10-Q
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a

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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: 001-31666

 

First Advantage Corporation

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

84-3884690

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

1 Concourse Parkway NE, Suite 200

Atlanta, GA

30328

(Address of principal executive offices)

(Zip Code)

(888) 314-9761

(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, $0.001 par value per share

 

FA

 

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

As of May 3, 2024, the registrant had 145,197,595 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

 

 

 

PART I.

FINANCIAL INFORMATION

2

 

 

 

Item 1.

Financial Statements (Unaudited)

2

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

3

 

Condensed Consolidated Statements of Cash Flows

4

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

34

 

 

 

PART II.

OTHER INFORMATION

35

 

 

 

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

36

Signatures

37

 

1


 

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

First Advantage Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

 

(in thousands, except share and per share amounts)

 

March 31, 2024

 

 

December 31, 2023

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

245,436

 

 

$

213,774

 

Restricted cash

 

 

135

 

 

 

138

 

Short-term investments

 

 

600

 

 

 

 

Accounts receivable (net of allowance for doubtful accounts of $893 and $1,036 at March 31, 2024 and December 31, 2023, respectively)

 

 

129,011

 

 

 

142,690

 

Prepaid expenses and other current assets

 

 

21,795

 

 

 

13,426

 

Income tax receivable

 

 

2,568

 

 

 

3,710

 

Total current assets

 

 

399,545

 

 

 

373,738

 

Property and equipment, net

 

 

71,352

 

 

 

79,441

 

Goodwill

 

 

819,633

 

 

 

820,654

 

Trade names, net

 

 

64,370

 

 

 

66,229

 

Customer lists, net

 

 

262,876

 

 

 

275,528

 

Other intangible assets, net

 

 

2,138

 

 

 

2,257

 

Deferred tax asset, net

 

 

2,797

 

 

 

2,786

 

Other assets

 

 

9,202

 

 

 

10,021

 

TOTAL ASSETS

 

$

1,631,913

 

 

$

1,630,654

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

Accounts payable

 

$

47,956

 

 

$

47,024

 

Accrued compensation

 

 

12,742

 

 

 

16,379

 

Accrued liabilities

 

 

24,102

 

 

 

16,162

 

Current portion of operating lease liability

 

 

3,367

 

 

 

3,354

 

Income tax payable

 

 

2,988

 

 

 

264

 

Deferred revenues

 

 

2,043

 

 

 

1,856

 

Total current liabilities

 

 

93,198

 

 

 

85,039

 

Long-term debt (net of deferred financing costs of $5,815 and $6,268 at March 31, 2024 and December 31, 2023, respectively)

 

 

558,909

 

 

 

558,456

 

Deferred tax liability, net

 

 

63,604

 

 

 

71,274

 

Operating lease liability, less current portion

 

 

5,632

 

 

 

5,931

 

Other liabilities

 

 

2,826

 

 

 

3,221

 

Total liabilities

 

 

724,169

 

 

 

723,921

 

COMMITMENTS AND CONTINGENCIES (Note 12)

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

Common stock - $0.001 par value; 1,000,000,000 shares authorized, 145,195,030 and 145,074,802 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively

 

 

145

 

 

 

145

 

Additional paid-in-capital

 

 

982,982

 

 

 

977,290

 

Accumulated deficit

 

 

(52,453

)

 

 

(49,545

)

Accumulated other comprehensive loss

 

 

(22,930

)

 

 

(21,157

)

Total equity

 

 

907,744

 

 

 

906,733

 

TOTAL LIABILITIES AND EQUITY

 

$

1,631,913

 

 

$

1,630,654

 

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

2


 

First Advantage Corporation

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

(Unaudited)

 

 

 

Three Months Ended March 31,

 

(in thousands, except share and per share amounts)

 

2024

 

 

2023

 

REVENUES

 

$

169,416

 

 

$

175,520

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization below)

 

 

87,192

 

 

 

91,061

 

Product and technology expense

 

 

12,466

 

 

 

12,624

 

Selling, general, and administrative expense

 

 

40,662

 

 

 

28,682

 

Depreciation and amortization

 

 

29,822

 

 

 

31,866

 

Total operating expenses

 

 

170,142

 

 

 

164,233

 

(LOSS) INCOME FROM OPERATIONS

 

 

(726

)

 

 

11,287

 

 

 

 

 

 

 

OTHER EXPENSE, NET:

 

 

 

 

 

 

Interest expense, net

 

 

3,570

 

 

 

8,681

 

Total other expense, net

 

 

3,570

 

 

 

8,681

 

(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES

 

 

(4,296

)

 

 

2,606

 

(Benefit) provision for income taxes

 

 

(1,388

)

 

 

681

 

NET (LOSS) INCOME

 

$

(2,908

)

 

$

1,925

 

 

 

 

 

 

 

Foreign currency translation (loss) income

 

 

(1,773

)

 

 

869

 

COMPREHENSIVE (LOSS) INCOME

 

