annual report and accounts 2019...the credit risk associated with accounts receivable is the amount...

ClearStar Inc.

A

nnual Report and A

ccounts 2019

ClearStar, Inc.6250 Shiloh Road, Suite 300

AlpharettaGeorgia 30005

USATel: +1 877 796 2559

www.clearstar.net

Making the world a safer place with intuitive technology solutions that encourage authenticity and empower informed hiring

Annual Report and Accounts 2019

ClearStar Inc. Annual Report & Accounts 2019

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2 Directors, Secretary & Advisers

3 Financial & Operational Highlights

Strategic Report

4 Chairman’s Statement

5 Chief Executive Officer’s Review

8 Chief Financial Officer’s Review

9 ClearStar Market Trends

10 Principle Risks & Uncertainties

Corporate Governance

12 Directors’ Report

14 Directors’ Biographies

16 Corporate Governance Report

18 Audit Committee Report

19 Remuneration Committee Report

Financial Statements

24 Independent Auditors’ Report

25 Consolidated Statements of Operations

26 Consolidated Balance Sheets

28 Consolidated Statements of Changes in Stockholders’ Equity

29 Consolidated Statements of Cash Flows

31 Notes to the Consolidated Financial Statements

CONTENTS

DirectorsBernard ‘‘Barney’’ QuinnNon-executive Chairman

Robert James Vale Jr.Chief Executive Officer

Kenneth Wayne Dawson Jr.Chief Information & Security Officer

Samuel “André” SchnablNon-executive Director

Company SecretaryNicolas Simon Dufour

Registered Office c/o Maples Corporate Services Ltd

PO Box 309Ugland HouseGrand Cayman

KY1-1104Cayman Islands

Principal Place of Business

6250 Shiloh RoadSuite 300

AlpharettaGA 30005

USA

Nominated Adviser & Broker

finnCap Ltd60 New Broad Street

London EC2M 1JJ

United Kingdom

Auditors Aprio, LLP

Five Concourse ParkwaySuite 1000

AtlantaGA 30328

USA

Legal Advisers – under English Law

Addleshaw Goddard LLPMilton Gate

60 Chiswell StreetLondon

EC1Y 4AGUnited Kingdom

– under US LawEversheds Sutherland (US) LLP

999 Peachtree Street NESuite 2300

AtlantaGA 30309

USA

– under Cayman Islands LawMaples and Calder

PO Box 309Ugland HouseGrand Cayman

KY1-1104Cayman Islands

RegistrarsLink Market Services (Guernsey) Ltd

Mont Crevelt HouseBulwer Avenue

St SampsonGuernseyGY2 4LH

United Kingdom

Financial PRLuther Pendragon

48 Gracechurch StreetLondon

EC3V 0EJUnited Kingdom

Investor RelationsWeston Advisors Ltd

PingassonWeston Patrick

HampshireRG25 2NX

United Kingdom

Directors, Secretary & Advisers


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■ Revenue increased by 14% to $23.0m (2018: $20.1m)

■ Gross profit grew by 9% to $12.4m (2018: $11.3m)

■ Adj.* EBITDA doubled to $0.4m (2018: $0.2m)

■ Loss before tax flat at $1.4m (2018: $1.4m)

■ As at 31 December 2019, the Company had increased cash of $1.8m (30 June 2019: $1.1m)

* Adjusted to exclude certain non-recurring expenses (see Chief Financial Officer’s Review)

■ Strong revenue growth in direct sales and Medical Information Services, which, in aggregate, accounted for 72% of total revenue (2018: 65%):

l Direct sales increased by 32% due to expansion of higher-volume, tier 1 client base

l Medical Information Services sales increased by 23% primarily due to greater volume with channel partner customers through purchase of additional services

■ Expanded direct tier 1 client base in key industries as well as into new segments:

l Won a contract with a major shipyard specialising in vessels for the U.S. Navy

l Awarded multiple contract expansions for financial institution screening

l Won first direct customer in the petrochemical industry and, post period, in facilities management

■ Enhanced sales & marketing resulting in greater brand recognition, significant increase in interest and upscaling:

l Expansion of sales pipeline, including transition up-channel to higher-value prospects

l Average spend per direct customer increased 32% over 2018

l Value of lead generation through strategic integrations with Veritas Prime and SAP SuccessFactors increased by more than 200% over 2018

■ Enhanced offering with the introduction of new services for ordering breath alcohol screening (in medical screening) and, post period, the launch of Criminal Monitoring


Financial Highlights

Operational Highlights

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2019 was a great year for ClearStar as we continued to execute on our strategy to expand and increasingly upscale our direct client base as well as grow our market-leading medical screening solutions business. Our success is reflected in our revenue growth for the year and our contract wins, which included some high-calibre organisations.

ClearStar valueClearStar provides employment intelligence to support better recruitment and other decisions affecting employees by increasing the quality, reliability and visibility of information. Importantly, we do so in a way that is designed to make the process as simple and as efficient as possible for both the employer and the employee or applicant. As a result, we enable more effective decision-making – getting people to work quicker – as well as a safer workforce.

Our strength in delivery is based on our technology and our approach of providing the right solution to meet our customers’ needs. Our cloud-based platform offers portability and flexibility, and we continually invest to ensure we maintain the highest levels of security. Our proprietary algorithms enable the rapid interrogation and processing of data, which we deliver through easy-to-use mobile and desktop solutions. In medical information services, our mobile solution can be used with over 9,500 medical test sites. We have some fantastic integrations – in particular, SAP SuccessFactors – that provide us with channels-to-market and brand endorsement. ClearStar is also one of the few companies with the requisite compliance and technology interface to be able to offer comprehensive searches in over 230 countries and territories.

Strategy execution & business continuityThe investments that we have made over the last few years to establish and build on this strong competitive position has driven our growth in 2019. Our key revenue generators continue to be our direct sales channel and medical information services, which, together, accounted for 72% of our sales and grew by 27% over 2018. Interest in our services is constantly increasing and from ever-larger organisations that bring higher volumes. We also continue to diversify our customer base, including winning our first client in the petrochemical industry and, post period, in facilities management.

The success of our sales activity in 2019 is reflected in the fact that we entered 2020 with our highest ever order book, a healthy pipeline and strong momentum. However, with the outbreak of COVID-19, the world – and, correspondingly, our outlook for the year – has

clearly changed. As discussed in the Chief Executive Officer’s Review, in March 2020, we implemented our business continuity plan in response to the pandemic with all employees being transitioned to remote working. ClearStar’s priorities are to ensure the health and wellbeing of employees while we maintain all critical business functions with the same level of client servicing and security – keeping both our employees and our customers’ data safe. Thanks to the valiant efforts of the ClearStar team, we have continued to service our clients without any degradation in quality and, while volumes are reduced, we have not lost a single customer during this period.

Strong fundamentalsWhile times are undoubtedly challenging for everyone, the markets that ClearStar addresses remain attractive in the long-term – underpinned by increasing regulatory drivers and awareness of the need to take action to ensure the safety of the workforce and wider society. Moreover, when ‘normal’ business starts to resume and the US begins to reopen, many of the vast number of jobs that have been lost will need to be recouped and at speed, and ClearStar is well placed to benefit thanks to our solutions that are specifically designed to get people into work quicker.

ClearStar continues to offer solutions that meet the business needs of its customers, which are in a diverse range of sectors – providing a large addressable market. We have also established a strong competitive position for targeting these markets. While the current situation is far from what we imagined at the start of the year, the fundamentals of our business remain strong. Our swift and decisive action in response to the crisis has put ClearStar in the best position possible to navigate the coming months. I would like to thank our customers, shareholders and other partners for their continued support and, above all, Bob and our employees for their tremendous commitment and hard work.

Barney QuinnChairman5 May 2020

Chairman’s Statement


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In 2019, we continued to execute on our strategy and deliver strong growth, with revenue increasing by 14% to $23.0m (2018: $20.1m). This was driven by sales in Medical Information Services (“MIS”) and ramp-up of new direct customers that were won in 2018, primarily for background screening. We also continued to upscale our direct client base, increasing the average spend per direct customer by 32% over the previous year.

Our investment in strengthening the direct sales team enabled an expansion in the pipeline and upscaling of our client base, including some major client wins during the year and post period. We also continued to enhance our offer, including the introduction of breath alcohol screening as part of our medical screening services and, post period, the launch of our Criminal Monitoring service.

Performance by business channelDirect servicesSales from direct services increased by 32% to $7.9m for 2019 (2018: $6.0m), accounting for 34% of total revenue (2018: 30%). In addition, in 2019, a direct customer became one of our ten largest customers by revenue generation, reflecting the increasing significance of this business channel. The growth was driven primarily by the financial services and transportation industries as well as a significant contribution from an organisation that provides student exchange programmes. Home healthcare remained the largest overall contributor to direct sales.

ClearStar has had a clear and stated intention of not just growing our client base but expanding into new verticals and upscaling to larger, higher-volume businesses. During 2019, we made significant progress in this endeavour. Average spend per direct customer increased by 32% in 2019 over 2018, reflecting the higher volume of larger businesses. The value of leads generated through our strategic integrations with Veritas Prime and SAP SuccessFactors increased by more than 200% over 2018. We also continued to expand in our core verticals as well as successfully winning new business in two new verticals.

Healthcare: In home healthcare, wins during 2019 were in expanding our business with existing customers, primarily by servicing additional locations for those customers. In addition, we were appointed by a medical humanitarian organisation to provide global background screening of its employees and volunteers. We were also awarded a contract by a leading animal healthcare and mineral nutrition company, with over 1,400 employees, to provide

background and medical screening – specifically, drug testing and occupational health.

Financial Services: We were granted two extensions in 2019 by our significant financial institution screening client, which is a professional services company that provides outsourcing and staffing primarily for the financial services industry. As noted previously, revenue in the fourth quarter was lower than anticipated due to the impact on the financial services industry of political uncertainty in the US and abroad and market realignments. However, post period, we were pleased to be appointed to provide financial institution screening for three further institutions under our contract with this customer (albeit with relatively modest initial volumes), as well as continuing to provide services to the original major financial institution.

Transportation and Logistics: We continued to make progress in expanding our customer base in our target growth market of transportation and logistics. This includes being appointed to provide background screening by a major shipyard specialising in the design, building and support of vessels for the U.S. Navy. The contract includes minimum annual volumes over a three-year period, which adds to revenue visibility. We also increased our client base in the aerospace industry, which included some notable wins that were achieved through our integration with SAP SuccessFactors. Environmental Services: We were awarded a contract by Milestone Environmental Services, a leading provider of oilfield waste disposal services, to provide a combination of drug and background screening services – representing our first direct client in the petrochemical industry.

Facilities Management: Post period, we were appointed by a leading facilities management company to provide background screening of all service providers entering the customer’s healthcare facilities. This is our first direct customer in facilities management and we believe the sector offers good growth potential due to the large number of external service providers entering a facility. It also offers the opportunity to cross-sell further solutions to these service providers who will already be on-boarded to our platform.

Channel partnersIn 2019, sales to channel partners – indirect services – increased by 7% to $15.0m (2018: $14.1m) as a result of MIS growth. Indirect services accounted for 66% of total revenue (2018: 70%).

Chief Executive Officer’s Review

Strategic Report


Chief Executive Officer’s Review (continued)For the year ended 31 December 2019

Performance by service offeringMedical Information ServicesMIS continued to be the largest single contributor to revenue by product, accounting for 44% of total revenue (2018: 41%) and grew strongly year-on-year with an increase in MIS revenue of 23% to $10.1m (2018: $8.3m). This growth was primarily based on increased volume with existing channel partner customers for drug testing services.

