TIDMCLSU TIDMTTM
RNS Number : 1114Z
ClearStar,Inc.
16 September 2020
16 September 2020
ClearStar, Inc.
("ClearStar" or the "Company")
Interim Results
ClearStar (AIM: CLSU), a provider of Human Capital IntegritySM
technology-based services specialising in background and medical
screening, announces its interim results for the six months ended
30 June 2020.
Financial Summary
-- Revenue of $8.9m (H1 2019: $11.6m)
-- Gross profit of $4.7m (H1 2019: $6.3m)
-- Adj. EBITDA of $541k loss (H1 2019: $191k)*
-- Loss before tax of $1.2m (H1 2019: $0.9m loss)
-- At 30 June 2020, the Company had gross cash of $2.2m (31 Dec 2019: $1.8m)
-- Net debt as at 30 June was $1.4m (31 December 2019: $0.3m)
* Adjusted to exclude certain non-recurring expenses (see
Financial Review)
Operational Summary
-- Responded rapidly and effectively to the COVID-19 outbreak
and continued to be able to service clients with no degradation in
quality standards
-- Volumes were significantly reduced in March and April due to
the widespread job losses and freeze on recruitment as a result of
the pandemic, but substantial recovery from the end of May driven
by the business outsourcing, financial institutions and home
healthcare sectors
-- Strong progress in on-boarding previously-won customers and
continued to generate new business
-- Sustained strategic execution throughout the period:
o Expanded the direct tier 1 client base, including being
awarded a contract by a provider of technology testing and
industrial automation that has a market value on NASDAQ of over
$10bn
o Entered into a new segment with the appointment by a leading
facilities management company, a sector that offers good growth
potential
o Established an integration with a technology solutions
provider for home healthcare agencies and community organisations
and, post period, achieved Prime Connector status with iCIMS Talent
Platform
-- Enhanced offering with the launch of Criminal Monitoring and
a COVID-19 testing service for employers
Current Trading & Outlook
-- Sales for August 2020 reached the same level as for August
2019 following a sustained and significant uptick in run rate from
the end of May 2020
-- As at 15 September 2020, the Company had reduced net debt to $0.3m with gross cash of $3.3m
-- Revenue recovery has been primarily based on new activity
with customers with increased requirements because of the pandemic,
such as business staffing companies and hospital systems
-- The Board is encouraged by the significant revenue recovery
and strengthening financial position, however, with the continued
uncertainty around the length of the pandemic and its economic
impacts, it remains cautious about the near-term outlook
Recommended Offer
It has also been announced today that Hanover Bidco 1 Limited is
making an offer for the entire issued and to be issued share
capital of the Company at a price of 40 pence per share, valuing
the Company at GBP14.7m ($19m).
Robert Vale, CEO of ClearStar, commented: "With the outbreak of
COVID-19 and consequent widespread freeze on recruitment, our
volumes were substantially reduced in March and April. However,
from the end of May we have achieved a significant uptick in
revenues - increasing month-on-month - and in August returned to
our run rate of last year. We have continued to be able to service
our customers throughout the period as well as win new business and
launch new services. This reflects our resilience and ClearStar's
strong fundamentals with the necessity of employers taking action
to protect the safety of their workforce and customers never being
more apparent. However, with ongoing concerns created by the
pandemic and its economic impact, there remains continued
uncertainty as to the potential impact on short-term revenues for
the Company and the Board is therefore cautious about the Company's
near-term outlook."
Enquiries:
ClearStar, Inc. +1 877 796 2559
Robert Vale, Chief Executive Officer
Jennifer Balleza, Chief Financial Officer
-----------------
finnCap Ltd. +44 20 7220 0500
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Jonny Franklin-Adams, Marc Milmo, Simon Hicks
- Corporate Finance
Andrew Burdis, Tim Harper - ECM
-----------------
Luther Pendragon Ltd. +44 20 7618 9100
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Harry Chathli, Claire Norbury, Joe Quinlan
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The information communicated in this announcement contains
inside information for the purposes of Article 7 of the Market
Abuse Regulation (EU) No. 596/2014.
About ClearStar
ClearStar, Inc. is a leading provider of Human Capital
Integrity(SM) technology-based services specialising in background
and medical screening. It provides employment intelligence direct
to employers and via channel partners/consumer reporting agencies
("CRAs") to support better recruitment and other decisions
affecting employees by increasing the quality, reliability, and
visibility of information.
A seven-time Inc. 5000 honoree and founding member of the
Professional Background Screening Association (formerly, 'NAPBS'),
ClearStar has provided innovative technology solutions to
businesses in the human capital management industry from its
corporate offices in Alpharetta, Georgia since 1995. For more
information about ClearStar, please visit: www.clearstar.net.
Operational Review
ClearStar entered 2020 with its highest ever order book and was
delivering against a healthy pipeline ahead of the COVID-19
outbreak. With the widespread recruitment freezes and job losses as
a result of the pandemic, screening volumes were significantly
reduced in March and April 2020 across all of the Company's
channels and services. From the end of May, ClearStar has
experienced a strong and sustained uptick in activity from the lows
of March and April 2020. As a result, revenue for the first six
months of 2020 was $8.9m (H1 2019: $11.6m).
