Icts International N V 20-F for FY2023
Icts International N V (ICTSF)
20-F
2024-05-10
For: 2023-12-31
View Original
Added on
April 06, 2026
About this 20-F
Icts International N V filed this 20-F on May 10, 2024, covering the fiscal year ended December 31, 2023 (FY2023).
Headline figures
Fiscal year ended December 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $431.54M
- up 32.8% from $324.98M a year earlier
- Net income
- $7.08M
- compared with a net loss of $4.73M a year earlier
- Diluted EPS
- $0.18
- compared with -$0.13 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
OR
OR
OR
Date of event requiring this shell company report
For the transition period from _________________ to _________________
COMMISSION FILE NUMBER 0-28542
(Exact Name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
The Netherlands
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Email: alon@ictsintl.com , Address: Same as above
(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: Common Stock
Name of each exchange on which registered: OTCQB
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value 0.45 Euro per share
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 37,433,333 .
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES ☐ ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
YES ☐ ☒
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ 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).
☒ 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):
|
Large accelerated filer ☐
|
Accelerated filer ☐
|
|
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
|
|
International Financial Reporting Standards as issued by the
International Accounting Standards Board ☐
|
Other ☐
|
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ☐ NO ☒
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
YES ☐ NO ☐
When used in this Form 20-F, the words “may”, “will”, “expect”, “anticipate”, “continue”, “estimates”, “project”, “intend” and similar expressions are intended to identify Forward-Looking Statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, operating results and financial position. Prospective investors are cautioned that any Forward-Looking Statements are not guarantees of future performance and are subject to risks and uncertainties and those actual results may differ materially from those included within the Forward-Looking Statements as a result of various factors.
2
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Table of Contents |
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Part I |
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| 21 | ||
| 33 | ||
| 38 | ||
| 39 | ||
| 41 | ||
| 42 | ||
| 58 | ||
| 58 | ||
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Part II |
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| 58 | ||
| 58 | ||
| 59 | ||
| 59 | ||
| 59 | ||
| 59 | ||
| 59 | ||
| 59 | ||
| 60 | ||
| 60 | ||
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Part III |
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| 61 | ||
| 61 | ||
| 62 | ||
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Exhibits |
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3
PART I
Item
1. Identity of Directors, Senior Management
and Advisers
Not Applicable
Item
2. Offer Statistics and Expected Timetable
Not Applicable
Item
3. Key information
Operations
ICTS International N.V. (“ICTS”) was registered at
the Department of Justice in Amstelveen, Netherlands on October 9, 1992. ICTS and subsidiaries (collectively referred to as “ICTS”
or the “Company”) operate in four reportable segments: (a) corporate (b) airport security (c) other aviation related services
and (d) authentication technology. The corporate segment does not generate revenue and contains primarily non-operational expenses. The
airport security segment provides security services primarily to airport authorities and airlines predominantly in Europe. The other aviation
services segment provides services primarily to airlines and airport authorities in the United States of America. The authentication technology
segment provides authentication services to financial and other companies, predominantly in the United States of America.
Selected Financial Data
Selected data set forth below have been derived from the ICTS Consolidated
Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America
(“US GAAP”). The Selected Consolidated Financial Data set forth below should be read in conjunction with Item 5 - Operating
and Financial Review and Prospects, the ICTS Consolidated Financial Statements and the Notes to those Consolidated Financial Statements
included in Item 18 in this Annual Report.
During 2022 and 2021, governments
in some of the countries in which we operate have implemented government assistance measures, which mitigated the impact of the COVID-19
outbreak on our results and liquidity. In the United States of America, the government has approved a payroll support to the American
subsidiary of the Company of $0.0 million and $15.9 million, for the years ended December 31, 2022 and 2021. Out of those amounts, the
American subsidiary recognized amounts of $0.0 million and $16.9 million as reduction of labor expenses for the years ended December 31,
2022 and 2021, respectively. For the years ended December 31, 2022 and 2021, the Dutch government has provided financial assistance to
the Dutch subsidiary of the Company of €3.7 million and €18.1 million ($3.9 million and $22.6 million as of December 31, 2022
and 2021), respectively. The Dutch government terminated the support program on March, 2022. For the year ended December 31, 2023 the
Company did not receive any payroll support or financial assistance from any government regarding COVID-19.
In the Netherlands wage tax, social security and VAT payments for
the period March 2020 through September 2021 were postponed and are to be paid in 60 monthly installments beginning October 2022. The
debt incurs annual interest starting July 2022 of 1% and increases every six months to a maximum of 4% starting on January 1, 2024 onwards.
As of December 31, 2023 and 2022, the Company accumulated debt to the Dutch tax authorities of €24.9 million and €31.8 million
($27.3 million and $33.8 million as of December 31, 2023 and 2022), respectively to the Dutch tax authorities.
In Germany, our employees were eligible for payroll support up
to 60% of the employee’s payroll (on an individual basis) where the employees meet the support plan requirements. The Company applied
for this support starting from April 2020 to June 2021.
In July 2019, AU10TIX Technologies
B.V. (together with its subsidiaries, “AU10TIX”, a subsidiary of ICTS issued preferred shares to an investor for a subscription
price of $60 million in cash representing 24% of the outstanding share capital of AU10TIX and 23.077% of the outstanding share capital
of AU10TIX on a fully diluted basis. AU10TIX retained $20 million of the sale proceeds for general working capital purposes and $40 million
was transferred to its parent company, ICTS International N.V.
In July 2019, the Company repaid $30 million to the entity related
to the main shareholder, who provided the Company loans as convertible notes.
In November 2019, AU10TIX issued preferred shares to a new investor
for a subscription price of $20 million in cash representing 7.401% of the outstanding share capital of AU10TIX and 7.143% of the outstanding
share capital of AU10TIX on a fully diluted basis.
4
On June 28, 2021, TPG, Oak, GF GW LLC (“GF”) and AU10TIX,
entered into a Sale and Purchase Agreement (the “SPA”), pursuant to which Oak and GF purchased preferred shares in AU10TIX
from TPG. In connection with the SPA, (i) such parties and ICTS entered into an amended and restated shareholders agreement (the
“SHA”) and an amended and restated registration rights agreement (the “RRA”) and (ii) AU10TIX’s Articles
of Association (the “Articles”) were amended by a deed of amendment. Following the completion of the sales and purchases contemplated
by the SPA: (i) ICTS owns 68.69% of the outstanding share capital of AU10TIX in the form of Class B Ordinary Shares; (ii) Oak owns 12.87%
of the outstanding share capital of AU10TIX in the form of New Series A Preferred Shares; (iii) GF owned 10.93% of the outstanding
share capital of AU10TIX in the form of New Series A Preferred Shares; and (iv) TPG owns 7.51% of the outstanding share capital of AU10TIX
in the form of New Series A Preferred Shares. In addition, AU10TIX may issue up to 1,000,000 Ordinary Shares under its existing
employee stock option plan.
The following table summarizes certain balance sheet data for the
Company at December 31, 2023, 2022, 2021, 2020 and 2019:
|
(U.S. Dollars in Thousands) |
||||||||||||||||||||
|
December 31, |
||||||||||||||||||||
|
2023 |
2022 |
2021 |
2020 |
2019 |
||||||||||||||||
|
Cash and cash equivalents
|
$ |
55,222 |
$ |
50,937 |
$ |
88,753 |
$ |
51,602 |
$ |
52,352 |
||||||||||
|
Restricted cash
|
9,766 |
15,867 |
14,699 |
9,472 |
2,493 |
|||||||||||||||
|
Bank deposits
|
34,002 |
24,568 |
- |
- |
- |
|||||||||||||||
|
Total current assets
|
176,557 |
155,483 |
174,562 |
116,554 |
103,136 |
|||||||||||||||
|
Total assets
|
197,096 |
184,633 |
195,880 |
140,388 |
123,447 |
|||||||||||||||
|
Total current liabilities
|
80,495 |
68,326 |
60,887 |
59,334 |
75,509 |
|||||||||||||||
|
Other liabilities
|
22,038 |
29,214 |
40,867 |
25,684 |
1,761 |
|||||||||||||||
|
Total liabilities
|
106,178 |
105,019 |
111,234 |
95,551 |
84,832 |
|||||||||||||||
|
Redeemable non-controlling interests
|
93,521 |
89,974 |
90,478 |
75,322 |
74,300 |
|||||||||||||||
|
Shareholders' deficit
|
$ |
2,603 |
$ |
10,360 |
$ |
5,832 |
$ |
30,485 |
$ |
35,685 |
||||||||||
5
The following table summarizes certain statement of operations
data for the Company for the years ended December 31, 2023, 2022, 2021, 2020, and 2019:
|
U.S. Dollars in Thousands Year ended December 31, |
||||||||||||||||||||
|
2023 |
2022 |
2021 |
2020 |
2019 |
||||||||||||||||
|
Revenue
|
$ |
431,542 |
$ |
324,977 |
$ |
324,934 |
$ |
248,419 |
$ |
333,307 |
||||||||||
|
Cost of revenue
|
351,558 |
261,181 |
209,771 |
196,569 |
290,461 |
|||||||||||||||
|
GROSS PROFIT
|
79,984 |
63,796 |
115,163 |
51,850 |
42,846 |
|||||||||||||||
|
Operating expenses: |
||||||||||||||||||||
|
Research and development |
12,325 |
13,601 |
12,114 |
6,541 |
5,060 |
|||||||||||||||
|
Selling, general and administrative
|
56,927 |
53,799 |
50,882 |
37,239 |
33,063 |
|||||||||||||||
|
Goodwill impairment
|
- |
- |
139 |
- |
- |
|||||||||||||||
|
Total operating expenses
|
69,252 |
67,400 |
63,135 |
43,780 |
38,123 |
|||||||||||||||
|
OPERATING INCOME (LOSS)
|
10,732 |
(3,604 |
) |
52,028 |
8,070 |
4,723 |
| |||||||||||||
|
Equity Income (loss) from investment in affiliates
|
- |
(97 |
) |
(983 |
) |
(790 |
) |
91 |
||||||||||||
|
Other income (expenses), net
|
1,584 |
113 |
(537 |
) |
(1,288 |
) |
(10,518 |
) | ||||||||||||
|
INCOME (LOSS) BEFORE INCOME TAX EXPENSES
|
12,316 |
(3,588 |
) |
50,508 |
5,992 |
|
(5,704 |
) | ||||||||||||
|
Income tax expenses
|
1,745 |
1,646 |
9,220 |
590 |
1,549 |
|||||||||||||||
|
NET INCOME (LOSS)
|
$ |
10,571 |
$ |
(5,234 |
) |
$ |
41,288 |
$ |
5,402 |
|
$ |
(7,253 |
) | |||||||
|
Net income (loss) attributable to non-controlling interests
|
3,490 |
(509 |
) |
6,481 |
999 |
789 |
| |||||||||||||
|
NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V.
|
$ |
7,081 |
$ |
(4,725 |
) |
$ |
34,807 |
$ |
4,403 |
|
$ |
(8,042 |
) | |||||||
|
BASIC NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V.
PER SHARE |
||||||||||||||||||||
|
Net income (loss)
|
$ |
0.19 |
$ |
(0.13 |
) |
$ |
0.66 |
$ |
0.12 |
|
$ |
(0.26 |
) | |||||||
|
Basic weighted average number of shares
|
37,433,333 |
37,433,333 |
37,433,333 |
35,827,854 |
30,524,461 |
|||||||||||||||
|
DILUTED NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL
N.V. PER SHARE |
||||||||||||||||||||
|
Net income (loss)
|
$ |
0.18 |
$ |
(0.13 |
) |
$ |
0.61 |
$ |
0.11 |
|
$ |
(0.26 |
) | |||||||
|
Diluted weighted average number of shares
|
39,423,506 |
37,433,333 |
40,237,340 |
38,424,718 |
30,524,461 |
|||||||||||||||
6
Risk Factors
You should carefully consider the risks described below regarding
the business and the ownership of our shares. If any of the risks are realized, our business, financial condition or results of operations
could be adversely affected, and the price of our common stock could decline significantly.
Labor Concerns
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 sick leave, 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, such as employee dismissal, may
lead to labor disputes. Most of these claims are covered by insurance. In the event such claims are not covered by the insurance, there
could be an adverse impact on the Company.
Our Contracts with Airports or Airlines may
be Cancelled or not Renewed
Our revenues are primarily provided from services pursuant to contracts,
which are cancellable on short notice at any time with or without cause. We cannot assure you that existing clients will decide not to
terminate our contracts or that we won’t fail to renew contracts. In some jurisdictions and operations, contracts are subject to
a tender detailing, inter alia, participation terms, cap pricing and award criteria. In addition,
consolidation in the airline industry could also result in a loss of customers. Any such termination, failure to renew a contract with
us and/or failure in tenders could have a material adverse effect on our results of operations and financial condition. If our relationships
with our major customers are impaired then there may be a material adverse effect on our results of operations and financial condition.
Our major customers include airports in Europe and major airlines servicing the United States of America. The aviation industry might
encounter difficulties and this may have a material adverse impact on our business.
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.
Results from Operations
The Company incurred net income (loss) of $10.6 million, $(5.2)
million and $41.3 million in 2023, 2022 and 2021, respectively. The 2022 and 2021 profits (losses) include special grants provided by
different governments as COVID-19 assistance to the company. The Company has a shareholders’ deficit of $2.6 million and $10.4 million
as of December 31, 2023 and 2022, 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.
7
Loans from Third Parties
Our financing activities have consisted in the past of loans from
banks and other third parties. Currently, two of the Company’s subsidiaries have a line of credit and a loan facility, while the
Company is looking for additional lines of credit for its other subsidiaries. There is no assurance that third parties will provide 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 service attacks, social engineering or other malicious activities or any combination
of the foregoing. The Company has in place policies and procedures to identify and manage cybersecurity risks. 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 because costs are a function of the size and nature of the incident. For more information see item 5 – Operating
and Financial Review and Prospects in this 20F report for additional information on cyber security.
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.
8
Operations in International Environments Risk
The Company is currently engaged in direct operations in numerous
countries and is therefore subject to risks associated with international operations (including economic and/or political instability,
conflict, trade restrictions, wars and striker). 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.
Our R&D facility is located in Israel and currently remain
largely unaffected following the war declared in Israel and the military activity in the region. However, the duration, severity and global
implications of these and other geopolitical conflicts that may arise in the future, cannot be predicted at this time and could have an
effect on our business as impact of our employees who are military reservists being called to active military duty, and the impact of
the war on the economic, social and political stability of Israel.
Governmental Regulation
Industries on which we operate are subject to extensive governmental
regulation, the impact of which is difficult to predict. In the past, 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 the Company. 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 or limit our growth in new airports.
Poor Economic Conditions
Poor economic conditions could adversely affect our business. Deterioration
in the global economic environment may result in decreased demand for our services. Weakening economic conditions could also affect our
customers, which may result in redirection of their request for our services.
Inflation
In the last years, record levels of inflation have resulted in
significant volatility and disruptions in the global economy. In response to rising inflation, central banks in the markets in which we
operate, including the United States Federal Reserve, have tightened their monetary policies and raised interest rates, and such measures
may continue if there is a period of sustained heightened inflation. Higher interest rates and volatility in financial markets could lead
to additional economic uncertainty or recession. Increased inflation rates have increased our operating costs, mostly labor costs. There
is no assurance that we will be able to promptly increase our pricing to offset our increased costs, or that our operations will not be
materially impacted by rising inflation and its broader effects on the markets in which we operate in the future. We have implemented
certain measures in response to such inflation pressures, including negotiating with major customers reimbursement for salary increase
following the inflation adjustments in the employees’ salaries. There is no assurance that we will be fully or partly successful
in those negotiations. In addition, the Company has a loan facility and a line of credit for two of its subsidiaries. The increased
interest rates will increase the Company's financing costs. We are continuing to monitor the effects of inflation on our business
performance and financial condition. However, we cannot accurately predict whether we will be able to effectively and timely mitigate
their impact on our business.
Currency Risk
A substantial portion of our revenue is generated in foreign countries.
We usually 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.
9
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 and the volume may be low, which may make it more difficult for you to resell
your shares.
Main Shareholders
As of May 1st, 2024, the MacPherson Trust, its beneficiaries and
Mr. M.J. Atzmon, own or control together approximately 76.6% of our issued and outstanding common stock (excluding conversion rights).
Mr. Atzmon, the Chairman of the Supervisory Board, disclaims any benefit or interest in the MacPherson Trust. As a result of such ownership
and conversion rights, the MacPherson Trust and its beneficiaries together with Mr. Atzmon are able to significantly influence and/or
control all matters requiring shareholder approval including the election of directors and approval of significant corporate transactions.
Such concentration may also have the effect of delaying or preventing a change in control. 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
There is no assurance the Company will pay any cash dividends on
our common stock in the foreseeable future.
The Ability of Shareholders to Bring Action
or Enforce Judgments Against the Company, the Managing Directors and the Supervisory Directors may be Limited Since ICTS is a Foreign
Company
The ability of shareholders of ICTS (Shareholders) to bring actions
against ICTS, the members of the management board of ICTS (“Management Board” and its members “Managing Directors”)
and the members of the supervisory board of ICTS (“Supervisory Board” and its members “Supervisory Directors”)
or to enforce liabilities predicated upon non-Dutch laws may be limited.
The Company is a public company with limited liability (naamloze
vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands. The corporate affairs of ICTS are governed
by the articles of association of ICTS (the Articles of Association) and by the laws governing companies incorporated in the Netherlands.
Significant number of ICTS’ assets and activities are located outside the United States of America. In addition, Managing Directors
and some of the Supervisory Directors are residents of countries other than the United States of America.
The United States of America and the Netherlands currently do not
have a treaty providing for reciprocal recognition and enforcement of judgments, other than arbitration awards, in civil and commercial
matters. In addition, the countries of residence of the Managing Directors, the Supervisory Directors and of the Company’s employees
may also not have a treaty providing for the reciprocal recognition and enforcement of judgments. Consequently, a final judgment for payment
rendered by an US court that is enforceable 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. In order to obtain a judgment which is enforceable in the Netherlands, the claim
must be relitigated before a competent Dutch court. A Dutch court will, under current practice, generally grant the same judgment without
relitigating on the merits if the judgment by the US court (i) results from proceedings compatible with the Dutch concept of due process,
(ii) does not contravene public policy (openbare orde) of the Netherlands, (iii) has been based on an internationally acceptable ground
and (iv) is not incompatible with a judgment rendered between the same parties by a Dutch court, or with an earlier judgment rendered
between the same parties by a non-Dutch court in a dispute that concerns the same subject and is based on the same cause, provided that
the earlier judgment qualifies for recognition in the Netherlands. 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
governed exclusively by the Dutch Civil Procedure Code (Wetboek van Burgerlijke Rechtsvordering) and relevant case law.
10
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 solely act in the best interests of the Company, which in principle
is determined by the continued success of the company with a view to sustainable long-term value creation. It is generally accepted that,
in discharging this duty, the Management Board and Supervisory Board must take into account the reasonable interests of all the company’s
stakeholders, including its shareholders, employees and creditors. There will generally not be one prevailing stakeholder interest and
so directors will often have discretion in balancing those interests. It is possible that some of these parties will have interests that
are different from, or in addition to, the interests of the Shareholders.
Item 4.
Information on the Company
ICTS is a public limited liability company organized under the
laws of The Netherlands since 1992. Our offices are located at Walaardt Sacréstraat 425-5, 1117 BM Schiphol-Oost, The Netherlands
and its telephone number is +31-20-347-1077.
History and Development of the Company:
Aviation Security
The Company provides aviation security through its subsidiary I-SEC
International Security B.V. and its subsidiaries.
In 2001 and 2002, ICTS sold its European aviation security operations
in two stages for an aggregate purchase price of $103 million. As a result of the sale ICTS divested itself at that time from most of
its European operations.
In February 2005 the Company decided to re-enter the European aviation
security market. In March 2005, the Company established a wholly owned subsidiary, I-SEC International Security B.V. and Subsidiaries
(“I-SEC”), under which all the airport security activities provided by ICTS are operated. Thereafter, I-SEC established new
subsidiaries throughout Europe and the Far East.
Other Aviation Related
Services Businesses
The Company provides other aviation related services in the United
States of America through its subsidiary Huntleigh U.S.A. (“Huntleigh”).
Authentication Technology
Business
Our technology business is primarily involved in the services of
authentication security to financial and other companies, mainly in the United States of America and Europe through its subsidiary (68.69%)
AU10TIX.
Business Overview
General
ICTS provides the following services through its subsidiaries as
follows:
I-SEC provides mainly aviation security services at airports in
Europe and the Far East.
Huntleigh provides for the most part non-security other aviation
related services in the United States of America.
AU10TIX develops technological systems and provides authentication
solutions for financial and other companies.
Business Strategy
We are currently pursuing the following business strategy:
Aviation Security and Critical Infrastructure Operations in Europe
and the Far East
Through the I-SEC subsidiaries, we supply aviation and other high-end
security services to airports, airlines, governments and critical infrastructure facilities in Europe and the Far East. Currently, I-SEC
provides aviation security services to two out of the five largest airports in Europe. I-SEC is focused on the critical infrastructure
operations in the countries where we are present, next to our core business (airports, airlines, cargo). I-SEC is continuously looking
for ways to extend its operations mostly in existing locations.
11
Other Aviation Related Services in the U.S.A.
Through Huntleigh we provide limited security services and non-security
other aviation related services in the U.S.A. Huntleigh is continuously looking for ways to extend its operations in new and existing
locations.
Developing Authentication Technologies
Through AU10TIX, we are focusing on developing authentication technologies
in order to provide authentication services to financial and other markets worldwide. AU10TIX is continuously looking for ways to extend
the services it provides worldwide 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 services in 4 fields: Airports, Airlines, Cargo and General (High-risk) Security. Furthermore, I-SEC
offers Consulting, Training, Auditing and Technology in all those fields.
The Company benefits from the broad know-how and international
operational experience it has acquired in more than three 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 airports and airlines with varying operational volumes and needs.
I-SEC has operations in The Netherlands, Germany, Spain, Italy,
Denmark, Sweden, Finland and Norway. Additionally, I-SEC currently operates at four major airports in Japan providing airline services
such as passenger handling services, secondary screening and training to airlines.
Building on its management’s strong reputation and on its
broad know-how and experience, I-SEC is committed to providing its clients with security services at the highest professional level, while
offering unprecedented cost savings. The Company constantly upgrades its services, trains its employees and applies a state-of-the-art
quality management system in order to ensure that amendments in regulatory requirements as well as changes in the threat environment and
developing needs are at all times respected.
I-SEC Aviation Security Services
Airports:
Related to airports, I-SEC offers a wide range of services. They
include Security Screening of passengers as well as hold baggage, vehicles and employees performed at the highest level for its clients.
The Company trains its staff to perform screening at checkpoints, both efficiently and effectively, fully complying with regulatory and
client requirements on the one hand and focusing on hospitality and customer service requirements on the other hand.
Upon clients’ requirements, the services may be extended
to cover as well Behavior detection on crowds and queues while maintaining passenger privacy and confidentiality at all times in accordance
with all relevant regulations issued by both US and EU regulators. Furthermore, I-SEC is actively engaged in delivering Perimeter guarding,
CCTV surveillance and Vehicle marshalling if required.
Services related to Airports:
| • |
Security Screening: |
| o |
Passenger and hand luggage |
| o |
Hold baggage |
| o |
Employees / Staff |
| o |
Access control and vehicles |
| • |
Behavior detection on crowds and queues |
| • |
Perimeter guarding / patrolling |
| • |
CCTV surveillance and/or alarm resolution |
| • |
Vehicle marshalling |
12
Airlines:
Delivering services to airlines requires a high proficiency in
Security services combined with Hospitality requirements of the client, operational processing and knowledge of regulatory requirements
from international authorities (e.g. TSA) and authorities at the location of the operations. I-SEC is well equipped to deliver a wide
variety of such integrated services linking security with customer service. I-SEC’s performance is based on numerous years of experience
and expertise and fully complies with all local, national and international regulatory requirements. They as well include many customer
service functions enabling airlines to improve customer services while reducing manpower needs and operational costs.
Services related to Airports:
|
a. |
Above Wing Services: |
| • |
Security: |
| o |
Security interviewing |
| o |
Behavior detection |
| o |
Escort of valuables and weapons |
| • |
Handling (Check-in, Ticketing, Boarding, etc) |
| b. |
Below Wing Services: |
| • |
Ramp guarding |
| • |
Door guarding |
| • |
Interior and exterior searches |
| • |
Catering guarding |
| • |
Bag room guarding |
| • |
Selectee search |
Cargo Security
I-SEC provides a range of services that focuses on Screening of air cargo for global
forwarding companies and Cargo Centers. Also in this area, the highest standards are applied. The Company supports not only in the provision
of related services but also implements dedicated Security programs, trains the client’s staff and management team and deploys explosives
detection dogs to support in the efficient screening of goods.
Services related to Cargo:
| • |
Cargo Screening |
| • |
Explosives Detection Dogs |
| • |
Access control (Guard duties and airside gate checks) |
| • |
Vehicle marshalling |
General
(high-risk) Security:
The requirements especially in the EU for a higher degree of security
in so-called Critical Infrastructure has led I-SEC to offer its services in these areas as well. I-SEC delivers a variety of services
which are similar to those offered to airports and airlines stemming from a different legal requirement and based on a different regulatory
framework. I-SEC’s professionalism and experience in the said fields puts it in an advantageous position to also offer general security
services requested by clients all over the world.
Services related to General Security:
| • |
Security search and screening services |
| • |
Access control |
| • |
Perimeter guarding / patrolling (Including weapons and dogs) |
| • |
Security host & reception services |
| • |
CCTV surveillance and/or alarm resolution |
Training
/ Consulting / Auditing
I-SEC’s Training Programs are the product of over 30 years
of expertise and experience in the development of training materials covering every aspect of airline and airport as well as cargo security
operations and their implementation worldwide. They are similarly suitable to be implemented in Critical Infrastructure facilities and
for High-End guarding services.
13
Aviation security and security awareness training courses are offered,
which 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-the-job training. Sophisticated training aids are employed to make the training experience
more efficient and interesting, thus ensuring optimal results.
The identification of the risks relevant to the particular site
or operation, and the grading according to their potential damage and probability enables I-SEC to develop security concepts and design
a security system that will effectively deal with these risks. 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. For over three decades
I-SEC specialists have been assisting their clients 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.
Furthermore, I-SEC’s expert security consultants specialize
in the performance of airport security surveys and audits. Surveys can range from individual aspects of airport security to comprehensive,
all-encompassing surveys. Special attention is put on the verification of compliance with applicable regulation and the presentation of
recommendations regarding any amendments that may be required. As security systems are only effective if they continue to address existing
and anticipated threats and to fully comply with international, national and local regulatory requirements, periodical aviation security
audits are of vital importance. I-SEC experts possess vast international experience in the performance of such audits and the recommended
steps that must be taken to ensure full compliance and suitability of the aviation security system.
Aviation Security Technology
In the interest of enabling clients 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 customer information and is designed to help filter airline customers 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.
X-CHECK & I-CHECK
X-Check and I-Check support airline staff, security or filtering
agents with customer processing. Using NAPS to perform automated customer filtering for different reasons, like security vetting, reducing
in-admissible and optimizing customer flow by reducing touchpoints. The application turns a tablet or cell phone into an extremely fast
and accurate passport and barcode scanner. Once the X-Check tablet app is connected to the X-Check infrastructure, a wide variety of functionalities
including NAPS customer filtering, becomes available guiding the airline, security and or filtering agents and supervisors intuitively
through the features and functionalities.
Services Offered in the
United States of America
As of December 31, 2023 Huntleigh provides limited aviation security
services and other aviation related services at approximately 31 airports in 22 states.
The limited security services provided by Huntleigh involve the
following:
• Private
Charter Flight Screening for Airlines - which includes security check of passengers’ body and carry-on items.
• Cargo
Security Screening – for some international and domestic carriers.
• Catering
Security Screening – for some international and domestic carriers.
• Aircraft
Security Screening – for some international and domestic carriers.
• Aircraft
Search – search of the entire aircraft to detect dangerous objects.
• Employee Screening
- check of employees entering and leaving a facility.
Each of the non– security services involve one of the following
specific job classifications:
Agent
Services for Airlines
Agent services include vendor behind counters and baggage service
(BSO). Although an agent is a Huntleigh employee, the employee is considered a representative of specific airlines.
14
Guard Services
Guard services involve guarding secured areas including aircraft.
Huntleigh also provides guard services to schools, places of worship, homeowners association, events, etc. In addition, Huntleigh is offering
and providing camera security monitoring services.
Queue Monitors
Huntleigh provides queue monitors assisting passengers before the
checkpoint.
Aircraft Cleaning
Huntleigh provides employees who perform aircraft cleaning services
such as the following:
• Cleaning the aircraft interior
• Conducting cabin searches
• Waxing the aircraft exterior
Janitorial
Huntleigh provides janitorial services to airline airport offices,
airline terminal areas, airline gates and office buildings.
Shuttle Service
Huntleigh provides shuttle services to airline crews between hotel
and airport.
Skycap Services Provider
A skycap assists passengers with their luggage. Located at the
curb side of the check-in at airports, a skycap checks in passengers’ luggage and meets security requirements established by the
TSA to screen passengers. A skycap also assists arriving passengers with transporting luggage from the baggage carousel to ground transportation
or other designated areas.
A skycap also may transport checked baggage from the curb side
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 as well as in some cases move the baggage which was not collected by passengers to a Baggage Service Office (BSO).
Cruise line baggage transfer
Huntleigh provides baggage handlers from the airport to the seaport
and vice versa for cruise line passengers as well the trucks and Drivers to move the bags.
VIP Meet and Greet Services
Huntleigh provides VIP meet and greet services of assisting passengers
with the transition through the airport on arrival and / or departure.
Equipment for Passengers
with Restricted Mobility
In December 2019, Aviation Mobility Solutions Inc. a subsidiary
of Huntleigh, was formed in order to find, evaluate and deliver new and innovative products for passengers with restricted mobility. Equipment
examples are: E-mobby, Multi Mobby and Mobby wheelchairs.
15
Authentication Systems and Solutions
AU10TIX, an identity management company, is on a mission to obliterate
fraud and further a more secure and inclusive world. The company provides critical, modular solutions to verify and link physical and
digital identities so businesses and their customers can confidently connect. Over the past decade AU10TIX has become the preferred partner
of major global brands for customer onboarding and customer verification automation and continues to work on the edge of what’s
next for identity’s role in society. AU10TIX’s proprietary technology provides results in less than 8 seconds, enabling businesses
to onboard customers faster while preventing fraud, meeting compliance mandates and, importantly, promoting trust and safety.
