TIDMCLSU TIDMTTM
RNS Number : 0505M
ClearStar,Inc.
06 May 2020
6 May 2020
ClearStar, Inc.
("ClearStar" or the "Company")
Final Results
ClearStar (AIM: CLSU), a provider of Human Capital IntegritySM
technology-based services specialising in background and medical
screening, announces its final results for the year ended 31
December 2019.
Financial Summary
-- 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
Financial Review)
Operational Summary
-- Strong revenue growth in direct sales and Medical Information
Services ("MIS"), which, in aggregate, accounted for 72% of total
revenue (2018: 65%):
o Direct sales increased by 32% due to expansion of
higher-volume, tier 1 client base
o MIS 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:
o Won a contract with a major shipyard specialising in vessels
for the U.S. Navy
o Awarded multiple contract expansions for financial institution
screening
o 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:
o Expansion of sales pipeline, including transition up-channel
to higher-value prospects
o A verage spend per direct customer increased 32% over 2018
o 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 MIS services
for ordering breath alcohol screening and, post period, the launch
of Criminal Monitoring
COVID-19 Update
-- ClearStar continues to be able to service its clients with no
degradation in quality standards and it has not lost any customers,
but volumes have been significantly reduced
-- The Company responded rapidly to implement mitigation
measures to reduce operating costs, including Non-Executive
Directors forgoing their fees and voluntary salary reductions for
all employees, which are expected to generate up to approximately
$2.3m of savings in the current financial year
-- At 5 May 2020, the Company had net debt of $1.0m, which
included a $1.1m loan received under the Paycheck Protection
Program ("PPP")
-- It remains too early to assess the full financial impact and
to be in a position to provide guidance for the current financial
year
-- The Board continues to monitor the situation closely and will update the market as necessary
Robert Vale, CEO of ClearStar, commented: "In 2019, 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. Our success is reflected in our revenue growth
for the year and our contract wins, which included some
high-calibre organisations. We also entered 2020 with our highest
ever order book.
"Our business model has meant that we could adapt rapidly in
response to the COVID-19 outbreak - with the procedures and
technology in place to enable remote working and with the same
strict level of security. There has been no degradation in our
quality standards and we have not lost any customers, however,
volumes have been significantly reduced. We have acted decisively
to cut our costs to support our liquidity during this period and I
am proud of the response of our employees to this crisis, but it
remains too early to predict the full financial impact on the
Company in the current year. The Board continues to monitor the
situation closely and we will update the market as necessary."
Enquiries:
ClearStar, Inc. +1 877 796 2559
Robert Vale, Chief Executive Officer
Jennifer Balleza, Chief Financial Officer
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finnCap Ltd. +44 20 7220 0500
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Jonny Franklin-Adams, Marc Milmo, Simon Hicks
- Corporate Finance
Andrew Burdis - ECM
-----------------
Luther Pendragon +44 20 7618 9100
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Harry Chathli, Claire Norbury, Joe Quinlan
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Weston Advisers +44 7739 517 581
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Dominic Del Mar
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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 continued to execute on its strategy and deliver
strong growth in 2019, with revenue increasing by 14% to $23.0m
(2018: $20.1m). This was driven by sales of the Company's
industry-leading Medical Information Services and ramp-up of new
direct customers that were won in 2018, primarily for background
screening. ClearStar also continued to upscale its direct client
base with the average spend per direct customer increasing by 32%
over the previous year.
The Company's investment in strengthening its direct sales team
enabled an expansion in the pipeline and upscaling of the client
base, including some major client wins during the year and post
period. ClearStar also continued to enhance its offer, including
the introduction of breath alcohol screening as part of its medical
screening services and, post period, the launch of its Criminal
Monitoring service.
Performance by business channel
Direct services
Sales 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 the Company's
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 its client base but expanding into new verticals and
upscaling to larger, higher-volume businesses. During 2019, the
Company 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 the ClearStar's strategic integrations with
Veritas Prime and SAP SuccessFactors increased by more than 200%
over 2018. ClearStar continued to expand in its core verticals as
well as successfully winning new business in two new verticals.
