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Annual Report and Accounts 2018

ClearS

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Annual R

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ccounts 2018

ClearStar, Inc.6250 Shiloh Road, Suite 300

AlpharettaGeorgia 30005

USATel: +1 877 796 2559

www.clearstar.net

ClearStar Inc. Annual Report & Accounts 2018

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CONTENTS

2 Directors, Secretary & Advisers

3 Financial & Operational Highlights

Strategic Report

4 Chairman’s Statement

5 Chief Executive Officer’s Review

6 Chief Financial Officer’s Review

7 ClearStar Business

10 Principle Risks & Uncertainties

Corporate Governance

12 Directors’ Report

14 Directors’ Biographies

16 Corporate Governance Report

18 Audit Committee Report

19 Remuneration Committee Report

Financial Statements

24 Independent Auditors’ Report

25 Consolidated Statements of Operations

26 Consolidated Balance Sheets

28 Consolidated Statements of Changes in Stockholders’ Equity

29 Consolidated Statements of Cash Flows

31 Notes to the Consolidated Financial Statements

DirectorsBernard ‘‘Barney’’ QuinnNon-executive Chairman

Robert James Vale Jr.Chief Executive Officer

Kenneth Wayne Dawson Jr.Chief Information & Security Officer

Samuel “André” SchnablNon-executive Director

Company SecretaryNicolas Simon Dufour

Registered Office c/o Maples Corporate Services Ltd

PO Box 309Ugland HouseGrand Cayman

KY1-1104Cayman Islands

Principal Place of Business

6250 Shiloh RoadSuite 300

AlpharettaGA 30005

USA

Nominated Adviser & Broker

finnCap Ltd60 New Broad Street

London EC2M 1JJ

United Kingdom

Auditors Aprio, LLP

Five Concourse ParkwaySuite 1000

AtlantaGA 30328

USA

Legal Advisers – under English Law

Addleshaw Goddard LLPMilton Gate

60 Chiswell StreetLondon

EC1Y 4AGUnited Kingdom

– under US LawEversheds Sutherland (US) LLP

999 Peachtree Street NESuite 2300

AtlantaGA 30309

USA

– under Cayman Islands LawMaples and Calder

PO Box 309Ugland HouseGrand Cayman

KY1-1104Cayman Islands

RegistrarsLink Market Services (Guernsey) Ltd

Mont Crevelt HouseBulwer Avenue

St SampsonGuernseyGY2 4LH

United Kingdom

Financial PRLuther Pendragon Ltd

48 Gracechurch StreetLondon

EC3V 0EJUnited Kingdom

Directors, Secretary & Advisers


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■ Revenue increased by 13% to $20.1m (2017: $17.8m)

■ Achieved adj. EBITDA of $154k (2017: $391k loss)

■ Operational cash flow improved to inflow of $380k (2017: $184k outflow)

■ Loss from operations reduced to $1.3m loss (2017: $1.9m loss)

■ As at 31 December 2018, the Company had net cash of $0.9m (30 June 2018: $1.2m)

■ Strong revenue growth in direct sales and Medical Information Services, which in aggregate accounted for 65% of total revenue (2017: 58%):

l Direct sales increased by 28% due to expansion of higher-volume, tier 1 client base

l Medical Information Services sales increased by 25%, primarily due to greater volume with channel partner customers through purchase of additional services

■ Expanded direct tier 1 client base in key industries of transport and logistics as well as entering new segments:

l Won first contract for financial institution screening, which was extended, post period, to a second major financial institution

l Won first direct customer in the petrochemical industry with the award, post period, of a contract by an oilfield waste disposal services company operating seven locations in Texas

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

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

l Value of 10 highest revenue generating direct customers increased by 25% in 2018 over 2017 and by 35% in Q1 2019 over Q1 2018

l In Q1 2019, ClearStar was invited to respond to double the number of Request for Proposals than in the whole of 2018

■ Strengthened the foundations for accelerated future growth with key integrations and technology enhancements, in particular:

l Integrated with Alere Inc. to double the number of collection sites where ClearMD can be used and establish ClearStar as the only provider offering paperless medical screening with a fully-customisable user platform across all three major laboratories in the US

l Achieved “touchless” automated integration with SAP® SuccessFactors® Recruiting


Financial Highlights

Operational Highlights

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This has been a period of sustained delivery for ClearStar as we continued to grow our sales, achieved positive adjusted EBITDA and met our operational targets. In particular, through enhancing our salesforce and securing key integrations with leading applicant tracking systems, we have successfully transitioned to be able to target larger, more established businesses that provide a greater transaction volume.

This progression is refl ected in our greater brand recognition. In my statement last year, I noted that market awareness of ClearStar had increased so that with almost all of the calls that we made, we would reach someone who had heard of ClearStar. Now, I’m pleased to say that we have gone even further and are being actively approached and even named in Request for Proposals – a milestone in our development.

Our growth continues to be driven by direct sales and medical information services. As Bob discusses in his CEO Review, we have invested in enhancing our direct sales team and increasing our marketing. We have established a high calibre team with signifi cant experience, and we are already seeing results with an expansion of our pipeline and upscaling of our client base. We have also invested in tools and onboarding consultants to support the direct salesforce with our growth.

The crucial channel-to-market that is supporting our growth is the integrations that we have established with applicant tracking systems and other leading solutions for human capital management. In particular, our integration with SAP SuccessFactors® Recruiting, which enables SAP customers to buy solutions directly from ClearStar – and, indeed, recommends them to do so – provides signifi cant brand endorsement and is especially important for targeting larger, more established businesses. We remain focused on establishing further such integrations to accelerate our growth.

However, ultimately, the foundation of our growth is the quality of our product. Our sophisticated platform has the fl exibility to be able to meet the precise criteria of our customers and to be optimised for their systems and processes. It has been built with the future in mind with the fl exibility required to adapt as technology evolves. Alongside our continuous investment in R&D, we are able to seamlessly introduce market-leading products – and are proud to have pioneered solutions that meet the needs of today’s society, above all with our mobile products. Our ClearMD product, in particular, is a key technology-diff erentiator. Not only does it streamline the ordering process for drug and clinical testing, helping to eliminate errors and

hassles associated with paper forms, but is also the only paperless medical screening off ering with a fully-customisable user platform across all three major laboratories in the US.

The growth drivers supporting our business show no sign of abating. The increasing regulation governing employment and insurance necessitates greater adoption of screening services in order to comply. The transient labour force – or ‘gig economy’ – remains a growing societal trend that requires an increased number of background screens, whilst benefi tting from the use of our on-demand mobile solutions for on-the-spot ID validation. Employers must also consider increasingly divergent laws on recreational and medicinal substances. The current trend towards deregulation of recreational drug use, especially in many US states, is driving further demand for our medical information services. All of this is against the backdrop of businesses increasingly embracing mobile technology to facilitate workforce productivity and security.

