The accompanying condensed unaudited consolidated financial statements for the six months ended June 30, 2020 have been prepared by the Company, in accordance with accounting principles generally
accepted in the United States of America (“US GAAP”) for financial information. These financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals, which are, in the opinion of management, necessary for a
fair presentation of the financial position of the Company as of June 30, 2020 and the results of operations for the six months then ended. Accordingly, certain information and footnote disclosures normally included in annual financial statements
prepared in accordance with US GAAP have been condensed or omitted. The results of operations presented are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2020.
The following discussion and analysis should be read in conjunction with the financial statements, related notes and other information included in this report and with the Risk Factors included in
Part 1 Item 3 in our Annual Report on Form 20-F for the year ended December 31, 2019, filed with the SEC.
This Report contains statements that may constitute “forward-looking statements”. Generally, forward-looking statements include words or phrases such as “anticipates,” “believes,” “estimates,”
“expects,” “intends,” “plans,” “projects,” “could,” “may,” “might,” “should,” “will”, the negative of such terms, and words and phrases of similar import. Such statements are based on management’s current expectations and are subject to a number of
risks and uncertainties. These risks and uncertainties could cause our actual results to differ materially from those described in the forward-looking statements. Any forward-looking statement represents our expectations or forecasts only as of the
date it was made and should not be relied upon as representing its expectations or forecasts as of any subsequent date. Except as required by law, we undertake no obligation to correct or update any forward-looking statement, whether as a result of
new information, future events or otherwise, even if our expectations or forecasts change.
Certain amounts have been reclassified in prior years balance sheets and statements of operations to conform with current period presentation.
ICTS International N.V. (“ICTS”) was established by the Department of Justice in Amstelveen, Netherlands on October 9, 1992. ICTS and subsidiaries (collectively referred to as, the “Company” or
“ICTS”) 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 and identity security software to financial
and other institutions, predominantly in the Unites States of America and Europe.
Accounting Standard Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern requires a Company’s management to assess an entity’s ability to
continue as a going concern, and to provide related footnote disclosure in certain circumstances, as following:
As of June 30, 2020, and December 31, 2019, the Company has a working capital of $17,657and $27,627 and shareholders deficit of $46,267 and $35,685, respectively. During the periods ended June 30,
2020 and 2019, the Company incurred net losses of $10,098 and $657, respectively.
The Company has a line of credit in the Netherlands up to €12,000 ($13,453 as of June 30, 2020), which will expire in March 2021 and additional line of credit in the United States of America up to
$10,000, which will expire in October 2021 (see note 7). The Company is negotiating with the lender in the Netherlands the future of the line of credit. In addition, the Company anticipates that it will be able to extend its line of credit in the
United States of America.
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, the decisions taken by various governments have affected economic activity and the Company’s business as following:
In July 2019, ABC Technologies B.V. (“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 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 (see note 11).
In October 2020, the Company extended the agreement with the entity related to the main shareholder to extend the period of the loan and the convertible notes until January 1, 2022. The maximum
amount of the loans and the convertible notes will be $3,000, excluding interest (see note 10).
The Company’s business plan projects income from operations (including the current known and approved governmental support programs) and positive cash flows from operations. Management also
believes that it will receive continued support in order to finance its operations. There can be no assurance that management will be successful in achieving its business plan.
(1) In the Netherlands, certain payments are being done by the customers directly into restricted bank accounts that can be used only in order to make certain payments to the local
authorities. From time to time, the Company can request from the tax authorities to transfer certain amounts from those restricted accounts into the regular operating bank accounts of the Company, however, the money has to be transferred first to
the tax authorities. Once the transaction is being approved by them, they make the transfer to the regular operating bank account.
(2) As part of the COVID 19 the German authorities support employees, in certain circumstances, by paying them up to sixty percent of their monthly salary (on individual basis). Payment is
being done by the Company to the employees and the German government pay the amount back to the Company.
As of June 30, 2020, the Company owns 198,311 shares or 3.8% of the outstanding common stock of Artemis Therapeutics, Inc (“ATMS”).
The Company suspended its use of the equity method to accounting for this investment in 2007 after its investment balance was reduced to zero.
