Sterling Check Corporation

05/09/2024 | Press release | Distributed by Public on 05/09/2024 05:16

Quarterly Report for Quarter Ending March 31, 2024 (Form 10-Q)

ster-20240331

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
Sterling Check Corp.
(Exact name of registrant as specified in its charter)
Delaware 37-1784336
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
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 class Trading
Symbol(s) 		Name of each exchange
on which registered
Common stock, $0.01 par value STER The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated
filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The total number of outstanding shares of the registrant's common stock, $0.01 par value per share, as of 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


PART I-FINANCIAL INFORMATION
Item 1.
Financial Statements
5
Unaudited Condensed Consolidated Balance Sheets
5
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
6
Unaudited Condensed Consolidated Statements of Stockholders' Equity
7
Unaudited Condensed Consolidated Statements of Cash Flows
8
Notes to Unaudited Condensed Consolidated Financial Statements
10
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
29
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
45
Item 4.
Controls and Procedures
46
PART II-OTHER INFORMATION
Item 1.
Legal Proceedings
47
Item 1A.
Risk Factors
47
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
47
Item 3.
Defaults Upon Senior Securities
48
Item 4.
Mine Safety Disclosures
48
Item 5.
Other Information
48
Item 6.
Exhibits
48
Signatures
49

2
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and we intend that all forward-looking statements that we make will be subject to the safe harbor protections created thereby. You can generally identify forward-looking statements by our use of forward-looking terminology such as "aim," "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "playbook," "potential," "predict," "projection," "seek," "should," "will" or "would," or the negative thereof or other variations thereon or comparable terminology. In particular, statements that address market trends, and statements regarding our expectations, beliefs, plans, strategies, objectives, prospects or assumptions, or statements regarding future events or performance, 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
Table of Contents
•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
Table of Contents
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 receivable 2,895 2,937
Prepaid expenses 11,382 9,651
Other current assets 17,276 15,800
Total current assets 255,924 224,791
Property and equipment, net 7,329 7,695
Goodwill 902,862 879,408
Intangible assets, net 264,558 230,212
Deferred tax assets 4,748 4,818
Operating leases right-of-use asset 5,872 6,452
Other noncurrent assets, net 9,733 10,067
TOTAL ASSETS $ 1,451,026 $ 1,363,443
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 47,486 $ 38,879
Litigation settlement obligation 5,224 5,279
Accrued expenses 73,605 63,987
Current portion of long-term debt 15,000 15,000
Operating leases liability, current portion 3,879 4,219
Income tax payable, current portion 3,523 8,933
Other current liabilities 17,832 11,839
Total current liabilities 166,549 148,136
Long-term debt, net 541,242 479,788
Deferred tax liabilities 900 14,239
Long-term operating leases liability, net of current portion 6,606 7,278
Other liabilities 7,717 12,058
Total liabilities 723,014 661,499
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 capital 1,027,214 983,283
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' equity 728,012 701,944
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
Table of Contents
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) 2024 2023
REVENUES $ 185,999 $ 179,274
OPERATING EXPENSES:
Cost of revenues (exclusive of depreciation and amortization below) 104,041 94,754
Corporate technology and production systems 13,214 11,952
Selling, general and administrative 59,890 47,451
Depreciation and amortization 15,770 15,122
Impairments and disposals of long-lived assets 168 106
Total operating expenses 193,083 169,385
OPERATING (LOSS) INCOME (7,084) 9,889
OTHER EXPENSE (INCOME):
Interest expense, net 10,312 8,608
Other income (423) (412)
Total other expense, net 9,889 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
Basic 90,274,094 92,877,506
Diluted 90,274,094 95,350,342
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Table of Contents
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 Income (Loss) Total
BALANCE at December 31, 2023 93,194,403 $ 98 $ 983,283 6,771,755 $ (88,918) $ (186,564) $ (5,955) $ 701,944
Issuance of common stock 2,111 - - - - - - -
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 withholding 3,397,303 34 33,918 - - - - 33,952
Issuance of common stock under the 2021 Employee Stock Purchase Plan 64,983 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 forfeitures 1,889,788 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, 2024 97,811,676 $ 156 $ 1,027,214 7,508,667 $ (99,653) $ (194,519) $ (5,186) $ 728,012

(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 Income (Loss) Total
BALANCE at December 31, 2022 96,717,883 $ 76 $ 942,789 1,047,237 $ (14,859) $ (186,448) $ (4,912) $ 736,646
Issuance of common stock 4,567 - - - - - - -
Repurchases of common stock (493,926) - - 493,926 (7,712) - - (7,712)
Issuance of restricted shares, net of forfeitures 1,894,310 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, 2023 98,085,706 $ 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
Table of Contents
STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
(in thousands) 2024 2023
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (7,955) $ 591
Adjustments to reconcile net (loss) income net cash provided by operations
Depreciation and amortization 15,770 15,122
Deferred income taxes (14,306) 209
Stock-based compensation 9,342 8,043
Impairments and disposals of long-lived assets 168 106
Provision for bad debts 240 244
Amortization of financing fees 269 269
Amortization of debt discount 204 194
Deferred rent (428) 39
Unrealized translation gain on investment in foreign subsidiaries 18 135
Change in fair value of contingent consideration, net 4,000 -
Interest rate swap settlements - 23
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable (7,285) (3,414)
Insurance receivable 41 -
Prepaid expenses (1,276) 2,844
Other assets (1,200) (2,534)
Accounts payable 7,149 3,716
Litigation settlement obligation (55) 315
Accrued expenses 6,723 (12,256)
Other liabilities (7,745) (2,364)
Net cash provided by operations 3,674 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 options 53,629 -
Cash paid for tax withholding on exercise of employee stock options (19,172) -
Proceeds from employee stock purchase plan 695 -
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 facility 65,000 -
Payment of contingent consideration for acquisition - (305)
Net cash provided by (used in) financing activities 85,667 (10,378)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (487) 20
NET CHANGE IN CASH AND CASH EQUIVALENTS 12,755 (52,131)
CASH AND CASH EQUIVALENTS
Beginning of period 54,224 103,095
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
Table of Contents
STERLING CHECK CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Ended
March 31,
(in thousands) 2024 2023
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 combinations 2,750 4,821
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
Table of Contents
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
Table of Contents
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 millionand $54.2 millionas 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 millionwith 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 millionas of December 31, 2023, with the largest deposits being held in Australia and India, with balances of $6.2 millionand $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 millionand $2.9 million as of March 31, 2024 and December 31, 2023, respectively.
11
Table of Contents
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 millionand $1.2 millionas of March 31, 2024and December 31, 2023, respectively.
TheCompany 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 millionand $2.8 millionas 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) 2024 2023
Balance as of beginning of period $ 2,816 $ 2,304
Additions 204 244
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) 2024 2023
Corporate information technology $ 4,826 $ 5,267
Development of platform and product initiatives 5,560 4,414
Production support and maintenance 2,828 2,271
Total production systems 8,388 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
Table of Contents
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.
13
Table of Contents
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 receivable 8,514
Other current assets 583
Property and equipment 38
Intangible assets 44,500
Total assets acquired $ 56,542
Accounts payable and accrued expenses 4,609
Total liabilities assumed $ 4,609
Total identifiable net assets 51,933
Goodwill 24,203
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
14
Table of Contents
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 Allocation Final Purchase Price Allocation
(in thousands) March 31,
2023 		Purchase Price Adjustments December 31,
2023
Consideration
Cash $ 11,935 $ - $ 11,935
Other current assets
Accounts receivable 4,279 (3) 4,276
Other current assets 805 447 1,252
Property and equipment 177 (1) 176
Intangible assets 32,141 (1,268) 30,873
Other long-term assets 6 - 6
Total assets acquired $ 49,343 $ (825) $ 48,518
Accounts payable and accrued expenses 1,156 94 1,250
Other current liabilities 1,291 (72) 1,219
Deferred tax liability 8,388 (1,163) 7,225
Other liabilities 2 788 790
Total liabilities assumed $ 10,837 $ (353) $ 10,484
Total identifiable net assets 38,506 (472) 38,034
Goodwill 27,352 766 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.
