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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, 2024
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
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.)
6150 Oak Tree Boulevard, Suite 490
Independence, Ohio
44131
(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 classTrading
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
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 2, 2024 was 97,751,383 (excluding treasury shares of 7,509,635).
1


STERLING CHECK CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2024
TABLE OF CONTENTS



2

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, including those related to our pending merger with First Advantage Corporation (“First Advantage”), 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:

the risk that our proposed merger with First Advantage may not be completed in a timely manner, or at all;
the failure to satisfy the conditions to the consummation of the proposed merger, including the receipt of certain governmental and regulatory approvals and clearances;
the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement (as defined herein);
the effect of the announcement or pendency of the proposed merger on our business relationships, operating results and business generally;
risks that the proposed merger disrupts our current plans and operations and creates potential difficulties in our employee retention as a result of the proposed merger;
risks related to diverting management’s attention from our ongoing business operations;
unexpected costs, charges or expenses resulting from the proposed merger;
certain restrictions during the pendency of the proposed merger that may impact our ability to pursue certain business opportunities or strategic transactions;
the outcome of any legal proceedings that may be instituted against us or against First Advantage related to the Merger Agreement or the proposed merger;
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;
our ability to cost-effectively attract new clients and retain our existing clients;
our ability to grow our Identity-as-a-Service offerings;
3

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;
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 other military conflicts (such as the ongoing conflicts in Ukraine and the Middle East) 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 6, 2024.
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.
4

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value amounts)March 31,
2024
December 31,
2023
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$66,979 $54,224 
Accounts receivable (net of allowance for credit losses of $2,933 and $2,816 at March 31, 2024 and December 31, 2023, respectively)
157,392 142,179 
Insurance receivable2,895 2,937 
Prepaid expenses11,382 9,651 
Other current assets17,276 15,800 
Total current assets255,924 224,791 
Property and equipment, net 7,329 7,695 
Goodwill902,862 879,408 
Intangible assets, net 264,558 230,212 
Deferred tax assets4,748 4,818 
Operating leases right-of-use asset5,872 6,452 
Other noncurrent assets, net9,733 10,067 
TOTAL ASSETS$1,451,026 $1,363,443 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable$47,486 $38,879 
Litigation settlement obligation5,224 5,279 
Accrued expenses73,605 63,987 
Current portion of long-term debt15,000 15,000 
Operating leases liability, current portion3,879 4,219 
Income tax payable, current portion3,523 8,933 
Other current liabilities17,832 11,839 
Total current liabilities166,549 148,136 
Long-term debt, net541,242 479,788 
Deferred tax liabilities900 14,239 
Long-term operating leases liability, net of current portion6,606 7,278 
Other liabilities7,717 12,058 
Total liabilities723,014 661,499 
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; 105,320,343 shares issued and 97,811,676 shares outstanding at March 31, 2024; 99,966,158 shares issued and 93,194,403 shares outstanding at December 31, 2023)
156 98 
Additional paid-in capital1,027,214 983,283 
Common stock held in treasury (7,508,667 and 6,771,755 shares at March 31, 2024 and December 31, 2023, respectively)
(99,653)(88,918)
Accumulated deficit(194,519)(186,564)
Accumulated other comprehensive loss(5,186)(5,955)
Total stockholders’ equity728,012 701,944 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$1,451,026 $1,363,443 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5

STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 Three Months Ended
March 31,
(in thousands, except share and per share data)20242023
REVENUES$185,999 $179,274 
OPERATING EXPENSES:
Cost of revenues (exclusive of depreciation and amortization below)104,041 94,754 
Corporate technology and production systems13,214 11,952 
Selling, general and administrative59,890 47,451 
Depreciation and amortization15,770 15,122 
Impairments and disposals of long-lived assets168 106 
Total operating expenses193,083 169,385 
OPERATING (LOSS) INCOME(7,084)9,889 
OTHER EXPENSE (INCOME):
Interest expense, net10,312 8,608 
Other income(423)(412)
Total other expense, net9,889 8,196 
(LOSS) INCOME BEFORE INCOME TAXES(16,973)1,693 
Income tax (benefit) provision(9,018)1,102 
NET (LOSS) INCOME$(7,955)$591 
Unrealized gain (loss) on hedged transactions, net of tax expense (benefit) of $1,041 and $(1,815), respectively
3,020 (5,159)
Foreign currency translation adjustments, net of tax expense of $0 and $0, respectively
(2,251)682 
Total other comprehensive income (loss)769 (4,477)
COMPREHENSIVE LOSS$(7,186)$(3,886)
Net (loss) income per share attributable to stockholders
Basic$(0.09)$0.01 
Diluted$(0.09)$0.01 
Weighted average number of shares outstanding
Basic90,274,09492,877,506
Diluted90,274,09495,350,342
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 TreasuryCommon Stock Held in TreasuryAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Total
BALANCE at December 31, 202393,194,403$98 $983,283 6,771,755$(88,918)$(186,564)$(5,955)$701,944 
Issuance of common stock2,111 — — — — — — — 
Repurchases of common stock(494,157)— — 494,157 (6,832)— — (6,832)
Exercise of employee stock options, net of shares exchanged for payment and tax withholding3,397,303 34 33,918 — — — — 33,952 
Issuance of common stock under the 2021 Employee Stock Purchase Plan64,983 5 690 — — — — 695 
Shares withheld to cover restricted share vesting tax(242,755)— — 242,755 (3,903)— — (3,903)
Issuance of restricted shares, net of forfeitures1,889,788 19 (19)— — — —  
Stock-based compensation— — 9,342 — — — — 9,342 
Net loss— — — — — (7,955)— (7,955)
Unrealized gain on hedged transactions, net of tax— — — — — — 3,020 3,020 
Foreign currency translation adjustment, net of tax— — — — — — (2,251)(2,251)
BALANCE at March 31, 202497,811,676$156 $1,027,214 7,508,667$(99,653)$(194,519)$(5,186)$728,012 

(in thousands, except share amounts)Shares OutstandingPar ValueAdditional Paid-In CapitalCommon Shares Held in TreasuryCommon Stock Held in TreasuryAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Total
BALANCE at December 31, 202296,717,883$76 $942,789 1,047,237$(14,859)$(186,448)$(4,912)$736,646 
Issuance of common stock4,567 — — — — — — — 
Repurchases of common stock(493,926)— — 493,926 (7,712)— — (7,712)
Issuance of restricted shares, net of forfeitures1,894,310 19 (19)— — — —  
Shares withheld to cover restricted share vesting 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 at 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.