$

(4,681

)

 

$

2,794

 

 

 

 

 

 

 

NET (LOSS) INCOME

 

$

(2,908

)

 

$

1,925

 

Basic net (loss) income per share

 

$

(0.02

)

 

$

0.01

 

Diluted net (loss) income per share

 

$

(0.02

)

 

$

0.01

 

Weighted average number of shares outstanding - basic

 

 

143,591,713

 

 

 

145,862,562

 

Weighted average number of shares outstanding - diluted

 

 

143,591,713

 

 

 

147,031,866

 

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

3


 

First Advantage Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2024

 

 

2023

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net (loss) income

 

$

(2,908

)

 

$

1,925

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

29,822

 

 

 

31,866

 

Amortization of deferred financing costs

 

 

453

 

 

 

461

 

Bad debt recovery

 

 

(112

)

 

 

(40

)

Deferred taxes

 

 

(7,808

)

 

 

(2,144

)

Share-based compensation

 

 

4,751

 

 

 

2,058

 

Gain on foreign currency exchange rates

 

(0)

 

 

 

(10

)

Loss on disposal of fixed assets and impairment of ROU assets

 

0

 

 

 

1,222

 

Change in fair value of interest rate swaps

 

 

(7,045

)

 

 

1,879

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

13,736

 

 

 

15,980

 

Prepaid expenses and other assets

 

 

(3,345

)

 

 

2,933

 

Accounts payable

 

 

468

 

 

 

(7,618

)

Accrued compensation and accrued liabilities

 

 

6,608

 

 

 

(11,828

)

Deferred revenues

 

 

185

 

 

 

209

 

Operating lease liabilities

 

 

(328

)

 

 

(110

)

Other liabilities

 

 

(11

)

 

 

980

 

Income taxes receivable and payable, net

 

 

3,863

 

 

 

836

 

Net cash provided by operating activities

 

 

38,329

 

 

 

38,599

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Purchases of property and equipment

 

 

(321

)

 

 

(42

)

Capitalized software development costs

 

 

(6,135

)

 

 

(6,056

)

Other investing activities

 

 

(575

)

 

 

15

 

Net cash used in investing activities

 

 

(7,031

)

 

 

(6,083

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Cash dividends paid

 

 

(12

)

 

 

 

Share repurchases

 

 

 

 

 

(25,266

)

Proceeds from issuance of common stock under share-based compensation plans

 

 

976

 

 

 

1,399

 

Payments on deferred purchase agreements

 

 

(234

)

 

 

(234

)

Payments on finance lease obligations

 

 

 

 

 

(37

)

Net settlement of share-based compensation plan awards

 

 

(41

)

 

 

(25

)

Net cash provided by (used in) financing activities

 

 

689

 

 

 

(24,163

)

Effect of exchange rate on cash, cash equivalents, and restricted cash

 

 

(328

)

 

 

147

 

Increase in cash, cash equivalents, and restricted cash

 

 

31,659

 

 

 

8,500

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

213,912

 

 

 

391,796

 

Cash, cash equivalents, and restricted cash at end of period

 

$

245,571

 

 

$

400,296

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

Cash paid for income taxes, net of refunds received

 

$

2,510

 

 

$

2,049

 

Cash paid for interest

 

$

11,954

 

 

$

10,625

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

Property and equipment acquired on account

 

$

585

 

 

$

275

 

Non-cash property and equipment additions

 

$

540

 

 

$

 

Excise taxes on share repurchases incurred but not paid

 

$

 

 

$

252

 

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

4


 

First Advantage Corporation

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

(in thousands)

 

Common Stock

 

 

Additional
Paid-In-Capital

 

 

Accumulated
Deficit

 

 

Accumulated Other
Comprehensive
Loss

 

 

Total Stockholders’
Equity

 

BALANCE – December 31, 2023

 

$

145

 

 

$

977,290

 

 

$

(49,545

)

 

$

(21,157

)

 

$

906,733

 

Share-based compensation

 

 

 

 

 

4,751

 

 

 

 

 

 

 

 

 

4,751

 

Forfeitures of previously declared cash dividends

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Proceeds from issuance of common stock under share-based compensation plans

 

 

0

 

 

 

976

 

 

 

 

 

 

 

 

 

976

 

Common stock withheld for tax obligations on restricted stock unit and option settlement

 

(0)

 

 

 

(41

)

 

 

 

 

 

 

 

 

(41

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

(1,773

)

 

 

(1,773

)

Net loss

 

 

 

 

 

 

 

 

(2,908

)

 

 

 

 

 

(2,908

)

BALANCE – March 31, 2024

 

$

145

 

 

$

982,982

 

 

$

(52,453

)

 

$

(22,930

)

 

$

907,744

 

 

(in thousands)

 

Common Stock

 

 

Additional
Paid-In-Capital

 

 

Accumulated
Deficit

 

 

Accumulated Other
Comprehensive
Loss

 

 