15
Table of Contents
5. Property and Equipment, Net
(in thousands) March 31,
2024 		December 31,
2023
Furniture and fixtures $ 1,211 $ 1,317
Computers and equipment 39,876 39,251
Leasehold improvements 1,879 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 Vault 24,203
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, 2024 December 31, 2023
(in thousands)
Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net
Customer lists $ 571,582 $ (383,343) $ 188,239 $ 533,204 $ (375,107) $ 158,097
Trademarks 79,205 (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
Technology 274,883 (238,207) 36,676 266,194 (233,996) 32,198
Domain names 10,118 (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 millionand $30.2 millionof internal-use software, net of accumulated amortization, as of March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, $7.1 millionof 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 millionof costs to develop internal-use software included in technology during the three months ended March 31, 2023 (consisting of internal costs of $3.4 millionand external costs of $0.7 million).
For the three months ended March 31, 2024, the Company recorded nowrite-down of capitalized software. For the threemonths 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 millionand $14.1 millionfor the three months ended March 31, 2024 and 2023, respectively.
16
Table of Contents
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
2025 50,671
2026 42,044
2027 31,520
2028 25,842
Thereafter 69,918
$ 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 revenues 30,155 25,548
Accrued interest 1,238 321
Other accrued expenses 25,713 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) 2024 2023
Components of total lease costs
Operating lease expense
$ 761 $ 1,379
Sublease income (388) (222)
Total net lease costs $ 373 $ 1,157

17
Table of Contents
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 portion 6,606 7,278
Total operating leases liability $ 10,485 $ 11,497
Weighted average remaining lease term in years - operating leases 3.6 3.7
Weighted average discount rate - operating leases 4.89 % 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
2025 2,380
2026 2,117
2027 2,149
2028 1,028
Thereafter 85
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 Facility 270,494 205,494
Unamortized discount and debt issuance costs (3,002) (3,206)
Total long-term debt, net $ 541,242 $ 479,788
18
Table of Contents
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 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 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.
19
Table of Contents
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 1 Level 2 Level 3 Total
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 1 Level 2 Level 3 Total
Assets
Cash equivalents from money market funds 11,593 - - 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)
2024 2023
Fair value of contingent consideration, beginning of period
$ 2,989 $ 1,219
Acquired liabilities 2,750 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.
20
Table of Contents
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:
Product Number of Instruments Effective Date Maturity Date
Current Notional(1)
Interest Rate Swap 4 February 28, 2023 November 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, 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 $ 1,952 Other current assets $ 1,187
Liability Derivatives
March 31, 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 $ 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) 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 $ 4,879 $ (6,877) Interest expense $ 818 $ 97
21
Table of Contents
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,
2024 2023
(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
22
Table of Contents
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 fivebusiness 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
23
Table of Contents
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) 2024 2023
Stock-based compensation expense
Cost of revenues $ 359 $ 428
Corporate technology and production systems 819 612
Selling, general and administrative 8,164 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 SVOs Outstanding 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, 2023 5,635,742 $ 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.
24
Table of Contents
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 oneto 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 Shares Weighted Average Exercise Price Weighted Average Contractual Term (in years) Aggregate Intrinsic Value
Outstanding as of December 31, 2023 4,558,199 $ 21.14 8.06 $ 904
Granted - -
Forfeited / Expired (11,724) 23.00
Exercised - -
Outstanding as of March 31, 2024 4,546,475 $ 21.09 7.79 $ 2,629
Exercisable as of March 31, 2024 1,974,043 $ 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 oneto 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.
25
Table of Contents
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 Shares Weighted Average Fair Value
(per share)
Unvested as of December 31, 2023 3,796,203 $ 16.40
Granted 1,958,874 15.92
Forfeited / Cancelled (74,354) 17.45
Vested (591,611) 10.92
Unvested as of March 31, 2024 5,089,112 $ 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 oneto 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 Shares Weighted Average Fair Value
(per share)
Unvested as of December 31, 2023 120,555 $ 15.82
Granted 6,347 15.92
Forfeited / Cancelled (18,925) 13.30
Vested (5,268) 9.82
Unvested as of March 31, 2024 102,709 $ 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."
26
Table of Contents
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) 2024 2023
Numerator:
Net (loss) income attributable to stockholders $ (7,955) $ 591
Denominator:
Weighted average number of shares outstanding-basic 90,274,094 92,877,506
Weighted average additional shares assuming conversion of potential common shares - 2,472,836
Weighted average common shares outstanding-diluted 90,274,094 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,
2024 2023
Stock options 12,106,717 12,136,464
Restricted stock 3,950,029 5,160,978
Restricted stock units 114,348 59,895
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.
27
Table of Contents
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) 2024 2023
Screening services $ 183,019 $ 176,871
Other services 2,980 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) 2024 2023
United States $ 159,827 $ 149,742
All other countries 26,172 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.
28
Table of Contents
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
29
Table of Contents
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.
30
Table of Contents
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 results in a high degree of revenue visibility.
31
Table of Contents
Our revenue drivers are acquiring new clients measured by new client growth, growing our existing client base through retaining existing clients measured by gross retention rate, and growing our existing client relationships through upselling, cross-selling, and organic and inorganic growth in our client's operations that lead to an increase in hiring measured by base business growth with existing clients. The aforementioned metrics are calculated as discussed in the following paragraph.
New client growth for the relevant period is calculated as revenues from clients that are in the first twelve months of billing with Sterling divided by total revenues from the prior period, expressed as a percentage. Existing client growth is defined as: (i) base business with existing clients due to increased or decreased volumes, which is calculated as change in revenues in the current period from clients that have been billing with us for longer than twelve calendar months, plus (ii) additional revenue from cross-sell and up-sell, net of (iii) attrition, which is the revenue impact from accounts considered lost. Existing client growth is expressed as a percentage, where the denominator is total revenues from the prior period. Gross retention rate is a percentage, the numerator of which is prior period revenues less the revenue impact from accounts considered lost and the denominator is prior period revenues. The revenue impact is calculated as revenue decline of lost accounts in the relevant period from the prior period for the months after they were considered lost. Therefore, the attrition impact of clients lost in the current year may be partially captured in both the current and following period's retention rates depending on what point during the period they are lost. Our gross retention rate does not factor in the revenue impact, whether growth or decline, attributable to existing clients or the incremental revenue impact of new clients.
In addition to organic growth through the drivers mentioned above, we may from time to time consider acquisitions that drive growth in our business. In those instances, inorganic growth will refer to the revenue from acquisitions for the twelve months following an acquisition. Any incremental revenue generation thereafter will be considered organic growth.
Our revenues come from the following services which are sold as a bundle or individually, with revenue recognized at the time of delivery of background screening reports.
•Identity Verification - Leveraging innovative technologies in fingerprinting, facial recognition and ID validation to verify that candidates are who they say they are.
•Background Checks - County, state and federal criminal checks fulfilled through proprietary automation technology enabling global criminal screening capabilities in over 240 countries and territories. Other services include credit checks, civil checks, motor vehicle registration confirmation and social media checks.
•Credential Verification - Thorough employment and education verification services and licensing certification backed by a powerful fulfillment engine.
•Drug and Health Screening - Comprehensive, accurate and fast drug and health screening services through a network of approximately 20,000 collection sites supporting the Substance Abuse and Mental Health Services Administration in the U.S.
•Onboarding - Custom forms including I-9 and eVerify employment eligibility, tax withholding forms and Equal Employment Opportunity disclosure forms, with built-in compliance and dynamic validation.
•Post-Hire Monitoring - Continuous screening allowing for greater mobility and safety for remote, onsite and contingent jobs and also ensuring prompt risk warnings on any changes to an employee's profile.
Operating Expenses
Our cost structure is flexible and provides us with operational leverage to be able to effectively adapt to changing client needs and broader economic events. Additionally, in 2023, we implemented strategic structural changes in our business to improve operating leverage and accelerate modernizing our technological infrastructure including increasing the use of robotics process automation and leveraging artificial intelligence. These changes have allowed us to optimize processes, reduce manual touch points and improve productivity of our internal teams and experience of our customers. We moved to a virtual-first strategy in 2020 and began to close or reduce the size of other offices globally and reduce our data center footprint as we executed moving our revenue to the cloud and streamlined our sales and operations organization for greater operational efficiency. Due to the success to date of the virtual-first strategy, we continued our real estate consolidation efforts to exit or reduce the size of remaining offices during 2023. In the second quarter of 2023, we closed our former principal executive office and headquarters in New York and moved our headquarters to an existing administrative office in Ohio and closed or reduced the size of additional offices. As of March 31, 2024, we have closed or reduced the size of 24 offices globally since we launched our virtual first strategy.
