UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended June 30, 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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
1 (800 ) 853-3228
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated
filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The total number of outstanding shares of the registrant’s common stock, $0.01 par value per share, as of August 1, 2024 was 97,989,463 (excluding treasury shares of 7,527,472).
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STERLING CHECK CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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;
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•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.
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| (in thousands, except share and par value amounts) | June 30, 2024 | December 31, 2023 | |||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable (net of allowance for credit losses of $ | |||||||||||
| Insurance receivable | |||||||||||
| Prepaid expenses | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Deferred tax assets | |||||||||||
| Operating leases right-of-use asset | |||||||||||
| Other noncurrent assets, net | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| CURRENT LIABILITIES: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Litigation settlement obligation | |||||||||||
| Accrued expenses | |||||||||||
| Current portion of long-term debt | |||||||||||
| Operating leases liability, current portion | |||||||||||
| Income tax payable, current portion | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, net | |||||||||||
| Deferred tax liabilities | |||||||||||
| Long-term operating leases liability, net of current portion | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | $ | $ | |||||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 13) | |||||||||||
| STOCKHOLDERS’ EQUITY: | |||||||||||
Preferred stock ($ | |||||||||||
Common stock ($ | |||||||||||
| Additional paid-in capital | |||||||||||
Common stock held in treasury ( | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands, except share and per share data) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| REVENUES | $ | $ | $ | $ | |||||||||||||||||||
| OPERATING EXPENSES: | |||||||||||||||||||||||
| Cost of revenues (exclusive of depreciation and amortization below) | |||||||||||||||||||||||
| Corporate technology and production systems | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Impairments and disposals of long-lived assets | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| OPERATING INCOME | |||||||||||||||||||||||
| OTHER EXPENSE (INCOME): | |||||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Other income | ( | ( | ( | ( | |||||||||||||||||||
| Total other expense, net | |||||||||||||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | ( | ||||||||||||||||||||||
| Income tax provision (benefit) | ( | ( | |||||||||||||||||||||
| NET (LOSS) INCOME | $ | ( | $ | $ | ( | $ | |||||||||||||||||
Unrealized gain (loss) on hedged transactions, net of tax expense (benefit) of $ | ( | ||||||||||||||||||||||
Foreign currency translation adjustments, net of tax expense of $ | ( | ( | |||||||||||||||||||||
| Total other comprehensive income | |||||||||||||||||||||||
| COMPREHENSIVE (LOSS) INCOME | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Net (loss) income per share attributable to stockholders | |||||||||||||||||||||||
| Basic | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Diluted | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Weighted average number of shares outstanding | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| (in thousands, except share amounts) | Shares Outstanding | Par Value | Additional Paid-In Capital | Common Shares Held in Treasury | Common Stock Held in Treasury | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||||||||
| BALANCE at December 31, 2023 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Exercise of employee stock options, net of shares exchanged for payment and tax withholding | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the 2021 Employee Stock Purchase Plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Shares withheld to cover restricted share vesting tax | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted shares, net of forfeitures | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on hedged transactions, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| BALANCE at March 31, 2024 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Exercise of employee stock options, net of shares exchanged for payment and tax withholding | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Shares withheld to cover restricted share vesting tax | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted shares, net of forfeitures | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on hedged transactions, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| BALANCE as of June 30, 2024 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
7
STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)
| (in thousands, except share amounts) | Shares Outstanding | Par Value | Additional Paid-In Capital | Common Shares Held in Treasury | Common Stock Held in Treasury | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||||||||
| BALANCE at December 31, 2022 | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted shares, net of forfeitures and vestings | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Shares withheld to cover restricted share vesting tax | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Unrealized loss on hedged transactions, net of tax | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| BALANCE at March 31, 2023 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued for exercise of employee stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted shares, net of forfeitures and vestings | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Shares withheld to cover restricted share vesting tax | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on hedged transactions, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| BALANCE as of June 30, 2023 | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Six Months Ended June 30, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net (Loss) Income | $ | ( | $ | ||||||||
