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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 March 31, 2023
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/c71e307c47b22723416e4aeeaee59a12-Image_2.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 May 8, 2023 was 98,030,304 (excluding treasury shares of 1,579,388).

2


STERLING CHECK CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2023
TABLE OF CONTENTS
3

Table of Contents
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,” “playbook,” “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 statements regarding 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, including bank failures and concerns of a potential economic downturn or recession, 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 and integrate strategic mergers and acquisitions;
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design defects, errors, failures or delays with our products and services;
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;
our ability to adequately protect our intellectual property;

our ability to implement, maintain and improve effective internal controls;
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 2, 2023.
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 social media channels, including the following: 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,
2022
March 31,
2023
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$103,095 $50,964 
Accounts receivable (net of allowance of $3,200 and $3,248 as of December 31, 2022 and
    March 31, 2023, respectively)
139,579 147,123 
Insurance receivable921 922 
Prepaid expenses13,433 11,201 
Other current assets13,654 16,563 
Total current assets270,682 226,773 
Property and equipment, net10,341 9,600 
Goodwill849,609 877,212 
Intangible assets, net241,036 263,109 
Deferred income taxes4,452 4,518 
Operating leases right-of-use asset20,084 19,652 
Other noncurrent assets, net11,050 11,518 
TOTAL ASSETS$1,407,254 $1,412,382 
LIABILITIES AND STOCKHOLDERS’ EQUITY 
CURRENT LIABILITIES:  
Accounts payable$38,372 $42,132 
Litigation settlement obligation4,165 3,850 
Accrued expenses67,047 57,091 
Current portion of long-term debt7,500 9,375 
Operating leases liability, current portion3,717 3,565 
Other current liabilities12,939 13,974 
Total current liabilities133,740 129,987 
Long-term debt, net493,990 490,434 
Deferred income taxes23,707 30,102 
Long-term operating leases liability, net of current portion16,835 16,574 
Other liabilities2,336 12,681 
Total liabilities$670,608 $679,778 
COMMITMENTS AND CONTINGENCIES (NOTE 13)  
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; 97,765,120 shares
    issued and 96,717,883 shares outstanding as of December 31, 2022; 99,663,997 shares
    issued and 98,085,706 shares outstanding as of March 31, 2023)
76 95 
Additional paid-in capital942,789 950,813 
Common stock held in treasury (1,047,237 and 1,578,291 shares as of December 31, 2022
    and March 31, 2023, respectively)
(14,859)(23,058)
Accumulated deficit(186,448)(185,857)
Accumulated other comprehensive loss(4,912)(9,389)
Total stockholders’ equity736,646 732,604 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$1,407,254 $1,412,382 
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 INCOME (LOSS)

 Three Months Ended
March 31,
(in thousands, except share and per share data)20222023
REVENUES$191,972 $179,274 
OPERATING EXPENSES:  
Cost of revenues (exclusive of depreciation and amortization below)100,956 94,754 
Corporate technology and production systems12,552 11,952 
Selling, general and administrative42,333 47,451 
Depreciation and amortization20,156 15,122 
Impairments of long-lived assets 106 
Total operating expenses175,997 169,385 
OPERATING INCOME 15,975 9,889 
OTHER EXPENSE (INCOME):  
Interest expense, net6,336 8,608 
Gain on interest rate swaps(328) 
Other income(354)(412)
Total other expense, net5,654 8,196 
INCOME BEFORE INCOME TAXES10,321 1,693 
Income tax provision 4,085 1,102 
NET INCOME $6,236 $591 
Unrealized loss on hedged transactions, net of tax of $0 and $1,815, respectively
 (5,159)
Foreign currency translation adjustments, net of tax of $0 and $0, respectively
283 682 
Total other comprehensive income (loss) 283 (4,477)
COMPREHENSIVE INCOME (LOSS) $6,519 $(3,886)
Net income per share attributable to stockholders  
Basic$0.07 $0.01 
Diluted$0.06 $0.01 
Weighted average number of shares outstanding  
Basic93,967,81992,877,506
Diluted99,186,45695,350,342
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 OutstandingPar ValueAdditional Paid-In CapitalCommon Shares
Held in
Treasury
Common Stock Held in Treasury
Accumulated Deficit
Accumulated Other Comprehensive Income (Loss)
Total
BALANCE as of December 31, 202195,746,975$68 $916,578 107,820$(897)$(206,218)$93 $709,624 
Issuance of common stock1,112— — — — — — 
Common stock issued for exercise of employee 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 $921,753 107,820$(897)$(200,180)$376 $721,125 