As part of our refreshed strategy, in 2022, we began executing on a restructuring program to realign senior leadership and functions and streamline our organization, with the goal of elevating our go-to-market strategy and
32
Table of Contents
accelerating our technology and product innovation. At the end of 2022, we also launched Project Nucleus which we expect to drive meaningful cost savings and efficiency gains in our cost of revenues. This initiative enhances our organization by re-engineering processes, driving fulfillment cost reductions and identifying and executing on additional automation opportunities. In any given period, operating expenses are driven by the amount of revenue, mix of clients and products, and impact of automation, productivity and procurement initiatives. While we expect operating expenses to increase in absolute dollars to support our continued growth, we believe that operating expenses will decline gradually as a percentage of total revenues in the future as we expect our business to grow and our operating scale to continue to improve.
Operating expenses include the following costs:
Cost of Revenues
Cost of revenues includes costs related to delivery of services and includes third-party vendor costs associated with acquisition of data and to a lesser extent, costs related to our onshore and offshore fulfillment teams and facilities and hosting costs for our cloud-based platforms. Our ability to grow profitably depends on our ability to manage our cost structure. Our costs are affected by third-party costs including government fees and data vendor costs, as these third parties have discretion to adjust pricing.
Third-party data costs include amounts paid to third parties for access to government records, other third-party data and services, as well as costs related to our court runner network. Third-party costs of services are largely variable in nature. Where applicable, these are typically invoiced to our clients as direct pass-through costs.
Cost of revenues also includes salaries, benefits and stock-based compensation expense for personnel involved in the processing and fulfillment of our screening products and solutions, as well as our client care organization, and facilities costs for our onshore and offshore fulfillment centers. Additional vendor costs are third-party costs for robotics process automation related to fulfillment, and third-party costs related to hosting our fulfillment platforms in the cloud. We do not allocate depreciation and amortization to cost of revenues.
Corporate Technology and Production Systems
Included in this line item are costs related to maintaining our corporate information technology infrastructure and non-capitalizable costs to develop and maintain our production systems.
Corporate information technology expenses consist of personnel costs, including stock-based compensation, supporting internal operations such as information technology support and the maintenance of our information security and business continuity functions. Also included are third-party costs including cloud computing costs that support our 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 our technology platform and the launch of new screening products. Production support and maintenance includes costs to support and maintain the technology underlying our existing screening products, and to enhance the ease of use for our cloud applications. Certain personnel costs related to new products and features are capitalized and amortization of these capitalized costs is included in the depreciation and amortization line item.
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, which was completed in 2022, focused on decommissioning our on-premises data centers and migrating our production systems and corporate information technological infrastructure to a managed service provider in the cloud and resulted in approximately 98% of our revenue being processed through platforms hosted in the cloud and allows us to consistently maintain 99.9% platform availability while being prepared to scale into the future. Phase three of Project Ignite was decommissioning of 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 our clients onto a single global platform. Our core platform now processes approximately 77% of our global revenue. We expect to increase the revenue processed on our core platform as a percent of global revenue in 2024.
33
Table of Contents
Selling, General and Administrative
Selling expenses consist of personnel costs, travel expenses and other expenses for our client success, sales and marketing teams. Additionally, selling expenses include the cost of marketing and promotional events, corporate communications and other brand-building activities. General and administrative expenses consist of personnel and related expenses for human resources, legal and compliance, finance, global shared services and executives. Additional costs include professional fees, stock-based compensation, insurance premiums and other corporate expenses.
While our selling, general and administrative ("SG&A") expenses have increased over the last several years due to additional public company related reporting and compliance costs, we expect expenses to stabilize in the future as a result of strategic initiatives to drive operational efficiencies.
In addition, non-cash stock-based compensation expense associated with special one-time bonus grants in connection with the IPO of options and restricted stock under our Sterling Check Corp. 2021 Omnibus Incentive Plan (discussed in Note 15, "Stock-based Compensation" to our audited consolidated financial statements included in Part II, Item 8. "Financial Statements and Supplementary Data" of our 2023 Annual Report) began in the third quarter of 2021 and will continue over the following four years. Over the long term, we expect our SG&A expenses to decrease as a percentage of our revenue as we leverage our past investments.
Depreciation and Amortization
Definite-lived intangible assets consist of intangibles acquired through acquisition and the costs of developing internal-use software. They are amortized using a straight-line basis over their estimated useful lives except for customer lists, to which we apply an accelerated method of amortization. The costs of developing internal-use software are capitalized during the application development stage. Amortization commences when the software is placed into service and is computed using the straight-line method over the useful life of the underlying software of three years.
Depreciation of our property and equipment is computed on the straight-line basis over the estimated useful life of the assets, generally three to five years or, for leasehold improvements, the shorter of seven years or the term of the lease.
Impairment of Long-Lived Assets
Long-lived assets, such as property, equipment and capitalized internal use software subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, such as (i) a significant adverse change in the extent or manner in which it is being used or in its physical condition, (ii) a significant adverse change in legal factors or in business climate that could affect its value, or (iii) a current-period operation or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with its use. An asset is considered impaired if the carrying amount exceeds the undiscounted future net cash flows the asset is expected to generate. An impairment charge is recognized for the amount by which the carrying amount of the assets exceeds its fair value. The adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated or amortized over the remaining useful life of that asset. Assets held for sale are reported at the lower of the carrying amount or fair value, less selling costs.
Interest Expense, Net
Interest expense consists of interest, the amortization of loan discount and deferred financing fees on the outstanding debt, and includes proceeds received or settlements paid on our designated interest rate swaps.
On February 28, 2023, we entered into an amortizing $300.0 million notional value interest rate swap. The notional value steps down from $300.0 million to $150.0 million on February 27, 2026. The swap provides for us to pay, as applied to the notional value, a fixed rate of interest of 4.26% monthly and receive, on a monthly basis, an amount equal to the greater of the one-month term Secured Overnight Financing Rate ("SOFR") and a floor of (0.10%), as applied to the notional value (the "Floating Leg"). The interest rate swap matures on November 29, 2027.
Income Tax Provision or Benefit
Income tax provision or benefit consists of domestic and foreign corporate income taxes related to earnings from our sale of services, with statutory tax rates that differ by jurisdiction. Income earned by our international entities could grow over time as a percentage of total income, which may impact our effective income tax rate. However, our effective tax rate will be affected by many other factors including changes in tax laws, regulations or
34
Table of Contents
rates, new interpretations of existing laws or regulations, shifts in the allocation of income earned throughout the world and changes in overall levels of income before tax. 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 or loss before tax and adjusting for discrete tax items recorded in the period, if any.
Results of Operations
Three Months Ended March 31, 2024 compared to the Three Months Ended March 31, 2023
The following table sets forth certain historical consolidated and comparative financial information for the periods presented:
Three Months Ended
March 31,
Increase/
(Decrease)
(dollars in thousands, except per share amounts) 2024 2023 $ %
Revenues $ 185,999 $ 179,274 $ 6,725 3.8 %
Cost of revenues (exclusive of depreciation and amortization below) 104,041 94,754 9,287 9.8 %
Corporate technology and production systems 13,214 11,952 1,262 10.6 %
Selling, general and administrative 59,890 47,451 12,439 26.2 %
Depreciation and amortization 15,770 15,122 648 4.3 %
Impairments and disposals of long-lived assets 168 106 62 58.5 %
Total operating expenses 193,083 169,385 23,698 14.0 %
Operating (loss) income (7,084) 9,889 (16,973) (171.6) %
Interest expense, net 10,312 8,608 1,704 19.8 %
Other income (423) (412) 11 2.7 %
Total other expense, net 9,889 8,196 1,693 20.7 %
(Loss) income before income taxes (16,973) 1,693 (18,666) (1,102.5) %
Income tax (benefit) provision (9,018) 1,102 (10,120) (918.3) %
Net (loss) income $ (7,955) $ 591 $ (8,546) (1,446.0) %
Net (loss) income margin (4.3) % 0.3 % (460) bps
Net (loss) income per share-basic $ (0.09) $ 0.01 $ (0.10) (1,000.0) %
Net (loss) income per share-diluted $ (0.09) $ 0.01 $ (0.10) (1,000.0) %
Revenues
Revenues increased by 3.8%, or $6.7 million, from $179.3 million for the three months ended March 31, 2023 to $186.0 million for the three months ended March 31, 2024. The 3.8% increase in revenue was driven by 8.7% inorganic growth from the acquisitions of Vault Workforce Screening ("Vault") and A-Check Global ("A-Check"), partially offset by a 4.9% decrease in organic constant currency revenue. The organic revenue decrease reflected a decline in existing client business of approximately 11% including base business, cross-sell and up-sell, and net of attrition offset by new client growth of approximately 6%. Year-over-year decline in base business was driven by lower hiring volumes by our clients due to macroeconomic uncertainty. Our investments in technology and products, coupled with our best-in-class turnaround times and customer-first focus, enabled our gross retention rate to remain strong at approximately 96% for the last twelve months ended March 31, 2024. Pricing was relatively stable across the periods and not meaningful to the change in revenues.
