ClearStar : Interim Results

18 September 2019

ClearStar, Inc.

("ClearStar" or the "Company")

Interim Results

ClearStar (AIM: CLSU), a provider of Human Capital Integrity℠ technology-based services specialising in background and medical screening, announces its interim results for the six months ended 30 June 2019.

Financial Summary

• Revenue increased by 17% to $11.6m (H1 2018: $9.9m)
• Gross profit of $6.3m (H1 2018: $5.7m)
• Adj. EBITDA of $191k (H1 2018: $65k)*
• Loss before tax of $914k (H1 2018: $645k loss)
• As of 30 June 2019, the Company had cash of $1.1m (31 Dec 2018: $0.9m)

* Adjusted to exclude certain non-recurring expenses (see Financial Review)

Operational Summary

• Strong revenue growth in direct sales and Medical Information Services ("MIS"), which in aggregate accounted for 72% of total revenue (H1 2018: 62%):
  o Direct sales increased by 49% due to expansion of higher-volume, tier 1 client base
  o MIS 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 in new segments: o Won a contract to provide background screening for a major shipyard specialising in the design,
  building and support of vessels for the U.S. Navy
  o Awarded two contract extensions for financial institution screening by major professional services company
  o Won first direct customer in the petrochemical industry with appointment by an oilfield waste disposal services company in Texas for drug and background screening
  o Leading animal health and mineral nutrition company appointed ClearStar to provide background and medical screening - specifically, drug testing and occupational health
• Enhanced sales & marketing resulting in greater brand recognition, significant increase in interest and upscaling:
  o Expansion of sales pipeline, including transition up-channel to higher-value prospects o Average spend per direct customer increased 48% over the first half of 2018
• Enhanced MIS offering with the introduction of new services for ordering breath alcohol screening, including a combined drug and breath alcohol testing service

Robert Vale, CEO of ClearStar, commented: "We are pleased to report another period of strong sales growth, driven by our medical screening solutions and providing background checks to our expanding direct client base. It also reflects our success in targeting larger, higher-volume customers, with some notable wins this year. During the period, we invested in our growth to enable us to capitalise on the ever-growing demand that we are receiving as customers increasingly recognise the value that our solutions can add to their screening programmes - to benefit both the employer and the employee. As a result, with our expanded pipeline and sustained sales momentum, we continue to expect to achieve strong revenue growth for full year 2019 and, with trading in line with the Board's expectations, we look to the future with confidence."

Enquiries:
ClearStar, Inc.	[phone]
Robert Vale, Chief Executive Officer
Jennifer Balleza, Chief Financial Officer
finnCap Ltd.	[phone]
Jonny Franklin-Adams, Marc Milmo, Simon Hicks - Corporate Finance
Andrew Burdis - ECM
Luther Pendragon Ltd.	[phone]
Harry Chathli, Claire Norbury, Joe Quinlan

The information communicated in this announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014.

Analyst Presentation

Robert Vale, CEO, and Jennifer Balleza, CFO, will be hosting a presentation for analysts at 9.30am BST today at the offices of Luther Pendragon, 48 Gracechurch Street, London, EC3V 0EJ.

About ClearStar

ClearStar, Inc. is a leading provider of Human Capital IntegritySM technology-based services specialising in background and medical screening. It provides employment intelligence direct to employers and via channel partners/consumer reporting agencies ("CRAs") to support better recruitment and other decisions affecting employees by increasing the quality, reliability, and visibility of information.

A seven-time Inc. 5000 honoree and founding member of the Professional Background Screening Association (formerly, 'NAPBS'), ClearStar has provided innovative technology solutions to businesses in the human capital management industry from its corporate offices in Alpharetta, Georgia since 1995. For more information about ClearStar, please visit: www.clearstar.net.

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Operational Review

In the first six months of 2019, ClearStar continued to deliver strong revenue growth, which increased by 17% to $11.6m (H1 2018: $9.9m). This was driven by sales of the Company's industry-leading Medical Information Services and onboarding and ramp-up of new direct customers that were won in 2018, primarily for background screening. The period also reflected the upscaling of the Company's direct client base with the average spend per direct customer increasing by 48% over the same period of the previous year.