On behalf of the Board, I would like to thank David Pattillo, who stepped down as CFO and a Director earlier this year, for his invaluable contribution to ClearStar. During his tenure, we transitioned to becoming a public company, solidifi ed our strategy and are now in a stronger position than ever before. We wish David all the best for his future endeavours, and we now welcome Jennifer Balleza to the role of CFO. Since joining ClearStar in 2014 as Corporate Controller ahead of our IPO, Jennifer has played an instrumental role in our fi nance function and we look forward to continuing to benefi t from her considerable skills and experience.

Finally, I would like to thank all of our staff and shareholders for their ongoing support. With the investments that we have made over the past two years coming to fruition and the sustained momentum that we are experiencing, 2019 is set to be a breakout year for ClearStar. We remain committed to growing our business and delivering value for our shareholders, and I look forward to reporting our progress.

Chairman’s StatementBarney Quinn, Chairman31 May 2019


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In 2018, we achieved our highest ever annual revenue of $20.1m, a 13% increase over the previous year, as we made excellent progress in our key growth areas of Medical Information Services (MIS) and direct sales. Importantly, this strong revenue growth enabled us to generate positive adjusted EBITDA while continuing to invest in strengthening our business through enhanced sales & marketing. This has resulted in greater brand recognition, a signifi cant increase in interest in our services and the upscaling of our client base.

Performance by business channelSales from direct services increased by 28% to $6.0m for 2018, accounting for 30% of total revenues. This growth was driven by the transportation and logistics and elderly home healthcare industries, while the momentum we gained in 2017 in upscaling the direct client base to larger, higher-volume business was maintained. This includes being appointed by Parsons Corporation, a global digital engineering business, to implement a monitoring system with monthly background screening, and by relocation service-provider Stevens Worldwide Van Lines for background screening and drug testing its drivers.

Sales to channel partners increased by 8% to $14.1m based on growth in MIS.

Performance by service off eringMIS continued to be the largest single contributor to revenues by product, accounting for 41% of total revenues, and grew strongly year-on-year with an increase of 25% to $8.3m. This growth was primarily based on increased volume with existing channel partner customers through the purchase of additional services, such as clinical testing and occupational health screening, but also through the addition of a new signifi cant customer - a large consumer reporting agency that awarded us a contract for mobile-managed drug screening.

Sales to channel partners accounted for 85% of MIS revenue, but MIS revenue generated by direct customers also grew strongly and is making an increasingly meaningful contribution to total sales.

Excluding MIS, revenues from our other services – primarily background screening as well as the wholesale provision of data and global services – increased to $11.9m (2017: $11.2m), driven by a 30% rise in sales in background screening to direct clients.

Expanding into new segmentsWhile continuing to grow in our key segments, we also expanded into new ones. Importantly, we were awarded our fi rst contract for fi nancial institution screening to ensure compliance with the US Federal Deposit Insurance Act and the US Patriot Act. The client, which is a professional

services company that provides outsourcing and staffi ng primarily for the fi nancial services industry, has since granted two extensions to the original contract, refl ecting the strength of our solution.

We also won our fi rst direct client in the petrochemical industry: Milestone Environmental Services, a leading provider of oilfi eld waste disposal services in Texas. The contract, which was awarded post-period, is to provide a combination of drug and background screening services.

Investing for growthDuring the year, we continued to strengthen the foundations of the business to position ClearStar for accelerated growth.

A key element of this was establishing further integrations to expand our off er and channels-to-market, which included:• Integrating with eScreen, Inc., an Alere company, which doubled

the number of collection sites where ClearMD can be used to over 9,500 – an important competitive diff erentiator

• Achieving “touchless” integration with SAP® SuccessFactors® Recruiting to provide process automation

• Integrating with Virtual Badge to enable remote identity verifi cation with a smartphone ID badging system – the fi rst time facial recognition-based background screening has been integrated with a mobile access badge

• Establishing partnerships with Veritas Prime and iCIMS, Inc.

We signifi cantly strengthened our direct sales team with the appointment of a new Chief Revenue Offi cer with over 17 years’ experience of leading large sales teams in the background screening market. Three new enterprise roles were created as well as appointing a Salesforce administrator. We also enhanced our marketing eff orts with the deployment of a disruptive video marketing campaign alongside other eff orts to support the new sales team.

OutlookThe revenue momentum of 2018 has been sustained into 2019, resulting in our highest ever fi rst quarter revenue.

The investments that we have made over the past two years in technology improvements, integrations and sales & marketing are increasing our brand awareness and enabling us to successfully target larger, higher-volume customers. In Q1 2019, we were invited to respond to double the number of RFPs than in the whole of 2018.

This is serving to strengthen our pipeline, particularly in direct services and MIS, which we expect to continue to be the main drivers of growth. As a result, we continue to expect to achieve strong growth in 2019, in line with market expectations, and the Board looks to the future with confi dence.

Chief Executive’s ReviewRobert J. Vale, Chief Executive O� cer

31 May 2019

Strategic Report

Chief Executive’s Review

2018 was a year of solid revenue growth for ClearStar, culminating in the milestone achievement of positive adjusted EBITDA. Our total revenues increased 13% for the year ended 31 December 2018 to $20.1m compared with $17.8m for 2017. This was based on growth across both direct and indirect services, with strong demand for Medical Information Services.

Gross profi t increased 10% to $11.3m (2017: $10.3m) and gross profi t margin was 56.4% (2017: 58.2%). The slight decrease in margin was primarily due to having a higher percentage of revenue derived from Medical Information Services, which has a lower gross margin than other services.

Total operating expenses, including depreciation and amortisation, were $12.7m (2017: $12.3m). The increase was due to higher general and administrative expenses at $8.1m (2017: $7.3m) primarily as a result of investing to expand the direct sales team. This increase off sets reductions in research and development expenses to $1.7m (2017: $1.9m), with the reduction due to the investment we made in 2017 as part of the set-up of our global platform, and depreciation and amortisation expenses to $1.2m (2017: $1.5m). Selling and marketing expenses were broadly fl at at $1.7m (2017: $1.6m) as we invested, particularly in the second half of the year, in campaigns to support the new direct sales team.

We achieved positive adjusted EBITDA for 2018 of $154k compared with a $391k loss for 2017, an improvement of $545k as a result of generating higher revenue. Loss from operations was reduced to $1.3m (2017: $1.9m) and net loss was $1.3m compared with a $2.0m loss for 2017.

Our total liabilities at 31 December 2018 were $2.7m (30 June 2018: $2.9m; 31 December 2017: $1.8m), with the increase compared with the same point of the prior year primarily due to the growth in sales and change in sales mix to include a greater proportion from MIS.

As at 31 December 2018, total assets were $7.8m (30 June 2018: $8.5m) with the largest assets being goodwill and other intangible assets of $4.0m (30 June 2018: $4.2m), accounts receivable of $2.2m (30 June 2018: $2.4m) and net cash of $0.9m (30 June 2018: $1.2m).

We generated $380k in net cash from operating activities for 2018 compared with utilising $184k in net cash in 2017. This represents an improvement of $564k, mainly due to improvement in working capital accounts.

