ICTSF ICTS International NV (QB)

NOTE 1 - BASIS OF PRESENTATION

 

General

 

The accompanying condensed unaudited consolidated financial statements for the six months ended June 30, 2016 have been prepared by the Company, in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for financial information. These financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals, which are, in the opinion of management, necessary for a fair presentation of the financial position of the Company as of June 30, 2016 and the results of operations for the six months then ended. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted. The results of operations presented are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2016.

 

The following discussion and analysis should be read in conjunction with the financial statements, related notes and other information included in this report and with the Risk Factors included in Part 1 Item 3 in our Annual Report on Form 20-F for the year ended December 31, 2015, filed with the SEC.

 

This Report contains statements that may constitute “forward-looking statements”. Generally, forward-looking statements include words or phrases such as “anticipates”, “believes”, “estimates”, “expects”, “intends”, “plans”, “projects”, “could”, “may”, “might”, “should”, “will”, the negative of such terms, and words and phrases of similar import. Such statements are based on management’s current expectations and are subject to a number of risks and uncertainties. These risks and uncertainties could cause our actual results to differ materially from those described in the forward-looking statements. Any forward-looking statement represents our expectations or forecasts only as of the date it was made and should not be relied upon as representing its expectations or forecasts as of any subsequent date. Except as required by law, we undertake no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, even if our expectations or forecasts change.

 

NOTE 2 - ORGANIZATION

 

Description of Business

 

ICTS International N.V. (“ICTS”) was established by the Department of Justice in Amstelveen, Netherlands on October 9, 1992. ICTS and subsidiaries (collectively referred to as, the “Company”) operate in three reportable segments: (a) Corporate (b) Airport security and other aviation services and (c) Technology. The corporate segment does not generate revenue and contains primarily non-operational expenses.

 

ICTS INTERNATIONAL N.V. AND SUBSIDIARIES

(US $ in thousands, except share and per share data)

 

NOTE 2 – ORGANIZATION - (CONTINUED)

 

The airport security and other aviation services segment provides security and other services to airlines and airport authorities, predominantly in Europe and the United States of America.

 

The technology segment is predominantly involved in the development and sale of identity security software to customers, predominantly in Europe and the Unites States of America.

 

 

The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

 

NOTE 3 - DISCONTINUED OPERATIONS

 

During the year ended December 31, 2014, the Company committed to a plan to cease the operations of its subsidiary in Switzerland (I-SEC Switzerland), which provided aviation security services.

 

As of June 30, 2016 and December 31, 2015, the Company had no assets or liabilities from discontinued operations.

 

 

NOTE 4 – NOTES PAYABLE – BANKS

 

United States

 

In June 2014, the Company amended its credit facility to maximum borrowing capacity of $6,500 and amended existing financial and non-financial covenants, including the maintenance of a specified fixed charge coverage ratio. The borrowing base limitation was also amended and is equivalent to: (i) 85% of eligible accounts receivable, as defined, plus (ii) 75% of eligible unbilled receivables, as defined, plus (iii) 95% of a $1,000 standby letter of credit that was provided to the lender by an entity related to the Company’s main shareholder.

 

In March 2015, the Company amended its credit facility with its lender. The amendment revised existing financial covenants, including the maintenance of a specified fix charge coverage ratio and maintenance of minimum monthly EBITDA requirements. As of December 31, 2015 the Company was in violation of its financial covenants. As of March 2016, the lender waived the violation.

 

In July 2016, the Company amended its credit facility with the lender. The amendment revised the maximum borrowing capacity to $8,500 subject to the borrowing base limitations as before.

 

Borrowings made under the credit facility bear interest, which is payable monthly, at LIBOR (subject to a floor of 1.375%) plus 4.25% per annum (5.625% as of June 30, 2016).

 

The company evaluated the terms of the amendments and concluded that they do not constitute substantive modification.

 

 

NOTE 4 – NOTES PAYABLE – BANKS – (CONTINUED)

 

As of June 30, 2016 and December 31, 2015, the Company had approximately $7,190 and $5,569, respectively, outstanding under line of credit arrangements. As of June 30, 2016 and December 31, 2015, the Company had $200, and $572, respectively, in unused borrowing capacity under the line of credit facility.

 

Europe

 

In April 2015, the Company entered into a new line of credit arrangement with a commercial bank, replacing all previous lines of credit with that bank, to provide it with up to €5,500 ($6,119 as of June 30, 2016) in borrowings until further notice. Borrowings under the line of credit bear interest at LIBOR plus 3.75% per annum. The Company is also subject to an unused line fee of 0.75% per annum, which is payable quarterly.

 

In January 2016 the Company entered into a new line of credit arrangement with the same commercial bank in Europe to provide it with up to €10,000 ($11,125 as of June 30, 2016) in borrowings, with the purpose to refinance the prevailing credit facility with this bank. Borrowings under the line of credit bear interest at LIBOR plus 3.50% per annum for the borrowed amount and 0.75% for the non-borrowed balance, which is payable quarterly. The line of credit is secured by the accounts receivable and tangible fixed assets of six of the Company’s European subsidiaries. The line of credit cannot exceed 80% of the borrowing base. The line of credit is made available until further notice.