(in thousands, except share amounts)Shares OutstandingPar ValueAdditional Paid-In CapitalCommon Shares
Held in
Treasury
Common Stock Held in Treasury
Accumulated Deficit
Accumulated Other Comprehensive Income (Loss)
Total
BALANCE as of December 31, 202296,717,883$76 $942,789 1,047,237$(14,859)$(186,448)$(4,912)$736,646 
Issuance of common stock4,567— — — — — — 
Issuance of restricted shares, net of forfeitures and vestings1,894,31019 (19)— — —  
Repurchases of common stock(493,926)— — 493,926(7,712)— — (7,712)
Shares withheld to cover restricted share vestings tax(37,128)— — 37,128(487)— — (487)
Stock-based compensation— 8,043 — — — 8,043 
Net income— — — 591 — 591 
Unrealized loss on hedged transactions, net of tax— — — — (5,159)(5,159)
Foreign currency translation adjustment, net of tax— — — — 682 682 
BALANCE as of March 31, 202398,085,706$95 $950,813 1,578,291$(23,058)$(185,857)$(9,389)$732,604 


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

 Three Months Ended March 31,
(in thousands)20222023
CASH FLOWS FROM OPERATING ACTIVITIES  
Net income$6,236 $591 
Adjustments to reconcile net income to net cash provided by operations  
Depreciation and amortization20,156 15,122 
Deferred income taxes3,412 209 
Stock-based compensation5,108 8,043 
Impairments of long-lived assets 106 
Provision for bad debts308 244 
Amortization of financing fees109 269 
Amortization of debt discount478 194 
Deferred rent 39 
Noncash impact of lease accounting under ASC 842(55) 
Unrealized translation (gain) loss on investment in foreign subsidiaries(393)135 
Changes in fair value of derivatives(2,464) 
Interest rate swap settlements 23 
Gain on disposition of property and equipment(4) 
Changes in operating assets and liabilities
Accounts receivable(20,006)(3,414)
Prepaid expenses(869)2,844 
Other assets(1,736)(2,534)
Accounts payable10,255 3,716 
Litigation settlement obligation 315 
Accrued expenses(12,283)(12,256)
Other liabilities(4,807)(2,364)
Net cash provided by operating activities3,445 11,282 
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment(1,495)(140)
Purchases of intangible assets and capitalized software(3,742)(4,120)
Acquisitions, net of cash acquired (48,802)
Proceeds from disposition of property and equipment4 7 
Net cash used in investing activities(5,233)(53,055)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock70  
Repurchases of common stock (7,711)
Payments of IPO issuance costs(225) 
Cash paid for tax withholding on RSA vestings (487)
Payments of long-term debt(1,615)(1,875)
Payment of contingent consideration for acquisition (305)
Payments of finance lease obligations(1) 
Net cash used in financing activities(1,771)(10,378)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS(92)20 
NET CHANGE IN CASH AND CASH EQUIVALENTS(3,651)(52,131)
CASH AND CASH EQUIVALENTS  
Beginning of period47,998 103,095 
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Cash and cash equivalents at end of period$44,347 $50,964 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION  
Cash paid during the period for  
Interest, net of capitalized amounts of $73 and $90 for the three months ended
          March 31, 2022 and 2023, respectively
$8,296 $11,602 
Income taxes4,2222,978
Noncash investing activities
Purchases of property and equipment in accounts payable and
       accrued expenses
$245 $69 
Noncash purchase price of business combinations4,821
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.
As of March 31, 2023, the Company is 61.1% 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, 2022 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 2, 2023.
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, collectability of receivables, 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 assets. 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 $103.1 million and $51.0 million as of December 31, 2022 and March 31, 2023, respectively, include money market instruments with maturities of three months or less. The Company maintained cash outside the U.S. as of December 31, 2022 of $28.0 million with the largest deposits being held in India and Canada, with balances of $5.1 million and $9.2 million, respectively. Cash outside the U.S. was
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$26.6 million as of March 31, 2023, with the largest deposits being held in India and Canada, with balances of $5.4 million and $1.9 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 income (loss). The cumulative translation adjustment resulted in losses of $5.6 million and $4.9 million as of December 31, 2022 and March 31, 2023, respectively.
Accounts Receivable and 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 $0.9 million and $0.8 million as of December 31, 2022 and March 31, 2023, respectively.