Total Stockholders’
Equity

 

BALANCE – December 31, 2022

 

$

149

 

 

$

1,176,163

 

 

$

(27,363

)

 

$

(22,331

)

 

$

1,126,618

 

Share-based compensation

 

 

 

 

 

2,058

 

 

 

 

 

 

 

 

 

2,058

 

Repurchases of common stock

 

 

(2

)

 

 

 

 

 

(25,515

)

 

 

 

 

 

(25,517

)

Proceeds from issuance of common stock under share-based compensation plans

 

 

0

 

 

 

1,399

 

 

 

 

 

 

 

 

 

1,399

 

Common stock withheld for tax obligations on restricted stock unit and option settlement

 

 

0

 

 

 

(25

)

 

 

 

 

 

 

 

 

(25

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

869

 

 

 

869

 

Net income

 

 

 

 

 

 

 

 

1,925

 

 

 

 

 

 

1,925

 

BALANCE – March 31, 2023

 

$

147

 

 

$

1,179,595

 

 

$

(50,953

)

 

$

(21,462

)

 

$

1,107,327

 

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

5


 

First Advantage Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Organization, Nature of Business, and Basis of Presentation

First Advantage Corporation, a Delaware corporation, was formed on November 15, 2019. Hereafter, First Advantage Corporation and its subsidiaries will collectively be referred to as the “Company.”

The Company derives its revenues from a variety of background check and compliance services performed across all phases of the workforce lifecycle from pre-onboarding services to post-onboarding and ongoing monitoring services, covering employees, contractors, contingent workers, tenants, and drivers. We generally classify our service offerings into three categories: pre-onboarding, post-onboarding, and adjacent products.

Pre-onboarding services are comprised of an extensive array of products and solutions that customers typically utilize to enhance their evaluation process and support compliance from the time a job or other application is submitted to a successful applicant’s onboarding date. This includes searches such as criminal background checks, drug / health screenings, extended workforce screening, biometrics and identity checks, education / workforce verification, driver records and compliance, healthcare credentials, and executive screening.

Post-onboarding services are comprised of continuous monitoring and re-screening solutions, which are important tools to help keep their end customers, workforces, and other stakeholders safer, more productive, and more compliant. Our post-monitoring solutions include criminal records, healthcare sanctions, motor vehicle records, social media, and global sanctions screening continuously or at regular intervals selected by our customers.

Adjacent products include products that complement our pre-onboarding and post-onboarding products and solutions. This includes fleet / vehicle compliance, hiring tax credits and incentives, resident / tenant screening, employment eligibility, and investigative research.

Basis of Presentation —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 the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. The Company includes the results of operations of acquired companies prospectively from the date of acquisition.

The condensed consolidated financial statements included herein are unaudited, but in the opinion of management, such financial statements include all adjustments, consisting of normal recurring adjustments, necessary to summarize fairly the Company’s financial position, results of operations, and cash flows for the interim periods presented. The interim results reported in these condensed consolidated financial statements should not be taken as indicative of results that may be expected for future interim periods or the full year. For a more comprehensive understanding of the Company and its condensed consolidated financial statements, these interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

The Company has historically experienced seasonality with respect to certain customer industries as a result of fluctuations in hiring volumes and other economic activities. Generally, the Company’s highest revenues have historically occurred between October and November of each year, driven by many customers’ pre-holiday season hiring initiatives.

Use of Estimates — The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Changes in these estimates and assumptions may have a material impact on the condensed consolidated financial statements and accompanying notes.

Significant estimates, judgments, and assumptions, include, but are not limited to, the determination of the fair value and useful lives of assets acquired and liabilities assumed through business combinations, goodwill impairment, revenue recognition, capitalized software, assumptions used for purposes of determining share-based compensation, and income tax liabilities and assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.

6


 

Note 2. Summary of Significant Accounting Policies

Fair Value of Financial Instruments — Certain financial assets and liabilities are reported at fair value in the accompanying consolidated balance sheets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurement. ASC 820 establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 defines fair value as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The valuation techniques required by ASC 820 are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 — Quoted prices for identical instruments in active markets.

Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 — Significant inputs to the valuation model are unobservable (supported by little or no market activities). These inputs may be used with internally developed methodologies that reflect the Company’s best estimate of fair value from a market participant.

The fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated knowledgeable and willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, rather than the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.

The carrying amounts of cash and cash equivalents, short-term investments, receivables, and accounts payable approximate fair value due to the short-term maturities of these financial instruments (Level 1). The fair values and carrying values of the Company’s long-term debt are disclosed in Note 6.

The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy as of March 31, 2024 (in thousands):

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

 

$

3,876

 

 

$

 


Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Other intangible assets are subject to nonrecurring fair value measurement as the result of business acquisitions. The fair values of these assets were estimated using the present value of expected future cash flows through unobservable inputs (Level 3).