As of June 30, 2020, and December 31, 2019, the Company’s share of the underlying net assets of ATMS does not exceed the Company’s carrying value of its investment in ATMS ($0 as of June 30, 2020
and December 31, 2019). The market value of the Company's investment in ATMS as of June 30, 2020 and December 31, 2019 is $48 and $10, respectively.
The Company evaluated the stock price of ATMS, but as 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.
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 June 30, 2020, and December 31, 2019, the Company’s investment is approximately 363,640
and 381,332 KRW respectively ($303 as of June 30, 2020 and $330 as of December 31, 2019). For the periods ended June 30, 2020 and 2019, the Company recognized a profit (loss) in its consolidated statement of operations of (17,659) and 50,073 KRW,
respectively ($(14) and $45 as of June 30, 2020, and 2019 respectively) from its investment in the JVC.
In December 2019, the Company invested an amount of $1,750 in Arrow Ecology & Engineering Overseas (1999) Ltd (“Arrow”), a limited company incorporated in Israel. Arrow develops and operates a
sustainable green process to recycle mixed and sorted municipal solid waste. The Company purchased few types of shares representing 23.3% of Arrow’s equity for an amount of $22 and shareholders loans were purchased for a price of $1,728. The
Company uses the equity method for this investment. For the period ended June 30, 2020, the Company recognized loss in its consolidated statement of operations of $75 from its investment in Arrow.
The Company has an agreement with an entity related to its main shareholder, according to which, if the value of the investment decrease, the related party entity has guaranteed to repurchase this
full investment at a minimum amount of $1,750. The guarantee is effective immediately as of the date of purchase and terminates after three years. Some Directors and managers of Arrow are related parties of the Company.
Depreciation and amortization expense are $1,029, and $828 for the periods ended June 30, 2020 and 2019, respectively.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
(US $ in thousands, except share and per share data)
NOTE 6 – LEASES
The table below presents the effects on the amounts relating to the Company’s total lease cost:
|
|
|
Period ended June 30, 2020
|
|
|
Year ended June 30, 2019
|
|
|
Operating lease cost
|
|
$
|
1,904
|
|
|
|
1,613
|
|
|
Short-term lease cost
|
|
|
735
|
|
|
|
411
|
|
|
Total lease cost
|
|
$
|
2,639
|
|
|
|
2,024
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of Lease liabilities:
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
1,906
|
|
|
|
2,024
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
1,736
|
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term - operating leases
|
|
4.7 years
|
|
|
5.2 years
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate - operating leases
|
|
|
4.9
|
%
|
|
|
4.8
|
%
|
Supplemental balance sheet information related to operating leases was as follows:
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
Operating lease ROU assets
|
|
$
|
10,442
|
|
|
|
10,367
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
2,838
|
|
|
|
2,725
|
|
|
Operating lease liabilities
|
|
|
7,512
|
|
|
|
7,562
|
|
|
Total operating lease liabilities
|
|
$
|
10,350
|
|
|
|
10,287
|
|
Maturities of operating lease liabilities as of June 30, 2020 were as follows:
|
Year ending December 31,
|
|
|
|
|
|
|
|
|
2020 (excluding the six months ended June 30, 2020)
|
|
$
|
1,729
|
|
|
|
|
|
|
2021
|
|
|
2,607
|
|
|
|
|
|
|
2022
|
|
|
1,858
|
|
|
|
|
|
|
2023
|
|
|
1,637
|
|
|
|
|
|
|
2024
|
|
|
1,347
|
|
|
|
|
|
|
Thereafter
|
|
|
2,122
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
11,300
|
|
|
|
|
|
|
Less: imputed interest
|
|
|
950
|
|
|
|
|
|
|
Total
|
|
$
|
10,350
|
|
|
|
|
|
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
(US $ in thousands, except share and per share data)
NOTE 7 – NOTES PAYABLE – BANKS
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 $10,000, subject to a borrowing base limitation. The
borrowing base limitation was equivalent to: (i) 85% of eligible accounts receivable, as defined, plus (ii) 80% of eligible unbilled receivables, as defined, plus (iii) 95% of a $500 standby letter of credit 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 $500 letter of credit that was provided to the lender by an entity
related to the main Shareholder.
In December 2019, the Company replaced the $500 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.