We used $697k in investment activities in 2018 (2017: $754k), with the reduction due to lower capitalised software development costs, and cash used in fi nancing activities was reduced to $63k (2017: $179k) due to lower capital lease obligations and no debt issuance costs.

In 2018, we utilised $380k in net cash compared with $1.1m in the prior year, representing a 65% improvement in cash utilisation.

We continue to have a recurring revenue credit facility with Silicon Valley Bank for up to $5.0m. As at 31 December 2018, the facility was fully available. In 2019, we utilised approximately $900k to fi nance our yearly technology infrastructure investment that has historically been fi nanced through capital lease obligations. Additionally, we have utilised $1.2m to support the growth of the business.

CFO’s ReviewJennifer Balleza, Chief Financial O� cer 31 May 2019


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ClearStar provides Human Capital Integrity℠

• ClearStar provides employment intelligence direct to employers and via channel partners/consumer reporting agencies (“CRAs”); and, increasingly, to individuals to enable self-certification.

• This employment intelligence primarily consists of the results of background or medical screening delivered via a report. For a small proportion of CRAs, ClearStar provides data on a wholesale basis (without assimilating or processing into a report).

• ClearStar maintains the integrity of the individual applicant/employee: only reporting pass/fail against specific pre-defined criteria set by the employer without providing additional information that could result in explicit discrimination or unconscious bias.

ClearStar Business

How ClearStar delivers

• Background screening: ClearStar’s technology accesses the relevant sources of data for the specific employment intelligence stipulated by the employer; interrogates the data; extracts and aggregates the relevant information; and processes it to produce a contextualised report in accordance with the customer’s requirements.

• Medical screening: ClearStar’s technology coordinates a paper-less medical test and results review service via applicant-driven tools that enable an individual to book a test at a site of the Company’s laboratory partners. The requisite test is determined by the employer. The laboratory conducts the test and sends the results to ClearStar for review and processing into a report.

• ClearStar’s ClearID application enables remote verification of government issued photo ID: by taking a photo of the individual and the ID, the mobile app searches government databases to confirm if the ID is valid and, using biometric recognition technology, confirms if the ID matches the individual.

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Sales cycle & business model

• To gain new customers, ClearStar makes direct approaches; attends industry conferences and exhibitions; conducts online marketing campaigns; responds to RFPs; and establishes integrations and partnerships with key operators in the human capital management sector.

• Average sales cycle is generally dependent on the size of the contract – varying from 2 weeks to 2-6 months.

• Following the signing of a contract, ClearStar works with the customer to configure a reporting engine that meets the customers’ particular requirements and then undergoes an onboarding process to transition the customers’ operations to the new system.

• Once onboarding is complete and ClearStar commences delivering services, the Company starts to recognise revenue as customers pay on a consumption, per transaction, basis – with the price being fixed in the contract based on expected volume.

• ClearStar typically grows its business with existing customers by providing them with more services and by screening more of their employees.

ClearStar value

• Employment intelligence supports better recruitment and other decisions affecting employees by increasing the quality, reliability and visibility of information – resulting in more effective decision-making and a safer workforce.

• ClearStar’s particular value lies in the strength of its technology platform and its holistic approach of developing solutions to bridge business problems – getting people to work quicker:

• Cloud-based platform offers portability and flexibility enabling configuration to meet the precise requirements of the customer.

• Proprietary algorithms enable rapid data interrogation and processing – with access to over 3,000 data sources.

• Committed to maximising ease-of-use: solutions are optimised to run on mobile device as well as desktop, and are multi-lingual; employees can choose from over 9,500 medical test sites; and a dedicated US-based client service team provides after-sales support.

• One of the few companies with the requisite compliance and technology interface to be able to offer comprehensive searches in over 230 countries.

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Strategy & objectives

CLEARSTAR IS FOCUSING ITS SALES EFFORTS ON:

• Business sectors with high employee turnover or fluidity/transience; where employees are required to be repeatedly screened to meet industry regulations; and where a worker is entering the home – in particular, transport & logistics and healthcare (including home healthcare).

• The US as the point of inception for new business (while catering for customers globally).

KEY OBJECTIVES FOR THE NEAR-TERM:

• Expanding and converting the sales pipeline through sustained sales & marketing efforts.

• Establishing further third-party integrations and partnerships for additional channels-to-market and brand endorsement.

• Enhancing processes to continue to reduce the adoption time from contract signing to commencing service delivery.

• Introducing further process automation to increase speed of delivery and enhance internal efficiency.

• Sustained growth of business with existing clients by upselling further services and providing screening for more parts of their organisation.

VisionHelp make the world a safer place while maintaining the integrity of the individual

MissionProvide background and medical

screening with an optimal process for both employers and employees/

applicants

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

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

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


Principal Risks & UncertaintiesFor the year ended 31 December 2018

Risk Potential Impact Mitigation

Competition l ClearStar operates in competitive markets where competitors may develop new products or enhancements that results in customers choosing other service providers.

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

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

l The Company continually commits resources to enhance its technology and products to maintain a market-leading offering, including key integrations.

l ClearStar has invested in establishing an experienced, top tier sales team and enhanced sales & marketing activities.

l Business development functions monitor the activities of competitors to remain informed.

l Increasingly, the Company provides CRAs with Medical Information Services whereas the direct sales are primarily background screening.

l Once a customer adopts the Company’s service, the Company goes through a configuration process to integrate its solution with the customer’s existing systems and meet its requirements – which provides ‘stickiness’ to the Company’s solution.

Cyber risk l The Company relies on the efficient and uninterrupted operation of its computer and communications systems. Any failure could impair the value of projects and result in additional expenditure.

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

l The Company has disaster recovery and business continuity contingency plans in place and network security programmes that are regularly reviewed.

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

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

l Penetration testing is conducted via an approved third-party specialist.

l Incident response plans for cyber threats have been established by the Company.

Technology/product development

l It is critical to the Company’s success that it anticipates changes in technology or in industry standards and customer requirements and to develop and introduce new, enhanced and competitively priced products on a timely basis.

l In order to maintain a competitive advantage, the Company continually invests in technology and product development.

l The Company carries out research and market analysis on an ongoing basis to keep informed of industry developments.

Key personnel l Loss of a key person – whether executive, manage ment or subject matter expert – due to voluntary or in voluntary separation, death, disability, or changes in family situation could have an adverse impact on the Company’s operations and financial or competitive position.

l ClearStar has in place mitigation strategies including cross training, systemisation and contracts for key positions.

l The Company also offers competitive employment packages for its key sales people to attract and retain personnel with the requisite skills and experience.

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Strategic Report

Risk Potential Impact Mitigation

Regulatory change l Within the markets where ClearStar operates, new regulations and legislation are enacted and existing statutes amended on a regular basis.

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

l GDPR became effective in May 2018, and its effects will remain under review due to the impact it will have on data handling.

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

l The Company has always been committed to responding positively to new regulation and legislation. For example, in 2016, ClearStar was one of the first companies to achieve certification from the U.S. Department of Commerce under the EU-U.S. Privacy Shield for the transfer of personally identifiable information from the European Union to the United States.

