 31, 2019 and it was operating under the old terms and conditions until the renewal in May 2020.
In 2020,
the Company renewed its line of credit facility agreement with the commercial bank. The new arrangement provides it with up to € 12.0 million ($13.4 million as of
June 1,
2020) in borrowings until March 2021. Borrowings under the line of credit bear interest at one-month EURIBOR plus 4.8% with a minimum of 4.8% per annum.
The Company is also subject to unused line fee of 0.75% per annum, which is payable quarterly.
The line of credit is secured by accounts receivable of six of
the Company’s European
subsidiaries, tangible fixed assets and a bank guarantee of €2.0 million provided by the parent company, ICTS International N.V. The line of credit cannot exceed
70% of the borrowing base. As part of the agreement, also the guarantee facility of €2.5 million was renewed until March 2021, with an interest of 2.5% per annum and an unused line fee of 0.75% per annum which is payable quarterly.
The Company has an additional credit arrangement in Sweden to provide it with up to 2.0 million SEK ($0.2 million as of
December 31, 2019) 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, 2019 and
2018,
the Company had 1.1 million SEK and
3.0 million SEK ($0.1 million and $0.3 million as of
December 31, 2019 and
2018) respectively in outstanding borrowings under the line of credit facility. The Sweden subsidiary had an over advance of 1.0 million SEK ($0.1 million) at
December 31,
2018 which was subsequently repaid.
Related parties financing
Convertible notes payable to a related party
In May 2014,
the Company entered into an arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the parties, to provide it
with up to $37.0 million in revolving loans through December 2016. The term of the arrangement can be automatically extended for four additional six-month periods at the option of the holder. All outstanding borrowings from previous arrangements were
applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the interest rate charged by
the Company’s European commercial bank (LIBOR
plus 6% for U.S. dollar-denominated loans and the base rate plus 2% 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 outstanding notes payable (including accrued interest) under the arrangement into
the Company's common stock at a price of $1.50 per share.
The Company determined that the new arrangement did not represent a substantive modification
and, therefore, it was not necessary to evaluate whether the conversion feature qualified as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial.
In October 2015, the Supervisory Board of Directors approved to reduce the convertible price of the unpaid interest from $1.50 per share to $0.75 per share. In addition, the loan
period was extended until
January 1, 2018. The terms of the arrangement can be automatically extended for four additional six months periods at the option of the holder.
The Company determined that the new arrangement did not represent a substantive
modification and therefore it was not necessary to evaluate whether the conversion feature qualifies as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial.
In September 2016, the Supervisory Board of Directors approved an increase in the interest rates of the loan from the entity related to the main shareholder, by one percent,
retroactively for the whole period of the loan.
The Company determined that the new arrangement did not represent a substantive modification and therefore it was not necessary to evaluate whether the conversion feature qualifies as a freestanding
derivative instrument or contained any intrinsic value, which would be considered beneficial.
In December 2017, the loan period was extended until
January 1, 2019. The terms of the arrangement can be automatically extended for four additional six months periods at the
option of the holder.
In October 2018, the loan period was extended until
June 30, 2020. The terms of the arrangement can be automatically extended for four additional six months periods at the option
of the holder.
In January 2019, the entity related to the main shareholder converted $2.9 million accrued interest into 3,852,364 shares at a price of $0.75 per share.
In May 2019
the Company granted this entity, the option to convert up to $2 million of the loan into
the Company’s shares at a price of $0.4 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 June 2019 the Board of Directors approved a one-time compensation of $8.1 million to this entity for exchange rate and related losses suffered in connection with its convertible
notes to
the Company during the years. Compensation was approved subject to closing of investment transaction in
the Company’s subsidiary, ABC, which happened in July 2019. As a result,
the Company recorded $8.1 million in connection with this
payment which is included in other expenses in the consolidated statement of operation and comprehensive income (loss)
In July 2019,
the Company repaid $30.0 million of the debt to the entity related to the main shareholder who provided
the Company loans as convertible notes.
As of
December 31, 2019 and
2018, convertible notes payable to this related party consist of $0 million and $22.1 million respectively, in principal and $2.0 million and $8.8
million, respectively, in accrued interest.
