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ster-20220930

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 September 30, 2022


☐			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

Sterling Check Corp.

(Exact name of registrant as specified in its charter)


Delaware						37-1784336
(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 value

STER

The 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

filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller 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 November 7, 2022 was 97,063,754 (excluding treasury shares of 107,820).

STERLING CHECK CORP. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022

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PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

Unaudited Condensed Consolidated Balance Sheets as of December 31, 2021 and September 30, 2022

Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2021 and 2022

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2022

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2022

Notes to the Unaudited Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II – OTHER INFORMATION

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

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		September 30, 2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	47,998	$	99,190
Accounts receivable (net of allowance of $2,949 and $3,182 as of December 31, 2021 and September 30, 2022, respectively)	127,927		159,550

Prepaid expenses	12,510		8,702
Operating leases right-of-use asset	—		3,333
Other current assets	11,563		11,235
Total current assets	199,998		282,010
Property and equipment, net	11,124		10,973
Goodwill	852,536		849,423
Intangible assets, net	297,146		254,610
Deferred income taxes	4,770		4,117
Operating leases right-of-use asset	—		15,679
Other noncurrent assets, net	6,685		8,115
TOTAL ASSETS	$	1,372,259	$	1,424,927
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	31,127	$	36,784

Accrued expenses	67,971		66,200
Current portion of long-term debt	6,461		6,461
Operating leases liability, current portion	—		3,601
Other current liabilities	24,361		14,162
Total current liabilities	129,920		127,208
Long-term debt, net	499,107		495,705
Deferred income taxes	28,584		31,542
Long-term operating leases liability, net of current portion	—		18,087
Other liabilities	5,024		4,171
Total liabilities	$	662,635	$	676,713
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, 96,655,886 shares issued and 96,548,066 shares outstanding as of September 30, 2022)	68		75
Additional paid-in capital	916,578		936,239
Common stock held in treasury (107,820 shares as of December 31, 2021 and September 30, 2022)	(897)		(897)
Accumulated deficit	(206,218)		(179,306)
Accumulated other comprehensive income (loss)	93		(7,897)
Total stockholders’ equity	709,624		748,214
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,372,259	$	1,424,927

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 OPERATIONS AND

COMPREHENSIVE (LOSS) INCOME


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except share and per share data)	2021		2022		2021		2022
REVENUES	$	169,557	$	199,299	$	468,255	$	596,862
OPERATING EXPENSES:
Cost of revenues (exclusive of depreciation and amortization below)	82,638		106,422		225,798		314,954
Corporate technology and production systems	12,084		13,715		32,435		38,806
Selling, general and administrative	84,983		42,411		153,194		126,630
Depreciation and amortization	20,346		16,570		61,193		56,598
Impairments of long-lived assets	15		193		2,940		805
Total operating expenses	200,066		179,311		475,560		537,793
OPERATING (LOSS) INCOME	(30,509)		19,988		(7,305)		59,069
OTHER EXPENSE (INCOME):
Interest expense, net	7,668		7,764		22,841		20,719
Loss (gain) on interest rate swaps	112		—		199		(296)
Other income	(400)		(560)		(1,034)		(1,422)
Total other expense, net	7,380		7,204		22,006		19,001
(LOSS) INCOME BEFORE INCOME TAXES	(37,889)		12,784		(29,311)		40,068
Income tax (benefit) provision	(12,633)		3,481		(8,080)		12,958
NET (LOSS) INCOME	$	(25,256)	$	9,303	$	(21,231)	$	27,110
Unrealized loss on hedged transactions, net of tax	(1)		—		(323)		—
Foreign currency translation adjustments, net of tax	(1,565)		(4,790)		(971)		(7,990)
Total other comprehensive (loss) income	(1,566)		(4,790)		(1,294)		(7,990)
COMPREHENSIVE (LOSS) INCOME	$	(26,822)	$	4,513	$	(22,525)	$	19,120
Net (loss) income per share attributable to stockholders
Basic	$	(0.28)	$	0.10	$	(0.24)	$	0.29
Diluted	$	(0.28)	$	0.09	$	(0.24)	$	0.27
Weighted average number of shares outstanding
Basic	89,431,022		94,134,690		88,956,388		94,043,105
Diluted	89,431,022		99,118,521		88,956,388		99,217,125

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 Value		Additional 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 options	271,946	—		2,427		—		—		—		2,427
Stock-based compensation	—	—		911		—		—		—		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, 2021	88,826,908	$	1	$	774,052	$	(897)	$	(187,063)	$	1,295	$	587,388
Stock-based compensation	—	—		765		—		—		—		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
Common stock issued for exercise of employee-based stock options	6,093	—		56		—		—		—		56
Issuance of common stock in connection with IPO, net of offering costs, underwriting discounts and commissions	4,760,000	48		94,475		—		—		—		94,523
Issuance of common stock in connection with forgiveness of promissory notes	370,182	—		8,409		—		—		—		8,409
Capital contribution from Stockholder	—	—		15,576		—		—		—		15,576
Issuance of restricted shares	1,824,597	19		(19)		—		—		—		—
Stock-based compensation	—	—		17,919		—		—		—		17,919
Net loss	—	—		—		—		(25,256)		—		(25,256)
Unrealized gain on hedge transactions	—	—		—		—		—		(1)		(1)
Foreign currency translation adjustment	—	—		—		—		—		(1,565)		(1,565)
BALANCE as of September 30, 2021	95,787,780	$	68	$	911,233	$	(897)	$	(208,922)	$	(237)	$	701,245

