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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-40829
https://cdn.kscope.io/9e986cdc4383ec80c5bcddd9c0b24faf-ster-20220630_g1.jpg
Sterling Check Corp.
(Exact name of registrant as specified in its charter)
Delaware37-1784336
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1 State Street Plaza, 24th Floor
New York, New York
10004
(Address of principal executive offices)(Zip Code)
1 (800) 853-3228
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange
on which registered
Common stock, $0.01 par valueSTERThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated
1





filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒
The total number of outstanding shares of the registrant’s common stock, $0.01 par value per share, as of August 8, 2022 was 96,360,390 (excluding treasury shares of 107,820).

2


STERLING CHECK CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and we intend that all forward-looking statements that we make will be subject to the safe harbor protections created thereby. You can generally identify forward-looking statements by our use of forward-looking terminology such as “aim,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “projection,” “seek,” “should,” “will” or “would,” or the negative thereof or other variations thereon or comparable terminology. In particular, statements that address market trends, and statements regarding our expectations, beliefs, plans, strategies, objectives, prospects or assumptions, or future events or performance contained in this Quarterly Report on Form 10-Q under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements.
We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in this Quarterly Report on Form 10-Q under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may cause our actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements, or could affect our share price. Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:
changes in economic, political and market conditions and the impact of these changes on our clients’ hiring trends;
the sufficiency of our cash to meet our liquidity needs;
the possibility of cyber-attacks, security vulnerabilities and internet disruptions, including breaches of data security and privacy leaks, data loss and business interruptions;
our ability to comply with the extensive United States (“U.S.”) and foreign laws, regulations and policies applicable to our industry, and changes in such laws, regulations and policies;
our compliance with data privacy laws and regulations;
potential liability for failures to provide accurate information to our clients, which may not be covered, or may be only partially covered, by insurance;
the possible effects of negative publicity on our reputation and the value of our brand;
our failure to compete successfully;
our ability to keep pace with changes in technology and to provide timely enhancements to our products and services;
the continued impact of COVID-19 on global markets, economic conditions and the response by governments and third parties;
our ability to cost-effectively attract new clients and retain our existing clients;
our ability to grow our Identity-as-a-Service offerings;
our success in new product introductions and adjacent market penetrations;
our ability to expand into new geographies;
our ability to pursue strategic mergers and acquisitions;
design defects, errors, failures or delays with our products and services;
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systems failures, interruptions, delays in services, catastrophic events and resulting interruptions;
natural or man-made disasters including pandemics and other significant public health emergencies, outbreaks of hostilities or effects of climate change and our ability to deal effectively with damage or disruption caused by the foregoing;
our ability to implement our business strategies profitably;
our ability to retain the services of certain members of our management;
inadequate protection of our intellectual property;

our ability to implement, maintain and improve effective internal controls and remediate the material weakness described in Item 4. “Controls and Procedures” of this Quarterly Report on Form 10-Q;
our ability to comply with public company requirements in a timely and cost-effective manner, and expense strain on our resources and diversion of our management’s attention resulting from public company compliance requirements; and
the other risks described in Item 1A. “Risk Factors” in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 16, 2022.
Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance and our actual results of operations, financial condition, and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. In addition, even if our results of operations, financial condition, and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods.
Any forward-looking statement that we make in this Quarterly Report on Form 10-Q speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q.
Investors and others should note that we announce material financial and operational information using our investor relations website, press releases, SEC filings and public conference calls and webcasts. Information about Sterling Check Corp. (“Sterling”), our business, and our results of operations may also be announced by posts on our accounts on the following social media channels: Instagram; Facebook; LinkedIn and Twitter. The information contained on, or that can be accessed through, our social media channels and on our website is deemed not to be incorporated in this Quarterly Report on Form 10-Q or to be a part of this Quarterly Report on Form 10-Q. The information that we post through these social media channels and on our website may be deemed material. As a result, we encourage investors, the media and others interested in Sterling to monitor these social media channels in addition to following our investor relations website, press releases, SEC filings and public conference calls and webcasts. The list of social media channels we use may be updated from time to time on our investor relations website.

