View:
United States securities and exchange commission logo
July 2, 2021
Steven L. Barnett
Chief Legal & Risk Officer
Sterling Ultimate Parent Corp.
1 State Street Plaza
24th Floor
New York, New York 10004
Re: Sterling Ultimate
Parent Corp.
Draft Registration
Statement on Form S-1
Submitted June 8,
2021
CIK No. 0001645070
Dear Mr. Barnett:
We have reviewed your draft registration statement and have the
following comments. In
some of our comments, we may ask you to provide us with information so
we may better
understand your disclosure.
Please respond to this letter by providing the requested
information and either submitting
an amended draft registration statement or publicly filing your
registration statement on
EDGAR. If you do not believe our comments apply to your facts and
circumstances or do not
believe an amendment is appropriate, please tell us why in your
response.
After reviewing the information you provide in response to these
comments and your
amended draft registration statement or filed registration statement, we
may have additional
comments.
Draft Registration Statement on Form S-1 Submitted June 8, 2021
Prospectus Summary, page 1
1. We note your
presentation of Adjusted Operating Income in this section and elsewhere in
the filing. Please
revise your disclosures to present the most directly comparable GAAP
measure with equal or
greater prominence. We refer you to Item 10(e)(1)(i)(A) of
Regulation S-K and
Question 102.10 of Compliance & Disclosure Interpretations on Non-
GAAP Financial
Measures.
Our Market Opportunity, page 3
2. Please explain the
methodology and assumptions underlying your belief that the post-hire
Steven L. Barnett
FirstName LastNameSteven L. Barnett
Sterling Ultimate Parent Corp.
Comapany
July 2, 2021NameSterling Ultimate Parent Corp.
July 2,2 2021 Page 2
Page
FirstName LastName
monitoring market "could be nearly as large as the employment
screening market." Please
also explain whether there is overlap between the addressable markets
you identify.
3. You disclose that, pursuant to a Risk Based Security report, "the
total number of data
records compromised in 2020 exceeded 37 billion, a 141% increase
compared to 2019 and
by far the most records exposed in a single year since Risk Based
Security began reporting
on data breach activity." Please disclose when Risk Based Security
began reporting on
data breach activity.
Our Competitive Strengths, page 6
4. In your discussion of your "Attractive financial profile," please
balance your discussion of
free cash flow generation with a discussion of net losses.
5. You disclose that in 2020, 17% of your revenue was generated outside
of the United
States, "an increase from 2019." Please disclose the corresponding
percentage for 2019.
Growth Strategy, page 8
6. Please explain the source for your belief that "there is a common
misperception among
employers that background screening providers include identity
verification as part of
their pre-employment screening process," and that "background
screening companies do
not typically check identities or verify a candidate's biographic data
two things that are
critical for a successful background check."
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Trends and Other Factors Affecting Our Performance
New Product and Service Development, page 68
7. You note that you "plan to pursue new adjacent market opportunities,"
including
onboarding. However, throughout the prospectus, you reference
onboarding as an
existing revenue-generating service provided by your company. Please
reconcile.
Components of Our Results of Operations
Revenues, page 72
8. Please disclose the denominator for the New Client Growth and Base
Growth calculations.
In this regard, we note that each metric is presented as a percentage
on page 76.
Results of Operations
Revenues, page 76
9. You disclose that in 2020 you experienced high single-digit percentage
new client growth
and low-teens percentage decline in base growth due to the COVID-19
pandemic. You
further disclose that in the three months ended March 31, 2021, you
experienced mid-
teens percentage new client growth and mid-single digit percentage
base growth, a
significant improvement from the decline you had experienced in the
three months ended
Steven L. Barnett
FirstName LastNameSteven L. Barnett
Sterling Ultimate Parent Corp.
Comapany
July 2, 2021NameSterling Ultimate Parent Corp.