| Adjustments to reconcile net (loss) income to net cash provided by operations | |||||||||||
| Depreciation and amortization | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Stock-based compensation | |||||||||||
| Impairments and disposals of long-lived assets | |||||||||||
| Provision for bad debts | |||||||||||
| Amortization of financing fees | |||||||||||
| Amortization of debt discount | |||||||||||
| Deferred rent | ( | ||||||||||
| Unrealized translation loss on investment in foreign subsidiaries | |||||||||||
| Change in fair value of contingent consideration, net | |||||||||||
| Interest rate swap settlements | |||||||||||
| Changes in operating assets and liabilities, net of acquisitions | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Insurance receivable | ( | ||||||||||
| Prepaid expenses | |||||||||||
| Other assets | ( | ( | |||||||||
| Accounts payable | |||||||||||
| Litigation settlement obligation | |||||||||||
| Accrued expenses | ( | ||||||||||
| Other liabilities | ( | ( | |||||||||
| Net cash provided by operations | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Purchases of intangible assets and capitalized software | ( | ( | |||||||||
| Acquisitions, net of cash acquired | ( | ( | |||||||||
| Proceeds from disposition of property and equipment | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Issuance of common stock | |||||||||||
| Proceeds from exercise of employee stock options | |||||||||||
| Cash paid for tax withholding on exercise of employee stock options | ( | ||||||||||
| Proceeds from employee stock purchase plan | |||||||||||
| Repurchases of common stock | ( | ( | |||||||||
| Cash paid for tax withholding on vesting of restricted shares | ( | ( | |||||||||
| Payments of long-term debt | ( | ( | |||||||||
| Borrowings on revolving credit facility | |||||||||||
| Payment of contingent consideration for acquisition | ( | ||||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | ( | ( | |||||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | ( | ||||||||||
| CASH AND CASH EQUIVALENTS | |||||||||||
| Beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
| Six Months Ended June 30, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||||||
| Cash paid during the period for | |||||||||||
Interest, net of capitalized amounts of $ | $ | $ | |||||||||
| Income taxes | |||||||||||
| Noncash investing activities | |||||||||||
| Purchases of property and equipment in accounts payable and accrued expenses | |||||||||||
| Noncash purchase price of business combinations | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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STERLING CHECK CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Sterling Check Corp. (the “Company”), a Delaware corporation headquartered in 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 June 30, 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.
2. Summary of Significant Accounting Policies
Basis of Presentation and 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.
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Out-of-Period Adjustments
During the three months ended March 31, 2024, the Company recorded a $4.0 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 4.0 million and $2.0 million as of December 31, 2023 and 2022, respectively. In addition, during the three months ended March 31, 2024, the Company recorded an out-of-period adjustment of $0.7 million to increase the income tax benefit to correct for an error identified by management. This out-of-period adjustment is reflected in the unaudited condensed consolidated financial statements for the six months ended June 30, 2024 and 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, liabilities and contingent consideration. 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 risks and uncertainties including financial, operational, technological, regulatory, foreign operations, and other risks.
Segment Information
Cash and Cash Equivalents
Cash and cash equivalents of $74.2 million and $54.2 million as of June 30, 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 June 30, 2024 of $17.0 million with the largest deposits being held in Canada and Australia, with balances of $4.4 million and $2.7 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
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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 $0.8 million and $1.2 million as of June 30, 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 $3.2 million and $2.8 million as of June 30, 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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Balance as of beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Additions | |||||||||||||||||||||||
| Write-offs, net of recoveries | ( | ( | ( | ( | |||||||||||||||||||
| Foreign currency translation adjustment | ( | ( | |||||||||||||||||||||
| Balance as of end of period | $ | $ | $ | $ | |||||||||||||||||||
Corporate Technology and Production Systems
Corporate technology and production systems includes costs related to maintaining the Company’s corporate information technology infrastructure and non-capitalizable costs to develop and maintain its production systems.
The following table sets forth expenses included in each category of corporate technology and production systems for the periods presented:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Corporate information technology | $ | $ | $ | $ | |||||||||||||||||||
| Development of platform and product initiatives | |||||||||||||||||||||||
| Production support and maintenance | |||||||||||||||||||||||
| Total production systems | |||||||||||||||||||||||
Total corporate technology and production systems | $ | $ | $ | $ | |||||||||||||||||||
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.
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Certain personnel costs related to new products and features are capitalized and amortized to depreciation and amortization.
