Report of Independent Registered Public Accounting Firm
To the Supervisory Board of Directors and
Shareholders 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. (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive income (loss), shareholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2017, 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, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, 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.
/s/ Mayer Hoffman McCann CPAs
(The New York Practice of Mayer Hoffman McCann P.C.)
We have served as the Company's auditor since 2006.
New York, New York
May 9, 2018
NOTE 1 – ORGANIZATION
Description of Business
ICTS International N.V. was registered at the Department of Justice in Amstelveen, Netherlands on October 9, 1992. ICTS and subsidiaries (collectively referred to as “ICTS” or the "Company") operate in three reportable segments: (a) corporate (b) airport security and other aviation services and (c) technology. The corporate segment does not generate revenue and contains primarily non-operational expenses. The airport security and other aviation services segment provides security and other services to airlines and airport authorities, predominantly in Europe and the United States of America. The technology segment is predominantly involved in the development and sale of authentication security software to financial and other institutions, predominantly in the United States of America and Europe.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The significant accounting policies are as follows:
Functional Currency
The accompanying consolidated financial statements are presented in United States dollars. The Company has determined that the functional currency of its foreign subsidiaries is the local currency, which is predominantly the Euro. For financial reporting purposes, the assets and liabilities of such subsidiaries are translated into United States dollars using exchange rates in effect at the balance sheet date. The revenue and expenses of such subsidiaries are translated into United States dollars using average exchange rates in effect during the reporting period. Resulting translation adjustments are presented as a separate category in shareholders' deficit called accumulated other comprehensive loss.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. The most significant estimates and assumptions included in these consolidated financial statements consist of the: (a) calculation of the allowance for doubtful accounts,
(b) determination of the fair value of stock options, (c) recognition of contingent liabilities and (d) valuation allowance of deferred income taxes
.
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.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Restricted cash as of December 31, 2017 consists of: (a) $233 held in a bank account that serves as cash collateral for outstanding letters of credit and (b) $4,199 held in several bank accounts in the Netherlands, which is restricted for payments to local tax authorities.
Restricted cash as of December 31, 2016 consists of: (a) $233 held in a bank account that serves as cash collateral for outstanding letters of credit and (b) $3,554 held in several bank accounts in the Netherlands, which is restricted for payments to local tax authorities.
During the year ended December 31, 2017, the Company adopted Accounting Standards Update (“ASU”) No. 2016-18 guidance for presentation of restricted cash on the statements of cash flows using a retrospective approach. Restricted cash amounts are now reported on the statements of cash flows together with cash as one line item. Previously, restricted cash was shown separately in the investing activities section of the statements of cash flows. Restricted cash amounts as of December 31, 2016, 2015 and 2014 have been reclassified in the statements of cash flows in order to comply with the new guidance.
The following table provides a reconciliation of cash and restricted cash reported on the balance sheet that sum to the total of the same such amounts shown in the statements of cash flows.
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December 31,
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2017
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2016
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Cash and cash equivalents
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$
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9,073
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$
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3,892
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Restricted cash
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4,432
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3,787
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Total cash, cash equivalents and restricted cash shown in the statement of cash flows.
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$
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13,505
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$
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7,679
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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 doubtful accounts is based on historical collection experience, factors related to a specific customer and current economic trends. The Company writes off accounts receivable against the allowance for doubtful accounts when the balance is determined to be uncollectible. As of December 31, 2017 and 2016, the allowance for doubtful accounts is $103 and $84, respectively.
Investments
The Company follows Topic 820, “Fair Value Measurement”, of FASB ASC. 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.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments (continued)
In determining the fair value, the Company assesses the inputs used to measure fair value using a three-tier hierarchy, as follows:
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Level 1 -
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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.
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Level 2 -
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Inputs to the valuation methodology include:
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Quoted prices for similar assets or liabilities in active markets;
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·
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Quoted prices for identical or similar assets or liabilities in inactive markets;
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·
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Inputs other than quoted prices that are observable for the asset or liability;
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·
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Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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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.
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Level 3 -
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Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
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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.
Investment in Artemis Therapeutics, Inc. is valued using level 1 inputs, however, the Company has determined that value of the investment is impaired (see note 5).
Property and Equipment
Equipment and furniture, internal-use software, 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:
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Years
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Equipment and facilities
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3-7
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Internal- use software
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7
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Vehicles
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3-7
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Leasehold improvements are amortized using the straight-line method over the shorter of the term of the lease or the estimated useful lives of the assets.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Capitalized Internal-Use Software Costs
The Company capitalizes the cost of internal-use software that has a useful life in excess of one year in property and equipment. These costs consist of payments made to third party consultants for the installation and integration of software and related travel costs. Software maintenance and training costs, including related travel costs, are expensed in the period in which they are incurred.
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. As of January 1, 2017 the Company adopted Accounting Standards Update 2017-04 which eliminates step two from the goodwill impairment test. During the years ended December 31, 2017, 2016 and 2015, the Company did not recorded impairment charges on its goodwill relating its continuing operations.
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, 2017, 2016, and 2015, the Company did not record any impairment charges on its long-lived assets.
Convertible Debt Instruments
The Company evaluates convertible debt instruments to determine whether the embedded conversion option needs to be bifurcated from the debt instrument and accounted for as a freestanding derivative instrument or considered a beneficial conversion option. An embedded conversion option is considered to be a freestanding derivative when: (a) the economic characteristics and risks of the embedded conversion option are not clearly and closely related to the economic characteristics and risks of the host instrument, (b) the hybrid instrument that embodies both the embedded conversion option and the host instrument is not re-measured at fair value under otherwise applicable US GAAP with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded conversion option would be considered a derivative instrument subject to certain requirements (except when the host instrument is deemed to be conventional). When it is determined that an embedded conversion option should not be bifurcated from its host instrument, the embedded conversion option is evaluated to determine whether it contains any intrinsic value which needs to be discounted from the carrying value of the convertible debt instrument.
The intrinsic value of an embedded conversion option is considered to be the difference between the fair value of the underlying security on
the commitment date of the debt instrument and the effective conversion price embedded in the debt instrument.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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) for the years ended December 31, 2017, 2016 and 2015 consists of the Company’s net income (loss) and foreign currency translation adjustments.
Accumulated other comprehensive loss consist of the Company’s accumulated foreign exchange currency adjustments.
Stock-Based Compensation
Stock-based compensation to 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.