Notwithstanding the impact on volume as a result of the
pandemic, ClearStar's operational performance was robust during the
period. ClearStar continued to win new bluechip customers,
including expanding into new sectors; onboard previously-won
customers; and enhance its offer through establishing further
integrations and launching new services. Consequently, the Company
made progress with the development of its business during the
period.
The Company responded rapidly and effectively to the COVID-19
outbreak. To protect the health and safety of its workforce, all of
the Company's employees were transitioned to remote working during
March 2020 while continuing to be able to service its clients, with
no degradation in quality or security. This capability was
strengthened by the investments the Company made during 2019 in its
IT infrastructure to enhance its security measures and cloud data
management. The Company also acted decisively to implement a number
of mitigation measures to support the liquidity of the business and
its financial position during the period of reduced trading, which
significantly reduced monthly running costs.
Performance by business channel
Sales from direct services were $3.0m for the first half of 2020
(H1 2019: $4.2m), accounting for 34% of total revenue (H1 2019:
36%) as a result of lower screening volumes due to COVID-19. The
largest contributors to revenue for the period were the home
healthcare and transportation and logistics industries, while the
financial services sector and business staffing companies helped
drive the improved revenue from the end of May.
During the first half of 2020, ClearStar made good operational
progress with the onboarding of previously-won customers and
winning new business. This includes expanding into new verticals
and continuing to upscale its client base to larger, higher-volume
businesses.
Key new customer wins during the first half include:
-- A leading facilities management company - the Company's first
direct customer in this sector - which appointed ClearStar to
provide background screening of all service providers entering the
customer's healthcare facilities. The Company commenced generating
revenue from this customer post period
-- A provider of technology testing and industrial automation,
which has a market value on NASDAQ of over $10bn, with onboarding
completing and revenue generation commencing post period
-- One of the largest US providers of hand-prepared,
home-delivered meals, which often works alongside healthcare or
social services to ensure vulnerable populations receive healthy
food at home. ClearStar commenced generating revenue from this
customer during the period
-- A real estate rental company that appointed ClearStar to
provide tenant screening, which is expected to commence generating
revenue this autumn
Significant progress during the period under previously-won
contracts includes being appointed to provide financial institution
screening for three further institutions by ClearStar's customer
that offers outsourcing and staffing primarily for the financial
services industry. The improvement in the Company's revenue from
the end of May following the COVID-19 challenges of March and April
was driven, in particular, by the ramp up in volume of one of these
three new financial institutions, which is a sizeable, household
name investment bank. Another key development was the ramp in
volume for an HR business outsourcing customer, which operates from
70 offices throughout the US and typically fills more than 4,000
recruitment positions per year. The customer appointed ClearStar in
H2 2019 and increased in volume throughout H1 2020 and into the
second half, which the Company expects to continue as businesses
transition to more flexible working.
Channel partners
In the first half of 2020, sales to channel partners - indirect
services - were $5.9m (H1 2019: $7.4m) and accounted for 66% of
total revenue (H1 2019: 64%).
Performance by service offering
Medical Information Services
Medical Information Services ("MIS") continued to be the largest
single contributor to revenue by product, accounting for 44% of
total revenue (H1 2019: 43%), and was $4.0m (H1 2019: $5.0m). Sales
to channel partner customers accounted for 89% of MIS revenue (H1
2019: 83%), which was primarily for drug testing services. However,
ClearStar experienced improved sales from its occupational health
screening and clinical testing, albeit still an immaterial
contribution to revenue, as the Company increasingly rolls out
these solutions.
Other services
Excluding MIS, revenue from ClearStar's other services - which
primarily comprise background screening as well as the wholesale
provision of data and global services - was $4.9m (H1 2019:
$6.6m).
Enhanced offer
During the first half of 2020, ClearStar enhanced its offer
through the launch of new services, securing a further strategic
integration and receiving a new comprehensive security
standard.
Launch of new services
ClearStar launched a testing service aimed at supporting
employers with their COVID-19 return-to-work planning and keeping
their workforce safe. The new COVID-19 testing programme is
provided by the Company's MIS business through Clinical Reference
Laboratory, Inc. ("CRL"), one of the largest privately held
clinical testing laboratories in the US. The service was launched
in May 2020 and, post period, the CRL Rapid Response kit received
U.S. Food and Drug Administration Emergency Use Authorization
enabling shipments of this test to commence.
Customers are able to order the service using the same process
as for their existing ClearStar drug and clinical screening
programmes. The CRL Rapid Response(TM) kit, which is a saliva-based
molecular diagnostic test, is shipped either in bulk to the
employer or direct to the employees (or job applicants). Samples
are self-collected by employees and sent back to the CRL lab for
testing. Employees also complete a questionnaire and register the
test collection kit online. The results of the tests are reported
via the ClearStar platform within 24-48 hours, on average, of the
samples being received by the lab and are provided in the same
format, based on employer preference, as the customer receives
their other drug or background screening reports from the Company.