AU10TIX stands at the forefront of identity management, dedicated
to stamping out fraud and building a safer business environment. With decades of mature technology, our award-winning and innovative products
offer modular, cutting-edge solutions to verify and link physical and digital identities so businesses and their customers can confidently
connect. Our scalable and flexible technology adapts in real-time to the shifting dynamics of fraud, offering a versatile solution for
any business, industry, and use case. Delivering an exceptional user experience, AU10TIX's system achieves verification results within
seconds, driving higher conversion rates by meeting diverse customer onboarding and verification needs with precision. As a trusted partner
for global brands, our commitment to trust, safety, and compliance is unwavering, enabling businesses to grow confidently with the assurance
that every identity challenge they face is met.
Product & Technology
AU10TIX’s modular SaaS offering for identity verification
and fraud prevention automates the capture, extraction and validation from physical and digital ID documents. AU10TIX speeds up
customer screening and enrollment while enhancing security and identity fraud prevention with fully automated (i.e., no data entry or
back-office dependencies) multi-level fraud protection, counterfeiting and risk factor detection and higher conversion rates of borderline
quality images. AU10TIX technology, in addition, is data-rich and has fast-response exception reporting and multi-lingual document content
support while providing rapid processing (typically 8 seconds or less for the complete verification process).
AU10TIX technology is designed for security-sensitive and business-sensitive
environments such as airports, border control, financial services, etc, which require hi-resolution document imaging, auto image optimization,
auto-classification of documents up to version level, extraction of readable + encoded content including MRZ lines and barcodes. The automated
technology provides real-time verification of both data and visual across , multi-factor identity authentication immediate detailed exception
alerts, the ability to integrate with chip readers and barcode readers, integrate with biometric inputs and to query date against databases
or watch-lists.
AU10TIX’s core IDV engine along with products like the Identity
Verification Suite, KYB solution, and Digital services, automates all essential components of KYC and KYB initiation in regulated markets
including ID document authentication, face matching, Proof-Of-Address processing, identity data verification and screening (eIDVS), and
business and UBOs verification.
AU10TIX enables fully automated ID image recognition and optimization,
pre-screening, content retrieval, forgery, counterfeiting collateral risk flag detection and exception reporting. Customers are also offered
SDK packages to improve and control ID and face image capturing by customers.
This portfolio of services enables service providers to rapidly
automate customer onboarding and AML/KYC/ KYB processes.
AU10TIX incorporates advanced AI algorithms and advanced neural
networks that increase the accuracy of analyzing images at a broad range of image quality levels for various types of official ID documents.
The system is designed to handle images that originate from any common imaging device including mobile phones, tablets, computer webcams,
etc.
AU10TIX is relevant for a variety of commercial and government
global markets many of which are required to comply with KYC/AML regulations. The technology can be integrated with additional Identity
Data Verification and Screening (eIDV/eIDVS) as a client or 3rd party augmented service or seamlessly integrated into AU10TIX’s
ID authentication and POA handling components, enabling automated submission of customer data to the required person and address verification
services, as well as screening services such as PEPs & Sanctions, watchlists, etc, through a single API call.
Target Markets
Key markets for AU10TIX are financial services including banking,
insurance, payments, wallets, money transfer, lending, remittance, online investments, trading and forex, cryptocurrency exchanges, rental
services, sharing economy, professional services, telecommunications and social media, etc.
16
Investments
Manuka, Inc. (Previously Artemis Therapeutics,
Inc.)
As of December 31, 2023, the Company owns less than 1% of the issued
and outstanding share capital of Manuka, Inc. (“MNKA”). MNKA is a company incorporated in Israel engaged in developing and
manufacturing skincare products based on Manuka honey and bee venom. The market value of the Company’s investment in MNKA as of
December 31, 2023 and 2022 is $0.0 million and $0.1 million, respectively. The Company evaluated the stock price of MNKA but as MNKA share
price is low, the number of shares that are being traded is low and as MNKA still does not have any material revenue or profitable operations,
the Company determined that the value of the investment is impaired and accordingly, valued the investment at zero.
Freezone I-SEC Korea Inc.
In April 2018, the Company signed a Joint Venture Agreement with
a South Korean Company in order to establish a Joint Venture Company (“JVC”) and to provide aviation security and non-security
services in South Korea. Each one of the parties held 50% (fifty percent) of the JVC’s equity. In January 1, 2023, the Company sold
its part in the JVC to the South Korean Company for an amount of €25 thousand ($27 thousand as of December 31, 2022). At December
31, 2022 the Company wrote off $0.1 million of the investment to match the value of the investment in its books to the sale price.
Mesh Technologies, Inc.
In January 2019, the Company invested an amount of $0.1 million
in Mesh Technologies, Inc. (“Mesh”), a company incorporated in the USA. The investment represents less than 1% of the issued
and outstanding share capital of Mesh. Mesh is a technology company providing cross-border payments technology by innovating on the existing
payment rails of established card networks available in the market. As Mesh is a private, closely-held company, there is no active market
for this investment. Therefore, the Company measures the investment at cost minus impairment. In December 2021, the Company sold approximately
25% of its investment for a total amount of $0.2 million and recognized similar gain from the sale.
Arrow Ecology & Engineering Overseas (1999)
In December 2019, the Company invested an amount of $1.8 million
in Arrow Ecology & Engineering Overseas (1999) Ltd (“Arrow”), a limited company incorporated in Israel. Arrow develops
and operates a sustainable green process to recycle mixed and sorted municipal solid waste. Arrow is in discussions to build plants in
various locations. The Company purchased few types of shares representing 22.6% of Arrow’s equity for an amount of $22 thousand
and shareholders loans were purchased for a price of $1.7 million ($4.1 million stated value less $2.4 million allowance for credit losses
which have not changed since the acquisition). The Company uses the equity method for this investment. During the years ended December
31, 2023, 2022 and 2021, the Company recognized its share in Arrow losses in the amount of $0 million, $0 million and $1.0 million, respectively,
from this investment.
The Company suspended its use of the equity method to accounting
for this investment in 2023 after its investment balance was reduced to zero.
The Company has an agreement with an entity related to its main
shareholder, according to which, if the value of the investment decreases, 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
on January 1, 2025. Some Directors, managers and shareholders of Arrow are related parties of the Company.
GreenFox Logistics LLC.
In March 2020, the Company invested an amount of $0.1 million in
GreenFox Logistics, LLC. (“GreenFox”), a company incorporated in the USA. The investment was done as SAFE investment (Simple
Agreement for Future Equity). GreenFox is an on-demand delivery/moving/transportation company. As GreenFox is a private, closely held
company, there is no active market for this investment. Therefore, the Company measures the investment at cost minus impairment.
Sardine AI Corp.
In August 2020, the Company invested an amount of $0.1 million
in SardineAI Corp (“SardineAI”), a company incorporated in the USA. In return, the Company received preferred shares representing
less than 1% of SardineAI equity. SardineAI is a Fraud Prevention-as-a-Service (FaaS) platform for Digital businesses to detect frauds
and financial crimes. As SardineAI is a private, closely held company, there is no active market for this investment. Therefore, the Company
measures the investment at cost minus impairment. In January 2023, the Company sold approximately 85% of its investment for a total amount
of $0.8 million.
17
Silver Circle One
In December 2021, March 2022 and December 2022, the Company invested
a total amount of $38 thousand in Silver Circle One, a capital fund which aims to invest in private emerging companies with focus on consumer,
commerce and technology companies. The company committed to invest up to $0.1 million on the pool. As Silver Circle One is a private,
closely-held fund, there is no active market for this investment. Therefore, the company measures the investment at cost minus impairment.
Justt Fintech Ltd (previously Acrocharge Ltd)
In December 2021, the Company invested an amount of $0.1 million
in Justt Fintech Ltd (“Justt”), a company incorporated in Israel. As of December 31, 2023, the investment represented less
than 1% of the issued and outstanding share capital of Justt Fintech Ltd. Justt is a technology company which fully automated chargeback
disputes on behalf of online merchants. As Justt is a private, closely-held company, there is not active market for this investment. Therefore,
the Company measures the investment at cost minus impairment.
Nilus OS Ltd
In March 2022, the Company invested an amount of $25 thousand in
Nilus OS Ltd. (“Nilus”), a company incorporated in Israel. As of December 31, 2023, the investment represented less than 1%
of the issued and outstanding share capital of Nilus. Nilus is a company that automates payment and financial workflows for platforms
that involve transfers of money. As Nilus is a private, closely-held company, there is no active market for this investment. Therefore,
the Company measures the investment at cost minus impairment.
Revenue
Revenue generated from customers by geographical area based on
the geographical location of the customers invoicing address is as follows:
Revenue in Germany
Our revenue in Germany during the years 2023, 2022 and 2021 totaled
$114.2 million (26% of total revenue), $111.8 million (34% of total revenue) and $126.4 million (39% of total revenue), respectively.
Revenue in the U.S.
Our revenue in the United States of America during the years 2023,
2022 and 2021 totaled $99.7 million (23% of total revenue), $88.3 million (27% of total revenue) and $94.7 million (29% of total revenue),
respectively.
Revenue in The Netherlands
Our revenue in The Netherlands during the years 2023, 2022 and
2021 totaled $101.5 million (24% of total revenue), $63.8 million (20% of total revenue) and $52.2 million (16% of total revenue), respectively.
Revenue in Spain
Our revenue in Spain during the years 2023, 2022 and 2021 totaled
$82.2 million (19% of total revenue), $39.4 million (12% of total revenue) and $30.9 million (10% of total revenue), respectively.
Revenue in Other Locations
Our revenue in other locations during the years 2023, 2022 and
2021 totaled $33.9 million (8% of total revenue), $21.5 million (7% of total revenue) and $20.7 million (6% of total revenue), respectively.
18
Major
Customers
Revenue from two customers represented 34% of total revenue during
the year ended December 31, 2023, of which customer A accounted for 20% and customer B accounted for 14% of total revenue. Accounts receivable
from these two customers represented 20% of total accounts receivable as of December 31, 2023.
Revenue from two customers represented 52% of total revenue during
the year ended December 31, 2022, of which customer A accounted for 34% and customer C accounted for 18% of total revenue. Accounts receivable
from these two customers represented 31% of total accounts receivable as of December 31, 2022.
Revenue from three customers represented 64% of
total revenue during the year ended December 31, 2021, of which customer A accounted for 39%, customer B accounted for 14% of total revenue
and customer C accounted for 11% of total revenue. Accounts receivable from these three customers represented 39% of total accounts receivable
as of December 31, 2021.
Customers A and C mentioned above, have been principal
customers in the last three years. Revenue and receivables from customer B in 2023 used to be presented in previous years as part of customer
C. In 2023 there have been some changes in the structure of customer C and revenue is being split between few customers. For comparative
purposes, total revenue of those customers in 2023 would have been 19% of total revenue. Accounts receivable from customers A and C would
represent 12% of total accounts receivable as of December 31, 2023.
Aviation
Security Regulatory Matters
Our aviation security activities are subject to various regulations
imposed by authorities and various local and federal agencies having jurisdiction in the serviced area. The Company, on behalf of its
clients, is responsible for adherence to such regulations relating to certain security aspects of their activities. The Company is also
responsible to prevent passengers without proper travel documentation from boarding a flight, thereby avoiding fines otherwise imposed
on its clients by immigration authorities. We are subject to random periodic tests by government authorities with regard to the professional
level of its services and training. Any failure to pass such a test may result in the loss of a contract or a license to perform services
or a fine or both. In the airports in which we operate, a license to operate is required from the respective airport authority. The Company
currently holds the licenses required to operate in such locations.
Climate
Change Regulation
Our business is not affected directly or indirectly in any way
by existing and pending, local, state, regional, federal or international legal requirements and agreements related to climate change.
19
Organizational Structure
The following are the active subsidiaries of ICTS as of December
31, 2023:
I-SEC Global Security B.V. (The Netherlands - 100%) and its wholly-owned
subsidiaries:
I-SEC International Security B.V. (The Netherlands - 100%), which
holds the shares of:
I-SEC Benelux Holdings B.V. (Netherlands - 100%) which holds the
shares of:
I-SEC Nederland B.V. (Netherlands – 100%)
I-SEC Nederland Security Services B.V. (Netherlands – 100%)
I-SEC Belgium Aviation Security B.V. (Belgium – 100%)
I-SEC Spain Holdings B.V. (Netherlands - 100%) which holds the
shares of:
I-SEC Spain Services Management S.L. (Spain - 100%)
I-SEC Spain Security Management S.L. (Spain – 100%)
I-SEC Aviation Security S.L. (Spain – 100%)
I-SEC Nordic Holding B.V. (Netherlands – 100%) which holds
the shares of:
I-SEC Denmark Aviation Security A.S (Denmark – 100%)
I-SEC Norway Aviation Security A.S. (Norway – 100%)
I-SEC Finland Aviation Security O.y (Finland – 100%)
I-SEC Sweden Aviation Security A.B. (Sweden – 100%)
I-SEC German Holding B.V. (Netherlands – 100%) which holds
the shares of:
I-SEC Security Services GmbH (Germany - 100%)
I-SEC German Aviation Holdings 1 B.V. (Netherlands – 100%)*
which holds the shares of:
I-SEC Verwaltungs SE (Germany – 100%)**
I-SEC Deutsche Luftsicherheit SE&Co.KG (Germany – 100%)
I-SEC German Special Operations B.V. (Netherlands – 100%)
I-SEC Tech B.V. (Netherlands – 100%)
I-SEC Italia s.r.l. (Italy - 100%), which holds the shares of:
I-SEC Italia Services s.r.l. (Italy – 100%)
I-SEC Japan K.K. (Japan - 100%)
ICTS USA, Inc. (New York - 100%) which holds the shares of:
Huntleigh USA Corporation (Missouri, USA - 100%)
Aviation Mobility Solutions, Inc (Texas, USA – 100%)
AU10TIX Technologies B.V. (The Netherlands – 69%,) which
holds the shares of:
AU10TIX Limited (Cyprus – 100%) which holds the shares of:
AU10TIX B.V. (The Netherlands – 100%) which holds the shares
of:
AU10TIX Ltd. (Israel – 100%), which holds the shares of:
AU10TIX Services Inc. (Texas, USA – 100%)
*I-SEC German Aviation Holdings 1 B.V. is a limited partner (100%)
of I-SEC Deutsche Luftsicherheit SE&Co.KG (Germany)
**I-SEC Verwaltungs SE is a general partner (0%) of I-SEC Deutsche
Luftsicherheit SE&Co.KG (Germany).
20
Property, Plant and Equipment
The Company leases certain premises under various operating leases.
Maturities of operating lease liabilities as of December 31, 2023 were as follows (in millions):
|
Year ended December 31, |
||||
|
2024 |
$ |
4.2 |
||
|
2025 |
1.7 |
|||
|
2026 |
1.1 |
|||
|
2027 |
0.8 |
|||
|
2028 |
0.3 |
|||
|
Thereafter |
- |
|||
|
$ |
8.1 |
|||
Lease expenses for the years ended December 31, 2023, 2022 and
2021 are $6.5 million, $6.2 million and $6.0 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 managements’ 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 four reportable segments (a) corporate
(b) airport security (c) other aviation related services and (d) authentication technology. Until December 31, 2021 the Company used to
present the results of the airport security and the other aviation related services as one consolidated segment. The corporate segment
does not generate revenue and contains primarily non-operational expenses. The airport security segment provides security services primarily
to airport authorities and airlines predominantly in Europe. The other aviation related services segment provides services primarily to
airlines and airport authorities in the United States of America. The authentication technology provides authentication services to financial
and other companies, predominantly in the United States of America. All inter-segment transactions are eliminated in consolidation. The
accounting policies of the segments are the same as the accounting policies of the Company as a whole.
Critical Accounting Estimates
The consolidated financial statements have been prepared in accordance
with U.S. GAAP. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
Our critical accounting policies that require the use of judgment and estimates are: (a) valuation allowance of deferred income taxes
and (b) determination of the estimated fair value of the AU10TIX preferred shares conversion in 2021. Please refer to Note 2 of ICTS’s
consolidated financial statements included in this Annual Report for the year ended December 31, 2023 for a summary of ICTS’s significant
accounting policies.
Income Taxes
The Company accounts for income taxes using the liability method.
Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the
period that includes the enactment date. A valuation allowance is established when realization of net deferred tax assets is not considered
more likely than not.
21
Uncertain income tax positions are determined based upon the likelihood
of the positions being sustained upon examination by taxing authorities. The benefit of a tax position is recognized in the consolidated
financial statements in the period during which management believes it is more likely than not that the position will not be sustained.
Income tax positions taken are not offset or aggregated with other positions. Income tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of income tax benefit that is more than 50 percent likely of being realized if
challenged by the applicable taxing authority. The portion of the benefits associated with income tax positions taken that exceeds the
amount measured is reflected as income taxes payable.
Redeemable Non-Controlling
Interests
When the Company or its subsidiaries issues preferred shares, it
considers the provisions of Accounting Standards Codification (“ASC”) 480 –”Distinguishing Liabilities from Equity”
(Topic 480) in order to determine whether the preferred share should be classified as a liability. If the instrument is not within the
scope of Topic 480, the Company or its subsidiaries further analyses the instruments characteristics in order to determine whether
it should be classified within temporary equity (mezzanine) or within permanent equity in accordance with the provisions of Topic 480-10-S99.
AU10TIX redeemable convertible preferred shares are not mandatorily or currently redeemable. However, it includes a liquidation or
deemed liquidation events that would constitute a redemption event that is outside of the Company’s control. As such, all shares
of redeemable preferred shares have been presented outside of permanent equity. The Company has not adjusted the carrying values
of the redeemable preferred shares to the deemed liquidation values of such shares since a liquidation event was not probable at any of
the balance sheet dates. Subsequent adjustments to increase or decrease the carrying values to the ultimate liquidation values will be
made only if and when it becomes probable that such a liquidation event will occur.
Following the SPA on June 28, 2021, the Company has assessed whether
the change in the terms of the AU10TIX Preferred Shares (“Preferred Shares”) following the closing of the 2021 SPA constituted
a modification or extinguishment for accounting purposes by comparing the fair value of these Preferred Shares immediately before and
immediately after the closing of the 2021 SPA. An extinguishment occurs when the difference in fair value exceeds 10%, while a modification
occurs when such fair value difference is lower than 10%.
Additionally, the carrying value of the Series A-1 Shares, which
were previously presented among non-controlling interests, were reclassified to redeemable non-controlling interests and initially recognized
at their fair value following their re-designation as New Series A Preferred Shares.
Following the modification and extinguishment of the Preferred
Shares and the reclassification of the Series A-1 Shares, in 2021 the Company adjusted the carrying value of the redeemable non-controlling
interests by $9.1 million, with a corresponding decrease to additional paid-in capital and non-controlling interests in the amounts of
$10.1 million and $1.0 million, respectively.
22
Discussion and Analysis of the Results of Operations
The following table summarizes our results of operations for the
years ended December 31, 2023, 2022 and 2021. However our discussion of the results of operations excludes the comparison of the results
for the years ended December 31, 2022 and 2021. 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, 2022 which was filed with the SEC on May 10, 2023.
|
U.S. Dollars in Thousands |
||||||||||||
|
Year ended December 31, |
||||||||||||
|
2023 |
2022 |
2021 |
||||||||||
|
Revenue |
$ |
431,542 |
$ |
324,977 |
$ |
324,934 |
||||||
|
Cost of revenue |
351,558 |
261,181 |
209,771 |
|||||||||
|
Gross profit |
79,984 |
63,796 |
115,163 |
|||||||||
|
Operating expenses: |
||||||||||||
|
Research and development
|
12,325 |
13,601 |
12,114 |
|||||||||
|
Selling, general and administrative
|
56,927 |
53,799 |
50,882 |
|||||||||
|
Goodwill impairment
|
- |
- |
139 |
|||||||||
|
Total operating expenses
|
69,252 |
67,400 |
63,135 |
|||||||||
|
OPERATING INCOME (LOSS) |
10,732 |
(3,604 |
) |
52,028 |
||||||||
|
Equity loss from investment in affiliates
|
- |
97 |
983 |
|||||||||
|
Other income (expenses), net |
1,584 |
113 |
(537 |
) | ||||||||
|
INCOME (LOSS) BEFORE INCOME TAX EXPENSES
|
12,316 |
(3,588 |
) |
50,508 |
||||||||
|
Income tax expenses |
1,745 |
1,646 |
9,220 |
|||||||||
|
NET INCOME (LOSS) |
10,571 |
(5,234 |
) |
41,288 |
||||||||
|
Less: Net income (loss) attributable to non-controlling interests |
3,490 |
(509 |
) |
6,481 |
||||||||
|
NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V |
$ |
7,081 |
$ |
(4,725 |
) |
$ |
34,807 |
|||||
23
The following table sets forth, for the annual periods indicated, certain results of
operations data as a percentage of revenue for the years ended December 31, 2023, 2022 and 2021:
|
Year ended December 31, |
||||||||||||
|
2023 |
2022 |
2021 |
||||||||||
|
Revenue |
100.0 |
% |
100.0 |
% |
100.0 |
% | ||||||
|
Cost of revenue |
81.5 |
% |
80.4 |
% |
64.6 |
% | ||||||
|
Gross profit |
18.5 |
% |
19.6 |
% |
35.4 |
% | ||||||
|
Research and development |
2.9 |
% |
4.2 |
% |
3.7 |
% | ||||||
|
Selling, general and administrative |
13.1 |
% |
16.5 |
% |
15.7 |
% | ||||||
|
Goodwill impairment |
- |
- |
% |
- |
% | |||||||
|
Total operating expenses |
16.0 |
% |
20.7 |
% |
19.4 |
% | ||||||
|
OPERATING INCOME (LOSS) |
2.5 |
% |
(1.1 |
)% |
16.0 |
% | ||||||
|
Equity loss from investment in affiliates
|
- |
(- |
)% |
(0.3 |
)% | |||||||
|
Other income (expenses), net |
0.4 |
% |
- |
% |
(0.2 |
)% | ||||||
|
INCOME (LOSS) BEFORE INCOME TAX EXPENSES |
2.9 |
% |
(1.1 |
)% |
15.5 |
% | ||||||
|
Income tax expenses |
0.5 |
% |
0.5 |
% |
2.8 |
% | ||||||
|
NET INCOME (LOSS) |
2.4 |
% |
(1.6 |
)% |
12.7 |
% | ||||||
|
Less: Net income (loss) attributable to non-controlling interests |
0.8 |
% |
(0.1 |
)% |
2.0 |
% | ||||||
|
NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V |
1.6 |
% |
(1.5 |
)% |
10.7 |
% | ||||||
The following table sets forth, for the annual periods indicated,
the Company’s revenues generated from customers by geographical area based on the geographical location of the customers invoicing
address:
|
(U.S. Dollars in Thousands) |
||||||||||||
|
Year ended December 31, |
||||||||||||
|
2023 |
2022 |
2021 |
||||||||||
|
Germany |
$ |
114,176 |
$ |
111,826 |
$ |
126,367 |
||||||
|
United States of America |
99,765 |
88,333 |
94,743 |
|||||||||
|
The Netherlands |
101,512 |
63,842 |
52,165 |
|||||||||
|
Spain |
82,217 |
39,448 |
30,946 |
|||||||||
|
Other |
33,872 |
21,528 |
20,713 |
|||||||||
|
Total Revenue |
$ |
431,542 |
$ |
324,977 |
$ |
324,934 |
||||||
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
During the years ended December 31, 2021 and 2020 the COVID-19
outbreak developed rapidly. As a result, there was a decrease of travel by flights, reducing the demand for services the Company provide
as part of its airport security and other aviation services. Our cumulative revenues during those years were lower than our revenues in
previous years. During 2022 we have seen improvement and partial recovery in the aviation industry. However, in some locations, the industry
suffered from a shortage in manpower making it difficult to handle the growing demand. The Company has overcome the manpower shortage
in most of the locations in which it operates by the end of 2022 so that the revenue of the year ended December 2023 represents a full
year of operations on a regular base.
During 2022 and 2021, governments in some of the countries in which
we operate implemented the government assistance measures, which mitigated the impact of the COVID-19 outbreak on our results and liquidity.
In the United States of America, the government has approved a payroll support of $0.0 million and $15.9 million, for the years ended
December 31, 2022 and 2021 to the American subsidiary of the Company. The American subsidiary recognized amounts of $0.0 million, $0.0
million and $16.9 million as reduction of labor expenses for the years ended December 31, 2023, 2022 and 2021, respectively.
For the years ended December 31, 2022 and 2021, the Dutch government
has provided financial assistance of €3.7 million and €18.1 million ($3.9 million and $22.6 million as of December
31, 2022 and 2021), respectively. The Dutch government terminated the support program in March, 2022.
In the Netherlands wage tax, social security and VAT payments for
the period March 2020 until September 2021 were postponed and have to be paid in 60 monthly installments, starting October 2022. The debt
incurs annual interest starting July 2022 of 1% and increases every six months to a maximum of 4% starting on January 1, 2024 onwards.
As of December 31, 2023 and 2022, the Company accumulated debt of €24.9 million and €31.8 million ($27.3 million and
$33.8 million as of December 31, 2023 and 2022), respectively to the Dutch tax authorities.
24
In Germany, the employees are eligible for payroll support up to 60%
of the employee’s payroll (on individual basis) in case the employees meet the support plan requirements. The Company pays to its
German employees their full salary and the Company is being reimbursed by the German government for the payroll support amount. The Company
applied for this support regarding COVID-19 starting from April 2020 to June 2021.
As the majority of the Company’s operations are in Euros,
the yearly results are being affected by the movements in exchange rates between the Euros and the US Dollars. The yearly average exchange
rate for the year 2023 was 1.09 USD to 1.00 Euro compared to 1.05 USD to 1.00 Euro in 2022, representing a increase of approximately 3.5%.
During 2022 the Crypto market has been volatile and was negatively
affected, for the most part by the monetary tightening by central banks around the world to combat inflation. The Company’s authentication
technology segment provides services to some customers in this market, adversely impacting the Company’s revenues. The crypto market
in 2023 was less volatile and more stable than 2022.
Revenue
Total revenue in 2023 was $431.5 million compared to $325.0 million
in 2022.
Revenue generated in Germany was $114.2 million in 2023 compared
to $111.8 million in 2022. As revenue in Germany is in Euro, it is being affected also by exchange rate fluctuations as its being translated
to USD. Revenue of 2022 according to the 2023 exchange rate would have been $115.4 million.
Revenue generated in the Netherlands was $101.5 million in 2023
compared to $63.8 million in 2022. The increase in revenue generated in the Netherlands was a result of more services provided to our
main customer in the Netherlands (Schiphol Airport) and increases in the hourly rate paid to employees and reimbursed to the Company by
Schiphol Airport. As revenue in the Netherlands is in Euro, it is being affected also by exchange rate fluctuations as it is being translated
to USD. Revenue of 2022 according to the 2023 exchange rate would have been $65.9 million.
Revenue generated in the United States of America was $99.7 million
in 2023, compared to $88.3 million in 2022. The increase in revenue generated in the United States of America was primarily a result of
increase of services provided by our other aviation related services segment to its customers. Services provided by our other aviation
related services segment to its customers in the United States of America increased from $54.0 million in 2022 to $66.5 million following
a recovery in the airline industry in 2023 and increases in minimum wage rates.
Revenue generated in Spain was $82.2 million in 2023 compared to
$39.4 million in 2022. The increase in revenue generated in Spain represents new contracts in Spain and an increase of services to existing
customers. As revenue in Spain is in Euro, it is being affected also by exchange rate fluctuations as it is being translated to USD. Revenue
in 2022 according to the 2023 exchange rate would have been $40.7 million.
Revenue outside Germany, the Netherlands, Spain and the United
States of America totaled $33.9 million in 2023 compared to $21.5 million in 2022.
Cost of Revenue
Cost of revenue in 2023 was $351.6 million or 81.5% of revenue,
compared to $261.2 million or 80.4% of revenue in 2022. The majority of cost of revenue relates to payroll and related costs. Following
the recovery of the airport security and other aviation related services segments in 2023, the cost of revenue increased. Following the
COVID-19 crisis the Netherlands provided in 2022 financial assistance to the Company and its subsidiaries at the airport security segment,
of €3.7 million ($3.9 million as of December 31, 2022), reducing the Company’s labor costs.
Research and Development
Expenses (“R&D”)
Research and development costs in 2023 were $12.3 million or 2.9%
of revenue, compared to $13.6 million or 4.2% of revenue in 2022. The authentication technology segment has been restructuring its operations
in 2023 resulting in a decrease of the R&D costs, mostly because of less payroll costs.
Selling, General and Administrative Expenses
(“SG&A”)
SG&A expenses in 2023 were $56.9 million or 13.1% of revenue
in 2023, compared to $53.8 million or 16.5% of revenue in 2022. The Company’s payroll, related expenses and commissions increased
by $5.4 million compared to 2022, mainly because the increase in revenue which required more employees in order to manage the operations
as well as increase in payroll costs and commissions relating to the authentication technology segment. The Company’s legal expenses
decreased by $2.5 million. The legal costs in 2022 related mostly to legal costs of the authentication technology segment regarding potential
changes in the shareholding structure.
25
Other Income (Expenses),
net
Other income (expenses), net, were $1.6 million or 0.4% of revenues
in 2023, compared to $0.1 million or 0% of revenues in 2022. The company recognized in 2023 interest expense of $1.2 million to the Dutch
tax authorities in relation to the debt following the COVID-19 assistance. In the other hand, interest income increased by $2.1 million
in 2023 as a result of increase in the market interest rates which allowed the company to deposit its cash in bank deposits in exchange
for higher interest compared to 2022. In 2023 the Company recorded a one-time profit of $0.7 million following the sale of part of its
investment in SardiAI. In addition, in 2023 the Company recorded exchange rate income of $0.3 million compared to exchange rate income
of $0.7 million in 2022.
Income Tax Expenses
Income tax expenses were $1.7 million or 0.5% of revenue in 2023
compared to $1.6 million or 0.5% of revenue in 2022. Income tax expenses relating to the authentication technology segment were $0.9 million
in 2023 compared to $0.2 million in 2022. Income tax expenses relating to the airport security were $0.8 million in 2023 compared to $1.3
million in 2022. Income tax expenses relating to the other aviation related services were $0.0 million in 2023 compared to $0.1 million
in 2022. Although some of the subsidiaries of the Company were profitable in 2022, previous net operating losses were utilized to reduce
the yearly income tax expenses.