Included within corporate technology and production systems are non-capitalizable production system and corporate information technology expenses related to Project Ignite, a three-phase strategic investment initiative. Phase one of Project Ignite modernized client and candidate experiences and is complete. Phase two of Project Ignite focused on decommissioning the Company’s on-premises data centers and migrating the Company’s production systems and corporate information technological infrastructure to a managed service provider in the cloud. During the first half of 2021, the Company completed phase two initiatives related to the migration of its production and fulfillment systems to the cloud, and as a result, approximately 99 % 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 79 % 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 non-public company timeline of the Financial Accounting Standards Board (“FASB”). 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, 2024.
Recently Issued Accounting Pronouncements Not Yet Effective
In November 2023, the FASB issued Accounting Standard Update (“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 included initial contingent consideration of $2.8 million recorded at fair value.
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The Company incurred approximately $0.1 million and $0.2 million of transaction expenses related to the acquisition during the three and six months ended June 30, 2024, 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 determination of fair value of assets and liabilities requires the use of significant assumptions and estimates. These estimates are based on assumptions that management believes to be reasonable as well as a third party-prepared valuation analysis; however, final results may differ from these estimates. The following table summarizes the consideration paid and the amounts recognized for the assets acquired and liabilities assumed:
| Preliminary Purchase Price Allocation | Adjusted Purchase Price Allocation | |||||||||||||||||||
| (in thousands) | March 31, 2024 | Purchase Price Adjustments | June 30, 2024 | |||||||||||||||||
| Consideration | ||||||||||||||||||||
| Cash | $ | $ | — | $ | ||||||||||||||||
| Accounts receivable | — | |||||||||||||||||||
| Other current assets | ( | |||||||||||||||||||
| Property and equipment | — | |||||||||||||||||||
| Intangible assets | — | |||||||||||||||||||
| Total assets acquired | $ | $ | ( | $ | ||||||||||||||||
| Accounts payable and accrued expenses | — | |||||||||||||||||||
| Total liabilities assumed | $ | $ | — | $ | ||||||||||||||||
| Total identifiable net assets | ( | |||||||||||||||||||
| Goodwill | ||||||||||||||||||||
| Total consideration | $ | $ | ( | $ | ||||||||||||||||
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) income for the three and six months ended June 30, 2024. Our revenues for the three and six months ended June 30, 2024 include $11.9 million and $25.2 million of revenues attributable to Vault, respectively. The following unaudited pro forma results for the three and six months ended June 30, 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 and six months ended June 30, 2023:
| (in thousands) | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | |||||||||
| Revenues | $ | $ | |||||||||
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
15
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 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 $0.3 million and $2.0 million of transaction expenses related to the acquisitions during the three and six months ended June 30, 2023, respectively. During the six months ended June 30, 2024, the Company incurred approximately $0.2 million of transaction expenses related to the acquisitions.
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 Allocation | Final Purchase Price Allocation | ||||||||||||||||
| (in thousands) | March 31, 2023 | Purchase Price Adjustments | December 31, 2023 | ||||||||||||||
| Consideration | |||||||||||||||||
| Cash | $ | $ | — | $ | |||||||||||||
| Other current assets | |||||||||||||||||
| Accounts receivable | ( | ||||||||||||||||
| Other current assets | |||||||||||||||||
| Property and equipment | ( | ||||||||||||||||
| Intangible assets | ( | ||||||||||||||||
| Other long-term assets | — | ||||||||||||||||
| Total assets acquired | $ | $ | ( | $ | |||||||||||||
| Accounts payable and accrued expenses | |||||||||||||||||
| Other current liabilities | ( | ||||||||||||||||
| Deferred tax liability | ( | ||||||||||||||||
| Other liabilities | |||||||||||||||||
| Total liabilities assumed | $ | $ | ( | $ | |||||||||||||
| Total identifiable net assets | ( | ||||||||||||||||
| Goodwill | |||||||||||||||||
| Total consideration | $ | $ | $ | ||||||||||||||
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 June 30, 2024 or results of operations for the three and six months ended June 30, 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.
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During the six months ended June 30, 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.