Healthcare: In home healthcare, the Company's wins during 2019
were in expanding its business with existing customers, primarily
by servicing additional locations for those customers. In addition,
the Company was appointed by a medical humanitarian organisation to
provide global background screening of its employees and
volunteers. ClearStar was 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: ClearStar's significant financial
institution screening client, which is a professional services
company that provides outsourcing and staffing primarily for the
financial services industry, granted the Company two extensions
during 2019. 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, p ost period, ClearStar was pleased
to be appointed to provide financial institution screening for
three further institutions under its contract with this customer
(albeit with relatively modest initial volumes), as well as
continuing to provide its services to the original major financial
institution.
Transportation and Logistics: ClearStar continued to make
progress in expanding its customer base in its 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. The Company also increased its
client base in the aerospace industry, which included some notable
wins that were achieved through ClearStar's integration with SAP
SuccessFactors.
Environmental Services: ClearStar was 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 the Company's first
direct client in the petrochemical industry.
Facilities Management: Post period, ClearStar was appointed by a
leading facilities management company to provide background
screening of all service providers entering the customer's
healthcare facilities. This is the Company's first direct customer
in facilities management and ClearStar believes 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 ClearStar's platform.
Channel partners
In 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%).
Performance by service offering
Medical Information Services
MIS 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 ClearStar's
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 the Company's 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 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 - 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, the Company further enhanced its 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.
ClearStar enhanced its MIS offering 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 ClearStar's goal of offering complete medical review
services.
Post period, ClearStar further expanded its offering with the
launch of its 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 the
Company's clients in the child education sector and industries
where a worker enters the home.
During 2019, the Company gained ISO/IEC 27001:2013
accreditation, which certifies that ClearStar's information
security, cybersecurity and privacy protection systems and policies
comply with international standards of best practice. This also
followed ClearStar having invested during the year to enhance its
security measures, such as for automated threat monitoring.
In addition, during 2019 the Company commenced transitioning its
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.
Financial Review
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
MIS.
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
MIS, 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 the Company's 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 the Company invested for growth
with the expansion of the direct sales team at the beginning of the
year.
The Company 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, the Company 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. The Company recognised a
provision for income taxes of $0.2m in 2019, resulting in net loss
being $1.4m compared with $1.3m in 2018.
The Company's 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, with the Company
typically experiencing 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).
The Company 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 the
Company paying an annual upfront fee part-way through the year to
receive pricing advantages (rather than continuing to pay
monthly).
The Company 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 the Company's technology platform.
The Company 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, the Company had cash of $1.8m.
ClearStar has a recurring revenue credit facility with Silicon
Valley Bank for up to $5.0m (dependent on monthly recurring
revenue) of which $2.9m remained available at 31 December 2019.
Post period, the Company has made further draw downs on the
facility in response to the COVID-19 crisis as described below.
Current trading and COVID-19 Update
To protect the health and safety of its workforce, all of the
Company's employees were transitioned to remote working during
March 2020. ClearStar has continued to be able to service its
clients, with no degradation in quality or security, as the
Company's 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 the Company
made during 2019 in its IT infrastructure to enhance its security
measures and cloud data management.
ClearStar entered 2020 with its 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.
The Company responded rapidly to the crisis to implement a
number of mitigation measures to support the liquidity of the
business and its 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 the Company's 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 Company. These measures, combined, are
expected to significantly reduce monthly running costs and generate
in-year savings of up to approximately $2.3m.
As at 5 May 2020, the Company had net debt of $1.0m and gross
cash of $3.8m. The gross cash comprised $1.1m derived from the PPP
loan that the Company received pursuant to the Coronavirus Aid,
Relief, and Economic Security Act; $1.5m from the Company's
recurring revenue credit facility with Silicon Valley Bank; and
$1.2m from current operations. As noted above, the borrowing
capacity under the credit facility is determined by Company's
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 be required to make debt repayments in the coming months based
on its existing covenants. The Company was not in compliance with
certain covenants as at 31 March 2020, and the bank agreed to waive
the breach through 30 June 2020. The Company is engaged in active
negotiations with Silicon Valley Bank to secure new covenant terms.