Stock-based compensation issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the stock-based compensation, whichever is more readily determinable.
Non-controlling interest
The Company’s non-controlling interest represent the minority shareholder’s ownership interest related to the Company’s subsidiaries. The Company reports its non-controlling interest in subsidiaries as a separate component of equity in the consolidated balance sheets and reports net income (loss) attributable to the non-controlling interest in the consolidated statement of operations.
Revenue Recognition
Revenue is recognized as services are rendered based on the terms contained in the Company’s contractual arrangements with customers, provided that services have been rendered, the fee is fixed or determinable, and collection of the related receivable is reasonably assured.
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.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and Development Costs
Research and development costs are expensed as incurred and consist primarily of payroll and related costs.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs during the years ended December 31, 2017, 2016 and 2015 are $316, $247 and $202, 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.
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.
The Company recognizes interest related to uncertain tax positions in interest expense. The Company recognizes penalties related to uncertain tax positions in selling, general and administrative expenses.
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 an income from continuing operations for the year ended December 31, 2017. Potentially dilutive securities were excluded from the computation of diluted income (loss) per share as the conversion rate of the convertible note payable to related party was higher than the weighted average computed price of the Company’s stock for the year 2017 and the effect of including them is anti-dilutive.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income (Loss) Per Share (continued)
The Company had an income from continuing operations for the year ended December 31, 2016. Potentially dilutive securities were excluded from the computation of diluted income (loss) per share as the conversion rate of the convertible note payable to related party and the exercise price of the stock options was higher than the market price of the Company’s common stock as of December 31, 2016 and the effect of including them is anti-dilutive.
The following table summarizes the number of shares of common stock attributable to potentially dilutive securities outstanding for each of the periods which were excluded from the calculation of diluted income (loss) per share:
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, value added tax (VAT) payable, notes payable – banks, loan payable and loan payable to related party approximate their carrying values due to the short-term nature of the instruments.
The carrying values of the convertible notes payable to a related party and other liabilities are not readily determinable because: (a) these instruments are not traded and, therefore, no quoted market prices exist upon which to base an estimate
of fair value and (b) there were no readily determinable similar instruments on which to base an estimate of fair value.
Concentration of Credit Risk
Financial instruments which are subject to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash and accounts receivable.
The Company maintains cash and cash equivalents and restricted cash in accounts with financial institutions in the United States, Europe, Japan and Israel. As of December 31, 2017, accounts at financial institutions located in the United States are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250 per institution. As of December 31, 2017, cash and cash equivalents and restricted cash of $282 is being held in the United States. Bank accounts located in Europe, Japan and Israel, totaling $13,223 as of December 31, 2017, are uninsured.
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.
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)
Revenue from two customers represented 76% of total revenue during the year ended December 31, 2017, of which one customer accounted for 42% and the other customer accounted for 34% of total revenue. Accounts receivable from these two customers represented 53% of total accounts receivable as of December 31, 2017.
Revenue from two customers represented 75% of total revenue during the year ended December 31, 2016, of which one customer accounted for 42% and the other customer accounts for 33% of total revenue. Accounts receivable from these two customers represented 70% of total accounts receivable as of December 31, 2016.
Revenue from two customers represented 70% of total revenue during the year ended December 31, 2015, of which one customer accounted for 37% and the other customer accounts for 33% of total revenue. Accounts receivable from these two customers represented 64% of total accounts receivable as of December 31, 2015.
Both customers mentioned above, have been principle customers in the last three years.
Risks and Uncertainties
The Company is currently engaged in direct operations in numerous countries and is therefore subject to risks associated with international operations (including economic and/or political instability and trade restrictions). Such risks can cause the Company to have significant difficulties in connection with the sale or provision of its services in international markets and have a material impact on the Company's consolidated financial position, results of operations and cash flows.
The Company is subject to changes in interest rates based on 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. As such, significant foreign currency exchange rate fluctuations can have a material impact on the Company's consolidated financial position, results of operations and cash flows.
Reclassification
Certain amounts have been reclassified in prior years balance sheets, statements of operations and statements of cash flows to conform with current period presentation.
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
Accounting Standards Update 2015-14 and related updates
In May 2014, the FASB issued ASU no. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, and the guidance defines a five-step process to achieve this core principle. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU 2014-09 by one year. The ASU, as amended, is effective for the Company’s 2018 fiscal year and may be applied either(i) retrospectively to each prior reporting period presented with an election for certain specified practical expedients, or (ii) retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application, with additional disclosure requirements.
We have prepared an analysis of how we currently recognize revenue compared to the accounting treatment required under the new guidance, in order to determine the impact of the accounting treatment under the new guidance and evaluation of the adoption method. We have concluded that the guidance will not have a material impact on our consolidated financial statements. We will adopt the new guidance beginning January 1, 2018, and will use the modified retrospective method.
Accounting Standards Update 2016-01
In January 2016, the FASB issued ASU 2016-01, “financial Instruments –Overall (Topic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 amends the guidance on the classification and measurement of financial instruments. Some of the amendments in ASU 2016-01 include among others the following: 1) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and 4) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value.
For public business entities, the amendments of ASU 2016-01 are effective for fiscal years beginning after December 15, 2017 , including interim periods within those fiscal years.
This update is not expected to have a material impact on the Company’s financial statements.
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 2016-02
The FASB has issued its new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842).
Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:
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A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and
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A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
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The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing.
Public companies should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public companies upon issuance.
Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.
The Company is currently evaluating the impact on the Company’s financial statement.
Accounting Standards Update 2016-15
In August 2016, the FASB issued Accounting Standards Update 2016-15, “Statements of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statements of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard requires adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable.
The update is not expected to have a material impact on the Company’s financial statements.
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 2016-16
The FASB has issued Accounting Standards Update (ASU) No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This prohibition on recognition is an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP.
The amendments require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments eliminate the exception for an intra-entity transfer of an asset other than inventory. Two common examples of assets included in the scope of the amendments are intellectual property and property, plant, and equipment.
The amendments do not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory.
The amendments align the recognition of income tax consequences for intra-entity transfers of assets other than inventory with International Financial Reporting Standards. IAS 12, Income Taxes, requires recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset (including inventory) when the transfer occurs.
The amendments are effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods
The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.
The update is not expected to have a material impact on the Company’s financial statements.