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(in thousands, except share amounts)	Shares Outstanding	Par Value		Additional 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 stock	1,112	—		—		—		—		—		—
Common stock issued for exercise of employee-based stock options	8,486	—		80		—		—		—		80
Issuance of restricted shares, net of forfeitures and vestings	533,095	5		(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, 2022	96,289,668	$	73	$	921,753	$	(897)	$	(200,180)	$	376	$	721,125
Issuance of common stock	1,812	—		—		—		—		—		—
Common stock issued for exercise of employee stock options	76,399	—		734		—		—		—		734
Issuance of restricted shares, net of forfeitures and vestings	42,388	—		—		—		—		—		—
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
Issuance of common stock	1,604	—		—		—		—		—		—
Common stock issued for exercise of employee stock options	159,350	2		1,477		—		—		—		1,479
Issuance of restricted shares, net	(23,155)	—		—		—		—		—		—
Stock-based compensation	—	—		6,293		—		—		—		6,293
Net income	—	—		—		—		9,303		—		9,303

Foreign currency translation adjustment, net of tax	—	—		(17)		—		—		(4,790)		(4,807)
BALANCE as of September 30, 2022	96,548,066	$	75	$	936,239	$	(897)	$	(179,306)	$	(7,897)	$	748,214

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


	Nine Months Ended September 30,
(in thousands)	2021		2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$	(21,231)	$	27,110
Adjustments to reconcile net (loss) income to net cash provided by operations
Depreciation and amortization	61,193		56,598
Deferred income taxes	(13,349)		4,885
Stock-based compensation	27,236		17,424
Impairments of long-lived assets	2,940		805
Provision for bad debts	604		1,016
Amortization of financing fees	362		327
Amortization of debt discount	1,741		1,444
Deferred rent	(1,334)		(170)

Unrealized translation gain on investment in foreign subsidiaries	(100)		(1,838)
Changes in fair value of derivatives	(5,024)		(4,102)
Excess payment on contingent consideration for acquisition	(1,159)		—

Changes in operating assets and liabilities
Accounts receivable	(40,383)		(33,145)
Insurance receivable	750		—
Prepaid expenses	(1,421)		3,579
Other assets	1,464		(2,097)
Accounts payable	12,116		6,546
Litigation settlement obligation	(750)		—
Accrued expenses	15,609		84
Other liabilities	(338)		(4,868)
Net cash provided by operating activities	38,926		73,598
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment	(2,619)		(3,978)
Purchases of intangible assets and capitalized software	(11,987)		(11,719)
Proceeds from disposition of property and equipment	7		25
Net cash used in investing activities	(14,599)		(15,672)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock	2,483		2,291
Proceeds from issuance of common stock in IPO, net of underwriting discounts and commissions	102,638		—
Payments of IPO issuance costs	(6,120)		(225)
Capital contribution from certain stockholders	15,576		—
Payments of long-term debt	(11,531)		(4,846)


Payment of contingent consideration for acquisition	(738)		(226)
Payments of finance lease obligations	(8)		(3)
Net cash provided by (used in) financing activities	102,300		(3,009)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(863)		(3,725)
NET CHANGE IN CASH AND CASH EQUIVALENTS	125,764		51,192
CASH AND CASH EQUIVALENTS
Beginning of period	66,633		47,998
Cash and cash equivalents at end of period	$	192,397	$	99,190

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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest, net of capitalized amounts of $220 and $245 for the nine months ended September 30, 2021 and 2022, respectively	$	21,494	$	24,277
Income taxes	4,663		11,513
Offering costs included in accounts payable and accrued liabilities	1,996		—
Noncash investing activities
Purchases of property and equipment in accounts payable and accrued expenses	35		8

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 September 30, 2022, the Company is 62.1% 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.