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

l The Company has access to external legal advisors, nationally and globally.

l ClearStar has built a platform that is technologically flexible to enable any requisite amends to be implemented rapidly.

l The Company has a dedicated global team with expertise in global privacy requirements, and makes ongoing investment to remain up-to-date with evolving global regulations, including GDPR.

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

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

l The Company relies on a combination of patent, copyright, trademark and trade secret laws, as well as licensing agreements, third-party non-disclosure agreements and other contractual provisions and technical measures, to protect its intellectual property.

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

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

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

Access to information l ClearStar relies on information derived from a wide variety of sources and on service providers such as drug testing laboratories. The removal from the market of these third-party suppliers or interruption in supply could adversely affect the Company’s operations and result in the loss of revenue or additional expenditure.

l The Company works strategically to prevent over reliance on any one key supplier – it currently derives data from over 3,000 sources and is integrated with the three major drug testing laboratories in the US.

l Suppliers are carefully selected to minimise risk of supplier failure or insolvency.

l The Company ensures staff are aware of supplier requirements or restrictions to minimise the risk of loss of a supplier due to a breach of contractual obligations.

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

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

Business ReviewThe information that fulfils the requirements of the business review, including details of the 2018 results, principal risks and uncertainties and the outlook for future years, are set out in the Strategic Report section on pages 4 to 11.

Admission to AIMClearStar was admitted to trading on the AIM market of the London Stock Exchange on 11 July 2014, at which time 15,500,000 new Ordinary Shares were placed to raise gross proceeds of approximately US $15 million.

Further information relating to movements of share capital is set out in Note 7 to the consolidated financial statements on page 39.

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

DirectorsThe following Directors held office as indicated below for the year ended 31 December 2018 and up to the date of signing the consolidated financial statements except where otherwise shown.

Barney Quinn – Non-executive Chairman

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

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

David A. Pattillo – Director and Chief Financial Officer (resigned 23 January 2019)

André Schnabl – Non-executive Director

Election of DirectorsAlthough not required under the Company’s Articles of Association and The Companies Law of the Cayman Islands, the Company is seeking at its annual Stockholders meeting confirmation that the shareholders are satisfied with the current Board and approve for the current Board to continue in office until the next Board election. The 2019 Annual Meeting will be held at 11 a.m. EDT (4 p.m. BST) on 18 June 2019 at the Company’s headquarters located at 6250 Shiloh Road, Suite 300, Alpharetta, GA 30005, USA.

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

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

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

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

As at 31 December 2018, the Company had 78 employees (2017: 64) – of which 69% were female. The proportion of the Company’s senior management positions that were held by females was 25%.


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Directors’ ReportFor the year ended 31 December 2018

Share Capital and Substantial ShareholdingsDetails of the share capital of the Company as of and at 31 December 2018 are set out in Note 7 to the consolidated financial statements. At 30 May 2019, a total of 36,362,900 Ordinary Shares were outstanding; the following shareholders own 3 per cent. or more of the Ordinary Shares:

Robert J. Vale, Jr. 1 31.09%Canaccord Genuity Group, Inc. 15.75%Kenneth W. Dawson, Jr. 11.25%William T. White 2 10.48%River & Mercantile Group 8.69%Artemis Investment Management LLP 4.82%David Pattillo 3.75%Paul Hill 3.19%

(1) The aggregate number of shares shown for Mr. Vale includes (a) 26.47% held by and controlled by Mr. Vale; and (b) 4.67% held by or on behalf of Mr. Vale’s children.

(2) The aggregate number of shares shown for Mr. White includes (a) 6.85% held by and controlled by Mr. White; and (b) 3.64% held by or on behalf of Mr. White’s children.

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

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

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

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

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

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

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

Independent AuditorsThe Audit Committee of the Board of Directors reviews annually the quality and cost effectiveness of the external audit and the independence and objectivity of the external auditors. Aprio, LLP (Aprio) was engaged to perform the 2018 audit for fees of approximately $78,000, the 2018 corporate income tax compliance returns for fees of approximately $32,000 and various income tax consulting work for fees of approximately $12,000.


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Barney QuinnNon-executive Chairman Barney has over 30 years’ experience in the global application software and cloud markets. For many years, Barney was an executive board director of Sherwood International plc, an LSE-listed provider of software and services to the global insurance industry, and was CEO of then AIM-listed Workplace Systems International plc. He is currently a non-executive director of Rosslyn Data Technologies plc and a former non-executive director of SSP Holdings plc and Raft International plc. His involvement with private businesses includes currently being non-executive chairman of Arkivum Ltd and Oxehealth Ltd, and a founder of Gotus Ltd, which provides an advisory service to a number of technology companies. Previously, he was non-executive chairman of Becrypt, an encryption software specialist, for seven years.


Directors’ Biographies

1

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

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

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

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

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

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

André SchnablNon-executive Director André retired in 2012 as Managing Partner of the Atlanta offi ce of Grant Thornton, LLP. Prior to assuming the Managing Partner role, André led the Technology Industry Practice, which focused on serving the needs of software, medical device and telecommunications clients. Throughout his career, André has excelled at linking people, vision, strategies and diligent execution to drive sustainable revenue growth and a highly productive corporate culture. During his tenure as the leader of the Atlanta offi ce, André drove the formu lation and execution of a strategy that achieved three-fold revenue growth.

Seeking ways to infl uence excellence among audit committee chairs and members, in 2012 André launched the ‘‘Grant Thornton Peer 2 Peer Audit Committee Forum’’. In partnership with Kennesaw State University’s ‘‘Center of Corporate Governance’’, the Forum is designed specifi cally to give audit committee members an eff ective way to stay current on the many regulatory, risk, and business issues aff ecting their roles as audit committee members and the companies on whose boards they serve.

André has served on numerous corporate and not-for-profi t boards.


15

The Company is incorporated and registered in the Cayman Islands (registration number 287331). The Directors recognise the importance of sound corporate governance and have chosen to apply the Quoted Companies Alliance Corporate Governance Code (the QCA Code). The QCA Code was developed by the QCA in consultation with a number of significant institutional small company investors, as an alternative corporate governance code applicable to AIM companies. The underlying principle of the QCA Code is that “the purpose of good corporate governance is to ensure that the company is managed in an efficient, effective and entrepreneurial manner for the benefit of all shareholders over the longer term”. The Directors anticipate that, whilst the Company will continue to comply with the QCA Code, given ClearStar’s size and plans for the future, it will also endeavour to have regard to the provisions of the UK Corporate Governance Code published by the Financial Reporting Council (which does not apply to AIM companies) as best practice guidance to the extent appropriate for a company of its size and nature.

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

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

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

Remuneration CommitteeThe Remuneration Committee is responsible for determining and agreeing with the Board the framework for the remuneration of the Chairman, the Board Members and other designated senior executives and, within the terms of the agreed framework, determining the total individual remuneration packages of such persons including, where appropriate, bonuses, incentive payments and share options or other share awards. The remuneration of Non-executive Directors is a matter for the Chairman and the executive members of the Board. No Director is involved in any decision as to his or her own remuneration.