Reportable Segment
The following table sets forth, for the annual periods indicated,
certain financial data related to the Company’s reportable segments. However our discussion of the reportable segments excludes
the comparison for the year ended December 31, 2021. 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, 2022, which was filed with the SEC on May 10, 2023.
|
U.S. Dollars in Thousands |
||||||||||||||||||||
|
Corporate |
Airport Security |
Other Aviation related Services |
Authentication Technology |
Total |
||||||||||||||||
|
Year ended December 31, 2023: |
||||||||||||||||||||
|
Revenue
|
$ |
- |
$ |
309,335 |
66,463 |
$ |
55,744 |
$ |
431,542 |
|||||||||||
|
Depreciation and amortization
|
5 |
904 |
307 |
1,463 |
2,679 |
|||||||||||||||
|
Net income (loss)
|
(3,311 |
) |
2,577 |
14 |
11,291 |
10,571 |
||||||||||||||
|
Goodwill
|
- |
668 |
- |
- |
668 |
|||||||||||||||
|
Total assets
|
17,740 |
81,733 |
19,325 |
78,298 |
197,096 |
|||||||||||||||
|
Year ended December 31, 2022: |
||||||||||||||||||||
|
Revenue
|
$ |
- |
$ |
224,037 |
53,954 |
$ |
46,986 |
$ |
324,977 |
|||||||||||
|
Depreciation and amortization
|
71 |
779 |
286 |
1,318 |
2,454 |
|||||||||||||||
|
Net income (loss)
|
(2,921 |
) |
1,128 |
(2,229 |
) |
(1,212 |
) |
(5,234 |
) | |||||||||||
|
Goodwill
|
- |
646 |
- |
- |
646 |
|||||||||||||||
|
Total assets
|
8,698 |
82,016 |
25,072 |
68,847 |
184,633 |
|||||||||||||||
|
Year ended December 31, 2021: |
||||||||||||||||||||
|
Revenue
|
$ |
- |
$ |
217,463 |
$ |
36,224 |
$ |
71,247 |
$ |
324,934 |
||||||||||
|
Depreciation and amortization
|
75 |
939 |
167 |
880 |
2,061 |
|||||||||||||||
|
Net income (loss)
|
(2,020 |
) |
7,202 |
14,710 |
21,396 |
41,288 |
||||||||||||||
|
Goodwill
|
- |
690 |
- |
- |
690 |
|||||||||||||||
|
Total assets
|
10,349 |
84,923 |
27,502 |
73,106 |
195,880 |
|||||||||||||||
26
Corporate Segment
The Company’s loss in the corporate segment increased from
$2.9 million in 2022 to $3.3 million in 2023. During 2023 the corporate segment payroll and related costs increased by $0.2 million and
audit expenses increased by $0.2 million compared to 2022.
Airport Security Segment
Increase in revenue from the airport security segment from $224.0
million in 2022 to $309.3 million in 2023 relates to the recovery of the aviation industry from the COVID-19 crisis and overcome the shortage
in manpower that affected the 2022 operations. As the majority of this segments operations are in Euros, the yearly results are being
affected by the movements in exchange rates between the Euros and the US Dollars. The yearly average exchange rate for the year 2023 was
1.09 USD to 1.00 Euro compared to 1.05 USD to 1.00 Euro in 2022, representing an increase of approximately 3.5%.
The Company’s net income from the airport security was $2.6
million in 2023 compared to $1.1 million in 2022. The main reason for the difference between 2023 and 2022 is the recovery of the aviation
industry in 2023 which increased the demand for our services which was reflected in increase of revenue and profitability.
Other Aviation Related
Services Segment
Increase in revenue from aviation related services segment from
$54.0 million in 2022 to $66.5 million in 2023 relates to the recovery of the aviation industry from the COVID-19 crisis and overcome
the shortage in manpower that affected the 2022 operations. In addition, in few states in the United States of America there have been
some increases in minimum wages, which increase both our revenues and our labor costs, even though not always by the same amounts.
The Company’s net income (loss) from the other aviation related
services was $0.0 million in 2023 compared to $(2.2) million in 2022. The main reasons for the difference between 2023 and 2022 are the
recovery of the aviation industry in 2023 which increased the demand for our services, reflected in increase of revenue and profitability,
as well as some changes implemented in 2023 in the operations in order to improve efficiency.
Authentication Technology
Segment
Revenue in 2023 from the authentication technology segment was
$55.7 million compared to $47.0 million in 2022. The Company has been increasing its customers as well as increasing the services it provides
to existing customers. The net profit (loss) from this segment amounted $11.3 million in 2023 compared to $(1.2) million in 2022. Increase
in profitability in 2023 was a result of increase in revenue as well as changes in the segment structure and cutting of expenses.
Liquidity and Capital
Resources
The Company’s most significant expenditures consist of payroll,
related costs and professional fees. The Company has historically financed such expenditures through cash flows from operations, funding
received from lines of credit, loans with lenders in Europe, the United States of America and borrowings from a convertible note arrangement
with a related party.
As of December 31, 2023 and 2022, the Company had cash, cash equivalents,
restricted cash and bank deposits of $101 million and $96.0 million, respectively. As of December 31, 2023 and 2022, restricted cash were
$11.8 million and $20.5 million which consist of collateral for our letters of credit, derivative instruments and restricted bank accounts
in the Netherlands, which are restricted for payments to local tax authorities. As of December 31, 2023 and 2022, bank deposits were $34.0
million and $24.6 million, respectively.
As of December 31, 2023 and 2022, the Company had a working capital
of $96.1 million and $87.2 million, respectively and shareholders’ deficit of $2.6 million and $10.4 million, respectively. During
the years ended December 31, 2023, 2022 and 2021, the Company incurred net income (loss) of $10.6 million, $(5.2) million and $41.3 million,
respectively, and net cash flows provided by (used in) operating activities of $4.4 million, $(2.1) million and $53.4 million, respectively.
The Company had a line of credit in the Netherlands up to €12.0
million ($12.7 million as of December 31, 2022), which expired in May 2021 (except the line of credit for guarantees of €2.5 million
which was in place until March 2022) and additional line of credit in the United States of America up to $10 million which expired in
October 2021. In September 2023 the Company signed a three-year credit facility for its American subsidiary with a maximum borrowing limit
of $7.5 million. In addition, the Company has a line of credit in Sweden up to 4,000 SEK ($0.4 million as of December 31, 2023), as well
as a loan facility in Spain for short term loans which was used during 2023 by taking loans for periods ranging between three to six months
in a total amount of $2.9 million and which were fully repaid during the year.
27
The Company has an agreement with an entity related to its main
shareholder, to provide it with up to $2.0 million in revolving loans through January 2026 with interest rate of 2.5% per annum. The lender
can convert up to 3 million shares into the Company’s shares at a price of $0.75 per share.
The Company’s business plan projects profit from operations
in 2024. The Company is dependent mostly in Europe and the United States of America for its businesses on the airline industry. ICTS is
an employee intensive company.
The decisions taken in previous years by various governments following
the COVID 19 situation have affected economic activity and the Company’s business as following:
| • |
During 2022 and 2021, governments in some of the countries in which we operate implemented the government assistance measures, which
mitigated the impact of the COVID-19 outbreak on our results and liquidity. In the United States of America, the government has approved
a payroll support of $0 and $15.9 million, for the years ended December 31, 2022 and 2021 to the American subsidiary of the Company.
The American subsidiary recognized amounts of $0.0 million, $0.0 million and $16.9 million as reduction of labor expenses for
the years ended December 31, 2023, 2022 and 2021, respectively. |
| • |
For the years ended December 31, 2022 and 2021, the Dutch government has provided financial assistance of €3.7 million and
€18.1 million ($3.9 million and $22.6 million as of December 31, 2022 and 2021), respectively. The Dutch government terminated
the support program in March, 2022. |
| • |
In the Netherlands wage tax, social security and VAT payments for the period March 2020 until September 2021 were postponed and have
to be paid in 60 monthly installments, starting October 2022. The debt incurs annual interest starting July 2022 of 1% and increases every
six months to a maximum of 4% starting on January 1, 2024 onwards. As of December 31, 2023 and 2022, the Company accumulated debt of €24.9
million and €31.8 million ($27.3 million and $33.8 million as of December 31, 2023 and 2022), respectively to
the Dutch tax authorities. |
| • |
In Germany, the employees are eligible for payroll support up to 60% of the employee’s payroll (on individual basis) in
case the employees meet the support plan requirements. The Company pays to its German employees their full salary and the Company is being
reimbursed by the German government for the payroll support amount. The Company applied for this support regarding COVID-19 starting from
April 2020 to June 2021. |
The below analysis of cash flows excludes discussions relate to
year ended December 31, 2021. 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, 2022, which was filed with the SEC on May 10, 2023.
Cash Flows from Operating
Activities
Our cash flows from operating activities vary significantly from
year to year, depending on our operating results, timing of cash receipts and disbursements on accounts receivable, accounts payable,
accrued expenses and other current liabilities.
Net cash provided by (used in) operating activities for the year
ended December 31, 2023 was $4.4 million. This provided cash resulted primarily from net profit for the year of $10.6 million, decrease
of prepaid expenses and other current assets of $2.9 million mostly as the last governmental assistance payment of $4.3 million was paid
to the Company during 2023. In addition, cash provided by operating activities was affected by decrease of deposits that were held by
customers by $2.1 million following by termination of agreements, accrued expenses increase of $8.3 million and increase of VAT payable
of $2.8 million following the increase in revenue. This was offset by increase of accounts receivable of $15.7 million following the increase
of revenue, decrease of accounts payable by $2.3 million and decrease of other liabilities of $8.0 million following payments done during
2023 by the Company in order to repay its long-term debt to the Dutch tax authorities which was provided as part of the governmental assistance
to the Company during COVID-19. A non-cash charge of $2.7 million for depreciation and amortization was recognized in 2023.
28
Net cash provided by (used in) operating activities for the year
ended December 31, 2022 was $(2.1) million. This provided cash resulted primarily from net loss for the year of $5.2 million offset by
a decrease in prepaid expenses and other current assets of $5.3 million, mostly as 2021 included $9.1 million receivable from the Dutch
tax authorities which was fully received during 2022 and in addition, in 2022, it included $1.8 million VAT receivable compared to $0
million in 2021. Deposits increased by $4.5 million. In 2022 there is an increase in accounts payable of $3.0 million compared to 2021,
an increase in accrued expenses and other current liabilities of $3.6 million compared to 2021, mostly following increase in deferred
revenue of $1.3 million and increase of accrued vacation of $0.9 million - as the company didn’t have enough manpower to supply
the demand and less employees took vacations during the year. VAT payable increased in 2022 by $2.7 million following an increase in the
revenue of the Company. Other liabilities decreased by $9.3 million mostly due to payments the Company has been making to cover its long
term liabilities to the Dutch tax authorities, following the measures taken by the Dutch government and the postpone of payroll taxes,
social security and VAT. A non-cash charge of $2.5 million for depreciation and amortization was recognized in 2022.
Cash Flows from Investing
Activities
Net cash used in investing activities for the year ended December
31, 2023 was $0.6 million and consisted primarily of capital expenditures of $1.6 million offset mostly by $0.8 million proceeds received
from sale of investments.
Net cash used in investing activities for the year ended December
31, 2022 was $2.7 million and consisted primarily of capital expenditures of $1.7 million and capitalization of software costs of $1.4
million.
Cash Flows from Financing
Activities
Net cash provided by financing activities for the year ended December
31, 2023 was $0.2 million which consisted of payments under the lines of credit and the convertible notes payable to a related party totaling
$0.2 million.
Net cash used in financing activities for the year ended December
31, 2022 was $0.2 million which consisted of repayments under the lines of credit, net of $0.1 million and repayment of convertible notes
payable to a related party of $0.1 million.
Borrowings
United States of America
The Company’s U.S subsidiary secured a three-year credit
facility with its primary bank in September 2023. The origination fee paid on the credit facility was $0.1 million. The credit facility
has a maximum borrowing base limit of $7.5 million. The borrowing base limitation is equivalent to: (i) 85% of eligible non-investment
grade receivables and 90% of eligible investment grade receivables, plus (ii) 80% of direct labor payroll for the previous two pay periods
plus 20%. The company is required to maintain a fixed charge ratio of 1.00. Borrowings on the credit facility are subject to interest
at SOFR plus 2.65% and a minimum annual interest charge of $0.1 million. As of December 31, 2023, there was an unused amount available
on the credit facility of $7.5 million. As of December 31, 2023, the Company has not yet borrowed funds under the credit facility.
Europe
The Company has a credit arrangement in Sweden to provide it with
up to 4 million SEK ($0.4 million as of December 31, 2023) 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, 2023 and 2022, the Company had 2.1 million SEK and 1.2 million SEK ($0.2 million and $0.1 million as of
December 31, 2023 and 2022) respectively in outstanding borrowings under the line of credit facility.
On November 2023, the Company entered into a loan agreement with
a commercial bank in Spain to provide it with up to €1.0 million ($1.1 million as of December 31, 2023). Interest rate will be determined
by the bank at the time the loan will be taken. The loan agreement expires in November 2024. As of December 31, 2023 the Company had no
outstanding balance under the loan agreement.
During the year ended December 31, 2023 the Company has been taking
from time to time revolving short term loans from the same commercial bank, of variable amounts. The loans ranged between €0.3 million
to €1.4 million ($0.3 million and $1.6 million as of December 31, 2023) with interest rates between 5.25% to 5.90% and for periods
between three to six months. On December 2023, an agreement with the commercial bank was extended, to provide loans up to €1.5 million
($1.6 million as of December 31, 2023). These loans can be used only for paying different taxes to the Spanish tax authorities. The interest
rate is being determined at the time the loans are being taken. The loan agreement can be terminated by both sides at any time. As of
December 31, 2023 there are no outstanding balances regarding those loans.
The Company’s weighted average interest rate in Europe during
the years ended December 31, 2023, 2022 and 2021, was 4.7%, 2.8% and 4.8% respectively.
29
Related Parties Financing
Convertible Notes Payable
to a Related Party
The Company had an agreement with an entity related to its main
shareholder, to provide it with up to $2.0 million in revolving loans through January 2024. The term of the arrangement can be automatically
extended for four additional six-month periods at the option of the holder. Loans received under the arrangement bear interest, which
is compounded semi-annually and payable at maturity, at the interest rate of 2.5%. In connection with the arrangement, the holder was
granted in May 2019 an option to convert up to $2.0 million of the loan into maximum of 5,000,000 shares at a price of $0.4 per share.
In October 2020, the entity converted $0.8 million into 2,000,000 shares. In November 2023 the Company and the related party agreed to
extend the length of the note until January 2026 and to adjust the terms of the option to convert the loan into maximum 5,000,000 shares
at a price of $0.75 per share. As a result, an adjustment was made to the per share price of the 2,000,000 million shares issued in October
2020 conversion, resulting in an amount of $0.7 million of the loan derecognized with a corresponding increase to the additional paid
in capital.
The Company’s weighted average interest during the years
ended December 31, 2023, 2022 and 2021 is 2.5%, 2.5% and 7.10%, respectively.
Total interest expense related to the note is $21 thousands $28
thousands and $83 thousands for the years ended December 2023, 2022 and 2021, respectively.
As of December 31, 2023, and 2022, convertible notes payable to
this related party consist of $0.0 million and $1.1 million, respectively.
Sale of AU10TIX Technologies B.V. Preferred
Shares
On July 3, 2019, AU10TIX entered into a Series A Preferred Subscription
Agreement (the “Agreement”) with TPG Lux 2018 SC I, S.a.r.l (“TPG”), according to which AU10TIX issued 3,000,000
Series A Preferred Shares (“Series A Shares”) to TPG for a subscription price of US$60.0 million in cash representing approximately
24% of the outstanding share capital of AU10TIX and 23.077% of the fully-diluted share capital of AU10TIX. Transaction costs totaled $4.5
million and were deducted from the redeemable non-controlling interests balance.
On November 7, 2019, AU10TIX entered into a Series A and Series
A-1 Preferred Subscription Agreement with Oak HC/FT Partners II, L.P. (“Oak”), according to which AU10TIX issued 1,000,000
Series A Preferred Shares and 23,622 Series A-1 Preferred Shares (“Series A-1 Shares” and together with Series A Shares –
“the Preferred Shares”) to Oak for a subscription price of US$20.0 million in cash representing approximately 7.401% of the
outstanding share capital of AU10TIX and 7.143% of the fully-diluted share capital of AU10TIX. For accounting purposes, the investment
was allocated to the Series A and Series A-1 Preferred Shares on a relative fair value basis: $19.5 million and $0.5 million, respectively.
Transaction costs totaled $1.5 million and were deducted from the respective investment amounts.
Following the Oak investment, on November 7, 2019, TPG subscribed
for 307,087 Series A-1 Shares at nominal value (US$0.001 per share) (“Bonus Issue Series A-1 Shares”) in order to preserve
its 23.077% ownership interest in the fully diluted share capital of AU10TIX.
On June 28, 2021, TPG, Oak, GF GW LLC (“GF”) and the
Company, entered into a Sale and Purchase Agreement (the “SPA”), pursuant to which Oak and GF purchased preferred shares in
the Company from TPG. In connection with the SPA, (i) such parties and the Registrant entered into an amended and restated shareholders
agreement (the “SHA”) and an amended and restated registration rights agreement (the “RRA”) and (ii) The Company’s
Articles of Association (the “Articles”) were amended by a deed of amendment (the “Deed of Amendment”).
Pursuant to the SPA, OAK purchased 755,906 AU10TIX Series A Preferred
shares from TPG and GF purchased 1,511,811 AU10TIX Series A preferred Shares from TPG. In connection with such purchases, all outstanding
AU10TIX’s Series A Preferred Shares and Series A-1 Preferred Shares were re-designated as New Series A Preferred Shares and the
Ordinary Shares owned by ICTS were re-designated as Class B Ordinary Shares, as described below.
30
Following the completion of the sales and purchases contemplated
by the SPA on June 28, 2021: (i) the Registrant owned 68.69% of the outstanding share capital of the Company in the form of Class B Ordinary
Shares; (ii) Oak owned 12.87% of the outstanding share capital of A the Company in the form of New Series A Preferred Shares; (iii) GF
owned 10.93% of the outstanding share capital of the Company in the form of New Series A Preferred Shares; and (iv) TPG owned 7.51% of
the outstanding share capital of the Company in the form of New Series A Preferred Shares. In addition, The Company may issue up to 500,000
Class A Ordinary Shares under its existing employee stock option plan.
In consideration of the benefits to the Company of Oak increasing
its shareholding and GF becoming a shareholder, The Company provided certain customary warranties to Oak and GF concerning The Company
and its business. In addition, the Company agreed to be primarily liable to Oak and GF for any breaches by TPG of its customary fundamental
warranties given to Oak and GF (including that TPG owns the Company Series A Preferred Shares being sold to Oak and GF); provided, that,
TPG has agreed to indemnify and hold The Company harmless for any losses incurred by the Company in relation to such fundamental warranties
given by TPG.
The Preferred Shares Rights
The SHA and the Articles (as amended by the Deed of Amendment)
provide for the following material matters in respect of the rights attaching to the New Series A Preferred Shares and the Ordinary Shares
and the ongoing governance of the Company:
General: The New Series A Preferred Shares are entitled to one
vote per share and rank equally with the Ordinary Shares in regards to dividends. The Ordinary Shares are divided into two classes: Class
A Ordinary Shares and Class B Ordinary Shares, which rank equally as to dividends. The Class A Ordinary Shares are entitled to one vote
per share. The Class B Ordinary Shares are entitled to three votes per share and may only be held by the Registrant and its permitted
transferees.
Liquidation Preference: the holders of New Series A Preferred Shares
(“Series A Holders”) are entitled to a liquidation preference upon the occurrence of a (i) sale, initial public offering,
which term includes certain business combinations with a SPAC (an “IPO”), merger, consolidation or reorganization, which results
in change of control of the Company, and (ii) winding-up, dissolution or liquidation of the Company, pursuant to which the Series A Holders
are entitled, on the occurrence of such event and in priority to the Ordinary Shares, to receive the greater of: (a) US$26.5 million per
share, subject to adjustments for certain events affecting the capital of The Company (the “Starting Price”) plus all accrued
but unpaid dividends in respect of the New Series A Preferred Shares, less all dividends previously paid on the New Series A Preferred
Shares, and (b) the proceeds distributable in respect of the New Series A Preferred Shares had they been converted into Class A Ordinary
Shares. The Ordinary Shares rank equally in liquidation.
Conversion Rights: The New Series A Preferred Shares are subject
to conversion into Class A Ordinary Shares on a 1:1 basis (subject to adjustments for certain events affecting the capital of The Company):
(a) upon the written request by any Series A Holder; and (b) immediately prior to a qualifying IPO of the Company (being an IPO where
each Class A Ordinary Share is valued at not less than 150% of the Starting Price at the completion of the IPO, subject to adjustments
for certain events affecting the capital of The Company) (a “Qualifying IPO”). The Class B Ordinary Shares are convertible
into Class A Ordinary Shares at any time upon the written request of a holder of Class B Ordinary Shares on a 1:1 basis, subject to adjustments
for certain events affecting the capital of The Company.
Anti-Dilution Protection: The SHA contains customary broad-based
weighted average anti-dilution protection whereby, if further shares are issued by The Company at a price per new security that is less
than the Starting Price, then the Series A Holders shall be entitled to receive additional Class A Ordinary Shares (at no further cost)
on a weighted-average basis, reflecting the value of the equity in The Company, as determined based on the subscription price paid in
the new issue of securities.
Transfers: Subject to certain customary exceptions, including a
transfer to a permitted transferee, any shareholder (other than TPG, Oak and GF) wishing to transfer any of the shares held by it shall
first offer such shares to each shareholder holding 3% or more of The Company’s outstanding share capital at the same price and
on the same terms at which the selling shareholder wishes to transfer such shares.
New Issuances: Subject to certain customary exceptions, each shareholder
holding 3% or more of The Company’s outstanding share capital has the right to participate in any new issuance of securities by
The Company.
Information Rights: Subject to certain exceptions, each shareholder
holding 3% or more of The Company’s outstanding share capital is entitled to receive certain financial information regarding The
Company including budgets, annual and quarterly accounts and details of any third party offer for the stock or assets of The Company,
as well as certain inspection rights.
Exit Rights: At any time from and after July 3, 2026, upon written
request by Series A Holders holding at least 60% of the then outstanding New Series A Preferred Shares (the “Preferred Majority”),
The Company is required to use reasonable endeavors to facilitate a sale of The Company within six months after such written request,
and, thereafter, the Preferred Majority has the right to step-in and require The Company to facilitate a sale or IPO. On the exercise
of such step-in right, each other shareholder (including the Registrant) is required to cooperate with the Preferred Majority regarding
such sale or IPO and the Preferred Majority has the right to exercise drag rights over the shares held by other shareholders in order
to facilitate such exit event.
31
Board Arrangements: The Shareholders Agreement and Articles provide
that the board of directors of The Company shall be constituted by up to six directors: (i) four of whom will be appointed by the holder
of a majority of the Class B Ordinary Shares (i.e., currently the Registrant); (ii) one of whom will be appointed by Oak (for so long
as Oak holds at least 50% of the New Series A Preferred Shares held on the date of the closing of the transactions contemplated by the
SPA, subject to adjustments for certain events affecting the capital of The Company); and (iii) one of whom will be appointed by GF (for
so long as GF holds at least 50% of the New Series A Preferred Shares held on the date of the closing of the transactions contemplated
by the SPA, subject to adjustments for certain events affecting the capital of The Company). As a general matter, the board of The Company
is able to pass resolutions by a simple majority, subject to the consent rights of the Preferred Majority set out below.
Preferred Majority Consent Rights: For as long as the Series A
Holders hold, in the aggregate, at least 25% of the New Series A Shares Preferred Shares held on the date of the closing of the transactions
contemplated by the SPA, subject to adjustments for certain events affecting the capital of The Company, the consent of the Preferred
Majority is required for the following actions (i) amending the SHA or the Articles in a manner that would adversely affect the rights,
preferences or privileges of the New Series A Preferred Shares; (ii) issuing new securities ranking senior to or pari passu with the New
Series A Preferred Shares; (iii) making of any dividend or distribution other than a dividend or distribution that is pro rata to the
Series A Holders and the holders of the Ordinary Shares; (iv) redeeming any Ordinary Shares; (v) incurring debt in excess of 4.0x The
Company’s consolidated EBITDA in the 12-month period ending on the last day of the month preceding the month in which the debt was
incurred; (vi) consummating an IPO other than a Qualifying IPO; (vii) making certain changes to the size of the Company’s board;
(viii) making any fundamental change in the nature of the business of The Company and its subsidiaries; (ix) entering into related party
transactions, unless such transaction is commercially reasonable and on an arm’s-length basis; and (x) either amending the Company’s
existing stock option plan or creating a new stock option plan to allow for the issuance of more than 500,000 additional Class A Common
Shares.
Tag Rights: Following completion of the procedures on transfers
set out above, each Series A Holder holding 3% or more of AU10TIX’s outstanding shares will have the right to participate proportionately
in any third-party share sale by another shareholder other than a Series A Holder (subject to certain customary exceptions).
Drag Rights: The Company has the right to drag other shareholders
into an exit event subject to certain requirements being satisfied (including either (i) holders of New Series A Shares receiving the
greater of: (a) the Starting Price and (b) the proceeds distributable in respect of the New Series A Preferred Shares had they been converted
into Class A Ordinary Shares, in each case with the approval of the Board, the Preferred Majority and the holders of a majority of the
shares or (ii) a minimum value per New Series A Share of 150% of the Starting Price approved by the Board and holders of a majority of
the shares, in each case subject to adjustments for certain events affecting the capital of The Company) in relation to such exit transaction.
Termination: The SHA terminates upon (i) the agreement of The Company,
the Preferred Majority and a majority of the holders of the Ordinary Shares or (ii) the closing of a Qualifying IPO.
Tax Matters: The Company is required to provide the Series A Holders
with certain customary information for U.S. federal tax reporting purposes.
Confidentiality and Public Announcements: The SHA provides for
customary confidentiality protections and limitations on public announcements without consent.
The RRA provides the Series A Holders (and in certain cases the
holders of the Class B Ordinary Shares) with a limited number of customary long-form and short-form demand registration rights, shelf
registration rights and the right to participate under certain conditions if The Company determines to register its shares. In addition,
The Company has undertaken to (i) take certain actions to facilitate the rights of the parties under the RRA; (ii) provide customary indemnification;
(iii) not agree to further registration rights superior to those granted under the RRA; and (iv) limit issuances of its shares under certain
circumstances set out in the RRA.
Pre-emption Rights: The Shareholders Agreement contains a restriction
on issuing any securities senior to or pari passu with the New Series A Preferred Shares for so long as the holders of the New Series
A Preferred Shares on June 28, 2021 (or their transferees in accordance with the terms of the Shareholders Agreement) continue to collectively
hold at least 25% of such number (appropriately adjusted for certain corporate events) of New Series A Preferred Shares. In addition,
each shareholder holding in excess of 3% of the Company’s outstanding shares has the right to participate in any new issuance of
securities by the Company, subject to customary exceptions.
32
Research and Development Costs
Research and development costs are expensed as incurred and consist
primarily of payroll and related costs. Research and development costs are $12.3 million, $13.6 million and $12.1 million during the years
ended December 31, 2023, 2022 and 2021, 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. During 2021 and 2020 the company has been materially affected by the COVID-19 crisis.
Off-Balance Sheet Arrangements
The Company is a party to an agency agreement, so that in the event
that the operations on one of the countries that we operate are sold in the future, the third-party agent is entitled to a payment of
€3.0 million ($3.3 million as of December 31, 2023).
In 2022 the Company has signed an employment agreement with a CEO
of a subsidiary on which starting in 2023 the CEO is entitled to 10% EBIDA (excluding the applicable taxes) of that subsidiary.
The Company has no unconsolidated special purpose entities.
Future Contractual Obligations
The following table summarizes our future contractual obligations
as of December 31, 2023:
|
Contractual Obligations |
Payments due by Period (U.S. Dollars in Thousands) |
|||||||||||||||||||
|
Total |
Less than 1Year |
1-3 years |
4-5 years |
more than 5 years |
||||||||||||||||
|
Operating lease obligations |
$ |
7,475 |
$ |
4,187 |
$ |
3,194 |
$ |
94 |
$ |
- |
||||||||||
|
Repurchase of shares |
1,518 |
1,518 |
- |
- |
- |
|||||||||||||||
|
Governmental payments in the Netherlands (VAT, social security, wage tax and interest) |
29,440 |
8,258 |
21,182 |
- |
- |
|||||||||||||||
|
$ |
38,433 |
$ |
13,963 |
$ |
24,376 |
$ |
94 |
$ |
- |
|||||||||||
The following table summarizes the Company’s other future
commercial obligations as of December 31, 2023:
|
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 and Letters of credit |
$ |
9,083 |
$ |
4,434 |
$ |
4,649 |
$ |
- |
$ |
- |
||||||||||
Item 6.
Directors, Senior Management and Employees
The following table lists the directors and executive officers
of ICTS:
|
Age |
Position | ||
|
Menachem Atzmon |
79 |
Chairman of the Supervisory Board | |
|
Ron Atzmon |
50 |
Member of the Supervisory Board and Active Chairman of AU10TIX | |
|
Gil Atzmon |
48 |
Member of the Supervisory Board | |
|
Philip M. Getter |
87 |
Member of the Supervisory Board, Chairman of the Audit Committee | |
|
David W. Sass |
88 |
Member of the Supervisory Board | |
|
Gail F. Lieberman |
80 |
Member of the Supervisory Board, Member of the Audit Committee and Chairman of the
Compensation Committee | |
|
Gordon Hausmann |
78 |
Member of the Supervisory Board, Member of the Audit Committee and member of the Compensation
Committee | |
|
Ilan Nir |
42 |
Member of the Supervisory Board | |
|
Alon Raich |
48 |
Managing Director and Chief Financial Officer |
33
Menachem J. Atzmon is a CPA (Isr). Since 1976 Mr. Atzmon serves
as director and chairman of Spencer Corporation. From 1996 until 2012 Mr. Atzmon has been the managing director of Albermale Investment
Ltd., an investment company. Since 1998 until 2012 he has served as the Chairman of the Management Board of Seehafen Rostock, Umschlagsgesellschaft
GmbH and its Holding Company. Mr. Atzmon has been a member of the Supervisory Board of ICTS since 1999 and acts as the Chairman of the
Supervisory Board since 2004. Since 2010 he serves as the Chairman of Arrow Ecology & Engineering Overseas (1999) Ltd, an advance
recycling company. During 2014 Mr. Atzmon was appointed in addition to his role of Chairman of the Supervisory Board to CEO of the Arrow
Ecology & Engineering Overseas Ltd.
Ron Atzmon is the Managing Director of the AU10TIX Group since
September 2008. Mr. Atzmon was the CEO and founder of 1ST2C.com between April 2005 and January 2009. Mr. Atzmon holds an MA in Business
Administration from the College of Management Academic, Israel and an MBA from the Imperial College London, UK.