Strong regulatory drivers in the area of drug screening have continued to increase the time-sensitive requirement on our channel partner customers to bring a solution to market. ClearStar’s ability to deliver a white label solution that can be quickly configured and integrated has made our medical technology the solution of choice for customers to rapidly resolve any regulatory requirement gaps. Sales to channel partners accounted for 85% of MIS revenue (2018: 85%) and sales to direct customers accounted for 15% (2018: 15%). The slight growth in direct MIS revenue was primarily based on increased volume with existing direct customers.

Other servicesExcluding MIS, revenue from other services – which primarily comprise background screening as well as the wholesale provision of data and global services – increased to $12.8m (2018: $11.9m). This was driven by an increase in sales in background screening to direct clients, which grew by 32% year-on-year, and more than mitigated the reduction in revenue from channel partner background screening.

Investing for growth At the beginning of 2019, we further enhanced our sales team, establishing a team with combined experience of over 70 years in background screening sales. This investment contributed to the significant upscaling of the client base, reflected in the increase in average spend per direct customer, as well as the expanded pipeline – some of which has now converted to sales.

Our MIS offering was enhanced with the introduction of new services for ordering breath alcohol screening to meet both Department of Transportation (“DOT”) and non-DOT requirements. This includes a combined drug and breath alcohol screening offer, which facilitates the screening process for the employee and employer by allowing tests to be conducted at the same location and providing consolidated results reporting. This marks an important step towards our goal of offering complete medical review services.

Post period, we further expanded our offering with the launch of a Criminal Monitoring solution. This new service, which is already

being used by several clients, provides ongoing monitoring for records of employee criminality, for which clients pay a monthly fee. The initial uptake has been primarily from clients in the child education sector and industries where a worker enters the home.

During 2019, we gained ISO/IEC 27001:2013 accreditation, which certifies that our information security, cybersecurity and privacy protection systems and policies comply with international standards of best practice. This also followed the enhancements we made during the year to our security measures, such as for automated threat monitoring.

In addition, during 2019 we commenced transitioning our IT infrastructure from third-party data centres to an AWS cloud-based environment. This provides greater scalability, security and resilience as well as enabling faster deployment of software updates.

Current trading and COVID-19 UpdateTo protect the health and safety of our workforce, all of our employees were transitioned to remote working during March 2020. We have continued to be able to service clients, with no degradation in quality or security, as our business model does not require employees to be in a particular physical location to perform their roles. This capability was also strengthened by the investments made during 2019 in our IT infrastructure to enhance security measures and cloud data management.

We entered 2020 with our highest ever order book and a healthy pipeline. However, the COVID-19 outbreak has resulted in a significant reduction in volume and a delay to some expected activity due to the widespread hiring freezes and economic downturn. Consequently, revenue for the year-to-date is 16% lower than for the same period in 2019, with the current run rate approximately 50% below the same point last year. Given the evolving nature of the crisis and the uncertainty over its length and severity, it is too early to assess the financial impact that the disruption will have on the full year ending 31 December 2020.

We responded rapidly to the crisis to implement a number of mitigation measures to support the liquidity of the business and our financial position during this period of reduced trading. The Non-Executive Directors have chosen to forego their director fees, the Executive Directors are taking a voluntary salary reduction of 25% and all other employees have agreed to a reduction of 10%-25%. Other actions taken include the implementation of some organisational restructuring; curtailing all travel and non-essential spend; and securing a short-term rent concession on our leased properties. The remuneration reductions are effective from 1 April 2020 and will be reinstated at management’s discretion based on the length of the disruption and financial impact on the business. These measures, combined, are expected to significantly reduce

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Strategic Report

monthly running costs and generate in-year savings of up to approximately $2.3m.

As at 5 May 2020, we had net debt of $1.0m and gross cash of $3.8m. The gross cash comprised $1.1m derived from the Paycheck Protection Progam loan we received pursuant to the Coronavirus Aid, Relief, and Economic Security Act; $1.5m from our recurring revenue credit facility; and $1.2m from current operations. The borrowing capacity under the credit facility is determined by monthly recurring revenue. Accordingly, based on the current level of reduced trading due to the COVID-19 outbreak, we are unable to drawdown further funds from the facility and we expect to be required to make debt repayments in the coming months based on existing covenants. We were not in compliance with certain covenants as at 31 March 2020, and the lender agreed to waive the breach through 30 June 2020. We are engaged in active negotiations with our lender to secure new covenant terms. If the existing covenants continue, and based on the current level of trading, the Board believes that we have sufficient liquidity to remain viable until year end.

Nonetheless, the Board is encouraged that, while volumes have been significantly reduced, we have not lost any customers during this period and we have continued to win new business. This strengthens the Board’s confidence that ClearStar is well-positioned to benefit from the expected ramp up in US recruitment when normal business resumes. We will continue to monitor the situation closely and update the market as appropriate.

Robert ValeChief Executive Officer 5 May 2020

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ClearStar achieved solid revenue growth with total revenues increasing 14% for the year ended 31 December 2019 to $23.0m compared with $20.1m for 2018. This was based on growth across both direct and indirect services, with particularly strong demand for Medical Information Services.

Gross profit increased 9% to $12.4m (2018: $11.3m) and gross profit margin was 54.1% (2018: 56.4%). The decrease in margin was primarily due to having a higher percentage of revenue derived from Medical Information Services, which has a lower gross margin than other services.

Total operating expenses, including depreciation and amortisation, were $13.6m (2018: $12.7m). The increase was due to higher general and administrative expenses at $9.0m (2018: $8.1m) primarily resulting from two non-recurring items totalling $522k: a severance payment to a former executive and exit costs associated with an early lease termination relating to our office relocation. Research and development expenses were $1.3m (2018: $1.7m) and depreciation and amortisation expenses were slightly lower at $1.1m (2018: $1.2m). Selling and marketing expenses were higher at $2.2m (2018: $1.7m) as we invested for growth with the expansion of our direct sales team at the beginning of the year.

We doubled adjusted EBITDA for 2019 to $0.4m compared with $0.2m for 2018 as a result of generating higher revenue. Loss from operations was reduced to $1.2m (2018: $1.3m) and loss before tax was flat at $1.4m (2018: $1.4m) due to greater interest expenses in 2019 due to utilisation of the credit facility. In 2018, we received a $0.07m benefit from income taxes as a result of the reduction of the corporate tax rate from 35.0% to 21.0% under the US Tax Cuts and Jobs Act. We recognised a provision for income taxes of $0.02m in 2019, resulting in net loss being $1.4m compared with $1.3m in 2018.

Total liabilities at 31 December 2019 were $5.2m (30 June 2019: $5.7m; 31 December 2018: $2.7m). The decrease compared with 30 June 2019 was due to seasonality, as we typically experience lower sales volume at year-end and, accordingly, lower cost of sales liabilities. The increase compared with the same point in the prior year was primarily due to the growth in sales and a credit facility utilisation of $2.1m to finance periodic technology infrastructure investment and support growth in the business.

At 31 December 2019, total assets were $9.0m (30 June 2019: $9.9m; 31 December 2018: $7.8m) with the largest assets being goodwill and

other intangible assets of $3.7m (30 June 2019: $3.3m; 31 December 2018: $4.0m), accounts receivable of $2.0m (30 June 2019: $3.3m; 31 December 2018: $2.2m) and cash of $1.8m (30 June 2019: $1.1m; 31 December 2018: $0.9m).

We generated $160k in net cash from operating activities for 2019 (2018: $380k). The decrease was primarily due to higher software subscription costs in 2019 as a result of paying an annual upfront fee part-way through the year to receive pricing advantages (rather than continuing to pay monthly).

We used $1.4m in investment activities in 2019 (2018: $0.7m), due to increased technology-related expenditures associated primarily with the purchase of new hardware and software to support and enhance our technology platform.

We used $2.1m in financing activities (which primarily relates to the credit facility utilisation for working capital) and general corporate purposes (which included the purchase of new hardware and software).

As noted, at 31 December 2019, we had cash of $1.8m. We have a recurring revenue credit facility for up to $5.0m (dependent on monthly recurring revenue) of which $2.9m remained available at 31 December 2019. Post period, we have made further draw downs on the facility in response to the COVID-19 crisis as described in ‘Current Trading and COVID-19 Update’ section of the Chief Executive Officer’s Review on page 6.

Jennifer BallezaChief Financial Officer 5 May 2020

Chief Financial Officer’s Review


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ClearStar market trends

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(Sources: Hr.research Institute ‘How Human Resources Professionals View and Use Background Screening in Employment’, May 2019; HRO Today ‘Real-time Risk Mitigation’, 21 October 2019; SHRM ‘Stakes are high when choosing background-screening providers’, 16 April 2019)

ClearStar solutions include...

Nearly all US employers (95%) believe it is important to have access to international/global screeningProportion conducting international checks on all candidates has tripled from 4% in 2017 to 12% today

ClearStar platform

Ninety-six percent of US employers conduct one or more types of employment background screening 86% screen all full-time employees

ClearStar helps its customers to hire the best candidate, reduce risk and maintain compliance against an increasingly complex legislative and regulatory landscape

Accuracy and completeness of the screen is the most important consideration for US employers - followed by speed In an ordinarily tight labour market, reducing time-to-hire is critical, which includes providing a modern intuitive applicant and client portal to facilitate the process, provide real-time updates and mobile communications

Data protection and security with personally identifiable information is increasingly important for both candidates and employers

ClearStar accreditations include...

96%

ClearStar solution US employers conducting drug and alcohol testing on all candidates as part of the background screening process has risen from 37% in 2017 to 47% in 2019US Department of Justice estimates drug abuse costs US business owners more than $140bn a year

ClearStar provides fast, comprehensive and compliant mobile solutions

Emerging trends that support ClearStar’s value proposition:l Continuous monitoring and rescreening, especially in highly

regulated industries (financial services) and where workers have unsupervised access to the public or who work with vulnerable populations (transport & logistics, healthcare) as well as due to the growth of the ‘gig economy’/on-demand labour

l Applicant-generated background report, where candidates buy their own report and send it to an employer as part of the application process

The Board considers risk to the business at every Board meeting (at least six meetings are held each year), and the risk register is updated at each meeting. The Company formally reviews and documents the principal risks to the business at least annually.

Both the Board and senior management are responsible for reviewing and evaluating risk, and senior management meet monthly to review ongoing trading performance, discuss budgets and forecasts and new risks associated with ongoing trading.

The key risk areas potentially impacting the business are set out in the table below, along with the Company’s actions to mitigate these risks.


Principal Risks & UncertaintiesFor the year ended 31 December 2019

CompetitionPotential Impact l ClearStar operates in competitive markets where

competitors may develop new products or enhancements that results in customers choosing other service providers.

l Increased competition could cause price reduction or a loss of market share.

l ClearStar’s direct services offering competes with that of a Consumer Reporting Agency (CRA), and so there is a risk that the Company’s CRA customers will cease to use ClearStar’s services if it becomes a direct competitor.

Mitigation l The Company continually commits resources to enhance its technology and

products to maintain a market-leading offering, including key integrations.l ClearStar has invested in establishing an experienced, top tier sales team and

enhanced sales & marketing activities.l Business development functions monitor the activities of competitors to remain

informed.l Increasingly, the Company provides CRAs with Medical Information Services

whereas the direct sales are primarily background screening. l Once a customer adopts the Company’s service, the Company goes through a

configuration process to integrate its solution with the customer’s existing systems and meet its requirements – which provides ‘stickiness’ to the Company’s solution.