As of June 30, 2020, and December 31, 2019, the Company had approximately $1,875 and $6,475, respectively, outstanding under line of credit arrangement. As of June 30, 2020, and December 31, 2019,
the Company had $196 and $3,525, respectively, in unused borrowing capacity under the line of credit facility.
Borrowings made under the credit facility bear interest, which is payable monthly, at LIBOR plus 3% per annum (3.2% as of June 30, 2020).
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 had a credit arrangement with a commercial bank, to provide it with up to €12,000 ($13,453 as of June 30, 2020) in borrowings until further notice. Borrowings under the line of credit
bear interest at one-month EURIBOR plus 3.5% (3.5% as of June 30, 2020). The Company was 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.
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 €16,000 ($17,936 as of December 31, 2019) under
the same terms and conditions through September 2019.
In addition to the line of credit arrangement, a guarantee facility of €2,500 ($2,803 as of June 30, 2020) was provided to the Company by the same commercial bank. As of June 30, 2020, and December
31, 2019, the Company had €2,263 and €2,316 ($2,537 and $2,596 as of June 30, 2020 and December 31, 2019), respectively, of outstanding guarantees under the guarantee facility, which related to leases and performance guarantees for contracts.
In May 2020, the Company renewed its line of credit facility agreement with the commercial bank. The new arrangement provides it with up to €12,000 ($13,453 as of June 30, 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 (4.8% as of June 30, 2020). 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 €2,000 ($2,242 as of June 30, 2020) provided by a company related to the main shareholder (see note
10).
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
(US $ in thousands, except share and per share data)
NOTE 7 – NOTES PAYABLE – BANKS (CONTINUED)
Europe (continued)
The line of credit cannot exceed 70% of the borrowing base. As part of the agreement, also the guarantee facility of €2,500 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.
As of June 30, 2020, and December 31, 2019, the Company had €1,925 and €11,872 ($2,158 and $13,313 as of June 30, 2020 and December 31, 2019), respectively, in outstanding borrowings under the line
of credit arrangement.
The Company has an additional credit arrangement in Sweden to provide it with up to 2,000 SEK ($213 as of June 30, 2020) 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 June 30, 2020, and December 31, 2019, the Company had 2,168 SEK and 1,115 SEK ($231 and $120 as of June 30, 2020 and December 31, 2019) respectively in outstanding borrowings under the line
of credit facility. The Sweden subsidiary had as of June 30, 2020 an over advance of 168 SEK ($18) which was subsequently repaid.
NOTE 8 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are as follows:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Accrued payroll and related costs
|
|
$
|
24,049
|
|
|
$
|
20,662
|
|
|
Accrued vacation
|
|
|
8,285
|
|
|
|
6,639
|
|
|
Labor union contribution
|
|
|
1,315
|
|
|
|
2,089
|
|
|
Deferred revenue
|
|
|
1,683
|
|
|
|
1,652
|
|
|
American governmental payroll support program
|
|
|
4,347
|
|
|
|
-
|
|
|
Other
|
|
|
3,391
|
|
|
|
3,991
|
|
|
Total accrued expenses and other current liabilities
|
|
$
|
43,070
|
|
|
$
|
35,033
|
|
NOTE 9 – LOAN PAYABLE
In December 2018, the Company entered into an agreement with a financing company to provide it €2,000 ($2,242 as of June 30, 2020) as a loan until December 2020. The loan can be repaid earlier but
not before December 2019. In November 2019, the Company repaid €1,000 of the payable loan plus interest calculated through December 2019. The loan bears interest of ten percent per annum. Interest is being paid quarterly.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
(US $ in thousands, except share and per share data)
NOTE 10 – BALANCES WITH RELATED PARTIES
Receivable from related party
In May 2020, the Company renewed its line of credit facility agreement with the commercial bank (see note 7). The line of credit is secured also by a bank guarantee of €2,000 ($2,242 as of June 30,
2020) provided by a company related to the main shareholder which was provided against a payment of $2,200 to the company related to the main shareholder. Once the bank guarantee will be canceled the receivable will be repaid to the Company.
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 $37,000
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.
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.
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.
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 $2,889 accrued interest into 3,852,364 shares at a price of $0.75 per share.