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)December 31,
2021
June 30,
2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$47,998 $65,811 
Accounts receivable (net of allowance of $2,949 and $3,322 as of December 31, 2021 and June 30, 2022, respectively)
127,927 164,179 
Prepaid expenses12,510 13,080 
Operating leases right-of-use asset 3,282 
Other current assets11,563 12,173 
Total current assets199,998 258,525 
Property and equipment, net11,124 11,647 
Goodwill852,536 850,309 
Intangible assets, net297,146 266,497 
Deferred income taxes4,770 4,495 
Operating leases right-of-use asset 15,736 
Other noncurrent assets, net6,685 8,432 
TOTAL ASSETS$1,372,259 $1,415,641 
LIABILITIES AND STOCKHOLDERS’ EQUITY 
CURRENT LIABILITIES:  
Accounts payable$31,127 $44,767 
Accrued expenses67,971 58,135 
Current portion of long-term debt6,461 6,461 
Operating leases liability, current portion 3,553 
Other current liabilities24,361 16,961 
Total current liabilities129,920 129,877 
Long-term debt, net499,107 496,835 
Deferred income taxes28,584 30,065 
Long-term operating leases liability, net of current portion 18,176 
Other liabilities5,024 4,742 
Total liabilities$662,635 $679,695 
COMMITMENTS AND CONTINGENCIES (NOTE 12)  
STOCKHOLDERS’ EQUITY:  
Preferred stock ($0.01 par value; 100,000,000 shares authorized; no shares issued or outstanding)
  
Common stock ($0.01 par value; 1,000,000,000 shares authorized, 95,854,795 shares issued and 95,746,975 shares outstanding as of December 31, 2021; 1,000,000,000 shares authorized, 96,518,087 shares issued and 96,410,267 shares outstanding as of June 30, 2022)
68 73 
Additional paid-in capital916,578 928,486 
Common stock held in treasury (107,820 shares as of December 31, 2021 and June 30, 2022)
(897)(897)
Accumulated deficit(206,218)(188,609)
Accumulated other comprehensive income (loss)93 (3,107)
Total stockholders’ equity709,624 735,946 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$1,372,259 $1,415,641 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME

 Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands, except share and per share data)2021202220212022
REVENUES$159,328 $205,591 $298,698 $397,563 
OPERATING EXPENSES:    
Cost of revenues (exclusive of depreciation and amortization below)75,580 107,576 143,159 208,532 
Corporate technology and production systems9,998 12,539 20,351 25,091 
Selling, general and administrative38,605 41,886 68,211 84,219 
Depreciation and amortization20,299 19,872 40,848 40,028 
Impairments of long-lived assets49 612 2,925 612 
Total operating expenses144,531 182,485 275,494 358,482 
OPERATING INCOME 14,797 23,106 23,204 39,081 
OTHER EXPENSE (INCOME):    
Interest expense, net7,603 6,619 15,173 12,955 
Loss (gain) on interest rate swaps133 32 87 (296)
Other income(362)(508)(633)(862)
Total other expense, net7,374 6,143 14,627 11,797 
INCOME BEFORE INCOME TAXES7,423 16,963 8,577 27,284 
Income tax provision 4,026 5,392 4,552 9,477 
NET INCOME$3,397 $11,571 $4,025 $17,807 
Unrealized loss on hedged transactions, net of tax(188) (322) 
Foreign currency translation adjustments, net of tax222 (3,483)594 (3,200)
Total other comprehensive income (loss)34 (3,483)272 (3,200)
COMPREHENSIVE INCOME $3,431 $8,088 $4,297 $14,607 
Net income per share attributable to stockholders    
Basic$0.04 $0.12 $0.05 $0.19 
Diluted$0.04 $0.12 $0.05 $0.18 
Weighted average number of shares outstanding    
Basic88,826,91994,024,97088,717,89093,996,553
Diluted88,913,17599,344,56388,802,94899,265,668
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)Shares Outstanding Par ValueAdditional Paid-In Capital
Common Stock Held in Treasury
Accumulated Deficit
Accumulated Other Comprehensive Income (Loss)
Total
BALANCE as of December 31, 2020
88,554,962$1 $770,714 $(897)$(187,691)$1,057 $583,184 
Common stock issued for exercise of employee-based stock options271,9462,427 — — — 2,427 
Stock-based compensation911 — — — 911 
Net income— — 628 — 628 
Unrealized loss on hedged transactions, net of tax— — — (134)(134)
Foreign currency translation adjustment, net of tax— — — 372 372 
BALANCE as of March 31, 202188,826,908$1 $774,052 $(897)$(187,063)$1,295 $587,388 
Stock-based compensation765 — — — 765 
Net income— — 3,397 — 3,397 
Unrealized loss on hedged transactions, net of tax— — — (188)(188)
Foreign currency translation adjustment, net of tax— — — 222 222 
BALANCE as of June 30, 2021
88,826,908$1 $774,817 $(897)$(183,666)$1,329 $591,584 
(in thousands, except share amounts)Shares OutstandingPar ValueAdditional Paid-In Capital
Common Stock Held in Treasury
Accumulated Deficit
Accumulated Other Comprehensive Income (Loss)
Total
BALANCE as of December 31, 2021
95,746,975$68 $916,578 $(897)$(206,218)$93 $709,624 
Issuance of common stock1,112— — — — — — 
Common stock issued for exercise of employee-based stock options8,486— 80 — — — 80 
Issuance of restricted shares, net of forfeitures and vestings533,0955 (5)— — — — 
Stock-based compensation— 5,108 — — — 5,108 
Net income— — — 6,236 — 6,236 
Cumulative effect adjustment for adoption of CECL, net of tax of $56
— — — (198)— (198)
Foreign currency translation adjustment, net of tax— (8)— — 283 275 
BALANCE as of March 31, 202296,289,668$73 $921,753 $(897)$(200,180)$376 $721,125 
Issuance of common stock1,812— — — — — — 
Common stock issued for exercise of employee stock options76,399— 734 — — — 734 
Issuance of restricted shares, net of forfeitures and vestings42,388— — — — — — 
Stock-based compensation— 6,023 — — — 6,023 
Net income— — — 11,571 — 11,571 
Foreign currency translation adjustment, net of tax— (24)— — (3,483)(3,507)
BALANCE as of June 30, 2022
96,410,267$73 $928,486 $(897)$(188,609)$(3,107)$735,946 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 Six Months Ended June 30,
(in thousands)20212022
CASH FLOWS FROM OPERATING ACTIVITIES  
Net income$4,025 $17,807 
Adjustments to reconcile net income to net cash provided by operations  
Depreciation and amortization40,848 40,028 
Deferred income taxes(699)3,409 
Stock-based compensation1,653 11,131 
Impairments of long-lived assets2,925 612 
Provision for bad debts496 659 
Amortization of financing fees249 218 
Amortization of debt discount1,156 959 
Deferred rent(1,223)(146)
Unrealized translation gain on investment in foreign subsidiaries(229)(1,220)
Changes in fair value of derivatives(2,904)(4,102)
Excess payment on contingent consideration for acquisition(166) 
Changes in operating assets and liabilities
Accounts receivable(24,828)(36,451)
Insurance receivable750  
Prepaid expenses(2,436)(702)
Other assets(1,109)(3,180)
Accounts payable12,600 14,249 
Litigation settlement obligation(750) 
Accrued expenses15,637 (8,610)
Other liabilities(705)(1,382)
Net cash provided by operating activities45,290 33,279 
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment(1,260)(3,266)
Purchases of intangible assets and capitalized software(8,035)(7,616)
Proceeds from disposition of property and equipment 9 
Net cash used in investing activities(9,295)(10,873)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock2,427 814 
Payments of IPO issuance costs (225)
Payments of long-term debt(9,916)(3,231)
Payment of contingent consideration for acquisition(738)(215)
Payments of finance lease obligations(7)(1)
Net cash used in financing activities(8,234)(2,858)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS(103)(1,735)
NET CHANGE IN CASH AND CASH EQUIVALENTS27,658 17,813 
CASH AND CASH EQUIVALENTS  
Beginning of period66,633 47,998 
Cash and cash equivalents at end of period$94,291 $65,811 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION  
Cash paid during the period for  
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Interest, net of capitalized amounts of $137 and $150 for the six months ended June 30, 2021 and 2022, respectively
$12,320 $17,225 
Income taxes2,7439,531
Noncash investing activities
Purchases of property and equipment in accounts payable and
       accrued expenses
205222
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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STERLING CHECK CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.Description of Business
Sterling Check Corp. (the “Company”), a Delaware corporation headquartered in New York City, New York, is a global provider of technology-enabled background and identity verification services. The Company provides the foundation of trust and safety its clients need to create effective environments for their most essential resource—people. The Company offers a comprehensive hiring and risk management solution that begins with identity verification, followed by criminal background screening, credential verification, drug and health screening, employee onboarding document processing and ongoing risk monitoring.
The Company’s final prospectus related to the initial public offering (“IPO”) of its common stock, $0.01 par value per share (“common stock”) was filed with the Securities and Exchange Commission (“SEC”) on September 24, 2021 pursuant to Rule 424(b) under the Securities Act (the “IPO Prospectus”) and the common stock began trading on the Nasdaq Global Select Market on September 23, 2021. On September 27, 2021, the Company completed its IPO of an aggregate of 16,427,750 shares of common stock at a public offering price of $23.00 per share, pursuant to the IPO Prospectus. The Company sold 4,760,000 shares and certain existing stockholders sold an aggregate of 11,667,750 shares, including 2,142,750 shares that were sold pursuant to the full exercise of the underwriters’ option to purchase additional shares. The Company received aggregate net proceeds of $94.5 million after deducting underwriting discounts and commissions of $6.8 million and other offering expenses of $8.1 million.
As of June 30, 2022, the Company is 62.2% owned by an investment group consisting of entities advised by or affiliated with The Goldman Sachs Group, Inc. (“Goldman Sachs”) and Caisse de dépôt et placement du Québec (“CDPQ”). CDPQ owns its equity interest in the Company indirectly through a limited partnership controlled by Goldman Sachs.