Economic, trade and market conditionsPotential Impact l The Company is generally exposed to political,

economic, trade, market and public health risk factors. Economic downturn or uncertainty, or public health crises such as the COVID-19 outbreak, can have a negative impact on the employment market and, in turn, demand for ClearStar’s services.

Mitigation l ClearStar services employers in a broad range of sectors – minimising its exposure

to particular industries being severely impacted by a downturn – and no customer accounts for more than 11% of total revenue and therefore the Company is not at risk if any one client becomes insolvent.

l As noted above, ClearStar has a strong competitive position and its solutions have a ‘stickiness’ that facilitate its ability to maintain its customer base during a crisis.

l The demand for some of ClearStar’s services, especially in medical screening, is regulatory driven and not related to recruitment: employers are required to conduct the ongoing screening irrespective of economic or other factors.

l The Company has established business continuity plans, including the ability to securely work remotely (see ‘Cyber risk’ below; further detail regarding the Company’s mitigating actions in response to the COVID-19 outbreak can be found on pages 6 – 7.

Cyber riskPotential Impact l The Company relies on the efficient and uninterrupted

operation of its computer and communications systems. Any failure could impair the value of projects and result in additional expenditure.

l Given the nature of ClearStar’s business, the threat of unauthorised or malicious attacks on the Company’s IT systems is an ongoing risk. The risk of a cyber attack, such as denial of service attacks, phishing and disruptive software campaigns is constantly evolving and becoming increasingly sophisticated. A cyber attack could affect the Company’s ability to meet customers’ expectations, result in reputational harm, expose the Company to liabilities and increase operating expenses required to correct problems caused by a breach.

Mitigation l The Company has disaster recovery and business continuity contingency plans,

including incident response plans for cyber threats, in place and network security programmes that are regularly reviewed.

l The Company has cyber insurance in place as well as established policies to help protect the Company against a cyber attack and any security breaches, which are overseen by the CIO/CISO.

l These policies and programmes are subject to review and audit, including by the Professional Background Screening Association in order to maintain its accreditation.

l Penetration testing is conducted via an approved third-party specialist.l The Company is ISO/IEC 27001:2013 accredited.

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Potential Impact l It is critical to the Company’s success that it anticipates

changes in technology or in industry standards and customer requirements and to develop and introduce new, enhanced and competitively priced products on a timely basis.

Mitigation l In order to maintain a competitive advantage, the Company continually invests

in technology and product development.l The Company carries out research and market analysis on an ongoing basis to

keep informed of industry developments.

Strategic Report

Potential Impact l Within the markets where ClearStar operates, new regulations

and legislation are enacted and existing statutes amended on a regular basis.

l This continuous evolution requires constant monitoring and a change in legislation could require additional human and financial resources and IT enhancement and/or development – and have an impact on the Company’s operations.

l The legal ramification and implementation of GDPR, which became effective in May 2018, continues to evolve and be defined. It is continuously monitored and under review due to the impact it has on the handling of personal data.

l While representing a potential risk, change in legislation/regulation is also a growth driver for ClearStar when further checks are required on employees.

Mitigation l The Company has always been committed to responding positively to new

regulation and legislation. For example, in 2016, ClearStar was one of the first companies to achieve certification from the U.S. Department of Commerce under the EU-U.S. Privacy Shield for the transfer of personally identifiable information from the European Union to the United States.

l ClearStar’s senior management team – led by the General Counsel – is responsible for monitoring changes to legislation and regulation ensuring compliance in each area.

l The Company has access to external legal advisors, nationally and globally.l ClearStar has built a platform that is technologically flexible to enable any

requisite amends to be implemented rapidly. l The Company has a dedicated global team with expertise in global privacy

requirements, and makes ongoing investment to remain up-to-date with evolving global regulations, including GDPR.

Potential Impact l ClearStar’s success is dependent, in part, on protecting its

proprietary technology and its brand, marks and domain names – in particular, the processes and software technology solutions that it has created to interact, aggregate and contextualise information that it obtains from many sources and suppliers to quickly and accurately deliver screening reports. There is a risk that proprietary rights could be challenged, limited, invalidated or circumvented.

l The Company also relies on intellectual property rights in the form of unregistered know-how based on the collective expertise of key employees.

Mitigation l The Company relies on a combination of patent, copyright, trademark and

trade secret laws, as well as licensing agreements, third-party non-disclosure agreements and other contractual provisions and technical measures, to protect its intellectual property.

l The Company works closely with external advisers to ensure that the businesses’ rights are safeguarded.

l The Company has ensured that its standard terms and conditions of employment contain appropriate provisions dealing with the ownership of intellectual property rights, confidentiality and restrictive covenants post termination of employment. ClearStar owns the copyright in the software developed for the business by its own employees.

l The Company generally protects its proprietary application software products and services by licensing rights to use the applications rather than selling or licensing the computer source code.

Potential Impact l ClearStar relies on information derived from a wide variety

of sources and on service providers such as drug testing laboratories. The removal from the market of these third-party suppliers or interruption in supply could adversely affect the Company’s operations and result in the loss of revenue or additional expenditure.

Mitigation l The Company works strategically to prevent over reliance on any one key

supplier – it currently derives data from over 3,000 sources and is integrated with the three major drug testing laboratories in the US.

l Suppliers are carefully selected to minimise risk of supplier failure or insolvency.l The Company ensures staff are aware of supplier requirements or restrictions to

minimise the risk of loss of a supplier due to a breach of contractual obligations.

Potential Impact l Loss of a key person – whether executive, manage ment

or subject matter expert – due to voluntary or in voluntary separation, death, disability, or changes in family situation could have an adverse impact on the Company’s operations and financial or competitive position.

Mitigation l ClearStar has in place mitigation strategies including cross training, systemisation

and contracts for key positions.l The Company also offers competitive employment packages for its key sales

people to attract and retain personnel with the requisite skills and experience.

Regulatory change

Access to information

Key personnel

Technology/product development

Intellectual property

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Principal ActivitiesClearStar is a technology and service provider to the background check and medical screening industries, mainly supporting background screening companies, employers and employees with their recruitment and employment application decisions. ClearStar primarily provides employment intelligence to its clients through a suite of IT applications for day-to-day use in their business. Employment intelligence aims to improve business insight to support better recruitment and other decisions affecting employees generally, by increasing the quality, reliability and visibility of information available to management.

The IT suite consists of a collection of applications that utilises data from over 3, 000 sources ranging from résumés to records with local authorities. ClearStar’s primary business involves searching the relevant source of data for specific employment intelligence information based on clients’ bespoke requirements for its employment applicants and workforce integrity. ClearStar extracts the required input and this information is then processed, allowing the client to make a swift decision in respect of the relevant applicant, thereby minimising bottlenecks in the hiring process, and/or maintaining timely workforce compliance.

Business ReviewThe information that fulfils the requirements of the business review, including details of the 2019 results, principal risks and uncertainties and the outlook for future years, are set out in the Strategic Report section on pages 4 to 11.

DividendsThe Company is primarily seeking to achieve capital growth for its shareholders, and it is the Board’s intention during the current phase of the Company’s development to retain future distributable profits and only recommend dividends when appropriate and practicable. In the long term, the Directors intend to follow a progressive dividend policy in respect of excess equity over and above that required to fund the Company.

DirectorsThe following Directors held office as indicated below for the year ended 31 December 2019 and up to the date of signing the consolidated financial statements except where otherwise shown.

Barney Quinn – Non-executive Chairman

Robert J. Vale, Jr. – Founding Member, Director and Chief Executive Officer

Kenneth W. Dawson, Jr. – Founding Member, Director and Chief Information & Security Officer

André Schnabl – Non-executive DirectorDavid A. Pattillo – Director and Chief Financial Officer (resigned 23 January 2019)

Election of DirectorsAlthough not required under the Company’s Articles of Association and The Companies Law of the Cayman Islands, the Company is seeking at its annual general meeting confirmation that the shareholders are satisfied with the current Board and approve for the current Board to continue in office until the next Board election. The 2020 Annual Meeting will be held at 11 a.m. EDT (4 p.m. BST) on 16 June 2020 at the Company’s headquarters located at 6250 Shiloh Road, Suite 300, Alpharetta, GA 30005, USA.

Directors’ Remuneration and InterestsThe Directors’ remuneration is set out in the Remuneration Committee Report on pages 19 to 21. It includes details of Directors’ remuneration, interests in the Ordinary Shares of the Company and share options.

Corporate GovernanceThe Board’s Corporate Governance Statement is set out on pages 16 to 17.

Employees The Company’s policy is to ensure adequate provision for the welfare, health and safety of its employees. The Company is committed to ensuring there are equal opportunities for all employees, irrespective of age, gender, ethnicity, race, religion and belief, sexual orientation, disability and marital status. All employees are treated fairly and equally. The Company encourages feedback from its employees through town hall meetings, employee surveys and exit interviews.

The Company treats applications for employment from disabled persons equally with those of other applicants having regard to their ability, experience and the requirements of the job. Were an existing employee to become disabled, the Company is committed to make appropriate efforts to provide them with continuing suitable work within the Company and to provide retraining if necessary.

As at 31 December 2019, the Company had 83 employees (2018: 78) – of which 70% were female. The proportion of the Company’s senior management positions that were held by females was 25%.


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Directors’ ReportFor the year ended 31 December 2019

Share Capital and Substantial ShareholdingsDetails of the share capital of the Company as of and at 31 December 2019 are set out in Note 7 to the consolidated financial statements. At 5 May 2020, a total of 36,362,900 Ordinary Shares were outstanding; the following shareholders own 3 per cent. or more of the Ordinary Shares:

Robert J. Vale, Jr. 1 26.66%Canaccord Genuity Group, Inc. 16.30%Kenneth W. Dawson, Jr. 11.25%William T. White 2 10.48%River & Mercantile Group 8.25%Paul Hill 5.32% Artemis Investment Management LLP 4.69%David Pattillo 3.75%

(1) The aggregate number of shares shown for Mr. Vale includes (a) 21.99% held by and controlled by Mr. Vale; and (b) 4.67% held by or on behalf of Mr. Vale’s children.

(2) The aggregate number of shares shown for Mr. White includes (a) 6.85% held by and controlled by Mr. White; and (b) 3.63% held by or on behalf of Mr. White’s children.

Directors’ Responsibilities StatementUnder the Company’s Articles of Association and The Companies Law of the Cayman Islands, all corporate powers are exercised by or under the authority of, and the business and affairs of the corporation managed under the direction of, its Board of Directors, subject to any limitations set forth in the Company’s Articles of Association. The Company has prepared financial statements in accordance with Generally Accepted Accounting Principles in the United States (U.S. GAAP). The Directors:

(1) Discharge their duties as a Director, including duties as a member of a committee, in a manner he or she believes in good faith to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.

(2) In discharging their duties as Directors, Directors rely on infor mation, opinions, reports or statements, including financial state ments and other financial data, if prepared or presented by:

(a) One or more officers or employees of the corporation whom the Directors reasonably believe to be reliable and competent in the matters presented; or

(b) Legal counsel, public accountants or other persons as to matters the Directors reasonably believe are within the person’s professional or expert competence; or

(c) A committee of the Board of Directors of which a Director is not a member if the Director reasonably believes the committee merits confidence.

(3) Are not entitled to rely if the Directors have knowledge concerning the matter in question that makes reliance otherwise permitted by subsection (2) above unwarranted.