The Company determined that the any of the arrangements above 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 May 2019 the Company granted this entity, the option to convert up to $2,000 of the loan into the Company’s shares at a price of $0.40 per share, and all other conversion rights for the balance
of the debt except $2,611, which is convertible at a price of $0.75 per share, would eliminate. In December 2019, this entity converted the $2,611 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 $8,139 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 Technologies B.V., which happened in July 2019 (see note 11).
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
(US $ in thousands, except share and per share data)
NOTE 10 – BALANCES WITH RELATED PARTIES (CONTINUED)
Convertible Notes Payable to a Related Party (continued)
As a result, the Company recorded $8,139 in connection with this payment which is included in other expenses in the consolidated statement of operation and comprehensive income (loss) for the
period ended June 30, 2019.
In July 2019, the Company repaid $30,000 of the convertible notes.
As of June 30, 2020, and December 31, 2019, convertible notes payable to this related party consist of $2,000 and $2,000, respectively.
In October 2020, out of this amount $800 was converted into the Company’s shares according to the agreed terms into 2,000,000 shares.
Note Payable to Related Party
As of June 30, 2020, and December 31, 2019, notes payable to this related party consist of $0 and $1,033, respectively, in principal and $628 and $505, respectively in accrued interest.
Total interest expense related to these notes is $90, $1,106 for the periods June 30, 2020 and 2019, respectively.
NOTE 11 – REDEEMABLE NON-CONTROLLING INTERESTS
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 3,000,000 Series A Preferred
Shares ("Series A Shares") to TPG for a subscription price of US$60 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 $4,540 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 million in cash representing approximately 7.401% of the outstanding share
capital of ABC and 7.143% 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: $19,537 and $461, respectively. Transaction costs totaled
$1,513 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.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
(US $ in thousands, except share and per share data)
NOTE 11 – REDEEMABLE NON-CONTROLLING INTERESTS (CONTINUED)
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 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.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
(US $ in thousands, except share and per share data)
NOTE 11 – REDEEMABLE NON-CONTROLLING INTERESTS (CONTINUED)
The Preferred Shares Rights (continued)
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.
The following table sets forth for the period ended June 30, 202, the movement in the Redeemable non-controlling interests:
|
|
|
2020
|
|
|
Balance as of the beginning of the year
|
|
$
|
74,300
|
|
|
Net Income
|
|
|
416
|
|
|
Other Comprehensive Income - translation adjustment
|
|
|
(13
|
)
|
|
Balance as of the end of the year
|
|
$
|
74,703
|
|
NOTE 12 - REVENUE RECOGNITION
Revenue Recognition
Revenue is recognized when the promised services are performed for our clients, and the amount that reflects the consideration we are entitled to receive in exchange for those services is
determined. The Company’s revenues are recorded net of any sales taxes.
In order to determine the revenue, we (1) identify the contract with the client, (2) identify the performance obligations, usually it’s based on the hours spent, (3) determination of the
transaction price, (4) allocation of the transaction price to the performance obligation and (5) we recognize revenue as performance obligation is satisfied.
A performance obligation is a promise in a contract to transfer a distinct service to the client, and it is the unit of account in the new accounting guidance for revenue recognition. The majority
of our contracts have a single performance obligation as the promise to transfer the individual services is not separately identifiable from other promises in our contracts and, therefore, is not distinct.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
(US $ in thousands, except share and per share data)
NOTE 12 - REVENUE RECOGNITION (CONTINUED)
Revenue Recognition (continued)
The following table presents the Company’s revenues according to the Company’s segments:
|
|
|
Period ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Airport Security and Other Aviation Services
|
|
$
|
113,840
|
|
|
|
152,622
|
|
|
Technology
|
|
|
12,286
|
|
|
|
11,870
|
|
|
Total revenues
|
|
$
|
126,126
|
|
|
$
|
164,492
|
|
The following table presents the Company’s revenues disaggregated by geography according to the customers billing address:
|
|
|
Period ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Germany
|
|
$
|
59,779
|
|
|
|
47
|
%
|
|
$
|
67,501
|
|
|
|
41
|
%
|
|
The Netherlands
|
|
|
30,461
|
|
|
|
24
|
%
|
|
|
49,007
|
|
|
|
30
|
%
|
|
United States
|
|
|
22,583
|
|
|
|
18
|
%
|
|
|
35,787
|
|
|
|
22
|
%
|
|
Other countries
|
|
|
13,303
|
|
|
|
11
|
%
|
|
|
12,197
|
|
|
|
7
|
%
|
|
Total revenues
|
|
$
|
126,126
|
|
|
|
100
|
%
|
|
$
|
164,492
|
|
|
|
100
|
%
|
Airport Security and Other Aviation Services Segment
In the airport security and other aviation services, for performance obligations that we satisfy over time, revenues are recognized by consistently applying a method of measuring hours spent on
that performance obligation. We generally utilize an input measure of time (hours and attendance for specific time framed service like specific flights) of the service provided. Performance obligations are satisfied over the course of each month
and continue to be performed until the contract has been terminated or cancelled.