Accounting Standards Update 2017-01
The FASB has issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, clarifying the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business.
The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments provide a more robust framework to use in determining when a set of assets and activities is a business. They also provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable.
For public companies, the amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods.
The update is not expected to have a material impact on the Company’s financial statements.
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 2017-05
The FASB has issued Accounting Standards Update No. 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.
A contract may involve the transfer of both nonfinancial assets and financial assets (e.g., cash and receivables). The amendments clarify that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments also define the term in substance nonfinancial asset.
The amendments clarify that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. A contract that includes the transfer of ownership interests in one or more consolidated subsidiaries is within the scope of Subtopic 610-20 if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets.
The amendments clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it.
The amendments are effective at the same time Topic 606, Revenue from Contracts with Customers, is effective. For public entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.
The update is not expected to have a material impact on the Company’s financial statements.
Accounting Standards Updates 2017-09
The FASB has issued Accounting Standards Update (ASU) No. 2017-09, Compensation—Stock Compensation (Topic 718) — Scope of Modification Accounting. ASU 2017-09 applies to entities that change the terms or conditions of a share-based payment award.
The FASB adopted ASU 2017-09 to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to the modification of the terms and conditions of a share-based payment award.
Diversity in practice has arisen in part because some entities apply modification accounting under Topic 718 for modifications to terms and conditions that they consider substantive, but do not when they conclude that particular modifications are not substantive. Others apply modification accounting for any change to an award, except for changes that they consider purely administrative in nature. Still others apply modification accounting when a change to an award changes the fair value, the vesting, or the classification of the award. In practice, it appears that the evaluation of a change in fair value, vesting, or classification may be used to evaluate whether a change is substantive.
Although the Master Glossary of the FASB Accounting Standards Codification™ currently defines the term modification as “a change in any of the terms or conditions of a share-based payment award,” Topic 718 does not contain guidance on what changes are substantive or purely administrative.
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 2017-09 (continued)
The amendments in ASU 2017-09 include guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718.
These amendments require the entity to account for the effects of a modification unless all of the following conditions are met:
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•
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The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or value using an alternative measurement method) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification;
|
|
•
|
The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and
|
|
•
|
The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.
|
The amendments are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.
Early adoption is permitted, including adoption in any interim period for: (a) public business entities for reporting periods for which financial statements have not yet been issued, and (b) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments should be applied prospectively to an award modified on or after the adoption date.
The update is not expected to have a material impact on the Company’s financial statements.
NOTE 3 – BUSINESS COMBINATION
On July 19, 2017, the Company acquired 100% of the outstanding shares of Harsec A/S (“Harsec”) in Denmark. Harsec provides cargo security services in the Danish airports and is serving international parcel companies. Consideration of the acquisition for the shares was 10 million Danish Krone (“DKK”) ($1,579 as of the purchase date) in cash of which 90% was paid upon the signing of the purchase contract and 10% paid three months after that. The acquisition was done in order to expend our services to the Danish market.
The acquisition was accounted for as a purchase and accordingly a purchase price was allocated to the assets acquired and liabilities assumed at their fair values.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 3 – BUSINESS COMBINATION (CONTINUED)
The following represents the allocation of the purchase price as of the purchase rate in DKK and the translation to United States Dollars as of the purchase date:
|
|
DKK
|
|
|
U.S. Dollars
|
|
Cash
|
|
|
3,161
|
|
|
|
499
|
|
Accounts receivable
|
|
|
3,219
|
|
|
|
508
|
|
Other receivables
|
|
|
124
|
|
|
|
20
|
|
Fixed assets
|
|
|
665
|
|
|
|
105
|
|
Goodwill
|
|
|
4,478
|
|
|
|
707
|
|
Total identifiable assets acquired
|
|
|
11,647
|
|
|
|
1,839
|
|
|
|
|
|
|
|
|
|
|
Accouts payable and accrued expenses
|
|
|
1,647
|
|
|
|
260
|
|
Total liabilities assumed
|
|
|
1,647
|
|
|
|
260
|
|
|
|
|
10,000
|
|
|
|
1,579
|
|
On December 7, 2016, the Company acquired 51% of the outstanding shares of Easyserve Ltd (“New Subsidiary”) in Cyprus together with third party, which holds the additional 49% of the New Subsidiary. Consideration of the acquisition for the 100% shares included €300 ($359 as of December 31, 2017) in cash upon the signing of the purchase contract.
The Company with its New Subsidiary participated in a tender for services in Cyprus, according to the contract terms. Upon winning the tender, the Company will pay additional €100 ($120 as of December 31, 2017). In addition, the purchase price will include a maximum of €300 ($359 as of December 31, 2017) out of the net profits of the New Subsidiary, which relate to the business of the New Subsidiary as it is presently carried out and which does not relate to the business resulting from the award of the tender or any other new business.
In the event that the New Subsidiary is not successful with the tender, then the seller will repay to the Company the payments made by the Company, in return the Company will transfer the shares back to the seller.
The 2016 acquisition was accounted for as a purchase and, accordingly, the purchase price was allocated to the assets acquired and liabilities assumed at their fair values. The results of operations from the date of acquisition to December 31, 2016 are not significant.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 3 – BUSINESS COMBINATION (CONTINUED)
The following is the allocation of the purchase price as of December 31, 2016:
|
|
Euro
|
|
|
U.S. Dollars
|
|
Cash
|
|
|
300
|
|
|
|
317
|
|
Due at obtaining contract tender
|
|
|
100
|
|
|
|
106
|
|
Earn out liability
|
|
|
300
|
|
|
|
317
|
|
Total consideration given
|
|
|
700
|
|
|
|
740
|
|
|
|
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
269
|
|
|
|
284
|
|
Prepaid expenses
|
|
|
53
|
|
|
|
56
|
|
Property and equipment
|
|
|
25
|
|
|
|
26
|
|
Goodwill
|
|
|
377
|
|
|
|
398
|
|
Other assets
|
|
|
84
|
|
|
|
89
|
|
Total identifiable assets acquired
|
|
|
808
|
|
|
|
853
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
51
|
|
|
|
53
|
|
Accrued expenses and other liabilities
|
|
|
57
|
|
|
|
60
|
|
Total liabilities assumed
|
|
|
108
|
|
|
|
113
|
|
|
|
|
700
|
|
|
|
740
|
|
As the Company was not successful with the tender, the Company reached an agreement with the seller during 2018, that the shares will be transferred back to the seller and will be kept in escrow for a period of three years, in which the seller will pay back to the Company an amount of €150 ($180 as of December 31, 2017). Balances and results from those operations are being presented as discontinued operations (see note 4).