The Company adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 326, Financial Instruments - Credit Losses (“CECL”) on 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.

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.

Allowances for expected credit losses were $2.3 million and $2.5 million as of December 31, 2022 and March 31, 2023, respectively. The following table summarizes changes in the allowance for expected credit losses for the periods presented:

Three Months Ended March 31,
(in thousands)20222023
Balance at beginning of period$2,949 $2,304 
Cumulative effect of accounting change upon adoption of CECL254  
Additions308 244 
Write-offs, net of recoveries(1,669)(78)
Foreign currency translation adjustment 3 
Balance at end of period$1,842 $2,473 
Corporate Technology and Production Systems
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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
March 31,
(in thousands)20222023
Corporate information technology$6,123 $5,267 
Development of platform and product initiatives4,249 4,414 
Production support and maintenance2,180 2,271 
Total production systems6,429 6,685 
Corporate technology and production systems$12,552 $11,952 
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, 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 clients to one global platform. This third and final phase, which was complete as of March 31, 2023, unified clients onto a single global platform. The Company’s core platform now processes approximately 80% of its global revenue.

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
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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.


4.Acquisitions

Socrates and A-Check Acquisitions

On January 4, 2023, the Company acquired all of the outstanding shares of Socrates Limited and its affiliates (“Socrates”), a screening company in Latin America, pursuant to a share purchase agreement. The Socrates acquisition expands the Company’s global presence into Latin America to serve the rapidly growing regional hiring needs of both multi-national and local clients. On March 1, 2023, the Company acquired all of the outstanding shares of A-Check Global (“A-Check”), a U.S.-based employment screening organization, pursuant to a share purchase agreement. The A-Check acquisition provides the Company access to a high quality, enterprise-focused customer base diversified across verticals including healthcare and telecom. The aggregate purchase price for the acquisitions totaled approximately $65.9 million, was funded with available cash on hand and is subject to certain closing adjustments specified in the share purchase agreements and includes contingent consideration related to the A-Check acquisition of $4.7 million recorded at fair value. The contingent consideration will be determined based on actual future results. As of March 31, 2023, the fair value of the contingent consideration consisted of $2.6 million for an earn-out payable one year after the acquisition based upon revenue retention and a $2.1 million payable throughout the second and third year following the acquisition based on revenue retention and referral revenue. The Company recorded a preliminary allocation of the purchase price to assets acquired and liabilities assumed based on their estimated fair values as of their respective purchase dates. Additionally, in connection with the Socrates acquisition, $5.0 million is payable to certain senior employees two years after the acquisition date based on certain retention requirements.

The Company incurred approximately $2.7 million of transaction expenses related to the acquisitions during the three months ended March 31, 2023.