7

STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months Ended
March 31,
(in thousands)20242023
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income$(7,955)$591 
Adjustments to reconcile net (loss) income net cash provided by operations
Depreciation and amortization15,770 15,122 
Deferred income taxes(14,306)209 
Stock-based compensation9,342 8,043 
Impairments and disposals of long-lived assets168 106 
Provision for bad debts240 244 
Amortization of financing fees269 269 
Amortization of debt discount204 194 
Deferred rent(428)39 
Unrealized translation gain on investment in foreign subsidiaries 18 135 
Change in fair value of contingent consideration, net4,000  
Interest rate swap settlements 23 
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable(7,285)(3,414)
Insurance receivable41  
Prepaid expenses (1,276)2,844 
Other assets(1,200)(2,534)
Accounts payable7,149 3,716 
Litigation settlement obligation(55)315 
Accrued expenses6,723 (12,256)
Other liabilities(7,745)(2,364)
Net cash provided by operations3,674 11,282 
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment(673)(140)
Purchases of intangible assets and capitalized software(4,947)(4,120)
Acquisitions, net of cash acquired(70,479)(48,802)
Proceeds from disposition of property and equipment 7 
Net cash used in investing activities(76,099)(53,055)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of employee stock options53,629  
Cash paid for tax withholding on exercise of employee stock options(19,172) 
Proceeds from employee stock purchase plan695  
Repurchases of common stock(6,832)(7,711)
Cash paid for tax withholding on vesting of restricted shares(3,903)(487)
Payments of long-term debt(3,750)(1,875)
Borrowings on revolving credit facility65,000  
Payment of contingent consideration for acquisition (305)
Net cash provided by (used in) financing activities85,667 (10,378)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS(487)20 
NET CHANGE IN CASH AND CASH EQUIVALENTS12,755 (52,131)
CASH AND CASH EQUIVALENTS
Beginning of period54,224 103,095 
Cash and cash equivalents at end of period$66,979 $50,964 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8

STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Ended
March 31,
(in thousands)20242023
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION  
Cash paid during the period for  
Interest, net of capitalized amounts of $129 and $90 for the three months ended March 31, 2024 and 2023, respectively
$9,102 $11,602 
 Income taxes 9,542 2,978 
Noncash investing activities
Purchases of property and equipment in accounts payable and accrued expenses$469 $69 
Noncash purchase price of business combinations2,750 4,821
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9

STERLING CHECK CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.    Description of Business
Sterling Check Corp. (the “Company”), a Delaware corporation headquartered in Independence, Ohio, 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, 2024, the Company is 51% 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” and, together with Goldman Sachs, our “Sponsor”). CDPQ owns its equity interest in the Company indirectly through a limited partnership controlled by Goldman Sachs.
Merger with First Advantage
On February 28, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with First Advantage Corporation, a Delaware corporation (“First Advantage”), and Starter Merger Sub, Inc., a Delaware corporation and an indirect wholly-owned subsidiary of First Advantage (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving corporation in the Merger and becoming an indirect wholly-owned subsidiary of First Advantage. The respective boards of directors of the Company and First Advantage unanimously approved the Merger Agreement, and the board of directors of the Company recommended that the Company’s stockholders adopt the Merger Agreement.
On February 28, 2024, following the execution of the Merger Agreement, certain entities advised by or affiliated with Goldman Sachs & Co. LLC and holding a majority of the issued and outstanding shares of the Company’s common stock (together, the “Specified Stockholders’) delivered a written consent to adopt the Merger Agreement and to approve the transactions contemplated thereby, including the Merger, and on April 26, 2024 these stockholders delivered a written consent readopting the Merger Agreement and adopting the ratification by the board of directors of the Company of the execution and delivery of the Merger Agreement. The Merger was approved on behalf of all stockholders of the Company, and no further vote of Company stockholders will be required.
Refer to the audited consolidated financial statements as of December 31, 2023 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 6, 2024, specifically Note 20, “Subsequent Events,” for more detailed information on the Merger.
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 (“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 including those of a normal recurring nature necessary to state fairly the financial position, results of operations and cash flows for the periods presented in conformity with 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, 2023 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 6, 2024.
10

Out-of-Period Adjustments
The unaudited condensed consolidated financial statements for the three months ended March 31, 2024 include an adjustment of $4.0 million to increase selling, general and administrative expense and other current liabilities to correct for an error identified by management during the preparation of the unaudited condensed consolidated financial statements. The Company identified that the fair value of the contingent consideration related to the acquisition of Employment Background Investigations, Inc. (“EBI”) was understated by $4.0 million as of December 31, 2023. This out-of-period adjustment represents a correction of an understatement of expenses and an overstatement of net income of $2.0 million in each of the years ended December 31, 2023 and 2022 and an understatement of the related liabilities of $4.0 million and $2.0 million as of December 31, 2023 and 2022, respectively. In addition, the unaudited condensed consolidated financial statements for the three months ended March 31, 2024 include an adjustment of $0.7 million to increase the income tax benefit to correct for an error identified by management. This out-of-period adjustment represents a correction of an overstatement of the income tax provision for the year ended December 31, 2023.The Company evaluated the impact of these errors and out-of-period adjustments and concluded they are not material to any previously issued interim or annual consolidated financial statements and the adjustments are not expected to be material to the consolidated financial statements for the year ending December 31, 2024.
Use of Estimates
The preparation of financial statements in conformity with 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, derivative instruments and hedging activities, and the determination of the fair value of acquired assets and liabilities. 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.
Risks and Uncertainties
The Company operates in an industry that is subject to intense competition, government regulation and rapid technological change. The Company’s operations are subject to significant risk and uncertainties including financial, operational, technological, regulatory, foreign operations, and other risks.
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 $67.0 million and $54.2 million as of March 31, 2024 and December 31, 2023, respectively, include money market instruments with maturities of three months or less. The Company maintained cash outside the U.S. as of March 31, 2024 of $23.4 million with the largest deposits being held in Australia and India, with balances of $6.7 million and $4.0 million, respectively. Cash outside the U.S. was $19.3 million as of December 31, 2023, with the largest deposits being held in Australia and India, with balances of $6.2 million and $3.2 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 or loss (“OCI”), 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. The cumulative translation adjustment resulted in losses of $5.1 million and $2.9 million as of March 31, 2024 and December 31, 2023, respectively.
11

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 $0.7 million and $1.2 million as of March 31, 2024 and December 31, 2023, respectively.
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 $2.9 million and $2.8 million as of March 31, 2024 and December 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)20242023
Balance as of beginning of period$2,816 $2,304 
Additions204 244 
Write-offs, net of recoveries(82)(78)
Foreign currency translation adjustment(5)3 
Balance as of end of period$2,933 $2,473 
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
March 31,
(in thousands)20242023
Corporate information technology$4,826 $5,267 
Development of platform and product initiatives5,560 4,414 
Production support and maintenance2,828 2,271 
Total production systems8,388 6,685 
Total corporate technology and production systems
$13,214 $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.
12

