London's AIM - U.S. Company Performance - Share Price and Liquidity - H1 2014

The 52 U.S. companies listed on London's AIM stock exchange lost 17%, versus a loss of 8% for the FTSE AIM All-Share Index, during the first half of 2014, reinforcing the fact that AIM is a 'stock picker's market'.  The 42 AIM IPOs during the first half of 2014, however, achieved average and median share price gains of 8% and 5%, respectively, from the median IPO date of April 9, 2014.

Two of the U.S. companies that left AIM during the first half of 2014 did so in order to concentrate their public listings in the U.S.  They completed their initial IPOs on AIM during 2007 and 2006 and their U.S. IPOs on the NYSE MKT, the small cap tier of the NYSE Euronext, and NASDAQ during 2011 and 2013, respectively.  This is the natural evolution for U.S. companies that complete their initial IPOs on AIM; using it as a platform for raising capital, the achievement of commercial success and a dual listing on the U.S. public markets.

There was a significant increase in the weighted liquidity level on AIM during the first half of 2014 at 5.49% compared to 3.69% during 2013 for a number of reasons.  From August 2013, AIM shares can be held in U.K. Individual Savings Accounts (ISAs), the U.S. equivalent of IRAs, which provided a liquidity boost from retail investors into some of the larger, more well-known companies listed on AIM.  In addition, at the start of the new tax year in early April 2014, the annual ISA allowance was raised from £11,520 to £15,000.  Finally, the 0.5% stamp duty (tax) on the purchase of AIM shares was abolished at the end of April 2014.

AIM shares can be one of the most tax-advantaged investments; avoiding capital gains tax, income tax, inheritance tax and now stamp duty.  The benefits for companies considering an AIM IPO, and for those already listed on AIM, should be a further reduction in the cost-of-capital and an increase in aftermarket liquidity; both positively impacting valuations.

Highlights

• U.S. domiciled companies register a weighted loss of 5%
• Foreign domiciled U.S. operating companies register a weighted loss of 20%
• FTSE AIM All-Share Index lost 8%
• Significant liquidity difference between U.S. and foreign domiciled U.S. companies

There were 20 U.S. domiciled and 35 foreign domiciled U.S.operating companies listed on AIM at the beginning of 2014.  During the first half of 2014, four companies delisted and one joined by way of reverse takeover.  Of the four companies that left AIM; two completed their U.S. IPOs on the NYSE MKT, the small cap tier of the NYSE Euronext (the old NYSE AMEX), and NASDAQ in 2011 and 2013, respectively, and simply decided to concentrate their public listings in the U.S., one was a large oil and gas exploration and production company that was acquired at a 15% premium and the final one was an investment fund that wanted to issue a class of shares that weren’t eligible for AIM, therefore, they used the London Stock Exchange’s Specialist Fund Market (SFM) for that purpose and then migrated their AIM-listed shares to the SFM.

The four leavers during the first half of 2014 are not included in the chart and analysis below because they left during the early part of the half-year, however, the one joiner is included since that occurred in January.  The distribution of returns during the first half of 2014 was relatively normal, although, the slight negative bias is due to fact that the junior mining and oil and gas exploration and production companies were adversely impacted by global macroeconomic force, such as central bank policies and slowing growth in emerging markets.

The weighted returns in the table below were calculated using the average market capitalizations of the companies during the half-year, similar to how an index fund would calculate returns.

Index	Unweighted	Weighted
U.S. Domiciled Companies	3%	(5)%
Foreign Domiciled Companies	(12%)	(20)%
FTSE AIM All-Share Index	N/A	(8)%

The weighted return contributions for the U.S. domiciled companies were tightly packed at +/-2%, with two exceptions, one where a 3% weighted gain was achieved (absolute gain of 81%) and one where a weighted loss of 5% was recorded (absolute loss of 58%).  The company that gained 81% is a life sciences company focused on nature-derived insect and parasite control products that recently achieved significant commercial traction through multiple channels.  The company that lost 58% is an aquaculture biotech company that gained 168% during 2013 after receiving regulatory clearance for commercial production in Canada, however, continuing delays with the U.S. FDA caused a retracement in the share price to early 2013 levels.