Pricing and Reduction to Revenues
We generally determine standalone selling prices based upon the prices included in the client contracts, using expected costs plus margin, or other observable prices. The price as specified in our
client contracts is generally considered the standalone selling price as it is an observable input that depicts the price as if sold to a similar client in similar circumstances. Certain client contracts have variable consideration, including
quality thresholds or other similar items that could reduce the transaction price. These amounts may be constrained and revenue is recorded to the extent we do not expect a significant reversal or when the uncertainty associated with the variable
consideration is resolved. Our variable consideration amounts, if any, are not material, and we do not expect significant changes to our estimates.
Contracts
Our client contracts generally include standard payment terms acceptable in each of the countries, states and territories in which we operate. The payment terms vary by the type and location of our
clients and services offered. Client payments are typically due in 30 to 60 days after invoicing, but may be a shorter or longer term depending on the contract.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
(US $ in thousands, except share and per share data)
NOTE 12 - REVENUE RECOGNITION (CONTINUED)
Revenue Recognition (continued)
Airport Security and Other Aviation Services Segment (continued)
Contracts (continued)
Our client contracts in the material countries are generally long term between three to five years. The timing between satisfaction of the performance obligation, invoicing and payment is not
significant.
Practical Expedients and Exemptions
Because nearly all our contracts are based on input measure of time of service provided (as hours or attendance) no exemptions need to be made. We have no material contracts with material revenues
expected to be recognized subsequent to June 30, 2020 related to remaining performance obligations.
Revenue Service Types
The following is a description of our revenue service types, including Airport Security, Airline Security, Cargo Security, Other Airport Services, General Security Services and Other.
Airport Security
Staffing or manning for specialized airport security are usually based on long term contract issued via a public tender procedure. We recognize revenue given the unit of measure (hours) provided in
the given time period and the specific price for specific hours agreed upon in the contracts. Quality and criteria of staffing are described in the contracts and are measured in the given time period. Deviations, if any, are discussed with the
customer before invoicing and will be reflected in the invoice showing the approved hours and other cost elements as agreed upon price.
Most contracts have an hourly rate that reflects an all-in tariff based on a full cost price calculation. In some of the contracts the hourly rates are split between a component based on hours and
a component based on specific costs in a specific time period but always linked to the service provided in given time period. Revenue is recognized at the time period set in the contract.
Airline Security
Staffing or manning for airline security are usually based on long term contracts issued via a public tender procedure. We recognize revenue according to the unit of measure provided (usually
attendance for specific time framed service like specific flights). The time framed specialized security services are in this case are the executed number of flights. When the manning for the security of these flights are delivered, the Company
invoices the customer according to the agreed flight tariff.
Cargo Security
Staffing or manning for specialized cargo security are usually based on long term contract, sometimes publicly tendered. Contracts are based on hourly planned and executed screening services.
Revenue is recognized based on the realized screening hours and contractually agreed upon hourly rate.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
(US $ in thousands, except share and per share data)
NOTE 12 - REVENUE RECOGNITION (CONTINUED)
Revenue Recognition (continued)
Other Airport Services
Airport Services include wheelchair attendants, pre-departure skycaps, bag-runners, agents, guards, charter security screening, janitorial, and cabin cleaning to major U.S. and foreign carriers in
airports throughout the United States of America. Our contracts may include either single or multiple performance obligations and vary by airport and airline. We recognize revenue given the unit of measure (hours) provided in the given time period
and the specific price for specific hours or attendance for specific event, time framed service as agreed upon in the contracts.