2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and include accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
These unaudited condensed consolidated financial statements are unaudited; however, in the opinion of management, they reflect all adjustments consisting only of normal recurring adjustments necessary to state fairly the financial position, results of operations and cash flows for the periods presented in conformity with US GAAP applicable to interim periods. The results of operations for the interim periods presented are not necessarily indicative of results for the full year or future periods. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2021 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2022.
On September 10, 2021, the Company’s Board of Directors (the “Board of Directors”) authorized a stock split and the Company filed an amendment to its certificate of incorporation to effectuate a 1,198-for-1 split of its outstanding common stock. The stock split was effectuated such that (i) each then outstanding share of common stock was increased to 1,198 shares; (ii) the number of shares of common stock into which then-outstanding options to purchase common stock is exercisable was proportionately increased; and (iii) the exercise price of each then-outstanding option to purchase common stock was proportionately reduced. The accompanying unaudited condensed consolidated financial statements give retroactive effect as though the 1,198-for-1 stock split of the Company’s common stock occurred for all periods presented.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and judgments that can affect the reported amount of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Significant estimates include the impairment of long-lived assets, goodwill impairment, the determination of the fair value of acquired assets and liabilities, the valuation of stock-
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based awards and stock-based compensation and sales and income tax liabilities. The Company also applies an estimated useful life of three years to internally developed software. This is based on the historical observed pace of change in the Company’s delivery, technology, and product offerings as well as market competition. The Company believes that the estimates used in the preparation of these unaudited condensed consolidated financial statements are reasonable; however, actual results could differ materially from these estimates.
Segment Information
The Company has one operating and reportable segment. The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.
Cash and Cash Equivalents
Cash and cash equivalents of $48.0 million and $65.8 million as of December 31, 2021 and June 30, 2022, respectively, include money market instruments with maturities of three months or less. The Company maintained cash outside the U.S. as of December 31, 2021 of $34.2 million with the largest deposits being held in India and Canada, with balances of $15.0 million and $3.6 million, respectively. Cash outside the U.S. was $32.1 million as of June 30, 2022, with the largest deposits being held in India and Canada, with balances of $15.7 million and $6.4 million, respectively.
Foreign Currency
Assets and liabilities of operations having non-USD functional currencies are translated at period-end exchange rates, and income statement accounts are translated at weighted average exchange rates for the period. Gains or losses resulting from translating foreign currency financial statements, net of any related tax effects, are reflected in Accumulated other comprehensive income (loss), a separate component of stockholders’ equity on the unaudited condensed consolidated balance sheets. Gains or losses resulting from foreign currency transactions incurred in currencies other than the local functional currency are included in Other income in the unaudited condensed consolidated statements of income and comprehensive income. The cumulative translation adjustment resulted in a loss of $0.6 million and a loss of $3.8 million as of December 31, 2021 and June 30, 2022, respectively.
Allowance for Credit Losses
Accounts receivable balances consist of trade receivables that are recorded at the invoiced amount, net of allowances for expected credit losses and for potential sales credits and reserves. Sales credits and reserves were $0.4 million and $1.2 million as of December 31, 2021 and June 30, 2022, respectively.