The Remuneration Committee is also responsible for issuing awards of relevant shares and options to purchase Ordinary Shares of the Company under the Company’s 2014 Share Option and Incentive Plan. Details on the activities of the Remuneration Committee during the year are contained in the Remuneration Committee Report on pages 19 to 21.

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

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

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

AIM Compliance and Corporate Governance CommitteeThe AIM Compliance and Corporate Governance Committee is responsible for ensuring that the Company is complying with the AIM Rules. It also assesses the Company’s corporate governance obligations every year. During the year ended 31 December 2018, the AIM Compliance and Corporate Governance Committee comprised Robert J. Vale, Jr., who acts as Chairman, David A. Pattillo and Kenneth W. Dawson, Jr. The AIM Compliance and Corporate Governance Committee met three times in 2018 and all members attended the meetings. Members of the AIM Compliance and Corporate Governance Committee were re-appointed to a three-year term at the Board of Directors’ meeting held on 9 July 2018. Following the resignation of Mr. Pattillo effective 23 January 2019, the AIM Compliance and Corporate Governance Committee is comprised of Mr. Vale, as Chairman, and Mr. Dawson.

Board of DirectorsDuring the year ended 31 December 2018, the Board consisted of two Non-executive Directors and three Executive Directors. The Non-executive Directors were Barney Quinn (Chairman) and André Schnabl. The three Executive Directors were Robert J. Vale, Jr. (Chief Executive Officer), Kenneth W. Dawson, Jr. (Chief Information & Security Officer) and David A. Pattillo (Chief Financial Officer). Following the resignation of Mr. Pattillo effective 23 January 2019, the Board consists of two Non-executive Directors and two Executive Directors, who were all re-elected at the Company’s last Annual Meeting held on 22 May 2018.

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Corporate Governance ReportFor the year ended 31 December 2018

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

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

Board effectivenessBiographical details of the Directors are set out on pages 14 to 15. The Board is diverse in its range of skillsets and experience, and the Directors believe that they have an appropriate balance of sector, financial and public markets skills and experience, as well as an appropriate balance of personal qualities and capabilities to best support the Company. The Directors consider that all Non-executive Directors bring an independent judgement to bear notwithstanding the varying lengths of service and have the relevant experience to complement the Executive Directors.

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

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

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

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

National Association of Professional Background Screeners (NAPBS) conventions and other relevant associations.

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

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

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

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

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

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

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

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

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

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18

Dear Shareholder,

On behalf of the Board, I am pleased to present the Audit Committee report for the year ended 31 December 2018.

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

Member of the Audit CommitteeDuring the year, the Committee consisted of the Company’s two independent Non-executive Directors: myself (as Chairman of the Committee) and Barney Quinn. The Committee met four times in 2018, with all members present.

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

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

representation letter;• going concern review;• review of the 2018 audit plan and audit engagement letter;• review of suitability of the external auditors;• review of the risk management and internal control systems;• review and approval of the interim results;• assessment of the need for an internal audit function;• review of regular whistleblowing reports; and• meeting with the external auditor without management present.

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

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

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

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

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

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

André SchnablAudit Committee Chairman


Audit Committee ReportFor the year ended 31 December 2018

18

19


19

Dear Shareholder,

On behalf of the Board, I am pleased to present the Remuneration Committee Report for the year ended 31 December 2018.

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

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

Remuneration Committee Membership and Activities in 2018The Remuneration Committee’s members during the year were: myself, as Chair of the Committee, and Barney Quinn. The Committee met four times during the year and its activities were as follows: • approved the Directors’ remuneration for 2018;• reviewed Executive Director remuneration arrangements;• reviewed and approved the Executive Directors’ performance

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

bonus; and• reviewed developments in corporate governance and best practice.

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

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

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

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

Executive remuneration consists of the following elements:

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

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

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

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

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

Bonus awards are paid in cash. Clawback (of any bonus paid) may be applied where the Committee deems it necessary to do so, including in the event of gross misconduct or a material misstatement.

Service ContractsBarney QuinnMr. Quinn entered into an agreement with the Company on 30 May 2014 to serve as its Chairman. The service contract provides for, among other things:

(i) annual board fees of $55,000 and participation in the Executive Bonus Plan to be directed by the Remuneration Committee; and

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

Robert J. Vale, Jr.Mr. Vale entered into an employment agreement with the Company on 7 July 2014 to serve as its Chief Executive Officer and to serve on the Board at the request of the Company. The employment agreement provides for, among other things:

(i) annual salary of $480,000 and participation in the Executive Bonus Plan to be directed by the Remuneration Committee; and

Remuneration Committee ReportFor the year ended 31 December 2018

(ii) a two-year term (automatically renewing for successive one-year periods). The agreement may only be terminated by Mr. Vale upon six-month prior written notice or by the Company upon providing for one-year base salary, payable in 24 semi-monthly instalments in arrears, as severance if he is terminated with or without cause or resigns for good reason. The agreement provides for customary non-solicitation, non-compete and non-disclosure restrictions.

Kenneth W. Dawson, Jr.Mr. Dawson entered into an employment agreement with the Company on 7 July 2014 to serve as its Chief Information & Security Officer and to serve on the Board of Directors. The employment agreement provides for, among other things:


(ii) a two-year term (automatically renewing for successive one-year periods). The agreement may only be terminated by Mr. Dawson upon six-month prior written notice or by the Company upon providing for one-year base salary, payable in 24 semi-monthly instalments in arrears, as severance if he is terminated with or without cause or resigns for good reason. The agreement provides for customary non-solicitation, non-compete and non-disclosure restrictions.

David A. PattilloMr. Pattillo entered into an employment agreement with the Company on 7 July 2014 to serve as its Chief Financial Officer and to serve on the Board of Directors. The employment agreement provided for, among other things:


(ii) a two-year term (automatically renewing for successive one-year periods). The agreement could only be terminated by Mr. Pattillo upon six-month prior written notice or by the Company upon providing for one-year base salary, payable in 24 semi-monthly instalments in arrears, as severance if he were terminated with or without cause or resigns for good reason. The agreement provided for customary non-solicitation, non-compete and non-disclosure restrictions.