If the existing covenants continue, and based on the current level
of trading, the Board believes that the Company has sufficient
liquidity to remain viable until year end.
Nonetheless, the Board is encouraged that, while volumes have
been significantly reduced, the Company has not lost any customers
during this period and it has 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. The Company will continue
to monitor the situation closely and update the market as
appropriate.
CLEARSTAR, INC.
Consolidated Statements of Operations
(USD, in thousands)
Year Ended Year Ended
31 December 31 December
2019 2018
$000 $000
------------- -------------
Net revenue 22,953 20,113
Cost of revenue 10,543 8,773
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Gross profit 12,410 11,340
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Operating expenses
Selling 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
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Total operating expenses 13,617 12,674
Loss from operations (1,207) (1,334)
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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)
============= =============
The accompanying notes are an integral part of the consolidated
financial statements
CLEARSTAR, INC.
Consolidated Balance Sheets
(USD, in thousands)
At At
31 December 31 December
2019 2018
$000 $000
------------- -------------
ASSETS
Current assets
Cash 1,754 923
Accounts receivable -- trade, net 1,981 2,197
Research and development tax credits - 90
Prepaid expenses 630 358
------------- -------------
Total current assets 4,365 3,568
------------- -------------
Property and equipment, at cost
Computer equipment 661 70
Furniture and fixtures 226 283
Leasehold improvements 76 57
Less accumulated depreciation (198) (241)
------------- -------------
Total property and equipment, net 765 169
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Other assets
Goodwill and other intangible assets, net 3,747 4,028
Deferred debt issuance costs, net 36 40
Deposits 43 13
------------- -------------
Total other assets 3,826 4,081
------------- -------------
Total assets 8,956 7,818
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loan facility 2,100 -
Accounts payable 2,494 2,348
Accrued liabilities 249 179
Deferred revenue 9 81
State income taxes 9 7
------------- -------------
Total current liabilities 4,861 2,615
------------- -------------
Long-term liabilities
Accrued liabilities 272 32
Deferred 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 4
Additional paid--in capital 13,992 13,951
Accumulated deficit (10,207) (8,811)
------------- -------------
Stockholders' equity 3,789 5,144
------------- -------------
Total liabilities and stockholders' equity 8,956 7,818
============= =============
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. $000 $000 $000 $000
---------------------- ------- ----------- ------------ --------
Balances at 1 January 2018 36,302,900 4 13,686 (7,474) 6,216
Non-cash stock compensation - - 265 - 265
Net loss - - - (1,337) (1,337)
---------------------- ------- ----------- ------------ --------
Balances at 31 December 2018 36,302,900 4 13,951 (8,811) 5,144
Non-cash stock compensation - - 11 - 11
Issuance of common stock 60,000 - 30 - 30
Net loss - - - (1,396) (1,396)
---------------------- ------- ----------- ------------ --------
Balances at 31 December 2019 36,362,900 4 13,992 (10,207) 3,789
====================== ======= =========== ============ ========
The accompanying notes are an integral part of the consolidated
financial statements
CLEARSTAR, INC.
Consolidated Statements of Cash Flows
(USD, in thousands)
Year Ended Year Ended
31 December 31 December
2019 2018
$000 $000
------------- -------------
CASH 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 1,226
Deferred income taxes 7 (73)
Non-cash stock compensation 11 265
Non-cash debt issuance costs 41 48
Loss on disposal of property and equipment 57 1
Loss 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 146 893
Accrued liabilities 133 38
Deferred revenue (72) 72
State income taxes 2 1
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Total adjustments 1,556 1,717
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Net cash provided by operating activities 160 380
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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
============= =============
The accompanying notes are an integral part of the consolidated
financial statements
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Year Ended Year Ended
31 December 2019 31 December 2018
$000 $000
----------------- -----------------
Cash paid:
Interest 131 19
Income taxes 9 8
----------------- -----------------
140 27
================= =================
SUPPLEMENTAL SCHEDULE OF NONCASH 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.