Total revenue in our U.S. business increased 6.7% year-over-year. This increase is primarily driven by our acquisitions of Vault and A-Check as well as growth in our Healthcare, Retail, and Gig, Consumer, and Volunteers Verticals, partially offset by decreases in our Industrials, Contingent, and Financial and Business Services Verticals. Our international business experienced total revenue decline of 11.4% driven by a decline in base business.
35
Table of Contents
Cost of Revenues
Cost of revenues increased by 9.8%, or $9.3 million, from $94.8 million for the three months ended March 31, 2023 to $104.0 million for the three months ended March 31, 2024. The increase in cost of revenues was primarily driven by the acquisitions of Vault and A-Check, partially offset by lower costs driven by our cost optimization efforts resulting from Project Nucleus.
Cost of revenues as a percentage of revenues increased by 300 basis points from 52.9% for the three months ended March 31, 2023 to 55.9% for the three months ended March 31, 2024 driven by increased volume from Vault and A-Check at lower margins and higher third-party vendor costs as a percentage of revenue, partially offset by lower costs driven by our cost optimization efforts. The increase in third party vendor costs was due to the combination of organic revenue growth in certain lower-margin products and revenue declines within our higher-margin base business.
Corporate Technology and Production Systems
Corporate technology and production systems increased by 10.6%, or $1.3 million, from $12.0 million for the three months ended March 31, 2023 to $13.2 million for the three months ended March 31, 2024. These expenses include costs related to maintaining our corporate information technology infrastructure and non-capitalizable costs to develop and maintain our production systems. Costs related to maintaining our corporate information technology infrastructure decreased by $0.4 million from $5.3 million for the three months ended March 31, 2023 to $4.8 million for the three months ended March 31, 2024 primarily due to lower payroll and related expenses, lower telecommunications, software licenses, software maintenance support, and other expenses as a result of restructuring efforts. Costs to develop platform and product initiatives increased by $1.1 million from $4.4 million for the three months ended March 31, 2023 to $5.6 million for the three months ended March 31, 2024, driven by higher payroll and related expenses and software licenses resulting from the acquisition of Vault. Costs related to maintaining our production systems increased by $0.6 million from $2.3 million for the three months ended March 31, 2023 to $2.8 million for the three months ended March 31, 2024, primarily due to software licenses, maintenance costs and cloud hosting costs resulting from the acquisition of Vault.
These expenses also include non-capitalizable costs related to Project Ignite. We incurred $3.1 million related to phase three during the three months ended March 31, 2023. The third and final phase of Project Ignite was completed in the first quarter of 2023. For more information about Project Ignite, please see "-Components of our Results of Operations-Operating Expenses-Corporate Technology and Production Systems."
Selling, General and Administrative
Selling, general and administrative expenses increased by 26.2%, or $12.4 million, from $47.5 million for the three months ended March 31, 2023 to $59.9 million for the three months ended March 31, 2024. The year-over-year increase is primarily driven by a $8.0 million increase in professional fees and transaction costs related to the merger with First Advantage, a $4.0 million increase as a result of the out-of-period adjustment to the estimated fair value of contingent consideration related to the acquisition of Employment Background Investigations, Inc. ("EBI"), and a $1.1 million increase in stock-based compensation. These year-over year increases were partially offset by a decrease in office rent and other facilities related costs in connection with our real estate consolidation efforts.
Depreciation and Amortization
Depreciation and amortization expense increased by 4.3%, or $0.6 million, from $15.1 million for the three months ended March 31, 2023 to $15.8 million for the three months ended March 31, 2024 due primarily to the Vault acquisition on January 2, 2024 and the amortization on the related intangible assets.
Impairment of Long-Lived Assets
Impairment of long-lived assets totaled $0.2 million for the three months ended March 31, 2024. The impairments of long-lived assets primarily resulted from the write down of abandoned property and equipment no longer in use.
Interest Expense, Net
Interest expense consists of interest, the amortization of loan discount and deferred financing fees on our outstanding debt, and includes proceeds received or settlements paid on our designated interest rate swaps.
Interest expense increased by 19.8%, or $1.7 million, from $8.6 million for the three months ended March 31, 2023 to $10.3 million for the three months ended March 31, 2024 primarily due to an increase in interest expense as
36
Table of Contents
a result of drawing an additional $65.0 million of proceeds from the Revolving Credit Facility to fund the acquisition of Vault. The realized gain or loss on interest rate swaps designated as hedging instruments that we entered into in February 2023 is included in interest expense. This realized gain was $0.8 million and less than $0.1 million for the three months ended March 31, 2024 and 2023, respectively, and was recorded as a reduction to interest expense. Amortization of the loan discount and deferred financing fees resulted in expense of $0.5 million for the three months ended March 31, 2024 and 2023, respectively.
Income Tax Benefit or Provision
Income tax benefit or provision decreased $10.1 million from $1.1 million income tax provision for the three months ended March 31, 2023 to $9.0 million income tax benefit for the three months ended March 31, 2024, resulting in an effective tax rate of 65.1% and 53.1%, respectively. The increase in the income tax benefit is primarily due to decreased income before taxes, and other permanent items, including the impact of stock-based compensation. 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.
Net (Loss) Income and Net (Loss) Income Margin
Net (loss) income decreased $8.5 million from $0.6 million net income for the three months ended March 31, 2023 to $8.0 million net loss for the three months ended March 31, 2024. Net income margin decreased from 0.3% for the three months ended March 31, 2023 to (4.3)% for the three months ended March 31, 2024.
The decrease in both net income and net income margin resulted primarily from higher Selling, General, and Administrative costs due to higher professional fees and transaction costs related to the Merger, the contingent consideration out-of-period adjustment, higher cost of revenues resulting from lower margin volume from A-Check and Vault and higher third-party vendor costs as a percentage of revenue, and higher interest expense.
Net (Loss) Income per Share
Net income per share-basic decreased $0.10 per share from $0.01 per share for the three months ended March 31, 2023 to $(0.09) per share for the three months ended March 31, 2024 and net income per share-diluted decreased $0.10 per share from $0.01 per share for the three months ended March 31, 2023 to $(0.09) per share for the three months ended March 31, 2024 due to the decrease in net income.
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q contains "non-GAAP financial measures," which are financial measures that are not calculated and presented in accordance with accounting principles generally accepted in the United States of America ("GAAP").
Specifically, we make use of the non-GAAP financial measures "organic constant currency revenue growth (decline)", "Adjusted EBITDA," "Adjusted EBITDA Margin," "Adjusted Net Income," "Adjusted Earnings Per Share" and "Free Cash Flow" to assess the performance of our business.
Organic constant currency revenue growth (decline) is calculated by adjusting for inorganic revenue growth (decline), which is defined as the impact to revenue growth (decline) in the current period from M&A activity that has occurred over the past twelve months, and converting the current period revenue at foreign currency exchange rates consistent with the prior period. For the three months ended March 31, 2024, we have provided the impact of revenue from the acquisitions of Vault (acquired during the first quarter of 2024) as well as A-Check (acquired during the first quarter of 2023) and for the three months ended March 31, 2023, we have provided the impact of revenue from the acquisition of Socrates Limited and its affiliates ("Socrates") (acquired in January 2023) as well as A-Check. We present organic constant currency revenue growth (decline) because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance; however, it has limitations as an analytical tool, and you should not consider such a measure either in isolation or as a substitute for analyzing our results as reported under GAAP. In particular, organic constant currency revenue growth (decline) does not reflect M&A activity or the impact of foreign currency exchange rate fluctuations.