July 2,3 2021 Page 3
Page
FirstName LastName
March 31, 2020. Please revise your disclosures to quantify the
increase/decrease in
revenues attributable to the new and base clients to provide your
readers with better
insight into the underlying reasons behind the changes in your results
of operations. We
refer you to Item 303(a) of Regulation S-K and Section III.D of SEC
Release No. 33-
6835.
10. Please revise to describe the extent to which changes in revenues are
attributable to
changes in prices or to changes in the volume or amount of goods or
services being sold or
to the introduction of new products or services. We refer you to Item
303(a) of
Regulation S-K and Section III.D of SEC Release No. 33-6835.
Income Tax Benefit, page 78
11. You disclose that the benefit from income taxes decreased by 2.0%, or
$0.2 million, from
$(11.8) million for the year ended December 31, 2019 to $(11.6)
million for the year
ended December 31, 2020 primarily due to a decrease in the U.S. state
deferred income
tax provision. Please reconcile this statement with your disclosures
on page F-25 that
appear to indicate the change in the income tax benefit is primarily
attributable to changes
in both your state and international deferred income tax provision.
Non-GAAP Financial Measures, page 81
12. We note your presentation of Adjusted Earnings Per Share and Adjusted
EBITDA
Margin. Please revise your disclosures to present the most directly
comparable GAAP
measure with equal or greater prominence. We refer you to Item
10(e)(1)(i)(A) of
Regulation S-K and Question 102.10 of Compliance & Disclosure
Interpretations on Non-
GAAP Financial Measures. Similarly revise your non-GAAP disclosures
elsewhere in
your filing, as applicable.
13. Please clarify why certain adjustments to your Non-GAAP financial
measures are proper.
We note that you adjust for "M&A, optimization & restructuring",
"Technology
transformation", and "Other". See Non-GAAP Compliance & Disclosure
Interpretations
Question 100.1. Please provide an analysis of each item included in
those line items to
support that such expenses are not normal, recurring, cash operating
expenses necessary to
operate your business.
Critical Accounting Policies and Estimates
Goodwill, page 94
14. We note your critical accounting policy for goodwill. To the extent
that any reporting unit
is at risk of failing step one of the impairment test, disclose the
following:
The percentage by which fair value exceeded carrying value as
of the date of the most
recent test;
The amount of goodwill allocated to the reporting unit;
A description of the methods and key assumptions used and how
the key assumptions
Steven L. Barnett
Sterling Ultimate Parent Corp.
July 2, 2021
Page 4
were determined;
A discussion of the degree of uncertainty associated with the
key assumptions. The
discussion regarding uncertainty should provide specifics to the
extent possible; and
A description of potential events and/or changes in
circumstances that could
reasonably be expected to negatively affect the key assumptions.
Alternatively, if no reporting unit is at risk of failing step one of
the test, please disclose
that fact.
Pre-IPO Valuation of Equity, page 95
15. When your preliminary IPO price is known, please provide us with a
breakdown of all
equity awards granted from six month before the date of this letter
and leading up to the
preliminary pricing of your IPO. This breakdown should list grants in
chorological order
including the fair value of the underlying common stock used to value
such awards as
determined by your board of directors. Please reconcile and explain
the differences
between the fair values of the underlying equity interest determined
on each grant date,
including the difference between the most recent grant date fair value
and the midpoint of
your offering range. Your disclosure should fully describe the
assumptions utilized at the
IPO valuation date that are significantly different than those used in
the most recent
valuation. In addition, revise to disclose that the estimates will not
be necessary to
determine the fair value of new awards once the underlying shares
begin trading.
Management
Executive Officers and Directors, page 123
16. Please disclose which of your directors are affiliated with the
controlling stockholder and
any arrangement or understanding by which each such director was or is
to be selected as
a director or nominee. Refer to Item 401 of Regulation S-K.
Executive Compensation
Narrative Disclosure to Summary Compensation Table
Employment Agreements, page 130
17. Please describe the relationship of Sterling Infosystems, Inc. to the
company or provide an
organization chart.