Independent AuditorsThe Audit Committee of the Board of Directors reviews annually the quality and cost effectiveness of the external audit and the independence and objectivity of the external auditors. Aprio, LLP (“Aprio”) was engaged to perform the 2019 audit for fees of approximately $82,000, the 2019 corporate income tax compliance returns for fees of approximately $42,000 and various income tax consulting work for fees of approximately $9,000.


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Barney QuinnNon-executive Chairman Barney has over 30 years’ experience in the global application software and cloud mar-kets. For many years, Barney was an executive board director of Sherwood International plc, an LSE-listed provider of software and services to the global insurance industry, and was CEO of then AIM-listed Workplace Systems International plc.

He is currently a non-executive director of Rosslyn Data Technologies plc and a former non-executive director of SSP Holdings plc and Raft International plc. His involvement with private businesses includes currently being non-executive chairman of Arkivum Ltd and Oxehealth Ltd, and a founder of Gotus Ltd, which provides an advisory service to a number of technology companies. Previously, he was non-executive chairman of Becrypt, an encryption software specialist, for seven years.


Directors’ Biographies

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Robert ValeChief Executive Officer Robert is Chief Executive Officer of ClearStar, which he founded in partnership with Ken Dawson and William White in 1995. Prior to forming ClearStar, he was the Manager of Loss Prevention Technical Support for United Parcel Service (UPS). This group was responsible for all loss prevention, risk mitigation and security-related system designs, development, implementation and 24/7 management of systems for UPS worldwide. During his tenure, he worked with the Aerospace Testing Alliance to assist in developing security guidelines for UPS’ airline.

A founding member of the Professional Background Screening Association, Robert is often called upon to deliver keynote presentations on the subject of large-scale systems management, tech nology trends and personal information security. Robert has been a guest instructor at the Federal Law Enforcement Training Centre and has published numerous articles for security trade journals. He has been a member of ASIS International, the pre- eminent organisation for security professionals, since 1987.

Robert holds a Bachelor of Science degree from the State University of New York, Plattsburgh, and served six years in the United States Air Force as Security Police – Security Specialist.

Ken DawsonChief Information & Security Officer Ken is a founding member of ClearStar, who has diversified experience in data management, architecture and security or realtime, analytical technology solutions. Ken currently serves as its Chief Information & Security Officer. In this role, Ken is responsible for evaluating, designing and implementing background check tech nology solutions that combine information from disparate information sources in varied data formats into cohesive, consistent and richly formatted reports.

Prior to forming ClearStar in 1995, Ken developed enterprise systems for United Parcel Service (UPS) and Kaiser Permanente. Ken began his career in software development and content delivery in 1990 while working as an intern for Conatec, Inc., an aerospace engineering firm.

Ken is a certified information systems professional and studied Aerospace Engineering at the University of Maryland.

André SchnablNon-executive Director André retired in 2012 as Managing Partner of the Atlanta office of Grant Thornton, LLP. Prior to assuming the Managing Partner role, André led the Technology Industry Practice, which focused on serving the needs of software, medical device and telecommunications clients. During his tenure as the leader of the Atlanta office, André drove the formu lation and execution of a strategy that achieved three-fold revenue growth.

In 2012 André launched the ‘‘Grant Thornton Peer 2 Peer Audit Committee Forum’’ in partnership with Kennesaw State University’s ‘‘Center of Corporate Governance’’. The Forum is designed to support audit committee chairs and members in staying current on the many regulatory, risk, and business issues affecting their roles and the companies on whose boards they serve.

Currently, André serves as a principal and managing partner of Tenor Capital Partners, a boutique advisory firm focused on advising shareholders and business owners on employee ownership through the use of employee stock ownership plans (ESOPs). André has served on numerous corporate and not-for-profit boards.


15

The Company is incorporated and registered in the Cayman Islands (registration number 287331). The Directors recognise the importance of sound corporate governance and have chosen to apply the Quoted Companies Alliance Corporate Governance Code (the QCA Code). The QCA Code was developed by the QCA in consultation with a number of significant institutional small company investors, as an alternative corporate governance code applicable to AIM companies. The underlying principle of the QCA Code is that “the purpose of good corporate governance is to ensure that the company is managed in an efficient, effective and entrepreneurial manner for the benefit of all shareholders over the longer term”.

The Board has established an Audit Committee, a Remuneration Committee, a Nominations Committee and an AIM Compliance and Corporate Governance Committee, with formally delegated duties and responsibilities as described below.

Audit CommitteeThe Audit Committee is responsible for monitoring the integrity of the Company’s consolidated financial statements, reviewing significant financial reporting issues, reviewing the effectiveness of the Company’s internal control and risk management systems and overseeing the relationship with the external auditors (including advising on their appointment, agreeing to the scope of the audit and reviewing the audit findings). The Audit Committee keeps under review the need for an internal audit function. Details on the activities of the Audit Committee during the year are contained in the Audit Committee Report on page 18.

During the year ended 31 December 2019 and up to the signing of this report, the Audit Committee comprised André Schnabl, who acts as Chairman, and Barney Quinn. The Audit Committee met three times during 2019 and all members attended the meetings. The Audit Committee also meets with the Company’s external auditors at least annually and on an as needed basis. Members of the Audit Committee were re-appointed to a three-year term at a Board of Directors’ meeting on 9 July 2018.

Remuneration CommitteeThe Remuneration Committee is responsible for determining and agreeing with the Board the framework for the remuneration of the Chairman, the Board Members and other designated senior executives and, within the terms of the agreed framework, determining the total individual remuneration packages of such persons including, where appropriate, bonuses, incentive payments and share options or other share awards. The remuneration of Non-executive Directors is a matter for the Chairman and the executive members of the Board. No Director is involved in any decision as to his or her own remuneration. The Remuneration Committee is also responsible for issuing awards of relevant shares and options to purchase Ordinary Shares of the Company under the Company’s 2014 Share Option and Incentive Plan. Details on the activities of the Remuneration Committee during the year are contained in the Remuneration Committee Report on pages 19 to 21.

During the year ended 31 December 2019 and up to the signing of this report, the Remuneration Committee comprised André Schnabl, who acts as Chairman, and Barney Quinn. The Remuneration Committee met three times during 2019 and all members attended the meetings. Members of the Remuneration Committee were re-appointed to a three-year term at a Board of Directors’ meeting on 9 July 2018.

Nominations CommitteeThe Nominations Committee is responsible for identifying and nominating members of the Board, recommending Directors to be appointed to each committee of the Board and the chair of each such committee. The Nominations Committee also arranges for evaluation of the Board.

During the year ended 31 December 2019 and up to the signing of this report, the Nominations Committee comprised Barney Quinn, who acts as Chairman, and André Schnabl. The Nominations Committee met three times during 2019 and all members attended the meetings. Members of the Nominations Committee were re-appointed to a three-year term at a Board of Directors’ meeting on 9 July 2018.

AIM Compliance and Corporate Governance CommitteeThe AIM Compliance and Corporate Governance Committee is responsible for ensuring that the Company is complying with the AIM Rules. It also assesses the Company’s corporate governance obligations every year. During the year ended 31 December 2019, the AIM Compliance and Corporate Governance Committee comprised Robert J. Vale, Jr., who acts as Chairman, and Kenneth W. Dawson, Jr. The AIM Compliance and Corporate Governance Committee met three times in 2019 and all members attended the meetings. Members of the AIM Compliance and Corporate Governance Committee were re-appointed to a three-year term at the Board of Directors’ meeting held on 9 July 2018.

Board of DirectorsDuring the year ended 31 December 2019, the Board consisted of two Non-executive Directors and two Executive Directors. The Non-executive Directors were Barney Quinn (Chairman) and André Schnabl. The two Executive Directors were Robert J. Vale, Jr. (Chief Executive Officer) and Kenneth W. Dawson, Jr. (Chief Information & Security Officer). The Board was re-elected at the Company’s last Annual Meeting held on 18 June 2019.

During the year, the Board met on ten occasions. All Directors attended these meetings.

The Board is responsible for formulating, reviewing and approving the Company’s strategy, budgets and corporate actions.

Board effectivenessBiographical details of the Directors are set out on pages 14 to 15. The Board is diverse in its range of skillsets and experience,

16


Corporate Governance ReportFor the year ended 31 December 2019

and the Directors believe that they have an appropriate balance of sector, financial and public markets skills and experience, as well as an appropriate balance of personal qualities and capabilities to best support the Company. The Directors consider that all Non-executive Directors bring an independent judgement to bear notwithstanding the varying lengths of service and have the relevant experience to complement the Executive Directors.

Each Non-executive Director is expected to devote, in aggregate, 1.5 days per month to their duties as a Director of ClearStar. This includes attendance at Board meetings, which are held on at least six occasions per year, and meetings of Board Committees as well as spending appropriate preparation time ahead of each meeting. Mr. Vale (Chief Executive Officer) and Mr. Dawson (Chief Information & Security Officer), as Executive Directors, are employed on a full-time basis.

At the present, the Board does not undertake a formal evaluation of its performance, as this is constantly under review given its size.

Relations with StakeholdersShareholdersThe Company’s Chief Executive Officer, Chief Financial Officer and Chairman go on a road show at least twice a year to meet with shareholders to listen to their concerns and address their expectations. Copies of the Annual Report and Consolidated Financial Statements are made available to all shareholders on the Company’s website (www.clearstar.net/financial-reports/). The Company also uses its website to provide information to shareholders and other interested parties, subject to applicable restrictions of the United States securities laws. The Chief Financial Officer and Secretary also deal with shareholder correspondence as and when it arises. At the Company’s Annual Meeting, the Chairman along with the Chief Executive Officer and other Directors are available before and after the meeting for further discussions with shareholders.

Broader stakeholdersClearStar uses a consultative approach with its employees, clients and suppliers. The Company has town hall meetings with its employees, and officers of the Company go to industry associations conventions to meet with its clients on a regular basis. Additionally, ClearStar’s representatives meet with its clients on an as needed basis. ClearStar provides regulatory compliance webinars through the ClearStar’s Academy, industry regulatory compliance news on a monthly basis and the Company’s industry experts provide seminars at the Professional Background Screening Association (PBSA) conventions and other relevant associations.

ClearStar was re-accredited by PBSA in 2018 and retains this accreditation for seven years. To become accredited, ClearStar must pass a rigorous onsite audit, conducted by an independent auditing firm, of its policies and procedures as they relate to six critical areas: consumer protection, legal compliance, client education, product standards, service standards and general business practices.

The Company has in place (i) an Anti-Bribery & FCPA Policy, (ii) a Disclosure and Control of Inside Information Policy, (iii) Vendor Risk Management Policy, (iv) Whistle Blower Policy, and has a Financial Accuracy and Compliance Hotline Process into place that designates individuals appropriate to each type of allegation to ensure that any allegation is investigated in an effective and timely manner. Additionally, the Company has an Environmental and Sustainability Program in place.

ClearStar’s mission is to help make the world a safer place through background screening, and the Board believes that keeping people safe should extend beyond ClearStar’s clients to those who live and work in ClearStar’s neighbourhood. To help achieve this goal, ClearStar created a Community Program with the purpose of donating background screening services to local, non-profit organisations that serve young, disadvantaged and vulnerable people. More information on this topic can be found on the Company’s website at www.clearstar.net/about-us.

Due to its size, ClearStar is not required to report on Section 172 of the Companies Act 2006.

Internal ControlThe Board is ultimately responsible for the Company’s system of internal control and reviewing its effectiveness on an ongoing basis. The system is designed to manage rather than eliminate the risk of failure to achieve the Company’s strategic objectives and cannot provide absolute assurance against material misstatement or loss. The key risk management processes and internal control procedures include the following:

• The involvement of the Executive Directors in day-to-day business operations.