The Company adopted FASB ASC Topic 326, Financial Instruments - Credit Losses, (“CECL”) with an adoption date of January 1, 2022. As a result, the Company changed its accounting policy for allowance for credit losses and the policy pursuant to CECL is disclosed below. The adoption of CECL resulted in a $0.3 million cumulative effect adjustment recorded in retained earnings as of January 1, 2022.

CECL requires an entity to utilize an impairment model to estimate its lifetime expected credit losses and record an allowance that, when deducted from the amortized cost basis of a financial asset, presents the net amount expected to be collected on the financial asset.

The Company maintains an allowance for expected credit losses in order to record accounts receivable at their net realizable value. Inherent in the assessment of the allowance for expected credit losses are certain judgments and estimates relating to, among other things, the Company’s customers’ access to capital, customers’ willingness and ability to pay, general economic conditions and the ongoing relationship with customers. Allowances have been recorded for receivables believed to be uncollectible, including amounts for the resolution of potential credit and other collection issues such as disputed invoices. The allowance for expected credit losses is determined by analyzing the Company’s historical write-offs, the current aging of receivables, the financial condition of customers and the general economic climate. Adjustments to the allowance may be required in future periods depending on how such potential issues are resolved or if the financial condition of the Company’s customers were to deteriorate resulting in an impairment of their ability to make payments. The Company has not historically had material write-offs due to uncollectible accounts receivable.
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The following table summarizes changes in the allowance for expected credit losses for the periods presented:

Three Months Ended June 30,Six Months Ended June 30,
(in thousands)2021202220212022
Balance at beginning of period$1,778 $1,842 $1,861 $2,949 
Cumulative effect of accounting change upon adoption of CECL   254 
Additions417 351 496 659 
Write-offs, net of recoveries(16)(22)(172)(1,691)
Foreign currency translation adjustment1 (10)(5)(10)
Balance at end of period$2,180 $2,161 $2,180 $2,161 
Corporate Technology and Production Systems
Corporate technology and production systems includes costs related to maintaining the Company’s corporate information technology infrastructure and non-capitalizable costs to develop and maintain its production systems.
The following table sets forth expenses included in each category of corporate technology and production systems for the periods presented:
 Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands)2021202220212022
Corporate information technology$4,937 $6,290 $9,489 $12,413 
Development of platform and product initiatives3,740 4,115 7,336 8,364 
Production support and maintenance1,321 2,134 3,526 4,314 
Total production systems5,061 6,249 10,862 12,678 
Corporate technology and production systems$9,998 $12,539 $20,351 $25,091 
Corporate information technology consists of salaries and benefits of personnel (including stock-based compensation expense) supporting internal operations such as information technology support and the maintenance of information security and business continuity functions. Also included are third-party costs including cloud computing costs that support the Company’s corporate internal systems, software licensing and maintenance, telecommunications and other technology infrastructure costs.

Production systems costs consist of non-capitalizable personnel costs including contractor costs incurred for the development of platform and product initiatives and production support and maintenance. Platform and product initiatives facilitate the development of the Company’s technology platform and the launch of new screening products. Production support and maintenance includes costs to support and maintain the technology underlying the Company’s existing screening products and to enhance the ease of use of the Company’s cloud applications. Certain personnel costs related to new products and features are capitalized and amortized to depreciation and amortization.
Included within corporate technology and production systems are non-capitalizable production system and corporate information technology expenses related to Project Ignite, a three-phase strategic investment initiative. Phase one of Project Ignite modernized client and candidate experiences and is complete. Phase two of Project Ignite focused on decommissioning the Company’s on-premises data centers and migrating the Company’s production systems and corporate information technological infrastructure to a managed service provider in the cloud. During the first half of 2021, the Company completed phase two initiatives related to the migration of its production and fulfillment systems to the cloud, and as a result, as of December 31, 2021, over 95% of revenue is processed through platforms hosted in the cloud. The Company incurred expenses related to phase two to complete the decommissioning of on-premises data centers for internal corporate technology infrastructure and migration to the cloud which was substantially completed as of June 30, 2022. Phase three of
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Project Ignite is decommissioning of the platforms purchased over the prior ten years and the migration of the clients to one global platform. This third and final phase, which the Company expects to substantially complete by year-end 2022, will unify clients onto a single global platform. The future costs related to completing these initiatives will be included in corporate technology and production systems.