General Security Services
Security Services include providing armed and un-armed guards to private schools and places of worship, video surveillance and patrol. Contracts for security services generally include only a
single performance obligation. We generally recognize revenue for security guard services. We recognize revenue for security guard given the unit of measure (hours) provided in the given time period. Revenue from video surveillance and patrol is
recognized based upon a fixed monthly rate.
Other Services
Other services include revenues from (incidental) specialized security manning services, training services and ad hoc work performed on and off airports. Revenue is recognized over time as
services are being performed, using the input of service delivered during the time period, according to the contractual agreed price.
Authentication Technology Segment
In the authentication technology segment, the Company offers authentication services on a cost per click basis, with a minimum yearly commitment which means the customer pays the Company according
to the higher of (a) number of times the customer used the system in order to authenticate IDs or (b) according to the yearly minimum commitment. According to the agreement with the customers, each chargeable click has an agreed price and revenue
is being recognized accordingly.
Pricing and Reduction to Revenues
We generally determine standalone selling prices based upon the prices included in the client contracts, using expected costs plus margin, or other observable prices. The price as specified in our
client contracts is generally considered the selling price as agreed with the customer. Certain client contracts have variable consideration which are based on quantity of usage. These amounts may be constrained and revenue is recorded to the
extent we do not expect a significant reversal or when the uncertainty associated with the variable consideration is resolved. Our variable consideration, if any, amounts are not material, and we do not expect significant changes to our estimates.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
(US $ in thousands, except share and per share data)
NOTE 12 - REVENUE RECOGNITION (CONTINUED)
Revenue Recognition (continued)
Authentication Technology Segment (continued)
Contracts
Our client contracts generally include standard payment terms acceptable in each of the countries, states and territories in which we operate. The payment terms vary by the type and location of our
clients and services offered. The minimum commitment is usually being paid in advance. Client payments are typically due in 30 days after invoicing, but may be a shorter or longer term depending on the contract. Our client contracts are usually for
a one-year period with a renewal option. The timing between satisfaction of the performance obligation, invoicing and payment is not significant.
Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.
Deferred Revenues
We record deferred revenues when cash payments are received or due in advance of our performance. Deferred revenues at June 30, 2020 and December 31, 2019 were $1,683 and $1,652, respectively shown
as part of the accrued expenses and other current liabilities (see note 8) and $263 and $268 shown as other liabilities.
Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant.
NOTE 13 – SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates in three reportable segments: (a) corporate (b) airport security and other aviation services and (c) authentication technology. The corporate segment does not generate revenue
and contains primarily non-operational expenses. The airport security and other aviation services segment provides security and other aviation services to airlines and airport authorities, predominantly in 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 Europe and the United States of America. All inter-segment
transactions are eliminated in consolidation. The accounting policies of the segments are the same as the accounting policies of the Company as a whole.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
(US $ in thousands, except share and per share data)
NOTE 13 – SEGMENT AND GEOGRAPHICAL INFORMATION (CONTINUED)
The operating results of these reportable segments are regularly reviewed by the chief operating decision.
|
|
|
|
|
|
Airport Security
and Other
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Aviation Services
|
|
|
Technology
|
|
|
Total
|
|
|
Six months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
113,840
|
|
|
$
|
12,286
|
|
|
$
|
126,126
|
|
|
Depreciation and amortization
|
|
|
41
|
|
|
|
670
|
|
|
|
318
|
|
|
|
1,029
|
|
|
Net profit (loss)
|
|
|
(1,345
|
)
|
|
|
(10,130
|
)
|
|
|
1,377
|
|
|
|