Any employee testing positive will automatically be contacted by a
licenced doctor to discuss the results and next steps, and also
receives instructions on self-isolation.
In addition, during the period ClearStar expanded its offering
with the launch of a Criminal Monitoring solution. This new service
provides ongoing monitoring for records of employee criminality,
for which clients pay a monthly fee. The initial uptake has been
primarily from the Company's clients in the child education sector
and industries where a worker enters the home.
Integrations
At the end of the first half of 2020, ClearStar signed an
agreement for an integration with a provider of end-to-end
technology solutions for home healthcare agencies and community
organisations. This integration, once live later this year, will
enable users of the platform in the US and Canada to seamlessly,
through a single platform, utilise ClearStar's background screening
services alongside their other operational activities for workforce
and business management. This represents the addition of another
route-to-market in a key industry for ClearStar.
ClearStar also, post period, achieved a Prime Connector
integration with iCIMS Talent Platform, one of the leading
applicant tracking systems in the US with over 4,000 clients,
including approximately 20% of the Fortune 100. ClearStar has had a
Standard integration with iCIMS since 2018. With Prime Connector
status, the Company's services will now be fully integrated,
enabling customers to create orders (including for global
screening), track progress and view the results from within the
iCIMS platform. This will enhance the efficiency and convenience of
the screening process for customers as well as expand the
availability of ClearStar's services, with the Company also being
listed as a Prime supplier on the iCIMS marketplace.
Security
The Company achieved, post period, System and Organization
Controls ("SOC") 2 certification, which is a comprehensive
reporting framework of the American Institute of Certified Public
Accountants. It requires companies to establish and follow strict
information security policies and procedures, encompassing the
security, availability, processing, integrity, confidentiality and
privacy of customer data. This enhances the Company's offer to
customers by attesting to ClearStar's consistent dedication to
information security and compliance.
Financial Review
Revenue for the six months ended 30 June 2020 was $8.9m compared
with $11.6m for the first half of 2019. This reflects a reduction
in volumes across the business as a result of widespread
recruitment freezes and job losses due to the COVID-19
outbreak.
Gross profit was $4.7m (H1 2019: $6.3m) due to the lower revenue
and a reduction in gross profit margin to 53.1% (H1 2019: 54.5%).
The decrease in margin was primarily due to having a higher
percentage of revenue derived from MIS, which has a lower gross
margin than other services.
Total operating expenses, including depreciation and
amortisation, were reduced to $5.9m (H1 2019: $7.1m) as management
responded rapidly to the COVID-19 outbreak to introduce mitigation
measures to offset the reduced trading. This includes general and
administrative expenses, which decreased to $4.0m (H1 2019: $4.7m).
Selling and marketing expenses were lower at $798k (H1 2019:
$1.2m). Research and development expenses decreased to $461k (H1
2019: $724k), and depreciation and amortisation expenses were $569k
(H1 2019: $560k). The mitigation measures that were introduced to
reduce operating costs, including Non-Executive Directors forgoing
their fees and voluntary salary reductions for all employees, are
expected to generate up to approximately $2.3m of savings in the
current financial year.
Loss before tax was $1.2m for the first half of 2020 compared
with $914k for the same period of the prior year due to the lower
revenue. Loss after tax was $1.2m (H1 2019: $930k loss). Adjusted
EBITDA for the first half of 2020 was $546k loss (H1 2019: $191k
earnings). However, due to the decisive mitigation measures
implemented at the start of the outbreak and ongoing cost control
combined with the recovery in revenue, ClearStar was able to
generate positive adjusted EBITDA for the months of May and June
2020.
At 30 June 2020, total assets were $9.3m (31 December 2019:
$9.0m), with the largest assets being goodwill and other intangible
assets of $3.5m (31 December 2019: $3.7m), accounts receivable of
$2.3m (31 December 2019: $2.0m) and available funds of $2.2m (31
December 2019: $1.8m).
The Company's total liabilities at 30 June 2020 were $6.7m (31
December 2019: $5.2m), with the increase primarily due to a $1.1m
loan received under the Paycheck Protection Program ("PPP")
pursuant to the Coronavirus Aid, Relief, and Economic Security Act
("CARES Act") and a credit facility utilisation of $0.3m for
working capital as a result of the current level of reduced trading
due to the COVID-19 outbreak
The Company utilised $888k of net cash in operating activities
during the period (H1 2019: $790k) mainly due to an increase in the
net loss and working capital accounts.
The Company used $250k in investment activities in the first
half of 2020 (H1 2019: $1.2m). The reduction was due to
technology-related capital expenses in the first half of 2019
associated primarily with the purchase of new hardware and software
to support and enhance the Company's technology platform.
The Company used $1.5m in financing activities, which primarily
relates to the $1.1m in PPP loan and the credit facility
utilisation.
At 30 June 2020, the Company had net debt of $1.4m (31 December
2019: $0.3m). As at 15 September 2020, the Company had further
reduced net debt to $0.3m and had gross cash of $3.3m.