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 4 – DISCONTINUED OPERATIONS
During the year ended December 31, 2014, the Company committed to a plan to cease the aviation security operations of its subsidiary in Switzerland (I-SEC Switzerland).
During the year ended December 31, 2017, the Company committed to a plan to cease the aviation security operations of its subsidiary in Cyprus. As of December 31, 2017 and 2016 the Company presented in its equity $123 and $153, respectively, as non- controlling interest in subsidiaries regarding its investment in Cyprus.
A summary of the Company's balance sheet accounts from the above discontinued operations for the years ended December 31, 2017 and 2016 are as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2
|
|
|
$
|
-
|
|
Restricted cash
|
|
|
25
|
|
|
|
-
|
|
Accounts receivable, net
|
|
|
128
|
|
|
|
284
|
|
Prepaid expenses and other current assets
|
|
|
126
|
|
|
|
56
|
|
Total current assets from discontinued operations
|
|
|
281
|
|
|
|
340
|
|
Property and equipment, net
|
|
|
25
|
|
|
|
26
|
|
Goodwill
|
|
|
-
|
|
|
|
398
|
|
Other assets
|
|
|
-
|
|
|
|
89
|
|
Total assets from discontinued operations
|
|
$
|
306
|
|
|
$
|
853
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
26
|
|
|
$
|
53
|
|
Accrued expenses and other current liabilities
|
|
|
15
|
|
|
|
166
|
|
Total current liabilities from discontinued operations
|
|
|
41
|
|
|
|
219
|
|
Other liabilities
|
|
|
-
|
|
|
|
317
|
|
Total liabilities from discontinued operations
|
|
$
|
41
|
|
|
$
|
536
|
|
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 4 – DISCONTINUED OPERATIONS (CONTINUED)
A summary of the Company’s statement of operations from the above discontinued operations for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
609
|
|
|
$
|
-
|
|
|
$
|
97
|
|
Cost of revenue
|
|
|
588
|
|
|
|
-
|
|
|
|
94
|
|
GROSS PROFIT
|
|
|
21
|
|
|
|
-
|
|
|
|
3
|
|
Selling, general and administrative expenses
|
|
|
116
|
|
|
|
-
|
|
|
|
6
|
|
OPERATING LOSS
|
|
|
(95
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
Other income, net
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
Net loss
|
|
|
(95
|
)
|
|
|
-
|
|
|
|
-
|
|
LESS: Net loss attributable to non controlling interest
|
|
|
47
|
|
|
|
-
|
|
|
|
-
|
|
LOSS FROM DISCONTINUED OPERATIONS ATTRIBUTABLE TO ICTS INTERNATIONAL N.V.
|
|
$
|
(48
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE 5 – INVESTMENTS
Artemis Therapeutics, Inc.
As of December 31, 2017, the Company owns 198,311 shares or 3.8% of the outstanding common stock of Artemis Therapeutics, Inc (“ATMS”).
The Company suspended its use of the equity method to accounting for this investment in 2007 after its investment balance was reduced to zero.
As of December 31, 2017 and 2016, the Company’s share of the underlying net assets of ATMS exceeds the Company’s carrying value of its investment in ATMS ($0 at December 31, 2017 and 2016) by $4 and $130, respectively. The market value of the Company's investment in ATMS as of December 31, 2017 and 2016 is $317 and $162 respectively.
The Company evaluated the increase in the stock price in 2017 of ATMS but as the amount of shares that are being traded is low, and as ATMS still does not have any revenue, the Company determined that the value of the investment is impaired and accordingly, valued the investment at zero as of December 31, 2017.
White Line B.V.
In March 2017 the Company invested an amount of $2,000 for 7,000 shares of White Line B.V., a limited company incorporated in the Netherlands. White Line is a holding and finance company. Because White Line B.V. is a private, closely-held company, there is no active market for this investment. Therefore, the Company accounts for this investment under the cost method.
In October
2017, the Company invested additional amount of $1,500 for additional 5,000 shares aggregating to 10% ownership.
Should the value of this investment decrease, a company related to the main shareholder has guaranteed to repurchase this full investment at a minimum amount of $3,500. The guaranty is effective after three years of the date of purchase and terminates after five years.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment is as follows:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Equipment and facilities
|
|
$
|
6,780
|
|
|
$
|
5,118
|
|
Internal-use software
|
|
|
554
|
|
|
|
531
|
|
Vehicles
|
|
|
1,737
|
|
|
|
1,127
|
|
Leasehold improvements
|
|
|
460
|
|
|
|
257
|
|
|
|
|
9,531
|
|
|
|
7,033
|
|
Less: accumulated depreciation and amortization
|
|
|
6,326
|
|
|
|
5,275
|
|
Total property and equipment, net
|
|
$
|
3,205
|
|
|
$
|
1,758
|
|
Depreciation and amortization expense is $1,416, $893 and $713 for the years ended December 31, 2017, 2016 and 2015 respectively.
NOTE 7 – NOTES PAYABLE – BANKS
United States
The Company was a party to a credit facility with a commercial lender, which provided it with up to $6,500 in borrowings subject to a borrowing base limitation. The borrowing base limitation was 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. Borrowings under the credit facility were secured by the Company’s accounts receivable, unbilled receivables, equipment, cash and the $1,000 letter of credit that was provided to the lender by an entity related to the Company’s main shareholder.
In July 2016, the Company amended the credit facility to increase the maximum borrowing capacity to $8,500. The amendment also revised the existing fixed charge coverage ratio financial covenant. The credit facility expires on June 24, 2018. As of December 31, 2017 and 2016, the company was in compliance with all required debt covenants.
In December 2017, the Company amended the credit facility agreement to reduce the amount of the letter of credit provided as security to the lender by an entity related to the Company’s main shareholder, from $1,000 to $700. In April 2018, the letter of credit was reduced to $500.
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 December 31, 2017).
The Company’s weighted average interest rate in the United States during the years ended December 31, 2017, 2016 and 2015 is 5.64%, 5.76% and 5.88% respectively.
The Company evaluated the terms of the amendments and concluded that they do not constitute substantive modification.