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

(in thousands)
Consideration
Cash$11,935 
Other current assets
Accounts receivable4,279 
Other current assets805 
Property and equipment177 
Intangible assets32,141 
Other long-term assets$6 
Total assets acquired$49,343 
Accounts payable and accrued expenses1,156 
Other current liabilities1,291 
Deferred tax liability8,388 
Other liabilities2 
Total liabilities assumed$10,837 
Total identifiable net assets38,506 
Goodwill27,352 
Total consideration$65,858 

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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 $28.0 million to be amortized over 15 years. The remaining intangible assets include trade names, developed technology and a non-compete agreement, which will be amortized over two years, eight years, and five years, respectively.

The acquisitions are not material to the Company's financial position as of March 31, 2023 or results of operations for the three months ended March 31, 2023, and therefore, pro forma operating results and other disclosures for the acquisitions are not presented.

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. As of December 31, 2022, the purchase price was reduced by $0.3 million reflecting the final determination of the post-closing adjustment of the purchase price in accordance with the purchase agreement with EBI, resulting in an adjusted purchase price of $67.5 million. The receivable related to this adjustment was collected in February 2023.

5.Property and Equipment, net
(in thousands)December 31,
2022
March 31,
2023
Furniture and fixtures$2,568 $2,516 
Computers and equipment41,084 41,421 
Leasehold improvements6,565 6,587 
 50,217 50,524 
Less: Accumulated depreciation(39,876)(40,924)
Total property and equipment, net$10,341 $9,600 
Depreciation expense on property and equipment was $1.1 million and $1.0 million during the three months ended March 31, 2022 and 2023, respectively. There were no write downs of property and equipment during the three months ended March 31, 2022. Write down of abandoned property and equipment no longer in use was less than $0.1 million for the three months ended March 31, 2023.
6.Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill for the periods presented were as follows:
(in thousands) 
Goodwill as of December 31, 2022
$849,609 
Acquisitions27,352 
Foreign currency translation adjustment251 
Goodwill as of March 31, 2023
$877,212 
Intangible Assets
Intangible assets, net consisted of the following for the periods presented:
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 December 31, 2022March 31, 2023
(dollars in thousands)Estimated Useful LivesGross
Carrying
Amount
Accumulated
Amortization
NetGross
Carrying
Amount
Accumulated
Amortization
Net
Customer lists
7 - 17 years
$506,015 $(340,579)$165,436 $533,848 $(348,729)$185,119 
Trademarks
2 - 16 years
77,198 (37,519)39,679 77,791 (39,010)38,781 
Non-compete agreement
1 - 5 years
3,179 (2,584)595 3,976 (2,619)1,357 
Technology
3 - 8 years
246,220 (216,330)29,890 252,943 (220,358)32,585 
Domain names
2 - 15 years
10,118 (4,682)5,436 10,117 (4,850)5,267 
  $842,730 $(601,694)$241,036 $878,675 $(615,566)$263,109 
Included within technology is $28.1 million and $30.2 million of internal-use software, net of accumulated amortization, as of December 31, 2022 and March 31, 2023, respectively. As of March 31, 2023, $5.1 million of technology assets have not yet been put in service.
The Company capitalized $3.7 million of costs to develop internal-use software included in technology during the three months ended March 31, 2022 (consisting of internal costs of $3.0 million and external costs of $0.7 million). The Company capitalized $4.1 million of costs to develop internal-use software included in technology during the three months ended March 31, 2023 (consisting of internal costs of $3.4 million and external costs of $0.7 million).
For the three months ended March 31, 2022, the Company recorded no write-down of capitalized software. For the three months ended March 31, 2023, the Company recorded a write-down related to the impairment of capitalized software in the amount of $0.1 million.
Amortization expense was $19.1 million and $14.1 million for the three months ended March 31, 2022 and 2023, 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 March 31, 2023 is as follows for each of the next five years:
(in thousands) 
Year Ending December 31, 
Remainder of fiscal year 2023
$71,305 
202445,083 
202535,729 
202627,578 
202722,070 
Thereafter61,344 
 $263,109 
7.Accrued Expenses
Accrued expenses on the unaudited condensed consolidated balance sheets as of the periods presented consisted of the following:
(in thousands)December 31,
2022
March 31,
2023
Accrued compensation$29,835 $18,392 
Accrued cost of revenues15,721 19,005 
Accrued interest3,143 106 
Other accrued expenses18,348 19,588 
Total accrued expenses$67,047 $57,091 
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8.Leases
Effective January 1, 2022 using the effective date method, the Company adopted the FASB’s Accounting Standards Update No. 2016-02, “Leases” (“ASC 842”), which requires the recognition of all leases, including operating leases on the unaudited condensed consolidated balance sheets by recording a right-of-use (“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).
Upon adoption on January 1, 2022, the Company recognized a ROU asset of $23.5 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 used the incremental borrowing rate of the former first lien term loan credit agreement of 4.50% for all leases entered into for the period prior to November 29, 2022. 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 23 operating leases with remaining lease terms ranging from 1 month to 70 months.
The components of lease expense for the periods presented are as follows:
Three Months Ended
March 31,
(in thousands)20222023
Components of total lease costs
Operating lease expense$1,299 $1,379 
Sublease income(72)(222)
Total net lease costs$1,227 $1,157 
Information related to the Company’s ROU assets and lease liabilities for the period presented is as follows:
(dollar amounts in thousands)March 31, 2023
Operating leases
Operating leases ROU asset - long-term$19,652 
Operating leases ROU asset, net$19,652 
Operating leases liability - current$3,565 
Operating leases liability - long-term16,574 
Total operating leases liability$20,139 
Weighted average remaining lease term in years - operating leases4.5
Weighted average discount rate - operating leases4.50 %