As noted above, the Company had increased available funds of
$2.2m at 30 June 2020 (31 December 2019: $1.8m). The available
funds comprised $1.7m net cash from current operations; $0.3m from
the Company's recurring revenue credit facility; and $0.2m from the
PPP loan. As previously stated, the Company was not in compliance
with certain covenants during the period, and the Company's credit
facility provider agreed to waive the breach and extend the
forbearance letter to 13 October 2020. As at 15 September 2020, the
Company has access to $2.6m of available funds from its recurring
revenue credit facility. 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, the Company is unable to drawdown further funds from the
facility and it expects to make debt repayments in the coming
months based on existing covenants. The Company is engaged in
active negotiations with the bank to secure new covenant terms.
Current Trading & Outlook
ClearStar experienced an excellent improvement in run rate from
the end of May following the significant impact on revenue in March
and April caused by COVID-19, and it is encouraging that this trend
has continued into the second half.
The recovery in revenue has been primarily based on new activity
with customers that have increased requirements because of the
pandemic, such as business staffing companies and hospital systems.
However, the Company has not yet seen a return in much of its
traditional business and it believes that the ongoing challenges
created by the pandemic means that there remains significant
near-term uncertainty. In addition, the final quarter of the
financial year is historically a slower quarter for the industry,
which could be accentuated by the 2020 presidential elections in
the United States in November. As noted above, the Company is also
constrained by the fact that it is currently unable to drawdown
further funds from its loan facility . As a result, while the Board
is still confident in the long-term opportunities for the Company,
there remains continued uncertainty as to the potential impact on
revenues and the Board is therefore cautious about the Company's
near-term outlook.
CLEARSTAR, INC.
Consolidated Statements of Operations
(USD, in thousands)
Six Months Six Months Year Ended
Ended Ended
30 June 30 June 31 December
2020 2019 2019
(Unaudited) (Unaudited)
$ $ $
-------------- -------------- --------------
Net revenue 8,931 11,559 22,953
Cost of revenue 4,192 5,254 10,543
-------------- -------------- --------------
Gross profit 4,739 6,305 12,410
-------------- -------------- --------------
Operating expenses
Selling and marketing 798 1,164 2,221
Research and development 461 724 1,329
Depreciation and amortisation 569 558 1,055
General and administrative 4,026 4,694 9,012
-------------- -------------- --------------
Total operating expenses 5,854 7,140 13,617
Loss from operations (1,115) (835) (1,207)
-------------- -------------- --------------
Other income (expense)
Interest expense, net (85) (79) (171)
-------------- -------------- --------------
Total other expense (85) (79) (171)
-------------- -------------- --------------
Net loss before taxes (1,200) (914) (1,378)
Provision for income taxes 17 16 18
Net loss (1,217) (930) (1,396)
============== ============== ==============
CLEARSTAR, INC.
Consolidated Balance Sheets
(USD, in thousands)
At At At
30 June 30 June 31 December
2020 2019 2019
(Unaudited) (Unaudited)
$ $ $
-------------- -------------- --------------
ASSETS
Current assets
Cash 2,153 1,088 1,754
Accounts receivable -- trade, net 2,316 3,264 1,981
Research and development tax
credits 19 29 -
Prepaid expenses 533 702 630
-------------- -------------- --------------
Total current assets 5,021 5,083 4,365
-------------- -------------- --------------
Property and equipment, at cost
Computer equipment 672 743 661
Furniture and fixtures 229 225 226
Leasehold improvements 76 76 76
Less accumulated depreciation (308) (158) (198)
-------------- -------------- --------------
Total property and equipment, net 669 886 765
-------------- -------------- --------------
Other assets
Goodwill and other intangible assets,
net 3,525 3,908 3,747
Deferred debt issuance costs, net 26 16 36
Deposits 48 43 43
-------------- -------------- --------------
Total other assets 3,599 3,967 3,826
-------------- -------------- --------------
Total assets 9,289 9,936 8,956
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loan facility 2,422 2,100 2,100
Payroll protection program loan 507 - -
Accounts payable 2,334 2,950 2,494
Accrued liabilities 258 360 249
Deferred revenue 67 45 9
State income taxes 18 - 9
-------------- -------------- --------------
Total current liabilities 5,606 5,455 4,861
-------------- -------------- --------------
Long-term liabilities
Payroll Protection Program Loan 636 - -
Accrued liabilities 355 191 272
Deferred employer social security
taxes 71 - -
Deferred income taxes 42 41 34
-------------- -------------- --------------
Total long--term liabilities 1,104 232 306
-------------- -------------- --------------
Stockholders' equity
Common stock, $0.0001 par value;
100,000,000
shares authorised; 36,362,900
shares issued and outstanding in
2020 and
2019 4 4 4
Additional paid--in capital 13,999 13,986 13,992
Accumulated deficit (11,424) (9,741) (10,207)
-------------- -------------- --------------
Stockholders' equity 2,579 4,249 3,789
-------------- -------------- --------------
Total liabilities and
stockholders' equity 9,289 9,936 8,956
============== ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
CLEARSTAR, INC.