(10,098
|
)
|
|
Total assets
|
|
$
|
16,144
|
|
|
$
|
60,077
|
|
|
$
|
37,206
|
|
|
$
|
113,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
152,622
|
|
|
$
|
11,870
|
|
|
$
|
164,492
|
|
|
Depreciation and amortization
|
|
|
21
|
|
|
|
665
|
|
|
|
142
|
|
|
|
828
|
|
|
Net profit (loss)
|
|
|
(2,841
|
)
|
|
|
(1,609
|
)
|
|
|
3,793
|
|
|
|
(657
|
)
|
|
Total assets
|
|
$
|
348
|
|
|
$
|
70,890
|
|
|
$
|
11,214
|
|
|
$
|
82,452
|
|
The following table sets forth, for the periods indicated, revenue generated from customers by geographical area based on the geographical location of the customers invoicing address:
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Germany
|
|
$
|
59,779
|
|
|
$
|
67,501
|
|
|
Netherlands
|
|
|
30,461
|
|
|
|
49,007
|
|
|
United States of America
|
|
|
22,583
|
|
|
|
35,787
|
|
|
Other
|
|
|
13,303
|
|
|
|
12,197
|
|
|
Total
|
|
$
|
126,126
|
|
|
$
|
164,492
|
|
The following table sets forth, for the periods indicated, property and equipment, net of accumulated depreciation and amortization by country:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Netherlands
|
|
$
|
821
|
|
|
$
|
862
|
|
|
Germany
|
|
|
470
|
|
|
|
516
|
|
|
United States of America
|
|
|
327
|
|
|
|
354
|
|
|
Other
|
|
|
2,666
|
|
|
|
2,854
|
|
|
Total
|
|
$
|
4,284
|
|
|
$
|
4,586
|
|
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
(US $ in thousands, except share and per share data)
NOTE 14– SUBSEQUENT EVENTS
In October 2020, convertible notes for total of $800 were converted into 2,000,000 Company shares (see note 10 in the above financial statements)
During the period June till December, 2020 the Company has received some governmental assistance (see note 2 in the above financial statements).
In December 2020 the Company signed a contract with AENA, to provide security services at Adolfo Suarez Madrid-Barajas Airport for a duration of two years starting December 28th, 2020. The new
contract establishes I-SEC's position as a leading provider of aviation security in Spain.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis should be read in conjunction with the financial statements, related notes and other information included in this report and with the Risk Factors included in
Part 1 Item 3 in our Annual Report on Form 20-F for the year ended December 31, 2019, filed with the SEC.
|
|
|
Period ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Cost of Revenue
|
|
|
88.3
|
%
|
|
|
87.5
|
%
|
|
Gross profit
|
|
|
11.7
|
%
|
|
|
12.5
|
%
|
|
Research and development expenses
|
|
|
3.1
|
%
|
|
|
1.2
|
%
|
|
Selling, general and administrative expenses
|
|
|
15.4
|
%
|
|
|
9.9
|
%
|
|
Total operating expenses
|
|
|
18.5
|
|
|
|
11.1
|
%
|
|
Operating income (loss)
|
|
|
(6.8
|
)%
|
|
|
1.4
|
%
|
|
Equity loss from investment in affiliate
|
|
|
0.1
|
%
|
|
|
-
|
%
|
|
Other expenses, net
|
|
|
0.6
|
%
|
|
|
1.2
|
%
|
|
Income (loss) before income tax expense
|
|
|
(7.5
|
)%
|
|
|
0.2
|
%
|
|
Income tax expense
|
|
|
0.5
|
%
|
|
|
0.6
|
%
|
|
Net loss
|
|
|
(8.0
|
)%
|
|
|
(0.4
|
)%
|
|
Net profit attributable to non-controlling interests
|
|
|
0.3
|
%
|
|
|
-
|
%
|
|
Net loss attributable to ICTS International N.V.
|
|
|
(8.3
|
)%
|
|
|
(0.4
|
)%
|
Revenue
Total revenue decreased from $164,492 in the first six months of 2019 to $126,126 in the first six months of 2020.
Revenue from Aviation Security activities in Europe and the Far East decreased by $26,370 in the first six months of 2020, compared to the comparable period in 2019. The main reason for the decline
in revenue is the effect of COVID-19 on the aviation industry. The Company doesn’t expect to recover its revenues to the level of previous years anytime soon, and it depends on the recovery of the global aviation industry.
Revenue from other Aviation Services provided in the United State of America (“U.S”) decreased by $12,412 in the first six months of 2020 compared to the comparable period in 2019. The main reason
for the decline in revenue is the effect of COVID-19 on the aviation industry. The Company doesn’t expect to recover its revenues to the level of previous years anytime soon, and it depends on the recovery of the American and the global aviation
industries.
Revenue from the Authentication Technology segment for the period ended June 30, 2020 increased by $416 compared to the comparable period in due to the continuing trend of growth in the Technology
segment, achieved by expending our services to new and some of our existing customers. The Company expected its revenue from the Authentication Technology to grow further but as some of our main customers are operating in businesses affected by
COVID-19, the revenues from those customers decreased during the six months ended June 30, 2020.