Business Combinations— The Company records business combinations using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, identifiable assets acquired and liabilities assumed are recorded at their acquisition-date fair values. The excess of the purchase price over the estimated fair value is recorded as goodwill. Changes in the estimated fair values of net assets recorded for acquisitions prior to the finalization of more detailed analysis, but not to exceed one year from the date of acquisition, will adjust the amount of the purchase price allocable to goodwill. Measurement period adjustments are reflected in the period in which they occur.

In valuing the trade names, customer lists, and software developed for internal use, the Company utilizes variations of the income approach, which relies on historical financial and qualitative information, as well as assumptions and estimates for projected financial information. The Company considers the income approach the most appropriate valuation technique because the inherent value of these assets is their ability to generate current and future income. Projected financial information is subject to risk if estimates are incorrect. The most significant estimate relates to projected revenues and profitability. If the projected revenues and profitability used in the valuation calculations are not met, then the asset could be impaired.

Concentrations of Credit Risk — Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Cash is deposited with major financial institutions and, at times, such balances with each financial institution may be in excess of insured limits. The Company has not experienced, and does not anticipate, any losses with respect to its cash deposits. Accounts receivable represent credit granted to customers for services provided. The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on accounts receivable. The Company had one customer which represented approximately 11% of its consolidated revenues during the three months ended March 31, 2024. The Company did not have any customers which represented 10% or more of its consolidated revenues during the three months ended March 31, 2023. Additionally, the Company did not have any customers which represented 10% or more of its consolidated accounts receivable, net for any period presented.

7


 

The Company has entered into interest rate derivative agreements with a counterparty bank to reduce its exposure to interest rate volatility. The Company has determined the counterparty bank to be a high credit quality institution. The Company does not enter into financial instruments for trading or speculative purposes.

Foreign Currency — The functional currency of all of the Company’s foreign subsidiaries is the applicable local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenues and expense accounts using average exchange rates prevailing during the fiscal year. Adjustments resulting from the translation of foreign currency financial statements are accumulated net of tax in a separate component of equity. Currency translation (loss) income included in accumulated other comprehensive loss was approximately $(1.8) million and $0.9 million for the three months ended March 31, 2024 and 2023, respectively.

Gains or losses resulting from foreign currency transactions are included in the accompanying condensed consolidated statements of operations and comprehensive (loss) income, except for those relating to intercompany transactions of a long-term investment nature, which are captured in a separate component of equity as accumulated other comprehensive loss. Currency transaction (loss) income included in the accompanying condensed consolidated statements of operations and comprehensive (loss) income was approximately $0.0 million and $(0.5) million for the three months ended March 31, 2024 and 2023, respectively.

Recent Accounting Pronouncements — There were no accounting pronouncements issued during the three months ended March 31, 2024 that are expected to have a material impact on the condensed consolidated financial statements.

 

8


 

Note 3. Acquisitions

Pending Acquisition of Sterling Check Corp.

On February 28, 2024, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among First Advantage, Sterling Check Corp., a Delaware corporation (“Sterling”), 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 Sterling, with Sterling continuing as the surviving corporation in such merger and becoming an indirect, wholly owned subsidiary of First Advantage. The cash-and-stock transaction (the “Acquisition”) valued Sterling at approximately $2.2 billion as of the date of the Merger Agreement.

The Acquisition is subject to satisfaction or waiver of customary closing conditions, including, among others, adoption of the Merger Agreement by Sterling stockholders, the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (the “HSR Act”) and clearance under the antitrust and foreign direct investment laws of certain other jurisdictions, and the effectiveness of a registration statement on Form S-4 to be filed by First Advantage in connection with the Acquisition.

2023 Acquisition

On September 1, 2023, the Company acquired 100% of the equity interest of a digital identity and biometrics solutions company headquartered in New York, for $41.0 million. The acquired company operates under the trade name Infinite ID. The acquisition expands the Company’s network and portfolio of identity solutions in the United States. The acquired company was determined to constitute a business and the Company was deemed to be the acquirer under ASC 805. As a result, the Company has recorded the related purchase accounting as of September 1, 2023.

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

Consideration

 

 

 

Cash purchase price

 

$

41,000

 

Other transaction adjustments

 

 

97

 

Total fair value of consideration transferred

 

$

41,097

 

Current assets

 

$

1,335

 

Property and equipment, including software developed for internal use

 

 

5,959

 

Trade name

 

 

2,300

 

Customer lists

 

 

3,800

 

Other intangible assets

 

 

2,400

 

Other assets

 

 

236

 

Total liabilities

 

 

(1,427

)

Total identifiable net assets

 

$

14,603

 

Goodwill

 

$

26,494

 

Goodwill recognized is not expected to be deductible for tax purposes. Results of operations have been included in the condensed consolidated financial statements of the Company’s Americas segment since the date of acquisition. The acquisition is 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.