3.Recent Accounting Standards Updates
The Company qualifies as an emerging growth company under the Jumpstart Our Business Startups Act (the “JOBS Act”). The JOBS Act permits extended transition periods for complying with new or revised accounting standards affecting public companies. The Company has elected to use the extended transition periods and is adopting new or revised accounting standards on the FASB‘s non-public company timeline. As such, the Company’s financial statements may not be comparable to financial statements of public entities that comply with new or revised accounting standards on a non-delayed basis.
The Company will cease to be an emerging growth company upon the earliest of (a) the last day of the fiscal year in which it has total annual gross revenues of $1.07 billion or more; (b) the last day of its fiscal year following the fifth anniversary of the date of its IPO; (c) the date on which it has issued more than $1.0 billion in nonconvertible debt during the previous three years; or (d) the date on which it is deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur as of the last day of a fiscal year in which the market value of its common stock held by non-affiliates equals or exceeds $700 million as of the last business day of the second fiscal quarter of such fiscal year, which threshold was not exceeded as of June 30, 2022.
Accounting Pronouncements Adopted
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (“ASC 842”), on the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use (“ROU”) asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for in a manner similar to the accounting under previously issued guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to previously issued guidance for sales-type leases, direct financing leases and operating leases. ASC 842 supersedes the previous leases standard, ASC 840, Leases. The guidance is effective for the Company for annual periods beginning after December 15, 2021 and interim periods within annual periods beginning after December 15, 2022. Effective January 1, 2022, the Company adopted ASC 842 on a modified retrospective transition basis and recognized a ROU asset of $21.0 million and a lease liability of $23.8 million upon adoption. For additional information see Note 8, “Leases”.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments” (“ASU No. 2016-13”). ASU No. 2016-13 requires an entity to utilize a CECL model to estimate its lifetime expected credit loss and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU No. 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans, and available-for-sale debt securities. As per the latest ASU No. 2020-02, “Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842),” the FASB deferred the timelines for certain small public and private entities. The Company adopted the guidance as of January 1, 2022. The adoption of CECL resulted in a $0.3 million cumulative effect adjustment recorded in retained earnings as of January 1, 2022.

Accounting Pronouncements Not Yet Adopted
In March 2020 and January 2021, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848)” (“ASU No. 2020-04”) and ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope” (“ASU No. 2021-01”), respectively. These ASUs address concerns about the risk of cessation of the London Interbank Offered Rate (“LIBOR”) and the identification of alternative reference rates. The amendments in ASU No. 2020-04 and ASU No. 2021-01 provide optional expedients and exceptions for applying US GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. The amendments in ASU No. 2020-04 and ASU No. 2021-01 are elective. The cessation of the one-week and two-month LIBOR rates in
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December 2021 did not have any impact on the Company as such rates are not used. The Company is evaluating the impact that adoption of any of the amendments within these ASUs will have on its financial statements ahead of the cessation date of the one-month LIBOR rate after June 2023 and will consider alternative reference rates as part of future amendments or modifications to its credit agreements.

4.Acquisitions

EBI Acquisition

On November 30, 2021, the Company acquired all of the outstanding shares of Employment Background Investigations, Inc. (“EBI”) for a purchase price of $67.8 million, consisting of $66.3 million of cash and $1.5 million of contingent consideration recorded at fair value. The contingent consideration is limited to a maximum of $8.5 million of additional payments, to be determined based on actual future results. As of December 31, 2021, the fair value of this contingent consideration totaled $1.5 million and consisted of $0.9 million for an earn-out payable two years after the acquisition based upon revenue retention and $0.6 million payable throughout the year following the acquisition based on customer collections on receivables acquired. As of June 30, 2022, the fair value of this contingent consideration totaled $1.2 million and consisted of the $0.9 million earn-out and $0.3 million remaining payable throughout the year following the acquisition based on customer collections on acquired receivables. The Company recorded a preliminary allocation of the purchase price to assets acquired and liabilities assumed based on their estimated fair values as of November 30, 2021 and no measurement period adjustments were recognized during the three and six month periods ended June 30, 2022. The Company incurred approximately $1.9 million of transaction expenses related to the acquisition of EBI during the year ended December 31, 2021.