Note Payable to Related Party
As of
December 31, 2019 and
2018, notes payable to this related party consist of $1.0 million and $0 million, respectively, in principal and $0.5 million and $0 million,
respectively in accrued interest.
Total interest expense related to these notes is $1.2 million, $2.7 million and $2.7 million for the years ended
December 31, 2019,
2018 and
2017, respectively.
Loan from related party
In March 2017,
the Company signed a loan agreement with a related party, to provide
the Company a loan of $2.0 million for up to one year bearing 7% interest per annum. At
December 31, 2019 and
2018, the loan payable to the related party consist of $0 and $0.2 million, respectively, in principal and $0 and $0.1 million respectively in accrued interest. Interest expense related to this loan is $8 thousands and $59
thousands for the years ended
December 31, 2019 and
2018, respectively.
Sale of ABC Technologies Preferred Shares
On
July 3, 2019, ABC, entered into a Series A Preferred Subscription Agreement (the
"Agreement") with TPG Lux 2018 SC I, S.a.r.l (
"TPG"), according to which ABC issued 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 ABC and 23.077% of the fully-diluted share capital of ABC. Transaction costs totaled
$4.5 million and were deducted from the redeemable non-controlling interests balance.
On
November 7, 2019, ABC entered into a Series A and Series A-1 Preferred Subscription Agreement with Oak HC/FT Partners II, L.P. (
"Oak"), according to which ABC 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 7.4% of the
outstanding share capital of ABC and 7.1% of the fully-diluted share capital of ABC. 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 million and $0.4
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 ABC.
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 ABC, 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 ABC: (a) on the written request by any Series A Shareholder; and (b) immediately prior to
a qualifying IPO of ABC (being an IPO where the net aggregate gross proceeds to ABC exceed US$75.0 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 ABC 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 ABC 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 ABC has the right to participate in any
new issuance of securities by the ABC, 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, ABC 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, ABC is required to facilitate a sale of ABC within six (6) months after such
written request, and thereafter, TPG has the right to require ABC to facilitate a sale or IPO of ABC. 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 ABC'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 ABC's non-traded shares, thus the
"net settlement"
criteria is not met.
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 $5.1 million, $3.7 million and $2.7
million during the years ended
December 31, 2019,
2018 and
2017, 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 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, 2019:
|
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
|
|
|
Line of credit in the U.S.
|
|
$
|
6,475
|
|
|
$
|
-
|
|
|
$
|
6,475
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Lines of credit in Europe
|
|
|
13,433
|
|
|
|
13,433
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Loan payable
|
|
|
1,121
|
|
|
|
1,121
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Consulting agreements
|
|
|
1,008
|
|
|
|
168
|
|
|
|
504
|
|
|
|
336
|
|
|
|
-
|
|
|
Convertible notes payable - related party (including accrued interest)
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Future interest and fees on line of credit and convertible notes to a related party (1)
|
|
|
875
|
|
|
|
350
|
|
|
|
525
|
|
|
|
-
|
|
|
|
-
|
|
|
Loan payable to a related party
|
|
|
1,538
|
|
|
|
1,538
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Operating lease obligations
|
|
|
11,883
|
|
|
|
3,100
|
|
|
|
5,333
|
|
|
|
2,658
|
|
|
|
792
|
|
| |
|
$
|
38,333
|
|
|
$
|
21,710
|
|
|
$
|
12,837
|
|
|
$
|
2,994
|
|
|
$
|
792
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Interest and fees are estimated based on future interest rates expected to be applicable.
|
|
|
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
|
|
$
|
2,593
|
|
|
$
|
202
|
|
|
$
|
2,391
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Letters of credit
|
|
|
733
|
|
|
|
233
|
|
|
|
500
|
|
|
|
-
|
|
|
|
-
|
|
| |
|
$
|
3,326
|
|
|
$
|
435
|
|
|
$
|
2,891
|
|
|
$
|
-
|
|
|
$
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Interest and fees are estimated based on future interest rates expected to be applicable.