As of the date these condensed consolidated financial statements were issued, the purchase accounting related to this acquisition was incomplete as the valuation of deferred taxes and certain customary transaction adjustments were not yet finalized. The Company has reflected the provisional amounts in these condensed consolidated financial statements. As such, the above balances may be adjusted in a future period as the valuation is finalized and these adjustments may be material to the condensed consolidated financial statements.

9


 

Note 4. Property and Equipment, net

Property and equipment, net as of March 31, 2024 and December 31, 2023 consisted of the following (in thousands):

 

 

March 31, 2024

 

 

December 31, 2023

 

Furniture and equipment

 

$

26,673

 

 

$

26,576

 

Capitalized software for internal use, acquired by business combination

 

 

232,361

 

 

 

232,505

 

Capitalized software for internal use, developed internally or otherwise purchased

 

 

93,525

 

 

 

86,704

 

Leasehold improvements

 

 

2,810

 

 

 

2,275

 

Total property and equipment

 

 

355,369

 

 

 

348,060

 

Less: accumulated depreciation and amortization

 

 

(284,017

)

 

 

(268,619

)

Property and equipment, net

 

$

71,352

 

 

$

79,441

 

Depreciation and amortization expense of property and equipment was approximately $15.5 million and $16.4 million for the three months ended March 31, 2024 and 2023, respectively.

Note 5. Goodwill, Trade Names, Customer Lists and Other Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2024 by reportable segment were as follows (in thousands):

 

 

Americas

 

 

International

 

 

Total

 

Balance – December 31, 2023

 

$

703,797

 

 

$

116,857

 

 

$

820,654

 

Adjustments to initial purchase price allocations

 

 

(25

)

 

 

 

 

 

(25

)

Foreign currency translation

 

 

12

 

 

 

(1,008

)

 

 

(996

)

Balance – March 31, 2024

 

$

703,784

 

 

$

115,849

 

 

$

819,633

 

The following summarizes the gross carrying value and accumulated amortization for the Company’s trade names, customer lists, and other intangible assets as of March 31, 2024 and December 31, 2023 (in thousands):

 

 

March 31, 2024

 

 

Gross
Carrying Value

 

 

Accumulated
Amortization

 

 

Net
Carrying Value

 

 

Useful Life
(in years)

Trade names

 

$

96,208

 

 

$

(31,838

)

 

$

64,370

 

 

20 years

Customer lists

 

 

519,543

 

 

 

(256,667

)

 

 

262,876

 

 

13-14 years

Other intangible assets

 

 

2,400

 

 

 

(262

)

 

 

2,138

 

 

5 years

Total

 

$

618,151

 

 

$

(288,767

)

 

$

329,384

 

 

 

 

 

 

December 31, 2023

 

 

Gross
Carrying Value

 

 

Accumulated
Amortization

 

 

Net
Carrying Value

 

 

Useful Life
(in years)

Trade names

 

$

96,321

 

 

$

(30,092

)

 

$

66,229

 

 

20 years

Customer lists

 

 

520,105

 

 

 

(244,577

)

 

 

275,528

 

 

13-14 years

Other intangible assets

 

 

2,400

 

 

 

(143

)

 

 

2,257

 

 

5 years

Total

 

$

618,826

 

 

$

(274,812

)

 

$

344,014

 

 

 

Amortization expense of trade names, customer lists, and other intangible assets was approximately $14.3 million and $15.4 million for the three months ended March 31, 2024 and 2023, respectively. Trade names and customer lists are amortized on an accelerated basis based upon their estimated useful life. Other intangible assets are amortized on a straight-line or accelerated basis over their expected useful life of five years.

10


 

Note 6. Long-term Debt

The fair value of the Company’s long-term debt obligation approximated its book value as of March 31, 2024 and December 31, 2023 and consisted of the following (in thousands):

 

 

March 31, 2024

 

 

December 31, 2023

 

First Lien Credit Facility

 

$

564,724

 

 

$

564,724

 

Less: Deferred financing costs

 

 

(5,815

)

 

 

(6,268

)

Long-term debt, net

 

$

558,909

 

 

$

558,456

 

The Company is a party to a First Lien Credit Agreement (as amended, “Credit Agreement”), which provides for a term loan of $766.6 million due January 31, 2027, carrying an interest rate of 2.75% to 3.00%, based on the first lien ratio, plus LIBOR (“First Lien Credit Facility”) and a $100.0 million revolving credit facility due July 31, 2026 (“Revolver”). Pursuant to an amendment in June 2023, the reference rate under the Credit Agreement was transitioned from LIBOR to SOFR (the Secured Overnight Financing Rate as administered by the Federal Reserve Bank of New York), with the addition of an applicable margin. The Credit Agreement is collateralized by substantially all assets and capital stock owned by direct and indirect domestic subsidiaries and are governed by certain restrictive covenants including limitations on indebtedness, liens, and other corporate actions such as investments and acquisitions. In the event the Company’s outstanding indebtedness under the Revolver exceeds 35% of the aggregate principal amount of the revolving commitments then in effect, it is required to maintain a consolidated first lien leverage ratio no greater than 7.75 to 1.00. As of March 31, 2024, there were no outstanding borrowings under the Revolver and $564.7 million outstanding under the First Lien Credit Facility. As the Company had no outstanding amounts under the Revolver, it was not subject to the consolidated first lien leverage ratio covenant. The Company was compliant with all other covenants under the agreement as of March 31, 2024.