• Clearly defined responsibilities and limits of authority.• A system of financial reporting, forecasting and budgeting. Budgets

are prepared annually for the business based upon a multi-year strategic plan narrowed to a current year tactical plan to take advantage of current opportunities and address near-term risks. Reviews occur through the management structure culminating in a Company budget that is considered and approved by the Board. Company management accounts are prepared monthly and submitted to the Board for review. Variances from budget and prior year are monitored, and the reasons for significant variances are reviewed.

• An ongoing process for identifying, evaluating and seeking to manage significant risks across the Company.

Corporate SecretaryThe Company’s corporate secretary is ClearStar’s Executive Vice President and General Counsel, Nicolas S. Dufour.

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18

Dear Shareholder,

On behalf of the Board, I am pleased to present the Audit Committee report for the year ended 31 December 2019.

The Audit Committee is responsible for monitoring the integrity of the Company’s consolidated financial statements, reviewing significant financial reporting issues, reviewing the effectiveness of the Company’s internal control and risk management systems and overseeing the relationship with the external auditors (including advising on their appointment, agreeing to the scope of the audit and reviewing the audit findings). The Audit Committee keeps under review the need for an internal audit function.

Member of the Audit CommitteeDuring the year, the Committee consisted of the Company’s two independent Non-executive Directors: myself (as Chairman of the Committee) and Barney Quinn. The Committee met three times in 2019, with all members present.

The Board is satisfied that I, as Chairman of the Committee, have recent and relevant financial experience. Until I retired in 2012, I served as the Managing Partner of the Atlanta office of Grant Thornton, LLP. Prior to assuming the Managing Partner role, I led the Technology Industry Practice, which focused on serving the needs of software, medical device and telecommunications clients.

DutiesThe duties of the Audit Committee are set out above and the main items of business considered by the Audit Committee during the year included:• review of the financial statements and Annual Report;• consideration of the external audit report and management

representation letter;• going concern review;• review of the 2019 audit plan and audit engagement letter;• review of suitability of the external auditors;• review of the risk management and internal control systems;• review and approval of the interim results;• assessment of the need for an internal audit function;• review of regular whistleblowing reports; and• meeting with the external auditor without management present.

Role of the External AuditorThe Audit Committee monitors the relationship with the external auditor, Aprio LLP, to ensure that auditor independence and objectivity are maintained. As part of its review, the Committee monitors the provision of non-audit services by the external auditor.

The Audit Committee also assesses the auditor’s independence and performance. Having reviewed the auditor’s independence and performance, the Audit Committee recommends that Aprio LLP be re-appointed as the Company’s auditor at the next AGM subject to an acceptable fee proposal and engagement letter.

Audit ProcessThe auditor prepares an audit plan for its review of the full year financial statements. The audit plan sets out the scope of the audit, areas to be targeted and audit timetable. This plan is reviewed and agreed in advance by the Audit Committee. Following its review, the auditor presents its findings to the Audit Committee for discussion. No major areas of concern were highlighted by the auditor during the year.

Internal AuditAt present, the Company does not have an internal audit function, and the Committee believes that management is able to derive assurance as to the adequacy and effectiveness of internal controls and risk management procedures without one.

Risk Management and Internal ControlsAs described on page 17 of the Corporate Governance Report, the Company has established a framework of risk management and internal control systems, policies and procedures. The Audit Committee is responsible for reviewing the risk management and internal control framework and ensuring that it operates effectively. During the year, the Committee reviewed the framework and the Committee is satisfied that the internal control systems in place are currently operating effectively.

WhistleblowingThe Company has in place a whistleblowing policy that sets out the formal process by which an employee of the Company may, in confidence, raise concerns about possible improprieties in financial reporting or other matters. Whistleblowing is a standing item on the Committee’s agenda, and updates are provided at each meeting. During the year, there were no incidents for consideration.

André SchnablAudit Committee Chairman


Audit Committee ReportFor the year ended 31 December 2019

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Dear Shareholder,

On behalf of the Board, I am pleased to present the Remuneration Committee Report for the year ended 31 December 2019.

The Remuneration Committee is responsible for determining and agreeing with the Board the framework for the remuneration of the Chairman, the Board Members and other designated senior executives and, within the terms of the agreed framework, determining the total individual remuneration packages of such persons including, where appropriate, bonuses, incentive payments and share options or other share awards. The Remuneration Committee is also responsible for issuing awards of relevant shares and options to purchase Ordinary Shares of the Company under the Company’s 2014 Share Option and Incentive Plan.

As an AIM-listed company, ClearStar is not required to comply with Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. The following disclosures are therefore made on a voluntary basis. The information is unaudited.

Remuneration Committee Membership and Activities in 2019The Remuneration Committee’s members during the year were: myself, as Chair of the Committee, and Barney Quinn. The Committee met three times during the year and its activities were as follows: • approved the Directors’ remuneration for 2019;• reviewed Executive Director remuneration arrangements;• reviewed and approved the Executive Directors’ performance

against 2018 annual objectives;• approved performance targets for the Executive Directors’ 2019

bonus; and• reviewed developments in corporate governance and best

practice.

Remuneration PolicyThe Company’s remuneration policy is based on the following broad principles:• to provide competitive remuneration packages to attract and

retain quality individuals;• to align the interests of management with the interests of

shareholders; and• to set the pay of the Executive and Non-executive Directors with

due account taken of (i) pay and conditions throughout the Company and (ii) corporate governance best practice.

Executive remuneration consists of the following elements:

Base PayExecutive Directors’ base pay is reviewed on an annual basis, with any increases taking effect from 1 January, and is payable in cash.

The Committee reviews base salaries with reference to: • the individual’s role, performance and experience; • business performance and the external economic environment;

and• salary increases across the Company.

Any base salary increases are applied in line with the outcome of the review as part of which the Committee also considers average increases across the Company.

Annual BonusAll Executive Directors and members of senior management participate in the Company’s annual bonus scheme, which is based on the achievement of individual and Company performance targets. Annual bonuses are designed to incentivise performance and reward achievement in line with the agreed corporate strategy, and the Committee determines the maximum bonus opportunity to ensure that the overall remuneration package remains competitive.

Performance measures are reviewed prior to the start of the year to ensure they remain appropriate and align with the business strategy and priorities. At the end of the year, the Committee determines the extent to which these were achieved and has discretion to adjust the formulaic bonus outcomes both upwards and downwards to ensure alignment of pay with the underlying performance of the business over the financial year.

Bonus awards are paid in cash. Clawback (of any bonus paid) may be applied where the Committee deems it necessary to do so, including in the event of gross misconduct or a material misstatement. For the year ended 31 December 2019, no bonuses were announced to Executive Directors or members of senior management.

Remuneration Committee ReportFor the year ended 31 December 2019

Service ContractsNon-executive DirectorsBarney Quinn and André Schnabl entered into agreements with the Company on 30 May 2014. Their service contracts provide for, among other things:

(i) annual board fees and participation in the Executive Bonus Plan to be directed by the Remuneration Committee; and

(i) a three-year term (automatically renewing for successive one-year periods). The agreement provides for customary non-solicitation, non-compete and nondisclosure restrictions.

Executive DirectorsRobert J. Vale, Jr., Kenneth W. Dawson, Jr. and David A. Pattillo1 entered into employment agreements with the Company on 7 July 2014. Their employment agreements provide for, among other things:

(i) annual salary and participation in the Executive Bonus Plan to be directed by the Remuneration Committee; and

(ii) a two-year term (automatically renewing for successive one-year periods). The agreement may only be terminated by the

employee upon six-month prior written notice or by the Company upon providing for one-year base salary, payable in 24 semi-monthly instalments in arrears, as severance if the employee is terminated with or without cause or resigns for good reason. The agreement provides for customary non- solicitation, non-compete and non-disclosure restrictions.

1 In January 2019, the Company entered into a severance and release agreement (“Agreement”) with Mr. Pattillo following the terms of his employment agreement with the Company. Under the Agreement, Mr. Pattillo resigned as a member of the Company’s Board and from all other positions with the Company effective 23 January 2019.

All Directors are elected by the shareholders at an annual or special meeting, to serve until the next election and until their successors are elected and qualified, or until their earlier death, resignation or removal.

The Directors’ remuneration for 2019 was as follows (Benefits in kind include medical and life insurance, 401(k) matching contributions and payments made into the UK’s national insurance):


20

Remuneration Committee Report continued)For the year ended 31 December 2019

Salary and Director’s fees

US$

Separationpayment

US$

Benefits in kind US$

Performance related bonus

US$

2019 Total US$

2018 Total US$

Non-executive ChairmanBarney Quinn $55,000 – $3,026 – $58,026 $59,479

ExecutiveRobert J. Vale, Jr. Kenneth W. Dawson, Jr.David A. Pattillo (1)

$494,400$269,860

$20,833

––

$256,623

$496 $14,562 $25,449

–––

$494,896 $284,422 $302,905

$509,375$296,868$287,126

Non-executiveAndré Schnabl $45,000 – – – $45,000 $45,000

(1) In January 2019, the Company entered into a severance and release agreement with Mr. Pattillo. Under the Agreement, Mr. Pattillo resigned as a member of the Company’s Board and from all other positions with the Company effective 23 January 2019.


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The interests of the Directors at 31 December 2019 in the shares of the Company, not including interests of investment funds in respect of which the Director may have a managerial interest, and with respect to which such Director disclaims beneficial ownership, were:

Number of Ordinary Shares Percentage of issued share capital

Barney Quinn 1 309,325 0.85%Robert J. Vale, Jr. 2 9,693,000 26.66%Kenneth W. Dawson, Jr. 4,090,000 11.25%André Schnabl 126,000 0.35%

(1) The interests of Mr. Quinn include 25,000 shares held by his wife, Jennifer Quinn(2) The aggregate number of shares shown for Mr. Vale includes (a) 7,997,000 shares held by and controlled by Mr. Vale; and (b) 1,696,000 shares held by or on behalf of Mr.

Vale’s children

Share OptionsOptions for Ordinary Shares awarded to Directors under the 2014 Share Option and Incentive Plan in place on 31 December 2019 and 2018 were:

André SchnablRemuneration Committee Chairman

Earliest exercise date Exercise price Number ofOption holder Type of award and date of vesting Expiry date ($US) options

Kenneth W. Dawson, Jr Employee Stock Option 2 July 2018 2 July 2023 $0.85 186,000

2222

Typical Input ClearStar Technology Data Sources

Branded Company CS Site

HR Information System

Applicant Tracking System

Mass Data Uploads

All Global Records

CreditDatabases

Government Criminal

DrivingEducation

EmploymentWatch Lists

Testing Laboratories

Government Documents

Client Specific Program Management

Medical Management

Biometric Identity Verification

Casual Labour Management

Casual Labour

Applicant/Employee

Global Record Management

23

FINANCIALSTATEMENTS

For the year ended 31 December 2019

To the Stockholders of ClearStar, Inc. and Subsidiaries

We have audited the accompanying consolidated financial statements of ClearStar, Inc. and Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ClearStar, Inc. and Subsidiaries as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Atlanta, GeorgiaMay 4, 2020

Aprio, LLP Five Concourse Parkway, Suite 1000, Atlanta, Georgia 30328 404.892.9651 Aprio.com

Independently Owned and Operated Member of Morison KSi

INDEPENDENT AUDITORS’ REPORT

To the Stockholders of ClearStar, Inc. and subsidiaries We have audited the accompanying consolidated financial statements of ClearStar, Inc. and subsidiaries, which comprise the consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ClearStar, Inc. and subsidiaries as of December 31, 2016 and 2015 and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Atlanta, Georgia April 14, 2017

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Independent Auditors’ Report

Year Ended Year Ended 31 December 2019 31 December 2018 $000 $000

Net revenue 22,953 20,113 Cost of revenue 10,543 8,773

Gross profit 12,410 11,340

Operating expensesSelling and marketing 2,221 1,655 Research and development 1,329 1,652 Depreciation and amortisation 1,055 1,226 General and administrative 9,012 8,141

Total operating expenses 13,617 12,674

Loss from operations (1,207) (1,334)

Other income (expense) Interest expense, net (171) (68)

Total other expense (171) (68)

Net loss before taxes (1,378) (1,402) Provision (benefit) for income taxes 18 (65)

Net loss (1,396) (1,337)

Consolidated Statements of Operations (US$, in thousands)

For the years ended 31 December 2019 and 2018

The accompanying notes are an integral part of the consolidated financial statements.