The investment that the Company made towards the end of 2018 and early in 2019 in strengthening its direct sales team enabled an expansion in the pipeline, including some major client wins during the period in its key markets of transport and logistics as well as in new markets. The Company also continued to enhance its offer, including the introduction of breath alcohol screening as part of its medical screening services.

Performance by business channel

Sales from direct services increased by 49% to $4.2m for the first half of 2019 (H1 2018: $2.8m), accounting

for 36% of total revenue (H1 2018: 28%). The growth was driven primarily by the financial services and transportation and logistics industries, with home healthcare remaining an important contributor to direct revenue. There was also a significant increase in revenue generated from an organisation that provides student exchange programmes, for which the Company conducts background screening of the students and host families. In addition, the direct services revenue growth reflects the continued momentum in the upscaling of the direct client base to larger, higher-volume businesses, with the average spend per direct customer in the first half of 2019 increasing 48% over the first half of 2018.

Following the award, towards the end of 2018, of ClearStar's first contract for financial institution screening, the client, which is a professional services company that provides outsourcing and staffing primarily for the financial services industry, granted the Company two extensions during the period. Under the contract, ClearStar provides background screening to ensure compliance with the US Federal Deposit Insurance Act (FDI Act), which governs the Federal Deposit Insurance Corporation and the banks insured by that organisation, and the US Patriot Act.

ClearStar continued to make progress in expanding its customer base in its target growth market of transportation and logistics with the appointment to provide background screening by a major shipyard specialising in the design, building and support of vessels for the U.S. Navy. The contract includes minimum annual volumes over a three-year period, which adds to revenue visibility.

Also, during the period, ClearStar was appointed by a leading animal health and mineral nutrition company, with over 1,400 employees, to provide background and medical screening - specifically, drug testing and occupational health. The superior applicant experience and reduced recruiter touch points were key considerations in the customer choosing ClearStar, which the Company is able to deliver as a result of its mobile-friendly applications, ClearMD and SAP® SuccessFactors® Recruiting integration.

In addition, the investment made last year and during the period in the new sales team and sales & marketing resulted in further milestones being achieved. In particular, the Company entered a new market with the award of a contract by Milestone Environmental Services, a leading provider of oilfield waste disposal services that is currently operating seven locations in Texas, US, to provide a combination of drug and background screening services - representing ClearStar's first direct client in the petrochemical industry.

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In the first half of 2019, sales to channel partners - indirect services - increased by 4% to $7.4m (H1 2018: $7.1m) as a result of MIS growth as described below. Indirect services accounted for 64% of total revenue (H1 2018: 72%).

Performance by service offering

Medical Information Services

MIS continued to be the largest single contributor to revenue by product, accounting for 43% of total revenue (H1 2018: 40%) and grew strongly in the first half of 2019 with an increase in MIS revenue of 25% to $5.0m (H1 2018: $3.9m). This growth was primarily based on increased volume with existing channel partner customers for drug testing services. This momentum continued post period with monthly sales (for July 2019) exceeding $1.0m for the first time.

Strong regulatory drivers in the area of drug screening have continued to increase the time-sensitive requirement on ClearStar's channel partner customers to bring a solution to market. ClearStar's ability to deliver a white label solution that can be quickly configured and integrated has made the Company's medical technology the solution of choice for customers to rapidly resolve any regulatory requirement gaps.

Sales to channel partners accounted for 83% of MIS revenue (H1 2018: 85%), but MIS revenue generated by

direct customers, which accounted for 17% of MIS sales (H1 2018: 15%), also grew strongly and is making an increasingly meaningful contribution to total sales. The growth in direct MIS revenue was primarily based on increased volume with existing direct customers.

Other services

Excluding MIS, revenue from ClearStar's other services - which primarily comprise background screening as well as the wholesale provision of data and global services - increased to $6.6m (H1 2018: $5.9m). This was driven by an increase in sales in background screening to direct clients, which grew by 50% for the first half of 2019, and more than mitigated the reduction in revenue from channel partner background screening.