|
|
Item 6. Directors, Senior Management and Employees
The following table lists the directors and executive officers of ICTS:
| |
Age
|
Position
|
| |
---
|
--------
|
|
Menachem Atzmon
|
75
|
Chairman of the Supervisory Board
|
|
Ron Atzmon
|
44
|
Member of the Supervisory Board and Managing Director of AU10TIX
|
|
Gil Atzmon
|
46
|
Member of the Supervisory Board
|
|
Philip M. Getter
|
83
|
Member of the Supervisory Board, Chairman of the Audit Committee
|
|
David W. Sass
|
84
|
Member of the Supervisory Board
|
|
Gail F. Lieberman
|
76
|
Member of the Supervisory Board, Member of the Audit Committee and Chairman of the Compensation Committee
|
|
Gordon Hausmann
|
74
|
Member of the Supervisory Board, Member of the Compensation Committee and Member of the Audit Committee
|
|
Ran Langer
|
74
|
Joint Managing Director
|
|
Alon Raich
|
44
|
Joint Managing Director and Chief Financial Officer
|
|
|
37
|
Joint Managing Director and Internal Controller
|
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 until 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 since 2002 till 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 President/CEO of Generics Corporation of America, then one of the largest generic drug companies in the United States of America. As Chairman 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 security inks and 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 Theaters and Producers] Senior Executive Vice Chairman of The Kurt Weill Foundation for Music, and Trustee of the American Theatre Wing
[TONY and OBIE Awards]. 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 including the 2019 Tony Award for
Hedestown as best musical.
David W. Sass for the past 60 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 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 Committee of WL Gore & associates. Mrs. Lieberman is a board member of Equilend, a financial technology company. 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.
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.
Ran Langer joined ICTS in 1988 through 1998 as General Manager of the German
subsidiaries of ICTS. From 1998 to 2013, he served as General Manager of Seehafen Rostock
Umschlagsgesellschaft GmbH, the operator of the Seaport in Rostock, Germany. Mr. Langer became a Managing Director of ICTS in 2004. In 2013 Mr. Langer was appointed also as CEO of I-SEC International Security B.V., a fully owned subsidiary of ICTS.
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 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 joint ICTS in 2015 as an Internal Auditor. In April 2019 Mr. Shaked was nominated as Deputy CEO of I-SEC
International Security B.V. and is responsible for
the Company, Quality Assurance, Corporate HR, and is providing support in project management in different areas. 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).
Summary Compensation Table
The following table sets forth compensation earned by
the Company’s Managing Director and the highest paid executives during the years 2017 through 2019 (U.S. Dollars in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
Non-equity
|
|
|
Nonqualified
|
|
|
Number
of
Option
Award
|
|
|
Number
of
Stock
Awards
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
Plan
|
|
|
Compensation
|
|
|
|
|
|
|
|
|
|
Position
|
Year
|
|
Salary
$
|
|
|
Bonus
$
|
|
|
Compensations
$
|
|
|
Compensation
$
|
|
|
Earnings
$
|
|
|
|
|
|
|
Total
$
|
|
|
Managing
|
2019
|
|
|
476
|
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
496
|
|
|
Director (a)
|
2018
|
|
|
481
|
|
|
|
295
|
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
797
|
|
| |
2017 |
|
|
423
|
|
|
|
-
|
|
|
|
32
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
455
|
|
Highest paid employee in 2019, 2018 and 2017.
| |
|
|
|
|
|
|
|
|
|
|
|
Non-equity
|
|
|
Nonqualified
|
|
|
Number
of
Option
Award
|
|
|
Number
of
Stock
Awards
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
Plan
|
|
|
Compensation
|
|
|
|
|
|
|
|
|
|
Principal
|
Year
|
|
Salary
|
|
|
Bonus
|
|
|
Compensations
|
|
|
Compensation
|
|
|
Earnings
|
|
|
|
|
|
|
Total
|
|
|
Position
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
$
|
|
|
Managing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director of a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsidiary (b)
|
2019
|
|
|
185
|
|
|
|
616
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
801
|
|
Highest paid employee in 2019
Each member of the Supervisory Board who is not an employee of
the Company receives an annual fee of $20 (starting 2020: $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.