Gil Atzmon is the CEO of Arrow Ecology since February 2017. Mr.
Atzmon was a Director of Sales at S. Juwal & Co from 2002 to 2017. Mr. Atzmon holds a BA in Business Administration and Management
from IDC Herzliya, Israel and an MBA from the London Metropolitan University, UK.
Philip M. Getter has been managing member of GEMPH Development
LLC since 1985. Mr. Getter has more than 30 years of corporate finance experience. From 2000 to 2005 he was president of DAMG Capital,
LLC Investment Bankers. Prior thereto he was head of Investment Banking and a member of the board of directors of Prime Charter,
Ltd. After graduation from Cornell University he served as Administrative Assistant to the Director of United States Atomic Energy Commission.
From 1960 to 1969 he was a partner with Shearson, Hammill and from 1969 to 1975 Senior Partner of Devon Securities, an international
investment-banking boutique. From 1975 to 1984 he was Chairman/CEO of Generics Corporation of America, then one of the largest generic
drug companies in the United States of America. As President and CEO of Wolins Pharmacal (1977 to 1984) he led the reorganization and
restructuring of this distributor of medical supplies. Mr. Getter was Chairman of Inksure Technologies, Inc.a manufacturer of RFID
and security inks. He was a founder of KIDSRx an all-natural pharmaceutical company and Chairman of TCI College of Technology. Mr. Getter
has been a member of The Broadway League [League of American Theatres and Producers], Vice Chairman of The Kurt Weill Foundation for Music
and Trustee of the American Theatre Wing. He has been involved in most aspects of the entertainment industry and has produced
for Broadway, television and film. His productions have earned Pulitzer Prize, Tony and Grammy Awards.
David W. Sass for the past 64 years has been a practicing attorney
in New York City and is currently a Special Council in the law firm of McLaughlin & Stern, LLP. Mr. Sass is also licensed in the State
of Texas. Mr. Sass has been a director of ICTS since 2002 and is also a director of several privately held corporations. Mr. Sass is an
Honorary Trustee of Ithaca College.
Gail F. Lieberman is the founder and Managing Partner of Rudder
Capital, LLC, which provides financial and strategic advisory services for middle-market companies in the services & technology sectors.
Previously, she was the Chief Financial Officer for Thomson Corporation’s Financial & Professional Publishing division, Moody’s
Investor Service, Inc. and Scali, McCabe, Sloves, Inc. (Ogilvy Group). Ms. Lieberman is a director of Thesys Group, a private financial
technology company and a board member and Chairman of the Audit & Finance Committee of WL Gore & associates. Mrs. Lieberman is
a board member and lead director of Equilend, a financial technology company, where she chairs the nominating, governance and compensation
committee. Formerly Mrs. Lieberman served as board member for the South-Central Connecticut Regional Water Authority, board member,
Compensation Committee Chair and Audit Committee Member for Dara Biosciences (NASDAQ: DARA), board member and Audit Committee Chair for
I-Trax Inc. (Amex: DMX), board member and Audit and Governance Committee Member for TriPath Imaging Inc. (NASDAQ: TPTH) and board member
and Audit Committee Chair for Breeze-Eastern Corporation (Amex: BZC). She also served on the board of FTEN, a financial technology company.
Ms. Lieberman holds a BA in Mathematics and Physics and an MBA in Finance from Temple University.
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, and is a Governor of the Hebrew University. 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 and philanthropic institutions.
34
Ilan Nir is the COO of Veloretti B.V., a Dutch based D2C bicycle
company that is part of one of the leading family-owned multinationals companies in the Netherlands (Pon Holdings). Mr. Nir has been with
Pon Holdings since 2012 in which he led strategic projects and was deeply involved in the M&A practice. Mr. Nir has had leadership
roles at different operating companies of Pon Holdings across the Netherlands, USA and Germany. From 2011 to 2012 Mr. Nir worked at PWC
in the M&A tax practice. From 2009 to 2010 Mr. Nir worked as a tax lawyer at Loyens & Loeff N.V. in the international tax practice.
Mr. Nir holds a Master of Tax Laws (LL.M.), specializing in International & European Tax Law.
Alon Raich is a CPA (Isr). From 2001 to 2002, Mr. Raich worked
at the accounting firms Kesselman & Kesselman and 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 Managing Director and CFO of
the Company. Mr. Raich holds a BA degree in economics and accounting and a MA degree in law from Bar Ilan University, Israel.
Summary Compensation Table
The following table sets forth compensation earned by the Company’s highest paid
executive during the years 2021 through 2023 (U.S. Dollars in thousands):
|
Principal Position |
Year |
Salary and Bonus |
Sales Commission |
All Other Compensations |
Non-equity Incentive Plan Compensation |
Nonqualified Deferred Compensation Earnings |
Number of Option Award (1) |
Number of Stock Awards |
Total |
|||||||||||||||||||||||||
|
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||||||||
|
CEO of a |
||||||||||||||||||||||||||||||||||
|
Subsidiary |
2023 |
1,513 |
- |
106 |
- |
- |
420,000 |
- |
1,619 |
|||||||||||||||||||||||||
|
Active Chairman of a subsidiary |
2022 |
519 |
1,101 |
163 |
-- |
- |
1,783 |
|||||||||||||||||||||||||||
|
2021 |
204 |
1,397 |
109 |
- |
- |
- |
- |
1,710 |
||||||||||||||||||||||||||
(1) Options granted relate to options of a subsidiary.
Each member of the Supervisory Board who is not an employee of
the Company received during 2023 an annual fee of $30 thousand and a fee for each Supervisory Board or committee meeting attended of $2
thousands. The Chairman of the Audit Committee receives an additional $20 thousand per year. The Chairman of the Board receives an annual
fix fee of $50 thousand. Managing Directors are being employed by the Company and the total expenses regarding their employment for the
year ended December 31, 2023 was $0.9 million.
The following table sets forth information concerning the aggregate
compensation paid or accrued on behalf of all of our directors, executive officers, subsidiaries CEOs and Chairmen as a group for the
year ended December 31, 2023:
|
Salaries, Board fees, commissions and bonuses |
Pension, retirement and other similar benefits |
|||||||
|
(in thousands) |
||||||||
|
Supervisory Directors as a group (8 persons)
|
$ |
308 |
$ |
- |
||||
|
Officers as a group (6 persons) |
$ |
3,385 |
$ |
431 |
||||
Background and Compensation Philosophy
Our Compensation Committee consists of Gail Lieberman, Chairman,
Gordon Hausmann and Ilan Nir, all of them independent directors.
The Compensation Committee is to assist and undertake preparatory
work for the Supervisory Board in its decision-making in relation the compensation to be paid to members of the Management Board and (other)
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, 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.
35
Our Supervisory Board 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.
ICTS’ 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 usually a fixed amount and does not depend on performance. Our cash incentive program takes into account multiple metrics,
thus diversifying the risk associated with any single performance metric, and we believe it does not incentivize our executive officers
to focus exclusively on short-term outcomes. Our equity awards are limited by the terms of our equity plans to a fixed maximum specified
in the plan, and are subject to vesting to align the long-term interests of our executive officers with those of our stockholders.
Elements of Compensation
We provide our executive officers with a base salary and certain
bonuses and commissions as well as equity awards in some cases to compensate them for services rendered during the year. The Compensation
Committee determines and recommends the composition and amount of directors and key employees compensation. When the annual award
consists of equity purchases, it is only permitted at a price equal or above market.
Board Practices
ICTS has a two tier board system, including a Supervisory Board
and a Management Board. The Supervisory Board has the primary responsibility of supervising the policies of the Management Board and the
general course of corporate affairs of ICTS and the business connected with it as well as to provide the Management Board with advice.
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 general meeting 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, 2023 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), Gail F. Lieberman (2010) and Ilan Nir (2023).
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
provides assistance and undertakes preparatory work for the Supervisory Board in its decision-making regarding the supervision of ICTS’
accounting and financial reporting processes and audits of the financial statements, in doing so the Audit Committee evaluates ICTS's
accounting policies and practices and financial reporting and internal control structures, selection of independent auditors to audit
ICTS’ financial statements and confers with the auditors and the officers. The Audit Committee has an Operating Charter as well,
most recently adopted on 6 February 2024.
ICTS does 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
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 dismissal, with or without cause, by the general meeting.
36
Employees
As of December 31, 2023, the Company has 8,263 employees, of which
6,196 employees are located in Europe, Far East and Israel and 2,067 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
AU10TIX’s Limited, AU10TIX’s subsidiary, had a Stock
Option Plan which reserved 500,000 shares of its common stock for its future issuance. Under the stock option plan, stock options
may be granted to employees, officers, directors, consultants and service providers of the subsidiary at an exercise price as determined
by the subsidiary’s board of directors with expiration terms of not more than ten years after the date such option is granted. Options
granted under the plan generally vest over a period of four years.
In August 2020, AU10TIX’s board agreed to transfer the option
plan from AU10TIX Limited to AU10TIX Technologies B.V. with the same terms and conditions. On June 24, 2022, the board of AU10TIX Technologies
B.V. has adopted the “AU10TIX Technologies B.V. 2022 Stock Option Plan” (the “Plan”). The Plan grants rights to
subscribe for up to 500,000 class A ordinary shares (“Ordinary Share”) in the capital of AU10TIX Technologies B.V.
to employees, directors, consultants and service providers of AU10TIX Technologies B.V. and / or any related entity (as defined in the
plan). By resolution of the board of AU10TIX Technologies B.V., on February 12, 2023, the board resolved to increase the number of options
that can be exercised under the option plan from 500,000 to 1,000,000 ordinary shares.
During the year ended December 31, 2023, 584,500 options were granted
by AU10TIX. As of December 31, 2023, there are 858,625 options granted and outstanding of which 389,500 options are fully vested and exercisable.
The weighted average exercise price is $0.67 and the weighted average remaining contractual term as of December 31, 2022 is 6 years.
In 2024 the Company is working to issue shares to employees that
asked to exercise their options. As of May 1, 2024, the Company received requests to exercise 266,750 options into shares.
37
| Item 7. |
Major Shareholders and Related Party Transactions |
Major Shareholders
The following table sets forth certain information regarding ownership
of the Company's Shares as of December 31, 2023 with respect to:
Each person who is known by the Company to own beneficially more
than 5% of the Company's outstanding Shares.
All directors and officers as a group.
|
Name Shareholders Holding Five Percent or More |
Percent of Amount Beneficially Owned (a) |
Shares Outstanding (a) |
||||||
|
MacPherson Trust and its beneficiaries (b)
|
23,818,861 |
63.6 |
% | |||||
|
Menachem J. Atzmon
|
4,850,000 |
13.0 |
% | |||||
|
Igal Tabori
|
2,002,483 |
5.3 |
% | |||||
|
All officers and directors as a group, the MacPherson Trust
and its Beneficiaries (10 persons) |
31,680,721 |
84.6 |
% | |||||
(a) The amounts include 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 beneficiaries approximately 63.6% of the issued and outstanding Shares. Mr. Atzmon disclaims any beneficial interest in the MacPherson
Trust. Spencer Corporation Limited and the MacPherson Trust and its beneficiaries together with Mr. Atzmon are able to appoint all the
directors of ICTS and control the affairs of ICTS.
2. As of December 31, 2023 the Company has no convertible notes
payable to a related party. However, there is a promissory note facility agreement with a related party in place under which agreement
that related party, to the extent convertible notes are payable to it, has the right to convert up to 3,000,000 Shares into the Company’s
shares at a rate of $0.75 per share. The calculation above does not take into consideration the conversion of convertible notes.
3. As previously reported, the Company intends to repurchase in
2024 the 3,000,000 shares issued to its directors and certain employees in 2019 at price of EUR 0.45. During the Company’s 2023
annual general meeting held on 20 December 2023, the General Meeting has authorized the Management Board to repurchase shares for this
purpose once the Company’s balance sheet test allows it according to Dutch law.
Related Party Transactions
An entity related to one of the Company’s Supervisory Board
members provide legal services to the Company. Legal expense related to these services is $46 thousand, $54 thousand and $59 thousand
for the years ended December 31, 2023, 2022 and 2021, respectively.
The Company engages the services of a related party to provide
certain selling and management services to the authentication technology segment. The Company incurred expenses of $0.9 million, $1.3
million and $1.7 million for such services for the years ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2023,
and 2022 the outstanding balances due for these services were $0.4 million and $0.7 million, respectively, included in accrued expenses
and other current liabilities. In addition, the related party serves as a board member of the Company and was paid an amount of $36 thousand,
$38 thousand and $38 thousand as board fees, for the years ended December 31, 2023, 2022 and 2021, respectively.
The Company engages the services of a related party to provide
certain selling services to its authentication technology segment. The Company incurred expenses of $0.2 million, $0.2 million and $0.1
million for such services for the years ended December 31, 2023, 2022 and 2021, respectively.
The Company engages the services of a related party to provide
services as a Managing Director of the Company. The Company incurred expenses of $0.5 million, $0.4 million and $0.3 million for such
services for the years ended December 31, 2023, 2022 and 2021, respectively.
The Chairman of the board, a related party, receives annual compensation
of $50 thousand for his services as Chairman. In addition, in 2023, 2022 and 2021, the Company incurred salary expenses of $0.1 million,
$0.1 million and $0.1 million, respectively for the services he provides to AU10TIX.
38
The Company engaged the services of a related party to provide
certain selling and administrative services to its authentication technology segment. The Company incurred expenses of $0.3 million, $0.3
million and $0.0 million for such services for the years ended December 31, 2023, 2022 and 2021, respectively. In addition, the related
party serves as a board member of the Company, and was paid an amount of $38 thousand, $36 thousand and $38 thousand as board fees, for
the years ended December 31, 2023, 2022 and 2021, respectively.
The Company engages the services of a related party to provide
certain administration services. The Company incurred expenses of $0.1 million, $0.1 million and $0.1 million for such services for the
years ended December 31, 2023, 2022 and 2021, respectively.
In May 2019, the Company engaged the services of Arrow to provide
some administrative services. The Company incurred expenses of $0.0 million, $0.1 million and $0.3 million for such services for the years
ended December 31, 2023, 2022 and 2021, respectively.
The Company has an agreement with
an entity related to its main shareholder to provide it up to $2.0. million in revolving loans through January 2026 with an interest rate
of 2.5% as of December 31, 2023. The loan is convertible in to the Company’s shares at a price of $0.75 per share. As of December
31, 2023 the Company owes under this line $0 million. Interest expenses related to the note were $21 thousand, $28 thousand and $0.1 million
for the years ended December 31, 2023, 2022 and 2021, respectively.
The Company had an agreement with an entity related to its main
shareholder, to provide it with up to $2.0 million in revolving loans through January 2024. The term of the arrangement can be automatically
extended for four additional six-month periods at the option of the holder. Loans received under the arrangement bear interest, which
is compounded semi-annually and payable at maturity, at the interest rate of 2.5%. In connection with the arrangement, the holder was
granted in May 2019 an option to convert up to $2.0 million of the loan into maximum of 5,000,000 shares at a price of $0.4 per share.
In October 2020, the entity converted $800 into 2,000,000 shares. In November 2023 the Company and the related party agreed to extend
the length of the note until January 2026 and to adjust the terms of the option to convert the loan into maximum 5,000,000 shares at a
price of $0.75 per share. As a result, an adjustment was made to the per share price of the 2,000,000 shares issued in October 2020 conversion,
resulting in an amount of $0.7 million of the loan derecognize with a corresponding increase to the additional paid in capital.
As of December 31, 2023, the Company included a liability for a
purchase of shares from certain directors and officers of the Company in the amount of $1.5 million with a corresponding reduction to
shareholders deficiency plus payment of previous issuances
| Item 8. |
Financial Information |
The Consolidated Financial Statements and Financial Statement Schedule
are included herein on pages F-1 through
F-38.
Letters of Credit and Guarantees
As of December 31, 2023, the Company has $7.2 million in outstanding
letters of credit and guarantees. Letters of credit and guarantees are being secured either by the same amounts in restricted cash with
commercial banks or with cash deposits provided to customers which serve as cash collateral in order to guarantee the performance and
quality of services provided to the customers.
Legal Proceedings
General
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the ordinary course of its business activities. These claims are primarily
related to grievances filed by current and former employees for unfair labor practices or discrimination and for passenger aviation claims.
Management recognizes a liability for any matter when the likelihood of an unfavorable outcome is deemed to be probable and the amount
is able to be reasonably estimated. Management has concluded that such claims, in the aggregate, would not have a material adverse effect
on the Company’s consolidated financial position, results of operations, or cash flows.
Inquiry Proceedings
In June 2021, a minority shareholder initiated inquiry proceedings
by requesting the Enterprise Chamber of the Amsterdam Court of Appeal to order an inquiry into seven aspects of the policy and affairs
of the Company that have been previously disclosed by the Company in its periodic filings with the SEC for the fiscal years 2020 and 2019.
In June 2022, the Enterprise Chamber rendered its judgment and (i) it accepted the Company’s defense on all items except two and
ordered an investigation into those two aspects of the policy and affairs of the Company, being (a) the issuance of shares to directors
and certain employees at USD 0.40 in May 2019 (the May 2019 Issuance) and (b) the adjustment of the conversion price under a convertible
shareholder loan to USD 0.40 in May 2019 (the May 2019 Adjustment of the Issue Price), and (ii) appointed an investigator for this purpose.
39
Following the appointment of the investigator, the Company has completed
an internal examination on the relevant subjects and provided the relevant findings to the investigator. In November 2023 the investigator
concluded that (i) certain aspects of the Company’s corporate governance and (ii) certain procedural aspects of the decision-making
according to Dutch law on (a) the May 2019 Issuance and (b) the May 2019 Adjustment of the Issue Price were flawed. The investigator suggested
several alternatives to correct these flaws and as a result, the Company has agreed to the following based on discussions with the Investigator
and his recommendations:
| (i) |
to bring more balance to the supervisory board by adding a new independent supervisory board member who is particularly attentive
to the interests of minority shareholders and mindful of Dutch law; |
| (ii) |
to undo the May 2019 Issuance due to the flaws in procedural aspects of the decision-making; and |
| (iii) |
to undo the May 2019 Adjustment of the Issue Price due to the flaws in in procedural aspects of the decision-making. |
In line with these recommendations the Company:
| (i) |
ratified the resolutions on the May 2019 Issuance and the May 2019 Adjustment of the Issue Price, which have been approved by the
General Meeting during the 2023 annual general meeting held on 20 December 2023; |
| (ii) |
has in accordance with Section 2:80(1) of the Dutch Civil Code called in the amounts not yet fully paid in under the May 2019 Issuances
from the relevant shareholders, which amounts were paid in as of September 2023, and will repurchase the shares issued under the
May 2019 issuance as soon as the financials of the Company allow according to Dutch law for the same price they were issued and by that
the issuance will be undone. As of December 31, 2023, the Company included a liability for this purchase in the amount of $1.5 million
in its balance sheet with a corresponding reduction to shareholders deficiency. |
| (iii) |
has reverted the May 2019 Adjustment of the Issue Price; |
| (iv) |
has strengthened the supervisory board by appointing a Dutch board member, who has knowledge of Dutch law; and |
| (v) |
has been and will continue to further strengthen its corporate governance through the amendment of its constitutional documents.
|
In addition, during the year ended December 31, 2023 the Company
has (i) ratified the resolutions on the issuance of shares to directors and certain employees in April 2018 and October 2018, which have
been approved by the General Meeting during the 2023 annual general meeting held on 20 December 2023, and (ii) in accordance with Section
2:80(1) of the Dutch Civil Code called in the amounts not yet fully paid in under the share issuances to directors and certain employees
in September 2016 and December 2018 from the relevant shareholders. The financial effect of all the above totaling $1.2 million was recorded
in 2023 as increase of equity against reduction of debt to related party.
Following the filing of the investigation report with the Enterprise
Chamber in November 2023, the relevant minority shareholder has filed three new requests with the court, two of which the Enterprise
Chamber already dismissed in full at the end of March 2024. The hearing of the third request, which is a request to establish mismanagement
on the basis of the investigation and to order certain definitive measures at the Company is scheduled for mid-September 2024 and the
Company has the opportunity to file a written statement of defense beforehand.
Inquiry proceedings revolve around corporate governance disputes
and no formal liability can be established or damages can be claimed in such proceedings.
Agency Agreement
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 million
($3.3 million as of December 31, 2023).
40
Employment Agreement
In December 2022, the Company entered into an employment agreement
with a third party to serve as the CEO of one of the Company’s subsidiaries. According to the agreement the employee is entitled
to annual target bonus. The bonus shall be equal to 10% of the EBIDA (excluding the applicable taxes).
Item 9. The
Offer and Listing
Our shares of common stock are currently traded on the OTCQB 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 |
||||||
|
2019 |
$ |
3.00 |
$ |
0.15 |
||||
|
2020 |
$ |
4.09 |
$ |
1.34 |
||||
|
2021 |
$ |
10.00 |
$ |
4.00 |
||||
|
2022 |
$ |
9.79 |
$ |
5.00 |
||||
|
2023 |
$ |
7.00 |
$ |
3.56 |
||||
The reported high and low closing sales prices per share during
each quarter for the last 3 years were as follows:
|
2023 |
High |
Low |
||||||
|
First quarter |
$ |
6.00 |
$ |
3.76 |
||||
|
Second quarter |
$ |
5.30 |
$ |
3.56 |
||||
|
Third quarter |
$ |
7.00 |
$ |
3.75 |
||||
|
Fourth quarter |
$ |
5.60 |
$ |
4.01 |
||||
|
2022 |
High |
Low |
||||||
|
First quarter |
$ |
9.79 |
$ |
6.62 |
||||
|
Second quarter |
$ |
8.72 |
$ |
6.25 |
||||
|
Third quarter |
$ |
7.98 |
$ |
6.50 |
||||
|
Fourth quarter |
$ |
7.25 |
$ |
5.00 |
||||
|
2021 |
High |
Low |
||||||
|
First quarter |
$ |
6.00 |
$ |
4.00 |
||||
|
Second quarter |
$ |
10.00 |
$ |
5.00 |
||||
|
Third quarter |
$ |
10.00 |
$ |
6.00 |
||||
|
Fourth quarter |
$ |
9.10 |
$ |
6.25 |
||||
41
Item 10. Additional
Information
Introduction
ICTS is a public company with limited liability (naamloze
vennootschap) incorporated under Dutch law on October 9, 1992. ICTS’ statutory seat is in Amstelveen, the Netherlands, and
its registered office address at Walaardt Sacréstraat 425 5th floor, 1117 BM Schiphol, the Netherlands. ICTS is registered with the
trade register of the Dutch Chamber of Commerce under number 33279300.
As a Dutch public company with limited liability, ICTS is
subject to certain requirements not generally applicable to corporations organized under the laws of jurisdictions within the United States
of America. Set forth below is a summary of the material provisions of the articles of association of ICTS as lastly amended on January
25, 2023 (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 advice and render services regarding the security of persons and goods and to provide
security (or having such security provided) on behalf of companies, government institutions and private individuals; in particular but
not exclusively: the installation, management and supervision of security systems for the purpose of crime and terrorism prevention and
control on and around premises, buildings, installations, vessels and aircraft, and 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).
The Shares are in registered form (op
naam) and are only available in the form of an entry in ICTS’ shareholders’ register.
In accordance with Dutch law, ICTS’ authorized share capital
sets out the maximum amount and number of Shares that it may issue without amending its Articles of Association. The Articles of Association
provide for an authorized share capital in an amount of EUR 67,500,000 divided into 150,000,000 Shares, each Share with a nominal value
of EUR 0.45. As of December 31, 2023, 37,433,333 Shares were issued and outstanding.
Issue of Shares and Pre-Emptive
Rights
The General Meeting is authorized to issue Shares or to grant rights
to subscribe for Shares and to restrict and/or exclude statutory pre-emptive rights in relation to the issuance of Shares or the granting
of rights to subscribe for Shares. The General Meeting may delegate the authority to issue Shares (or grant rights to subscribe for Shares)
to the Supervisory Board. and 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 delegate to the supervisory board of ICTS the authority as the competent corporate body to issue Shares
requires an absolute majority of the votes cast, in a general meeting in which at least half of the issued share capital of ICTS is represented.
Such resolution was adopted in December 2022 for a period of five
years until December 2027, in which the Supervisory Board was designated. 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 that follow from Dutch law 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 delegate the supervisory board of ICTS as another corporate body competent to resolve upon the restriction
or exclusion of the pre-emptive rights if the supervisory board has also been delegated 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 the supervisory board to exclude
or restrict pre-emptive rights requires an absolute majority of the votes cast, in a general meeting in which at least half of the issued
share capital of ICTS is present or represented. Such resolution of the General Meeting to exclude or restrict pre-emptive rights or to
authorize the supervisory board 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.
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Such resolution was adopted in December 2022 for a period of five
years until December 2027, in which the Supervisory Board was designated. The resolution by which 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) ICTS’s net equity less the payment required to pay 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),
(ii) the Management Board has been authorized thereto by the General Meeting and (iii) ICTS is entitled to buy back up to 20% of the issued
Shares. 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 ICTS , under a scheme applicable to such employees.
Shares (or depositary receipt issued for such Shares) held by ICTS
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
(or depositary receipt issued for such Shares) held by ICTS or its subsidiaries, and unless such Shares are subject to the right of usufruct
or to a pledge in favor of a person other than ICTS or its subsidiaries and the voting rights were vested in the pledgee or usufructuary
before ICTS or its subsidiaries acquired such Shares. ICTS or its subsidiaries may not exercise voting rights in respect of Shares for
which ICTS or its subsidiaries have a right of usufruct or a pledge.
Reduction of Share Capital
The General Meeting (at the proposal of the supervisory board of
ICTS) 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 at least half of ICTS’ issued and outstanding share capital is present
or represented. The resolution to reduce the issued share capital needs to be filed with the Netherlands Chamber of Commerce and an announcement
in a Dutch daily newspaper needs to be published stating that such filings took place (upon which a two-months creditor opposition period
starts).
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 ICTS’ net 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 annual accounts 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.
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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 and all Management Board members need to sign the interim statement
of assets and liabilities and if one of them does not so sign, the reason for this omission must be stated. 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’ net 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. The interim statement of assets and liabilities needs to be filed with the Netherlands
Chamber of Commerce within 8 days after the date on which the resolution to make the distribution is adopted.
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, among other
things, the annual report, the adoption of the annual accounts, allocation of profits (including the proposal to distribute dividends),
discharge of the Management Board members from liability for their management and the Supervisory Board members 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 otherwise in other countries as required pursuant to the relevant laws where ICTS’ Shares have
been admitted to trading on a trading facility.
All convocations for the General Meetings and all notifications
to shareholders shall take place by means of letters sent to the addresses listed in the register of shareholders. Instead of through
notice letters, any shareholder that gives his consent, may be sent notice of the meeting by means of a legible and reproducible message
electronically sent to the address stated by him for this purpose to ICTS.
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 are entitled to request the Management
Board to include items on the agenda of the General Meeting, provided that such request is received by ICTS not later than on the
60th day in advance of the meeting.
Chair
The General Meeting is chaired by the chairman of the Supervisory
Board or, in his absence, by the person designated for that purpose by the Supervisory Board from its midst or otherwise. If none of the
Supervisory Directors is present, the meeting itself shall provide for its Chairmanship.
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. At a General Meeting held elsewhere than in
the previous sentence, valid resolutions may only be adopted if the entire issued share capital of ICTS is represented.
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Admission
Each shareholder and each person to whom the law grants this right
shall be entitled, either in person or by written proxy, to attend the General Meeting, to address the meeting and, if the voting rights
accrue to him, to exercise his voting rights.
The Management Board may resolve that the powers referred to in
the paragraph above may be exercised by means of electronic communication. If a Shareholder and any person with meeting right participates
by means of electronic communication, it is required that the electronic communication allows for identification of the Shareholder and
any person with meeting right, for such person to directly take notice of the proceedings in the meeting and for the casting of votes
(if applicable). Furthermore, it shall be required that the electronic communication allows for the Shareholder and any person with meeting
right to participate in discussions in the meeting.
In deviation from the first paragraph under this section ‘admission’,
the Management Board may determine that such persons shall be deemed to have the right to vote and the right to attend the General Meeting
as at a time to be determined by the Management Board are registered as shareholders in one or more registers designated by the Management
Board, regardless of who is entitled to the relevant Shares at the time of the General Meeting. The notice convening the meeting must
state the registration date and also indicate the manner in which registration may take place and the manner in which shareholders may
exercise their rights. The Management Board determines the manner in which shareholders may have themselves registered and the manner
in which they may exercise their rights. The registration date shall be determined with due observance of applicable statutory provisions.
Admission to the General Meeting shall be granted to the Supervisory
Board members, the Management Board members and all other persons entitled to admission by law. The General Meeting may grant access to
the meeting to persons other than those referred to above. Management board members and Supervisory Board members shall as such have an
advisory vote in the General Meeting.
Voting Rights
Each Share entitles the holder to cast one vote. Resolutions of
the General Meeting are adopted by an absolute majority of the votes cast in a meeting where at least 50% the issued share capital of
ICTS is represented, unless Dutch law or the Articles of Association prescribe a larger majority. Resolutions of the General Meeting to
amend the Articles of Association, to reduce the issued share capital, to dissolve ICTS or to merge shall be passed by a majority of at
least two-thirds of the votes cast representing at least half of the issued share capital.
Blank votes and invalid votes shall be considered votes not cast.
They shall count towards the determination of a quorum. 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.
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Subject to certain exceptions following from Dutch law, 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 Management
Board members 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 Management Board members.
The General Meeting appoints the Management Board members. Management
Board members are appointed by the General meeting for an indefinite period.
The General Meeting and the Supervisory Board may suspend Management
Board members at any time, and the General Meeting may dismiss Management Board members at any time. A General Meeting must be held within
three months after a suspension of a Management Board member has taken effect, in which meeting a resolution must be adopted to either
terminate or extend the suspension. Provided if such suspension is not terminated, the suspension does not last longer than three months
in aggregate. The suspended Management Board member 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 Management Board member, the suspension will cease
after the period of suspension has expired.
In the event of a vacant seat or upon inability to act of one or
more Management Board members, the remaining Management Board members or the only remaining Management Board member shall temporarily
be in charge with the exercise of the duties and powers of the Management Board member(s)in question. In the event all seats are vacant
or upon inability to act of all Management Board members, or the sole Management Board member, as the case may be, the Supervisory Board
shall have the authority to temporarily entrust the exercise of the duties and powers of the Management Board members to one or more persons
(either or not from amongst its mid).
Decision-Making
The Management Board decides by majority vote. If there is a tie
in voting, the proposal shall be deemed to have been rejected. The Management Board may also pass resolutions outside of a meeting, provided
they are in writing, all Management Board members have cast their votes and none of them has objected to this manner of decision making.