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

André Schnabl Mr. Schnabl entered into an agreement with the Company on 30 May 2014 to serve on the Board of Directors. The service contract provides for, among other things:

(i) annual board fees of $45,000 and participation in the Executive Bonus Plan to be directed by the Remuneration Committee; and

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

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

The Director’s remuneration for 2018 was as follows (Benefits in kind include medical and life insurance and 401(k) matching contributions):

Salary and Director’s fees Benefits in kind Performance related bonus 2018 Total US$ US$ US$ US$

Non-executive ChairmanBarney Quinn $55,000 $4,479 – $59,479

Executive Robert J. Vale, Jr. $480,000 $9,375 $20,000 $509,375Kenneth W. Dawson, Jr. $262,000 $14,868 $20,000 $296,868David A. Pattillo (1) $250,000 $17,126 $20,000 $287,126

Non-executive André Schnabl $45,000 – – $45,000

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


20


21

The interests of the Directors at 31 December 2018 in the shares of the Company, not including interests of investment funds in respect of which the Director may have a managerial interest, and with respect to which such Director disclaims beneficial ownership, were:

Number of Ordinary Shares Percentage of issued share capital

Barney Quinn 1 278,215 0.77%Robert J. Vale, Jr. 2 11,306,000 31.14%Kenneth W. Dawson, Jr. 4,288,000 11.81%David A. Pattillo 1,303,900 3.59%André Schnabl 97,000 0.27%

(1) The interests of Mr. Quinn include 25,000 shares held by his wife, Jennifer Quinn(2) The aggregate number of shares shown for Mr. Vale includes (a) 9,610,000 shares held by and controlled by Mr. Vale; and (b) 1,696,000 shares held by or on behalf of Mr.

Vale’s children

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

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

David A. Pattillo Employee Stock Option 4 January 2016* $0.51 60,000 Employee Stock Option 2 July 2018** $0.85 126,000Kenneth W. Dawson, Jr. Employee Stock Option 2 July 2018* $0.85 186,000

* Options were exercised on 24 May 2019** Options were unexercised at the cancellation date of 27 May 2019

André SchnablRemuneration Committee Chairman

2222

Typical Input ClearStar Technology Data Sources

Branded Company CS Site

HR Information System

Applicant Tracking System

Mass Data Uploads

All Global Records

CreditDatabases

Government Criminal

DrivingEducation

EmploymentWatch Lists

Testing Laboratories

Government Documents

Client Specifi c Program Management

Medical Management

Biometric Identity Verifi cation

Casual Labour Management

Casual Labour

Applicant/Employee

Global Record Management

23

FINANCIALSTATEMENTSFor the year ended 31 December 2018

To the Stockholders of ClearStar, Inc. and Subsidiaries

We have audited the accompanying consolidated financial statements of ClearStar, Inc. and Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements.

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

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

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

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

OpinionIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ClearStar, Inc. and Subsidiaries as of December 31, 2018 and 2017 and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Atlanta, GeorgiaMay 22, 2019

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

Independently Owned and Operated Member of Morison KSi

INDEPENDENT AUDITORS’ REPORT

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

Atlanta, Georgia April 14, 2017

24







Independent Auditors’ Report






Year Ended Year Ended 31 December 2018 31 December 2017 $000 $000

Net revenue 20,113 17,785 Cost of revenue 8,773 7,436

Gross profit 11,340 10,349

Operating expensesSelling and marketing 1,655 1,632 Research and development 1,652 1,886 Depreciation and amortisation 1,226 1,470 General and administrative 8,141 7,293

Total operating expenses 12,674 12,281

Loss from operations (1,334) (1,932)

Other income (expense) Interest expense, net (68) (17)

Total other expense (68) (17)

Net loss before taxes (1,402) (1,949) Provision (benefit) for income taxes (65) 9

Net loss (1,337) (1,958)

Consolidated Statements of Operations (US$, in thousands)

for the years ended 31 December 2018 and 2017

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

25


As of As of 31 December 2018 31 December 2017 $000 $000

ASSETSCurrent assets Cash 923 1,303Accounts receivable – trade, net 2,197 1,654Research and development tax credits 90 63Prepaid expenses 358 175

Total current assets 3,568 3,195

Property and equipment, at cost Computer equipment 70 577Furniture and fixtures 283 294Leasehold improvements 57 60Less accumulated depreciation (241) (652)

Total property and equipment, net 169 279

Other assetsGoodwill and other intangible assets, net 4,028 4,447Deferred debt issuance costs, net 40 87Deposits 13 12

Total other assets 4,081 4,546

Total assets 7,818 8,020

LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilitiesAccounts payable 2,348 1,455Accrued liabilities 179 132 Deferred revenue 81 8State income taxes 7 6Current portion of obligations under capital lease – 63

Total current liabilities 2,615 1,664

Consolidated Balance Sheets (US$, in thousands)




26


LIABILITIES AND STOCKHOLDERS’ EQUITY (contd.)Long-term liabilitiesAccrued liabilities 32 40Deferred income taxes 27 100

Total long-term liabilities 59 140

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

authorised; 36,302,900 shares issued and outstanding 4 4Additional paid-in capital 13,951 13,686Accumulated deficit (8,811) (7,474)

Stockholders’ equity 5,144 6,216

Total liabilities and stockholders’ equity 7,818 8,020

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




27

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

Balances at 1 January 2017 36,302,900 4 13,602 (5,516) 8,090Non-cash stock compensation – – 64 – 64Non-cash debt issuance costs – – 20 – 20Net loss – – – (1,958) (1,958)

Balances at 31 December 2017 36,302,900 4 13,686 (7,474) 6,216Non-cash stock compensation – – 265 – 265Net loss – – – (1,337) (1,337)

Balances at 31 December 2018 36,302,900 4 13,951 (8,811) 5,144

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




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Year Ended Year Ended 31 December 2018 31 December 2017 $000 $000CASH FLOWS FROM OPERATING ACTIVITIES

Net loss (1,337) (1,958)

Adjustments to reconcile net loss to net cash provided by (used for) operating activities:

Change in allowance for doubtful accounts (22) (1)Depreciation and amortisation 1,226 1,470Deferred income taxes (73) 1Non-cash stock compensation 265 64Non-cash debt issuance costs 48 8Loss on disposal of property and equipment 1 –

Change in operating assets and liabilities: Accounts receivable (521) (211)Research and development tax credits (27) 75Prepaid expenses (183) 82Deposits (1) (1)Accounts payable 893 325Accrued liabilities 38 7Deferred revenue 72 (46)State income taxes 1 1

Total adjustments 1,717 1,774

Net cash provided by (used for) operating activities 380 (184)

CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment (32) (42)Capitalised software development costs (665) (712)

Net cash used for investing activities (697) (754)

CASH FLOWS FROM FINANCING ACTIVITIES Debt issuance costs – (75)Principal payments on capital lease obligations (63) (104)

Net cash used for financing activities (63) (179)

Net cash decrease for year (380) (1,117)Cash at beginning of year 1,303 2,420

Cash at end of year 923 1,303

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




29

Year Ended Year Ended 31 December 2018 31 December 2017SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION $000 $000

Cash paid:Interest 19 10Income taxes 8 5

27 15

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

During the years ended 31 December 2018 and 2017, the Company retired obsolete and fully-depreciated property and equipment of approximately $552,000 and $137,000, respectively.

During the years ended 31 December 2018 and 2017, the Company retired fully-amortised intangible assets of approximately $1,376,000 and $792,000, respectively.

In conjunction with the executed revolving line facility agreement in October 2017 (see Note 6 and 9), the Company issued a stock warrant to purchase 90,755 shares of Ordinary Shares as consideration to the lender. At the issuance date, the fair value of the warrant was determined to be approximately $20,000.