In connection with the execution of the Merger Agreement, on February 28, 2024, First Advantage Holdings, LLC, a subsidiary of the Company (the “Borrower”), entered into a commitment letter with certain financial institutions that committed to provide, subject to the terms and conditions of the commitment letter, an incremental term loan in an aggregate principal amount of up to $1.820 billion and incremental revolving commitments in an aggregate principal amount of $150 million, in each case, under the Credit Agreement. Such financial institutions also agreed to extend the maturity date of the Revolver from July 31, 2026 to the date that is the fifth anniversary of the closing date of the Acquisition.

11


 

Note 7. Derivatives

To reduce exposure to variability in expected future cash outflows on variable rate debt attributable to the changes in one-month LIBOR, the Company has historically entered into interest rate derivative instruments to economically offset a portion of this risk and may do so in the future. In June 2023, the Company transitioned the reference rate for its interest rate derivative agreements from one-month LIBOR to one-month SOFR.

As of March 31, 2024, the Company had the following outstanding derivatives that were not designated as a hedge in qualifying hedging relationships:

Product

 

Effective Date

 

Maturity Date

 

Notional

 

Rate

Interest rate swap(a)

 

June 30, 2023

 

February 28, 2026

 

$100.0 million

 

4.32%

Interest rate swap

 

December 29, 2023

 

December 31, 2026

 

$150.0 million

 

3.86%

Interest rate swap

 

March 1, 2024

 

December 31, 2026

 

$150.0 million

 

3.76%

 

(a)
In conjunction with the June 2023 transition of the reference rate from LIBOR to SOFR, the fixed rate was reduced from 4.36% to 4.32%.

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements; however, the Company has not elected to apply hedge accounting for these instruments.

The following is a summary of location and fair value of the financial positions recorded related to the derivative instruments (in thousands):

 

 

 

 

Fair Value

 

Derivatives not designated
as hedging instruments

 

Balance Sheet Location

 

As of
March 31, 2024

 

 

As of
December 31, 2023

 

Interest rate swaps

 

Accrued liabilities

 

$

 

 

$

1,576

 

Interest rate swaps

 

Prepaid expenses and other current assets

 

$

3,876

 

 

$

 

The following is a summary of location and amount of gains and (losses) recorded related to the derivative instruments (in thousands):

 

 

 

 

Gain/(loss)

 

 

 

 

 

Three Months Ended March 31,

 

Derivatives not designated
as hedging instruments

 

Income Statement Location

 

2024

 

 

2023

 

Interest rate collars

 

Interest expense, net

 

$

951

 

 

$

(435

)

Interest rate swaps

 

Interest expense, net

 

$

6,094

 

 

$

(1,444

)

 

Note 8. Income Taxes

The Company’s income tax expense and balance sheet accounts reflect the results of the Company and its subsidiaries.

For the three months ended March 31, 2024, the Company estimated the annual effective tax rate based on projected income for the full year and recorded a quarterly tax provision in accordance with the annual effective tax rate and adjusted for discrete tax items in the period.

The effective income tax rate for the three months ended March 31, 2024 was 32.3%. The Company’s effective income tax rate for the three months ended March 31, 2024 was higher than the U.S. federal statutory rate of 21% primarily due to nondeductible share-based compensation and U.S. state income taxes.

The effective income tax rate for the three months ended March 31, 2023 was 26.1%. The Company’s effective income tax rate for the three months ended March 31, 2023 was higher than the U.S. federal statutory rate of 21% primarily due to the GILTI inclusion, nondeductible share-based compensation, and U.S. state income taxes.

12


 

Note 9. Revenues

Substantially all of the Company’s revenues are recognized at a point in time when the orders are completed and the completed reports are reported, or otherwise made available. For revenues delivered over time, the output method is utilized to measure the value to the customer based on the transfer to date of the services promised, with no rights of return once consumed. In these cases, revenues on transactional contracts with a defined price but an undefined quantity is recognized utilizing the right to invoice expedient resulting in revenues being recognized when the service is provided and becomes billable. Additionally, under this practical expedient, the Company is not required to estimate the transaction price.

The Company considers negotiated and anticipated incentives and estimated adjustments, including historical collections experience, when recording revenues.

The Company’s contracts with customers generally include standard commercial payment terms acceptable in each region, and do not include any financing components. The Company does not have any significant obligations for refunds, warranties, or similar obligations. The Company records revenues net of sales taxes.

Contract balances are generated when the revenues recognized in a given period varies from billing. A contract asset is created when the Company performs a service for a customer and recognizes more revenues than what has been billed. The contract asset balance was $6.7 million and $4.8 million as of March 31, 2024 and December 31, 2023, respectively, and is included in accounts receivable, net in the accompanying condensed consolidated balance sheets.