The allocation of the purchase price is based on the fair value of assets acquired and liabilities assumed as of the acquisition date. The following table summarizes the consideration paid and the amounts recognized for the assets acquired and liabilities assumed:

November 30,
2021
(in thousands)
Consideration
Cash$ 
Other current assets
Accounts receivable8,861 
Prepaid expenses394 
Property and equipment1,290 
Intangible assets59,161 
Total assets acquired$69,706 
Accounts payable and accrued expenses5,614 
Other current liabilities1,182 
Deferred tax liability16,566 
Other liabilities298 
Total liabilities assumed$23,660 
Total identifiable net assets46,046 
Goodwill21,721 
Total consideration$67,767 

Goodwill recognized is primarily attributable to assembled workforce and expected synergies and is not tax deductible in future years. Intangible assets acquired consist largely of customer lists in the amount of $56.0 million to be amortized over 15 years. The remaining intangible assets include trade names and a non-compete agreement, which will be amortized over two years and five years, respectively.


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5.Property and Equipment, net
(in thousands)December 31,
2021
June 30,
2022
Furniture and fixtures$3,636 $3,134 
Computers and equipment37,767 40,509 
Leasehold improvements7,347 7,468 
 48,750 51,111 
Less: Accumulated depreciation(37,626)(39,464)
Total property and equipment, net$11,124 $11,647 
Depreciation expense on property and equipment was $1.1 million during the three months ended June 30, 2021 and 2022 and $2.4 million and $2.2 million during the six months ended June 30, 2021 and 2022, respectively. Write down of abandoned property and equipment no longer in use was less than $0.1 million for the three months ended June 30, 2021 and $2.8 million for the six months ended June 30, 2021. Write down of abandoned property and equipment no longer in use totaled $0.6 million during the three and six months ended June 30, 2022.
6.Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill for the six months ended June 30, 2022 were as follows:
(in thousands) 
Goodwill as of December 31, 2021
$852,536 
Foreign currency translation adjustment(2,227)
Goodwill as of June 30, 2022
$850,309 
Intangible Assets
Intangible assets, net consisted of the following for the periods presented:
 December 31, 2021June 30, 2022
(dollars in thousands)Estimated Useful LivesGross
Carrying
Amount
Accumulated
Amortization
NetGross
Carrying
Amount
Accumulated
Amortization
Net
Customer lists
7 - 17 years
$507,087 $(304,855)$202,232 $506,367 $(322,741)$183,626 
Trademarks
4 - 16 years
77,434 (31,685)45,749 77,240 (34,591)42,649 
Non-compete agreement
1 - 4 years
3,191 (2,462)729 3,181 (2,510)671 
Technology
3 - 7 years
231,165 (191,320)39,845 238,520 (207,060)31,460 
Domain names
3 - 15 years
10,118 (4,009)6,109 10,118 (4,345)5,773 
Favorable leases
4 - 14 years
4,940 (2,458)2,482 4,940 (2,622)2,318 
  $833,935 $(536,789)$297,146 $840,366 $(573,869)$266,497 
Included within technology is $30.7 million and $29.3 million of internal-use software, net of accumulated amortization, as of December 31, 2021 and June 30, 2022, respectively. As of June 30, 2022, $6.3 million of technology assets have not yet been put in service.
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The Company capitalized $8.0 million of costs to develop internal-use software included in technology during the six months ended June 30, 2021 (consisting of internal costs of $6.1 million and external costs of $1.9 million). The Company capitalized $7.6 million of costs to develop internal-use software included in technology during the six months ended June 30, 2022 (consisting of internal costs of $6.1 million and external costs of $1.5 million).
For the three and six months ended June 30, 2021, the Company recorded a write-down related to the impairment of capitalized software in the amount of $0.1 million. There was no write-down of capitalized software during the three and six months ended June 30, 2022.
Amortization expense was $19.2 million and $18.7 million for the three months ended June 30, 2021 and 2022, respectively, and $38.4 million and $37.8 million for the six months ended June 30, 2021 and 2022, respectively.
Except for the customer lists, which are amortized utilizing an accelerated method, all other intangible assets are amortized on a straight-line basis, which approximates the pattern in which economic benefits are consumed. Estimated amortization expense as of June 30, 2022 is as follows for each of the next five years:
(in thousands) 
Year Ending December 31, 
2022$31,093 
202351,235 
202441,471 
202532,023 
202626,423 
Thereafter84,252 
 $266,497 
7.Accrued Expenses
Accrued expenses on the unaudited condensed consolidated balance sheets as of December 31, 2021 and June 30, 2022, consisted of the following:
(in thousands)December 31,
2021
June 30,
2022
Accrued compensation$28,851 $22,684 
Accrued cost of revenues18,270 18,230 
Accrued interest4,144 2,226 
Other accrued expenses16,706 14,995 
Total accrued expenses$67,971 $58,135 