The weighted return contributions for the foreign domiciled U.S. operating companies were also tightly packed at +/-1%, and also with two exceptions, where weighted losses of 12% and 6% were recorded (absolute losses of 69% and 14%).  The company that lost 69% fell victim to a blog posted by a consultant who was paid by unnamed parties in which the company’s business model and practices were questioned.  The company strongly refuted the assertions made, completed a thorough internal and external review and published a detailed response.  During 2013, this company gained 215% after integrating several acquisitions and achieving exceptional financial results, all of which was wiped out, likely temporarily, by an apparently malicious act.  The company that lost 14% is an oil and gas exploration and production company that continued to encounter some unforeseen operational difficulties after losing 12% during 2013.

In terms of average monthly liquidity (see the table below), the foreign domiciled U.S. operating companies outperformed the U.S. domiciled companies and AIM as a whole on both measures.  One would expect all of the weighted results to exceed all of the unweighted results, reflecting the positive relationship between a company’s liquidity and its market capitalization.  The unweighted results represent the level of monthly liquidity that the average company can expect to achieve.

Since the reversal of this relationship was small for the U.S. domiciled companies, a firm conclusion cannot be drawn, however, since relative trading volumes were significantly larger for the larger foreign domiciled U.S. operating companies, it appears as if investors exited the larger companies because they were no longer comfortable with the risk/reward relationship, which is evidenced by the underperformance of the weighted share price return compared to the unweighted share price return.

Average Monthly Liquidity	Foreign Domiciled U.S. Operating Companies	U.S. Domiciled Companies	Entire AIM Market
Weighted	7.36%	1.17%	5.49%
Unweighted	5.60%	1.65%	3.50%

The chart below provides the monthly detail of the unweighted liquidity for each of the three categories in the table on the previous page.  While the unweighted liquidity levels have been stable, there has been a significant increase in the weighted liquidity level on London's AIM as a whole during the first half of 2014 at 5.49% compared to 2013 at 3.69% for the reasons outlined below.

From August 5, 2013, AIM shares can be held in U.K. Individual Savings Accounts (ISAs), the U.S. equivalent of IRAs, which provided a liquidity boost from retail investors into some of the larger, more well-known companies listed on AIM.  In addition, at the start of the new tax year on April 6, 2014, the annual ISA allowance was raised from £11,520 to £15,000.  Finally, the 0.5% stamp duty (tax) on the purchase of AIM shares was abolished from April 28, 2014.

AIM shares can be one of the most tax-advantaged investment; avoiding capital gains tax, income tax, inheritance tax and now stamp duty.  The benefit for companies considering an AIM IPO, and for those already listed on AIM, should be a further reduction in the cost-of-capital and an increase in aftermarket liquidity; both positively impacting valuations.

From a U.S. perspective, the key takeaway from the chart above is that there is a liquidity advantage for U.S. companies that list on AIM via a U.K. holding company.  The four main reasons being:

1. Once the Reg. S period expires, the IPO shares can trade directly within CREST
2. Pre-IPO shares not subject to Reg. S can immediately trade directly within CREST
3. Articles of incorporation fully conform to U.K. law, providing comfort to U.K. investors
4. Institutional investors only allocate a portion of their investments to non-U.K. companies

Nevertheless, irrespective of where a company is domiciled, liquidity can be improved.  The reasons for a lack of liquidity are often company specific and not obvious.  As a consequence, thoughtful and thorough investigation is needed in order to formulate actionable solutions.  Several strategic decisions can be taken during the planning of the AIM IPO to minimize the risk of lack of liquidity becoming a problem in the first instance; including, selection of the most appropriate Nomad, Broker(s), Financial PR/IR firm and Independent Equity Research firm.

London's AIM - Book- The Future Is Small - Why AIM Will be the World's Best Market Beyond the Credit Boom

Harriman House recently published a book written by Gervais Williams, a UK fund manager, that explains, amongst other things, why London's AIM will be the world's best stock exchange and a place of extraordinary vitality in the coming years.

The Future is Small - Why AIM Will be the World's Best Market Beyond the Credit Boom

Select quotes from the book include the following:

"The bottom-line is that AIM now stands among the most well-established and vibrant markets for small and micro-cap quoted stocks in the world.  Its breadth and depth are remarkable."

"The London AIM stock exchange is distinctive from other markets around the world because it has such a wide range of regular quoted businesses, and it has potential to list a whole lot more."

"There will never have been a better time to be a regular company with sustained turnover, profits and cash flow along with a listing.  Indeed, all the evidence points to this being the start of a super-cycle for returns in the genuinely small - as last experienced between the mid-1950s and the mid-1980s."

"So the AIM exchange stands as something of a beacon; an exchange that is dominated by smallness at a time when market trends are changing."