As of December 31, 2017 and 2016, the Company had approximately $6,605 and $6,301 respectively, outstanding under line of credit arrangements. As of December 31, 2017 and 2016, the Company had $700 and $833, respectively, in unused borrowing capacity under the line of credit facility.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 7 – NOTES PAYABLE – BANKS (CONTINUED)
Europe
In January 2016, the Company entered into a new line of credit arrangement with a commercial bank, replacing the previous line of credit with the same commercial bank, to provide it with up to €10,000 ($11,977 as of December 31, 2017) in borrowings until further notice. Borrowings under the line of credit bear interest at one month EURIBOR plus 3.5% with a minimum of 3.5% per annum (3.5% as of December 31, 2017). The Company is also subject to an unused line fee of 0.75% per annum, which is payable quarterly. The line of credit is secured by accounts receivable of five of the Company’s European subsidiaries and tangible fixed assets of three of the Company’s European subsidiaries. The line of credit cannot exceed 80% of the borrowing base. In December 2016, the Company and the same commercial bank agreed under the same terms and conditions to raise the existing line of credit to €12,000 ($14,372 as of December 31, 2017). As of December 31, 2017 and 2016 the Company had €2,848 and €1,943 ($3,410 and $2,051 as of December 31, 2017 and 2016), respectively in outstanding borrowings under the line of credit arrangement.
As of December 31, 2017, the Company was in violation with one of the non-financial covenants of the agreement. The commercial bank waived this violation on March 2018.
In addition to the line of credit arrangement, a guarantee facility of €2,500 ($2,994 as of December 31, 2017) is provided to the Company by the same commercial bank. As of December 31, 2017 and 2016 the Company had €2,465 and €2,289 ($2,952 and $2,415 as of December 31, 2017 and 2016), respectively, of outstanding guarantees under the guarantee facility.
The Company evaluated the terms of the amendments and concluded that they do not constitute a substantive modification.
The Company’s weighted average interest rate in Europe during the years ended December 31, 2017, 2016 and 2015 is 3.5%, 3.5% and 3.2%, respectively.
NOTE 8 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Accrued payroll and related costs
|
|
$
|
18,067
|
|
|
$
|
14,328
|
|
Accrued vacation
|
|
|
5,432
|
|
|
|
3,415
|
|
Accrual for minimum wage increase
|
|
|
1,128
|
|
|
|
3,581
|
|
Cash overdraft
|
|
|
-
|
|
|
|
1,109
|
|
Labor union contribution
|
|
|
1,912
|
|
|
|
1,564
|
|
Other
|
|
|
4,169
|
|
|
|
2,339
|
|
Total accrued expenses and other current liabilities
|
|
$
|
30,708
|
|
|
$
|
26,336
|
|
The cash overdraft balance above represents outstanding checks as of December 31, 2016.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 9 – LOAN PAYABLE
In June 2017, the Company entered into an arrangement with a financing company to provide it €1,000 ($1,198 as of December 31, 2017) as a loan until June 2018. The loan bears interest of ten percent per annum. Interest is being paid quarterly.
NOTE 10 – DEBT TO RELATED PARTIES
Convertible notes payable to a related party
In May 2014, the Company entered into an arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the parties, to provide it with up to $37,000 in revolving loans through December 2016. The term of the arrangement can be automatically extended for four additional six-month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the interest rate charged by the Company’s European commercial bank (LIBOR plus 6% for U.S. dollar-denominated loans and the base rate plus 2% for Euro-denominated loans). The arrangement is secured by a 26% interest in one of the Company's European subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable (including accrued interest) under the arrangement into the Company's common stock at a price of $1.50 per share. The Company determined that the new arrangement did not represent a substantive modification and, therefore, it was not necessary to evaluate whether the conversion feature qualified as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial.
In October 2015, the Supervisory Board of Directors approved to reduce the convertible price of the unpaid interest from $1.50 per share to $0.75 per share. In addition, the loan period was extended until January 1, 2018. The terms of the arrangement can be automatically extended for four additional six months periods at the option of the holder. The Company determined
that the new arrangement did not represent a substantive
modification and therefore it was not necessary to evaluate whether the conversion feature qualifies as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial.
In September 2016, the Supervisory Board of Directors approved an increase in the interest rate of the loan from the entity related to the main shareholder, by one percent, retroactively for the whole period of the loan. The Company determined that the new arrangement did not
represent a substantive
modification and therefore it was not necessary to evaluate whether the conversion feature qualifies as a freestanding derivative instrument or contained any intrinsic value, which would be considered beneficial. The interest recognized in 2016 regarding increase of the previous years interest rate totaled $1,159.
In December 2016, the entity related to the main shareholder converted $5,429 accrued interest into 7,238,302 shares at a price of $0.75 per share.
In December 2017 the loan period was extended until January 1, 2019. The terms of the arrangement can be automatically extended for four additional six months periods at the option of the holder.
The Company’s weighted average interest during the years ended December 31, 2017, 2016 and 2015 is 7.27%, 7.05% and 5.99%, respectively.
At December 31, 2017 and 2016, convertible notes payable to a related party consist of $24,977 and $25,078, respectively, in principal and $12,612 and $9,433, respectively, in accrued interest. Interest expense related to these notes is $2,706, $4,171 and $2,601 for the years ended December 31, 2017, 2016 and 2015, respectively
.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 10 – DEBT TO RELATED PARTIES (CONTINUED)
In March 2017, the Company signed a loan agreement with a related party, to provide the Company a loan of $2,000 for up to one year bearing 7% interest per year. In December 2017 the Company repaid $700 against the loan. The Company incurred interest expenses regarding this loan of $109 for the year ended December 31, 2017, which is included in the loan balance at December 31, 2017.
NOTE 11 – STOCK-BASED COMPENSATION
In February 2005, the Company adopted the 2005 Equity Incentive Plan and reserved 1,500,000 shares of common stock for future issuance. The plan expired in 2015.
In December 2008, the Company adopted the 2008 Employees and Directors Commitment Stock Option Plan and reserved 1,500,000 shares of common stock for future issuance. The plan expires in 2018.
Under the Company's stock option plans, stock options may be granted to employees, officers, directors and consultants of the Company at an exercise price equivalent to at least the fair market value of the Company's common stock on the date of grant with expiration terms of not more than ten years. Options granted under the plans generally vest over a period of three years.