8.Leases
Effective January 1, 2022, the Company adopted ASC 842, which requires the recognition of all leases, including operating leases on the unaudited condensed consolidated balance sheet by recording a ROU asset and related liability, and elected to exclude short-term leases from adoption. The lease liability and ROU asset will be remeasured when there is a change in the lease term (or upon the occurrence of another reassessment trigger). The Company elected to adopt ASC 842 using the effective date method, which required the Company to recognize and measure all leases that exist at the effective date using a modified transition approach. Under this approach, the Company will not restate financial information for any periods prior to January 1, 2022. ASC 842 includes certain practical expedients intended to ease the burden of adoption. Upon adoption, the Company elected the following package of practical expedients:

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No change to the classification of existing operating leases under previous lease guidance;
All existing leases classified as capital leases under previous lease guidance will be classified as financing leases under ASC 842;
All existing lessor leases classified as operating leases under previous lease guidance will be classified as operating leases under ASC 842; and
All existing lessor leases classified as sales-type or direct financing leases under previous lease guidance will be classified as sales-type or direct financing leases under ASC 842.

By electing this package of practical expedients, the Company will not be required to reassess whether an existing contract is or contains a lease, reassess lease classification, nor will the Company be required to reassess the accounting treatment for initial direct costs. These elections will apply to all leases, as lessee and sublessor.

The Company did not elect to use hindsight in determining its lease terms or whether a renewal, termination, or purchase option is reasonably certain to be exercised. Therefore, the lease term at transition for all leases will be the remaining lease term as determined under previous lease guidance.

In addition, the Company derecognized its intangible favorable and unfavorable lease balances at the transition date with a corresponding entry to the ROU asset, with no impact to the unaudited condensed consolidated statements of income and comprehensive income and the Company’s accumulated deficit.

Upon adoption on January 1, 2022, the Company recognized a ROU asset of $21.0 million and a lease liability of $23.8 million.

The Company determines if a contract is a lease or contains a lease at inception. Operating lease liabilities are measured, on each reporting date, based on the present value of the future minimum lease payments over the remaining lease term. The Company’s leases generally do not provide an implicit rate and, therefore, the Company uses the incremental borrowing rate in its credit agreement of 4.50%. The Company used the incremental borrowing rate on January 1, 2022 for all leases that commenced prior to that date. Operating lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense. Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.
The Company leases real estate and equipment for use in its operations. The Company has 21 operating leases with remaining lease terms ranging from 1 month to 79 months.
The components of lease expense are as follows:
Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands)2021202220212022
Components of total lease costs
Operating lease expense$1,257 $1,302 $1,719 $2,601 
Sublease income (216) (288)
Total net lease costs$1,257 $1,086 $1,719 $2,313 









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Information related to the Company’s ROU assets and lease liabilities is as follows:

(dollar amounts in thousands)June 30, 2022
Operating leases
Operating leases ROU asset - current$3,282 
Operating leases ROU asset - long-term15,736 
Operating leases ROU asset, net$19,018 
Operating leases liability - current$3,553 
Operating leases liability - long-term18,176 
Total operating leases liability$21,729 
Weighted average remaining lease term in years - operating leases5.3
Weighted average discount rate - operating leases4.50 %

Total remaining lease payments under the Company’s operating leases are as follows:

(in thousands)June 30, 2022
Remainder of fiscal year 2022$2,507 
20234,915 
20244,317 
20254,399 
20263,804 
20273,468 
Thereafter1,158 
Total future minimum lease payments$24,568 
Less: imputed interest(2,839)
Total$21,729 


9.