5. Property and Equipment, Net
| (in thousands) | June 30, 2024 | December 31, 2023 | |||||||||
| Furniture and fixtures | $ | $ | |||||||||
| Computers and equipment | |||||||||||
| Leasehold improvements | |||||||||||
| Less: Accumulated depreciation | ( | ( | |||||||||
| Total property and equipment, net | $ | $ | |||||||||
Depreciation expense on property and equipment was $0.9 1.8 million and $2.0 million for the six months ended June 30, 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 | $ | ||||
| Acquisition of Vault | |||||
| Foreign currency translation adjustment | ( | ||||
| Goodwill as of June 30, 2024 | $ | ||||
Intangible Assets
Intangible assets, net consisted of the following for the periods presented:
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||
| Customer lists | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Trademarks | ( | ( | |||||||||||||||||||||||||||||||||
Non-compete agreements | ( | ( | |||||||||||||||||||||||||||||||||
| Technology | ( | ( | |||||||||||||||||||||||||||||||||
| Domain names | ( | ( | |||||||||||||||||||||||||||||||||
| $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
Included within technology is $32.2 million and $30.2 million of internal-use software, net of accumulated amortization, as of June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024, $7.8 million of technology assets have not yet been put in service.
The Company capitalized $10.4 million of costs to develop internal-use software included in technology during the six months ended June 30, 2024 (consisting of internal costs of $7.8 million and external costs of $2.6 million). The Company capitalized $8.6 million of costs to develop internal-use software included in technology during the six months ended June 30, 2023 (consisting of internal costs of $7.3 million and external costs of $1.3 million).
For the three months ended June 30, 2024 and June 30, 2023, the Company recorded a write-down of capitalized software in the amount of less than $0.1 million and $0.1 million, respectively. For the six months ended
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June 30, 2024 and June 30, 2023, the Company recorded a write-down of capitalized software in the amount of less than $0.1 million and $0.2 million, respectively.
Amortization expense was $14.9 million and $15.2 million for the three months ended June 30, 2024 and 2023, respectively, and $29.8 million and $29.3 million for the six months ended June 30, 2024 and 2023, respectively.
Except for the customer lists, which are amortized utilizing an accelerated method, all other intangible assets are amortized on a straight-line basis, which approximates the pattern in which economic benefits are consumed. Estimated amortization expense as of June 30, 2024 is as follows for each of the next five years:
| (in thousands) | |||||
| Remainder of fiscal year 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| $ | |||||
7. Accrued Expenses
Accrued expenses on the unaudited condensed consolidated balance sheets as of the periods presented consisted of the following:
| (in thousands) | June 30, 2024 | December 31, 2023 | |||||||||
| Accrued compensation | $ | $ | |||||||||
| Accrued cost of revenues | |||||||||||
| Accrued interest | |||||||||||
| Other accrued expenses | |||||||||||
| Total accrued expenses | $ | $ | |||||||||
8. Leases
The Company leases real estate and equipment for use in its operations. The Company has 15 operating leases with remaining lease terms ranging from 1 to 55 months as of June 30, 2024.
The components of lease expense for the periods presented are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Components of total lease costs | |||||||||||||||||||||||
Operating lease expense | $ | $ | $ | $ | |||||||||||||||||||
| Sublease income | ( | ( | ( | ( | |||||||||||||||||||
| Total net lease costs | $ | $ | $ | $ | |||||||||||||||||||
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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) | June 30, 2024 | December 31, 2023 | |||||||||
| Operating leases | |||||||||||
| Operating leases right-of-use asset | $ | $ | |||||||||
| Operating leases liability, current portion | $ | $ | |||||||||
| Long-term operating leases liability, net of current portion | |||||||||||
| Total operating leases liability | $ | $ | |||||||||
| Weighted average remaining lease term in years - operating leases | |||||||||||
| Weighted average discount rate - operating leases | % | % | |||||||||
Total remaining lease payments under the Company’s operating leases (excluding short term leases) for the periods presented are as follows:
| (in thousands) | June 30, 2024 | ||||
| Remainder of fiscal year 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total future minimum lease payments | $ | ||||
| Less: imputed interest | ( | ||||
| Total | $ | ||||
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) | June 30, 2024 | December 31, 2023 | |||||||||
| Current portion of long-term debt | |||||||||||
| Term Loans | $ | $ | |||||||||
| Total current portion of long-term debt | $ | $ | |||||||||
| Long-term debt | |||||||||||
Term Loans, due November 29, 2027 ( | |||||||||||
| Revolving Credit Facility | |||||||||||
| Unamortized discount and debt issuance costs | ( | ( | |||||||||
| Total long-term debt, net | $ | $ | |||||||||
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The estimated fair value of the Company’s 2022 Credit Agreement was $543.0 million and $484.1 million as of June 30, 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 June 30, 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 1 | Quoted prices in active markets for identical assets and liabilities. | |||||||
| Level 2 | Quoted 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 3 | Unobservable 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 June 30, 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 June 30, 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) income.