A contract liability is created when the Company transfers a good or service to a customer and recognizes less than what has been billed. The Company recognizes these contract liabilities as deferred revenues when the Company has an obligation to perform services for a customer in the future and has already received consideration from the customer. The contract liability balance was $2.0 million and $1.9 million as of March 31, 2024 and December 31, 2023, respectively, and is included in deferred revenues in the accompanying condensed consolidated balance sheets. An immaterial amount of revenues was recognized in the current period related to the beginning balance of deferred revenues.

For additional disclosures about the disaggregation of our revenues, see Note 15, “Reportable Segments.”

Note 10. Share-based Compensation

Share-based compensation expense is recognized in cost of services, product and technology expense, and selling, general, and administrative expense, in the accompanying condensed consolidated statements of operations and comprehensive (loss) income as follows (in thousands):

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Share-based compensation expense

 

 

 

 

 

 

Cost of services

 

$

357

 

 

$

275

 

Product and technology expense

 

 

654

 

 

 

457

 

Selling, general, and administrative expense

 

 

3,740

 

 

 

1,326

 

Total share-based compensation expense

 

$

4,751

 

 

$

2,058

 

Prior to the IPO, all share-based awards were issued by Fastball Holdco, L.P., the Company’s previous parent company, under individual grant agreements and the partnership agreement of such parent company (collectively, the “the 2020 Equity Plan”). In connection with the IPO, the Company adopted the 2021 Omnibus Incentive Plan (as amended by the First Amendment, dated as of May 10, 2023, the “2021 Equity Plan”).

In May 2023, the Company’s Board of Directors approved a modification of the vesting terms of outstanding unvested and unearned performance-based options, restricted stock units, and restricted stock (collectively, “Performance Awards”) previously issued under its equity plans. The modification, effective May 10, 2023, allowed for unvested and unearned Performance Awards outstanding as of the date of the modification, to vest based on time on the fourth, fifth, and sixth anniversaries of the relevant vesting commencement date, as set forth in each grant agreement (the “Vesting Commencement Date”), while preserving the eligibility to vest upon the Company’s investors receiving a targeted money-on-money return, subject to continued service.

In connection with the Company’s declaration of a one-time special dividend in August 2023, the exercise price of outstanding stock option awards and stock purchases under the Company’s employee stock purchase plan (“ESPP”) was reduced by $1.50, in accordance with the non-discretionary anti-dilution provisions of the equity and stock purchase plans.

13


 

2020 Equity Plan

Awards issued under the 2020 Equity Plan consist of options and profit interests. No awards were issued under the plan during the three months ended March 31, 2024.

A summary of the stock option activity for the three months ended March 31, 2024 is as follows:

 

 

 

 

Options

 

 

Weighted Average
Exercise Price

 

 

Weighted Average Remaining Contractual Term

 

Aggregate Intrinsic Value

December 31, 2023

 

Grants outstanding

 

 

1,915,252

 

 

$

5.15

 

 

 

 

 

 

 

Grants exercised

 

 

(48,911

)

 

$

5.48

 

 

 

 

 

 

 

Grants cancelled/forfeited

 

 

(16,978

)

 

$

5.11

 

 

 

 

 

March 31, 2024

 

Grants outstanding

 

 

1,849,363

 

 

$

5.15

 

 

5.9 Years

 

$20.5 million

March 31, 2024

 

Grants vested

 

 

823,589

 

 

$

5.12

 

 

5.9 Years

 

$9.1 million

March 31, 2024

 

Grants unvested

 

 

1,025,774

 

 

$

5.18

 

 

 

 

 

2021 Equity Plan

The 2021 Equity Plan is intended to provide a means through which to attract and retain key personnel and to provide a means whereby our directors, officers, employees, consultants, and advisors can acquire and maintain an equity interest in us, or be paid incentive compensation, including incentive compensation measured by reference to the value of our common stock, thereby strengthening their commitment to our welfare and aligning their interests with those of our stockholders. The 2021 Equity Plan provides for the grant of awards of stock options, stock appreciation rights, restricted shares, restricted stock units, and other equity-based or cash-based awards as determined by the Company’s Compensation Committee. The 2021 Equity Plan initially had a total of 17,525,000 shares of common stock reserved. The number of reserved shares automatically increases 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) 2.5% of the total number of shares of common stock outstanding on the last day of the immediately preceding calendar year and (y) a number of shares as determined by the Board of Directors. As of March 31, 2024, 20,037,028 shares were available for issuance under the 2021 Equity Plan.