 

In January 2016 the company entered into a bank guarantee facility with the same commercial bank to provide it with up to €2,500 ($ 2,013 as of June 30, 2016) in guarantees, with the purpose to finance existing and new bank guarantees. Amounts under this bank guarantee facility bear interest at 1.9% per annum for the used amounts, and 0.75% for the unused balance, which is payable quarterly. The bank guarantee facility is made available until further notice and is being secured by the accounts receivable and tangible fixed assets of three of the Company’s European subsidiaries.

 

In April 2016 the Company amended its credit facility with its lender. The amendment revised the existing borrowing amount up to €12,000 ($13,350 as of June 30, 2016) for a period of five months, till October 2016. The Company is in negotiations with the lender to keep the increase of the line of credit permanent. The line of credit cannot exceed 80% of the borrowing base. As of June 30, 2016 and December 31, 2015 the Company had approximately  €10,122  ($11,261 as of June 30, 2016) in outstanding borrowings under the line of credit arrangement.

 

The Company evaluated the terms of the amendments and concluded that they do not constitute a substantive modification.

 

In August 2013, the Company entered into a line of credit arrangement with a commercial bank to provide it with up to €500 ($556 as of June 30, 2016) in borrowings. Borrowings under this arrangement bore interest at 3.5% per annum. The line of credit was secured by a bank guarantee provided by an entity related to the Company’s main shareholder as well as a guarantee from another bank. In July 2015, the line of credit was fully paid and the line of credit expired.

 

 

NOTE 4 – NOTES PAYABLE – BANKS –(CONTINUED)

 

In November 2013, the Company entered into a line of credit arrangement with a commercial bank to provide it with up to €1,200 ($1,335 as of June 30, 2016) in borrowings. Borrowings under the line of credit arrangement bear interest at 1.2% per annum, which is payable quarterly. The line of credit is secured by a guarantee provided by an entity related to the Company’s main shareholder. In June 2014, the borrowing capacity under the line of credit was increased up to €1,508 ($1,678 as of June 30, 2016). In December 2015 the borrowing capacity was reduced to €350 ($389 as of June 30, 2016). As of June 30, 2016 and December 31, 2015, the Company had €350 ($389 as of June 30, 2016) in outstanding borrowings under the line of credit arrangement.

 

The Company evaluated the terms of the amendment and concluded that they constitute a substantive modification, however, there is no effect on the financial statements of the Company.

 

NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities are as follows:

 

		June 30,				December 31,
		2016				2015
Accrued payroll and related costs		$	14,803			$	12,363
Accrued vacation			6,631				4,522
Accrual for minimum wage increase			3,010				3,284
Cash overdraft			1,334				1,300
Labor union contribution			952				920
Other			1,473				2,676
Total accrued expenses and other current liabilities		$	28,203			$	25,065

 

NOTE 6 – CONVERTIBLE NOTES PAYABLE TO A RELATED PARTY

 

In May 2014, the Company entered into a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the parties, to provide it with up to $37,000 in revolving loans through December 2016. The term of the arrangement can be automatically extended for four additional six-month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the interest rate charged by the Company’s European commercial bank (LIBOR plus 6% for U.S. dollar-denominated loans and the base rate plus 2% for Euro-denominated loans). The arrangement is secured by a 26% interest in one of the Company's European subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable (including accrued interest) under the arrangement into the Company's common stock at a price of $1.50 per share. The Company determined that the new arrangement did not represent a substantive modification and, therefore, it was not necessary to evaluate whether the conversion feature qualified as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial

 

NOTE 6 – CONVERTIBLE NOTES PAYABLE TO A RELATED PARTY – (CONTINUED)

 

In October 2015, the Supervisory Board of Directors approved to reduce the convertible price of the unpaid interest from $1.50 per share to $0.75 per share. In addition, the loan period was extended till January 1, 2018. The terms of the arrangement can be automatically extended for four additional six months periods at the option of the holder.

 

The Company determined that the new arrangement did not represent a substantive modification and therefore it was not necessary to evaluate whether the conversion feature qualifies as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial.

 

At June 30, 2016 and December 31, 2015, convertible notes payable to a related party consist of $29,981 and $29,048, respectively, in principal and $13,869 and $10,355, respectively, in accrued interest. Interest expense related to these notes is $3,351 and $1,529 for the periods ended June 30, 2016 and 2015, respectively.

 

NOTE 7 – SEGMENT AND GEOGRAPHICAL INFORMATION

 

The Company operates in three reportable segments: (a) Corporate (b) Airport security and other aviation services and (c) Technology. The corporate segment does not generate revenue and contains primarily non-operational expenses. The airport security and other aviation services segment provide security and other services to airlines and airport authorities, predominantly in Europe and the United States of America. The technology segment is predominantly involved in the development and sale of identity security software to customers, predominantly in Europe and the United States of America. All inter-segment transactions are eliminated in consolidation.