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 September 30, 20212023
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 001-04321001-40982
HireRight Holdings Corporation
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
| Delaware | | 82-109207283-1092072 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | | | | | | | |
| 100 Centerview Drive, Suite 300 | Nashville | Tennessee | 37214 |
| (Address of Principal Executive Offices) | | | (Zip Code) |
(615) 320-9800
(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, par value $0.001 per share | | HRT | | New York Stock Exchange |
Indicate by check mark whether the registrant: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 Act). ☐ Yes ☒ No
The registrant had outstanding 79,390,51367,644,747 shares of common stock as of November 18, 2021.
EXPLANATORY NOTE
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to “we,” “us,” “our,” the “Company,” and similar references refer: (1) following the consummation of our conversion to a Delaware corporation on October 15, 2021 in connection with our initial public offering, to HireRight Holdings Corporation, and (2) prior to the completion of such conversion, to HireRight GIS Group Holdings, LLC. See Note 1, “Organization, Basis of Presentation and Consolidation and Use of Estimates—Organization” to this Quarterly Report on Form 10-Q for further information.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
HireRight Holdings Corporation
Condensed Consolidated Balance Sheets (Unaudited)
| | | September 30,
2021 | | December 31,
2020 | | September 30,
2023 | | December 31, 2022 |
| | (in thousands, except unit amounts) | | (in thousands, except share, and per share data) |
| Assets | Assets | | Assets | |
| Current assets | Current assets | | Current assets | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 19,656 | | | $ | 19,077 | | Cash and cash equivalents | $ | 103,218 | | | $ | 162,092 | |
| Restricted cash | Restricted cash | 4,982 | | | 4,982 | | Restricted cash | — | | | 1,310 | |
| Accounts receivable, net of allowance for doubtful accounts of $4,277 and $3,919 at September 30, 2021 and December 31, 2020, respectively | 151,801 | | | 107,800 | | |
| Accounts receivable, net of allowance for credit losses of $5,421 and $5,812 at September 30, 2023 and December 31, 2022, respectively | | Accounts receivable, net of allowance for credit losses of $5,421 and $5,812 at September 30, 2023 and December 31, 2022, respectively | 139,557 | | | 136,656 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 21,992 | | | 18,221 | | Prepaid expenses and other current assets | 26,118 | | | 18,745 | |
| Total current assets | Total current assets | 198,431 | | | 150,080 | | Total current assets | 268,893 | | | 318,803 | |
| Property and equipment, net | Property and equipment, net | 14,457 | | | 17,486 | | Property and equipment, net | 7,190 | | | 9,045 | |
| Right-of-use assets, net | | Right-of-use assets, net | 6,352 | | | 8,423 | |
| Intangible assets, net | Intangible assets, net | 403,862 | | | 448,816 | | Intangible assets, net | 312,542 | | | 331,598 | |
| Goodwill | Goodwill | 819,639 | | | 820,032 | | Goodwill | 833,264 | | | 809,463 | |
| Cloud computing software, net | | Cloud computing software, net | 37,736 | | | 35,230 | |
| Deferred tax assets | | Deferred tax assets | 74,110 | | | 74,236 | |
| Other non-current assets | Other non-current assets | 18,258 | | | 17,238 | | Other non-current assets | 20,975 | | | 18,949 | |
| Total assets | Total assets | $ | 1,454,647 | | | $ | 1,453,652 | | Total assets | $ | 1,561,062 | | | $ | 1,605,747 | |
| Liabilities and Members' Equity | | | | |
| Liabilities and Stockholders' Equity | | Liabilities and Stockholders' Equity | | | |
| Current liabilities | Current liabilities | | Current liabilities | |
| Accounts payable | Accounts payable | $ | 10,053 | | | $ | 24,608 | | Accounts payable | $ | 11,740 | | | $ | 11,571 | |
| Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | 76,488 | | | 56,809 | | Accrued expenses and other current liabilities | 102,189 | | | 75,208 | |
| Accrued salaries and payroll | Accrued salaries and payroll | 29,319 | | | 23,125 | | Accrued salaries and payroll | 30,801 | | | 31,075 | |
| Derivative instruments, current | 18,772 | | | 18,258 | | |
| | Debt, current portion | Debt, current portion | 8,350 | | | 8,350 | | Debt, current portion | 7,500 | | | 8,350 | |
| Total current liabilities | Total current liabilities | 142,982 | | | 131,150 | | Total current liabilities | 152,230 | | | 126,204 | |
| Debt, long-term portion | Debt, long-term portion | 1,009,936 | | | 1,013,397 | | Debt, long-term portion | 726,338 | | | 683,206 | |
| Derivative instruments, long-term | 19,097 | | | 35,317 | | |
| Deferred taxes | 15,164 | | | 13,567 | | |
| | Tax receivable agreement liability, long-term portion | | Tax receivable agreement liability, long-term portion | 183,504 | | | 210,543 | |
| Deferred taxes liabilities | | Deferred taxes liabilities | 11,269 | | | 5,748 | |
| Other non-current liabilities | Other non-current liabilities | 3,052 | | | 3,334 | | Other non-current liabilities | 10,844 | | | 11,728 | |