Conflicts of Interests
A Management Board member shall not participate in deliberations
and the decision-making process in the event of a direct or indirect personal conflict of interest between that Management Board member
and ICTS and the enterprise connected with it. If there is such personal conflict of interest in respect of all, the decision shall be
taken by the Supervisory Board.
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 Board members are not authorized to represent ICTS. In performing their duties, the Supervisory Board
members 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. The Supervisory
Board has adopted board regulations governing its tasks and responsibilities, addressing (amongst other items) duties and responsibilities,
its committees, meetings and its relationship with the Management Board and the General Meeting.
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 Board members. Only individuals
can be appointed as Supervisory Board members.
The members of the Supervisory Board are appointed by the General
Meeting for a term of one year.
The General Meeting may suspend and dismiss Supervisory Board members
at any time. A General Meeting must be held within three months after a suspension of a Supervisory Board member 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 Board member 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 Board member, the suspension will cease after the period of suspension has expired.
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In the event of a vacant seat or upon inability to act of one or
more Supervisory Board members, the remaining Supervisory Board members or the only remaining Supervisory Board member shall temporarily
be in charge with the exercise of the duties and powers of the Supervisory Board member(s)in question. In the event all seats are vacant
or upon inability to act of all Supervisory Board members, or the sole Supervisory Board member, as the case may be, the General Meeting
shall have the authority to temporarily entrust the exercise of the duties and powers of the Supervisory Board members to one or more
persons.
Decision-Making
In a meeting of the Supervisory Board, each Supervisory Board member
is entitled to cast one vote. A Supervisory Board member may grant a written proxy to another Supervisory Board member (if in office)
to represent him at a meeting. All resolutions by the Supervisory Board are adopted by the favorable vote of a majority of the Supervisory
Board members present or represented at the meeting (and in respect of whom no conflict of interest exists). If there is a tie in voting,
the proposal is rejected.
The Supervisory Board may also adopt resolutions outside a meeting,
in writing, provided that the proposal concerned is submitted to all Supervisory Board members then in office and provided that none of
them objects to such decision-making process.
Conflicts of Interests
A Supervisory Board member shall not participate in the deliberations
and decision-making process in the event of a conflict of interest between that Supervisory Board member and ICTS and the enterprise connected
with it. If there is such a personal conflict of interest in respect of all Supervisory Board members, the preceding sentence does not
apply and the Supervisory Board shall maintain its authority.
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, which can be extend by no more
than five months by the General Meeting on the basis of special circumstances. 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 Management Board members and Supervisory Board members 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.
With due observance of Article 19 paragraph 4 of the Articles of
Association, adoption of the annual accounts by the General Meeting without any caveats constitutes discharge for the Management Board
members and the Supervisory Board members from liability for the performance of their respective duties for the past financial year.
In order to discharge the Management Board members and Supervisory
Board members from liability a separate resolution thereto needs to be adopted by the General Meeting (which resolution can be adopted
by separate resolution in the same meeting in which the annual accounts will be adopted).
Under Dutch law, this discharge is not absolute and will not be
effective with respect to matters which are not disclosed to the Shareholders.
Amendment of Articles
of Association
Only the General Meeting may resolve to amend the Articles of Association.
A proposal to amend the Articles of Association must be included in the notice convening the General Meeting. A copy of the proposal containing
the verbatim text of the proposed amendment must be available at ICTS for inspection by every Shareholder of ICTS and every holder of
meeting right until the end of the General Meeting.
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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, representing at least half of ICTS’ issued and outstanding share capital.
If the General Meeting has resolved to dissolve ICTS, the Management
Board members 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 amounts contributed on each Share held by them.
Material contracts
For material contracts See “Item 8 - Financial Information”.
Exchange controls
There are no governmental laws, decrees or regulations in The Netherlands,
ICTS’ jurisdiction of organization, that restrict ICTS’ export or import of capital in any material respect, including, but
not limited to, foreign exchange controls.
There are no limitations imposed by Dutch corporate 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, or (iv) an estate, the income
of which is subject to United States federal income taxation regardless of its source.
The summary is based on the Internal Revenue Code of 1986, as amended
(the “Code”), judicial decisions, administrative pronouncements, and existing and proposed Treasury Department regulations,
changes to any of which after the date of this Annual Report on Form 20-F could apply on a retroactive basis and affect the tax consequences
described herein.
Taxation of Dividends
For U.S. federal income tax purposes, the gross amount of distributions,
if any, (including any withholding tax thereon) made by the Company out of its current or accumulated earnings and profits (as determined
under U.S. federal income tax principles) will be included in the gross income of a direct U.S. Holder as foreign source dividend income
on the date of receipt, but in the case of a U.S. Holder that is a corporation, note that such dividend income generally will not be eligible
for a dividends received deduction unless the Company constitutes a so-called “specified 10%-owned foreign corporation” with
respect to such a U.S. Holder.
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Subject to the discussion below regarding passive foreign investment
companies, the Company should be considered to be a “qualified foreign corporation” so that such dividends should be eligible
to be taxed as net capital gains (at a maximum U.S. federal rate of 20 percent in the hands of a non-corporate U.S. Holder) plus potentially
a net investment income tax (for non-corporate U.S. Holders) at a maximum rate of 3.8%.
Distributions in excess of the earnings and profits of the Company
will be treated, for U.S. federal income tax purposes, first as non-taxable to the extent of the U.S. Holder's basis in the shares (resulting
in a corresponding reduction in such U.S. Holder’s basis, thereby increasing the amount of any gain and decreasing the amount of
any loss realized on the subsequent disposition of such shares) and then as a gain from the sale or exchange of the shares. The amount
of any dividend paid in Euros generally will be determined based on the U.S. dollar value of the Euro on the date of receipt regardless
of whether the U.S. Holder converts the payment into U.S. dollars.
The declaration of dividends will be at the discretion of the Company’s
Supervisory Board of directors and will depend upon the Company’s earnings, capital requirements, financial position, general economic
conditions, and other pertinent factors. The Company cannot assure Holders that dividends will be paid in the future.
Foreign Tax Credits
U.S. Holders will generally be entitled to claim a credit against
their United States federal income tax liability for the amount of Netherlands dividend withholding tax imposed on dividends paid to U.S.
Holders. See Netherlands Dividend Withholding Tax.
U.S. Holders who are entitled to the benefits of a reduced rate
of Netherlands dividend withholding tax under the tax treaty between the United States of America and the Netherlands will be allowed
a credit for only the amount of withholding tax provided for under the U.S. Tax Treaty (generally 15%).
However, the full amount of the dividend, including any withheld
amounts, generally will be subject to current United States federal income taxation whether or not such Holder is entitled to a tax benefit
for the credit of the amount withheld. In the event the Company pays a dividend to a U.S. Holder out of the earnings of a non-Dutch subsidiary,
however, it is possible that under certain circumstances that such U.S. Holder would not be entitled to claim a credit for a portion of
any Dutch taxes withheld by the Company from such dividend. Based on historic economics, the portion of Dutch withholding tax that may
not be creditable in this instance should equal a maximum of 3% of the gross amount of such dividend (or 20% of the Dutch taxes withheld
in the case of a U.S. Holder entitled to claim a 15% withholding rate under the U.S. Tax Treaty). This limitation would potentially apply
only under circumstances where the Company pays dividends on the shares.
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 foreign tax credit 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 (but not below zero) 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.
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Backup Withholding and Information Reporting
Payments in respect of the shares may be subject to information
reporting to the IRS and to a 24% U.S. backup withholding tax. Backup withholding generally will not apply, however, to a Holder who furnishes
a correct U.S. taxpayer identification number or certificate of foreign status and makes any other required certification or a beneficial
owner 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 any required 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 is 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, the Company and its corporate subsidiaries will take 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, which will include 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.
With respect to distributions the U.S. Holder receives in a taxable
year, the portion of such distributions 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 relating to excess distributions
received from a PFIC:
| • |
The excess distribution or gain will be allocated rateably over the U.S. Holder’s holding period for the shares, |
| • |
The amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which the Company was a
PFIC, will be treated as ordinary income, and |
| • |
The amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and an interest charge
generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. |
The tax liability for the amounts of any “excess distribution”
allocated to years prior to the year of the distribution of disposition 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, furnishes the shareholder annually with certain tax information. Management has not decided whether, or under what
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 makes 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 on such date. 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.
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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 satisfy the requirements so as to allow
the making of a 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 2023, the rates are 19% on profits up to €0.2 million
and 25.8%, on the excess.
ICTS and a number of our Netherlands resident subsidiaries
form a fiscal unity for Netherlands corporate income tax purposes. As a result, corporate income tax is levied from these entities
on a consolidated basis at the level of ICTS.
For Netherlands corporate income tax purposes, affiliated
entities should calculate their profits on an “at arm’s length” basis. In case transactions between such affiliated
entities are made or imposed on conditions (transfer prices) which differ from those conditions which would have been made or
imposed between independent entities in the free market, the profits of those entities are determined as if the “at arm’s
length” conditions had been agreed.
Participation Exemption
Pursuant to the Netherlands participation exemption (“deelnemingsvrijstelling”),
income and capital gains derived from the investment by a parent company in a subsidiary are exempt from corporate income
tax provided that the parent company holds a qualifying participation in the subsidiary, and the subsidiary is not considered
to be a portfolio investment. A qualifying participation exists if the parent company:
(i) owns at least 5 per cent of the nominal paid-up share capital
(or in certain cases at least 5% of the voting power) in the subsidiary, which has a capital divided into shares, or
(ii) holds at least 5% of the units of a fund for joint account,
or
(iii) is a member of a Cooperative, or
(iv) as a limited partner has a share in an open limited partnership
and as such is entitled to at least 5% of the results of the open limited partnership.
A qualifying participation may also exist, subject to conditions,
in case:
(a) the parent company owns less than 5 per cent of the nominal
paid-up share capital, units or share in the subsidiary, whilst
a. the subsidiary is related (as per the applicable
definition in the Dutch Corporate Income Tax Act) to the parent, or
b. an entity related (as per the applicable
definition in the Dutch Corporate Income Tax Act) to the parent has a qualifying participation in the subsidiary,
or
(ii) has owned for an uninterrupted period of at least
one year at least 5 per cent of the nominal paid-up share capital, units or share in the subsidiary and three years have not
yet passed after the participating interest of 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 does not exceed the return that can be expected in the case of normal 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.
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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.
If the parent company would (be deemed to) hold the participation in
the subsidiary as a portfolio investment, in case (i) the parent company - on its own or together with related group companies
- has an interest of at least 25% in the participation, (ii) the participation is not subject to an income/profits tax resulting
in an effective tax burden that is realistic under Netherlands principles, and (iii) the assets of the participation consist
for 90% or more directly or indirectly of low-taxed free investments, the parent company must (re)value the participation for
tax purposes at fair market value annually.
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 or the disposal of qualifying
participations are generally not deductible. Other expenses relating to participations (e.g., the cost of financing) are
in principle deductible, subject to possible interest deduction limitations.
The participation exemption does not apply to accrued payments
(of dividend, interest, or other) that are tax-deductible in the country of the debtor, whereas the corresponding income
would normally be exempt under the scope of the participation exemption. This will be the case e.g. if the country of the debtor
qualifies the distribution as an interest expense, whereas the Netherlands qualifies the income as a dividend.
In case the participation exemption is applicable, income
in the hands of ICTS arising from dividends paid by subsidiaries or capital gains from the disposal of its shares
in such subsidiaries are exempt from corporate income tax in the Netherlands.
If the participation exemption is not applicable, income derived by
ICTS from a subsidiary will be taxed at the statutory corporate income tax rates.
Controlled Foreign
Company Regulations
The Netherlands has implemented the Controlled Foreign Company
(“CFC”) regulations provided for in the EU Anti-Tax Avoidance Directive (“ATAD”) into domestic
law. Based on these regulations, subject to conditions, certain types of passive income generated by qualifying CFC’s that
are resident in low-tax jurisdictions (i.e., countries with a statutory profit tax rate lower than 9% or jurisdictions
that are included on the EU list of non-cooperative jurisdictions), are taxable at the level of the parent company against
the regular Dutch corporate income tax rates mentioned above.
Interest Deduction Limitations
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 20% of a taxpayer’s “corrected profit” (EBITDA). The earnings stripping rule generally 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”).
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Loss Compensation
According to Netherlands tax law, losses incurred may be carried back
for one year. As of 1 January 2019, the possibility to carry forward losses was limited from nine years to six
years. As from 1 January 2022, losses can be carried forward indefinitely. The yearly utilization of carry forward losses
will be limited to €1.0 million, plus 50% of taxable income above €1.0 million. The new rules are also applicable
to already existing carry forward losses as per 1 January 2022 (i.e., carry forward losses from 2013 and subsequent years).
Depreciation Limitations
For Netherlands corporate income tax purposes, restrictions
apply to the depreciation of goodwill, real estate and other business assets. The maximum yearly depreciation charge for
acquired goodwill is 10% of its cost price. Depreciation of real estate property is not allowed in case the book value
of the property falls below 100% of the value used for purposes of the Valuation of Immovable Property Act (“WOZ
value”). The maximum yearly depreciation charge for other business assets is 20% of the cost price of such assets.
In certain situations, it should still, however, be possible to value assets at lower going-concern value.
Netherlands Tax Considerations
of Holding Shares
The following summary outlines certain Netherlands tax consequences
in connection with the acquisition, ownership and disposal of Shares. All references in this summary to the Netherlands
and Dutch law are to the European part of the Netherlands and its law, respectively, only. The summary does not purport
to present any comprehensive or complete picture of all Netherlands tax aspects that could be of relevance to the acquisition, ownership
and disposal of Shares by a (prospective) holder of Shares who may be subject to special tax treatment under applicable
law. The summary is based on the tax laws and practice of the Netherlands as in effect on the date of this Prospectus, which
are subject to changes that could prospectively or retrospectively affect the Netherlands tax consequences.
For purposes of Netherlands income and corporate income tax, Shares
legally owned by a third party such as a trustee, foundation or similar entity or arrangement (a Third Party), may
under certain circumstances have to be allocated to the (deemed) settlor, grantor or similar originator (the Settlor) or,
upon the death of the Settlor, his/her beneficiaries (the Beneficiaries) in proportion to their entitlement to the
estate of the Settlor of such trust or similar arrangement (the Separated Private Assets).
The summary does not address the tax consequences of a holder
of Shares who is an individual and who has a substantial interest in ICTS. Generally, a holder of Shares will have a substantial
interest in ICTS if such holder of Shares, whether alone or together with his spouse or partner and/or certain other close
relatives, holds directly or indirectly, or as Settlor or Beneficiary of Separated Private Assets (i) the ownership of,
or certain other rights, such as usufruct, over, or rights to acquire (whether or not already issued), shares representing
5% or more of the total issued and outstanding capital (or the issued and outstanding capital of any class of shares) of ICTS or (ii)
the ownership of, or certain other rights, such as usufruct over, profit participating certificates (“winstbewijzen”)
that relate to 5% or more of the annual profit of ICTS or to 5% or more of the liquidation proceeds of ICTS.
In addition, a holder of Shares has a substantial interest
in ICTS if he, whether alone or together with his spouse or partner and/or certain other close relatives, has the ownership
of, or other rights over, shares in, or profit certificates issued by, ICTS that represent less than 5% of the relevant
aggregate that either (a) qualified as part of a substantial interest as set forth above and where shares, profit certificates
and/or rights there over have been, or are deemed to have been, partially disposed of, or (b) have been acquired as
part of a transaction that qualified for non-recognition of gain treatment.
This summary does not address the tax consequences of a holder
of Shares who:
(a) receives income or realizes capital gains in connection with
his or her employment activities; or
(b) in his/her capacity as (former) Management Board member
and/or (former) Supervisory Board member; or
(c) is a resident of any non-European part of the Netherlands; or
(d) for whom the Shares form part of a “lucrative interest”
(see further below).
Prospective holders of Shares should consult their own professional
adviser with respect to the tax consequences of any acquisition, ownership or disposal of Shares in their individual circumstances.
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Dividend Withholding Tax
General
ICTS is generally required to withhold dividend withholding
tax imposed by the Netherlands at a rate of 15% on dividends distributed by ICTS in respect of Shares. The expression “dividends distributed
by ICTS” as used herein includes, but is not limited to:
(a) distributions in cash or in kind, deemed and constructive distributions
and repayments of paid-in capital (“gestort kapitaal”) not recognized for Netherlands dividend withholding tax purposes;
(b) liquidation proceeds, proceeds of redemption of Shares
or, as a rule, consideration for the repurchase of Shares by ICTS in excess of the average paid-in capital recognized for Netherlands
dividend withholding tax purposes;
(c) the par value of Shares issued to a holder of Shares
or an increase of the par value of Shares, to the extent that it does not appear that a contribution, recognized for Netherlands
dividend withholding tax purposes, has been made or will be made; and
(d) partial repayment of paid-in capital, recognized for Netherlands
dividend withholding tax purposes, if and to the extent that there are net profits (“zuivere winst”), unless (i) the
General Meeting has resolved in advance to make such repayment and (ii) the par value of the Shares concerned has been
reduced by an equal amount by way of an amendment of the Articles of Association of ICTS.
Holders of Shares
Resident in the Netherlands
A holder of Shares who is resident or deemed to be resident
in the Netherlands is generally entitled, subject to the anti-dividend stripping rules described below, to a full
credit against its (corporate) income tax liability, or a full refund, of the Netherlands dividend withholding tax. As
from 1 January 2022, corporate taxpayers can only claim a credit for Netherlands dividend withholding tax for at maximum
the amount of their corporate income tax liability in any given year. Non-credited dividend withholding tax can be carried
forward indefinitely and be credited against the taxpayer’s tax liability in future years.
Holders of Shares
Resident Outside the Netherlands
A holder of Shares who 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, had
the holder of Shares been a Dutch tax resident, the dividends would have been tax exempt based on the application of the participation
exemption, as described above.
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).
Specific (anti-abuse) rules may apply in the case of transparent
entities and/or hybrid entities owning Shares of ICTS.
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.
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According to the anti-dividend stripping rules, no exemption, reduction,
credit or refund of Netherlands dividend withholding tax will be granted if the recipient of the dividend paid by the company
is not considered the beneficial owner (“uiteindelijk gerechtigde”) of the dividend as defined in these rules.
A recipient of a dividend is not considered the beneficial owner of the dividend if, as a consequence of a combination
of transactions, (i) a person (other than the holder of the dividend coupon), directly or indirectly, partly or wholly benefits
from the dividend, (ii) such person directly or indirectly retains or acquires a comparable interest in Shares, and (iii) such person is
entitled to a less favorable exemption, refund or credit of dividend withholding tax than the recipient of the dividend distribution. The
term “combination of transactions” includes among others transactions that have been entered into in the anonymity
of a regulated stock market, the sole acquisition of one or more dividend coupons and the establishment of short-term rights
or enjoyment on Shares (e.g., usufruct).
As per 1 January 2024, the new Conditional Withholding
Tax (CWHT) on dividends entered into force. Based on the CWHT, a withholding tax will be levied on (i) dividend payments to corporate
shareholders resident in low-tax jurisdictions (i.e., countries with a statutory profit tax rate lower than 9%), (ii) dividend payments
to jurisdictions that are included on the EU list of non-cooperative jurisdictions and (iii) dividend payments to hybrid
entities and artificial structures intended to avoid Dutch withholding tax on dividends (i.e., abuse situations). The rate
of the CWHT on dividends is linked to the highest rate of the Dutch corporate income tax (currently being 25.8%). The CWHT
on dividend payments exists next to the regular Dividend Withholding Tax (rate: 15%). As a result, these taxes may apply
simultaneously on the same dividend payment under certain circumstances. For these situations, the new CWHT rule provides
for an anti-accumulation scheme that could be applied so that effectively a maximum rate of 25.8% is applied.
Holders of Shares
Resident in the U.S.
Dividends paid to certain non-transparent corporate U.S. resident holders
of Shares owning at least 10% of ICTS’ total voting power 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%. Certain U.S. pension funds and tax-exempt organizations
may qualify for a complete exemption from Netherlands dividend withholding tax.
Under the U.S. Tax Treaty such benefits are generally available
to U.S. residents if such resident is the beneficial owner of the dividends, provided that such shareholder does not have
an enterprise or an interest in an enterprise that is, in whole or in part, carried on through a permanent establishment
or permanent representative in the Netherlands and to which enterprise or part of an enterprise Shares are attributable.
A person may, however, not claim the benefits of the U.S. Tax Treaty if such person’s entitlement to such benefits
is limited by the provisions of Article 26 (the limitation on benefits provision) of the U.S. Tax Treaty. The reduced dividend
withholding tax rate can generally be applied at source upon the distribution of the dividends, provided that the proper forms
have been filed and / or authorizations have been applied for in advance of the distribution. In the case of certain tax-exempt
organizations, as a general rule the so-called refund method applies. Only when certain administrative conditions have
been fulfilled may such tax-exempt organization use the exemption method.
Irrespective of meeting the conditions of the relevant provisions of
U.S. Tax Treaty, dividends distributed by the company to a U.S. resident holder (i) who is a legal entity resident in the
U.S. and (ii) that is in the U.S. under the terms of a double taxation agreement with a third state not considered to be
resident for tax purposes in a country with which the Netherlands has not concluded a tax treaty that includes an article
on dividends (not being a Member State of the European Union, Iceland, Norway or Liechtenstein), are generally, subject
to the anti-abuse rules and the anti-dividend stripping rules described above, fully exempt from Netherlands dividend withholding tax
if, had the holder of Shares been a Dutch tax resident, the dividends would have been tax exempt based on the application of the participation
exemption, as described above.
Specific (anti-abuse) rules may apply in the case of transparent
entities and/or hybrid entities owning Shares of ICTS.
Dividends paid to U.S. resident individual holders of Shares in
ICTS are generally subject to 15% dividend withholding tax. The U.S. Tax Treaty does not provide for a reduced withholding tax rate for
dividends paid to U.S. resident individual shareholders.
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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 any gains realized in relation to 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” (“belastbaar resultaat uit overige werkzaamheden”) which, for instance,
would be the case if the activities with respect to Shares exceed “normal active asset management” (“normaal,
actief vermogensbeheer”) or if income and gains are derived from the holding, whether directly or indirectly, of
(a combination of) shares, debt claims or other rights (together, a “lucratief belang”) that the holder thereof
has acquired under such circumstances that such income and gains are intended to be remuneration for work or services performed by
such holder (or a related person), whether within or outside an employment relation, where such lucrative interest provides
the holder thereof, economically speaking, with certain benefits that have a relation to the relevant work or services.
If either of the abovementioned conditions (a) or (b) applies, income
derived from Shares and the gains realized upon the acquisition, redemption and/or disposal of Shares will in general be
subject to Netherlands income tax at the progressive rates up to 49.5%.
If the abovementioned conditions (a) and (b) do not apply,
a holder of Shares who is an individual, resident or deemed to be resident in the Netherlands will not be subject to
taxes on actual income and capital gains in the Netherlands. Instead, such individual is generally taxed at a flat rate of 32%
(rate 2023, as from 2024: 36%) on deemed income from “savings and investments” (“sparen en beleggen”), which
deemed income is determined on the basis of the amount included in the individual’s “yield basis” (“rendementsgrondslag”)
at the beginning of the calendar year minus a tax-free threshold. The tax-free threshold for 2023 is €57,000
(2024: €57,000). Following case law from the Supreme Court of the Netherlands, the systematics of determining the
deemed income from savings and investments was changed by the Dutch government retro-actively to 2017. Based on these changes, the deemed
income from portfolio investments (such as investments in Shares) is determined based on the multiple-years weighted average
realized with investments in bonds, shares and real estate. For the years 2017-2022, the percentage was set between
5.28% and 5.69%. For 2023 and 2024, the percentage is set at 6.17% and 6.04% respectively. Given the mentioned developments, resident individual
holders of Shares are recommended to consult their own tax adviser to determine the potential effect of the above changes in their specific
situation.
Holders of Shares
Resident in the Netherlands: Corporate Entities
A holder of Shares that is resident or deemed to be resident
in the Netherlands for corporate income tax purposes, and that is a corporate taxpayer will in general be subject to regular corporate
income tax, against the regular Dutch income tax rates mentioned above over income derived from Shares and the gains realized
upon the acquisition, redemption and/or disposal of Shares, unless, and to the extent that, the participation exemption
applies.
Holders of Shares
Resident Outside the Netherlands: Individuals
A holder of Shares who is an individual, not resident
or deemed to be resident in the Netherlands will not be subject to any Netherlands taxes on income derived from Shares and
the gains realized upon the acquisition, redemption and/or disposal of Shares (other than the dividend withholding tax
described above), unless:
(a) such holder has an enterprise or an interest
in an enterprise that is, in whole or in part, carried on through a permanent establishment (“vaste inrichting”)
or a permanent representative (“vaste vertegenwoordiger”) in the Netherlands and to which enterprise or
part of an enterprise, as the case may be, Shares are attributable; or
(b) such income or capital gain forms a “benefit
from miscellaneous activities in the Netherlands” (“belastbaar 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.
56
If either of the above-mentioned conditions (a) or (b) applies, income
or capital gains in respect of dividends distributed by ICTS or in respect of any gains realized upon the acquisition,
redemption and/or disposal of Shares will in general be subject to Netherlands income tax at the progressive rates up 49.5%,
unless the Netherlands right to tax is limited by a tax treaty.
Holders of Shares
Resident Outside the Netherlands: Legal and Other Entities
A holder of Shares that is a legal entity, another entity
with a capital divided into shares, an association, a foundation or a fund or trust, not resident or deemed to be resident
in the Netherlands for corporate income tax purposes, will not be subject to any Netherlands taxes on income derived from
Shares and the gains realized upon the acquisition, redemption and/or disposal of Shares (other than the dividend withholding
tax described above), unless:
(a) such holder has an enterprise or
an interest in an enterprise that is, in whole or in part, carried on through a permanent establishment (“vaste inrichting”) or
a permanent representative (“vaste vertegenwoordiger”) in the Netherlands and to which enterprise or part of an
enterprise, as the case may be, Shares are attributable; or
(b) such holder has a substantial interest
in ICTS, that (i) is held with the avoidance of Netherlands income tax as (one of) the main purpose(s) and
(ii) forms part of an artificial structure or series of structures (such as structures which are not put into place for
valid business reasons reflecting economic reality).
If one of the above-mentioned conditions applies, income
derived from Shares and the gains realized upon the acquisition, redemption and/or disposal of Shares will,
in general, be subject to corporate income tax against the regular Dutch corporate income tax rates mentioned above, unless,
and to the extent that, with respect to a holder as described under (a), the participation exemption (“deelnemingsvrijstelling”) applies,
or the Netherlands right to tax is limited by a tax treaty.
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 (Separate Private Assets) 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.
57
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 2023, approximately 23% of the Company’s revenues were derived in the United States of America, and approximately 77%
was derived in Europe and the Far East. The Company is subject to market risks associated with foreign currency exchange rate fluctuations.
We utilize some derivative instruments to manage the exposure to currency risk relating salaries in Israel. As such, significant foreign
currency exchange rate fluctuations can have a material impact of the Company’s financial position, results of operations, and cash
flows.
Interest Rate Risk – As the Company currently doesn’t
have in use any line of credit and the interest rate on convertible notes payable to a related party is fix, the Company is not subject
to changes in interest rates based on Federal Reserve actions and/or general market conditions. The Company does not utilize derivative
instruments to manage exposure to interest rate risk. As of December 31, 2023, an increase of 1% in the interest rate would increase the
Company’s interest expense for the Company’s lines of credit with a maximum effect of $0.1 million.
Item 12. Description
of Securities Other than Equity Securities
Not applicable.
PART II
Item 13. Defaults,
Dividend Arrearages and Delinquencies
Not applicable.
Item 14. Material
Modifications to the Rights of Security Holders and Use of Proceeds
Not applicable
58
Item 15. Controls
and Procedures
Management’s report on internal control
over financial reporting
(a) Our management, including our Managing Director and Chief Financial
Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(d) and 15d-15(d)
of the Exchange Act) as of the end of the period covered by this annual report (the “Evaluation Date”).
Based on such evaluation, the Managing Director and Chief Financial
Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective.
(b) Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our
management, including our Managing Director and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as of the end of the period covered by this report.
Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of December
31, 2023. Notwithstanding the foregoing, there can be no assurance that our internal control over financial reporting will detect or uncover
all failures of persons within the Company to comply with our internal procedures, as all internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements.
This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation
by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this
annual report.
(c) On the evaluation conducted by our Managing Director and Chief
Financial Officer pursuant to Rules 13a-15(d) and 15d-15(d) under the Exchange Act, our management has concluded that there was no change
in our internal control over financial reporting that occurred during the year ended December 31, 2023 that materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Item 16A.
Audit Committee Financial Experts
The members of the Audit Committee consist of Philip M. Getter,
Gordon Hausmann and Gail F. Lieberman. All members are independent, with no relationship with management. Mr. Getter and Ms. Lieberman
have financial expertise. Mr. Getter is the Chairman of the Audit Committee.
Item 16B.
Code of Ethics
The Company has adopted a Code of Ethics for principal’s
executive officers and senior financial officers.
Item 16C.
Principal Accountant Fees and Services
The following table sets forth the aggregate fees billed by our
independent registered public accounting firm, Mazars USA LLP for services rendered to us during the years ended December 31, 2023 and
2022.
The audit committee has considered whether the provision of these
services is compatible with maintaining the principal accountant’s independence and has concluded that such services are compatible.
All fees were reviewed and pre-approved by the audit committee (U.S. Dollars in thousands).
|
2023 |
2022 |
|||||||
|
Audit fees |
$ |
404 |
$ |
400 |
||||
|
Audit related fees |
- |
- |
||||||
|
Tax fees |
- |
- |
||||||
|
Total fees |
$ |
404 |
$ |
400 |
||||
Item 16D.
Exemptions from the Listing Standards for Audit committees
Not applicable.
Item 16E.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable.
59
Item 16F.
Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G.
Corporate Governance
The Company has adopted Dutch law and the U.S. practices.
Item 16K.
Cybersecurity
As cybersecurity threats rapidly evolve in sophistication and become
more prevalent, especially with the increasing use of artificial intelligence technology, we have implemented a cybersecurity risk management
program as part of our oversight, evaluation and mitigation of enterprise-level risks. Our cybersecurity risk management program leverages
a combination of processes, technologies and personnel with expertise in cybersecurity to comply with applicable regulations and detect
and respond to cyber-attacks, data breaches, security incidents, and compromises of personal information, as well as to regularly and
promptly inform management and our Board of Directors of any significant cybersecurity risks and developments. Our cybersecurity
risk management program is led by our subsidiaries Chief Information Security Officers (“CISOs), who are directly responsible for
establishing cybersecurity strategies, structures and managing ongoing cybersecurity risk management activities and are responsible for
the day-to-day identification, monitoring and management of cybersecurity risks. Our CISOs have significant experience in managing
cybersecurity risks.