Adjusted EBITDA is defined as net income (loss) adjusted for provision (benefit) for income taxes, interest expense, depreciation and amortization, stock-based compensation, transaction expenses related to the IPO, one-time public company transition expenses and costs associated with financing transactions, M&A activity, optimization and restructuring, technology transformation costs, foreign currency (gains) and losses and other costs affecting comparability. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenue for the
37
Table of Contents
applicable period. We present Adjusted EBITDA and Adjusted EBITDA Margin because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management and our board of directors use Adjusted EBITDA and Adjusted EBITDA Margin to evaluate the factors and trends affecting our business to assess our financial performance and in preparing and approving our annual budget and believe they are helpful in highlighting trends in our core operating performance. Further, our executive incentive compensation is based in part on components of Adjusted EBITDA. Adjusted EBITDA and Adjusted EBITDA Margin have limitations as analytical tools and should not be considered in isolation or as substitutes for our results as reported under GAAP. Adjusted EBITDA excludes items that can have a significant effect on our profit or loss and should, therefore, be considered only in conjunction with net income (loss) for the period. Because not all companies use identical calculations, these measures may not be comparable to other similarly titled measures of other companies.
Adjusted Net Income is a non-GAAP profitability measure. Adjusted Net Income is defined as net income (loss) adjusted for amortization of acquired intangible assets, stock-based compensation, transaction expenses related to the IPO, one-time public company transition expenses and costs associated with financing transactions, M&A activity, optimization and restructuring, technology transformation costs, and certain other costs affecting comparability, adjusted for the applicable tax rate. Adjusted Earnings Per Share is defined as Adjusted Net Income divided by diluted weighted average shares for the applicable period. We present Adjusted Net Income and Adjusted Earnings Per Share because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding certain material non-cash items and unusual items that we do not expect to continue at the same level in the future. Our management believes that the inclusion of supplementary adjustments to net income (loss) applied in presenting Adjusted Net Income provide additional information to investors about certain material non-cash items and about items that we do not expect to continue at the same level in the future. Adjusted Net Income and Adjusted Earnings Per Share have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP.
Free Cash Flow is defined as Net Cash provided by (used in) Operating Activities minus purchases of property and equipment and purchases of intangible assets and capitalized software. We present Free Cash Flow because we believe it provides cash available for strategic measures, after making necessary capital investments in property and equipment to support ongoing business operations, and provides investors with the same measures that management uses as the basis for making resource allocation decisions. Free Cash Flow has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported under GAAP.
Organic Constant Currency Revenue Decline
The following table reconciles revenue growth (decline), the most directly comparable GAAP measure, to organic constant currency revenue decline for the periods presented. For the three months ended March 31, 2024, we have provided the impact of revenue from the acquisitions of Vault and A-Check. For the three months ended March 31, 2023, we have provided the impact of revenue from the acquisition of Socrates and A-Check.
Three Months Ended
March 31,
2024 2023
Reported revenue growth (decline) 3.8 % (6.6) %
Inorganic revenue growth(1)
8.7 % 1.5 %
Impact from foreign currency exchange(2)
- % (1.0) %
Organic constant currency decline (4.9) % (7.1) %
_________________________
(1)Impact to revenue decline in the current period from M&A activity that has occurred over the past twelve months.
(2)Impact to revenue decline in the current period from fluctuations in foreign currency exchange rates.
38
Table of Contents
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA decreased by 15.5%, or $7.0 million, from $45.6 million for the three months ended March 31, 2023 to $38.5 million for the three months ended March 31, 2024. Adjusted EBITDA Margin decreased by 470 basis points year-over-year from 25.4% for the three months ended March 31, 2023 to 20.7% for the three months ended March 31, 2024. The decrease in Adjusted EBITDA and Adjusted EBITDA Margin was predominantly driven byhigher third-party vendor costs driven by the combination of organic revenue growth in certain lower-margin product categories and revenue declines within our higher-margin base business, partially offset by lower costs driven by our cost optimization efforts. The decrease to Adjusted EBITDA margin was driven by these same factors decreasing Adjusted EBITDA, as well as increased volume from M&A activity at lower margins.
The following table reconciles net (loss) income, the most directly comparable GAAP measure, to Adjusted EBITDA for the periods presented:
Three Months Ended
March 31,
(dollars in thousands) 2024 2023
Net (loss) income $ (7,955) $ 591
Income tax (benefit) provision (9,018) 1,102
Interest expense, net 10,312 8,608
Depreciation and amortization 15,770 15,122
Stock-based compensation 9,342 8,043
Transaction expenses(1)
16,988 5,126
Restructuring(2)
3,201 3,273
Technology transformation(3)
375 3,233
Other(4)
(505) 457
Adjusted EBITDA $ 38,510 $ 45,555
Adjusted EBITDA Margin 20.7 % 25.4 %
_________________________
(1)Consists of transaction expenses related to M&A, associated earn-outs, one-time public company transition expenses and ancillary non-recurring public company expenses and fees associated with financing transactions. For the three months ended March 31, 2024, costs consisted of $10.3 million of transaction costs and professional fees to support the merger with First Advantage, $4.0 million due to an out-of-period adjustment to the earn-out liability for the EBI acquisition, and the remaining $2.7 million related to M&A activity for the acquisitions of Vault, A-Check, and Socrates. For the three months ended March 31, 2023, costs consisted primarily of $2.7 million of M&A related costs for the acquisitions of Socrates and A-Check, $1.1 million of M&A costs for the EBI acquisition primarily due to the acceleration of contract costs related to completion of the EBI platform migration and $1.3 million of registration statement costs, one-time public company transition expenses and expenses related to executing our interest rate swap.
(2)Consists of restructuring-related costs, including executive recruiting and severance charges, and lease termination costs and disposal of fixed assets related to our real estate consolidation efforts. Beginning in 2020, we began executing a virtual-first strategy, closing offices and reducing office space globally. In 2022, we began executing on a restructuring program to realign senior leadership and functions with the goal of elevating our go-to-market strategy and accelerating our technology and product innovation. At the end of 2022, we also launched Project Nucleus which we expect to drive meaningful cost savings and efficiency gains in our cost of revenues. For the three months ended March 31, 2024, costs include $3.0 million of restructuring-related charges and $0.2 million of fixed asset disposals in connection with office closures. For the three months ended March 31, 2023, costs consisted of $2.9 million of restructuring-related charges and $0.3 million of real estate consolidation costs.
(3)Includes costs related to technology modernization, as well as costs related to decommissioning of on-premise production systems and redundant fulfillment systems of acquired companies and the migration to our platform. We believe that these costs are discrete and non-recurring in nature, as they relate to a one-time restructuring and decommissioning of our on-premise production systems and corporate technological infrastructure and the move to a managed service provider, decommissioning redundant fulfillment systems and modernizing internal functional systems. As such, they are not normal, recurring operating expenses and are not reflective of ongoing trends in the cost of doing business. The significant majority of these are related to the last two phases of Project Ignite, a three-phase strategic investment initiative launched in 2019 to create an enterprise-class global platform, with the remainder related to an investment made to modernize internal functional systems in preparation for our public company infrastructure. Phase two of Project Ignite was completed in 2022 and phase three of Project Ignite was completed in the first quarter of 2023.For the three months ended March 31, 2024, $0.4 million related to decommissioning of the redundant production and fulfillment systems of A-Check, the redundant fulfillment systems of Socrates, the redundant production systems of Vault and integrating the fulfillment systems of Vault with Sterling to enhance the delivery of drug and health services.For the three months ended March 31, 2023, investment related to Project Ignite was approximately $3.1 million. The remaining $0.1 million for the three months ended March 31, 2023 relates to costs for decommissioning of the on-premise production system and decommissioning of the redundant fulfillment system of EBI and migrating onto our platform.
(4)Consists of gains or losses on foreign currency transactions and impairment of capitalized software.