There were no stock options granted or exercised during the years ended December 31, 2017 and 2016. During the year ended December 31, 2017 all granted options expired.
As of December 31, 2017, the Company has 1,500,000 options available for future grants.
A summary of the Company's stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Number
|
|
|
Price
|
|
|
(in years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of January 1, 2017
|
|
|
150,000
|
|
|
$
|
1.05
|
|
|
|
0.33
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Forfeited / Expired
|
|
|
150,000
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Outstanding as of December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
During the years ended December 31, 2017, 2016 and 2015, there were no compensation expenses related to the issuance of stock option plans.
As of December 31, 2017 the Company does not have any unrecognized compensation cost related to stock options granted under the stock option plans.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 12 – OTHER EXPENSE, NET
Other expense, net is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense to related parties (see Note 10)
|
|
$
|
(2,875
|
)
|
|
$
|
(4,171
|
)
|
|
$
|
(2,601
|
)
|
Interest expense and other bank charges
|
|
|
(1,073
|
)
|
|
|
(1,430
|
)
|
|
|
(1,374
|
)
|
Interest income
|
|
|
170
|
|
|
|
116
|
|
|
|
169
|
|
Foreign currency gain (loss)
|
|
|
(2,450
|
)
|
|
|
1,005
|
|
|
|
3,066
|
|
Other income (expense)
|
|
|
56
|
|
|
|
(21
|
)
|
|
|
(20
|
)
|
Total other expense,net
|
|
$
|
(6,172
|
)
|
|
$
|
(4,501
|
)
|
|
$
|
(760
|
)
|
NOTE 13 – INCOME TAXES
The components of income (loss) before income tax expense from continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
The Netherlands
|
|
$
|
1,602
|
|
|
$
|
(631
|
)
|
|
$
|
(2,048
|
)
|
Subsidiaries outside of the Netherlands
|
|
|
6,296
|
|
|
|
3,977
|
|
|
|
(2,505
|
)
|
Income (loss) before income tax expense
|
|
$
|
7,898
|
|
|
$
|
3,346
|
|
|
$
|
(4,553
|
)
|
The current income tax expense from subsidiaries outside of the Netherlands is $2,045, $1,249 and $110 for the years ended December 31, 2017, 2016 and 2015, respectively. There was no current income tax expense for the Netherlands for the years ended December 31, 2017, 2016 and 2015, respectively.
The deferred income tax (expense) benefit from subsidiaries outside of the Netherlands is $12, $245 and $(39) for the years ended December 31, 2017, 2016 and 2015, respectively. There was no deferred income tax expense for the Netherlands for the years ended December 31, 2017, 2016 and 2015.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 13 – INCOME TAXES (CONTINUED)
The components of deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Operating loss carryforwards
|
|
$
|
14,761
|
|
|
$
|
18,907
|
|
Capital loss carryforwards
|
|
|
147
|
|
|
|
145
|
|
Allowance for doubtful accounts
|
|
|
13
|
|
|
|
20
|
|
Tax credit carryforwards
|
|
|
558
|
|
|
|
558
|
|
Accrued expenses
|
|
|
910
|
|
|
|
2,032
|
|
Total deferred tax assets
|
|
|
16,389
|
|
|
|
21,662
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment
|
|
|
(139
|
)
|
|
|
(56
|
)
|
|
|
|
16,250
|
|
|
|
21,606
|
|
Valuation allowance
|
|
|
(15,901
|
)
|
|
|
(21,269
|
)
|
Deferred tax assets, net
|
|
$
|
349
|
|
|
$
|
337
|
|
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 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 two locations, which are currently generating taxable income. A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion of the valuation allowance in other jurisdictions.
In the United States of America, the Tax Cuts and Jobs act of 2017 was signed into law on December 2017. The law include significant changes to the U.S. corporate income tax system, including a Federal corporate rate reduction from 35% to 21%, limitations on the deductibility of interest expense and limitation on net operating losses generated after December 31, 2017. The re-measurement of deferred tax grants and liabilities due to the corporate rate deduction yielded a reduction in net deferred tax assets of $4,419, which was offset by a full valuation allowance.
The Company does not expect the legislation to have a near term impact on the Company’s current taxes because of the expectation of net losses utilization in future years.
As of December 31, 2017, the Company has net operating loss carry forwards of $23,769 in the Netherlands, which will expire in 2017 through 2025. As of December 31, 2017, the Company has net operating loss carry forwards of $29,267 in the United States, which will expire in 2025 through 2034 and $5,257 in Israel, which do not expire. The ultimate utilization of such net operating loss carry forwards is limited in certain situations.
As of December 31, 2017, the Company has capital loss carry forwards of $641 in Israel. Such capital loss carry forwards do not expire and can be offset against future capital gains generated in Israel.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 13 – INCOME TAXES (CONTINUED)
As of December 31, 2017, the Company has $558 in tax credits for the welfare to work and work opportunity programs in the United States that expire in 2024 through 2029.
During the year ended December 31, 2017 and 2016 the valuation allowance decreased by $5,368 and $874, respectively.
The Company's effective income tax rate differs from The Netherlands' statutory rate of 25% as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Effective loss (income) tax benefit from continuing operations at statutory rate
|
|
$
|
(1,975
|
)
|
|
$
|
(837
|
)
|
|
$
|
1,138
|
|
Rate differential
|
|
|
(545
|
)
|
|
|
(493
|
)
|
|
|
334
|
|
Non-deductible expenses
|
|
|
(131
|
)
|
|
|
(89
|
)
|
|
|
(162
|
)
|
Adjustments to prior year tax losses
|
|
|
-
|
|
|
|
-
|
|
|
|
1,097
|
|
Tax rate change-impact on prior years
|
|
|
(4,472
|
)
|
|
|
-
|
|
|
|
-
|
|
Changes in valuation allowance
|
|
|
5,368
|
|
|
|
874
|
|
|
|
(2,868
|
)
|
Other
|
|
|
(278
|
)
|
|
|
(459
|
)
|
|
|
312
|
|
Income tax expense from continuing operations
|
|
$
|
(2,033
|
)
|
|
$
|
(1,004
|
)
|
|
$
|
(149
|
)
|
As of December 31, 2017 and 2016 there are no unrecognized tax benefits. As of December 31, 2017 and 2016, the Company has income tax payable of $3,144 and $1,130, respectively.