Consolidated Statements of Changes in Stockholders' Equity
(USD, in thousands, except no. of shares)
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
No. $ $ $ $
----------- ------- ----------- ------------ --------
Balances at 1 January 2019 36,302,900 4 13,951 (8,811) 5,144
Non-cash stock compensation - - 4 - 4
Issuance of common stock 60,000 - 31 - 31
Net loss - - - (930) (930)
----------- ------- ----------- ------------ --------
Balances at 30 June 2019
(unaudited) 36,362,900 4 13,986 (9,741) 4,249
Non-cash stock compensation - - 6 - 6
Net loss - - - (466) (466)
----------- ------- ----------- ------------ --------
Balances at 31 December
2019 36,362,900 4 13,992 (10,207) 3,789
Non-cash stock compensation - - 7 - 7
Net loss - - - (1,217) (1,217)
----------- ------- ----------- ------------ --------
Balances at 30 June 2020
(unaudited) 36,362,900 4 13,999 (11,424) 2,579
=========== ======= =========== ============ ========
The accompanying notes are an integral part of the consolidated financial
statements.
CLEARSTAR, INC.
Consolidated Statements of Cash Flows
(USD, in thousands)
Six Months Six Months Year Ended
Ended Ended
30 June 30 June 31 December
2020 2019 2019
(Unaudited) (Unaudited)
$ $ $
-------------- -------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (1,217) (930) (1,396)
Adjustments to reconcile net
loss to net
cash provided (used for)
operating activities:
Change in allowance for doubtful
accounts 11 3 -
Depreciation and amortisation 569 558 1,055
Deferred income taxes 8 14 7
Non-cash stock compensation 7 4 11
Non-cash debt issuance costs 10 24 41
Loss on disposal of property and
equipment - 26 57
Loss on early lease exit (see
Commitments
and Contingencies note) - 173 173
Change in operating assets
and liabilities:
Accounts receivable (346) (1,070) 215
Research and development tax
credits (19) 62 90
Prepaid expenses 97 (344) (272)
Deposits (5) (30) (30)
Accounts payable (162) 599 146
Accrued liabilities 92 164 133
Deferred revenue 58 (36) (72)
State income taxes 9 (7) 2
-------------- -------------- ----------------
Total adjustments 329 140 1,556
-------------- -------------- ----------------
Net cash provided by (used for)
operating
activities (888) (790) 160
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and
equipment (14) (802) (743)
Capitalised website development
costs (40) - -
Capitalised software development
costs (196) (374) (679)
-------------- -------------- --------------
Net cash used for investing
activities (250) (1,176) (1,422)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from loan facility 322 2,100 2,100
Debt issuance costs - - (37)
Proceeds from sales of common
stock - 31 30
Proceeds from payroll protection
program
loan 1,144 - -
Deferred employer social
security taxes 71 - -
-------------- -------------- --------------
Net cash provided by financing
activities 1,537 2,131 2,093
-------------- -------------- --------------
Net cash increase for period 399 165 831
Cash at beginning of period 1,754 923 923
-------------- -------------- --------------
Cash at end of period 2,153 1,088 1,754
============== ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statements of Cash Flows (continued)
(USD, in thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Six Months Six Months
Ended Ended Year
30 June 30 June
2020 2019 Ended
(Unaudited) (Unaudited) 31 December
2019
$ $ $
-------------- -------------- --------------
Cash paid:
Interest 72 55 131
Income taxes - 2 9
72 57 140
============== ============== ==============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
During the year ended 31 December 2019, the Company retired
obsolete and fully-depreciated property and equipment of
approximately $141,000.
During the year ended 31 December 2019, the Company retired
fully-amortised intangible assets of approximately $861,000.
The accompanying notes are an integral part of the consolidated
financial statements.
Notes to the Consolidated Financial Statements
1. Summary of Significant Accounting Policies
a) Nature of Operations
ClearStar, 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 Integrity(SM)
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 Consolidation
The consolidated financial statements include the accounts of
the Company and those entities required to be consolidated under
generally accepted in the United States of America ("U.S. GAAP").
All significant intercompany transactions and balances have been
eliminated in consolidation.
c) Basis of Accounting
The accompanying financial statements have been prepared in
accordance with U.S. GAAP. These principles are established by the
Financial Accounting Standards Board ("FASB").
d) Reclassification
Certain reclassifications have been made to the 30 June 2019
consolidated financial statement presentation to correspond to the
current period's format. These reclassifications have no effect on
previously reported net income.
e) Use of Estimates
The 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.
f) Concentration of Credit Risk Arising from Cash Deposits in Excess of Insured Limits
The 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.
g) Accounts Receivable
The 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 period-end receivables are collected
within the following fiscal quarter. The Company has not
historically had significant write-offs for these receivables.