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At At 31 December 2019 31 December 2018 $000 $000

ASSETSCurrent assets Cash 1,754 923Accounts receivable – trade, net 1,981 2,197Research and development tax credits – 90Prepaid expenses 630 358

Total current assets 4,365 3,568

Property and equipment, at cost Computer equipment 661 70Furniture and fixtures 226 283Leasehold improvements 76 57Less accumulated depreciation (198) (241)

Total property and equipment, net 765 169

Other assetsGoodwill and other intangible assets, net 3,747 4,028Deferred debt issuance costs, net 36 40Deposits 43 13

Total other assets 3,826 4,081

Total assets 8,956 7,818

LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilitiesLoan facility 2,100 –Accounts payable 2,494 2,348Accrued liabilities 249 179 Deferred revenue 9 81State income taxes 9 7

Total current liabilities 4,861 2,615

Consolidated Balance Sheets (US$, in thousands)



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LIABILITIES AND STOCKHOLDERS’ EQUITY (contd.)Long-term liabilitiesAccrued liabilities 272 32Deferred income taxes 34 27

Total long-term liabilities 306 59

Stockholders’ equity Common stock, $0.0001 par value; 100,000,000 shares authorised; issued

and outstanding 36,362,900 shares in 2019 and 36,302,900 shares in 2018 4 4Additional paid-in capital 13,992 13,951Accumulated deficit (10,207) (8,811)

Stockholders’ equity 3,789 5,144

Total liabilities and stockholders’ equity 8,956 7,818

Consolidated Balance Sheets (continued) (US$, in thousands)



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Additional Common Stock Paid-in Accumulated Shares Amount Capital Deficit Total No. $000 $000 $000 $000

Balances at 1 January 2018 36,302,900 4 13,686 (7,474) 6,216Non-cash stock compensation – – 265 – 265Net loss – – – (1,337) (1,337)

Balances at 31 December 2018 36,302,900 4 13,951 (8,811) 5,144Non-cash stock compensation – – 11 – 11Issuance of common stock 60,000 – 30 – 30Net loss – – – (1,396) (1,396)

Balances at 31 December 2019 36,362,900 4 13,992 (10,207) 3,789

Consolidated Statements of Changes in Stockholders’ Equity (US$, in thousands, except no. of shares)



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Year Ended Year Ended 31 December 2019 31 December 2018 $000 $000CASH FLOWS FROM OPERATING ACTIVITIES

Net loss (1,396) (1,337)

Adjustments to reconcile net loss to net cash used for operating activities:

Change in allowance for doubtful accounts – (22)Depreciation and amortisation 1,055 1,226Deferred income taxes 7 (73)Non-cash stock compensation 11 265Non-cash debt issuance costs 41 48Loss on disposal of property and equipment 57 1Loss on lease exit (see Commitments and Contingencies note) 173 –

Change in operating assets and liabilities: Accounts receivable 215 (521)Research and development tax credits 90 (27)Prepaid expenses (272) (183)Deposits (30) (1)Accounts payable 146 893Accrued liabilities 133 38Deferred revenue (72) 72State income taxes 2 1

Total adjustments 1,556 1,717

Net cash provided by operating activities 160 380

CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment (743) (32)Capitalised software development costs (679) (665)

Net cash used for investing activities (1,422) (697)

CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from loan facility 2,100 –Debt issuance costs (37) –Proceeds from sales of common stock 30 –Principal payments on capital lease obligations – (63)

Net cash provided by (used for) financing activities 2,093 (63)

Net cash increase (decrease) for year 831 (380)

Cash at beginning of year 923 1,303

Cash at end of year 1,754 923

Consolidated Statements of Cash Flows (US$, in thousands)



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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION


Cash paid:Interest 131 19Income taxes 9 8

140 27

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

During the years ended 31 December 2019 and 2018, the Company retired obsolete and fully-depreciated property and equipment of approximately $141,000 and $552,000, respectively.

During the years ended 31 December 2019 and 2018, the Company retired fully-amortised intangible assets of approximately $861,000 and $1,376,000, respectively.

Consolidated Statements of Cash Flows (continued)(US$, in thousands)



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1. Summary of Significant Accounting Policies

a) Nature of OperationsClearStar, Inc. (“ClearStar”), an exempt company incorporated in the Cayman Islands on 23 April 2014, is a holding company that owns a 100% interest in ClearStar, Inc. (‘‘ClearStar US’’), an entity formed on 23 March 1995, and incorporated in the state of Delaware, and ClearStar Limited (“ClearStar UK”), a dormant entity formed in the United Kingdom on 17 January 2014. ClearStar UK has been dissolved effective 25 June 2019.

ClearStar together with its subsidiaries (collectively the “Company”) is a provider of Human Capital IntegritySM technology-based services specialising in background and medical screening, supporting background screening companies, employers and employees with their recruitment and employment application decisions. The Company provides employment intelligence to its clients through a suite of information technology applications for day-to-day use in their business. Employment intelligence aims to improve business insight to support better recruitment and other decisions affecting employees generally, by increasing the quality, reliability and visibility of information available to management.

b) Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and those entities required to be consolidated under generally accepted accounting principles in the United States of America (‘‘U.S. GAAP’’). All significant intercompany transactions and balances have been eliminated in consolidation.

c) Basis of AccountingThe accompanying financial statements have been prepared in accordance with U.S. GAAP. These principles are established by the Financial Accounting Standards Board (“FASB”).

d) Use of EstimatesThe preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions affecting reported amounts in the consolidated financial statements and accompanying notes. Management considers available facts and knowledge of existing circumstances when establishing these estimates. The most significant items that involve a greater degree of accounting estimates subject to change in the future are the allowance for doubtful accounts, depreciable lives of property and equipment, amortisation of other intangible assets, certain accrued liabilities, stock-based compensation and income taxes. Estimates for these and other items are subject to change and are reassessed by management in accordance with U.S. GAAP. Actual results could differ from these estimates.

e) Concentration of Credit Risk Arising from Cash Deposits in Excess of Insured LimitsThe Company maintains cash balances at certain financial institutions that at times may exceed federally insured limits. From time to time, the Company’s cash balances exceed such limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant risks on cash.

f) Accounts ReceivableThe Company extends credit to customers in a broad range of industries located throughout the United States and abroad based on the size of the customer, its payment history and other factors. The Company generally does not require collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectable by management. The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded, which is the face amount of the receivable, net of the allowance for doubtful accounts. The majority of year-end receivables are collected within the following fiscal quarter. The Company has not historically had significant write-offs for these receivables.

Notes to the Consolidated Financial Statements


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g) Property and EquipmentProperty and equipment, including assets acquired under capital leases, is depreciated using the straight-line method over estimated useful lives or lease terms if shorter. Expenditures for maintenance and repairs are expensed as incurred, while renewals and betterments that materially extend the life of an asset are capitalised. The cost of assets sold, retired, or otherwise disposed of, and the related allowance for depreciation are eliminated from the accounts, and any resulting gain or loss is recognised.

Depreciation of property and equipment is provided using the straight-line method over the estimated useful lives of the assets, which are as follows:

Computer equipment 3 – 4 yearsFurniture and fixtures 5 – 7 yearsLeasehold improvements Lesser of estimated useful life or life of the lease

Depreciation expense for the years ended 2019 and 2018 was approximately $95,000 and $141,000, respectively.

h) Deferred Debt Issuance CostsDeferred debt issuance costs were incurred by the Company to obtain debt and are amortised over the life of the respective debt agreement. The costs totalled approximately $41,000 and $95,000 at 31 December 2019 and 2018, respectively, with an accumulated amortisation of approximately $5,200 and $55,000 at 31 December 2019 and 2018, respectively. The Company amortised approximately $41,000 and $48,000 of these costs through interest expense for the years ended 2019 and 2018, respectively. The remaining amortisation expense is expected to be approximately $20,600 and $15,500 in 2020 and 2021, respectively.

i) GoodwillGoodwill recorded in the consolidated financial statements represents the excess of the purchase price of an acquisition over the fair value of acquired net assets on the date of acquisition. Goodwill is not amortised since it was deemed to have an indefinite useful life, but it is subject to an annual impairment test. Accordingly, the carrying value of goodwill is reviewed for impairment by the Company annually, or more often if events or circumstances indicate that there may be impairment. The Company has not recorded any goodwill impairment charges.

In its evaluation of goodwill impairment, the Company performs a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment is not conclusive, the Company proceeds to a two-step process to test goodwill for impairment including comparing the fair value of the reporting unit to its carrying value (including attributable goodwill). Fair value for the Company’s reporting unit is determined using an income or market approach, incorporating market participant considerations and management’s assumptions on revenue growth rates, operating margins, discount rates and expected capital expenditures. Fair value determinations may include both internal and third-party valuations. Unless circumstances otherwise dictate, the Company performs its annual impairment testing in the fourth quarter. If the carrying amount of the goodwill exceeds the implied fair value of that goodwill, the Company will recognise an impairment loss as an expense. No impairment had occurred in the years ended 31 December 2019 and 2018 as a result of the annual goodwill impairment tests performed, and there have been no subsequent events requiring further analysis.

j) Intangible AssetsIntangible assets, other than capitalised software development costs, arose from the purchase of certain assets in an acquisition and are reported net of amortisation. These intangible assets, including customer relationships and trade name, are amortised using the straight-line method over their estimated useful life of 7 and 1 year(s), respectively.

The Company has capitalised external direct costs of services consumed in developing and obtaining internal-use computer software and the payroll and payroll-related costs for employees who are directly associated with and who devote time to developing the internal-use computer software.

Management’s judgment is required in determining the point at which various projects enter the application development stage at which costs may be capitalised, in assessing the ongoing value of the capitalised costs, and in determining the estimated useful lives over which the costs are amortised. Costs in relation to the preliminary stages of projects are expensed in the period in which they are incurred. The Company expects to continue to invest in internally developed software and to capitalise costs in accordance with U.S. GAAP.

Notes to the Consolidated Financial Statements (continued)


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k) Impairment of Long-Lived AssetsLong-lived assets, such as property and equipment, and purchased intangible assets subject to amortisation, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognised to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Management determined that there were no impairments in the years ended 31 December 2019 and 2018.

l) Revenue RecognitionRevenue from fixed monthly fees are derived primarily from customers’ use of the Company’s services that are provided for an agreed number of transactions. Arrangements for these services generally have terms of one year or less, and the fixed monthly fees are recognised as services are provided. The Company recognises revenue from the per-transaction search results and/or search result review services and drug testing services at the time of delivery as the Company has no significant ongoing obligation after delivery.