The Company files income tax returns in the Netherlands and other foreign jurisdictions. Income tax returns for the tax years 2014 to 2016 are subject to examination in the Netherlands and the United States. Income tax returns for the tax years 2013 to 2017 are subject to examination in foreign jurisdictions.
NOTE 14 - RELATED PARTY TRANSACTIONS
Entities related to two of the Company's Supervisory Board members provide legal services to the Company. Legal expense related to these services is $47, $58 and $47 for the years ended December 31, 2017, 2016 and 2015, respectively. Included in accounts payable on the accompanying consolidated balance sheets is $9 and $6 due for these services as of December 31, 2017 and 2016, respectively.
The Company engages the services of a related party to provide certain selling and management services to its technology segment. The Company incurred expenses of $254, $227 and $223 for such services for the years ended December 31, 2017, 2016 and 2015, respectively.
An entity related to the Company’s main shareholder provides a letter of credit of $1,000 to a commercial bank to guarantee a borrowing arrangement on behalf of one of the Company’s subsidiaries. In December 2017, the Company agreed with the commercial bank to reduce the letter of credit to $700. In April 2018, the letter of credit was reduced to $500. (see note 7).
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 14 - RELATED PARTY TRANSACTIONS - CONTINUED
The Company engages the services of a related party to provide certain selling services to its technology segment. The Company incurred expenses of $95, $52 and $48 for such services for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company engages the services of a related party to provide certain administrative services. The Company incurred expenses of $0, $0 and $15 for such services for the years ended December 31, 2017, 2016 and 2015, respectively.
In November 2015, the Company engaged the services of a related party to provide internal audit services. The Company incurred expenses of $114, $112 and $13 for such services for the years ended December 31, 2017, 2016 and 2015, respectively.
In December 2015, the Supervisory Board approved an annual compensation for the Chairman of the Supervisory Board, a related party, of $60. In addition, as the Chairman of the Supervisory Board was not compensated for the last eleven years, a one-time grant of $660 was approved. In September 2016, the chairman of the Supervisory Board forgave $600 of this grant. Annual compensation was reduced to $50.
In December 2015, the Company issued 2.9 million shares to certain directors and officers of the Company for a purchase price of $0.60 per share.
In November and December 2016, the Company issued 2.8 million shares to certain directors and officers of the Company for a purchase price ranging from $0.40 - $0.45 per share.
In January 2017, a company related to the main shareholder of the Company has guaranteed the White Line B.V. investment of $3,500 (see note 5).
In August 2017 the Company engaged the services of a related party to provide certain selling and administrative services to its technology segment. The Company incurred expenses of $39 for such services for the year ended December 31, 2017.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain premises under various operating leases.
Future minimum lease payments under such operating leases are as follows:
Year ending
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2018
|
|
$
|
2,009
|
|
2019
|
|
|
612
|
|
2020
|
|
|
289
|
|
2021
|
|
|
13
|
|
|
|
$
|
2,923
|
|
Rent expense for the years ended December 31, 2017, 2016 and 2015 is
$4,662, $3,900,
and $3
,409
respectively.
Letters of Credit and Guarantees
As of December 31, 2017 and 2016, the Company has approximately $233 in outstanding letters of credit. Such letters of credit are being secured by the same amounts in restricted cash with a commercial bank (see Note 2).
As of December 31, 2017 and 2016 the Company has €2,465 and €2,289 ($2,952 and $2,415 as of December 31, 2017 and 2016 respectively) in outstanding guarantees on its lines of credit arrangement in Europe (see Note 7).
Legal Proceedings
September 11, 2001 Terrorist Attacks
As a result of the September 11, 2001 terrorist attacks, numerous lawsuits charging the Company with wrongful death and/or property damage were commenced in the United States District Court, Southern District of New York (the “Court”), resulting from certain airport security services provided by the Company for United Flight 175 out of Logan Airport in Boston, Massachusetts.
As of December 31, 2017 all the cases have been settled or dismissed at no cost to the Company because the payments were covered by the Company’s insurance. The Court approved the settlements.
Claims by former employees
The Company is subject to wrongful termination claims made by certain former employees of one of its European subsidiaries. The aggregate amount of such claims is approximately $807. In February 2018 the court has ruled in those cases in favor of the Company.
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal Proceedings (continued)
Minimum wage increase
In August 2015, the Company was informed about a court decision, which approved an increase to the minimum wage for the city of SeaTac, Washington (location of Seattle Airport). The increase to the minimum wage was originally approved by a vote in King County, Washington in 2013 (to be effective January 1, 2014). However, a court ruled that SeaTac employees were excluded from this increase because the airport was under the jurisdiction of the Port of Seattle and not the city of SeaTac. In August 2015, this decision was overturned by the State Supreme Court and accordingly, the Company is required to increase the minimum wage of its employees at the SeaTac Airport according to the court decision, effective January 1, 2014. At December 31, 2016 the Company has estimated that it has a liability of approximately $3,600 for back wages (inclusive of interest amounting to approximately $600) and has recorded an accrual for this liability.
A class action lawsuit was filed against the Company in the United States District Court for the Western District of Washington, Seattle, by an employee of the Company. The employee alleges the Company failed to pay the proper minimum wage in violation of the City of SeaTac Municipal Code.
Additional two lawsuits were filed against the Company in the District Court for the Southern District of Texas, Houston Division and in the Superior Court of Washington, King County, on the same subject.
During the year ended December 31, 2017 the three legal disputes for back wages due to the SeaTac, WA Minimum Wage ordinance were settled in the courts and the Company paid out approximately $1,933. As of December 31, 2017, the Company has an accrued amount of approximately $1,628 (inclusive of interest amounting to approximately $307) for the reminder of the settlement. Approximately $1,128 (including interest) of this amount is included in accrued expenses and other current liabilities (see note 8) and is due in 2018. The additional $500 (including interest) is shown as a long term liability in other liabilities since payment is due in 2019.
General
The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. These claims are primarily related to grievances filed by current and former employees for unfair labor practices or discrimination, and for passenger aviation claims. Management recognizes a liability for any matter when the likelihood of an unfavorable outcome is deemed to be probable and the amount is able to be reasonably estimated. Management has concluded that such claims, in the aggregate, would not have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows.
Agency Agreements
In April 2013, prior to the purchase of one of the current subsidiaries in Europe, the Company entered into an agency agreement with a third party to assist it with this transaction. According to the agreement, in the event that the operations of the subsidiary are sold in the future, the third party agent is entitled to a payment of €2,000 ($2,395 as of December 31, 2017).