"We are exceptionally fortunate that the long history of support for the smallest quoted stocks in the UK has resulted in AIM surviving when most others have foundered.  When it comes to allocating capital to smallness, our public markets have had a culture of supporting companies that are rather smaller than elsewhere.  Raising say, £10m via public markets would be difficult or indeed impossible in many other countries around the globe, but not in the UK."

"If the future is indeed small, London's AIM appears unusually well-positioned to participate in the new trends.  All the evidence points to this being the start of a new super-cycle in small-cap returns."

At 113 pages, The Future is Small may be a good stocking stuffer for avid investors and visionary entrepreneurs.

The Future is Small by Gervais Williams - Harriman House

Happy Holidays,

Mark McGowan
Managing Director
AIM Advisers, Inc.
1223 Wilshire Blvd., Suite 1855
Santa Monica, California 90403
(310) 903-0322
www.aimadvisers.com

London's AIM - ClearStar Raises $15 Million in London AIM IPO

With 2013 revenue, EBITDA and net income of $8.0 million, $1.0 million and $0.7 million, respectively, the Company was able to command an opening valuation of $35.5 million.  Revenue and EBITDA grew by 18% and 11%, respectively, from 2012 and net income was flat.  The pre-money revenue and EBITDA multiples were 2.6 and 20.4, respectively, and the pre-money P/E ratio was 29.1.

Co-Founder & CEO Robert Vale said, “We are delighted to be joining AIM.  We believe our public market status will enhance our credibility and profile within the background screening industry and allow us to more easily raise additional capital for organic and/or acquisitive growth.  The demand for background check services has never been greater and, with the scalability of our platform and listing on AIM, ClearStar is well-positioned to address the growth in the market.  We thank our new London-based, blue-chip investors, and all those who expressed an interest, and look forward to updating them on our progress as we continue to grow.”

Overview of Listing on London's AIM
Alpharetta, Georgia-based ClearStar, Inc. raised $15.1 million in its recent IPO on the London Stock Exchange’s AIM.

ClearStar is a technology and service provider to the background check industry.  The Company’s Aurora platform supports all of its screening management solutions and workflow processes, having delivered employment intelligence to over 20,000 employers; including, Toyota, Six Flags, IBM, the University of Pennsylvania, ADP and FedEx.  The Aurora platform consists of a collection of applications which utilize data from over 3,000 sources, ranging from resumes to records with local authorities.

The Company was founded in 1995 by white labeling its technology for use by Credit Reporting Agencies (CRA) and Channel Partners (CP) to provide background checks for employers.  The original business still accounts for 71% of the Company’s revenue.  In 2008, ClearStar launched its Medical Information Services (MIS) offering, an automated, web-based drug and alcohol testing and results review service, sold directly to employers.  MIS recently expanded into the occupational health sector since they were also being asked to provide services for employment physicals and medicals.  MIS has grown to account for 26% of the Company’s revenue in 2013 from only 8% in 2011.  In 2013, ClearStar launched a retail offering so as to directly engage with employers for the provision of background screening services.  While this competes with the original business, the Company’s CRA and CP customers only cover 4% of the background check market.  The MIS and retail offerings provide cross-selling opportunities.

ClearStar has 39 employees; 32 in Georgia, six in Florida and one in the U.K.  The employees are mainly engaged in software development, sales and marketing and general management.  Since 2007, despite the worldwide recession, there has been a fourfold increase in revenue with no capital injection.

The Company plans to substantially expand its retail sales force and enhance its branding within the geographies and industries in which it currently operates.  With the recent opening of an office in London and the hiring of a General Manager of International Business, ClearStar is also planning to grow internationally.  Finally, strategic acquisitions will be a focus where the target background screening companies have revenues of approximately $1.5m - $3.0m, profit margins of at least 10%, an opportunity for sales and/or margin uplift, a pipeline of work directly from employers and homegrown technology.

Key Financial Metrics

(in USD millions)	Y/E 12/31/11	Y/E 12/31/12	Y/E 12/31/13	Δ ’11 - ‘12	Δ ’12 - ‘13
Revenue	$5.2	$6.8	$8.0	+31%	+18%
Cost of Goods Sold	1.7	2.3	3.1	+35%	+35%
Operating Expenses	3.8	3.8	4.2	+0%	+11%
Net (Loss) / Income[1]	(0.3)	0.7	0.7	+333%	+0%
EBITDA	(0.1)	0.9	1.0	+1,000%	+11%
Total Assets	0.8	1.1	1.7	+38%	+55%
Cash	0.1	0.1	0.3	+0%	+200%

The Company’s revenue was almost entirely generated from the United States.  The largest customer accounted for 10% of revenue in 2013, the top three accounted for 28% and the top ten accounted for 58%, compared to 49% and 42% in 2012 and 2011, respectively.  Since the AIM IPO completed within nine months of the latest audited financial statements, audited, comparative stub period financials were not required and management chose not to provide unaudited, comparative management accounts for 2014.