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

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(in thousands)March 31, 2023
Remainder of fiscal year 2023
$4,378 
20244,958 
20254,610 
20263,796 
20273,468 
20281,073 
Thereafter85 
Total future minimum lease payments$22,368 
Less: imputed interest(2,229)
Total$20,139 



9.Debt
On November 29, 2022, Sterling Infosystems, Inc. (the “Borrower”), a Delaware corporation and a subsidiary of the Company, entered into a credit agreement (the “2022 Credit Agreement”) by and among the Borrower, as borrower, Sterling Intermediate Corp., KeyBank National Association, as administrative agent (the “Administrative Agent”), certain guarantors party thereto and the lenders party thereto.
The 2022 Credit Agreement provides for aggregate principal borrowings of $700.0 million, comprised of $300.0 million aggregate principal amount of term loans (the “Term Loans”) and a $400.0 million revolving credit facility (the “Revolving Credit Facility”). The Term Loans and the Revolving Credit Facility mature on November 29, 2027.
The table below sets forth the Company’s long-term debt as presented in the unaudited condensed consolidated balance sheets for the periods presented:
(in thousands)December 31,
2022
March 31,
2023
Current portion of long-term debt  
Term Loans$7,500 $9,375 
Total current portion of long-term debt$7,500 $9,375 
Long-term debt  
Term Loans, due November 29, 2027 (6.76% and 6.91% at December 31, 2022 and March 31, 2023, respectively)
292,500 288,750 
Revolving Credit Facility205,494 205,494 
Unamortized discount and debt issuance costs(4,004)(3,810)
Total long-term debt, net$493,990 $490,434 
The estimated fair value of the Company’s 2022 Credit Agreement was $487.1 million and $488.7 million as of December 31, 2022 and March 31, 2023, respectively. These fair values were determined based on quoted prices in markets with similar instruments that are less active (Level 2 inputs as defined below) as an observable price of the 2022 Credit Agreement or similar liabilities is not readily available.
The Company was in compliance with all financial covenants under its credit agreement as of March 31, 2023.
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10.Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. An asset or liability’s level in the hierarchy is based on the lowest level of input that is significant to the fair value measurement. The three levels of inputs used to measure fair value are as follows:
Level 1Quoted prices in active markets for identical assets and liabilities.
Level 2Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flows methodologies and similar techniques that use significant unobservable inputs.
The Company considers the recorded value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses to approximate the fair value of the respective assets and liabilities as of December 31, 2022 and March 31, 2023 based upon the short-term nature of such assets and liabilities (Level 1). See Note 9, “Debt” for discussion of the fair value of the Company’s debt.
Interest rate swaps are measured at fair value on a recurring basis in the Company’s financial statements and are considered Level 2 financial instruments. Interest rate swaps are measured based on quoted prices for similar financial instruments and other observable inputs recognized. The currency forward agreements are typically cash settled in U.S. dollars for their fair value at or close to their settlement date.
As of December 31, 2022, the fair value of contingent consideration related to the November 30, 2021 acquisition of EBI totaled $1.2 million and consisted of a $0.9 million earn-out payable two years after the acquisition based upon revenue retention and $0.3 million remaining payable throughout the year following the acquisition based on customer collections on acquired receivables and is considered a Level 3 financial instrument. As of March 31, 2023, contingent consideration for the earn-out payable related to the acquisition of EBI totaled $0.9 million and is considered a Level 3 financial instrument. As of March 31, 2023, contingent consideration related to the A-Check acquisition completed in 2023 totaled $4.7 million and consisted of $2.6 million for an earn-out payable one year after the acquisition based upon revenue retention and a $2.1 million payable throughout the second and third year following the acquisition based on revenue retention and referral revenue. Contingent consideration related to acquisitions is considered a Level 3 financial instrument.
The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy as of December 31, 2022:
(in thousands)Level 1Level 2Level 3
Liabilities   
Contingent consideration - acquisition of EBI$ $ $1,219 
The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy as of March 31, 2023:
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(in thousands)Level 1Level 2Level 3
Assets   
Interest rate swaps$ $1,049 $ 
Liabilities   
Interest rate swaps 8,024  
Contingent consideration - acquisition of EBI  914 
Contingent consideration - acquisitions of Socrates and A-Check  4,706 
During the three months ended March 31, 2022 and 2023, the Company did not re-measure any financial assets or liabilities at fair value on a nonrecurring basis. There were no transfers between levels during the periods presented.