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, 2019:
| |
|
Salaries, fees,
|
|
|
Pension, retirement
|
|
| |
|
commissions
|
|
|
and other
|
|
| |
|
and bonuses
|
|
|
similar benefits
|
|
| |
|
(in thousands)
|
|
| |
|
|
|
|
|
|
|
Supervisory Directors as a group ( 7 persons)
|
|
$
|
254
|
|
|
$
|
-
|
|
|
Officers as a group ( 4 persons)
|
|
$
|
1,672
|
|
|
$
|
94
|
|
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 Committee has oversight of executive compensation plans, policies and programs.
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. Our policy of compensating our executives with a cash salary has served us well.
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, 2019 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, 2019,
the Company has 7,472 employees, of which 5,208 employees are located in Europe, Far East and Israel and 2,264 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, one of
the Company’s subsidiary adopted a Stock Option Plan and reserved 500,000 shares of common stock for that subsidiary’s future issuance. As of
December 31,
2019, 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.
During the years ended
December 31, 2019,
2018 and
2017, the subsidiary granted 0, 0 and 62,500 options, respectively, to certain employees of
the Company, at an exercise price of
€0.01 per share. The grant date fair value was determined to be immaterial.
As of
December 31, 2019, there are 200,500 options outstanding, 156,625 options exercisable and 43,875 non-vested options.
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
June 1, 2020 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)
|
|
|
61.6
|
%
|
|
|
21,818,861
|
|
|
Menachem J. Atzmon
|
|
|
13.7
|
%
|
|
|
4,850,000
|
|
|
All officers and directors as a group (10 persons), the MacPherson Trust and its Ultimate Beneficial Owners
|
|
|
89.2
|
%
|
|
|
31,604,907
|
|
|
(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 61.6% 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 June 1, 2020 the Company has notes payable to a related party in the total amount of $0 million and accrued interest of $2.7 million. Out of this amount $2.0 million is convertible at a rate of $0.40
per share. The calculation above does not take into consideration the conversion of the accrued interest.
|
Related Party Transactions
Entities related to two of
the Company's Supervisory Board members provide legal services to
the Company. Legal expense related to these services is $46 thousands, $35 thousands
and $47 thousands for the years ended
December 31, 2019,
2018 and
2017, respectively. Included in accounts payable on the accompanying consolidated balance sheets is $1 thousand and $9 thousands due for these services as of
December 31, 2019 and
2018, respectively.
The Company engages the services of a related party to provide certain selling and management services to its authentication technology segment.
The Company incurred expenses of
$0.8 million, $0.7 million and $0.3 million for such services for the years ended
December 31, 2019,
2018 and
2017, respectively. In addition, since 2018, the related party serves as a board member of
the Company and was paid an amount of $28
thousands and $15 thousands as board fees, for the years ended
December 31, 2019 and
2018, respectively.
An entity related to
the Company’s main shareholder provided a letter of credit of $1.0 million to a commercial bank to guarantee a borrowing arrangement on behalf of one of the
Company’s
subsidiaries. In December 2017,
the Company agreed with the commercial bank to reduce the letter of credit to $0.7 million. In April 2018, the letter of credit was reduced to $0.5 million. In December 2019,
the Company replaced the letter
of credit by its own letter of credit.
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 million,
$0.1 million and $0.1 million for such services for each one of the years ended
December 31, 2019,
2018 and
2017, respectively.
The Company engages the services of a related party to provide internal audit services.
The Company incurred expenses of $0.2 million, $0.2 million and $0.1 million for such
services for the years ended
December 31, 2019,
2018 and
2017, respectively.
The Chairman of the Board, a related party, receives annual compensation of $50 thousands for his services as chairman.
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 $39 thousands and $103 thousands for such services for the years ended
December 31, 2019 and
2018 respectively. In addition, the related party serves as a board member of
the Company since 2018 and was paid an amount of $30
thousands and $15 thousands, as board fees, for the years ended
December 31, 2019 and
2018, respectively.