h) Property and Equipment
Property 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 years
Furniture and fixtures 5 - 7 years
Leasehold improvements Lesser of estimated useful life or life
of the lease
Depreciation expense for the six months ended 30 June 2020 and
2019, and the year ended 31 December 2019 was approximately
$110,000, $64,000 and $95,000, respectively.
i) Deferred Debt Issuance Costs
Deferred debt issuance costs were incurred by the Company to
obtain its revolving line facility and are amortised over the life
of the respective debt agreement. Deferred debt issuance costs
totalled approximately $41,000 and $95,000 at 31 December 2019 and
2018, respectively, with an accumulated amortisation of
approximately $15,000, $79,000 and $5,200 at 30 June 2020 and 2019,
and 31 December 2019, respectively. The Company amortised
approximately $10,300, $24,000 and $41,000 of these costs through
interest expense for the six months ended 30 June 2020 and 2019,
and the year ended 31 December 2019, respectively. The remaining
amortisation expense at 30 June 2020 is expected to be
approximately $10,300, $20,600, and $5,100 in the second half of
2020, 2021 and 2022, respectively.
j) Goodwill
Goodwill 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 year ended 31
December 2019 as a result of the annual goodwill impairment test
performed, and there have been no subsequent events requiring
further analysis.
k) Intangible Assets
Intangible assets, other than capitalised software and website
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.
l) Impairment of Long-Lived Assets
Long-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 during the six months ended 30 June 2020 and 2019, and
the year ended 31 December 2019.
m) Revenue Recognition
Revenue 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 13 (Revenue from Contracts with Customers) for details
related to the Company's revenue recognition policies.
n) Advertising
The Company expenses advertising costs as incurred. Advertising
expenses for the six months ended 30 June 2020 and 2019, and the
year ended 31 December 2019 were approximately $115,000, $202,000
and $411,000, respectively.
o) Income Taxes
ClearStar 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.
p) Research and Development
Expenditures related to the development of new products and
processes are expensed as incurred. Research and development
expenses were approximately $461,000, $724,000 and $1,329,000, net
of approximately $0 of tax credits, for the six months ended 30
June 2020 and 2019, and the year ended 31 December 2019,
respectively.
q) Stock-Based Compensation
The 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 six months ended 30 June
2020 and 2019, and the year ended 31 December 2019 was
approximately $7,000, $4,000 and $11,000, respectively.
r) Fair Value of Financial Instruments
Fair 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.
s) Future Application of Accounting Standards
In 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 December 2019, the FASB issued Accounting Standards Update
No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting
for Income Taxes ("ASU 2019-12"), which is intended to simplify
various aspects related to accounting for income taxes. ASU 2019-12
removes certain exceptions to the general principles in Topic 740
and clarifies and amends existing guidance to improve consistent
application. The guidance in ASU 2019-12 is effective for the
Company beginning January 1, 2022. The Company does not expect the
implementation of ASU 2019-12 to have a material effect on the
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 .
2. Accounts Receivable
Accounts receivable consisted of the following:
At 31 December
2019
At 30 June At 30 June
2020 (Unaudited) 2019 (Unaudited)
$000 $000 $000
------------------ ------------------ ---------------
Trade accounts receivable 2,330 3,274 1,988
Allowance for doubtful
accounts (14) (10) (7)
2,316 3,264 1,981
================== ================== ===============
3. Goodwill and Other Intangible Assets
Goodwill and other intangible assets were comprised of the
following at 30 June 2020 (unaudited):
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 1,990 196 - 2,186 1,006 338 - 1,344 842
Website
Development 3 - 40 - 40 - - - - 40
Customer
Relationships 7 1,673 - - 1,673 1,193 120 - 1,313 360
---------------- ---------------- ------------- ------- ---------------- ---------------------------------- ------- ---------
5,946 236 - 6,182 2,199 458 - 2,657 3,525
================ ================ ============= ======= ================ ================================== ======= =========
Goodwill and other intangible assets were comprised of the
following at 30 June 2019 (unaudited):
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 2,172 374 - 2,546 1,145 374 - 1,519 1,027
Customer
Relationships 7 1,673 - - 1,673 955 120 - 1,075 598
---------------- ---------------- ------------- ------- ---------------- ---------------------------------- ------- ---------
6,128 374 - 6,502 2,100 494 - 2,594 3,908
================ ================ ============= ======= ================ ================================== ======= =========
Goodwill 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
================ ================ ============= ======= ================ ================================== ======= ======= =========
Approximate aggregate future amortisation expense is as
follows:
Period Ending 30 June:
Amount
$000
-------
2021 730
2022 502
2023 10
1,242
=======
4. Commitments and Contingencies
-- Operating Leases
The Company leases office space and equipment. The lease
agreements expire on various dates through May 2027.
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 six months ended 30 June 2020 and 2019 and the
year ended 31 December 2019 was approximately $199,000, $117,000,
and $317,000, 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 30 June 2020, future minimum lease payments under
non-cancellable operating leases were as follows:
Period Ending 30 June:
Amount
$000
-------
2021 327
2022 396
2023 405
2024 416
2025 426
Thereafter 844
Total minimum rental commitments for
operating leases 2,814
=======
-- 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 for the
six months ended 30 June 2020 and 2019, and the year ended 31
December 2019 were approximately $25,000, $50,000 and $100,000,
respectively.