In the ordinary course of our business, we collect and store confidential
data, including intellectual property, proprietary business information and personally identifiable information (including of our employees,
customers, suppliers and business partners). We rely extensively on information technology systems, including some systems that are managed
by third-party service providers, to securely process, store and transmit such confidential data in order to conduct our business. These
systems include programs and processes relating to internal and external communications, ordering and managing materials from suppliers,
collecting, processing and storing data as processing transactions, processing payments to employees and vendors, generating our financial
results for each reporting period, summarizing and reporting results of operations, and complying with information technology security
compliance and other regulatory, legal or tax requirements.
On May 2nd 2022, one of the subsidiaries of ICTS, I-SEC International
Security B.V., has experienced a data breach incident. This was a ransomware incident that involved the exposure of information in the
Company’s possession including human resources data of current and former employees. The Company has taken steps in an effort to
address the incident. The immediate expenses following the incident were approximately $0.8 million. The incident did not affect its relationships
with its customers or any third parties.
We have not been materially impacted by risks from cybersecurity
threats and we are not aware of any cybersecurity risks that are reasonably likely to materially affect our business. However, our systems
and networks have been, and are expected to continue to be, the target of increasingly advanced and evolving cyber-attacks and cybersecurity
incidents in the future may adversely impact our business, financial condition and results of operations, and we are continuing
to actively monitor such threats.
In the event that we experience a cybersecurity incident, our subsidiaries
have a cybersecurity incident response policy that sets forth the applicable processes, roles, engagements, escalations and notifications
to be executed in order to promptly respond to such threats. Depending on its nature and scale, a cybersecurity threat may be managed
within our CISOs or escalated to our management, and Board of Directors and Audit Committee, as appropriate.
As part of its overall risk oversight function, our Audit Committee,
which is comprised entirely of independent directors, considers cybersecurity risks in connection with overseeing our overall enterprise
risk management system. As part of our cybersecurity risk management, we maintain industry standard procedures and policies, which are
reviewed and revised from time to time, to proactively assess, identify and manage potential cybersecurity risks and respond to any actual
cybersecurity threats and incidents. Such procedures and policies include: actively monitoring our information technology systems to ensure
compliance with applicable legal and regulatory requirements; engaging third-party consultants and other service providers to monitor
and, as appropriate, respond to cybersecurity risks; requiring our service providers and our business partners who connect directly to
our information technology systems, to comply with our cybersecurity standards, due diligence processes and be subject to our non-disclosure
and other confidentiality agreements that include cybersecurity-related terms; providing and analyzing specialized industry sector intelligence
on cybersecurity threats; regularly testing our cybersecurity systems and disaster preparedness, including our back-up information technology
systems; developing and updating incident response plans to address potential cybersecurity threats; and maintaining and training our
personnel on cybersecurity incident reporting procedures."
60
PART III
Item 17.
Financial Statements
See Item 18.
Item 18.
Financial Statements
The Consolidated Financial Statements and Financial Statement Schedule
of the Company as of December 31, 2023 and 2022 and for each of the three years in the period ended December 31, 2023, including the report
of our independent registered public accounting firm thereon are set forth on pages F-1 to F-38.
61
Item 19.
Exhibits
| 1. |
| 2. |
| 3. |
| 4. |
| 5. |
| 6. |
| 7. |
| 12.1 |
| 13.1 |
| * |
Incorporated by reference to the Company’s fillings. |
62
SIGNATURE
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
|
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
|
||
|
By: |
/s/ Alon Raich |
|
|
Name: |
Alon Raich |
|
|
Title: |
Managing Director and Chief Financial Officer |
|
|
Date: |
May 10, 2024 |
63
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
2023 ANNUAL REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
F- 2
|
|
|
|
|
|
F- 3
|
|
|
|
|
|
F- 4
|
|
|
|
|
|
F- 5
|
|
|
|
|
|
F- 6
|
|
|
|
|
|
F- 7
|
|
|
|
|
|
F- 9
|
|
|
|
|
|
Financial Statement Schedule:
|
|
|
|
|
|
F- 38
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Supervisory Board of Directors and
Stockholders of ICTS International N.V. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ICTS International N.V. and subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations and comprehensive income (loss), shareholders’ deficit, and cash flows for each of two years in the period ended December 31, 2023, and the related notes and schedule (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters.
|
/s/
|
|
|
|
|
|
We have served as the Company’s auditor since 2022.
|
|
|
|
|
|
|
|
|
|
|
|
May 10, 2024
|
|
F - 2
Report of Independent Registered Public Accounting Firm
To the Supervisory Board of Directors and
Stockholders of ICTS International N.V. and Subsidiaries:
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of operations and comprehensive income (loss), shareholders’ deficit, and cash flows of ICTS International N.V. and Subsidiaries (the “Company”) for the year ended December 31, 2021, and the related notes and schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of the Company’s operations and cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Mayer Hoffman McCann CPAs
(The New York Practice of Mayer Hoffman McCann P.C.)
(The New York Practice of Mayer Hoffman McCann P.C.)
We served as the Company’s auditor from 2007 to 2022
May 16, 2022
F - 3
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT ASSETS:
|
||||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
||||
|
Restricted cash
|
|
|
||||||
|
Bank deposits
|
|
|
||||||
|
Accounts receivable, net
|
|
|
||||||
|
Prepaid expenses and other current assets
|
|
|
||||||
|
Total current assets
|
|
|
||||||
|
Deferred tax assets, net
|
|
|
||||||
|
Investments
|
|
|
||||||
|
Deposits
|
|
|
||||||
|
Restricted cash
|
|
|
||||||
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Property and equipment, net
|
|
|
||||||
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Operating lease right of use assets
|
|
|
||||||
|
Goodwill
|
|
|
||||||
|
Other assets
|
|
|
||||||
|
Total assets
|
$
|
|
$
|
|
||||
|
LIABILITIES AND SHAREHOLDERS' DEFICIT
|
||||||||
|
CURRENT LIABILITIES:
|
||||||||
|
Notes payable-banks
|
$
|
|
$
|
|
||||
|
Accounts payable
|
|
|
||||||
|
Accrued expenses and other current liabilities
|
|
|
||||||
|
Value added tax (VAT) payable
|
|
|
||||||
|
Income taxes payable
|
|
|
||||||
|
Operating lease liabilities, current
|
|
|
||||||
|
Total current liabilities
|
|
|
||||||
|
Convertible notes payable to a related party
|
|
|
||||||
|
Operating lease liabilities, non-current
|
|
|
||||||
|
Other liabilities
|
|
|
||||||
|
Total liabilities
|
|
|
||||||
|
COMMITMENTS AND CONTINGENCIES (NOTE 18)
|
||||||||
|
REDEEMABLE NON-CONTROLLING INTERESTS (NOTE 12)
|
|
|
||||||
|
SHAREHOLDERS' DEFICIT:
|
||||||||
|
Common stock, €
|
|
|
||||||
|
Additional paid-in capital
|
|
|
||||||
|
Accumulated deficit
|
(
|
)
|
(
|
)
|
||||
|
Accumulated other comprehensive loss
|
(
|
)
|
(
|
)
|
||||
|
Treasury shares
|
(
|
)
|
|
|||||
|
Non-controlling interests in subsidiaries
|
|
|
||||||
|
Total shareholders' deficit
|
(
|
)
|
(
|
)
|
||||
|
Total liabilities and shareholders' deficit
|
$
|
|
$
|
|
||||
See accompanying notes to the consolidated financial statements.
F - 4
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
|
For the Years Ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Revenue
|
$
|
|
$
|
|
$
|
|
||||||
|
Cost of revenue
|
|
|
|
|||||||||
|
GROSS PROFIT
|
|
|
|
|||||||||
|
Operating expenses:
|
||||||||||||
|
Research and development
|
|
|
|
|||||||||
|
Selling, general and administrative
|
|
|
|
|||||||||
|
Goodwill impairment
|
|
|
|
|||||||||
|
Total operating expenses
|
|
|
|
|||||||||
|
OPERATING INCOME (LOSS)
|
|
(
|
)
|
|
||||||||
|
Equity loss from investment in affiliates
|
|
(
|
)
|
(
|
)
|
|||||||
|
Other income (expenses), net
|
|
|
(
|
)
|
||||||||
|
INCOME (LOSS) BEFORE INCOME TAX EXPENSES
|
|
(
|
)
|
|
||||||||
|
Income tax expenses
|
|
|
|
|||||||||
|
NET INCOME (LOSS)
|
|
(
|
)
|
|
||||||||
|
Net income (loss) attributable to non-controlling interests
|
|
(
|
)
|
|
||||||||
|
NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V.
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
BASIC AND DILUTED NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V. PER SHARE
|
||||||||||||
|
Net income (loss) attributable to ICTS International N.V.
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Less deemed dividend attributable to redeemable non-controlling interests
|
|
|
|
|||||||||
|
Net income (loss) available to ICTS International N.V. shareholders
|
|
(
|
)
|
|
||||||||
|
Basic weighted average number of shares
|
|
|
|
|||||||||
|
Net income (loss) per share attributable to ICTS International N.V. - basic
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Diluted weighted average number of shares
|
|
|
|
|||||||||
|
Net income (loss) per share attributable to ICTS International N.V. - diluted
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
COMPREHENSIVE INCOME (LOSS)
|
||||||||||||
|
Net income (loss)
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Other Comprehensive Income (loss) - Translation adjustments
|
|
(
|
)
|
(
|
)
|
|||||||
|
Unrealized gains (loss) on derivative instruments
|
|
(
|
)
|
|
||||||||
|
Comprehensive income (loss)
|
|
(
|
)
|
|
||||||||
|
Comprehensive income (loss) attributable to non-controlling interests
|
|
(
|
)
|
|
||||||||
|
COMREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V.
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
See accompanying notes to the consolidated financial statements.
F - 5
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(In thousands, except share data)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(In thousands, except share data)
|
Common Stock
|
Additional
Paid-In |
Accumulated
|
Accumulated
Other Comprehensive |
Treasury
|
Non
Controlling
|
Total
Shareholders' |
||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Loss
|
Shares
|
Interests
|
Deficit
|
|||||||||||||||||||||||||
|
BALANCE AT DECEMBER 31, 2020
|
|
$ |
|
$ |
|
$ |
(
|
)
|
$ |
(
|
)
|
$ |
|
$ |
(
|
)
|
$ |
(
|
)
|
|||||||||||||
|
Conversion of preferred shares A and A-1 in AU10TIX Technologies B.V. to new series A
|
-
|
|
(
|
)
|
|
|
|
|
(
|
)
|
||||||||||||||||||||||
|
Net income
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Stock-based compensation – AU10TIX Technologies B.V.
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Translation adjustment
|
-
|
|
|
|
(
|
)
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||
|
Unrealized gains on derivatives instruments
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
BALANCE AT DECEMBER 31, 2021
|
|
|
|
(
|
)
|
(
|
)
|
|
(
|
)
|
(
|
)
|
||||||||||||||||||||
|
Net loss
|
-
|
|
|
(
|
)
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||
|
Stock-based compensation – AU10TIX Technologies B.V.
|
-
|
|
(
|
)
|
|
|
|
|
|
|||||||||||||||||||||||
|
Translation adjustment
|
-
|
|
|
|
(
|
)
|
|
|
(
|
)
|
||||||||||||||||||||||
|
Unrealized loss on derivatives instruments
|
-
|
|
|
|
(
|
)
|
|
|
(
|
)
|
||||||||||||||||||||||
|
BALANCE AT DECEMBER 31, 2022
|
|
|
|
(
|
)
|
(
|
)
|
|
|
(
|
)
|
|||||||||||||||||||||
|
Net income
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Stock-based compensation – AU10TIX Technologies B.V.
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Additional payment for shares issued in previous years (see note 18)
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Translation adjustment
|
(
|
)
|
|
|
|
|||||||||||||||||||||||||||
|
Unrealized gain on derivatives instruments
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Commitment to purchase shares from certain directors and officers (see note 18)
|
-
|
|
|
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||||||||
|
BALANCE AT DECEMBER 31, 2023
|
|
$ |
|
$ |
|
$ |
(
|
)
|
$ |
(
|
)
|
$ |
(
|
)
|
$ |
|
$ |
(
|
)
|
|||||||||||||
See accompanying notes to the consolidated financial statements.
F - 6
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
|
Year Ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
CASH FLOW FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net income (loss)
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
||||||||||||
|
Depreciation and amortization
|
|
|
|
|||||||||
|
Goodwill impairment
|
|
|
|
|||||||||
|
Loss (gain) from sale of investment
|
(
|
)
|
|
(
|
)
|
|||||||
|
Bad debt expense (recovery)
|
|
|
|
|||||||||
|
Deferred income taxes
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Equity loss from investment in affiliates
|
|
|
|
|||||||||
|
Stock-based compensation
|
|
|
|
|||||||||
|
Changes in assets and liabilities:
|
||||||||||||
|
Accounts receivable
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Receivable from related party
|
|
|
|
|||||||||
|
Prepaid expenses and other current assets
|
|
|
|
|||||||||
|
Deposits
|
|
(
|
)
|
|
||||||||
|
Other assets
|
|
|
(
|
)
|
||||||||
|
Accounts payable
|
(
|
)
|
|
|
||||||||
|
Accrued expenses and other current liabilities
|
|
|
|
|||||||||
|
VAT payable
|
|
|
(
|
)
|
||||||||
|
Income taxes payable
|
|
|
|
|||||||||
|
Operating lease accounts, net
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Other liabilities
|
(
|
)
|
(
|
)
|
|
|||||||
|
Net cash provided by (used in) operating activities
|
|
(
|
)
|
|
||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Purchase of property and equipment
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Purchase of company in Sweden
|
|
|
(
|
)
|
||||||||
|
Capitalization of software costs
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Proceeds from sale of property and equipment
|
|
|
|
|||||||||
|
Proceeds from sale of investments
|
|
|
|
|||||||||
|
Purchase of investments
|
|
(
|
)
|
(
|
)
|
|||||||
|
Deposits (withdraws) regarding Employees severance
|
|
|
(
|
)
|
||||||||
|
Net cash used in investing activities
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
F - 7
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
|
Year Ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
CASH FLOW FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Loans received
|
$
|
|
$
|
|
$
|
|
||||||
|
Loans repaid
|
|
(
|
)
|
|
|
|
|
|||||
|
Withdraws (repayments) under lines of credit, net
|
|
|
|
(
|
)
|
|
(
|
) | ||||
|
Withdraws (repayments) of convertible notes payable to a related party
|
|
(
|
)
|
(
|
) | |||||||
|
Net cash provided by (used in) financing activities
|
|
(
|
)
|
(
|
)
|
|||||||
|
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE RATES ON CASH, CASH EQUIVALENTS, RESTRICTED CASH AND BANK DEPOSITS
|
|
(
|
)
|
(
|
) | |||||||
|
INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND DEPOSITS
|
|
(
|
)
|
|
||||||||
|
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND BANK DEPOSITS BEGINNING OF YEAR
|
|
|
|
|||||||||
|
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND BANK DEPOSITS END OF YEAR
|
$
|
|
$
|
|
$
|
|
||||||
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
||||||||||||
|
Additional payment for shares issued in previous years (see note 18)
|
$
|
|
$
|
|
$
|
|
||||||
|
Commitment to purchase shares from certain directors and officers (see note 18)
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
|
||||||||||||
|
Cash paid during the year for:
|
||||||||||||
|
Interest
|
$
|
|
$
|
|
$
|
|
||||||
|
Income taxes
|
$
|
|
$
|
|
$
|
|
||||||
See accompanying notes to the consolidated financial statements.
F - 8
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 1 - ORGANIZATION
Description of Business
ICTS International N.V. (“ICTS”) was registered at the Department of Justice in Amstelveen, Netherlands on October 9, 1992. ICTS and subsidiaries (collectively referred to as “ICTS” or the “Company”) operate in four reportable segments: (a) corporate (b) airport security (c) other aviation related services and (d) authentication technology. The corporate segment does not generate revenue and contains primarily non-operational expenses. The airport security segment provides security services mostly to airport authorities and airlines predominantly in Europe. The other aviation services segment provides services mostly to airlines and airport authorities in the United States of America. The authentication technology segment provides authentication services to financial and other companies, predominantly in the United States of America.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The significant accounting policies are as follows:
Functional Currency
The accompanying consolidated financial statements are presented in United States dollars. The Company has determined that the functional currency of its subsidiaries is usually the local currency. AU10TIX Technologies B.V. and its subsidiaries (“AU10TIX”) functional currency is United States Dollars. For financial reporting purposes, the assets and liabilities of such subsidiaries are translated into United States Dollars using exchange rates in effect at the balance sheet date. The revenue and expenses of such subsidiaries are translated into United States Dollars using average exchange rates in effect during the reporting period. Resulting translation adjustments are presented as a separate category in shareholders' deficit called accumulated other comprehensive loss.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
The most significant estimates and assumptions included in these consolidated financial statements consist of the: (a) valuation allowance of deferred income taxes and (b) determination of the estimated fair value of the AU10TIX preferred shares conversion in 2021.
Principles of Consolidation
The consolidated financial statements include the accounts of ICTS International N.V. and its wholly-owned and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash and cash equivalents.
Restricted Cash and Bank Deposits
Short term restricted cash as of December 31, 2023 consists of: (a) $2,980 held in bank accounts that serve as cash collateral for outstanding letters of credit and guarantees, (b) $6,036 held in several bank accounts in the Netherlands, which is restricted for payments to local tax authorities and (c) $750 secured for derivative instruments.
Short term restricted cash as of December 31, 2022 consists of: (a) $279 held in bank accounts that serve as cash collateral for outstanding letters of credit and guarantees, (b) $14,459 held in several bank accounts in the Netherlands, which is restricted for payments to local tax authorities and (c) $1,129 secured for derivative instruments.
F - 9
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Restricted Cash and Bank Deposits (Continued)
Long term restricted cash as of December 31, 2023 and 2022 consist of $2,037 and $ $4,590 held in bank accounts that serve as risk collateral for long term outstanding letters of credit and guarantees.
Bank deposits consist of interest bearing deposits held in banks and financial institutions with an original maturity of more than three months and less than a year from the date of deposit and carried at cost.
The following table provides a reconciliation of cash and restricted cash reported on the balance sheet that sum to the total of the same such amounts shown in the statements of cash flows.
|
Year Ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
$
|
|
||||||
|
Restricted cash – short term
|
|
|
|
|||||||||
|
Bank deposits
|
|
|
|
|||||||||
|
Restricted cash – long term
|
|
|
|
|||||||||
|
Total cash, cash equivalents, restricted cash and bank deposits shown in the statement of cash flows
|
$
|
|
$
|
|
$
|
|
||||||
Accounts Receivable
Accounts receivable represent amounts due to the Company for services rendered and are recorded net of an allowance for doubtful accounts. The allowance for credit losses is based on historical collection experience, factors related to specific customers and current economic trends. The Company writes off accounts receivable when determined to be uncollectible and are recognized as a reduction to the allowance for credit losses. As of December 31, 2023, and 2022, the allowance for doubtful accounts is $759 and $1,208 , respectively.
Fair Value Measurements
The Company follows Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 820, “Fair Value Measurement”. Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value should be based on assumptions that market participants would use.
In determining the fair value, the Company assesses the inputs used to measure fair value using a three-tier hierarchy, as follows:
| Level 1 - |
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Companies have the ability to access at the measurement date.
|
| Level 2 - |
Inputs to the valuation methodology include:
|
| • |
Quoted prices for similar assets or liabilities in active markets;
|
| • |
Quoted prices for identical or similar assets or liabilities in inactive markets;
|
| • |
Inputs other than quoted prices that are observable for the asset or liability;
|
| • |
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
| Level 3 - |
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
F - 10
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deposits
Deposits consist of long-term cash deposits provided to customers and suppliers which serve as cash collateral in order to guarantee the performance and quality of services provided to the customers or to secure the future payments to suppliers. The deposits are repaid to the Company at the end of the contract or the engagement with the customers or the suppliers.
Investments
The Company accounts for investments in the equity securities of companies which represent an ownership interest of 20 % to 50 % and the ability to exercise significant influence, provided that ability does not represent control, using the equity method. The equity method requires the Company to recognize its share of the net income (loss) of its investees in the consolidated statement of operations until the carrying value of the investment is zero.
The Company records investments in the equity securities of privately held companies which represent an ownership interest of less than 20% at cost minus impairment.
Derivative Instruments
Derivative instruments are measured at their fair value and recorded as either assets or liabilities. Changes in the fair value of derivatives designated as cash flow hedging instruments are initially recorded in other comprehensive income and a corresponding amount is reclassified out of other comprehensive income into earnings when the underlying transactions are recognized in the consolidated statements of operations and comprehensive income.
The Company maintains a risk management strategy that may incorporate the use of put options and forward exchange contracts, to minimize significant fluctuation in cash flows and/or earnings that are caused by exchange rate or interest rate volatility.
Property and Equipment
Equipment and furniture, internal-use software, leasehold improvements and vehicles are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives used in determining depreciation are as follows:
|
Years
|
|
|
Equipment and facilities
|
|
|
Internal- use software
|
|
|
Vehicles
|
|
Leasehold improvements are amortized using the straight-line method over the shorter of the total term of the lease or the estimated useful lives of the assets.
Capitalized Internal-Use Software Costs
The Company capitalizes certain costs incurred in developing internal-use software when capitalization requirements have been met. Costs prior to meeting the capitalization requirements are expensed as incurred. Costs, such as maintenance and training are also expensed as incurred. Capitalized costs are included in property and equipment, and amortized on a straight-lined basis over the estimated useful life of the software. Amortization expense, which is included in depreciation expense, amounted to $947 , $742 and $374 during the years ended December 31, 2023, 2022 and 2021, respectively.
Goodwill
Goodwill represents the excess purchase price over the fair value of the net tangible and intangible assets of an acquired business. Goodwill is assessed for impairment by reporting unit on an annual basis or when events or changes in circumstances indicate that the carrying value may not be recoverable. The Company would record a goodwill impairment charge for the difference between the carrying value and the fair value of the goodwill, not to exceed the carrying amount of the goodwill. During the years ended December 31, 2023, 2022 and 2021, the Company recorded goodwill impairment charge of $0 , $0 and $139 , respectively on its goodwill.
F - 11
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived Assets
The Company reviews long-lived assets, other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the fair value of the asset as compared to its carrying value. During the years ended December 31, 2023, 2022, and 2021, the Company did not record any impairment charges on its long-lived assets.
Employee Rights Upon Severance
The Company is required to make severance payments to its Israeli employees upon dismissal of an employee or upon a termination of employment in certain circumstances. The Israeli pension and severance pay liability to the employees is covered mainly by deposits made at insurance companies. For its employees who are employed under the Section 14 of the Israeli Severance Pay Law, 1963 (“Section 14”), the Company makes deposits with certain insurance companies for accounts controlled by each applicable employee in order to secure the employees’ rights upon termination. In addition, the related obligation and amounts deposited on behalf of the applicable employees for such obligations are not presented on the Company’s consolidated balance sheets, as the amounts funded are not under the control of management of the Company and the Company is legally released from the obligation to pay any severance payments to the employees once the required deposits amounts have been paid.
For employees not under Section 14, severance liabilities are recorded based on the length of service and their latest monthly salary. The Company’s liabilities for the Israeli employees amounted to $1,388 and $1,550 as of December 31, 2023 and 2022, respectively and are included in other liabilities in the Company’s consolidated balance sheets. The deposits made at insurance companies to cover these liabilities amounted to $854 and $1,048 as of December 31, 2023 and 2022, respectively and are included in other assets in the Company’s consolidated balance sheets.
Leases
The Company as a lessee
Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. A lease is a finance lease if it meets any one of the criteria below, otherwise the lease is an operating lease:
The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
The lease term is for the major part of the remaining economic life of the underlying asset.
The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all of the fair value of the underlying asset.
The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of lease term.
Based on the criteria above, all of the Company's leases are classified as operating leases.
Operating lease Rights of Use (“ROU”) assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, while the ROU assets are also adjusted for any prepaid or accrued lease payments. The Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of the lease payments. The company does not recognize ROU assets or lease liabilities for leases with a term shorter than 12 months.
The lease term is the non-cancellable period of the lease plus periods covered by an extension or termination option if it reasonably certain that the Company will exercise the option.
F - 12
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Leases (Continued)
The Company as a lessee (Continued)
After lease commencement, the Company measures the lease liability at the present value of the remaining lease payments using the discount rate determined at lease commencement (as long as the discount rate hasn’t been updated as a result of a reassessment event).
The Company subsequently measures the ROU asset at the present value of the remaining lease payments, adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if relevant and any unamortized initial direct costs. Lease expenses are recognized on a straight-line basis over the lease term. Lease terms will include options to extend or terminate the lease when it is reasonably certain that the Company will exercise or not exercise the option to renew or terminate the lease.
Variable lease payments that depend on an index or a rate
On the commencement date, the lease payments shall include variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), initially measured using the index or rate at the commencement date.
The Company does not remeasure the lease liability for changes in future lease payments arising from changes in an index or rate unless the lease liability is remeasured for another reason. Therefore, after initial recognition, such variable lease payments are recognized in profit or loss as they are incurred.
Convertible Debt Instruments
The Company evaluates convertible debt instruments to determine whether the embedded conversion option needs to be bifurcated from the debt instrument and accounted for as a freestanding derivative instrument. An embedded conversion option is considered to be a freestanding derivative when: (a) the economic characteristics and risks of the embedded conversion option are not clearly and closely related to the economic characteristics and risks of the host instrument, (b) the hybrid instrument that embodies both the embedded conversion option and the host instrument is not re-measured at fair value under otherwise applicable US GAAP with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded conversion option would be considered a derivative instrument subject to certain requirements .
Contingent Liabilities
The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the normal course of its business activities. Liabilities for such contingencies are recognized when: (a) information available prior to the issuance of the consolidated financial statements indicates that it is probable that a liability had been incurred at the date of the consolidated financial statements and (b) the amount of loss can reasonably be estimated.
Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
The Company's comprehensive income (loss) consists mostly of the Company’s net income (loss), foreign currency translation adjustments and changes in fair value of derivative instruments as cash flow instruments. Accumulated other comprehensive loss consist of the Company’s accumulated foreign exchange currency translation adjustments, and changes in fair value of derivative instruments.
Stock-Based Compensation
Stock-based compensation to employees and non-employees, including stock options, are measured at the fair value of the award on the date of grant based on the estimated number of awards that are ultimately expected to vest. The compensation expense resulting from stock-based compensation to management and administrative employees is recorded over the vesting period of the award in selling, general and administrative expense on the accompanying consolidated statements of operations and comprehensive income (loss). Compensation expense resulting from stock-based compensation to operational employees is recorded over the vesting period of the award in cost of revenue.
F - 13
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Non-Controlling Interests
The Company’s non-controlling interests represent the minority shareholder’s ownership interests related to the Company’s subsidiaries. The Company reports its non-controlling interests in subsidiaries as a separate component of equity in the consolidated balance sheets and reports net income (loss) attributable to the non-controlling interests in the consolidated statements of operations.
Redeemable Non-Controlling Interests
When the Company or its subsidiaries issues preferred shares, it considers the provisions of FASB ASC 480 –”Distinguishing Liabilities from Equity” (Topic 480) in order to determine whether the preferred share should be classified as a liability. If the instrument is not within the scope of Topic 480, the Company or its subsidiaries further analyses the instruments characteristics in order to determine whether it should be classified within temporary equity (mezzanine) or within permanent equity in accordance with the provisions of Topic 480-10-S99. AU10TIX redeemable convertible preferred shares are not mandatorily or currently redeemable. However, it includes a liquidation or deemed liquidation events that would constitute a redemption event that is outside of the Company’s control. As such, all shares of redeemable preferred shares have been presented outside of permanent equity. The Company has not adjusted the carrying values of the redeemable preferred shares to the deemed liquidation values of such shares since a liquidation event was not probable at any of the balance sheet dates. Subsequent adjustments to increase or decrease the carrying values to the ultimate liquidation values will be made only if and when it becomes probable that such a liquidation event will occur.
Revenue Recognition
Revenue is recognized when the promised services are performed for our clients, and the amount that reflects the consideration we are entitled to receive in exchange for those services is determined. The Company’s revenues are recorded net of any sales taxes.
In order to determine the revenue, we (1) identify the contract with the client, (2) identify the performance obligations, usually it’s based on the hours spent, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligation and (5) we recognize revenue as performance obligation is satisfied.
A performance obligation is a promise in a contract to transfer a distinct service to the client, and it is the unit of account for revenue recognition. The majority of our contracts have a single performance obligation as the promise to transfer the individual services is not separately identifiable from other promises in our contracts and, therefore, is not distinct.
The following table presents the Company’s revenues according to the Company’s segments:
|
Year ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Airport Security
|
$
|
|
$
|
|
$
|
|
||||||
|
Other Aviation Related Services
|
|
|
|
|||||||||
|
Authentication Technology
|
|
|
|
|||||||||
|
Total revenue
|
$
|
|
$
|
|
$
|
|
||||||
The following table presents the Company’s revenues generated from customers by geographical area based on the geographical location of the customers invoicing address:
|
Year ended December 31,
|
||||||||||||||||||||||||
|
2023
|
2022
|
2021
|
||||||||||||||||||||||
|
Germany
|
$
|
|
|
%
|
$
|
|
|
%
|
$
|
|
|
%
|
||||||||||||
|
United States
|
|
|
%
|
|
|
%
|
|
|
%
|
|||||||||||||||
|
The Netherlands
|
|
|
%
|
|
|
%
|
|
|
%
|
|||||||||||||||
|
Spain
|
|
|
%
|
|
|
%
|
|
|
%
|
|||||||||||||||
|
Other countries
|
|
|
%
|
|
|
%
|
|
|
%
|
|||||||||||||||
|
Total revenue
|
$
|
|
|
%
|
$
|
|
|
%
|
$
|
|
|
%
|
||||||||||||
F - 14
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Airport Security and Other Aviation Services Segments
In the airport security and other aviation services, for performance obligations that we satisfy over time, revenues are recognized by consistently applying a method of measuring hours spent on that performance obligation. We generally utilize an input measure of time (hours and attendance for specific time framed service like specific flights) of the service provided. Performance obligations are satisfied over the course of each month and continue to be performed until the contract has been terminated or cancelled.