Key Listing Metrics

·         $15.1m gross was raised, $12.6m net of offering costs, intended to be used for:

o    $4.0m – Sales and marketing

·         Headcount additions in the U.S. and internationally

·         Global marketing initiatives

o    $3.1m – Working capital and to strengthen the balance sheet

o    $3.0m – Research and development

·         Expand existing products and services

·         Develop new products and services

o    $2.5m – Acquisitions

·         Offering costs amounted to 16.6% of the gross capital raised for the Company

o    The offering was undertaken on a ‘best efforts’ basis, as opposed to being underwritten

§  Broking commission of 5.0%

§  Corporate finance fee of £250k ($425k), 90% payable in cash and 10% in shares

·         Opening market capitalization of $35.5m

·         Dilution to existing shareholders of 42.4%

·         Free float of 42.4%

·         Trailing pre-money revenue multiple of 2.6

·         Trailing pre-money EBITDA multiple of 20.4

·         Trailing pre-money P/E ratio of 29.1

Shareholder Base
The Company had 20.7 million shares outstanding prior to the IPO, issued 15.5 million new shares for cash in the IPO and issued 0.1 million shares to the AIM Nominated Broker, leaving the Company with 36.3 million shares outstanding.  The table below details those who held 3% or more of the Company prior to and/or after the IPO, along with the collective ownership of the Other New U.K. Investors.

Shareholder	Pre-IPO %	Post-IPO %
Co-Founder & CEO	54.55	31.14[2]
Co-Founder & CIO	24.15	13.792
Co-Founder	11.43	6.522
Three Gift Trusts Established by the Co-Founder	6.37	3.642
CFO	3.50	2.562
London Institution (Pension and Insurance Funds)	-	9.92
Global Institution (Various Funds)	-	8.24
London Private Client Broker	-	6.43
London Fund Manager (Retail)	-	4.89
London Fund Manager (Institutional and Retail)	-	4.83
Other New U.K. Investors	-	8.04
Totals	100.00	100.00

An important element of ClearStar’s AIM IPO was its ability to raise $5.8 million of the $15.1 million from tax-advantaged Venture Capital Trust (VCT) and Enterprise Investment Scheme (EIS) investors.  In order for the Company to become eligible for VCT and EIS investors, ClearStar had to, amongst other things, create a ‘permanent establishment’ in the U.K., which was achieved by hiring a London-based Senior Vice President and General Manager of International Business a few months before the IPO.  The Company also opened an office in London a couple months before the IPO.

The Company now has an adequate amount of growth capital to fund its ongoing marketing operations, build out its international business and continue R&D investment in its platform.  With a solid base of new blue-chip investors, the Company can more easily raise additional capital for organic and/or acquisitive growth.  In addition, the Company believes that its IPO and public market status on AIM will enhance its credibility and profile within the marketplace, enhance its ability to attract, recruit and retain key directors, employees and consultants and allow it to create equity-based incentive mechanisms with Share Options.

Board of Directors and Corporate Governance

The Board of Directors consists of three Executive Directors (the Co-Founder & CEO, the Co-Founder & CIO and the CFO), an independent Non-Executive Chairman (NEC) and an independent Non-Executive Director (NED); all with solid resumes and a good blend of complementary experiences and skill sets.

Companies listed on AIM are not required to comply with the U.K. Corporate Governance Code published by the Financial Reporting Council, which is mandatory for companies listed on the Main Market; however, the Company does intend to observe the requirements to the extent considered appropriate in light of the Company’s size, stage-of-development and resources.  AIM listed companies typically follow, and the Company will do so as far as practicable, the recommendations set out in the Corporate Governance Code for Small and Mid-Size Quoted Companies published by the Quoted Companies Alliance.  The overarching principle of such recommendations is to ensure that a company is managed in an efficient, effective and entrepreneurial manner for the benefit of all shareholders over the long term.