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, approximately 98% 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 was 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 completed in the first quarter of 2023, unified clients onto a single global platform. The Company’s core platform now processes approximately 77% 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 initial public offering (“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, 2023.
Recently Issued Accounting Pronouncements Not Yet Effective
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280), Improvement to Reportable Segment Disclosures (“ASU 2023-07”) to enhance disclosures about a public entity's reportable segments and more detailed information about a reportable segment's expenses. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is evaluating the impact that ASU 2023-07 will have on the financial statement disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures (“ASU 2023-09”), that improves the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. For public business entities, such as the Company, the standard is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The Company is evaluating the impact that ASU 2023-09 will have on the financial statement disclosures.
4.    Acquisitions
Vault Acquisition
On January 2, 2024, the Company acquired the equity interests of Vault Workforce Screening (“Vault”), a U.S. clinic management platform, bringing a network of 17,000 clinics and a flexible service model to enhance our existing drug and health services. The purchase price for the Vault acquisition totaled approximately $76.1 million, was funded with $65.0 million of proceeds from the Revolving Credit Facility and available cash on hand and includes initial contingent consideration of $2.8 million recorded at fair value.
The Company incurred approximately $0.1 million of transaction expenses related to the Vault acquisition during the three months ended March 31, 2024.
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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$2,907 
Accounts receivable8,514 
Other current assets583 
Property and equipment38 
Intangible assets44,500 
Total assets acquired$56,542 
Accounts payable and accrued expenses4,609 
Total liabilities assumed$4,609 
Total identifiable net assets51,933 
Goodwill24,203 
Total consideration$76,136 
Goodwill recognized is primarily attributable to assembled workforce and expected synergies and is tax deductible in future years. Intangible assets acquired consist largely of customer lists in the amount of $39.0 million to be amortized over 12 years. The remaining intangible assets include trade names and developed technology, which will be amortized over two years and seven years, respectively.
As the acquisition of Vault occurred on January 2, 2024, Vault’s results have been fully consolidated in our unaudited condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 2024. Our revenues for the three months ended March 31, 2024 include $13.3 million of revenues attributable to Vault. The following unaudited pro forma results for the three months ended March 31, 2023 show the effect on the Company’s revenues as if the acquisition of Vault had occurred on January 1, 2023. The pro forma results presented are the result of combining the revenues of the Company with the revenues of Vault for the three months ended March 31, 2023:
 (in thousands)Three Months Ended March 31, 2023
Revenues$195,638 
Pro forma net operating results are not presented as they were determined to not be material to the total net operating results of the Company. The Company did not have any material, non-recurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue. The pro forma information is presented for illustrative purposes only and may not be indicative of the future results or results of operations that would have actually occurred had the acquisition of Vault occurred as presented. Further, the above pro forma amounts do not consider any potential synergies that may result from the transaction. In addition, future results may vary significantly from the results reflected in such pro forma information.
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 adjusted purchase price for the acquisitions totaled approximately $66.2 million, of which $49.5 million was funded with available cash on hand and is subject to certain closing adjustments specified in the share purchase agreements and includes initial contingent consideration related to the A-Check acquisition of $4.7 million recorded at fair value. The contingent consideration was determined based on actual future results. The initial 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 an allocation of the purchase price to assets
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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 $0.2 million and $2.7 million of transaction expenses related to these acquisitions during the three months ended March 31, 2024 and March 31, 2023, respectively.
The 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:
Preliminary Purchase Price AllocationFinal Purchase Price Allocation
(in thousands)March 31,
2023
Purchase Price AdjustmentsDecember 31,
2023
Consideration
Cash$11,935 $— $11,935 
Other current assets
Accounts receivable4,279 (3)4,276 
Other current assets805 447 1,252 
Property and equipment177 (1)176 
Intangible assets32,141 (1,268)30,873 
Other long-term assets6 — 6 
Total assets acquired$49,343 $(825)$48,518 
Accounts payable and accrued expenses1,156 94 1,250 
Other current liabilities1,291 (72)1,219 
Deferred tax liability8,388 (1,163)7,225 
Other liabilities2 788 790 
Total liabilities assumed$10,837 $(353)$10,484 
Total identifiable net assets38,506 (472)38,034 
Goodwill27,352 766 28,118 
Total consideration$65,858 $294 $66,152 
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, 2024 or results of operations for the three months ended March 31, 2024, 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 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.
During the three months ended March 31, 2024, the Company recorded a $4.0 million out-of-period increase in the fair value of the contingent consideration, in accordance with the purchase agreement with EBI. Refer to “Note 2. Summary of Significant Accounting Policies” for further information regarding this out-of-period adjustment.
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5.    Property and Equipment, Net
(in thousands)March 31,
2024
December 31,
2023
Furniture and fixtures$1,211 $1,317 
Computers and equipment39,876 39,251 
Leasehold improvements1,879 2,067 
 42,966 42,635 
Less: Accumulated depreciation(35,637)(34,940)
Total property and equipment, net$7,329 $7,695 
Depreciation expense on property and equipment was $0.9 million and $1.0 million during the three months ended March 31, 2024 and 2023, respectively. Write down of abandoned property and equipment no longer in use was $0.2 million and less than $0.1 million during the three months ended March 31, 2024 and 2023, respectively.
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, 2023$879,408 
Acquisition of Vault24,203 
Foreign currency translation adjustment(749)
Goodwill as of March 31, 2024$902,862 
Intangible Assets
Intangible assets, net consisted of the following for the periods presented:
 March 31, 2024December 31, 2023
(in thousands)
Gross Carrying AmountAccumulated AmortizationNetGross Carrying AmountAccumulated AmortizationNet
Customer lists$571,582 $(383,343)$188,239 $533,204 $(375,107)$158,097 
Trademarks79,205 (45,188)34,017 77,860 (43,815)34,045 
Non-compete agreements
3,971 (2,939)1,032 3,979 (2,869)1,110 
Technology274,883 (238,207)36,676 266,194 (233,996)32,198 
Domain names10,118 (5,524)4,594 10,118 (5,356)4,762 
 $939,759 $(675,201)$264,558 $891,355 $(661,143)$230,212 
Included within technology is $31.0 million and $30.2 million of internal-use software, net of accumulated amortization, as of March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, $7.1 million of technology assets have not yet been put in service.
The Company capitalized $4.9 million of costs to develop internal-use software included in technology during the three months ended March 31, 2024 (consisting of internal costs of $3.9 million and external costs of $1.0 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, 2024, 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 $14.9 million and $14.1 million for the three months ended March 31, 2024 and 2023, respectively.
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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, 2024 is as follows for each of the next five years:
(in thousands) 
Year Ending December 31, 
Remainder of fiscal year 2024$44,563 
202550,671 
202642,044 
202731,520 
202825,842 
Thereafter69,918 
 $264,558 
7.    Accrued Expenses
Accrued expenses on the unaudited condensed consolidated balance sheets as of the periods presented consisted of the following:
(in thousands)March 31,
2024
December 31,
2023
Accrued compensation$16,499 $20,495 
Accrued cost of revenues30,155 25,548 
Accrued interest1,238 321 
Other accrued expenses25,713 17,623 
Total accrued expenses$73,605 $63,987 
8.    Leases
The Company leases real estate and equipment for use in its operations. The Company has 17 operating leases with remaining lease terms ranging from 1 to 58 months as of March 31, 2024.
The components of lease expense for the periods presented are as follows:
Three Months Ended
March 31,
(in thousands)20242023
Components of total lease costs
Operating lease expense
$761 $1,379 
Sublease income(388)(222)
Total net lease costs$373 $1,157 