Stock Options

A summary of the stock option activity for the three months ended March 31, 2024 is as follows:

 

 

 

 

Options

 

 

Weighted Average
Exercise Price

 

 

Weighted Average Remaining Contractual Term

 

Aggregate Intrinsic Value

December 31, 2023

 

Grants outstanding

 

 

4,686,659

 

 

$

13.61

 

 

 

 

 

 

 

Grants issued

 

 

146,401

 

 

$

15.81

 

 

 

 

 

 

 

Grants cancelled/forfeited

 

 

(6,600

)

 

$

16.02

 

 

 

 

 

March 31, 2024

 

Grants outstanding

 

 

4,826,460

 

 

$

13.67

 

 

7.6 Years

 

$12.3 million

March 31, 2024

 

Grants vested

 

 

2,207,644

 

 

$

13.68

 

 

7.3 Years

 

$5.6 million

March 31, 2024

 

Grants unvested

 

 

2,618,816

 

 

$

13.66

 

 

 

 

 

The fair value for stock options granted for the three months ended March 31, 2024 was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

 

Options

 

Expected stock price volatility

 

 

34.98

%

Risk-free interest rate

 

 

4.22

%

Expected term (in years)

 

 

6.25

 

Fair-value of the underlying unit

 

$

15.81

 

 

14


 

Restricted Stock Units

A summary of the restricted stock units (“RSU”) activity for the three months ended March 31, 2024 is as follows:

 

 

 

 

Shares

 

 

Weighted Average
Grant Date Fair Value

 

December 31, 2023

 

Nonvested RSUs

 

 

507,143

 

 

$

15.10

 

 

 

Granted

 

 

167,472

 

 

$

15.83

 

 

 

Vested

 

 

(9,443

)

 

$

14.91

 

 

 

Forfeited

 

 

(3,777

)

 

$

17.31

 

March 31, 2024

 

Nonvested RSUs

 

 

661,395

 

 

$

15.27

 

Restricted Stock

A summary of the restricted stock activity for the three months ended March 31, 2024 is as follows:

 

 

 

 

Shares

 

 

Weighted Average
Grant Date Fair Value

 

December 31, 2023

 

Nonvested restricted stock

 

 

1,954,630

 

 

$

8.50

 

 

 

Vested

 

 

(586,927

)

 

$

7.73

 

March 31, 2024

 

Nonvested restricted stock

 

 

1,367,703

 

 

$

9.16

 

As of March 31, 2024, the Company had approximately $36.4 million of unrecognized pre-tax non-cash compensation expense, comprised of approximately $12.1 million related to restricted stock, $8.1 million related to RSUs, and approximately $16.2 million related to stock options, which the Company expects to recognize over a weighted average period of 1.3 years.

2021 Employee Stock Purchase Plan

The Company adopted the ESPP, which allows eligible employees to voluntarily make after-tax contributions of up to 15% of such employee’s cash compensation to acquire Company stock during designated offering periods. Each offering period consists of one six-month purchase period. During the holding period, ESPP purchased shares are not eligible for sale or broker transfer. The Company recorded an associated expense of approximately $0.2 million for both the three months ended March 31, 2024 and 2023.

Note 11. Equity

Preferred Stock

As of March 31, 2024 and December 31, 2023, 250,000,000 shares of Preferred Stock were authorized, and no Preferred Stock was issued or outstanding.

Share Repurchase Program

The Company did not repurchase any shares of common stock during the three months ended March 31, 2024. As of March 31, 2024, the remaining authorized value of shares available to be repurchased under the Repurchase Program was approximately $80.5 million. In connection with the execution of the Merger Agreement, the Company will be suspending purchases under its Repurchase Program.

15


 

Note 12. Commitments and Contingencies

There have been no material changes to the Company’s contractual obligations as compared to December 31, 2023.

The Company is involved in litigation from time to time in the ordinary course of business. At times, the Company, given the nature of its background screening business, could become subject to lawsuits, or potential class action lawsuits, in multiple jurisdictions, related to claims brought primarily by consumers or individuals who were the subject of its screening services.

For all pending matters, the Company believes it has meritorious defenses and intends to defend vigorously or otherwise seek indemnification from other parties as appropriate. However, the Company has recorded a liability of $4.7 million and $5.2 million at March 31, 2024 and December 31, 2023, respectively, for matters that it believes a loss is both probable and estimable. This is included in accrued liabilities in the accompanying condensed consolidated balance sheets.

The Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.

Note 13. Related Party Transactions

The Company had no material related party transactions for the three months ended March 31, 2024.

Note 14. Net (Loss) Income Per Share

Basic weighted-average shares outstanding excludes nonvested restricted stock. Diluted weighted average shares outstanding is similar to basic weighted-average shares outstanding, except that the weighted-average number of shares is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common share had been issued, including the dilutive impact of nonvested restricted stock. The potentially dilutive securities outstanding during the three months ended March 31, 2024, had an anti-dilutive effect and were therefore not included in the calculation of diluted net loss per share. Basic and diluted net (loss) income per share was calculated as follows:

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Basic net (loss) income per share

 

$

(0.02

)

 

$

0.01

 

Diluted net (loss) income per share

 

$

(0.02

)

 

$

0.01