In April 2018,
the Company issued 3,350,000 shares to certain directors and officers of
the Company for a purchase price of $0.66 per share. In December 2018, additional 750,000
shares were issued to two related parties for a price of $0.48.
In May 2018,
the Company engaged the services of a related party to provide certain administration services.
The Company incurred expenses of $98 thousands and $53 thousands for
such services for the years ended
December 31, 2019 and
2018, respectively.
In May 2019,
the Company engaged the services of Arrow Ecology and Engineering Overseas (1999) to provide some administrative services.
The Company incurred expenses of $62
thousands for such services for the year ended
December 31, 2019.
In June 2019,
the Company issued 3.0 million shares to certain directors and officers of
the Company for a purchase price of $0.40 per share.
In December 2019,
the Company purchased shares and shareholders debt of Arrow for $1.8 million.
Item 8. Financial Information
The Consolidated Financial Statements and Financial Statement Schedule are included herein on pages F-1 through F-43.
Legal Proceedings
Claims by former employees
The Company is subject to wrongful termination claims made by certain former employees of one of its European
subsidiaries. The aggregate amount of such claims is approximately $0.6 million.
Minimum Wage Increase
In August 2015,
the Company was informed about a court decision, which approved an increase to the minimum wage for the city of SeaTac, WA (location of SeaTac Airport). The
increase to the minimum wage was originally approved by a vote in King County, WA in 2013 (to be effective
January 1, 2014); however, a court ruled that SeaTac employees were excluded from this increase because the airport was under the
jurisdiction of the Port of Seattle and not the city of SeaTac. In August 2015, this decision was overturned by the State Supreme Court and, accordingly,
the Company is required to increase the minimum wage of its employees at SeaTac Airport
according to the court decision, effective
January 1, 2014. After the settlements of the legal disputes in 2017 related to the minimum wage increase,
the Company was obligated to pay out approximately $1.6 million. The accrued amount at
December
31, 2018 is $0.5 million (inclusive of interest amounting to approximately $0.3 million) for the remainder of the settlement and is included in accrued expenses and other current liabilities.
The Company paid this amount in 2019 and the resulting
balance owed at
December 31, 2019 is zero.
Following the termination of the Procheck
contract on
December 31, 2018,
the Company has been negotiating with the customer compensation for the losses accrued as a result of the
termination. In December 2019
the Company started a legal procedure in order to settle the disagreement. The procedure have been completed without material effect to
the Company’s financials.
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.
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, 2019).
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. 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 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 ($2.2 million as of
December 31, 2019).
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
|
|
|
2015
|
|
$
|
0.85
|
|
|
$
|
0.51
|
|
|
2016
|
|
$
|
0.71
|
|
|
$
|
0.40
|
|
|
2017
|
|
$
|
1.30
|
|
|
$
|
0.45
|
|
|
2018
|
|
$
|
1.09
|
|
|
$
|
0.40
|
|
|
2019
|
|
$
|
3.00
|
|
|
$
|
0.15
|
|
The reported high and low closing sales prices per share during each quarter for the last 3 years were as follows:
|
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
|
|
| |
|
|
|
|
|
|
|
|
|
2018
|
|
High
|
|
|
Low
|
|
|
First quarter
|
|
$
|
1.09
|
|
|
$
|
0.60
|
|
|
Second quarter
|
|
$
|
0.80
|
|
|
$
|
0.40
|
|
|
Third quarter
|
|
$
|
0.80
|
|
|
$
|
0.47
|
|
|
Fourth quarter
|
|
$
|
0.48
|
|
|
$
|
0.40
|
|
| |
|
|
|
|
|
|
|
|
|
2017
|
|
High
|
|
|
Low
|
|
|
First quarter
|
|
$
|
0.57
|
|
|
$
|
0.45
|
|
|
Second quarter
|
|
$
|
0.62
|
|
|
$
|
0.45
|
|
|
Third quarter
|
|
$
|
0.80
|
|
|
$
|
0.55
|
|
|
Fourth quarter
|
|
$
|
1.30
|
|
|
$
|
0.51
|
|
Item 10. Additional Information
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
February 19, 2013 (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 15,000,000.30 divided into 33,333,334 Shares, each Share with a nominal value of EUR 0.45.