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Information related to the Company’s right-of-use assets and lease liabilities for the periods presented is as follows:
(dollars in thousands)March 31,
2024
December 31,
2023
Operating leases
Operating leases right-of-use asset$5,872 $6,452 
Operating leases liability, current portion$3,879 $4,219 
Long-term operating leases liability, net of current portion6,606 7,278 
Total operating leases liability$10,485 $11,497 
Weighted average remaining lease term in years - operating leases3.63.7
Weighted average discount rate - operating leases4.89 %4.92 %
Total remaining lease payments under the Company’s operating leases (excluding short term leases) for the periods presented are as follows:
(in thousands)March 31, 2024
Remainder of fiscal year 2024$3,687 
20252,380 
20262,117 
20272,149 
20281,028 
Thereafter85 
Total future minimum lease payments$11,446 
Less: imputed interest(961)
Total$10,485 
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)March 31,
2024
December 31,
2023
Current portion of long-term debt
Term Loans$15,000 $15,000 
Total current portion of long-term debt$15,000 $15,000 
Long-term debt
Term Loans, due November 29, 2027 (7.68% and 7.71% at March 31, 2024 and December 31, 2023, respectively)
273,750 277,500 
Revolving Credit Facility270,494 205,494 
Unamortized discount and debt issuance costs(3,002)(3,206)
Total long-term debt, net$541,242 $479,788 
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The estimated fair value of the Company’s 2022 Credit Agreement was $548.8 million and $484.1 million as of March 31, 2024 and December 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 2022 Credit Agreement as of March 31, 2024.
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 (an exit price) 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 March 31, 2024 and December 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.
Contingent consideration related to acquisitions is considered a Level 3 financial instrument. As of March 31, 2024, the fair value of contingent consideration related to the January 2, 2024 acquisition of Vault, the March 1, 2023 acquisition of A-Check and the November 30, 2021 acquisition of EBI. As of December 31, 2023, the fair value of contingent consideration related to the March 1, 2023 acquisition of A-Check and the November 30, 2021 acquisition of EBI. The contingent consideration consists of estimated future payments related to the Company’s acquisitions, based on metrics such as revenue retention and referral revenue. The fair value is determined using various assumptions and estimates, including revenue and customer projections to forecast a range of outcomes for the contingent consideration. The Company reassesses the estimated fair value of the contingent consideration at the end of each reporting period based on the information available at the time. Changes in the significant unobservable inputs used may result in a significantly higher or lower fair value measurement. Changes in fair value of contingent consideration are recorded in selling, general and administrative expense in the condensed consolidated statements of operations and comprehensive loss.
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The following tables present 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 the periods presented:
March 31, 2024
(in thousands)Level 1Level 2Level 3Total
Assets   
Cash equivalents from money market funds$13,600 $ $ $13,600 
Interest rate swaps$ $1,952 $ $1,952 
Liabilities
Interest rate swaps 2,061  2,061 
Contingent consideration  9,739 9,739 
December 31, 2023
(in thousands)Level 1Level 2Level 3Total
Assets   
Cash equivalents from money market funds11,593   11,593 
Interest rate swaps 1,187  1,187 
Liabilities
Interest rate swaps 5,357  5,357 
Contingent consideration$ $ $2,989 $2,989 
The following table summarizes the change in fair value of the Level 3 liabilities with significant unobservable inputs for the periods presented:
Three Months Ended
March 31,
(in thousands)
20242023
Fair value of contingent consideration, beginning of period
$2,989 $1,219 
Acquired liabilities2,750 4,706 
Cash payments
  
Change in fair value of contingent consideration, net(1)
4,000 (305)
Fair value of contingent consideration, end of period(2)
$9,739 $5,620 
_________________________
(1)During the three months ended March 31, 2024, the Company recorded a $4.0 million increase in the fair value of the contingent consideration, in accordance with the purchase agreement with EBI. Refer to Note 2. Summary of Significant Accounting Policies” for further information regarding this out-of-period adjustment.
(2)Recorded in Other current liabilities on the condensed consolidated balance sheets.
During the three months ended March 31, 2024 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.
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11.    Derivative Instruments and Hedging Activities
Cash Flow Hedges
For derivatives designated and that qualify as cash flow hedges for accounting purposes, the unrealized gain or loss on the derivative is initially recorded in accumulated OCI, reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item.
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.
As of March 31, 2024, the Company had the following outstanding interest rate swap derivatives that were used to hedge its interest rate risks:
ProductNumber of InstrumentsEffective DateMaturity Date
Current Notional(1)
Interest Rate Swap4February 28, 2023November 29, 2027
$300.0 million USD
_________________________
(1)The notional value steps down from $300.0 million to $150.0 million on February 27, 2026.
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
March 31, 2024December 31, 2023
(in thousands)Balance Sheet LocationFair ValueBalance Sheet LocationFair Value
Derivatives designated as hedging instruments:
Interest rate swapsOther current assets$1,952 Other current assets$1,187 
Liability Derivatives
March 31, 2024December 31, 2023
(in thousands)Balance Sheet LocationFair ValueBalance Sheet LocationFair Value
Derivatives designated as hedging instruments:
Interest rate swapsOther liabilities$2,061 Other liabilities$5,357 
The tables below present the effect of cash flow hedge accounting on accumulated OCI for the periods presented:
Three Months Ended
March 31,
Three Months Ended
March 31,
(in thousands)2024202320242023
Derivatives designated as hedging instruments:Amount of Gain or (Loss) Recognized in OCI on DerivativeLocation of Gain or (Loss) Reclassified from Accumulated OCI into IncomeAmount of Gain or (Loss) Reclassified from Accumulated OCI into Income
Interest rate swaps$4,879 $(6,877)Interest expense$818 $97 
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The table below presents the effect of the Company’s cash flow hedge accounting on the unaudited condensed consolidated statements of operations and comprehensive loss for the periods presented:
Three Months Ended
March 31,
20242023
(in thousands)Interest Expense
Total amounts of income and expense line items in which the effects of cash flow hedges are recorded$10,312 $8,608 
Gain or (loss) on cash flow hedging relationships
Interest rate swaps:
Amount of gain or (loss) reclassified from accumulated OCI into income$818 $97 
Amounts reported in accumulated OCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. Based on current interest rates, during the next twelve months, the Company estimates that an additional $2.0 million net gain will be reclassified from accumulated OCI as a decrease to interest expense. No gain or loss was reclassified from accumulated OCI into earnings as a result of forecasted transactions that failed to occur during the periods presented.