Shares Eligible for Future Sale
Lock-up
FirstName Agreements, page 148
LastNameSteven L. Barnett
Comapany
18. NameSterling
Please disclose the Ultimate Parent
exceptions to theCorp.
lockup agreements with your
officers, directors and
July 2, existing
2021 Pagestockholders.
4
FirstName LastName
Steven L. Barnett
FirstName LastNameSteven L. Barnett
Sterling Ultimate Parent Corp.
Comapany
July 2, 2021NameSterling Ultimate Parent Corp.
July 2,5 2021 Page 5
Page
FirstName LastName
Consolidated Financial Statements
Revenue Recognition, page F-11
19. You disclose that post-hire monitoring includes continuous screening
allowing for greater
mobility and safety for remote, onsite and contingent jobs and also
ensuring prompt risk
warnings on any changes to an employee s profile. Please revise your
disclosures to
describe how you recognize revenues for your post-hire monitoring
service. Tell us the
amount of revenues recognized for your post-hire monitoring service
for each period
presented.
20. We note that incremental costs include commissions to the sales force
and are amortized
over three years, as management estimates that this corresponds to the
period over which a
customer benefits from the contract. Please help us better understand
how you determined
the period over which a customer benefits from the contract. Tell us
whether you pay
additional commissions upon contract renewals and whether those
renewal commissions
are commensurate with the initial commission paid. Your response
should address how
you considered that the average relationship for your top 100 clients,
based on 2019 and
2020 total revenue, is nine years and growing. We refer you to ASC
340-40.
21. We note from your disclosures that third-party data costs include
amounts paid to third
parties for access to government records, other third-party data and
services, as well as
costs related to your court runner network, and where applicable,
these are typically
invoiced to your clients as direct pass-through costs. Please revise
your revenue
recognition policy to clarify whether the various third-party cost are
recognized on a gross
or net basis. Provide us with your analysis of the principal versus
agent considerations.
We refer you to ASC 606-10-55-36 through 55-40.
Note 9. Income Taxes, page F-25
22. We note you have experienced cumulative losses over the past two years
and that you
maintain a valuation allowance of approximately $2.5 million at
December 31,
2020 against your deferred tax asset. Please provide us with a
comprehensive analysis of
your assessment of the realizability of your deferred tax assets as of
December 31, 2020
and explain to us the basis for your conclusion that an additional
valuation allowance is
not necessary. Describe your assessment of the positive and negative
evidence you
considered and how the evidence was weighted to overcome the
determination that an
additional valuation allowance is not necessary. We refer you to ASC
740-10-30-23.
Note 16. Segment Information, page F-34
23. We note that you operate in several different countries outside the
United States, most
notably the United Kingdom and Canada. Please explain how you
considered the
guidance in ASC 280-10-50-41(a).
Steven L. Barnett
FirstName LastNameSteven L. Barnett
Sterling Ultimate Parent Corp.
Comapany
July 2, 2021NameSterling Ultimate Parent Corp.
July 2,6 2021 Page 6
Page
FirstName LastName
Exhibits
24. Please describe the consideration you have given to filing management
compensatory
contracts, including the agreements with Messrs. Peirez, Paglia, and
Walker and any
amendments thereto, the Annual Incentive Plan, and the 2015 Long-Term
Incentive Plan.
Refer to Item 601(b)(10) of Regulation S-K.
General
25. Please supplementally provide us with copies of all written
communications, as defined in
Rule 405 under the Securities Act, that you, or anyone authorized to
do so on your behalf,
present to potential investors in reliance on Section 5(d) of the
Securities Act, whether or
not they retain copies of the communications.
You may contact Morgan Youngwood, Senior Staff Accountant, at (202)
551-3479 or
Stephen Krikorian, Accounting Branch Chief, at (202) 551-3488 if you have
questions regarding
comments on the financial statements and related matters. Please contact Anna
Abramson, Staff
Attorney, at (202) 551-4969 or Larry Spirgel, Office Chief, at (202) 551-3815
with any other
questions.
Sincerely,
Division of
Corporation Finance
Office of
Technology
cc: Andrew Barkan