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




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1. Summary of Significant Accounting Policies

a) Nature of OperationsClearStar, Inc. (“ClearStar”), an exempt company incorporated in the Cayman Islands on 23 April 2014, is a holding company that owns a 100% interest in ClearStar, Inc. (‘‘ClearStar US’’), an entity formed on 23 March 1995, and incorporated in the state of Delaware, and ClearStar Limited (“ClearStar UK”), a dormant entity formed in the United Kingdom on 17 January 2014. ClearStar together with its subsidiaries (collectively the “Company”) is a technology and service provider to the background check industry, supporting background screening companies, employers and employees with their recruitment and employment application decisions. The Company provides employment intelligence to its clients through a suite of information technology applications for day-to-day use in their business. Employment intelligence aims to improve business insight to support better recruitment and other decisions affecting employees generally, by increasing the quality, reliability and visibility of information available to management.

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

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

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

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

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

Notes to the Consolidated Financial Statements



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

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

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

Depreciation expense for the years ended 2018 and 2017 was approximately $141,000 and $229,000, respectively.

h) Deferred Debt Issuance CostsDeferred debt issuance costs were incurred by the Company to obtain debt and are amortised over the life of the respective debt agreement. The costs totalled approximately $95,000 with accumulated amortisation of approximately $55,000 at 31 December 2018. The Company amortised approximately $48,000 and $8,000 of these costs through interest expense for the years ended 2018 and 2017, respectively. The remaining amortisation expense is expected to be approximately $40,000 in 2019.

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

In our evaluation of goodwill impairment, we perform 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, we proceed 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 our 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, we perform our 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 2018 and 2017 as a result of the annual goodwill impairment tests performed and there have been no subsequent events requiring further analysis.

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

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

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

Notes to the Consolidated Financial Statements (continued)



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k) Impairment of Long-Lived AssetsLong-lived assets, such as property and equipment, and purchased intangible assets subject to amortisation, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognised to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Management determined that there were no impairments in the years ended 31 December 2018 and 2017.

l) Revenue RecognitionThe Company requires that four basic criteria be met before revenue can be recognised for all transactions: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) delivery has occurred. Fixed monthly fees are derived primarily from customers’ use of 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. One-time setup fees are recognised 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 or the period beyond which the initial contract term is expected to extend and the customer continues to benefit, whichever is longer. Annual certification fees are billed annually and are recognised rateably over the contract period. 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.

m) AdvertisingThe Company expenses advertising costs as incurred. Advertising expenses for the years ended 31 December 2018 and 2017 were approximately $470,000 and $412,000, respectively.

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

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

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

The Company is not subject to income tax examinations for the years ending prior to 31 December 2015.


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o) Research and DevelopmentExpenditures related to the development of new products and processes are expensed as incurred. Research and development expenses were approximately $1,652,000 and $1,886,000, net of $0 of tax credits, for the years ended 31 December 2018 and 2017, respectively.

p) Stock-Based CompensationThe Company values stock options at the time of grant using a Black-Scholes model approach and records that fair market value as compensation expense, adjusted for actual forfeitures, over the requisite service period, using the straight-line method. Stock-based compensation expense for the years ended 31 December 2018 and 2017 was approximately $265,000 and $64,000, respectively.

q) Fair Value of Financial InstrumentsFair value is the exit price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our 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) Recent Accounting PronouncementsIn March 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation—Stock Compensation (Topic 718) - Improvements to Employee Share Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards, the method of recognising awards forfeitures and classification on the statement of cash flows. The provisions of ASU 2016-09 are effective for fiscal years beginning after 15 December 2016, and interim periods within those fiscal years. The Company adopted the new standard on 1 January 2017 by electing to account for awards forfeitures as they occur, rather than estimate expected forfeitures under the current guidance. The adoption of all other amendments outlined in ASU 2016-09 had either no impact to our consolidated financial statements or an immaterial impact to our consolidated financial statements.

s) Future Application of Accounting StandardsIn May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” and requires entities to recognise revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The amendments in ASU 2014-09 are effective for the Company beginning in fiscal year 2019 and can be adopted either retrospectively or by using the modified retrospective method. The Company will adopt the amendments in ASU 2014-09 effective 1 January 2019 using the modified retrospective method. The new revenue standard will not have a material impact on the amount and timing of revenue recognised in the Company’s consolidated financial statements.

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 2020, with early adoption permitted. We expect the primary impact from the adoption of ASU 2016-02 will be the recognition of our operating lease obligations and corresponding right-of-use assets on our balance sheet, which mainly consist of our home office operations and other real estate leases of office space. We anticipate that the impact of adopting ASU 2016-02 will result in an increase to assets and liabilities that is generally consistent with our remaining lease obligations as listed in Note 4 “Commitments and Contingencies” plus any new operating lease commitments agreed to before the effective date.



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In January 2017, 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 2017-04 are effective for the Company beginning in fiscal year 2020, 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 our consolidated financial statements, or did not or is not expected to have a material impact on our business.

2. Accounts ReceivableAccounts receivable consisted of the following:


Trade accounts receivable 2,204 1,683Allowance for doubtful accounts (7) (29)

2,197 1,654

3. Goodwill and Other Intangible AssetsGoodwill 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


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3. Goodwill and Other Intangible Assets (continued)

Goodwill and other intangible assets were comprised of the following at 31 December 2017:

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 2,963 712 (792) 2,883 1,465 1,002 (792) 1,675 1,208 Customer Relationships 7 1,673 – – 1,673 478 239 – 717 956

6,919 712 (792) 6,839 1,943 1,241 (792) 2,392 4,447

Approximate aggregate future amortisation expense is as follows:

Year Ending 31 December: Amount $000

2019 8262020 5762021 343

1,745

4. Commitments and Contingencies

l Operating LeasesThe Company leases office space and equipment. The lease agreements expire on various dates through February 2022.

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 for payment terms subject to escalation. Total rent expense for the years ended 31 December 2018 and 2017 was approximately $186,000, and $214,000, respectively.

At 31 December 2018, future minimum lease payments under non-cancellable operating leases were as follows:

Year Ending 31 December: Amount $000

2019 1552020 1582021 1092022 17

Total minimum rental commitments for operating leases 439




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4. Commitments and Contingencies (continued)

The Company terminated its lease of office space effective 30 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 the lease exit costs, particularly the buyout of the remaining lease obligations. Concurrent with the execution of the termination agreement, the Company entered into a new lease agreement with a separate third party. Under the new lease agreement, the Company will be reimbursed an amount equal to the total payment made under the termination agreement.

l Capital LeasesThe Company leased computer equipment under two agreements classified as capital leases that expired in November 2018. The lease obligations were subject to an interest rate of up to 8.7 per cent. per annum and were payable in monthly instalments totalling $9,334.

Assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are depreciated over the shorter of the estimated useful lives or the lease term if ownership does not transfer to the Company at the end of the lease. Depreciation of assets under capital leases is included in depreciation expense.