-- 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.
5. Income Taxes
-- Tax effects of temporary differences are as follows:
At 30 June At 30 June At 31 December
2020 (Unaudited) 2019 (Unaudited) 2019
$000 $000 $000
------------------ ------------------ ----------------------------
Allowance for doubtful accounts 3 2 2
Prepaid expenses - (12) (21)
Amortisation of software development (207) (251) (230)
Amortisation of intangibles 15 (203) 27
Amortisation of goodwill (32) (152) (34)
Accrued liabilities 84 62 70
Basis difference in property
and equipment (22) 6 (23)
Net operating losses 2,310 2,195 2,310
Stock-based compensation 111 99 111
Tax credits 247 161 248
Other adjustments 12 12 12
------------------ ------------------ ----------------------------
Total noncurrent 2,521 1,919 2,472
Less: valuation allowance (2,553) (1,960) (2,506)
Net deferred tax liabilities (32) (41) (34)
================== ================== ============================
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.
-- The components of the provision for income taxes are as follows:
Six Months Six Months Year Ended
Ended 30 Ended 30 31 December
June June 2019 2019
2020 (Unaudited) (Unaudited)
$000 $000 $000
---------------------------- ------------------------- --------------------------
Current tax expense:
Federal - - -
State 9 2 11
------------------------- --------------------------
Total current tax expense
(benefit) 9 2 11
---------------------------- ------------------------- --------------------------
Deferred tax expense:
Federal 7 14 6
State 1 - 1
---------------------------- ------------------------- --------------------------
Total deferred tax expense
(benefit) 8 14 7
Total provision (benefit) for
income taxes 17 16 18
============================ ========================= ==========================
The effective income tax rate differs from the federal statutory
income tax rate due to state income taxes, certain non-deductible
expenses and a decrease of approximately $47,000 in the valuation
allowance for the period from the year ended 31 December 2019.
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.
Amounts recognised by the Company at 31 December 2017 represented
reasonable estimates based on obtaining, preparing, and analysing
the information necessary at that time to account for the tax
effects of the Tax Act under ASC 740. At 31 December 2018, we
finalized our analysis of the incomplete areas and made the
necessary adjustments, if any, to the provisional amounts
recognised at 31 December 2017.
At of 30 June 2020, the Company had approximately $10,193,000 in
net operating loss carryforwards ("NOL") available to use against
taxable income. NOLs will begin to expire starting in 2033.
At 30 June 2020, 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 Facility
In October 2017, the Company obtained a revolving line facility
("Revolving Line") with a bank 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 bank. 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 bank 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. Amounts
outstanding on the Revolving Line at 30 June 2020, 2019 and at 31
December 2019 was $2.4m, $2.1m and $2.1m, respectively. The Company
was not in compliance of certain covenants at 30 June 2020, and the
bank agreed to waive the breach and extend the forbearance letter
to 13 October 2020.
7. Paycheck Protection Program Loan
On 25 April 2020, the Company entered into a loan with a bank in
an aggregate principal amount of $1,143,789 (the "Loan") pursuant
to the U.S. Government's Paycheck Protection Program ("PPP") under
the Coronavirus Aid, Relief, and Economic Security ("CARES") Act.
The Loan matures on 25 April 2022 and 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.
At 30 June 2020, the amount of the Loan outstanding was $1,143,789,
which is equal to the principal amount of the Loan.
At 30 June 2020, the Company utilised approximately $0.9m of the
proceeds for purposes consistent with the PPP and intends to use
the remaining $0.2m to fund qualifying expenses as described in the
CARES Act. Accordingly, the Company believes the Loan will be
forgiven and plans to file a PPP application for forgiveness once
the bank begins accepting loan forgiveness applications. No
accounting adjustments have been made in conjunction with this loan
forgiveness. The Company continues to accrue interest on the Loan
on a monthly basis and intends to recognise the debt until the Loan
is formally forgiven.
8. Stockholders' Equity
The Board has authorised 100,000,000 shares of Ordinary Shares,
$0.0001 par value. There were 36,362,900 of shares issued and
outstanding at 30 June 2020 and 2019, and at 31 December 2019,
respectively.
9. Stock-Based Compensation
In 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 30 June 2020, 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 six months ended 30 June 2020 and 2019, and the
year ended 31 December 2019:
Weighted-
Average
Shares Exercise Price
------------- ---------------
Outstanding at 1 January 2019 2,083,600 $0.79
Granted 90,000 $0.66
Exercised (60,000) $0.51
Forfeited or cancelled (252,000) $0.85
-------------
Outstanding at 30 June 2019 (unaudited) 1,861,600 $0.78
Granted - -
Forfeited or cancelled (18,000) $0.92
-------------
Outstanding at 31 December 2019 1,843,600 $0.79
Granted - -
Exercised - -
Forfeited or cancelled - -
-------------
Outstanding at 30 June 2020 (unaudited) 1,843,600 $0.79
-------------
Exercisable at 30 June 2020 (unaudited) 1,716,933 $0.78
-------------
Exercisable at 31 December 2019 1,686,933 $0.79
-------------
Exercisable at 30 June 2019 (unaudited) 1,671,600 $0.79
-------------
At 30 June 2020, there was approximately $18,000 of total
unrecognised compensation costs related to unvested stock options,
which is expected to be recognised over a weighted-average period
of 1.43 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 $0.230
Risk-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
10. Stock Warrant
In 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 Bank 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.