Deferred revenue consists of payments received in advance of revenue recognition and contractual billings in excess of recognised revenue. Deferred revenue includes one-time setup fees and annual certification fees. One-time setup fees are based on the Company’s configuring and activating customers on internal and third-party systems. The Company recognises one-time setup fees revenue rateably over 12 months. Annual certification fees are billed annually and are recognised rateably over the contract period.

See note 12 (Revenue from Contracts with Customers) for details related to the Company’s revenue recognition policies.

m) AdvertisingThe Company expenses advertising costs as incurred. Advertising expenses for the years ended 31 December 2019 and 2018 were approximately $411,000 and $470,000, respectively.

n) Income TaxesClearStar is incorporated as an exempted company in the Cayman Islands, which currently does not levy income taxes on individuals or companies. ClearStar and its operating subsidiary, ClearStar US, are both taxed as corporations for US federal income tax purposes.

Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred income taxes. Deferred income taxes are recognised for differences between the basis of assets and liabilities for financial statement and income tax purposes. Deferred income tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets or liabilities are recovered or settled. Deferred income taxes are also recognised for operating losses that are available to offset future taxable income. The tax provision differs from the expense that would result from applying federal statutory rates to income before income taxes primarily because of the marginal tax rates used to compute deferred income taxes, the effect of state taxes and permanent differences between determining income for financial statement purposes and taxable income.

The Company is subject to tax audits in numerous jurisdictions in the United States. Tax audits by their nature are often complex and can require several years to complete. In the normal course of business, the Company is subject to challenges from the Internal Revenue Service (“IRS”) and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. The Company accounts for the uncertain tax provisions using a minimum probability threshold that a tax position must meet before a financial statement benefit is recognised. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognised is measured as the largest amount of benefit that is greater than fifty per cent. likely of being realised upon ultimate settlement. The Company recognises interest and penalties related to unrecognised tax benefits as part of income tax expense. The cumulative effect of considering uncertain tax positions resulted in no uncertain tax liability in the consolidated balance sheets.

The Company is not subject to income tax examinations for the years ending prior to 31 December 2016.

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o) Research and DevelopmentExpenditures related to the development of new products and processes are expensed as incurred. Research and development expenses were approximately $1,329,000 and $1,652,000, net of $0 of tax credits, for the years ended 31 December 2019 and 2018, respectively.

p) Stock-Based CompensationThe Company values stock options at the time of grant using a Black-Scholes model approach and records that fair market value as compensation expense, adjusted for actual forfeitures, over the requisite service period, using the straight-line method. Stock-based compensation expense for the years ended 31 December 2019 and 2018 was approximately $11,000 and $265,000, respectively.

q) Fair Value of Financial InstrumentsFair value is the exit price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s view on the market assumption in the absence of observable market information.

Valuation inputs are classified in the following three level hierarchy:

(i) Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

(ii) Level 2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs.

(iii) Level 3 inputs are unobservable inputs for the asset or liability.

Highest priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market approach, income approach and cost approach. In some cases, more than one valuation technique is used.

Due to the short-term nature of cash, accounts receivable, prepaid expenses, accounts payable, and accrued liabilities, their fair value approximates carrying value.

r) New Accounting PrinciplesIn May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASC 606”), Revenue from Contracts with Customers (Topic 606). Under ASC 606, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. ASC 606 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue that is recognised. The Company adopted the amendments in ASC 606 on 1 January 2019 using the modified retrospective method. The adoption of ASC 606 did not result in any changes in the timing or measurement of revenue recognition for the Company’s revenue.

s) Future Application of Accounting StandardsIn February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases (ASC 842), which requires that lease arrangements longer than 12 months result in an entity recognising an asset and liability on the balance sheet. The pronouncement is effective for the Company beginning in fiscal year 2021, with early adoption permitted. The Company expects the primary impact from the adoption of ASU 2016-02 will be the recognition of its operating lease obligations and corresponding right-of-use assets on the balance sheet, which mainly consist of the Company’s home office operations and other real estate leases of office space. The Company anticipates that the impact of adopting ASU 2016-02 will result in an increase to assets and liabilities that is generally consistent with the Company’s remaining lease obligations as listed in note 4 “Commitments and Contingencies” plus any new operating lease commitments agreed to before the effective date.

In January 2018, the FASB issued ASU No. 2017-04 (“ASU 2017-04”) Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The amendments in ASU 2017-04 simplified the measurement of goodwill by eliminating step 2 from the goodwill impairment test. Instead, under ASU 2017-04, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognise an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in ASU 2018-04 are effective for the Company beginning in fiscal year 2021, with early adoption permitted. The Company is in the process of evaluating the impact of this standard on its consolidated financial statements.

Recent accounting guidance not discussed above is not applicable, is immaterial to the Company’s consolidated financial statements, or did not or is not expected to have a material impact on the Company’s business.


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2. Accounts ReceivableAccounts receivable consisted of the following: At At

31 December 2019 31 December 2018 $000 $000

Trade accounts receivable 1,988 2,204Allowance for doubtful accounts (7) (7)

1,981 2,197

3. Goodwill and Other Intangible AssetsGoodwill and other intangible assets were comprised of the following at 31 December 2019:

Gross Cost Accumulated Amortisation

Life Beginning Additions Disposal Ending Beginning Additions Disposal Ending Net (years) $000 $000 $000 $000 $000 $000 $000 $000 $000

Goodwill Indefinite 2,283 – – 2,283 – – – – 2,283 Software Development 3 2,172 679 (861) 1,990 1,145 722 (861) 1,006 984 Customer Relationships 7 1,673 – – 1,673 955 238 – 1,193 480

6,128 679 (861) 5,946 2,100 960 (861) 2,199 3,747

Goodwill and other intangible assets were comprised of the following at 31 December 2018:

Gross Cost Accumulated Amortisation

Life Beginning Additions Disposal Ending Beginning Additions Disposal Ending Net (years) $000 $000 $000 $000 $000 $000 $000 $000 $000

Goodwill Indefinite 2,283 – – 2,283 – – – – 2,283 Software Development 3 2,883 665 (1,376) 2,172 1,675 846 (1,376) 1,145 1,027 Customer Relationships 7 1,673 – – 1,673 717 238 – 955 718

6,839 665 (1,376) 6,128 2,392 1,084 (1,376) 2,100 4,028

Approximate aggregate future amortisation expense is as follows:

Year Ending 31 December: Amount $000

2020 8012021 5752022 88

1,464

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4. Commitments and Contingencies

l Operating LeasesThe Company leases office space and equipment. The lease agreements expire on various dates through October 2026.

Minimum lease payments under operating leases are recognised on a straight-line basis over the term of the lease including any periods of free rent or payment terms subject to escalation. Total rent expense for the years ended 31 December 2019 and 2018 was approximately $317,000, and $186,000, respectively.

The Company terminated its lease of office space in April 2019. Pursuant to the terms and condition of the termination agreement, the Company was required to pay approximately $173,000 in fees associated with its early lease termination. Concurrent with the execution of the termination agreement, the Company entered into a new lease contract with a separate third party. Under the new lease agreement, the Company was reimbursed an amount equal to the total amount due under the termination agreement.

At 31 December 2019, future minimum lease payments under non-cancellable operating leases were as follows:

Year Ending 31 December: Amount $000

2020 3552021 3952022 4002023 4102024 421Thereafter 800

Total minimum rental commitments for operating leases 2,781

l Board of Directors Fees Effective 30 May 2014, the Company contracts with two non-executive directors (“NEDs”) for 3-year terms subjective to renewal for successive one-year periods. The Company pays approximately $100,000 per annum to the NEDs. Director fees were approximately $100,000 each for the years ended 31 December 2019 and 2018.

l Long-Term Vendor Commitment In June 2019, the Company executed a thirty-month contract with a cloud-based software company to provide customer-relationship management services. The agreement requires an annual fee of approximately $274,000, payable quarterly through November 2021.

In January 2019, the Company executed a three-year vendor contract for an application security service, requiring an annual fee of approximately $70,000, payable annually through January 2022.


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5. Income Taxesl Tax effects of temporary differences are as follows:


Allowance for doubtful accounts 2 2 Prepaid expenses (21) (12)Amortisation of software development (230) (241)Amortisation of intangibles 27 29Amortisation of goodwill (34) (27)Accrued liabilities 70 9 Basis difference in property and equipment (23) 7Net operating losses 2,310 2,043Stock-based compensation 111 95Tax credits 248 211Other adjustments 12 11

Total non-current 2,472 2,127Less: valuation allowance (2,506) (2,154)

Net deferred tax liabilities (34) (27)

Deferred tax assets and liabilities are recognised for the expected tax consequences of temporary differences between the book and tax bases of the Company’s assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realised. Management does not expect deferred tax assets to be fully realised in future years. Therefore, a valuation allowance has been recorded.

l The components of the provision for income taxes are as follows:


Current tax expense: Federal – –State 11 8

Total current tax expense: 11 8

Deferred: Federal 6 (77)State 1 4

Total deferred tax expense 7 (73)

Total provision (benefit) for income taxes 18 (65)

The effective income tax rate differs from the federal statutory income tax rate due to state income taxes, certain non-deductible expenses and an increase of approximately $352,000 in the valuation allowance for the period.

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5. Income Taxes (continued)On 22 December 2017, the Tax Cuts and Jobs Act (“Tax Act”) was enacted in the United States, which includes a broad range of tax reforms affecting businesses, most notably changes to the U.S. federal income tax laws, including reduction of the corporate tax rate from 35.0% to 21.0%, income tax deductions, and international tax provisions. Under Accounting Standards Codification Topic 740 (“ASC 740”), the impact of changes in tax laws must be recorded in the financial statements in the reporting period that includes the date of enactment. However, the Securities and Exchange Commission (“SEC”) and the FASB both recognise that the magnitude of this law change will require companies to perform extensive analysis and calculations to conform to the new provisions. The SEC issued Staff Accounting Bulletin (“SAB”) 118, which allowed companies to recognise provisional amounts for the tax effects resulting from the enactment of the Tax Act for which the accounting under ASC 740 is incomplete, but a reasonable estimate can be determined. Adjustments to these provisional amounts, if any, are to be completed within a measurement period not to exceed one year. In 2018, the Company completed its accounting for the estimated tax effects of the Tax Act and identified the following areas:

l One-time Repatriation Tax on Foreign Earnings: The Tax act imposed a mandatory one-time tax charge on accumulated, undistributed foreign earnings, traditionally not subject to U.S. federal income tax until distributed as a dividend to U.S. shareholders. As ClearStar UK is dormant and does not have any accumulated or undistributed foreign earnings, the Company concluded that it is not subject to the repatriation tax associated with accumulated, undistributed foreign earnings.

l Global intangible low-taxed income (“GILTI”): Under U.S. GAAP, companies can make a policy election as to either recognise Global intangible low-taxed income as incurred or recognised it as deferred. An entity selection of an accounting policy related to the GILTI tax provisions depends, in part, on analysing its global income to determine whether the entity expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. As ClearStar UK is dormant, the Company concluded that GILTI is not expected to apply to 2018 or future periods. Further, the Company has made a policy decision to record such taxes, if any, as incurred.

l Foreign-derived intangible income (“FDII”): While the Company had foreign sales in 2018, the Company had an overall taxable loss, and accordingly no FDII deduction was allowable. If the Company had been in an income position, the amount of the FDII deduction would also have been immaterial based on the Company’s level of foreign sales.