Pricing and Reduction to Revenues
We generally determine standalone selling prices based upon the prices included in the client contracts, using expected costs plus margin, or other observable prices. The price as specified in our client contracts is generally considered the standalone selling price as it is an observable input that depicts the price as if sold to a similar client in similar circumstances. Certain client contracts have variable consideration, including quality thresholds or other similar items that could reduce the transaction price. These amounts may be constrained and revenue is recorded to the extent we do not expect a significant reversal or when the uncertainty associated with the variable consideration is resolved. Our variable consideration amounts, if any, are not material, and we do not expect significant changes to our estimates.
Contracts
Our client contracts generally include standard payment terms acceptable in each of the countries, states and territories in which we operate. The payment terms vary by the type and location of our clients and services offered. Client payments are typically due in 30 to 60 days after invoicing, but may be a shorter or longer term depending on the contract. Our contracts with main customers are generally long-term contracts, between two to five years. The timing between satisfaction of the performance obligation, invoicing and payment is not significant.
Practical Expedients and Exemptions
Because nearly all our contracts are based on input measure of time of service provided (as hours or attendance) no exemptions need to be made. We have no material contracts with material revenues expected to be recognized subsequent to December 31, 2023 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 process. 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 in this case the executed number of flights. When the manning for the security of these flights is delivered, the Company invoices the customer according to the agreed flight tariff.
F - 15
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Cargo Security
Staffing or manning for specialized cargo security are usually based on long term contract, sometimes publicly tendered. Contracts are based on hourly planned and executed screening services. Revenue is recognized based on the realized screening hours and contractually agreed upon hourly rate.
Other Airport Services
Airport Services include wheelchair attendants, pre-departure skycaps, bag-runners, agents, guards, charter security screening, janitorial, and cabin cleaning to major U.S. and foreign carriers in airports throughout the United States of America. Our contracts may include either single or multiple performance obligations and vary by airport and airline. We recognize revenue given the unit of measure (usually hours) provided in the given time period and the specific price for specific hours or attendance for specific event, time framed service as agreed upon in the contracts.
General Security Services
Security Services include providing armed and un-armed guards to private schools and places of worship, video surveillance and patrol. Contracts for security services generally include only a single performance obligation. We recognize revenue for security guard services given the unit of measure (hours) provided in the given time period. Revenue from video surveillance and patrol is recognized based upon a fixed monthly rate.
Other Services
Other services include revenues from (incidental) specialized security manning services, training services and ad hoc work performed on and off airports. Revenue is recognized over time as services are being performed, using the input of service delivered during the time period, according to the contractual agreed price.
Authentication Technology Segment
In the authentication technology segment, the Company offers authentication services on a cost per click basis, with a minimum yearly commitment which means the customer pays the Company according to the higher of (a) number of times the customer used the system in order to authenticate IDs or (b) according to the yearly minimum commitment. According to the agreement with the customers, each chargeable click has an agreed price and revenue is being recognized accordingly.
Pricing and Reduction to Revenues
The company determines standalone selling prices based upon the prices included in the client contracts, using expected costs plus margin, or other observable prices. The price as specified in our client contracts is considered the selling price as agreed with the customer. The Company’s variable consideration, if any, amounts are not material, and we do not expect significant changes to our estimates. The Company does not expect a significant reversal or when the uncertainty associated with the variable consideration is resolved. A customer might be offering a tier-based pricing scheme, or not, and in any event of usage above the committed amount, the pricing will remain unchanged.
Contracts
Client contracts generally include standard payment terms acceptable in each of the countries, states and territories in which the company operates, and are typically set to a three-year deal duration. The payment terms vary by the type and location of our clients and services offered. The minimum commitment is usually being paid in advance. Client payments are typically due in 30 days after invoicing, but may be a shorter or longer term depending on the contract. Client contracts are usually range from one to three years, with a convenience exit every twelve months period, and at the end of the contract there is a renewal option. The timing between satisfaction of the performance obligation, invoicing and payment is not significant.
F - 16
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Deferred Revenues
The Company records deferred revenues when cash payments are received or due in advance of our performance. Deferred revenues at December 31, 2023 and 2022 were $4,938 and $3,570 , respectively shown as part of the accrued expenses and other current liabilities and $0 and $336 shown as other liabilities. Revenue recognized for the years ended December 31, 2023, 2022 and 2021 that was included in the deferred revenue at the beginning of each year was $3,570 , $2,217 and $2,049 , respectively.
Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant.
Capitalized Contract Costs
As part of obtaining contracts with certain customers in the authentication technology segment, the Company incurs upfront costs such as sales commissions. The Company capitalizes these costs which are subsequently amortized on a straight-line basis over the estimated life of the relationship with the customer. The Company applies the practical expedient that allows it to determine this estimate for a portfolio of contracts that have similar characteristics in terms of type of service, contract term and pricing. This estimate is reviewed by management at the end of each reporting period as additional information becomes available.
Cost of Revenue
Cost of revenue represents primarily payroll and employee related costs associated with employees who provide services under the terms of the Company’s contractual arrangements, insurance and depreciation and amortization.
Research and Development Costs
Research and development costs are expensed as incurred and consist primarily of payroll and related costs, professional services, consulting services and non-capitalized cost associated with the development of technologies.
Advertising Costs
Advertising costs are expensed as incurred and consist of costs associated with promoting the Company, its products and services as participation in conferences and publication costs. Advertising costs during the years ended December 31, 2023, 2022 and 2021 are $3,107 , $3,472 and $2,150 , respectively.
Value Added Tax
Certain of the Company’s operations are subject to Value Added Tax (“VAT”) applied on the services sold in those respective countries. The Company is required to remit the VAT collected to the tax authorities, but may deduct the VAT paid on certain eligible purchases.
Income Taxes
The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities resulting from a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is established when realization of net deferred tax assets is not considered more likely than not.
F - 17
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes (Continued)
Uncertain income tax positions are determined based upon the likelihood of the positions being sustained upon examination by taxing authorities. The benefit of a tax position is recognized in the consolidated financial statements in the period during which management believes it is more likely than not that the position will not be sustained. Income tax positions taken are not offset or aggregated with other positions. Income tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of income tax benefit that is more than 50 percent likely of being realized if challenged by the applicable taxing authority. The portion of the benefits associated with income tax positions taken that exceeds the amount measured is reflected as income taxes payable.
Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share is determined in the same manner as basic income (loss) per share, except that the number of shares is increased to include potentially dilutive securities using the treasury stock method.
The Company had a net loss for the year ended December 31, 2022. For periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all dilutive potential common share is anti-dilutive due to the net loss. Potentially dilutive securities were excluded from the computation of diluted loss per share even though the conversion rate of the convertible note payable to related party was lower than the market price of the Company’s common stock as of December 31, 2022, due to the net loss during that year.
The Company had net income for the years ended December 31, 2023 and 2021. For the year ended December 31, 2021 the net income of the Company was adjusted by $10,102 as deemed dividends following the conversion of preferred shares A and A-1 in AU10TIX Technologies B.V. to new Series A. Potentially dilutive securities were included in the computation of diluted income per share as the conversion rate of the convertible note payable to related party was lower than the weighted average computed price of the Company’s stock for the year 2023 and 2021.
The number of shares of common stock attributable to potentially dilutive securities for the years ended December 31, 2023, 2022 and 2021 were 1,990,173 , 2,760,855 and 2,978,843 shares of which the December 31, 2022 shares were excluded from the loss per share calculation due to being anti-dilutive. In computing diluted earnings per share the Company took into account the potential dilution that could occur upon the exercise of options granted under employee stock compensation plans, using the treasury stock method and conversion of the convertible note using the if converted method.
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities, income taxes payable, VAT payable, notes payable-banks, long-term loan payable and loan payable to related party approximate their carrying values due to the short-term nature of the instruments. The carrying values of the convertible notes payable to a related party and other liabilities are not readily determinable because: (a) these instruments are not traded and, therefore, no quoted market prices exist upon which to base an estimate of fair value and (b) there were no readily determinable similar instruments on which to base an estimate of fair value.
Concentration of Credit Risk
Financial instruments which are subject to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, bank deposits and accounts receivable.
The Company maintains cash, cash equivalents, restricted cash and bank deposits in accounts with financial institutions in the United States of America, Europe, Japan and Israel. As of December 31, 2023 and 2022, accounts at financial institutions located in the United States of America are insured by the Federal Deposit Insurance Corporation up to $250 2,745 and $10,613 , respectively, are being held in the United States of America, of which $2,445 and $10,613 , respectively, are uninsured. Cash, cash equivalents, restricted cash and bank deposits located in Europe, Japan and Israel, totaling $98,282 and $85,349 as of December 31, 2023 and 2022, respectively, are uninsured.
F - 18
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Credit Risk (Continued)
The Company renders services to a limited number of airlines and airports through service contracts and provides credit without collateral. Some of these airlines and airports may have difficulties in meeting their financial obligations, which can have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows. To mitigate this risk, the Company regularly reviews the creditworthiness of its customers through its credit evaluation process.
Revenue from two customers represented 34 % of total revenue during the year ended December 31, 2023, of which customer A accounted for 20 % and customer B accounted for 14 % of total revenue. Accounts receivable from these two customers represented 20 % of total accounts receivable as of December 31, 2023.
Revenue from two customers represented 52 % of total revenue during the year ended December 31, 2022, of which customer A accounted for 34 % and customer C accounted for 18 % of total revenue. Accounts receivable from these two customers represented 31 % of total accounts receivable as of December 31, 2022.
Revenue from three customers represented 64 % of total revenue during the year ended December 31, 2021, of which customer A accounted for 39 %, customer B accounted for 14 % of total revenue and customer C accounted for 11 % of total revenue. Accounts receivable from these three customers represented 39 % of total accounts receivable as of December 31, 2021.
Customers A and C mentioned above, have been principal customers in the last three years. Revenue and receivables from customer B in 2023 used to be presented in previous years as part of customer C. In 2023 there have been some changes in the structure of customer C and revenue is being split between few customers. For comparative purposes, total revenue of those customers in 2023 would have been 19 % of total revenue. Accounts receivable from customers A and C would represent 12 % of total accounts receivable as of December 31, 2023.
Risks and Uncertainties
The Company is currently engaged in direct operations in numerous countries and is therefore subject to risks associated with international operations (including economic and/or political instability, trade restrictions and strikes). Such risks can cause the Company to have significant difficulties in connection with the sale or provision of its services in international markets and have a material impact on the Company’s consolidated financial position, results of operations and cash flows.
The Company is subject to changes in interest rates based on Central Banks Federal Reserve actions and general market conditions. The Company does not utilize derivative instruments to manage its exposure to interest rate risk.
Furthermore, as a result of its international operations, the Company is subject to market risks associated with foreign currency exchange rate fluctuations. The Company does not utilize derivative instruments to manage its exposure to such market risk except in one of its subsidiaries. As such, significant foreign currency exchange rate fluctuations can have a material impact on the Company’s consolidated financial position, results of operations and cash flows.
Recently Issued Accounting Pronouncements
Accounting Standards Update 2023-07
In November 2023, the Financial Standards Accounting Board (FASB) issued Accounting Standards Update (ASU) 2023-07 "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for our annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.
F - 19
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements (Continued)
Accounting Standards Update 2023-09
In December 2023, the FASB issued ASU 2023-09 "Income Taxes (Topics 740): Improvements to Income Tax Disclosures" to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for our annual periods beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.
NOTE 3 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets are as following:
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Receivable from the German authorities – COVID-19 (1)
|
$
|
|
$
|
|
||||
|
Dutch Governmental support – COVID-19 (2)
|
|
|
||||||
|
Income tax receivable
|
|
|
||||||
|
Interest from bank deposits
|
|
|
||||||
|
Value Added Tax (VAT) receivable
|
|
|
||||||
|
Prepaid uniforms
|
|
|
||||||
|
Prepaid insurance
|
|
|
||||||
|
Prepaid licenses
|
|
|
||||||
|
Prepaid rent
|
|
|
||||||
|
Other
|
|
|
||||||
|
Total prepaid expenses and other current assets
|
$
|
|
$
|
|
||||
| (1) |
In Germany, the employees are eligible for payroll support. The Company pays to its German employees their full salary and the Company is being reimbursed by the German government for the payroll support amount.
|
| (2) |
In the Netherlands, the Company was eligible for support following the COVID-19 crisis.
|
NOTE 4 - INVESTMENTS
Manuka, Inc. (Previously Artemis Therapeutics, Inc.)
As of December 31,2023, the Company owns less than 1% of the issued and outstanding share capital of Manuka, Inc. (“MNKA”). MNKA is a company incorporated in Israel engaged in developing and manufacturing skincare products based on Manuka honey and bee venom. The market value of the Company’s investment in MNKA as of December 31, 2023 and 2022 is $9 and $146 , respectively. The Company evaluated the stock price of MNKA but as MNKA share price is low, the number of shares that are being traded is low and as MNKA still does not have any material revenue or profitable operations, the Company previously determined that the value of the investment is impaired and accordingly, valued the investment at zero.
Freezone I-SEC Korea Inc.
In April 2018, the Company signed a Joint Venture Agreement with a South Korean Company in order to establish a Joint Venture Company (“JVC”) and to provide aviation security and non-security services in South Korea. Each one of the parties holds 50 % (fifty percent) of the JVC’s equity. In January 1, 2023, the Company sold its part in the JVC to the South Korean Company for an amount of €25 thousand ($27 thousand as of December 31, 2022). At December 31, 2022 the Company wrote off $131 of the investment to match the value of the investment in its books to the sale price.
F - 20
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 4 - INVESTMENTS (CONTINUED)
Mesh Technologies, Inc.
In January 2019, the Company invested an amount of $50 in Mesh Technologies, Inc. (“Mesh”), a company incorporated in the USA. The investment represents less than 1% of the issued and outstanding share capital of Mesh. Mesh is a technology company providing cross border payments technology by innovating on the existing payment rails of established card networks available in the market. As Mesh is a private, closely held company, there is no active market for this investment. Therefore, the Company measures the investment at cost minus impairment. In December 2021, the Company sold approximately 25 % of its investment for a total amount of $200 and recognized a gain of $186 .
Arrow Ecology & Engineering Overseas (1999)
In December 2019, the Company invested an amount of $1,750 in Arrow Ecology & Engineering Overseas (1999) Ltd (“Arrow”), a limited company incorporated in Israel. Arrow develops and operates a sustainable green process to recycle mixed and sorted municipal solid waste. The Company purchased few types of shares representing 22.6 % of Arrow’s equity for an amount of $22 and shareholders loans were purchased for a price of $1,728 ($4,146 stated value less $2,418 allowance for credit losses, which have not changed since the acquisition). The Company uses the equity method for this investment. During the years ended December 31, 2023, 2022 and 2021, the Company recognized its share in Arrow losses in the amount of $0 , $0 and $975 , respectively, from this investment.
The Company suspended its use of the equity method to accounting for this investment in 2023 after its investment balance was reduced to zero.
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 on January 1, 2025. Some Directors, managers and shareholders of Arrow are related parties of the Company.
GreenFox Logistics LLC.
In March 2020, the Company invested an amount of $100 in GreenFox Logistics, LLC. (“GreenFox”), a company incorporated in the USA. The investment was done as SAFE investment (Simple Agreement for Future Equity). GreenFox is an on-demand delivery/moving/transportation company. As GreenFox is a private, closely held company, there is no active market for this investment. Therefore, the Company measures the investment at cost minus impairment.
SardineAI Corp.
In August 2020, the Company invested an amount of $50 in SardineAI Corp (“SardineAI”), a company incorporated in the USA. In return, the Company received preferred shares representing less than 1% of SardineAI equity. SardineAI is a Fraud Prevention-as-a-Service (FaaS) platform for Digital businesses to detect frauds and financial crimes. As SardineAI is a private, closely held company, there is no active market for this investment. Therefore, the Company measures the investment at cost minus impairment. In January 2023, the Company sold approximately 85 % of its investment for a total amount of $758 .
Silver Circle One
In December 2021, March 2022 and December 2022, the Company invested a total amount of $38 in Silver Circle One, a capital fund which aims to invest in private emerging companies with focus on consumer, commerce and technology companies. The company committed to invest up to $100 on the pool. As Silver Circle One is a private, closely held fund, there is no active market for this investment. Therefore, the company measures the investment at cost minus impairment.
F - 21
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 4 - INVESTMENTS (CONTINUED)
Justt Fintech Ltd (previously Acrocharge Ltd)
In December 2021, the Company invested an amount of $50 in Justt Fintech Ltd (“Justt”), a company incorporated in Israel. As of December 31, 2023, the investment represented less than 1% of the issued and outstanding share capital of Justt Fintech Ltd. Justt is a technology company which fully automated chargeback disputes on behalf of online merchants. As Justt is a private, closely held company, there is not active market for this investment. Therefore, the Company measures the investment at cost minus impairment.
Nilus OS Ltd
In March 2022, the Company invested an amount of $25 in Nilus OS Ltd. (“Nilus”), a company incorporated in Israel. As of December 31, 2023, the investment represented less than 1% of the issued and outstanding share capital of Nilus. Nilus is a company that automates payment and financial workflows for platforms that involve transfers of money. As Nilus is a private, closely held company, there is no active market for this investment. Therefore, the Company measures the investment at cost minus impairment.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment is as follows:
|
December 31,
|
|||||||
|
2023
|
2022
|
||||||
|
Office, equipment and facilities
|
$
|
|
$
|
|
|||
|
R&D capitalization costs
|
|
|
|||||
|
Vehicles
|
|
|
|||||
|
Leasehold improvements
|
|
|
|||||
|
|
|
||||||
|
Less: accumulated depreciation and amortization
|
|
|
|||||
|
Total property and equipment, net
|
$
|
|
$
|
|
|||
Depreciation and amortization expenses are $2,679 , $2,454 and $2,061 for the years ended December 31, 2023, 2022 and 2021 respectively.
NOTE 6 - LEASES
Lessee Arrangements
The Company enters into leases in the normal course of business primarily as part of its operations in the different airports, back office operations, research and development offices and headquarters offices.
The table below presents the effects on the amounts relating to the Company’s total lease cost:
|
Year ended December 31,
|
||||||||||
|
2023
|
2022
|
2021
|
||||||||
|
Operating lease cost
|
$
|
|
$
|
|
$
|
|
||||
|
Short-term lease cost
|
|
|
|
|||||||
|
Total lease cost
|
$
|
|
$
|
|
$
|
|
||||
F - 22
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 6 - LEASES (CONTINUED)
Lessee Arrangements (Continued)
Other information:
Cash paid for amounts included in the measurement of Lease liabilities:
|
Year ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Operating cash flows from operating leases
|
$
|
|
$
|
|
$
|
|
||||||
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
|
|
|||||||||
|
Weighted-average remaining lease term-operating leases
|
|
|
|
|||||||||
|
Weighted-average remaining lease term-operating leases
|
|
%
|
|
%
|
|
%
|
||||||
Balance sheet information related to operating leases was as follows:
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Operating lease ROU assets
|
$
|
|
$
|
|
||||
|
Operating lease liabilities - current
|
$
|
|
$
|
|
||||
|
Operating lease liabilities - non current
|
|
|
||||||
|
Total operating lease liabilities
|
$
|
|
$
|
|
||||
Future undiscounted lease payments for operation leases with initial terms of more than one year as of December 31, 2023 are as follows:
|
Year ending December 31,
|
||||
|
2024
|
$
|
|
||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
2028
|
|
|||
|
Thereafter
|
||||
|
Total future minimum lease payments
|
|
|||
|
Less: imputed interest
|
|
|||
|
Total
|
$
|
|
||
F - 23
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 7 - GOODWILL
All the Company’s goodwill relates to its airport security segment. The change in goodwill during the year is as follows:
|
2023
|
2022
|
|||||||
|
Balance as of the beginning of the year
|
$
|
|
$
|
|
||||
|
Goodwill acquired during the year
|
|
|
||||||
|
Impairment losses
|
|
|
||||||
|
Exchange rate effect
|
|
(
|
)
|
|||||
|
Balance as of the end of the year
|
$
|
|
$
|
|
||||
At December 31, 2023 and 2022, the Company performed qualitative assessments to determine if it was more likely than not that the fair value of the reporting units exceeded its carrying values, including goodwill. The qualitative assessments indicated that it was more likely than not that the fair value exceeded the carrying value of the reporting unit.
During the years ended on December 31, 2023, 2022 and 2021, the Company recognized impairment charges of $0 , $0 and $139 , respectively.
NOTE 8 - NOTES PAYABLE – BANKS
United States of America
The Company’s U.S subsidiary secured a three-year credit facility with its primary bank in September 2023. The credit facility has a maximum borrowing base limit of $7,500 . The borrowing base limitation is equivalent to: (i) 85% of eligible non-investment grade receivables and 90% of eligible investment grade receivables, plus (ii) 80% of direct labor payroll for the previous two pay periods plus 20%. The company is required to maintain a fixed charge ratio of 1.00. Borrowings on the credit facility are subject to interest at SOFR plus 2.65% and a minimum annual interest charge of $60 . As of December 31, 2023, the Company has not yet borrowed funds under the credit facility and the unused available amount of the line is $7,500 .
Europe
The Company has a credit arrangement in Sweden to provide it with up to 4,000 SEK ($398 as of December 31, 2023) 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, 2023 and 2022, the Company had 2,098 SEK and 1,196 SEK ($209 and $115 as of December 31, 2023 and 2022) respectively in outstanding borrowings under the line of credit facility.
On November 2023, the Company entered into a loan agreement with a commercial bank in Spain to provide it with up to €1,000 ($1,099 as of December 31, 2023). Interest rate will be determined by the bank at the time the loan will be taken. The loan agreement expires in November 2024. As of December 31, 2023 the Company had no outstanding balance under the loan agreement.
During the year ended December 31, 2023 the Company has been taking from time to time revolving short term loans from the same commercial bank, of variable amounts. The loans ranged between €250 to €1,415 ($274 and $1,555 as of December 31, 2023) with interest rates between 5.25 % to 5.90 % and for periods between to six months . On December 2023, an agreement with the commercial bank was extended, to provide loans up to €1,500 ($1,648 as of December 31, 2023). These loans can be used only for paying different taxes to the Spanish tax authorities. The interest rate is being determined at the time the loans are being taken. The loan agreement can be terminated by both sides at any time. As of December 31, 2023 there are no outstanding balances regarding those loans.
The Company’s weighted average interest rate in Europe during the years ended December 31, 2023, 2022 and 2021, was 4.7 %, 2.8 % and 4.8 % respectively.
F - 24
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 9 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are as follows:
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Accrued payroll and related costs
|
$
|
|
$
|
|
||||
|
Accrued vacation
|
|
|
||||||
|
Deferred revenue
|
|
|
||||||
|
Advanced payments from a customer
|
|
|
||||||
|
Commitment to purchase shares from directors and officers
|
|
|
||||||
|
Other
|
|
|
||||||
|
Total accrued expenses and other current liabilities
|
$
|
|
$
|
|
||||
NOTE 10 - DEBT TO A RELATED PARTY
Convertible Notes Payable to a Related Party
The Company had an agreement with an entity related to its main shareholder, to provide it with up to $2,000 in revolving loans through January 2024. The term of the arrangement can be automatically extended for four additional six-month periods at the option of the holder. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the interest rate of 2.5 %. In connection with the arrangement, the holder was granted in May 2019 an option to convert up to $2,000 of the loan into maximum of 5,000,000 shares at a price of $0.4 per share. In October 2020, the entity converted $800 into 2,000,000 shares. In November 2023 the Company and the related party agreed to extend the length of the note until January 2026 and to adjust the terms of the option to convert the loan into maximum 5,000,000 shares at a price of $0.75 per share. As a result, an adjustment was made to the per share price of the 2,000,000 shares issued in October 2020 conversion, resulting in an amount of $700 of the loan derecognize with a corresponding increase to the additional paid in capital. See also note 18.
The Company’s weighted average interest during the years ended December 31, 2023, 2022 and 2021 is 2.5 %, 2.5 % and 7.10 %, respectively.
Total interest expense related to the note is $21 , $28 and $83 for the years ended December 2023, 2022 and 2021, respectively.
As of December 31, 2023, and 2022, convertible notes payable to this related party consist of $0 and $1,104 , respectively.
NOTE 11 - OTHER LIABILITIES
Other liabilities are as follows:
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Deferred wage tax and social security (1)
|
$
|
|
$
|
|
||||
|
Deferred VAT (1)
|
|
|
||||||
|
Severance pay liability
|
|
|
||||||
|
Deferred revenue
|
|
|
||||||
|
Other (2)
|
|
|
||||||
|
Total other liabilities
|
$
|
|
$
|
|
||||
F - 25
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 11 - OTHER LIABILITIES (CONTINUED)
| (1) |
Deferred VAT and deferred wage tax relate to measurements taken by the Dutch government, on which they postponed all VAT payable for the years 2021 and 2020 and all wage tax and social security payable for the months March – December 2021 to be paid in 60 instalments starting October 2022.
|
| (2) |
Including a
|
NOTE 12 - REDEEMABLE NON-CONTROLLING INTERESTS
On July 3, 2019, AU10TIX entered into a Series A Preferred Subscription Agreement (the “Agreement”) with TPG Lux 2018 SC I, S.a.r.l (“TPG”), according to which AU10TIX issued 3,000,000 Series A Preferred Shares (“Series A Shares”) to TPG for a subscription price of US$60,000 in cash representing approximately 24 % of the outstanding share capital of AU10TIX and 23.077 % of the fully-diluted share capital of AU10TIX (see note 14). Transaction costs totaled $4,540 and were deducted from the redeemable non-controlling interests balance.
On November 7, 2019, AU10TIX entered into a Series A and Series A-1 Preferred Subscription Agreement with Oak HC/FT Partners II, L.P. (“Oak”), according to which AU10TIX issued 1,000,000 Series A Preferred Shares and 23,622 Series A-1 Preferred Shares (“Series A-1 Shares” and together with Series A Shares – “the Preferred Shares”) to Oak for a subscription price of US$20,000 in cash representing approximately 7.401 % of the outstanding share capital of AU10TIX and 7.143 % of the fully-diluted share capital of AU10TIX. For accounting purposes, the investment was allocated to the Series A and Series A-1 Preferred Shares on a relative fair value basis: $19,537 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 AU10TIX.
On June 28, 2021, TPG, Oak, GF GW LLC (“GF”) and AU10TIX, entered into a Sale and Purchase Agreement (the “SPA”), pursuant to which Oak and GF purchased preferred shares in AU10TIX from TPG. In connection with the SPA, (i) such parties and ICTS entered into an amended and restated shareholders agreement (the “SHA”) and an amended and restated registration rights agreement (the “RRA”) and (ii) AU10TIX’s Articles of Association (the “Articles”) were amended by a deed of amendment (the “Deed of Amendment”).
Pursuant to the SPA, Oak purchased 755,906 AU10TIX Series A Preferred shares from TPG and GF purchased 1,511,811 AU10TIX Series A Preferred Shares from TPG. In connection with such purchases, all outstanding AU10TIX’s Series A Preferred Shares and Series A-1 Preferred Shares were re-designated as New Series A Preferred Shares and the Ordinary Shares owned by ICTS were re-designated as Class B Ordinary Shares, as described below.
Following the completion of the sales and purchases contemplated by the SPA on June 28, 2021: (i) ICTS owns 68.69 % of the outstanding share capital of AU10TIX in the form of Class B Ordinary Shares; (ii) Oak owns 12.87 % of the outstanding share capital of AU10TIX in the form of New Series A Preferred Shares; (iii) GF owned 10.93 % of the outstanding share capital of AU10TIX in the form of New Series A Preferred Shares; and (iv) TPG owns 7.51 % of the outstanding share capital of AU10TIX in the form of New Series A Preferred Shares. In addition, AU10TIX may issue up to 500,000 Class A Ordinary Shares under its existing employee stock option plan.
In consideration of the benefits to Oak increasing its shareholding and GF becoming a shareholder, AU10TIX provided certain customary warranties to Oak and GF concerning AU10TIX and its business. In addition, AU10TIX agreed to be primarily liable to Oak and GF for any breaches by TPG of its customary fundamental warranties given to Oak and GF (including that TPG owns AU10TIX Series A Preferred Shares being sold to Oak and GF); provided, that, TPG has agreed to indemnify and hold AU10TIX harmless for any losses incurred by AU10TIX in relation to such fundamental warranties given by TPG.
F - 26
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 12 - REDEEMABLE NON-CONTROLLING INTERESTS (CONTINUED)
The Preferred Shares Rights
The SHA and the Articles (as amended by the Deed of Amendment) provide for the following material matters in respect of the rights attaching to the New Series A Preferred Shares and the Ordinary Shares and the ongoing governance of AU10TIX:
General: The New Series A Preferred Shares are entitled to one vote per share and rank equally with the Ordinary Shares in regards to dividends. The Ordinary Shares are divided into two classes: Class A Ordinary Shares and Class B Ordinary Shares, which rank equally as to dividends. The Class A Ordinary Shares are entitled to one vote per share. The Class B Ordinary Shares are entitled to three votes per share and may only be held by ICTS and its permitted transferees.
Liquidation Preference: the holders of New Series A Preferred Shares (“Series A Holders”) are entitled to a liquidation preference upon the occurrence of a (i) sale, initial public offering, which term includes certain business combinations with a SPAC (an “IPO”), merger, consolidation or reorganization, which results in change of control of AU10TIX, and (ii) winding-up, dissolution or liquidation of AU10TIX, pursuant to which the Series A Holders are entitled, on the occurrence of such event and in priority to the Ordinary Shares, to receive the greater of: (a) US$26.4583 per share, subject to adjustments for certain events affecting the capital of AU10TIX (the “Starting Price”) plus all accrued but unpaid dividends in respect of the New Series A Preferred Shares, less all dividends previously paid on the New Series A Preferred Shares, and (b) the proceeds distributable in respect of the New Series A Preferred Shares had they been converted into Class A Ordinary Shares. The Ordinary Shares rank equally in liquidation.
Conversion Rights: The New Series A Preferred Shares are subject to conversion into Class A Ordinary Shares on a 1:1 basis (subject to adjustments for certain events affecting the capital of AU10TIX): (a) upon the written request by any Series A Holder; and (b) immediately prior to a qualifying IPO of AU10TIX (being an IPO where each Class A Ordinary Share is valued at not less than 150 % of the Starting Price at the completion of the IPO, subject to adjustments for certain events affecting the capital of AU10TIX) (a “Qualifying IPO”). The Class B Ordinary Shares are convertible into Class A Ordinary Shares at any time upon the written request of a holder of Class B Ordinary Shares on a 1:1 basis, subject to adjustments for certain events affecting the capital of AU10TIX.
Anti-Dilution Protection: The SHA contains customary broad-based weighted average anti-dilution protection whereby, if further shares are issued by AU10TIX at a price per new security that is less than the Starting Price, then the Series A Holders shall be entitled to receive additional Class A Ordinary Shares (at no further cost) on a weighted-average basis, reflecting the value of the equity in AU10TIX, as determined based on the subscription price paid in the new issue of securities.