39
Table of Contents
The following table presents the calculation of net (loss) income margin and Adjusted EBITDA Margin for the periods presented:
Three Months Ended
March 31,
(dollars in thousands)
2024 2023
Net (loss) income $ (7,955) $ 591
Adjusted EBITDA $ 38,510 $ 45,555
Revenues $ 185,999 $ 179,274
Net (loss) income Margin (4.3) % 0.3 %
Adjusted EBITDA Margin 20.7 % 25.4 %
Adjusted Net Income and Adjusted Earnings Per Share
Adjusted Net Income decreased by 25.2%, or $5.9 million, from $23.3 million for the three months ended March 31, 2023 to $17.4 million for the three months ended March 31, 2024. Adjusted Earnings Per Share-basic decreased by 24.0%, or $0.06 per share, from $0.25 per share for the three months ended March 31, 2023 to $0.19 per share for the three months ended March 31, 2024. Adjusted Earnings Per Share-diluted decreased from $0.24 per share for the three months ended March 31, 2023 to $0.19 per share for the three months ended March 31, 2024. The decrease in Adjusted Net Income, Adjusted Earnings Per Share-basic, and Adjusted Earnings Per Share-diluted was primarily driven by higher third-party vendor costs driven by the combination of organic revenue growth in certain lower-margin product categories and revenue declines within our higher-margin base business, partially offset by lower costs driven by our cost optimization efforts, partially offset by lower costs driven by our cost optimization efforts.
The following table reconciles net (loss) income, the most directly comparable GAAP measure, to Adjusted Net Income and Adjusted Earnings Per Share for the periods presented:
Three Months Ended
March 31,
(in thousands, except per share amounts) 2024 2023
Net (loss) income $ (7,955) $ 591
Income tax (benefit) provision (9,018) 1,102
Income (Loss) before income taxes (16,973) 1,693
Amortization of acquired intangible assets 10,631 10,061
Stock-based compensation 9,342 8,043
Transaction expenses(1)
16,988 5,126
Restructuring(2)
3,201 3,273
Technology transformation(3)
375 3,233
Other(4)
(505) 457
Adjusted Net Income before income tax effect 23,059 31,886
Income tax effect(5)
5,648 8,600
Adjusted Net Income $ 17,411 $ 23,286
Net (loss) income per share-basic $ (0.09) $ 0.01
Net (loss) income per share-diluted $ (0.09) $ 0.01
Adjusted Earnings Per Share-basic $ 0.19 $ 0.25
Adjusted Earnings Per Share-diluted $ 0.19 $ 0.24
_________________________
(1)Consists of transaction expenses related to M&A, associated earn-outs, one-time public company transition expenses and ancillary non-recurring public company expenses and fees associated with financing transactions.
(2)Consists of restructuring-related costs, including executive recruiting and severance charges, and lease termination costs and disposal of fixed assets related to our real estate consolidation efforts. Beginning in 2020, we began executing a virtual-first strategy, closing offices and reducing office space globally. In 2022, we began executing on a restructuring program to realign senior leadership and functions with the goal of elevating our go-to-market strategy and accelerating our technology and product innovation. At the end of 2022, we also launched Project Nucleus which we expect to drive meaningful cost savings and efficiency gains in our cost of revenues.
(3)Includes costs related to technology modernization, as well as costs related to decommissioning of on-premise production systems and redundant fulfillment systems of acquired companies and the migration to our platform. We believe that these costs are discrete and non-
40
Table of Contents
recurring in nature, as they relate to a one-time restructuring and decommissioning of our on-premise production systems and corporate technological infrastructure and the move to a managed service provider, decommissioning redundant fulfillment systems and modernizing internal functional systems. As such, they are not normal, recurring operating expenses and are not reflective of ongoing trends in the cost of doing business. The significant majority of these are related to the last two phases of Project Ignite, a three-phase strategic investment initiative launched in 2019 to create an enterprise-class global platform, with the remainder related to an investment made to modernize internal functional systems in preparation for our public company infrastructure. Phase two of Project Ignite was completed in 2022 and phase three of Project Ignite was completed in the first quarter of 2023.
(4)Consists of gains or losses on foreign currency transactions and impairment of capitalized software.
(5)Normalized effective tax rates of 24.5% and 27.0% have been used to compute Adjusted Net Income for the three months ended March 31, 2024 and 2023, respectively. As of December 31, 2023, we had net operating loss carryforwards of approximately $15.7 million for federal income tax purposes and deferred tax assets of approximately $5.6 million related to state and foreign income tax loss carryforwards available to reduce future income subject to income taxes. The amount of actual cash taxes we pay for federal, state, and foreign income taxes differs significantly from the effective income tax rate computed in accordance with US GAAP, and from the normalized rate shown above.
The following table reconciles net (loss) income per share, the most directly comparable GAAP measure, to Adjusted Earnings Per Share for the periods presented:
Three Months Ended
March 31,
(in thousands, except share and per share amounts) 2024 2023
Net (loss) income $ (7,955) $ 591
Weighted average number of shares outstanding-basic 90,274,094 92,877,506
Weighted average number of shares outstanding-diluted 90,274,094 95,350,342
Net (loss) income per share-basic $ (0.09) $ 0.01
Net (loss) income per share-diluted $ (0.09) $ 0.01
Adjusted Net Income $ 17,411 $ 23,286
Weighted average number of shares outstanding-basic 90,274,094 92,877,506
Weighted average number of shares outstanding-diluted 93,399,394 95,350,342
Adjusted Earnings Per Share-basic $ 0.19 $ 0.25
Adjusted Earnings Per Share-diluted $ 0.19 $ 0.24
The following table presents the calculation of Adjusted Diluted Earnings Per Share for the periods presented:
Three Months Ended
March 31,
2024 2023
Net (loss) income per share-diluted $ (0.09) $ 0.01
Adjusted Net Income adjustments per share
Income tax (benefit) provision (0.10) 0.01
Amortization of acquired intangible assets 0.12 0.11
Stock-based compensation 0.10 0.08
Transaction expenses(1)
0.18 0.05
Restructuring(2)
0.04 0.03
Technology transformation(3)
0.00 0.03
Other(4)
0.00 0.00
Income tax effect(5)
(0.06) (0.09)
Adjusted Earnings Per Share-diluted $ 0.19 $ 0.24
Weighted average number of shares outstanding used in computation of Adjusted Diluted Earnings Per Share:
Weighted average number of shares outstanding-diluted (GAAP) 90,274,094 95,350,342
Options not included in weighted average number of shares outstanding-diluted (GAAP) (using treasury stock method) 3,125,300 -
Weighted average number of shares outstanding-diluted (non-GAAP) (using treasury stock method) 93,399,394 95,350,342

41
Table of Contents
_________________________
(1)Consists of transaction expenses related to M&A, associated earn-outs, one-time public company transition expenses and ancillary non-recurring public company expenses and fees associated with financing transactions.
(2)Consists of restructuring-related costs, including executive recruiting and severance charges, and lease termination costs and disposal of fixed assets related to our real estate consolidation efforts. Beginning in 2020, we began executing a virtual-first strategy, closing offices and reducing office space globally. In 2022, we began executing on a restructuring program to realign senior leadership and functions with the goal of elevating our go-to-market strategy and accelerating our technology and product innovation. At the end of 2022, we also launched Project Nucleus which we expect to drive meaningful cost savings and efficiency gains in our cost of revenues.
(3)Includes costs related to technology modernization, as well as costs related to decommissioning of on-premise production systems and redundant fulfillment systems of acquired companies and the migration to our platform. We believe that these costs are discrete and non-recurring in nature, as they relate to a one-time restructuring and decommissioning of our on-premise production systems and corporate technological infrastructure and the move to a managed service provider, decommissioning redundant fulfillment systems and modernizing internal functional systems. As such, they are not normal, recurring operating expenses and are not reflective of ongoing trends in the cost of doing business. The significant majority of these are related to the last two phases of Project Ignite, a three-phase strategic investment initiative launched in 2019 to create an enterprise-class global platform, with the remainder related to an investment made to modernize internal functional systems in preparation for our public company infrastructure. Phase two of Project Ignite was completed in 2022 and phase three of Project Ignite was completed in the first quarter of 2023.
(4)Consists of gains or losses on foreign currency transactions and impairment of capitalized software.