Cost of revenue
Cost of revenue for the period ended June 30, 2020 was $111,343 (88.3% as percentage of revenue) compared to $143,887 (87.5% as percentage of revenue) for the first six months of 2019. Cost of
revenue as percentage of revenue increased in the first six months of 2020 compared to the comparable period in 2019. In the Company’s business, a business which involve manpower, big changes in demand are not easy to adjust, especially in the
short term and still require the Company to continue and carry expenses regarding the employees, even though the Company is not being fully reimbursed for it. The Company has received some governmental support in different countries, but even then,
the amounts do not necessarily cover all the related expenses of the Company. For more information about the governmental support programs, please refer to note 2 in the above financial statements.
Research and Development (“R&D”)
R&D expenses for the period ended June 30, 2020 were $3,880 (3.1% as percentage of revenue) compared to $1,969 (1.2% as percentage of revenue) for the first six months of 2019. R&D expenses
increased in 2020 as the Company is looking into expending the technical solutions it provides which requires an increase in its R&D costs.
Selling, general and administrative expenses (“SG&A”)
SG&A expenses were $19,466 for the period ended June 30, 2020 (15.4% as percentage of revenue) compared to $16,327 (9.9% as percentage of revenue) for the first six months of 2019. There are
few main reasons for the increase in the SG&A costs: (i) In the beginning of the year the Company was in a massive process of restructure in its main subsidiaries in Europe, following its expectations that the revenue and demand will grow in
2020, including recruitment of employees in order to support and control the operations (ii) Increase in selling efforts regarding the Authentication Technology segment which resulted in new customers and an increase of revenues in that segment and
(iii) In December 2019 the Company started a legal procedure in order to settle the disagreement regarding the termination of the Procheck contract in December 31, 2018. The proceedings have been completed without material effect to the Company’s
financials. The Company recognized $620 legal expenses in the first six months of 2020 in relation to this legal procedure.
Other expenses, net
Other expense net includes mainly interest to banks, related parties and other institutions, exchange rate income (expense) and bank charges. Other expense, net, was $738 (0.6% as percentage of
revenue) for the first six months of 2020 compared to $2,049 (1.2% as percentage of revenue) for the comparable period ending June 30, 2019.
Interest expenses to related parties totaled $90 in the first six months of 2020 compared to $1,106 in the comparable period of 2019. As most of the debt was paid during 2019 the interest expenses
declined materially.
Exchange rate expense during the first six months of 2020 totaled $117 compared to exchange rate expense of $60 at the comparable period in 2019. The main currency that is being revaluated in the
Company is the Euro, which is being translated to U.S. Dollars.
Other interest expenses and bank charges totaled $531 in the first six months of 2020 compared to $883 in the comparable period of 2019. Those expenses decreased during the first six months of 2020
compared to the comparable period of 2019 as the Company has been delaying payments (mostly to authorities) as part of the COVID-19 governmental support programs, reducing the usage of its lines of credit.
Income tax expense
Income tax expense for the period ended June 30, 2020 was $708 (0.5% as percentage of revenue) compared to expense of $962 (0.6% as percentage of revenue) in the comparable period of 2019. Decrease
in tax expense for the first six months of 2020 relates mostly to the decrease of profitably and the losses in the different locations and segments following the COVID-19 slowdown in the Company’s operations.
Net Loss
As result of the above, the Company’s net loss amounted $10,098 (8.0% as percentage of revenue) for the first six months of 2020, compared to net loss of $657 (0.4% as percentage of revenue) for
the comparable period of 2019.
Net profit attributable to non-controlling interests
Net profit attributable to non-controlling interests totaled $431 (0.3% as a percentage of revenue) for the first six months of 2020 compared to $0 (0.0% as percentage of revenue) for the
comparable period of 2019. The net profit attributable to non-controlling interests relates to the non-controlling interests in the Authentication Technology segment.
Net loss attributable to ICTS International N.V.
Net loss attributable to ICTS International N.V. was $10,529 (8.3% as a percentage of revenue) for the first six months of 2020, compared to net loss of $657 (0.4% as a percentage of revenue) for
the first six months of 2019.