Transfers: Subject to certain customary exceptions, including a transfer to a permitted transferee, any shareholder (other than TPG, Oak and GF) wishing to transfer any of the shares held by it shall first offer such shares to each shareholder holding 3 % or more of AU10TIX’s outstanding share capital at the same price and on the same terms at which the selling shareholder wishes to transfer such shares.
New Issuances: Subject to certain customary exceptions, each shareholder holding 3% or more of AU10TIX’s outstanding share capital has the right to participate in any new issuance of securities by AU10TIX.
Information Rights: Subject to certain exceptions, each shareholder holding 3% or more of AU10TIX’s outstanding share capital is entitled to receive certain financial information regarding AU10TIX including budgets, annual and quarterly accounts and details of any third party offer for the stock or assets of AU10TIX, as well as certain inspection rights.
Exit Rights: At any time from and after July 3, 2026, upon written request by Series A Holders holding at least 60 % of the then outstanding New Series A Preferred Shares (the “Preferred Majority”), AU10TIX is required to use reasonable endeavors to facilitate a sale of AU10TIX within six months after such written request, and, thereafter, the Preferred Majority has the right to step-in and require AU10TIX to facilitate a sale or IPO. On the exercise of such step-in right, each other shareholder (including ICTS) is required to cooperate with the Preferred Majority regarding such sale or IPO and the Preferred Majority has the right to exercise drag rights over the shares held by other shareholders in order to facilitate such exit event.
F - 27
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 12 - REDEEMABLE NON-CONTROLLING INTERESTS (CONTINUED)
The Preferred Shares Rights (Continued)
Board Arrangements: The Shareholders Agreement and Articles provide that the board of directors of AU10TIX shall be constituted by up to six directors: (i) four of whom will be appointed by the holder of a majority of the Class B Ordinary Shares (i.e., currently ICTS); (ii) one of whom will be appointed by Oak (for so long as Oak holds at least 50 % of the New Series A Preferred Shares held on the date of the closing of the transactions contemplated by the SPA, subject to adjustments for certain events affecting the capital of AU10TIX); and (iii) one of whom will be appointed by GF (for so long as GF holds at least 50 % of the New Series A Preferred Shares held on the date of the closing of the transactions contemplated by the SPA, subject to adjustments for certain events affecting the capital of AU10TIX). As a general matter, the board of AU10TIX is able to pass resolutions by a simple majority, subject to the consent rights of the Preferred Majority set out below.
Preferred Majority Consent Rights: For as long as the Series A Holders hold, in the aggregate, at least 25 % of the New Series A Shares Preferred Shares held on the date of the closing of the transactions contemplated by the SPA, subject to adjustments for certain events affecting the capital of AU10TIX, the consent of the Preferred Majority is required for the following actions (i) amending the SHA or the Articles in a manner that would adversely affect the rights, preferences or privileges of the New Series A Preferred Shares; (ii) issuing new securities ranking senior to or pari passu with the New Series A Preferred Shares; (iii) making of any dividend or distribution other than a dividend or distribution that is pro rata to the Series A Holders and the holders of the Ordinary Shares; (iv) redeeming any Ordinary Shares; (v) incurring debt in excess of 4.0x AU10TIX’s consolidated EBITDA in the 12-month period ending on the last day of the month preceding the month in which the debt was incurred; (vi) consummating an IPO other than a Qualifying IPO; (vii) making certain changes to the size of AU10TIX’s board; (viii) making any fundamental change in the nature of the business of AU10TIX and its subsidiaries; (ix) entering into related party transactions, unless such transaction is commercially reasonable and on an arm’s-length basis; and (x) either amending AU10TIX’s existing stock option plan or creating a new stock option plan to allow for the issuance of more than 500,000 additional Class A Common Shares.
Tag Rights: Following completion of the procedures on transfers set out above, each Series A Holder holding 3 % or more of AU10TIX’s outstanding shares will have the right to participate proportionately in any third-party share sale by another shareholder other than a Series A Holder (subject to certain customary exceptions).
Drag Rights: AU10TIX has the right to drag other shareholders into an exit event subject to certain requirements being satisfied (including either (i) holders of New Series A Shares receiving the greater of: (a) the Starting Price and (b) the proceeds distributable in respect of the New Series A Preferred Shares had they been converted into Class A Ordinary Shares, in each case with the approval of the Board, the Preferred Majority and the holders of a majority of the shares or (ii) a minimum value per New Series A Share of 150 % of the Starting Price approved by the Board and holders of a majority of the shares, in each case subject to adjustments for certain events affecting the capital of AU10TIX) in relation to such exit transaction.
Termination: The SHA terminates upon (i) the agreement of AU10TIX, the Preferred Majority and a majority of the holders of the Ordinary Shares or (ii) the closing of a Qualifying IPO.
Tax Matters: AU10TIX is required to provide the Series A Holders with certain customary information for U.S. federal tax reporting purposes.
Confidentiality and Public Announcements: The SHA provides for customary confidentiality protections and limitations on public announcements without consent.
The RRA provides the Series A Holders (and in certain cases the holders of the Class B Ordinary Shares) with a limited number of customary long-form and short-form demand registration rights, shelf registration rights and the right to participate under certain conditions if AU10TIX determines to register its shares. In addition, AU10TIX has undertaken to (i) take certain actions to facilitate the rights of the parties under the RRA; (ii) provide customary indemnification; (iii) not agree to further registration rights superior to those granted under the RRA; and (iv) limit issuances of its shares under certain circumstances set out in the RRA.
F - 28
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 12 - REDEEMABLE NON-CONTROLLING INTERESTS (CONTINUED)
The Preferred Shares Rights (Continued)
Pre-emption Rights: The Shareholders Agreement contains a restriction on issuing any securities senior to or pari passu with the New Series A Preferred Shares for so long as the holders of the New Series A Preferred Shares on June 28, 2021 (or their transferees in accordance with the terms of the Shareholders Agreement) continue to collectively hold at least 25 % of such number (appropriately adjusted for certain corporate events) of New Series A Preferred Shares. In addition, each shareholder holding in excess of 3% of AU10TIX’s outstanding shares has the right to participate in any new issuance of securities by AU10TIX, subject to customary exceptions.
The following table sets forth for the movement in the redeemable non-controlling interests:
|
Year Ended December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Balance as of the beginning of the year
|
$
|
|
$
|
|
||||
|
Net Income (loss)
|
|
(
|
)
|
|||||
|
Other Comprehensive Income - Translation adjustment
|
|
(
|
)
|
|||||
|
Other
|
|
(
|
)
|
|||||
|
Balance as of the end of the year
|
$
|
|
$
|
|
||||
NOTE 13 - GOVERNMENTAL SUPPORT
During 2022 and 2021, governments in some of the countries in which we operate implemented the government assistance measures, which mitigated the impact of the COVID-19 outbreak on our results and liquidity. In the United States of America, the government has approved a payroll support of $0 and $15,918 , for the years ended December 31, 2022 and 2021 to the American subsidiary of the Company. The American subsidiary recognized amounts of $0 and $16,925 as reduction of labor expenses for the years ended December 31, 2022 and 2021, respectively. For the year ended December 31, 2023 the Company did not receive any payroll support from the American government regarding COVID-19.
For the years ended December 31, 2022 and 2021, the Dutch government has provided financial assistance of €3,671 and €18,135 ($3,864 and $22,608 as of December 31, 2022 and 2021), respectively. The Dutch government terminated the support program in March 2022. For the year ended December 31, 2023 the Company did not receive any financial assistance from the Dutch government regarding COVID-19.
In the Netherlands wage tax, social security and VAT payments for the period March 2020 until September 2021 were postponed and have to be paid in 60 monthly installments, starting October 2022. The debt incurs annual interest starting July 2022 of 1% and increases every six months to a maximum of 4% starting on January 1, 2024 onwards. As of December 31, 2023 and 2022, the Company accumulated debt of €24,886 and €31,796 ($27,347 and $33,826 as of December 31, 2023 and 2022), respectively to the Dutch tax authorities.
In Germany, the employees are eligible for payroll support up to 60 % of the employee’s payroll (on individual basis) in case the employees meet the support plan requirements. The Company pays to its German employees their full salary and the Company is being reimbursed by the German government for the payroll support amount. The Company applied for this support regarding COVID-19 starting from April 2020 to June 2021.
F - 29
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 14 - STOCK-BASED COMPENSATION
AU10TIX Limited, AU10TIX’s subsidiary, had a Stock Option Plan which reserved 500,000 shares of its common stock for its future issuance. Under the stock option plan, stock options may be granted to employees, officers, directors, consultants and service providers of the subsidiary at an exercise price as determined by the subsidiary’s board of directors with expiration terms of not more than ten years after the date such option is granted. Options granted under the plan generally vest over a period of four years.
In August 2020, AU10TIX’s board agreed to transfer the option plan from AU10TIX Limited to AU10TIX Technologies B.V. with the same terms and conditions. On June 24, 2022, the board of AU10TIX Technologies B.V. has adopted the “AU10TIX Technologies B.V. 2022 Stock Option Plan” (the “Plan”). The Plan grants rights to subscribe for up to 500,000 class A ordinary shares (“Ordinary Share”) in the capital of AU10TIX Technologies B.V. to employees, directors, consultants and service providers of AU10TIX Technologies B.V. and / or any related entity (as defined in the plan). By resolution of the board of AU10TIX Technologies B.V., on February 12, 2023, the board resolved to increase the number of options that can be exercised under the option plan from 500,000 to 1,000,000 ordinary shares.
The following is a summary of the AU10TIX Technologies B.V. stock options issued and outstanding:
|
Number of options
|
Weighted average exercise price
|
Weighted average remaining contractual term
|
||||||||||
|
Options outstanding as of December 31, 2022
|
|
$
|
|
|
||||||||
|
Options granted
|
|
|
||||||||||
|
Options exercised
|
|
|||||||||||
|
Forfeited
|
(
|
)
|
|
|||||||||
|
Options outstanding, end of the year
|
|
$
|
|
|
||||||||
|
Options exercisable, as of December 31, 2023
|
|
|||||||||||
As of December 31, 2023 and 2022 the non-vested options are 469,125 and 86,250 , respectively.
During the years ended December 31, 2023, 2022 and 2021, there was $714 , $513 and $350 of compensation expenses.
As of December 31, 2023 and 2022, the Company has $2,502 and $374 , respectively of unrecognized compensation cost related to stock options.
In 2024 the Company is working to issue shares to employees that asked to exercise their options. As of May 1, 2024, 266,750 options will be exercised to shares.
NOTE 15 - OTHER INCOME (EXPENSES), NET
Other income (expenses) is summarized as follows:
|
Year ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Interest expense to related parties (see Note 10)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
Interest expense and other bank charges
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Interest expense to tax authorities
|
(
|
)
|
|
|
||||||||
|
Interest income
|
|
|
|
|||||||||
|
Foreign currency gain (loss)
|
|
|
|
|||||||||
|
Gain from sale of investments (see Note 4)
|
|
|
|
|||||||||
|
Loss from investment in I-SEC Korea (see Note 4)
|
|
(
|
)
|
|
||||||||
|
Loss from QDD
|
|
(
|
)
|
|
||||||||
|
Other income (expense)
|
(
|
)
|
(
|
)
|
|
|||||||
|
Total other income (expense), net
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
F - 30
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 16 - INCOME TAXES
The components of income (loss) before income tax benefit (expense) are as follows:
|
Year Ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
The Netherlands
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
|
Germany
|
|
|
|
|||||||||
|
United States of America
|
(
|
)
|
(
|
)
|
|
|||||||
|
Spain
|
|
|
(
|
)
|
||||||||
|
Israel
|
|
|
|
|||||||||
|
Other locations
|
|
(
|
)
|
(
|
)
|
|||||||
|
Income (loss) before income tax expenses
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
The current income tax expense from subsidiaries outside of the Netherlands is $2,299 , $1,984 and $8,937 , for the years ended December 31, 2023, 2022 and 2021, respectively. There current income tax expense for the Netherlands was $248 , $0 and $0 for the years ended December 31, 2023, 2022 and 2021.
The deferred income tax benefit from subsidiaries outside of the Netherlands is $48 , $135 and $331 , for the years ended December 31, 2023, 2022 and 2021, respectively. There was no deferred income tax expense for the Netherlands for the years ended December 31, 2023, 2022 and 2021.
Additionally, tax benefits (expenses) from subsidiaries outside the Netherlands include $754 , $203 and $(614 ), for the years ended December 31, 2023, 2022 and 2021, respectively, of tax related to previous years. There were no tax expenses related to previous years in the Netherlands for the years ended December 31, 2023, 2022 and 2021.
The components of deferred tax assets and liabilities are as follows:
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Deferred tax assets:
|
||||||||
|
Operating loss carry forwards
|
$
|
|
$
|
|
||||
|
Interest expense carry forward
|
|
|
||||||
|
Capital loss carry forwards
|
|
|
||||||
|
Allowance for doubtful accounts
|
|
|
||||||
|
Tax credit carry forwards
|
|
|
||||||
|
Accrued expenses
|
|
|
||||||
|
Research and development expenses, net
|
|
|
||||||
|
Other
|
|
|
||||||
|
Total deferred tax assets
|
|
|
||||||
|
Deferred tax liabilities:
|
||||||||
|
Depreciation of property and equipment
|
(
|
)
|
(
|
)
|
||||
|
|
|
|||||||
|
Valuation allowance
|
(
|
)
|
(
|
)
|
||||
|
Deferred tax assets, net
|
$
|
|
$
|
|
||||
The ultimate realization of the net deferred tax assets in each jurisdiction the Company does business in is dependent upon the generation of future taxable income in that jurisdiction during the periods in which net operating loss carry forwards are available and items that gave rise to the net deferred tax assets become deductible. At present, the Company does not have a sufficient history of generating taxable income in the various jurisdictions it does business in, or positive expected core earnings to conclude that it is more likely than not that the Company will be able to realize its net deferred tax assets in the near future and, therefore, a valuation allowance was established for the carrying value of the net deferred tax assets, with the exception of few locations, which are currently generating taxable income. A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion of the valuation allowance.
F - 31
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 16 - INCOME TAXES (CONTINUED)
As of December 31, 2023, the Company has net operating losses carry forwards of $24,608 and carry forward interest of $4,901 in the Netherlands. These losses and interest can be carried forward and do not expire but starting 2023 the yearly utilization is limited to one million Euro per year, plus 50% of the excess taxable income. As of December 31, 2023, the Company has net operating loss carry forwards of $8,924 in the United States of America, which will expire in 2031 through 2037 except $3,060 which do not expire but can offset up to 80% of taxable income every year. In addition, in the United States, the Company has carry forward interest of $3,033 which can be carried forward and do not expire.
As of December 31, 2023, the Company has $560 in tax credits for the welfare to work and work opportunity programs in the United States of America that expire in 2024 through 2029.
During the years ended December 31, 2023 and 2022 the valuation allowance increased by $131 and $1,872 , respectively.
The Company’s effective income tax rate differs from the Netherlands’ statutory rate of 25.8 %, 25.8 % and 25.0 % for the years 2023, 2022 and 2021, respectively, as follows:
|
Year Ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Effective income (loss) tax benefit at statutory rate
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Rate differential
|
(
|
)
|
|
(
|
)
|
|||||||
|
Non-deductible expenses
|
|
|
|
|||||||||
|
Adjustments to prior year tax losses
|
|
|
|
|||||||||
|
Changes in valuation allowance
|
|
|
(
|
)
|
||||||||
|
Other
|
(
|
)
|
|
|
||||||||
|
Income tax expense
|
$
|
|
$
|
|
$
|
|
||||||
Uncertain tax positions
The Company is subject to income taxes in the Netherlands, and numerous foreign jurisdictions. Significant judgment is required in evaluating the Company’s tax positions and determine its provision for income taxes. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax related uncertainties based on estimates of whether and the extent to which additional taxes will be due. These reserves are established when the Company believes that certain positions might be challenged despite evidence supporting the position. The Company adjusts this reserve in light of changing facts and circumstances, such as the outcome of income tax authority examinations. The provision for income taxes includes the impact of reserve positions and changes to reserves that are considered probable.
As of December 31, 2023 and 2022, there are $86 and $688 of unrecognized tax benefits, respectively, that if recognized would reduce the effective tax rate. Interest and penalties assessed by taxing authorities on an underpayment of income taxes are included as components of income tax provision in the consolidated statements of operations and comprehensive income.
A reconciliation of the Company’s unrecognized tax benefits is as follows:
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Balance at beginning of year
|
$
|
|
$
|
|
||||
|
Additions based on tax positions taken in prior years
|
|
|
||||||
|
Additions based on tax positions taken in the current year
|
|
|
||||||
|
Reduction based on tax positions taken in prior years
|
(
|
)
|
|
|||||
|
Balance at end of year
|
$
|
|
$
|
|
||||
The Company files income tax returns in the Netherlands and other foreign jurisdictions. Income tax returns for the years since 2017 are subject to examination in the Netherlands. In the United States of America, income tax returns for the years since 2020 are subject to examination. Income tax returns for the tax years since 2018 are subject to examination in foreign jurisdictions.
F - 32
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 17 - RELATED PARTY TRANSACTIONS
An entity related to one of the Company’s Supervisory Board members provide legal services to the Company. Legal expense related to these services is $46 , $54 and $59 for the years ended December 31, 2023, 2022 and 2021, respectively.
The Company engages the services of an individual who is a beneficiary of a trust, which is an indirect main shareholder of the Company, to provide certain selling and management services to the authentication technology segment. The Company incurred expenses of $929 , $1,329 and $1,710 for such services for the years ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2023, and 2022 the outstanding balances due for these services were $402 and $716 , respectively, included in accrued expenses and other current liabilities. In addition, the individual serves as a board member of the Company and was paid an amount of $36 , $38 and $38 as board fees, for the years ended December 31, 2023, 2022 and 2021, respectively.
The Company engages the services of an individual who is a beneficiary of a trust, which is an indirect main shareholder of the Company, to provide certain selling services to its authentication technology segment. The Company incurred expenses of $176 , $155 and $148 for such services for the years ended December 31, 2023, 2022 and 2021, respectively.
The Company engages the services of an individual which is a family member of the Chairman of the Board, to provide services as a Managing Director of the Company. The Company incurred expenses of $468 , $386 and $286 for such services for the years ended December 31, 2023, 2022 and 2021, respectively.
The Chairman of the board, who is related to a trust which is an indirect main shareholder of the Company, receives annual compensation of $50 103 , $112 and $117 , respectively for the services he provides to AU10TIX.
The Company engaged the services of an individual who is a beneficiary of a trust, which is an indirect main shareholder of the Company, to provide certain selling and administrative services to its authentication technology segment. The Company incurred expenses of $341 $340 and $0 for such services for the years ended December 31, 2023, 2022 and 2021, respectively. In addition, the individual serves as a board member of the Company, and was paid an amount of $38 , $36 and $38 as board fees, for the years ended December 31, 2023, 2022 and 2021, respectively.
The Company engages the services of an individual who is a family member of a beneficiary of a trust which is an indirect main shareholder of the Company, to provide certain administration services. The Company incurred expenses of $114 , $139 and $141 for such services for the years ended December 31, 2023, 2022 and 2021, respectively.
In May 2019, the Company engaged the services of Arrow (see note 4) to provide some administrative services. The Company incurred expenses of $0 , $119 and $286 for such services for the years ended December 31, 2023, 2022 and 2021, respectively.
The Company has an agreement with an entity which is related to the a main shareholder of the Company to provide it with revolving loans (see note 10).
As of December 31, 2023, the Company included a liability for a purchase of shares from certain directors and officers of the Company in the amount of $1,518 with a corresponding reduction to shareholders deficiency plus payment of previous issuances (see note 18).
NOTE 18 - COMMITMENTS AND CONTINGENCIES
Letters of Credit and Guarantees
As of December 31, 2023, the Company has $7,215 in outstanding letters of credit and guarantees. Letters of credit and guarantees are being secured either by the same amounts in restricted cash with commercial banks (see note 2) or with deposits provided to customers which serve as cash collateral in order to guarantee the performance and quality of services provided to the customers.
As of December 31, 2023, the Company has commercial guarantees of €1,700 ($1,868 as of December 31, 2023) which is not secured by restricted cash or deposits provided to customer. The guarantee is part of an agreement between the Company and one of its customers in order to guarantee the performance and quality of the services provided to that customers.
F - 33
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 18 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal Proceedings
General
The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. These claims are primarily related to grievances filed by current and former employees for unfair labor practices or discrimination, and for passenger aviation claims. Management recognizes a liability for any matter when the likelihood of an unfavorable outcome is deemed to be probable and the amount is able to be reasonably estimated. Management has concluded that such claims, in the aggregate, would not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
Inquiry Proceedings
In June 2021, a minority shareholder initiated inquiry proceedings by requesting the Enterprise Chamber of the Amsterdam Court of Appeal to order an inquiry into seven aspects of the policy and affairs of the Company that have been previously disclosed by the Company in its periodic filings with the SEC for the fiscal years 2020 and 2019. In June 2022, the Enterprise Chamber rendered its judgment and (i) it accepted the Company’s defense on all items except two and ordered an investigation into those two aspects of the policy and affairs of the Company, being (a) the issuance of shares to directors and certain employees at USD 0.40 in May 2019 (the May 2019 Issuance) and (b) the adjustment of the conversion price under a convertible shareholder loan to USD 0.40 in May 2019 (the May 2019 Adjustment of the Issue Price), and (ii) appointed an investigator for this purpose.
Following the appointment of the investigator, the Company has completed an internal examination on the relevant subjects and provided the relevant findings to the investigator. In November 2023 the investigator concluded that (i) certain aspects of the Company’s corporate governance and (ii) certain procedural aspects of the decision-making according to Dutch law on (a) the May 2019 Issuance and (b) the May 2019 Adjustment of the Issue Price were flawed. The investigator suggested several alternatives to correct these flaws and as a result, the Company has agreed to the following based on discussions with the Investigator and his recommendations:
| (i) |
to bring more balance to the supervisory board by adding a new independent supervisory board member who is particularly attentive to the interests of minority shareholders and mindful of Dutch law;
|
| (ii) |
to undo the May 2019 Issuance due to the flaws in procedural aspects of the decision-making; and
|
| (iii) |
to undo the May 2019 Adjustment of the Issue Price due to the flaws in in procedural aspects of the decision-making.
|
In line with these recommendations the Company:
| (i) |
ratified the resolutions on the May 2019 Issuance and the May 2019 Adjustment of the Issue Price, which have been approved by the General Meeting during the 2023 annual general meeting held on 20 December 2023;
|
| (ii) |
has in accordance with Section 2:80(1) of the Dutch Civil Code called in the amounts not yet fully paid in under the previous years issuances from the relevant shareholders totaling $
|
| (iii) |
it approved the repurchase of shares issued under the May 2019 Issuance for the same price they were issued and by that the issuance will be undone. The Company will repurchase those shares as soon as the financials of the Company allow according to Dutch law. As of December 31, 2023, the Company included a liability for this purchase in the amount of $
|
| (iv) |
has reverted the May 2019 Adjustment of the Issue Price so that the option price for the conversion option is $
|
|
| (v) |
has strengthened the supervisory board by appointing a Dutch board member, who has knowledge of Dutch law; and
|
| (vi) |
has been and will continue to further strengthen its corporate governance through the amendment of its constitutional documents.
|
F - 34
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 18 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal Proceedings (Continued)
In addition, during the year ended December 31, 2023 the Company has (i) ratified the resolutions on the issuance of shares to directors and certain employees in April 2018 and October 2018, which have been approved by the General Meeting during the 2023 annual general meeting held on 20 December 2023, and (ii) in accordance with Section 2:80(1) of the Dutch Civil Code called in the amounts not yet fully paid in under the share issuances to directors and certain employees in September 2016 and December 2018 from the relevant shareholders.
Following the filing of the investigation report with the Enterprise Chamber in November 2023, the relevant minority shareholder has filed three new requests with the court, two of which the Enterprise Chamber already dismissed in full at the end of March 2024. The hearing of the third request, which is a request to establish mismanagement on the basis of the investigation and to order certain definitive measures at the Company is scheduled for mid-September 2024 and the Company has the opportunity to file a written statement of defense beforehand.
Inquiry proceedings revolve around corporate governance disputes and no formal liability can be established or damages can be claimed in such proceedings.
Agency Agreement
In April 2013, prior to the purchase of one of the current subsidiaries in Europe, the Company entered into an agency agreement with a third party to assist it with this transaction. According to the agreement, in the event that the operations in that country are sold in the future, the third-party agent is entitled to a payment of €3,000 ($3,297 as of December 31, 2023).
Employment Agreement
In December 2022, the Company entered into an employment agreement with a third party to serve as the CEO of one of the Company’s subsidiaries. The annual target bonus is equal to 10 % of the EBIDA (excluding the applicable taxes) of that subsidiary.
NOTE 19 - SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates in four reportable segments: (a) corporate (b) airport security (c) other aviation related services and (d) authentication technology. The corporate segment does not generate revenue and contains primarily non-operational expenses. The airport security segment provides security services mostly to airlines and airport authorities mostly in Europe. The other aviation related services segment provides various services to airlines within airports in the United States of America. The authentication technology segment provides authentication services to financial and other companies, predominantly in the United States of America. All inter-segment transactions are eliminated in consolidation. The accounting policies of the segments are the same as the accounting policies of the Company as a whole.
F - 35
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 19 - SEGMENT AND GEOGRAPHICAL INFORMATION (CONTINUED)
The operating results of these reportable segments are regularly reviewed by the chief operating decision.
|
Corporate
|
Airport |
Other |
Authentication |
Total
|
||||||||||||||||
|
Year ended December 31, 2023:
|
||||||||||||||||||||
|
Revenue
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
Depreciation and amortization
|
|
|
|
|
|
|||||||||||||||
|
Net income (loss)
|
(
|
)
|
|
|
|
|
||||||||||||||
|
Goodwill
|
|
|
|
|
|
|||||||||||||||
|
Total assets
|
|
|
|
|
|
|||||||||||||||
|
Year ended December 31, 2022:
|
||||||||||||||||||||
|
Revenue
|
$
|
|
$
|
|
|
$
|
|
$
|
|
|||||||||||
|
Depreciation and amortization
|
|
|
|
|
|
|||||||||||||||
|
Net income (loss)
|
(
|
)
|
|
(
|
)
|
(
|
)
|
(
|
)
|
|||||||||||
|
Goodwill
|
|
|
|
|
|
|||||||||||||||
|
Total assets
|
|
|
|
|
|
|||||||||||||||
|
Year ended December 31, 2021:
|
||||||||||||||||||||
|
Revenue
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
Depreciation and amortization
|
|
|
|
|
|
|||||||||||||||
|
Net income (loss)
|
(
|
)
|
|
|
|
|
||||||||||||||
|
Goodwill
|
|
|
|
|
|
|||||||||||||||
|
Total assets
|
|
|
|
|
|
|||||||||||||||
The following table sets forth, for the periods indicated, revenue generated from customers by geographical area based on the geographical location of the customer’s invoicing address:
|
Year Ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Germany
|
$
|
|
$
|
|
$
|
|
||||||
|
United States
|
|
|
|
|||||||||
|
The Netherlands
|
|
|
|
|||||||||
|
Spain
|
|
|
|
|||||||||
|
Other countries
|
|
|
|
|||||||||
|
Total revenue
|
$
|
|
$
|
|
$
|
|
||||||
The following table sets forth, for the periods indicated, property and equipment, net of accumulated depreciation and amortization, by country:
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Germany
|
$
|
|
$
|
|
||||
|
United States
|
|
|
||||||
|
The Netherlands
|
|
|
||||||
|
Spain
|
|
|
||||||
|
Other countries
|
|
|
||||||
|
Total property and equipment, net
|
$
|
|
$
|
|
||||
Property and equipment, net, in other countries include $3,125 and $4,216 property and equipment in Israel, as of December 31, 2023 and 2022, respectively.
F - 36
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 20 - SUBSEQUENT EVENTS
On March 2024, the Company entered into a factoring agreement with the same commercial bank to provide it up to €3,000 ($3,297 as of December 31, 2023). The arrangement is linked to one of the service contracts that the Company provides to one of its customers. The maximum amount provided by the bank cannot exceed 75% of the monthly invoice for that customer. The factoring agreement will be end in April 2025, unless the service contract with the customer is extended. Borrowings under the factoring agreement bear interest at one month Euribor plus 0.6% . The Company is also subject to a 0.2 % fee for every withdrawal under the agreement.
On April 2024, AU10TIX has declared a dividend of $10,000 to its shareholders of which $6,751 will be paid to ICTS and 3,249 will be paid to other shareholders of AU10TIX (see notes 12 and 14).
F - 37
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
(In thousands, except share data)
FINANCIAL STATEMENT SCHEDULE
(In thousands, except share data)
Valuation and Qualifying Accounts
|
Beginning
of year |
Charges
to Costs and Expenses |
Charges
to other accounts |
Deductions
|
End of
Year |
||||||||||||||||
|
Allowance for doubtful accounts (1):
|
||||||||||||||||||||
|
Year ended December 31, 2021
|
$
|
|
|
(
|
)
|
|
$
|
|
||||||||||||
|
Year ended December 31, 2022
|
$
|
|
|
(
|
)
|
|
$
|
|
||||||||||||
|
Year ended December 31, 2023
|
$
|
|
|
(
|
)
|
|
$
|
|
||||||||||||
|
Allowance for net deferred tax assets:
|
||||||||||||||||||||
|
Year ended December 31, 2021
|
$
|
|
|
|
(
|
)
|
$
|
|
||||||||||||
|
Year ended December 31, 2022
|
$
|
|
|
|
|
$
|
|
|||||||||||||
|
Year ended December 31, 2023
|
$
|
|
|
|
|
$
|
|
|||||||||||||
(1) Write-off net of recoveries for the allowance for doubtful accounts.
F - 38
Exhibit 12.1
CERTIFICATION
I, Alon Raich, certify that:
1. I have reviewed this annual report on Form 20-F of ICTS International, N.V. (the "Company") for the year ended December 31, 2023;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the company as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material
information relating to the company, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has
materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's Supervisory Board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the company's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial
reporting.
|
By:
|
/s/ Alon Raich
|
|
|
Alon Raich, Managing Director and Chief Financial Officer
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Dated:
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May 10, 2024
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EXHIBIT 13.1
CERTIFICATION
In connection with the annual report of ICTS International, N.V. (the "Company") on Form 20-F for the period ending December 31, 2023 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Alon Raich, Managing Director and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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By:
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/s/ Alon Raich
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Alon Raich, Managing Director and Chief Financial Officer
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Dated:
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May 10, 2024
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