(5)Normalized effective tax rates of 24.5% and 27.0% have been used to compute Adjusted Net Income for the three months ended March 31, 2024 and 2023, respectively. As of December 31, 2023, we had net operating loss carryforwards of approximately $15.7 million for federal income tax purposes and deferred tax assets of approximately $5.6 million related to state and foreign income tax loss carryforwards available to reduce future income subject to income taxes. The amount of actual cash taxes we pay for federal, state, and foreign income taxes differs significantly from the effective income tax rate computed in accordance with US GAAP, and from the normalized rate shown above.
Liquidity and Capital Resources
Overview
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs to meet operating expenses, debt service, acquisitions, capital expenditures, other commitments and contractual obligations. We consider liquidity in terms of cash flows from operations and their sufficiency to fund our operating and investing activities.
Our primary liquidity requirements are for working capital, debt principal and interest obligations, continued investments in software development and other capital expenditures, and other strategic investments. In the third quarter of 2023, we fully utilized our remaining U.S. federal income tax net operating loss carryforwards that were not subject to annual use limitations. Our remaining net operating loss carryforwards are subject to annual use limitations and expire between 2026 and 2031. As a result, income taxes will become a material use of funds, depending on our future profitability, and future tax rates. Our liquidity needs are met primarily through existing balance sheet cash, cash flows from operations, as well as funds available under our revolving credit facility. Our cash flows from operations include cash received from customers, less cash costs to provide services to our customers, which includes general and administrative costs and interest payments.
Our capital expenditures can vary depending on the timing of the development of new products and services and technological enhancement-related investments. Capital expenditures, excluding acquisitions, for the three months ended March 31, 2024 and 2023 were approximately $5.6 million and $4.3 million, respectively, primarily related to capitalizable software development.
We believe that our projected cash position and cash flows from operations will be sufficient to fund our liquidity requirements for at least the next twelve months. However, our future liquidity requirements could be higher than we currently expect as a result of various factors. For example, any future investments, acquisitions, joint ventures or other similar transactions may require additional capital. In addition, our ability to continue to meet our future liquidity requirements will depend on, among other things, our ability to achieve anticipated levels of revenues and cash flows from operations and our ability to manage costs and working capital successfully, all of which are subject to general economic, financial, competitive and other factors beyond our control. In the event we require any additional capital, it will take the form of equity or debt financing, or both, and there can be no assurance that we will be able to raise any such financing on terms acceptable to us or at all.
As of December 31, 2023, we had cash and cash equivalents of approximately $54.2 million. As of March 31, 2024, we had cash and cash equivalents of approximately $67.0 million. We used $70.5 million (net of cash acquired) primarily to purchase Vault and $6.8 million to repurchase shares of our common stock in the first three months of 2024. All cash and cash equivalents are held with independent financial institutions with a minimum credit rating of "A" as defined by the three main credit rating agencies. As of March 31, 2024, all cash and cash equivalents were held in accounts with banks such that the funds are immediately available or in fixed term deposits with a maximum maturity of three months. The bank failures of Silicon Valley Bank, Signature Bank and First
42
Table of Contents
Republic Bank in 2023 created significant market disruption and uncertainty within the U.S. banking sector, in particular with respect to regional banks. We hold minimal cash balances with regional banks in the U.S. We have a robust and disciplined cash management process to protect our cash, maintain financial stability and diversify as we deem appropriate.
Credit Facility
On November 29, 2022 (the "Closing Date"), 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. ("Parent"), KeyBank National Association, as administrative agent (the "Administrative Agent"), certain guarantors party thereto (the "Guarantors") 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.
Amounts outstanding under the 2022 Credit Agreement bear interest under either of the following two rates, elected in advance by the Borrower: (1) a base rate (equal to the greatest of (a) the prime rate, (b) the federal funds rate plus 1⁄2 of 1% and (c) the one-month adjusted term SOFR rate plus 1%); or (2) an adjusted term SOFR rate (equal to the sum of (a) term SOFR plus (b) 0.10%), in each case, plus a tiered floating interest rate margin based on the net leverage ratio of the Borrower and its subsidiaries. Interest on adjusted term SOFR borrowings is payable on the last business day of the one, three or six-month interest period selected by the Borrower (except in the case of a six-month election, in which case it is payable on the last business day of the third and sixth month). Interest on base rate borrowings is payable on the last business day of each quarter. The applicable interest rate at March 31, 2024 was 7.68%.
We, as borrower, will pay a quarterly unused commitment fee at a rate per annum ranging from 0.20% to 0.30%, on the unused portion of the Revolving Credit Facility based on the net leverage ratio of the Borrower and its subsidiaries. We can use available funding capacity under the Revolving Credit Facility to issue letters of credit, subject to a sublimit equal to the lesser of $40.0 million and amounts available for borrowing under the Revolving Credit Facility.
The Term Loans amortize quarterly in the following amounts: $1.875 million per quarter (for the first four full quarters ending after the Closing Date), $3.75 million per quarter (for the next eight quarters) and $5.625 million per quarter (for the next seven quarters).
The 2022 Credit Agreement contains covenants that, among other things, restrict our ability to: incur certain additional indebtedness; transfer money between various subsidiaries; pay dividends on, repurchase or make distributions with respect to subsidiaries' capital stock or make other restricted payments; issue stock of subsidiaries; make certain investments, loans or advances; transfer and sell certain assets; create or permit liens on assets; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; enter into certain transactions with affiliates; and amend certain documents.
The 2022 Credit Agreement also contains financial covenants that require us to comply with (a) a maximum net leverage ratio of 4.00:1.00 (which may be increased to 4.50:1.00 for four quarters if the Borrower and its subsidiaries consummate acquisitions during any 6-month period for which the total aggregate cash consideration is greater than or equal to $75.0 million) and (b) a minimum interest coverage ratio of 3.00:1.00. Both financial covenants are tested quarterly. Since origination, we have been in compliance with all covenants under the 2022 Credit Agreement.
The Term Loans and the Revolving Credit Facility (and related revolving borrowings) are guaranteed by Parent and all of our material wholly owned domestic subsidiaries. Obligations under the 2022 Credit Agreement are collateralized by a first lien on substantially all of our assets and outstanding capital stock of our material domestic subsidiaries, subject to certain exceptions. The 2022 Credit Agreement also contains various events of default, including, without limitation, the failure to pay interest or principal when the same is due, cross default and cross acceleration provisions, the failure of representations and warranties contained therein to be true and certain insolvency events. If an event of default occurs and is continuing, the principal amounts outstanding under the 2022 Credit Agreement, together with all accrued and unpaid interest and other amounts owed thereunder, may be declared immediately due and payable by the lenders.
The net proceeds of the Term Loans, together with borrowings of approximately $223.0 million under the Revolving Credit Facility, were used to repay all outstanding indebtedness, including accrued and unpaid interest, in
43
Table of Contents
an aggregate amount of approximately $513.9 million, under that certain First Lien Credit Agreement, dated June 19, 2015 (as amended, the "2015 Credit Agreement"), by and among the Borrower, as borrower, the guarantors party thereto, KeyBank National Association, as administrative agent, and the lenders party thereto, and to pay related fees and expenses.
As of March 31, 2024, amounts outstanding under the 2022 Credit Agreement totaled $559.2 million and we had $129.5 million of capacity remaining under the Revolving Credit Facility and outstanding letters of credit in the amount of $0.7 million.
Off-Balance Sheet Arrangements
As of March 31, 2024, we did not have any off-balance sheet arrangements.
Cash Flows
The following table presents a summary and comparison of our condensed consolidated cash flows from operating, investing and financing activities for the periods presented:
Three Months Ended
March 31,
(in thousands)
2024 2023
Net cash provided by operations $ 3,674 $ 11,282
Net cash used in investing activities (76,099) (53,055)
Net cash provided by (used in) financing activities 85,667 (10,378)
Effect of exchange rate changes on cash (487) 20
Net change in cash and cash equivalents 12,755 (52,131)
Cash and cash equivalents at beginning of period 54,224 103,095
Cash and cash equivalents at end of period $ 66,979 $ 50,964
Operating Activities
Net cash provided by operations of $3.7 million for the three months ended March 31, 2024 reflects the adjustment to net loss for non-cash charges totaling $15.3 million, primarily driven by $15.8 million of depreciation and amortization and $9.3 million of stock-based compensation offset by deferred income taxes of $14.3 million. Changes in operating assets and liabilities for the three months ended March 31, 2024 reduced cash flow from operating activities by $3.6 million.