12.    Income Taxes
The computation of the provision for or benefit from income taxes for interim periods is determined by applying the estimated annual effective tax rate to year-to-date income before tax and adjusting for discrete tax items recorded in the period, if any.
The Company recorded a tax benefit of $9.0 million for the three months ended March 31, 2024 and a tax expense of $1.1 million for the three months ended March 31, 2023, which resulted in an effective tax rate of 53.1% and 65.1%, respectively. For the three months ended March 31, 2024 and 2023, the effective rate differs from the statutory rate mainly due to a jurisdictional mix of earnings and permanent items including the impact of stock-based compensation.
13.    Commitments and Contingencies
Merger Related
In connection with entering into the Merger Agreement, on February 28, 2024, the Company entered into a support agreement (the “Support Agreement”), by and among the Company, First Advantage and the Specified Stockholders. The Support Agreement will automatically terminate if the Merger Agreement is terminated in accordance with its terms. In connection with the Support Agreement and acting as a financial advisor to the Company, Goldman Sachs will receive a fee of up to $30.0 million for such services provided in connection with the Merger, of which $20.0 million is payable upon the completion of the Merger and an additional $10.0 million of which is payable at the sole discretion of the Company in connection with the completion of the Merger.
Citigroup Global Markets Inc. also acted as financial advisor to the Company in connection with the Merger and will receive a fee of up to $20.0 million for such services, of which $5.0 million is payable in connection with delivery of the fairness opinion and $5.0 million of which is payable upon completion of the Merger, and an additional $10.0 million that is payable at the sole discretion of the Company upon completion of the Merger. The $5.0 million in connection with the delivery of the fairness opinion has been recorded during the three months ended March 31, 2024.The fairness opinion was delivered during the three months ended March 31, 2024 and the associated $5.0 million fee is recorded in selling, general and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2024.
The Merger Agreement contains other termination rights for either or each of First Advantage and the Company, including, among others, by either party if the consummation of the Merger does not occur on or before 11:59 p.m., New York City time, on February 28, 2025 (the “Initial Outside Date”), subject to an extension of six months at First Advantage’s election (the “Extended Outside Date”) if on the Initial Outside Date all of the closing conditions except those relating to antitrust approvals have been satisfied or waived.
Upon termination of the Merger Agreement under certain specified circumstances, including by the Company to enter into a definitive agreement with respect to a superior proposal in accordance with the terms of the Merger Agreement, the Company will be required to pay First Advantage a termination fee in the amount of $66.3 million. Upon termination of the Merger Agreement by either party because certain required antitrust approvals are not
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obtained (i) by the Initial Outside Date, First Advantage will be required to pay the Company a termination fee of $60 million or (ii) by the Extended Outside Date, First Advantage will be required to pay the Company a termination fee of $90 million. In addition, if First Advantage fails to consummate the Merger within five business days after all of the required conditions have been satisfied and the Company terminates the Merger Agreement as a result thereof, First Advantage will be required to pay the Company a termination fee of $100 million.
Litigation
The Company is party to both class actions and individual actions in the ordinary course of business. The matters typically allege violations of the Fair Credit Reporting Act (“FCRA”), as well as other claims. In addition, from time to time, the Company receives inquiries from regulatory bodies regarding its business. The Company accrues for the cost of resolving matters where it can be determined that a loss is both estimable and probable. Certain matters are in litigation and an estimate of the outcome and potential losses, if any, cannot be determined. Certain of these matters are covered by the Company’s insurance policies, subject to policy terms, including retentions. The Company does not believe that the resolution of current matters will result in a material adverse effect on the financial position, results of operations, or cash flows of the Company.
As of March 31, 2024, the Company had a legal settlement obligation of $5.2 million and an offsetting insurance receivable of $2.9 million for the settlement of legal matters. As of December 31, 2023, the Company had a legal settlement obligation of $5.3 million and an offsetting insurance receivable of $2.9 million for the settlement of legal matters.
Net legal settlement expense recorded in selling, general and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2024 and 2023 totaled $0.2 million and $0.1 million, respectively.
14.    Equity
Under the Company’s Amended and Restated Certificate of Incorporation, a total of 1,100,000,000 shares of all classes of stock are authorized, divided as follows:
(i)1,000,000,000 shares of common stock, par value $0.01 per share (“common stock”); and
(ii)100,000,000 shares of undesignated preferred stock, par value $0.01 per share (“preferred stock”).
Each share of common stock is entitled to one vote on all matters on which holders of common stock are entitled to vote generally. Holders of common stock are entitled to be paid ratably any dividends as may be declared by the Board of Directors (in its sole discretion), subject to any preferential dividend rights of outstanding preferred stock (if any). No dividends have been declared or paid on the Company’s common stock through March 31, 2024.
The Board of Directors is authorized to direct the issuance of the undesignated preferred stock in one or more series and to fix the designation of such series, the powers (including voting powers), preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions thereof, of such series of preferred stock and the number of shares of such series.
On November 23, 2022, the Company’s board of directors authorized the repurchase of up to $100.0 million of the Company’s shares of common stock through December 31, 2024. The share repurchase program is being executed on a discretionary basis through open market repurchases, private transactions, or other transactions, including through block trades and Rule 10b-18 and Rule 10b5-1 trading plans. The Company is not obligated to repurchase any specific number of shares, and the timing and amount of any share repurchases will be subject to several factors including share price, trading volume, market conditions and capital allocation priorities. The share repurchase program may be suspended, terminated or modified without notice at any time. For the three months ended March 31, 2024, the Company repurchased 494,157 shares of its common stock for $6.8 million, inclusive of commissions and taxes.
On June 7, 2023, the Company entered into an Underwriting Agreement with Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC as representatives of the several underwriters named therein (the “Underwriters”) and the selling stockholders (the “Selling Stockholders”), relating to the sale by the Selling Stockholders of 8,000,000 shares of common stock, par value $0.01 per share, of the Company (the “Secondary Public Offering”). In connection with the Secondary Public Offering, the Selling Stockholders granted the Underwriters a 30-day option to purchase up to an additional 1,200,000 shares of common stock of the Company, of which 1,145,486 shares were purchased. The Company did not sell any shares in the Secondary Public Offering and did not receive any proceeds from the sale of shares being sold by the Selling Stockholders in the Secondary Public Offering. In addition, the Company entered into an agreement with Broad Street Principal Investments, L.L.C. (“BSPI”), one of the Selling Stockholders, dated June 5, 2023, pursuant to which the Company repurchased from BSPI an aggregate of
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1,000,000 shares of common stock of the Company for a total of $11.7 million pursuant to the Company’s share repurchase program at a price per share equal to the price paid by the Underwriters in the Secondary Public Offering.
15.    Stock-Based Compensation
Stock-based compensation expense is recognized in cost of revenues, corporate technology and production systems, and selling, general and administrative expense in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss as follows:
 Three Months Ended
March 31,
(in thousands)20242023
Stock-based compensation expense
Cost of revenues$359 $428 
Corporate technology and production systems819 612 
Selling, general and administrative8,164 7,003 
Total stock-based compensation expense$9,342 $8,043 
Prior to the IPO, all share-based awards were issued to employees under the Company’s 2015 Long-Term Equity Incentive Plan (the “2015 Plan”). Upon the adoption of the Sterling Check Corp. 2021 Omnibus Incentive Plan (the “2021 Equity Plan”) on August 4, 2021 and as of September 22, 2021, all newly granted share-based awards have been issued under the 2021 Equity Plan.