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-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

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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 $99.2 million as of December 31, 2021 and September 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 $36.1 million as of September 30, 2022, with the largest deposits being held in India and Canada, with balances of $16.5 million and $7.3 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 operations and comprehensive (loss) income. The cumulative translation adjustment resulted in a loss of $0.6 million and a loss of $8.6 million as of December 31, 2021 and September 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 $0.7 million as of December 31, 2021 and September 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 September 30,				Nine Months Ended September 30,

(in thousands)	2021		2022		2021		2022
Balance at beginning of period	$	2,180	$	2,161	$	1,861	$	2,949
Cumulative effect of accounting change upon adoption of CECL	—		—		—		254
Additions	108		351		604		1,010
Write-offs, net of recoveries	(26)		(36)		(198)		(1,727)
Foreign currency translation adjustment	(7)		(14)		(12)		(24)
Balance at end of period	$	2,255	$	2,462	$	2,255	$	2,462

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 September 30,				Nine Months Ended September 30,
(in thousands)	2021		2022		2021		2022
Corporate information technology	$	6,122	$	7,012	$	15,611	$	19,425
Development of platform and product initiatives	3,906		4,433		11,242		12,797
Production support and maintenance	2,056		2,270		5,582		6,584
Total production systems	5,962		6,703		16,824		19,381
Corporate technology and production systems	$	12,084	$	13,715	$	32,435	$	38,806

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 completed as of September 30, 2022. Phase three of Project Ignite is decommissioning of the platforms purchased over the prior ten years and the migration of the

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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 $1.235 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 December 2021 did not have any impact on the Company as such rates are not used. The Company is

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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 September 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 nine month periods ended September 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 receivable	8,861
Prepaid expenses	394
Property and equipment	1,290
Intangible assets	59,161
Total assets acquired	$	69,706
Accounts payable and accrued expenses	5,614
Other current liabilities	1,182
Deferred tax liability	16,566
Other liabilities	298
Total liabilities assumed	$	23,660
Total identifiable net assets	46,046
Goodwill	21,721
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		September 30, 2022
Furniture and fixtures	$	3,636	$	2,569
Computers and equipment	37,767		40,885
Leasehold improvements	7,347		6,539
	48,750		49,993
Less: Accumulated depreciation	(37,626)		(39,020)
Total property and equipment, net	$	11,124	$	10,973

Depreciation expense on property and equipment was $1.1 million and $1.1 million during the three months ended September 30, 2021 and 2022, respectively, and $3.5 million and $3.3 million during the nine months ended September 30, 2021 and 2022, respectively. Write down of abandoned property and equipment no longer in use was less than $0.1 million and $0.2 million for the three months ended September 30, 2021 and 2022, respectively, and $2.8 million and $0.8 million for the nine months ended September 30, 2021 and 2022, respectively.

6.Goodwill and Intangible Assets

Goodwill

The changes in the carrying amount of goodwill for the nine months ended September 30, 2022 were as follows:


(in thousands)
Goodwill as of December 31, 2021	$	852,536
Foreign currency translation adjustment	(3,113)
Goodwill as of September 30, 2022	$	849,423

Intangible Assets

Intangible assets, net consisted of the following for the periods presented:


		December 31, 2021						September 30, 2022
(dollars in thousands)	Estimated Useful Lives	Gross Carrying Amount		Accumulated Amortization		Net		Gross Carrying Amount		Accumulated Amortization		Net
Customer lists	7 - 17 years	$	507,087	$	(304,855)	$	202,232	$	505,426	$	(331,179)	$	174,247
Trademarks	2 - 16 years	77,434		(31,685)		45,749		77,035		(35,939)		41,096
Non-compete agreement	1 - 5 years	3,191		(2,462)		729		3,171		(2,537)		634
Technology	3 - 7 years	231,165		(191,320)		39,845		242,255		(211,462)		30,793
Domain names	3 - 15 years	10,118		(4,009)		6,109		10,118		(4,514)		5,604
Favorable leases	4 - 14 years	4,940		(2,458)		2,482		4,940		(2,704)		2,236
		$	833,935	$	(536,789)	$	297,146	$	842,945	$	(588,335)	$	254,610

Included within technology is $30.7 million and $29.0 million of internal-use software, net of accumulated amortization, as of December 31, 2021 and September 30, 2022, respectively. As of September 30, 2022, $7.2 million of technology assets have not yet been put in service.

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The Company capitalized $12.0 million of costs to develop internal-use software included in technology during the nine months ended September 30, 2021 (consisting of internal costs of $9.3 million and external costs of $2.7 million). The Company capitalized $11.7 million of costs to develop internal-use software included in technology during the nine months ended September 30, 2022 (consisting of internal costs of $9.4 million and external costs of $2.3 million).

For the three months ended September 30, 2021, the Company recorded no write-down of capitalized software. For the nine months ended September 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 nine months ended September 30, 2022.

Amortization expense was $19.2 million and $15.5 million for the three months ended September 30, 2021 and 2022, respectively, and $57.7 million and $53.3 million for the nine months ended September 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 September 30, 2022 is as follows for each of the next five years:


(in thousands)
Year Ending December 31,
2022	$	15,560
2023	52,447
2024	42,724
2025	33,288
2026	26,387
Thereafter	84,204
	$	254,610

7.Accrued Expenses

Accrued expenses on the unaudited condensed consolidated balance sheets as of December 31, 2021 and September 30, 2022, consisted of the following:


(in thousands)	December 31, 2021		September 30, 2022
Accrued compensation	$	28,851	$	28,584
Accrued cost of revenues	18,270		18,669
Accrued interest	4,144		2,880

Other accrued expenses