Article 24 of the
Articles of Association provide that, in the event the Management Board files a declaration with the trade register of the Netherlands Chamber of Commerce that at
least ninety percent of the authorized share capital is issued, Article 3 of the
Articles of Association will be changed as follows:
“The authorized capital of the Company amounts to EUR 67,500,000 dividend into one hundred fifty million
(150,000,000) shares, each share having a par value of EUR 0.45.” Such declaration was filed in 2019 and the authorized share capital was adjusted accordingly.
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.
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.
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 favor 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.
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 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.
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 favourable 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.
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 favourable 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.
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.
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.
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.
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, of (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 will not be eligible for the dividends received
deduction generally allowed to U.S. corporations.
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).
Distributions in excess of the earnings and profits of
the Company will be treated, for U.S. federal income tax purposes, first as a non taxable return of capital 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 Euro will be equal to 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 (i.e. 15%).
However, the full amount of the dividend, including any withheld amounts, will be subject to current United States federal income taxation whether or not such Holder obtained a
refund of the excess 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 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. The portion of Dutch withholding tax that may not be creditable in this instance equals 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 could potentially apply only under circumstances where
the Company pays dividends on the shares.
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 31% U.S. backup withholding tax. Backup withholding generally will not apply, however,
to a Holder who furnishes a correct 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.
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:
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The excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the shares,
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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 |
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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.
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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 furnish 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 2019, the standard corporate income tax rate is 19% on
profits up to €0.2 million and 25% on the excess. In 2020, the tax rate will be 16.5% on profits up to €0.2 million and 25% on the excess. In 2021, the statutory corporate income tax rates will be lowered further to 15% and 21.7%, respectively.
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.
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.
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.
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. 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 January 1 2019, the possibility to carry forward losses is limited from nine years to six
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 realises 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.
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.
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 recognised 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 recognised 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, recognised for
Netherlands dividend withholding tax purposes, has been made or will be made; and
(d) partial repayment of paid-in capital, recognised 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.
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.
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 favourable 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).
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 organisations 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 organisations, as a general rule, the
so-called refund method applies; only when certain administrative conditions have been fulfilled may such tax-exempt organisation 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 realised 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
(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 realised 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%.
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). For 2020, the deemed income derived from savings and investments amount to 1.80% of the individual’s
yield basis up to EUR 72,797, 4.22% of the individual’s yield basis exceeding EUR 72,797 up to and including EUR 1,005,572 and 5.33% of the individual’s yield basis in excess of EUR 1,005,572. The percentages to determine the deemed income are
reassessed every year. The tax-free threshold for 2020 is EUR 30,846.
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:
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another entity with a capital divided into shares;
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a cooperative (association); or
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another legal entity that has an enterprise or an interest in an enterprise to which the Shares are attributable,
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but which is not:
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a qualifying pension fund;
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a qualifying investment fund (fiscale beleggingsinstelling) or a qualifying exempt investment institution (vrijgestelde beleggingsinstelling); or
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another entity exempts from corporate income tax,
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will in general be subject to regular corporate income tax, levied at a rate of 25% (19% over profits up to EUR 200,000) over income derived from Shares and the gains realised 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 realised upon the acquisition, redemption and/or disposal of Shares (other than the dividend withholding tax described above), unless:
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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
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(b)
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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.
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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 realised 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 realised upon the acquisition, redemption and/or disposal of Shares (other than the dividend withholding
tax described above), unless:
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
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 realised upon the acquisition, redemption and/or disposal of Shares will, in general, be
subject to regular corporate income tax, levied at a rate of 25% (19% over profits up to EUR 200,000), 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.
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 2019, approximately 22% of
the Company’s revenues were derived in the United States of America, and
approximately 78% was derived in Europe and the Far East.
The Company is subject to market risks associated with foreign currency exchange rate fluctuations. We do not utilize derivative instruments to manage the exposure to such market risk. 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 $0.3 million in
the year ended
December 31, 2019.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not applicable.