As of March 31, 2024, the Company had approximately $93.3 million of unrecognized pre-tax non-cash stock-based compensation expense related to awards granted under the 2021 Equity Plan, consisting of approximately $18.8 million related to non-qualified stock options (“NQSOs”), $73.6 million related to restricted stock, and approximately $0.9 million related to restricted stock units (“RSUs”), all of which the Company expects to recognize over a weighted average period of 2.3 years.
2015 Long-Term Equity Incentive Plan
Pursuant to the Company’s 2015 Plan, the Company granted performance-based stock options (“PSOs”) and service-based vesting stock options (“SVOs”). On August 4, 2021, the Company amended each option outstanding under the 2015 Plan to (i) accelerate vesting upon an initial public offering and (ii) permit each option to be exercised following termination for any reason for the period set forth in the applicable award agreement or, if longer, an extended post-termination exercise period that would end on the date that is six months following the second anniversary of the effective date of the initial public offering, provided that if such date falls during a blackout period, the post-termination exercise period will be extended until the date that is thirty days after the commencement of the Company’s next open trading window.
The table below provides a summary of SVOs and PSOs currently outstanding under the 2015 Plan for the three months ended March 31, 2024:
Outstanding SVOsOutstanding PSOs
Number of
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
(years)
Aggregate
Intrinsic
Value
Number of
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
(years)
Aggregate
Intrinsic
Value
(in thousands, except shares and per share amounts)
Balances as of December 31, 20235,635,742 $9.60 3.68$24,349 3,036,930 $10.05 2.14$11,732 
Granted    
Forfeited / Expired(17,970)9.68 112   
Exercised(1,555,977)9.63 8,503 (1,841,326)10.30 10,482 
Balances as of March 31, 2024(1)
4,061,795 $9.59 4.33$26,373 1,195,604 $9.68 4.85$7,648 
_________________________
(1)    All SVOs and PSOs are exercisable as of March 31, 2024.
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2021 Omnibus Incentive Plan
On August 4, 2021, the Company’s board of directors adopted, and on August 13, 2021 the Company’s stockholders approved, the 2021 Equity Plan. Equity awards under the 2021 Equity Plan are intended to retain and motivate the Company’s officers and employees, consultants and non-employee directors and to promote the success of the Company’s business by providing such participating individuals with a proprietary interest in the performance of the Company. The 2021 Equity Plan will terminate on the tenth anniversary thereof, unless earlier terminated by the board of directors. Under the 2021 Equity Plan, the following types of awards can be granted to an eligible individual (as defined by the plan and to the extent permitted by applicable law): incentive stock options (“ISOs”) and NQSOs; stock appreciation rights (“SARs”); restricted stock; RSUs; performance awards; cash-based awards and other share-based awards. Upon its adoption, the 2021 Equity Plan provided that up to 9,433,000 shares may be issued pursuant to awards granted under the 2021 Equity Plan (the “Share Limit”); provided, that, the Share Limit shall be automatically increased on the first day of each calendar year commencing on January 1, 2022 and ending on January 1, 2030 in an amount equal to the lesser of (x) 5% of the total number of shares outstanding on the last day of the immediately preceding calendar year, and (y) such number of shares as determined by the board of directors, and no more than 9,433,000 shares may be issued upon the exercise of ISOs. As of March 31, 2024, 12,154,861 shares were available for issuance pursuant to future granted awards under the 2021 Equity Plan.
Stock Options
Options issued under the 2021 Equity Plan generally vest on various schedules over one to four-year periods on the anniversary of the grant date, subject to continued employment with the Company through the applicable vesting date. Options issued under the 2021 Equity Plan generally expire ten years after the grant date.
The table below provides a summary of stock option activity under the 2021 Equity Plan for the three months ended March 31, 2024:
Number of SharesWeighted Average Exercise PriceWeighted Average Contractual Term (in years)Aggregate Intrinsic Value
Outstanding as of December 31, 20234,558,199 $21.14 8.06$904 
Granted  
Forfeited / Expired(11,724)23.00 
Exercised   
Outstanding as of March 31, 20244,546,475 $21.09 7.79$2,629 
Exercisable as of March 31, 20241,974,043 $22.01 7.63$593 
Of the $53.6 million of proceeds from the exercise of employee stock options less $19.2 million of cash paid for tax withholding on those exercises included on the unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2024, $0.5 million relates to options exercised prior to, but settled during the three months ended March 31, 2024. As of December 31, 2023, these options were unsettled, but exercised, and were included in the additional paid-in capital balance as of December 31, 2023.
Restricted Stock
Restricted stock issued under the 2021 Equity Plan in connection with the Company’s initial public offering vests 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date, subject to continued employment with the Company through the applicable vesting date. Other restricted stock grants issued under the 2021 Equity Plan vest on various schedules over one to four-year periods on the anniversary of the grant date, subject to the continued employment with the Company through the applicable vesting date. Holders of restricted stock are entitled to all rights of a common stockholder of the Company and are subject to restrictions on transfer.
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The table below provides a summary of restricted stock activity under the 2021 Equity Plan for the three months ended March 31, 2024:
Number of SharesWeighted Average Fair Value
(per share)
Unvested as of December 31, 20233,796,203 $16.40 
Granted1,958,874 15.92 
Forfeited / Cancelled(74,354)17.45 
Vested(591,611)10.92 
Unvested as of March 31, 20245,089,112 $16.39 
Restricted Stock Units
Restricted stock units issued under the 2021 Equity Plan in connection with the Company’s initial public offering vest 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date, subject to continued employment with the Company through the applicable vesting date. Additional grants of RSUs vest on various schedules over a one to four-year period on the anniversary of the grant date, subject to the continued employment with the Company through the applicable vesting date. Upon vesting, employees will receive shares of common stock in settlement of the units.
The table below provides a summary of RSU activity under the 2021 Equity Plan for the three months ended March 31, 2024:
Number of SharesWeighted Average Fair Value
(per share)
Unvested as of December 31, 2023120,555 $15.82 
Granted6,347 15.92 
Forfeited / Cancelled(18,925)13.30 
Vested(5,268)9.82 
Unvested as of March 31, 2024102,709 $16.33 
Employee Stock Purchase Plan
The 2021 Employee Stock Purchase Plan (the “ESPP”) was launched on July 1, 2023. The ESPP allowed eligible employees to voluntarily make after-tax contributions of up to 15% of such employee’s cash compensation for the purchase of the Company’s stock. Consecutive offering periods of six months in duration were established, with the first one commencing on July 1, 2023. During each offering period, such contributions accumulated and applied to purchase shares at the end of the offering period. The purchase price for shares purchased in the initial offering period were, and for subsequent offering periods were not be less than, 85% of the lesser of the closing price of the shares on the first day of the offering period or the last day of the offering period. During the three months ended March 31, 2024, the amount the Company recorded for stock-based compensation expense associated with the ESPP was immaterial. The ESPP was suspended on February 29, 2024 as part of the Merger discussed in Note 1, “Description of Business.”
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16.    Net (Loss) Income Per Share
The following table sets forth the computation of basic and diluted net (loss) income per share attributable to common stockholders for the periods presented:
Three Months Ended
March 31,
(in thousands, except share and per share amounts)20242023
Numerator:
Net (loss) income attributable to stockholders$(7,955)$591 
Denominator:
Weighted average number of shares outstanding—basic90,274,094 92,877,506 
Weighted average additional shares assuming conversion of potential common shares 2,472,836 
Weighted average common shares outstanding—diluted90,274,094 95,350,342 
Net (loss) income per share attributable to stockholders, basic$(0.09)$0.01 
Net (loss) income per share attributable to stockholders, diluted$(0.09)$0.01 
The following table summarizes the weighted average potentially dilutive securities that were excluded from the computation of diluted net (loss) income per share because their effect would have been anti-dilutive for the periods presented:
 Three Months Ended
March 31,
 20242023
Stock options12,106,71712,136,464
Restricted stock3,950,0295,160,978
Restricted stock units114,34859,895
17.    Related Party Transactions