Net cash provided by operations of $11.3 million for the three months ended March 31, 2023 reflects the adjustment to net income for non-cash charges totaling $24.4 million, primarily driven by $15.1 million of depreciation and amortization, $8.0 million of stock-based compensation. Changes in operating assets and liabilities for the three months ended March 31, 2023 reduced cash flow from operating activities by $13.7 million.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2024 and 2023 was $76.1 million and $53.1 million, respectively. Net cash used in investing activities for the three months ended March 31, 2024 primarily consisted of $70.5 million of cash used for acquisitions, net of cash acquired, in addition to a $4.9 million investment in capitalized software. Net cash used in investing activities for the three months ended March 31, 2023 primarily consisted of $48.8 million of cash used for acquisitions, net of cash acquired, in addition to a $4.1 million investment in capitalized software.
Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2024 was $85.7 million consisting primarily of a draw of an additional $65.0 million of proceeds from the Revolving Credit Facility to fund the acquisition of Vault, and $53.6 million from the issuance of common stock offset by $23.1 million of cash paid on tax withholding for the exercise of employee stock options and vesting of restricted shares, $6.8 million of share repurchases and $3.8 million of payments of long-term debt. Net cash used in financing activities for the three months ended March 31, 2023 was $10.4 million consisting primarily of $7.7 million of share repurchases and $1.9 million of payments of long-term debt.
44
Table of Contents
Free Cash Flow
For the three months ended March 31, 2024, we generated $1.9 million of Free Cash Flow compared to $7.0 million for the three months ended March 31, 2023. The decrease in Free Cash Flow compared to the prior year period was driven by lower operating income and higher cash paid for taxes.
The following table reconciles net cash flow provided by operating activities, the most directly comparable GAAP measure, to Free Cash Flow for the periods presented:
Three Months Ended
March 31,
(in thousands) 2024 2023
Net cash provided by operations $ 3,674 $ 11,282
Purchases of intangible assets and capitalized software (4,947) (4,120)
Purchases of property and equipment (673) (140)
Free Cash Flow $ (1,946) $ 7,022
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates, assumptions and judgments that can affect the reported amount of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates" in our 2023 Annual Report for a description of our critical accounting estimates and Note 2, "Summary of Significant Accounting Policies" to our 2023 consolidated financial statements in our 2023 Annual Report for our significant accounting policies. There were no significant changes to our critical accounting estimates for the three months ended March 31, 2024.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk
We earn revenues, pay expenses, hold assets and incur liabilities in currencies other than the U.S. dollar. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations from period to period. In particular, fluctuations in exchange rates for non-U.S. dollar currencies may reduce the U.S. dollar value of revenues, earnings and cash flows we receive from non-U.S. markets, increase our operating expenses (as measured in U.S. dollars) in those markets, negatively impact our competitiveness in those markets or otherwise adversely impact our results of operations or financial condition. Key currencies affecting our results of operations at this time are the Canadian dollar (CAD), British pound (GBP), Australian dollar (AUD), Indian rupee (INR) and Philippine peso (PHP). As we expand into other markets, other currencies may become relevant. Future fluctuations of foreign currency exchange rates and their impact on our results of operations and financial condition are inherently uncertain. As we continue to pursue growth of our global operations, these fluctuations may be material. We may from time to time enter into foreign currency options and forward contracts to mitigate the foreign exchange risk on expected future cash outlays to fund our fulfillment centers.
Credit Risk
As of March 31, 2024 and December 31, 2023, we had accounts receivable, net of allowance for expected credit losses, of $157.4 million and $142.2 million, respectively. For the three months ended March 31, 2024 and 2023, no single client accounted for more than 3% of our revenue. No single client had an accounts receivable balance greater than 4% of total accounts receivable as of March 31, 2024 and December 31, 2023.
Interest Rate Risk
Our exposure to market risk is influenced by the changes in interest rates paid on any outstanding balance on our borrowings under our 2022 Credit Agreement. Amounts outstanding under the 2022 Credit Agreement bear interest under either of the following two rates, elected in advance by us: (1) a base rate (equal to the greatest of (a) the prime rate, (b) the federal funds rate plus 1⁄2 of 1% and (c) the one-month adjusted term SOFR rate plus 1%); or (2) an adjusted term SOFR rate (equal to the sum of (a) term SOFR plus (b) 0.10%), in each case, plus a tiered floating interest rate margin based on the net leverage ratio. Our borrowings as of March 31, 2024 and December 31, 2023 accrued interest at 7.68% and 7.71%, respectively, based on an adjusted term SOFR rate (equal to the sum of (a) term SOFR plus (b) 0.10%) plus a tiered floating interest rate margin based on our net leverage ratio.
45
Table of Contents
We hedge against changes in the interest rates through interest rate swaps. On February 28, 2023, we entered into an amortizing $300.0 million notional value interest rate swap. The notional value steps down from $300.0 million to $150.0 million on February 27, 2026. The swap provides for us to pay, as applied to the notional value, a fixed rate of interest of 4.26% monthly and receive, on a monthly basis, an amount equal to the greater of the one-month term SOFR and a floor of (0.10%), as applied to the notional value (the "Floating Leg"). The interest rate swap matures on November 29, 2027. The interest expense related to the 2022 Credit Agreement will be offset by proceeds received or increased from settlements paid for the Floating Leg of the interest rate swap. As of March 31, 2024, we are currently party to four interest rate swaps which hedge the future cash flows on approximately 54% of the outstanding principal balance of the aggregate amounts due under our 2022 Credit Agreement.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, our management has evaluated, under the supervision and with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of March 31, 2024. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management of the company, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Based upon the evaluation of our disclosure controls and procedures as of March 31, 2024, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
46
Table of Contents
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, we believe would individually or taken together have a material adverse effect on our business, financial condition, or liquidity.
For more information, see Note 13, "Commitments and Contingencies" to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Item 1A. Risk Factors.
There have been no material changes with respect to the risk factors as previously disclosed in our 2023 Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased(1)
(a)
Average Price Paid per Share(1)
(b)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)
(c)
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(2)
(d)
(in thousands)
01/01/2024 to 1/31/2024 454,645 $ 13.65 449,713 $ 12,204
02/01/2024 to 02/29/2024 44,444 13.91 44,444 11,586
03/01/2024 to 03/31/2024 237,823 16.08 - 11,586
Total 736,912 494,157
_________________________
(1)During the three months ended March 31, 2024, we received 242,755 shares of our common stock that were surrendered by employees in payment for the minimum required withholding taxes due on the vesting of restricted stock awards. In the above table, these shares are included in columns (a) and (b), but excluded from columns (c) and (d). These shares do not reduce the number of shares that may yet be purchased under our share repurchase program.
(2)On November 23, 2022, our board of directors authorized the repurchase of up to $100.0 million of our shares of common stock over a period through December 31, 2024. The share repurchase program is expected to be funded through our existing cash and future free cash flow. 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. We are 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. We have suspended repurchases of our common stock under the share repurchase program pending consummation of the Merger.
47
Table of Contents
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Rule 10b5-1 Trading Arrangements and Non-Rule 10b5-1 Trading Arrangements
During the three months ended March 31, 2024, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K.
Item 6. Exhibits.
(a) Exhibits.
Exhibit
No.
Exhibit Description
2.1
2.2*
Waiver, dated as of March 25. 2024, by and among First Advantage Corporation, Sterling Check Corp, and Starter Merger Sub, Inc.
10.1
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS* Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the XBRL document.
101.SCH* Inline XBRL Taxonomy Extension Schema Document.
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104 Cover Page Interactive Data File (embedded within the Inline XBRL document).
_________________________
* Filed herewith.
** Furnished herewith.

48
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

STERLING CHECK CORP.
By:
/s/ JOSHUA PEIREZ
Joshua Peirez
Chief Executive Officer
(Principal Executive Officer)
Date: May 9, 2024
By:
/s/ THERESA STRONG
Theresa Strong
Interim Chief Financial Officer and
Chief Accounting Officer
(Principal Financial Officer)
Date: May 9, 2024
49