Since the Company’s Co-Founder & CEO remains a substantial shareholder, he entered into a Relationship Agreement with the Company.  The Relationship Agreement regulates certain aspects of the continuing relationship between the parties with the intention of enabling the Company to conduct its business affairs independently of the Co-Founder & CEO and to ensure that future transactions between the parties are commercially normal and conducted on arm’s-length terms.  Certain provisions of the Relationship Agreement fall away if the Co-Founder & CEO’s shareholding drops below 30%.

The Company has established Audit, Remuneration, Nominations and AIM Compliance and Corporate Governance Committees.  The Audit Committee is chaired by the NED with the NEC serving as the other member and will meet at least three times a year, at appropriate times in the financial reporting and audit cycle, and regularly with the Auditors.  The Remuneration Committee is also chaired by the NED with the NEC serving as the other member and will meet at least two times a year.  The Nominations Committee is chaired by the NEC with the NED serving as the other member and will meet at least two times a year.  Finally, the AIM Compliance and Corporate Governance Committee is chaired by the Co-Founder & CEO with the Co-Founder & CIO and CFO serving as the other members and will meet as often as is required.

Accounting Considerations

The Company is domiciled in the Cayman Islands, which allows for the use of any internationally recognized GAAP.  Since the Company’s operating subsidiary is incorporated in Delaware and virtually all of the Company’s historic revenues have been generated from the United States, the Company has chosen to report using U.S. GAAP.  Since all of the Company’s revenues are earned in U.S. Dollars, the U.S. Dollar is the functional currency and was also chosen as the reporting currency.

The U.S. and U.K. Member Firms of an international accountancy network acted as Auditor and Reporting Accountant, respectively.  Since the AIM IPO completed within nine months of the latest audited financial statements, audited, comparative stub period financials were not required and management chose not to provide unaudited, comparative management accounts for 2014.

An unaudited pro forma statement of net assets is never required in connection with an AIM IPO and was not provided in this instance since the effect of the net proceeds from the IPO on the net assets of the Company is obvious.

Legal Considerations

Since the Company is not incorporated in the U.K. or one of its Crown Dependencies, the Channel Islands and the Isle of Man, but rather in the Cayman Islands, and its ‘place of central management and control’ is also outside these jurisdictions, the three most important elements of English corporate law do not automatically apply.  As is customary, the Company amended its constitutional documents for these three main differences as outlined below.

1.     Pre-emption rights (i.e. anti-dilution) – Shareholders may participate in, or the Company has to obtain approval from at least 75% of them for, the issuance of shares for cash of more than 15% of the then outstanding shares during any 12-month period.[3]

2.     Notifiable Interests – Shareholders are required to notify the Company of, and the Company is required to publicly announce, holdings at or above the 3% level and whenever a full percentage point is breached in either direction.

3.     Takeovers (i.e. mandatory offer) – If any party, or parties acting in concert, accumulates a holding of 30% or more, they must make a cash offer to the other shareholders at the highest price they paid for the Company’s shares during the last 12 months.

The Company relied on the safe harbor afforded by Regulation S of the U.S. Securities Act of 1933 so as to not have to file a registration statement with the U.S. SEC.  Shares subject to Reg. S (generally, those issued in the IPO for a period of one year, issued within one year prior to the IPO and/or held by affiliates) are not eligible for dematerialization and, as such, are always held and traded in certificated form.

Since the Company did not re-domicile into the U.K. or one of its Crown Dependencies, the Channel Islands and Isle of Man, its shares that are not subject to Reg. S are not eligible for trading within CREST; the most common electronic system for the holding and transfer of shares in the U.K., however, a Depositary could be appointed and Depositary Interests (DIs), which represent an entitlement to shares, could be created, allowing for the immediate trading of these non-Reg. S DIs within CREST.  The Company has, however, arranged for its registrar, in its capacity as Depositary, to issue DIs for the shares issued in the IPO, a subset of the Reg. S shares, upon the expiration of the one-year distribution compliance period and upon the provision of proper instructions from the shareholder(s) to the transfer agent and registrar.

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[1]  This is effectively pre-tax net income since ClearStar was an S Corporation; therefore, any Federal and most State tax liabilities were passed-through to the shareholders.

[2]  Subject to a 12-month lock-in and customary orderly market provisions for a further 12 months.

[3]  Since the Company raised a relatively small amount of capital at the time of the IPO, this is higher than the typical 10% level at which AIM-listed companies seek an annual standing authorization from their shareholders for the issuance of additional shares for cash.  This flexibility increases the certainty and speed of small capital raises during the year and reduces transaction costs, since further communications with, and approvals from, shareholders are not required.