At 31 December 2019, the Company had approximately $10,193,000 in net operating loss carry-forwards (“NOL”) available to use against taxable income. The NOLs will begin to expire starting in 2023 and through 2038.

At 31 December 2019, the Company had approximately $248,000 in federal research and development (“R&D”) credits available to use against taxable income. The R&D credits will begin to expire starting in 2034.

6. Revolving Line FacilityIn October 2017, the Company obtained a revolving line facility (“Revolving Line”) with a commercial bank (the “Lender”) to borrow up to $5,000,000, accruing interest of Prime plus a floating rate equal to 1% or 1.75% per annum, with such rate determined based on the Company’s performance pricing period, and payable monthly. The Revolving Line is governed by borrowing bases that limit the Company’s borrowing capacity to (a) recurring revenue for the most recent month, multiplied by (b) an advance rate determined by the Lender. Under the Revolving Line agreement, the total outstanding borrowings will not exceed the lesser of the Revolving Line limit or the borrowing bases. The Revolving Line is also subject to an unused revolving line facility fee of 0.375% per annum, payable monthly, on the average unused portion. The Revolving Line is secured by all assets of the Company and was to mature on 19 October 2019. A stock warrant to purchase 90,755 shares of Ordinary Shares was granted to the Lender as consideration.

In September 2019, the Company amended its Revolving Line, including extending the maturity to October 2021 and compliance with a minimum liquidity of $2,000,000 as defined. At 31 December 2019 and 2018, amounts outstanding on the Revolving Line was $2.1m and $0, respectively, and the Company was in compliance with its covenants. For additional information concerning the Company’s covenants at 31 March 2020, see note 17 (Subsequent Events).

7. Stockholders’ EquityThe Board has authorised 100,000,000 shares of Ordinary Shares, $0.0001 par value. There were 36,362,900 and 36,302,900 shares issued and outstanding at 31 December 2019 and 2018, respectively.


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8. Stock-Based CompensationIn June 2014, the Board adopted the 2014 Share Option and Incentive Plan (“Plan”) that authorised the Board to grant options and restricted stock to employees and directors to acquire up to 3,000,000 shares of the Company’s Ordinary Shares. The option price generally may not be less than the underlying stock’s fair market value on the date of the grant. The options generally vest rateably up to a three-year period beginning the date of grant and expire as determined by the Board, but not more than 10 years from the date of grant. The amounts granted each calendar year is limited depending on certain terms of the Plan. At 31 December 2019, 1,096,400 shares remain available for grant under the Plan. The Plan terminates in June 2024.

The following table summarises activity of the Company’s stock options during the years ended 31 December 2019 and 2018:

Weighted-Average Shares Exercise Price

Outstanding at 1 January 2018 1,776,165 $0.86Granted(1) 1,937,600 $0.84Forfeited or cancelled(2) (1,630,165) $0.92

Outstanding at 31 December 2018 2,083,600 $0.79Granted 90,000 $0.66Exercised (60,000) $0.51Forfeited or cancelled (270,000) $0.92

Outstanding at 31 December 2019 1,843,600 $0.79

Exercisable at 31 December 2018 1,859,600 $0.80

Exercisable at 31 December 2019 1,686,933 $0.79

(1) Consists of 286,000 granted shares and 1,651,600 replacement awards associated with shares that the Board elected to cancel. (2) Consists of 442,165 forfeited shares and 1,188,000 of fully-vested awards that the Company elected to replace.

At 31 December 2019, there was approximately $25,000 of total unrecognised compensation costs related to unvested stock options, which is expected to be recognised over a weighted-average period of 1.9 years.

The following assumptions were used for the Black-Scholes option pricing model:

3 June 2019 2 July 2018

Weighted-average fair value on day of grant $0.180 $0.230Risk-free interest rate 1.83% 1.95%Expected dividend yield 0.00% 0.00%Expected volatility 32.29% 30.76%Weighted-average expected life of option 4.00 years 4.00 years

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9. Stock WarrantIn conjunction with the executed Revolving Line in October 2017 as described in note 6 (Revolving Line Facility), the Company issued a stock warrant as consideration to the Lender to purchase 90,755 shares of Ordinary Shares at $0.59 per share. The warrant expires in October 2027 and is fully vested; if the fair market value of an Ordinary Share is greater than the exercise price on the Expiration Date, the stock warrant will automatically be deemed exercised.

10. Earnings Per ShareBasic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Dilutive common stock equivalents represent shares issuable upon assumed exercise of stock options.

Year Ended Year Ended 31 December 2019 31 December 2018

Basic income per share ($0.04) ($0.04)Diluted income per share ($0.04) ($0.04)Weighted-average common shares outstanding:

Basic and diluted 36,362,900 36,302,900

11. Employee Retirement PlanThe Company sponsors an employee retirement plan known as the ClearStar, Inc. 401(k) Profit Sharing Plan Trust (the ‘‘401k Plan’’). Under the 401k Plan, employees may contribute up to the maximum contributions as set periodically by the Internal Revenue Service. Additionally, the Company may make a discretionary contribution to the 401k Plan. Employer profit sharing contributions vest over six years. Participant contributions and employer safe harbour matching contributions are 100 per cent. vested. See note 17 (Subsequent Events) for more information on the employer safe harbour matching contributions.

For the years ended 31 December 2019 and 2018, matching contributions were approximately $151,000 and $153,000, respectively.

12. Revenue from Contracts with CustomersThe Company’s revenue is derived from providing background screening and medical information services to direct and indirect customers on a transactional basis, in which distinct services are delivered over time as the customer simultaneously receives and consumes the benefits of the services provided. Under ASC 606, revenue is recognised when a performance obligation is satisfied by transferring control of a promised product or service to the customer. Revenue is measured based on the amount of consideration that the Company expects to receive in exchange for those goods or services. In accordance with ASC 606, revenue is recognised when all of the following criteria are met: (1) the Company has entered into a binding agreement, (2) the performance obligations have been identified, (3) the transaction price to the customer has been determined, (4) the transaction price has been allocated to the performance obligations in the contract, and (5) the performance obligations have been satisfied.

The Company’s revenues from contracts with customers primarily include:

l Indirect services - Channel partners: The Company provides employment intelligence via channel partners or consumer reporting agencies. Indirect services consist of background screening as well as the wholesale provision of data and global services. Pricing is on an ongoing monthly minimum order commitment and is updated annually or amended as needed. Sales from indirect services were approximately $6.5m and $7.1m for the years ended 31 December 2019 and 2018, respectively.

l Direct sales: The Company transacts directly with businesses in various industries, including transport and logistics, financial institutions, as well as home healthcare. Fees vary by product type/service. Sales from direct services were approximately $6.4m and $4.8m for the years ended 31 December 2019 and 2018, respectively.


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12. Revenue from Contracts with Customers (continued) l Medical Information Services (“MIS”): Fee earned for drug and clinical testing services as well as occupational health screenings from

indirect and direct customers. The Company earns revenue per drug and clinical test. Sales from MIS services were approximately $10.1m and $8.3m for the years ended 31 December 2019 and 2018, respectively.

The Company recognises revenue when it has an agreement with the customer that creates an enforceable right, the performance obligations are distinct, and the transaction price is determined. Revenue is recognised at the point in time the Company’s performance obligation to the customer is satisfied, which is the transfer date. Payment from the customer is due and subject to normal terms. Typical payment terms range from 30 to 45 days, depending on the type of customer and relationship. The Company has no material obligations to refund fees on contracts with customers subsequent to completion of its performance obligation. Discounts provided to customers at the time of sale are recognised as a reduction in sales as the products or services are provided.

The Company does not enter into commitments to provide goods or services that have terms greater than one year. Therefore, the Company expenses direct costs of obtaining a contract when incurred because the amortisation period would have been one year or less.

13. Concentrationsl Significant VendorA significant vendor is defined as one from which the Company receives at least 10 per cent. of its total purchases. For the years ended 31 December 2019 and 2018, the Company had purchases from two suppliers totalling approximately $5,701,000 and $4,741,000, respectively, which comprised approximately 54 per cent. of the Company’s purchases for both years. Accounts payable and accrued liabilities included approximately $1,404,000 and $1,440,000 to these vendors at 31 December 2019 and 2018, respectively.

l Significant CustomerA significant customer is defined as one from whom at least 10 per cent. of reported revenue is derived. For the years ended 31 December 2019 and 2018, the Company had sales to one customer totalling approximately $2,450,000 and $2,254,000, respectively, which comprised approximately 11 per cent. of the Company’s revenues for both years. At 31 December 2019 and 2018, the accounts receivable balance included approximately $202,000 and $156,000, respectively, from this customer.

14. Related Party TransactionsThe Company contracted with a certain shareholder of the Company to provide consulting services. During the years ended 31 December 2019 and 2018, the Company incurred approximately $46,000 and $38,000, respectively, in consulting fees to this related party.

15. Impact of COVID -19The Company’s ongoing profitability may experience instability and estimates included in the financial statements may change due to current political and economic conditions as a result of public health concerns related to the novel coronavirus, or COVID-19. The duration and intensity of these impacts and resulting disruption to which these events effect the Company’s business will depend on future developments, which are highly uncertain and cannot be predicted at this time.

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16. LiquidityManagement anticipates that its 2020 results of operations will be impacted by the COVID-19 outbreak. Additionally, the Company’s ability to comply with its debt covenants at 31 March 2020 has been negatively impacted by the economic downturn and the prolonged lockdown orders due to the current pandemic. As such, the Lender issued a forbearance letter through 30 June 2020 to waive the Company’s existing covenant breach. Management believes that it will continue to operate the business and mitigate the risks associated with COVID-19. Management’s plan is to further strengthen the Company’s financial position by increasing revenue from its services contracts, reducing operating expenses, cutting capital expenditures, and participating in the US Government’s Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Management believes additional sources of capital will be available should cash flows from operations be insufficient to fund the working capital deficit. Although management continues to pursue this plan, there is no assurance that the Company will be successful in obtaining sufficient revenues from its services, financing or equity investments on terms acceptable to the Company. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

17. Subsequent EventsThe Company evaluated subsequent events through 4 May 2020, when these consolidated financial statements were available to be issued.

In January 2020, the Company amended its 401k Plan to stop the safe harbour matching contributions on future employee elective contributions.

On 25 April 2020, the Company entered into a loan with its Lender in an aggregate principal amount of $1,143,789 (the “Loan”) pursuant to the PPP under the CARES Act. The Loan is evidenced by a promissory note dated 25 April 2020 and matures on 25 April 2022. The Loan bears interest at a rate of 1.00% per annum, with a deferral of payments for the first six months. Principal and interest are payable monthly commencing on 25 November 2020 and may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Funds from the Loan may only be used for payroll costs, including benefits, rent, and utilities. Under the terms of the Loan, the Loan may be forgiven if it is used for qualifying expenses as described in the CARES Act. The Company intends to use the proceeds for purposes consistent with the PPP.

The Company was not in compliance of certain covenants at 31 March 2020 relating to its Revolving Line facility, and the Lender issued a forbearance letter to waive the Company’s existing covenant breach through 30 June 2020.

Except as disclosed above, management is not aware of any other significant events that occurred subsequent to the consolidated balance sheet date but prior to the filing of this report that would have a material impact on the consolidated financial statements.


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ClearStar Inc.

A

nnual Report and A

ccounts 2019

ClearStar, Inc.6250 Shiloh Road, Suite 300

AlpharettaGeorgia 30005

USATel: +1 877 796 2559

www.clearstar.net

Making the world a safer place with intuitive technology solutions that encourage authenticity and empower informed hiring

Annual Report and Accounts 2019