11.Derivative Instruments and Hedging Activities
Interest Rate Swap Hedges
To reduce exposure to variability in expected future cash outflows on variable rate debt attributable to the changes in the applicable interest rates under the 2022 Credit Agreement, the Company entered into interest rate swaps to economically offset a portion of this risk.
For interest rate swap derivatives designated and that qualify as hedges for accounting purposes, the unrealized gain or loss on the derivative is recorded in Accumulated other comprehensive income (loss) (“OCI”).
As of March 31, 2023, the Company had the following outstanding interest rate swap derivatives that were used to hedge its interest rate risks:
ProductNumber of InstrumentsEffective DateMaturity DateNotional
Interest Rate Swaps4February 28, 2023November 29, 2027
$300.0 million USD
All financial derivative instruments are carried at their fair value on the balance sheet. The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the unaudited condensed consolidated balance sheets as of the dates presented:
 Asset Derivatives
(in thousands)
As of December 31, 2022
As of March 31, 2023
Derivatives designated as hedging instruments:    
Interest rate swapsOther current assets$ Other current assets$1,049 
Interest rate swapsOther assets Other assets$ 
Total interest rate swaps $  $1,049 
 Liability Derivatives
(in thousands)
As of December 31, 2022
As of March 31, 2023
Derivatives designated as hedging instruments:    
Interest rate swapsOther current liabilities$ Other current liabilities$ 
Interest rate swapsOther liabilities Other liabilities8,024 
Total interest rate swaps $  $8,024 
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The tables below present the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income (Loss) for the periods presented:
 Three Months Ended
March 31,
Three Months Ended
March 31,
(in thousands)2022202320222023
Derivatives in Hedging RelationshipsAmount of Loss Recognized in OCI on Derivative (Included Component)Location of Gain Reclassified from Accumulated OCI into IncomeAmount of Gain Reclassified from Accumulated OCI into Income (Included Component)
   
Interest rate swaps$ $(6,877)Interest expense$ $97 
Total$ $(6,877) $ $97