Goldman Sachs and some of its affiliates, each an affiliate of our Sponsor, are clients of the Company and the Company had sales to Goldman Sachs and some of its affiliates in the amount of $1.1 million and $1.1 million for the three months ended March 31, 2024 and 2023, respectively. Outstanding accounts receivable from Goldman Sachs as of March 31, 2024 and December 31, 2023 were $0.9 million and $0.7 million, respectively. Additionally, the Company is currently a party to a $75.0 million notional value interest rate swap through November 29, 2027 with J. Aron & Company LLC, a wholly-owned subsidiary of Goldman Sachs. Outstanding accounts receivable from swap with J. Aaron & Company LLC were less than $0.1 million as of March 31, 2024 and December 31, 2023.
In connection with entering into the Merger Agreement, on February 28, 2024, the Company entered into a Support Agreement by and among the Company, First Advantage and the Specified Stockholders. In connection with the Support Agreement and acting as a financial advisor to the Company, Goldman Sachs will receive a fee of up to $30.0 million for such services provided in connection with the Merger payable upon completion of the Merger. Refer to “Note 13. Commitments and Contingencies” for further information regarding these fees.
An affiliate of certain stockholders that, to the Company’s knowledge, collectively own greater than 10% of the Company’s outstanding shares of common stock (the “Stockholders”) is a client of the Company, and the Company had sales to an affiliate of the Stockholders in the amount of less than $0.1 million for the three months ended March 31, 2024 and 2023, respectively. Outstanding accounts receivable from an affiliate of the Stockholders were less than $0.1 million as of March 31, 2024 and December 31, 2023.
18.    Revenue
Performance Obligations
Substantially all of the Company’s revenues are recognized at a point in time as results from services are provided through a screening report and the customer takes control of the product when the report is completed. Accordingly, revenue is generally recognized at the point in time when the customer receives and can use the report.
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For revenue arrangements containing multiple products or services, the Company accounts for the individual products or services as separate performance obligations if they are distinct, the product or service is separately identifiable from other terms in the contract, and if a customer can benefit from it on its own or with other resources that are readily available to the customer. If these criteria are not met, the promised products or services are accounted for as a combined performance obligation. The Company allocates the contract price to each performance obligation based on the standalone selling prices of each distinct product or service in the contract.
Disaggregation of Revenues
The following tables set forth total revenue by type of service for the periods presented:
 Three Months Ended
March 31,
(in thousands)20242023
Screening services$183,019 $176,871 
Other services2,980 2,403 
Total revenue$185,999 $179,274 
The following table sets forth total revenue by geographic area in which the revenues and invoicing are recorded for the periods presented:
 Three Months Ended
March 31,
(in thousands)20242023
United States$159,827 $149,742 
All other countries26,172 29,532 
Total revenue$185,999 $179,274 
Other than the U.S., no single country accounted for more than 10% of the Company’s total revenues during the three months ended March 31, 2024 and 2023. Substantially all of the Company’s long-lived assets were located in the U.S. as of March 31, 2024 and December 31, 2023.
Contract Assets and Liabilities
The incremental costs of obtaining a contract with a customer are recognized as an asset if the benefit of such costs is expected to be longer than one year, with a majority of contracts being multi-year. Incremental costs include commissions to the sales force and are amortized over three years, as management estimates that this corresponds to the period over which a customer benefits from the contract. As of March 31, 2024 and December 31, 2023, $3.4 million of deferred commissions are included in other current assets on the unaudited condensed consolidated balance sheets and approximately $2.6 million and $2.7 million, respectively, of deferred commissions are included in other noncurrent assets, net on the unaudited condensed consolidated balance sheets.
The Company did not have any material contract liabilities as of March 31, 2024 and December 31, 2023.
Concentrations
For the three months ended March 31, 2024 and 2023, no single customer accounted for more than 10% of the Company’s revenue. No single customer had an accounts receivable balance greater than 10% of total accounts receivable as of March 31, 2024 and December 31, 2023.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes for the three months ended March 31, 2024. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results described in or implied by the forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the sections titled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the U.S. Securities and Exchange Commission (“SEC”) on March 6, 2024 (“2023 Annual Report”) and “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q.
Basis of Presentation
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to “Sterling,” “we,” “us,” “our,” the “Company,” and similar references refer to Sterling Check Corp.
Numerical figures included in this Quarterly Report on Form 10-Q have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them. In addition, we may round certain percentages presented in this Quarterly Report on Form 10-Q to the nearest whole number. As a result, figures expressed as percentages in the text may not total 100% or, when aggregated, may not be the arithmetic aggregation of the percentages that precede them.
Overview
We are a leading global provider of technology-enabled background and identity verification services. We provide the foundation of trust and safety that our clients need to create great environments for their most essential resource—people. We offer a comprehensive hiring and risk management solution that begins with identity verification, followed by criminal background screening, credential verification, drug and health screening, processing of employee documentation required for onboarding and ongoing risk monitoring. Our services are generally delivered through our purpose-built, proprietary, cloud-based technology platform that empowers organizations with real-time and data-driven insights to conduct and manage their employment screening programs efficiently and effectively. Our clients face a dynamic and rapidly evolving global labor market with increasing complexity and regulatory requirements. We believe that our services and platform enable organizations to make more informed employment decisions, improve workplace safety, protect their brand and mitigate risk. As a result, we believe our solutions are mission-critical to our clients’ core human resources, risk management and compliance functions. During the twelve months ended December 31, 2023, we completed over 103 million searches for over 50,000 clients, including nearly 60% of the Fortune 100 and over 50% of the Fortune 500.
Our client-centric approach underpins everything we do. We serve a diverse and global client base in a wide range of industries, such as healthcare, gig economy, financial and business services, industrials, retail, contingent, technology, media and entertainment, transportation and logistics, hospitality, education and government. Employers are facing numerous challenges, including complex and changing legal and regulatory requirements, a rise in fraudulent job applications, a growing spotlight on reputation and a more complex global workforce. Successfully navigating these challenges requires an industry-specific perspective, given differing candidate profiles, economics, competitive dynamics and regulatory demands. To serve these differing needs, our sales and support delivery model is organized around teams dedicated to specific industries (“Verticals”) and geographic markets (“Regions”). Our delivery model provides our clients with both the personal touch and consultative partnership of a small boutique firm and the global reach, scale, innovation and resources of an industry leader. Additionally, this delivery model supports our principle of “Compliance by Design”, enabling clients to maintain compliance globally. We believe the combination of our deep market expertise from our sales and support combined with the flexibility of our proprietary technology platform enable us to deliver industry-relevant, highly specialized solutions to our clients in a scalable manner, driving growth and differentiating us from our competitors.
We offer an extensive suite of global products addressing a wide range of complex client needs, and we see compelling opportunities to continue extending our operating presence in other geographies. We believe we have a unique ability to translate client needs into superior local market solutions through a combination of portfolio depth and breadth, local know-how and language capabilities. Additionally, we view a targeted, disciplined approach to strategic mergers and acquisitions (“M&A”) as highly complementary to our other key growth objectives, compounding and/or accelerating related opportunities. Through our investments in technology, we have established a unified platform, allowing us to quickly integrate targets and drive synergies. Our core platform processes approximately 77% of our global revenue. We expect the revenue processed on our core platform to