Investing for growth

During the first half of 2019, ClearStar continued to strengthen its offering and sales & marketing function to position it for accelerated growth.

At the beginning of the year, the Company further enhanced its sales team, establishing a team with combined experience of over 70 years in background screening sales. This investment contributed to an expanded pipeline with ClearStar receiving an increase in Request for Proposals (RFPs) of more than 120% year-to-date compared with the whole of 2018.

In the first half of 2019, ClearStar enhanced its MIS offering with the introduction of new services for ordering breath alcohol screening to meet both Department of Transportation (DOT) and non-DOT requirements. This includes a combined drug and breath alcohol screening offer, which facilitates the screening process for the employee and employer by allowing tests to be conducted at the same location and providing consolidated results reporting. This marks an important step towards ClearStar's goal of offering complete medical review services.

The Company gained, post period, ISO/IEC 27001:2013 accreditation, which certifies that ClearStar's information security, cybersecurity and privacy protection systems and policies comply with international

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standards of best practice. This was based on the successful completion of a formal audit process, which confirmed that the Company's IT security systems, policies and procedures met rigorous international standards in ensuring the confidentiality, integrity and availability of data. The accreditation also followed the Company having invested during the period to enhance its security measures, such as for automated threat monitoring.

Financial Review

ClearStar achieved strong revenue growth with an increase of 17% for the six months ended 30 June 2019 to $11.6m compared with $9.9m for the first half of 2018. This was based on strong growth in MIS, which continues to be the primary growth driver by service, coupled with increased demand in direct services.

Gross profit increased 12% to $6.3m (H1 2018: $5.7m) and gross profit margin was 54.5% (H1 2018: 57.2%). The decrease in margin was primarily due to having a higher percentage of revenue derived from MIS, which has a lower gross margin than other services, partially offset by achieving greater purchase economies.

Total operating expenses, including depreciation and amortisation, were $7.1m (H1 2018: $6.3m). This

includes general and administrative expenses, which increased to $4.7m (H1 2018: $4.0m), primarily due to

two non-recurring items totalling $464k: a severance payment to a former executive and exit costs associated with an early lease termination relating to the Company's office relocation. Selling and marketing expenses were also higher at $1.2m (H1 2018: $794k) as the Company invested for growth with the expansion of the direct sales team at the beginning of the year. Research and development expenses decreased to $724k (H1 2018: $804k), due to cost reduction measures, and depreciation and amortisation expenses were also lower at $558k (H1 2018: $655k).

As a result, loss before tax increased to $914k for the first half of 2019 compared with $645k for the same period of the prior year. Loss after tax was $930k (H1 2018: $666k loss).

The Company achieved strong growth in adjusted EBITDA for the first half of 2019 to $191k (H1 2018: $65k) as a result of generating higher revenue combined with cost control measures. EBITDA has been adjusted to exclude the non-recurring items, which are not reflective of the core business, including severance payment and lease exit cost referred to above.

As of 30 June 2019, total assets were $9.9m (31 December 2018: $7.8m), with the largest assets being goodwill

and other intangible assets of $3.9m (31 December 2018: $4.0m), accounts receivable of $3.3m (31 December

2018: $2.2m) and cash of $1.1m (31 December 2018: $923k). At period end, the Company had up to $2.9m available under its recurring revenue credit facility with Silicon Valley Bank.

The Company's total liabilities as of 30 June 2019 were $5.7m (31 December 2018: $2.7m), with the increase primarily due to the growth in sales and a credit facility utilisation of $2.1m to finance periodic technology infrastructure investment and supporting growth in the business.

The Company utilised $793k in net cash for operating activities during the period compared with generating $283k in operational cash flow for the first half of 2018 mainly due to an increase in the net loss and working capital accounts.

The Company used $1.2m in investment activities in the first half of 2019 (H1 2018: $333k) due to increased technology-related capital expenses associated primarily with the purchase of new hardware and software to support and enhance the Company's technology platform. The Company used $2.1m in financing activities,

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