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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:
| June 30, 2024 | |||||||||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Cash equivalents from money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||
| Contingent consideration | |||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Cash equivalents from money market funds | |||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | |||||||||||||||||||
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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
(in thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
Fair value of contingent consideration, beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Acquired liabilities | |||||||||||||||||||||||
Cash payments | |||||||||||||||||||||||
Change in fair value of contingent consideration, net(1) | ( | ( | |||||||||||||||||||||
Fair value of contingent consideration, end of period(2) | $ | $ | $ | $ | |||||||||||||||||||
_________________________
(1)During the three months ended June 30, 2024, the Company recorded a $2.7 million decrease in fair value of the contingent consideration, in accordance with the purchase agreement with Vault. During the six months ended June 30, 2024, the Company recorded a $4.0 million out-of-period adjustment to increase 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 unaudited condensed consolidated balance sheets.
During the three and six months ended June 30, 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 June 30, 2024, the Company had the following outstanding interest rate swap derivatives that were used to hedge its interest rate risks:
| Product | Number of Instruments | Effective Date | Maturity Date | Current Notional(1) | ||||||||||||||||||||||
| Interest Rate Swap | February 28, 2023 | November 29, 2027 | $ | |||||||||||||||||||||||
(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 | |||||||||||||||||||||||
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||
| (in thousands) | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||
| Interest rate swaps | Other current assets | $ | Other current assets | $ | |||||||||||||||||||
| Liability Derivatives | |||||||||||||||||||||||
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||
| (in thousands) | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||
| Interest rate swaps | Other liabilities | $ | Other liabilities | $ | |||||||||||||||||||
The tables below present the effect of cash flow hedge accounting on accumulated OCI for the periods presented:
| Three Months Ended June 30, | Three Months Ended June 30, | ||||||||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | Amount of Gain or (Loss) Recognized in OCI on Derivative | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income | ||||||||||||||||||||||||||
| Interest rate swaps | $ | $ | Interest expense | $ | $ | ||||||||||||||||||||||||
| Six Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | Amount of Gain or (Loss) Recognized in OCI on Derivative | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income | ||||||||||||||||||||||||||
| Interest rate swaps | $ | $ | Interest expense | $ | $ | ||||||||||||||||||||||||
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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) income for the periods presented:
| Three Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| (in thousands) | Interest Expense | ||||||||||
| Total amounts of income and expense line items in which the effects of cash flow hedges are recorded | $ | $ | |||||||||
| Gain or (loss) on cash flow hedging relationships | |||||||||||
| Interest rate swaps: | |||||||||||
| Amount of gain or (loss) reclassified from accumulated OCI into income | $ | $ | |||||||||
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| (in thousands) | Interest Expense | ||||||||||
| Total amounts of income and expense line items in which the effects of cash flow hedges are recorded | $ | $ | |||||||||
| Gain or (loss) on cash flow hedging relationships | |||||||||||
| Interest rate swaps: | |||||||||||
| Amount of gain or (loss) reclassified from accumulated OCI into income | $ | $ | |||||||||
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 $1.9 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
During the three and six months ended June 30, 2024, the Company’s interim income tax provision was determined using the discrete effective tax rate method, as allowed by ASC Topic 740-270-30-18, “Income Taxes - Interim Reporting.” The discrete method is applied when the application of the estimated annual effective tax rate yields an estimate that is not reliable and the actual effective rate for the year-to-date results represents the best estimate of the annual effective tax rate. The Company determined that since small changes in forecasted income would result in significant variability in the estimated annual effective tax rate, the discrete method is more appropriate than the annual effective tax rate method.
The Company recorded a tax provision of $7.1 million and a tax benefit of $0.1 million for the three months ended June 30, 2024 and 2023, respectively, which resulted in an effective tax rate of 823.0 % and (35.7 )%, respectively. The Company recorded a tax benefit of $1.9 million and a tax provision of $1.0 million for the six months ended June 30, 2024 and 2023, respectively, which resulted in an effective tax rate of 11.9 % and 52.7 %, respectively. For the three and six months ended June 30, 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