11. Earnings Per Share
Basic 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.
Six Months Six Months Year Ended
Ended 30 Ended 30 31 December
June 2020 June 2019 2019
(Unaudited) (Unaudited)
--------------- --------------- --------------
Basic income per share ($0.03) ($0.03) ($0.04)
Diluted income per share ($0.03) ($0.03) ($0.04)
Weighted-average common shares outstanding:
Basic and diluted 36,362,900 36,362,900 36,362,900
12. Employee Retirement Plan
The 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.
In January 2020, the Company amended its 401k Plan to stop the
safe harbour matching contributions on future employee elective
contributions. For the six months ended 30 June 2020 and 2019, and
the year ended 31 December 2019, matching contributions were
approximately $0, $72,000 and $151,000, respectively.
13. Revenue from Contracts with Customers
The 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:
-- 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 $2.4m, $3.3m and $6.5m for the six months ended 30
June 2020 and 2019, and the year ended 31 December 2019,
respectively.
-- 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 $2.6m,
$3.3m, and $6.4m for the six months ended 30 June 2020 and 2019,
and the year ended 31 December 2019, respectively.
-- 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 were approximately $4.0m,
$5.0m, and $10.1m for the six months ended 30 June 2020 and 2019,
and the year ended 31 December 2019, 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
after 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.
14. Concentrations
-- Significant Vendor
A significant vendor is defined as one from which the Company
receives at least 10 per cent. of its total purchases. For the six
months ended 30 June 2020 and 2019, and the year ended 31 December
2019, the Company had purchases from two suppliers totalling
approximately $2,164,000, $2,678,000 and $5,701,000, respectively,
which comprised approximately 52, 51 and 54 per cent. of the
Company's purchases, respectively. Accounts payable and accrued
liabilities included approximately $1,340,000, $1,623,000 and
$1,404,000 to these vendors at 30 June 2020 and 2019, and 31
December 2019, respectively.
-- Significant Customer
A significant customer is defined as one from whom at least 10
per cent. of reported revenue is derived. For the six months ended
30 June 2020 and the year ended 31 December 2019, the Company had
sales to one customer totalling approximately $1,090,000 and
$2,450,000, which comprised approximately 12 and 11 per cent. of
the Company's revenue, respectively. At 30 June 2020 and 31
December 2019, the accounts receivable balance from this customer
included approximately $280,000 and $202,000, respectively. For the
six months ended 30 June 2019, there is no significant customer
whose revenue individually represented 10 per cent or more of the
Company's total revenue.
15. Related Party Transactions
The Company contracted with a certain shareholder of the Company
to provide consulting services. During the six months ended 30 June
2020 and 2019, and the year ended 31 December 2019, the Company
incurred approximately $9,000, $28,000 and $46,000, respectively,
in consulting fees to this related party.
16. Impact of Covid-19
The 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.
17. Liquidity
Management anticipates that its second half of 2020 results of
operations will continue to be impacted by the COVID-19 outbreak.
Additionally, the upcoming presidential election could have, in a
short period, a direct effect on the U.S. economy through a decline
in business demand and consumer confidence. As a result, the
Company's ability to comply with its debt covenants at 30 June 2020
has been negatively impacted by the prolonged economic downturn due
to the current pandemic. As such, the bank agreed to waive the
breach and extend the forbearance letter to 13 October 2020.
Since March 2020, the Company has taken several actions to
bolster its financial condition and 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, and
cutting capital expenditures. Subsequent to 30 June 2020, the board
of directors received an offer from a private equity firm to
acquire the entire issued and to be issued share capital of the
Company, which would provide additional liquidity to fund working
capital deficit. Management believes additional sources of capital
will be available through equity offering should the acquisition
fall through.
Although management continues to pursue its plan, there is no
assurance that the Company will be successful in obtaining
sufficient revenues from its services, financing, equity
investments on terms acceptable to the Company or the acquisition
of the Company. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
18. Subsequent Events
The Company evaluated subsequent events through 16 September
2020, when these consolidated financial statements were available
to be issued.
The Company was not in compliance of certain financial covenants
at 30 June 2020, and the bank agreed to waive the breach and extend
the forbearance letter to 13 October 2020.
It has also been announced today that Hanover Bidco 1 Limited is
making an offer for the entire issued and to be issued share
capital of the Company at a price of 40 pence per share, valuing
the Company at GBP14.7 million ($19 million).
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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END
IR EAENKFFKEEEA
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