Computer equipment held under capital leases consisted of the following:


Cost of equipment and installation – 390Less: accumulated depreciation – (337)

– 53

l Board of Directors FeesEffective 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 2018 and 2017.

l Long-Term Vendor CommitmentIn November 2014, the Company executed a three-year vendor contract for data centre and related services, requiring an annual fee of approximately $172,000, payable in equal monthly instalments in advance through January 2018. The contract was terminated early in November 2017.


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


Allowance for doubtful accounts 2 7 Prepaid expenses (12) (10)Amortisation of software development (241) (283)Amortisation of intangibles 29 108Amortisation of goodwill (27) (100)Accrued liabilities 9 11 Basis difference in property and equipment 7 (11)Net operating losses 2,043 1,827Stock-based compensation 95 89Tax credits 211 203Other adjustments 11 8

Total non-current 2,127 1,849

Less: valuation allowance (2,154) (1,949)

Net deferred tax assets (liabilities) (27) (100)

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

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

Year Ended Year Ended 31 December 2018 31 December 2017 $000 $000

Current tax expense: Federal – –State 8 8

Total current tax expense: 8 8

Deferred: Federal (77) 1State 4 –

Total deferred tax expense (benefit): (73) 1

Total provision (benefit) for income taxes (65) 9

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 $205,000 in the valuation allowance for the period.




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5. Income Taxes (continued)On 22 December 2017, the Tax Cuts and Jobs Act (“Tax Act”) was enacted in the United States, which includes a broad range of tax reforms affecting businesses, most notably changes to the U.S. federal income tax laws, including reduction of the corporate tax rate from 35.0% to 21.0%, income tax deductions, and international tax provisions. Under Accounting Standards Codification Topic 740 (“ASC 740”), the impact of changes in tax laws must be recorded in the financial statements in the reporting period that includes the date of enactment. However, the Securities and Exchange 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:

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

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

l 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 2018, the Company had approximately $8,992,000 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 2018, the Company had approximately $211,000 in federal research and development (“R&D”) credits available to use against taxable income. The R&D credits will begin to expire starting in 2034.

6. Revolving Line FacilityIn October 2017, the Company obtained a revolving line facility with a Lender (“Revolving Line”) to borrow up to $5,000,000, accruing interest of Prime plus up to 1.75% per annum, payable monthly. 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 matures on 19 October 2019. A stock warrant to purchase 90,755 shares of Ordinary Shares was granted to the Lender as consideration. At 31 December 2018 and 2017, no amounts have been drawn under the Revolving Line and the Company was in compliance with its covenants. Furthermore, no events of default have occurred under the Revolving Line during the years ended 31 December 2018 and 2017.

7. Stockholders’ EquityThe Board has authorised 100,000,000 shares of Ordinary Shares, $0.0001 par value. As of 31 December 2018 and 2017, there were 36,302,900 shares issued and outstanding.


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8. Stock-Based CompensationIn June 2014, the Board adopted the 2014 Share Option and Incentive Plan (“Plan”) that authorised the Board to grant options and restricted stock to employees and directors to acquire up to 3,000,000 shares of the Company’s Ordinary Shares. The option price generally may not be less than the underlying stock’s fair market value on the date of the grant. The options generally vest rateably up to a three-year period beginning the date of grant and expire as determined by the Board, but not more than 10 years from the date of grant. The amounts granted each calendar year is limited depending on certain terms of the Plan. As of 31 December 2018, 916,400 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 2018 and 2017:

Weighted-Average Shares Exercise Price

Outstanding at 1 January 2017 1,866,165 $0.86Granted – –Forfeited or cancelled (90,000) $0.93

Outstanding at 31 December 2017 1,776,165 $0.86Granted (1) 1,937,600 $0.84Forfeited or cancelled (2) (1,630,165) $0.92

Outstanding at 31 December 2018 2,083,600 $0.79

Exercisable at 31 December 2017 1,391,165 $0.92

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

(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.

As of 31 December 2018, there was approximately $19,000 of total unrecognised compensation costs related to unvested stock options, which is expected to be recognised over a weighted-average period of 2.5 years.

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

2 July 2018

Weighted-average fair value on day of grant $0.23Risk-free interest rate 1.95%Expected dividend yield 0.00%Expected volatility 30.76%Weighted-average expected life of option 4.00 years




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

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

19 Oct 2017

Weighted-average fair value on day of grant $0.22Risk-free interest rate 2.69%Expected dividend yield 0.00%Expected volatility 37.97%Weighted-average expected life of warrant 5.00 years

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

Year Ended Year Ended 31 December 2018 31 December 2017

Basic income per share ($0.04) ($0.05)Diluted income per share ($0.04) ($0.05)

Weighted-average common shares outstanding: Basic and diluted 36,302,900 36,302,900

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

For the years ended 31 December 2018 and 2017, matching contributions were approximately $153,000 and $150,000, respectively.

12. Concentrationsl Significant VendorA significant vendor is defined as one from which the Company receives at least 10 per cent. of its total purchases. For the years ended 31 December 2018 and 2017, the Company had purchases from two suppliers totalling approximately $4,741,000 and $3,929,000 which comprised approximately 54 and 53 per cent. of the Company’s purchases, respectively. Accounts payable and accrued liabilities included approximately $1,440,000 and $715,000 to these vendors at 31 December 2018 and 2017, respectively.

l Significant CustomerA significant customer is defined as one from whom at least 10 per cent. of reported revenue is derived. For the years ended 31 December 2018 and 2017, the Company had sales to one customer totalling approximately $2,254,000 and $2,020,000, respectively, which comprised approximately 11 per cent. of the Company’s revenues for both years. At 31 December 2018 and 2017, the accounts receivable balance included approximately $156,000 and $151,000, respectively, from this customer.


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13. Related Party TransactionsThe Company contracted with a certain shareholder of the Company to provide consulting services. During the years ended 31 December 2018 and 2017, the Company incurred approximately $38,000 and $36,000, respectively, in consulting fees to this related party.

Beginning in July 2017, a company owned by a shareholder provided investor research services of approximately $43,000 and $20,000 for the years ended 31 December 2018 and 2017, respectively.

14. Subsequent EventsThe Company evaluated subsequent events through 22 May 2019, when these consolidated financial statements were available to be issued.

In January 2019, the Company entered into a severance and release agreement (“Agreement”) with its Chief Financial Officer (“CFO”) totalling approximately $257,000 consistent with the terms and conditions of his separation agreement. Under the Agreement, the CFO resigned as a member of the Board of the Company and from all other positions with the Company effective 23 January 2019.

In February 2019, the Company signed a new lease agreement, which began on 1 April 2019, that has a seven-year term and has payment terms subject to escalation.

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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Annual Report and Accounts 2018

ClearS

tar Inc.

Annual R

epo

rt and A

ccounts 2018

ClearStar, Inc.6250 Shiloh Road, Suite 300

AlpharettaGeorgia 30005

USATel: +1 877 796 2559

www.clearstar.net