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increase in 2024. We expect Sterling’s proven track record of M&A—with 14 acquisitions over the last 13 years—to continue to support and elevate the various layers of our future growth profile.
Throughout our more than 45-year operating history, innovation and self-disruption have been at the core of what we do every day. Our history of unique, industry-oriented market insights allows us to be at the forefront of innovation which includes multiple industry-leading solutions. For example, we pioneered criminal fulfillment technology (CourtDirect), arrest record and incarceration alert products, post-hire monitoring capabilities, artificial intelligence-enhanced record review and validation process and the industry’s only proprietary technology in a single-sourced U.S.-nationwide fingerprint network. Our commitment to innovation has continued with the recent development of enhanced global language support capabilities, a cloud-based operating platform, our exclusive partnership with the Financial Industry Regulatory Authority, Inc. serving as their fingerprint services provider, and a comprehensive global identity verification solution through our partnership with ID.me in the U.S. and Yoti internationally. Enabled by our market leadership and platform investments, we have established a foundation and roadmap for future innovation which includes industry-specific products, growing our Identity-as-a-Service capabilities and further geographic expansion.
As part of our journey of growth and optimization, we continue to refine our corporate strategy and are committed to our goal of delivering stockholder value by executing on the growth opportunities in front of us. We have a number of key execution elements to help us achieve our goals, including increasing our revenues with existing clients, acquiring new clients, growing market share internationally, and utilizing M&A to supplement our organic revenue growth. We believe we are differentiated from competitors and well-positioned to achieve our goal of being the world’s most trusted background and identity services company due to our deep market expertise, unrivaled client service, best-in-class data, and seamless workflows. In 2023, we continued our focus on cost savings targets through a three-pillar approach. First, through Project Nucleus, which we launched at the end of 2022, an initiative to drive meaningful cost savings and efficiency gains, with the goal to enhance our organization by re-engineering processes, driving fulfillment cost reductions and identifying and executing on additional automation opportunities. Second, we are reducing our facilities costs by leaning more into our virtual-first approach and reducing our real estate and facilities footprint. Third, we are focused on continued enhancement of our functional alignment by streamlining our organization to align with the go-to-market structure that we established in 2022.
Merger with First Advantage
On February 28, 2024, we entered into a Merger Agreement with First Advantage and Merger Sub. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will be merged with and into Sterling, with Sterling continuing as the surviving corporation in the Merger and becoming an indirect wholly-owned subsidiary of First Advantage. Upon the effective time of the Merger, each share of our common stock issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive, at the election of the holder of such share of common stock, and subject to proration in accordance with the Merger Agreement: (i) $16.73 per share in cash, without interest (the “Cash Consideration”), or (ii) 0.979 shares of common stock, par value $0.001 per share, of First Advantage (the “Stock Consideration”). The election will be subject to a proration mechanism, such that the total number of shares of our common stock entitled to receive the Cash Consideration will be equal to 72%, and the total number of shares of our common stock entitled to receive the Stock Consideration will be equal to 28%, of the aggregate number of shares of our common stock issued and outstanding immediately prior to the consummation of the Merger. Following the consummation of the Merger, our stockholders are expected to own approximately 16% of the combined company, and current First Advantage stockholders are expected to own approximately 84% of the combined company. The transaction has been unanimously approved by the boards of directors of both companies and is expected to close in approximately the third quarter of 2024, with the closing and timing thereof subject to required regulatory approvals, clearances, and other customary closing conditions. See Part I, Item 1. “Business—Sterling Overview” in the 2023 Annual Report on Form 10-K for additional information.
M&A Activity
On January 2, 2024, the Company acquired the equity interests of Vault Workforce Screening (“Vault”), a U.S. clinic management platform, bringing a network of 17,000 clinics and a flexible service model to enhance our existing drug and health services. The aggregate purchase price for the Vault acquisition totaled approximately $76.1 million, was funded with $65.0 million of proceeds from the Revolving Credit Facility and available cash on hand and includes initial contingent consideration of $2.8 million recorded at fair value.
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Trends and Other Factors Affecting Our Performance
Macroeconomic and Job Environment
Our business is impacted by the overall economic environment and our clients’ hiring volumes. In the latter half of the third quarter of 2022, base growth began to moderate due to macroeconomic uncertainty related to factors including inflation, monetary policy and fiscal policy. This moderation has continued throughout 2023 and the first quarter of 2024 during which we experienced year-over-year declines in base business with our existing clients that offset positive trends in other revenue drivers, including growth from new clients, up-sell and cross-sell and retention. The ongoing macroeconomic factors have caused uncertainty among our clients and general populace of a future economic downturn or recession. Given the uncertain conditions, it is challenging to predict the hiring and turnover trends of our clients.
Effects of Inflation
As a result of inflation and other macroeconomic factors, we have experienced declines in base business growth with our existing clients. If inflation continues or worsens, it could further negatively impact us by increasing our operating expenses. For example, inflation may lead to cost increases in multiple areas across our business, including the cost of labor. Further, inflation may also cause our customers to reduce their use of our products and services. To the extent that we are unable to pass on these costs through increased prices, revised budget estimates or offset them otherwise, or that we experience lower demand from our customers due to inflation, the rising rate of inflation may adversely affect our business, results of operations and financial condition.
Recent Accounting Standards Updates
Emerging Growth Company
The Jumpstart Our Business Startups Act of 2021 permits us, as an “emerging growth company,” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for private companies.
We will cease to be an emerging growth company upon the earliest of (a) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more; (b) the last day of our fiscal year following the fifth anniversary of the date of the initial public offering (“IPO”); (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (d) the date on which we are 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 our 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, 2023.
Refer to Note 3, “Recent Accounting Standards Updates” of the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for information about recent accounting pronouncements.
Components of Our Results of Operations
The following discussion summarizes the key components of our unaudited condensed consolidated statements of operations and comprehensive loss. We have one operating and reportable segment.
Revenues
We generate revenue by providing identity verification and background services to our clients. We have an attractive business model underpinned by stable and highly recurring transactional revenues, significant operating leverage and low capital requirements that contribute to strong cash flow generation. We recognize revenue under the Financial Accounting Standards Board’s Accounting Standards Codification Topic No. 606, “Revenue from Contracts with Customers” (“ASC 606”). Under ASC 606, we recognize revenue when control of the promised goods or services is transferred to clients, generally at a point in time, in an amount that reflects the consideration that we are entitled to for those goods or services. A majority of our enterprise client contracts are exclusive to Sterling or require Sterling to be used as the primary provider. Additionally, they are typically multi-year agreements with automatic renewal terms, no termination for convenience clauses and set pricing with Sterling’s right to increase prices annually upon notice, including the ability to increase pass-through costs to our clients with 30 days’ notice. The strength of our contracts combined with our high levels of client retention