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) 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.
e) 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.
f) 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 year-end receivables are collected within
the following fiscal quarter. The Company has not historically had
significant write-offs for these receivables.
g) 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 years ended 2019 and 2018 was
approximately $95,000 and $141,000, respectively.
h) Deferred Debt Issuance Costs
Deferred 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) 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 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 Assets
Intangible 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.
k) 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 in the years ended 31 December 2019 and 2018.
l) 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 12 (Revenue from Contracts with Customers) for details
related to the Company's revenue recognition policies.
m) Advertising
The 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 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.
o) Research and Development
Expenditures 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 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 years ended 31 December
2019 and 2018 was approximately $11,000 and $265,000,
respectively.
q) 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.
r) New Accounting Principles
In 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 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 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.
2. Accounts Receivable
Accounts receivable consisted of the following:
At At
31 December 31 December
2019 2018
$000 $000
------------- -------------
Trade accounts receivable 1,988 2,204
Allowance for doubtful accounts (7) (7)
------------- -------------
1,981 2,197
============= =============
3. Goodwill and Other Intangible Assets
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 - - 1673 955 238 - 1193 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 801
2021 575
2022 88
=======
1,464
=======
4. Commitments and Contingencies
-- Operating Leases
The 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 in
$000
---------------------------------------
2020 355
2021 395
2022 400
2023 410
2024 421
Thereafter 800
Total minimum rental commitments for operating leases 2,781
=======================================
-- 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.
-- 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 At
31 December 2019 31 December 2018
$000 $000
Allowance for doubtful accounts 2 2
Prepaid expenses (21) (12)
Amortisation of software development (230) (241)
Amortisation of intangibles 27 29
Amortisation of goodwill (34) (27)
Accrued liabilities 70 9
Basis difference in property
and equipment (23) 7
Net operating losses 2,310 2,043
Stock-based compensation 111 95
Tax credits 248 211
Other adjustments 12 11
Total noncurrent 2,472 2,127
Less: 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.
-- The components of the provision for income taxes are as follows:
Year Ended Year Ended
31 December 2019 31 December 2018
$000 $000
------------------------------- ------------------------------
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.
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 Commissions
("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. The
Company completed its accounting for the estimated tax effects of
the Tax Act and identified the following areas:
-- 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 is not subject to the repatriation tax associated
with accumulated, undistributed foreign earnings.
-- 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.
-- Foreign-derived intangible income ("FDII"): While the Company
has foreign sales in 2018, the Company has an overall taxable loss,
and accordingly no FDII deduction should be allowable. If the
Company were in an income position the amount of the FDII deduction
would also be 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 Facility
In October 2017, the Company obtained a revolving line facility
("Revolving Line") with Silicon Valley 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' Equity
The 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.
8. 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 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 $ 0.86
Granted (1) 1,937,600 0.84
Forfeited or cancelled (2) (1,630,165) 0.92
-------------------- ---------------------------------
Outstanding at 31 December 2018 2,083,600 0.79
Granted 90,000 0.66
Exercised (60,000) 0.51
Forfeited 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 $0.230
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
9. 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 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 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.
Year Ended Year Ended
31 December 31 December
2019 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 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. 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 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 $6.5m and $7.1m for the years ended 31 December 2019
and 2018, 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 $6.4m
and $4.8m for the years ended 31 December 2019 and 2018,
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 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. 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
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.
-- Significant Customer
A 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 Transactions
The 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-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.
16. Liquidity
Management 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 Events
The 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 Silicon
Valley Bank 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, 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.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR FZGGKFKZGGZZ
(END) Dow Jones Newswires
May 06, 2020 02:00 ET (06:00 GMT)
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