In June 2015, the Agency agreement was amended. As part of the changes, in the event that the Company’s operations in that country are sold, the third party agent is entitled to a payment of €3,000 ($3,593 as of December 31, 2017) instead of €2,000 ($2,395 as of December 31, 2017).
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 16 –
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 provides security and other aviation 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 authentication security software to financial and other institutions, predominantly in Europe and the United States of America. All inter-segment transactions are eliminated in consolidation. The accounting policies of the segments are the same as the accounting policies of the Company as a whole.
The operating results of these reportable segments are regularly reviewed by the chief operating decision.
|
|
|
|
|
Airport
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
|
|
|
|
|
|
|
|
|
|
|
and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Services
|
|
|
Technology
|
|
|
Total
|
|
Year ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
292,393
|
|
|
$
|
5,289
|
|
|
$
|
297,682
|
|
Depreciation and amortization
|
|
|
46
|
|
|
|
1,333
|
|
|
|
37
|
|
|
|
1,416
|
|
Income (loss) from continuing operations
|
|
|
(9,294
|
)
|
|
|
15,803
|
|
|
|
(644
|
)
|
|
|
5,865
|
|
Total assets from continuing operations
|
|
|
4,403
|
|
|
|
63,428
|
|
|
|
2,626
|
|
|
|
70,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
252,878
|
|
|
$
|
2,698
|
|
|
$
|
255,576
|
|
Depreciation and amortization
|
|
|
10
|
|
|
|
846
|
|
|
|
37
|
|
|
|
893
|
|
Income (loss) from continuing operations
|
|
|
(6,052
|
)
|
|
|
10,654
|
|
|
|
(2,260
|
)
|
|
|
2,342
|
|
Total assets from continuing operations
|
|
|
431
|
|
|
|
45,092
|
|
|
|
780
|
|
|
|
46,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
185,519
|
|
|
$
|
1,503
|
|
|
$
|
187,022
|
|
Depreciation and amortization
|
|
|
1
|
|
|
|
655
|
|
|
|
57
|
|
|
|
713
|
|
Income (loss) from continuing operations
|
|
|
(3,182
|
)
|
|
|
1,597
|
|
|
|
(3,117
|
)
|
|
|
(4,702
|
)
|
Total assets from continuing operations
|
|
|
440
|
|
|
|
41,056
|
|
|
|
853
|
|
|
|
42,349
|
|
Revenue by country is summarized as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
$
|
125,896
|
|
|
$
|
108,692
|
|
|
$
|
61,765
|
|
The Netherlands
|
|
|
103,862
|
|
|
|
87,348
|
|
|
|
72,231
|
|
United States
|
|
|
52,234
|
|
|
|
47,733
|
|
|
|
41,817
|
|
Other
|
|
|
15,690
|
|
|
|
11,803
|
|
|
|
11,209
|
|
Total
|
|
$
|
297,682
|
|
|
$
|
255,576
|
|
|
$
|
187,022
|
|
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 16 –
SEGMENT AND GEOGRAPHICAL INFORMATION (CONTINUED)
Property and equipment, net of accumulated depreciation and amortization, by country is summarized as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Germany
|
|
$
|
333
|
|
|
$
|
359
|
|
The Netherlands
|
|
|
1,668
|
|
|
|
729
|
|
United States
|
|
|
742
|
|
|
|
487
|
|
Other
|
|
|
462
|
|
|
|
183
|
|
Total
|
|
$
|
3,205
|
|
|
$
|
1,758
|
|
NOTE 17 - SUBSEQUENT EVENTS
In January 2018, the Company acquired 100% of the outstanding shares of Abydos Consultores de Sistemas S.L.U., a Spanish company. Consideration of the acquisition was 183 euros. The acquisition was done in order to expand the services we provide in Spain.
The acquisition was accounted for as a purchase and accordingly a purchase price was allocated to the assets acquired and liabilities assumed at their fair values.
The following represents the allocation of the purchase price as of the purchase date in Euros and the translation to United States Dollars as of the purchase date:
|
|
EUR
|
|
|
U.S. Dollars
|
|
Cash
|
|
|
29
|
|
|
|
36
|
|
Accounts receivable
|
|
|
142
|
|
|
|
175
|
|
Fixed assets
|
|
|
88
|
|
|
|
108
|
|
Other assets
|
|
|
11
|
|
|
|
14
|
|
Goodwill
|
|
|
188
|
|
|
|
232
|
|
Total identifiable assets acquired
|
|
|
458
|
|
|
|
565
|
|
|
|
|
|
|
|
|
|
|
Notes payables - banks
|
|
|
11
|
|
|
|
14
|
|
Accounts payable
|
|
|
19
|
|
|
|
23
|
|
Accrued expenses and other current liabilities
|
|
|
126
|
|
|
|
155
|
|
Other liabilities
|
|
|
119
|
|
|
|
147
|
|
Total liabilities assumed
|
|
|
275
|
|
|
|
339
|
|
|
|
|
183
|
|
|
|
226
|
|
In April 2018, the Company issued 3.4 million shares to certain directors and officers of the Company for a purchase price of $0.66 per share.
Valuation and Qualifying Accounts
(US $ in thousands)
|
|
|
|
|
Charges (credit)
|
|
|
Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
to
|
|
|
to
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
other
|
|
|
|
|
|
End of
|
|
|
|
of year
|
|
|
Expenses
|
|
|
accounts
|
|
|
Deductions
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
$
|
116
|
|
|
$
|
(65
|
)
|
|
$
|
-
|
|
|
$
|
(1
|
)
|
|
$
|
50
|
|
Year ended December 31, 2016
|
|
|
50
|
|
|
|
34
|
|
|
|
-
|
|
|
|
-
|
|
|
|
84
|
|
Year ended December 31, 2017
|
|
|
84
|
|
|
|
97
|
|
|
|
(78
|
)
|
|
|
-
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for net deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
$
|
19,275
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,868
|
|
|
$
|
22,143
|
|
Year ended December 31, 2016
|
|
|
22,143
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(874
|
)
|
|
|
21,269
|
|
Year ended December 31, 2017
|
|
|
21,269
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,368
|
)
|
|
|
15,901
|
|
(1) Write-off net of recoveries for the allowance for doubtful accounts.
F - 37