| Total liabilities | Total liabilities | 1,190,231 | | | 1,196,765 | | Total liabilities | 1,084,185 | | | 1,037,429 | |
| Commitments and contingencies (Note 12) | 0 | | 0 | |
| Class A Units - 57,168,291 units issued and outstanding at September 30, 2021 and December 31, 2020 | 590,711 | | | 590,711 | | |
| Commitments and contingent liabilities (Note 14) | | Commitments and contingent liabilities (Note 14) | | | |
| Stockholders' equity | | Stockholders' equity | |
| Preferred stock, $0.001 par value, authorized 100,000,000 shares; none issued and outstanding as of September 30, 2023 and December 31, 2022 | | Preferred stock, $0.001 par value, authorized 100,000,000 shares; none issued and outstanding as of September 30, 2023 and December 31, 2022 | — | | | — | |
| Common stock, $0.001 par value, authorized 1,000,000,000 shares; 79,884,225 and 79,660,397 shares issued, and 68,138,638 and 78,131,568 shares outstanding as of September 30, 2023 and December 31, 2022, respectively | | Common stock, $0.001 par value, authorized 1,000,000,000 shares; 79,884,225 and 79,660,397 shares issued, and 68,138,638 and 78,131,568 shares outstanding as of September 30, 2023 and December 31, 2022, respectively | 80 | | | 80 | |
| Additional paid-in capital | Additional paid-in capital | 17,853 | | | 15,360 | | Additional paid-in capital | 820,090 | | | 805,799 | |
| Treasury stock, at cost; 11,745,587 and 1,528,829 shares repurchased at September 30, 2023 and December 31, 2022, respectively | | Treasury stock, at cost; 11,745,587 and 1,528,829 shares repurchased at September 30, 2023 and December 31, 2022, respectively | (126,742) | | | (16,827) | |
| Accumulated deficit | Accumulated deficit | (347,398) | | | (339,061) | | Accumulated deficit | (222,844) | | | (215,790) | |
| Accumulated other comprehensive income (loss) | 3,250 | | | (10,123) | | |
| Total members’ equity | 264,416 | | | 256,887 | | |
| Total liabilities and members’ equity | $ | 1,454,647 | | | $ | 1,453,652 | | |
| Accumulated other comprehensive loss | | Accumulated other comprehensive loss | (11,420) | | | (4,944) | |
| Total HireRight Holdings Corporation stockholders' equity | | Total HireRight Holdings Corporation stockholders' equity | 459,164 | | | 568,318 | |
| Noncontrolling interest | | Noncontrolling interest | 17,713 | | | — | |
| Total stockholders’ equity | | Total stockholders’ equity | 476,877 | | | 568,318 | |
| Total liabilities and stockholders’ equity | | Total liabilities and stockholders’ equity | $ | 1,561,062 | | | $ | 1,605,747 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HireRight Holdings Corporation
Condensed Consolidated Statements of Operations (Unaudited)
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2023 | | 2022 | | 2023 | | 2022 |
| | (in thousands, except units and per unit amounts) | | (in thousands, except share, and per share data) |
| Revenues | Revenues | $ | 204,981 | | | $ | 130,674 | | | $ | 531,522 | | | $ | 390,121 | | Revenues | $ | 188,262 | | | $ | 210,303 | | | $ | 555,833 | | | $ | 631,306 | |
| | Expenses | Expenses | | Expenses | |
| Cost of services (exclusive of depreciation and amortization below) | Cost of services (exclusive of depreciation and amortization below) | 111,328 | | | 69,683 | | | 295,832 | | | 215,143 | | Cost of services (exclusive of depreciation and amortization below) | 94,422 | | | 110,848 | | | 291,449 | | | 343,241 | |
| Selling, general and administrative | Selling, general and administrative | 47,652 | | | 48,347 | | | 130,261 | | | 128,583 | | Selling, general and administrative | 48,588 | | | 49,378 | | | 164,442 | | | 152,032 | |
| Depreciation and amortization | Depreciation and amortization | 19,531 | | | 19,808 | | | 56,013 | | | 58,283 | | Depreciation and amortization | 19,063 | | | 17,946 | | | 56,246 | | | 54,056 | |
| Total expenses | Total expenses | 178,511 | | | 137,838 | | | 482,106 | | | 402,009 | | Total expenses | 162,073 | | | 178,172 | | | 512,137 | | | 549,329 | |
| Operating income (loss) | 26,470 | | | (7,164) | | | 49,416 | | | (11,888) | | |
| Operating income | | Operating income | 26,189 | | | 32,131 | | | 43,696 | | | 81,977 | |
| | Other expenses | Other expenses | | Other expenses | |
| Interest expense | 18,518 | | | 18,597 | | | 54,674 | | | 56,930 | | |
| Other expense (income), net | 22 | | | (185) | | | 125 | | | 628 | | |
| Total other expense | 18,540 | | | 18,412 | | | 54,799 | | | 57,558 | | |
| Interest expense, net | | Interest expense, net | 22,447 | | | 8,457 | | | 48,392 | | | 20,971 | |
| Other expense, net | | Other expense, net | 881 | | | 89 | | | 1,429 | | | 163 | |
| Total other expenses | | Total other expenses | 23,328 | | | 8,546 | | | 49,821 | | | 21,134 | |
| Income (loss) before income taxes | Income (loss) before income taxes | 7,930 | | | (25,576) | | | (5,383) | | | (69,446) | | Income (loss) before income taxes | 2,861 | | | 23,585 | | | (6,125) | | | 60,843 | |
| Income tax expense | 649 | | | 1,466 | | | 2,954 | | | 3,490 | | |
| Income tax expense (benefit) | | Income tax expense (benefit) | 4,450 | | | (69,704) | | | 863 | | | (68,456) | |
| Net income (loss) | Net income (loss) | $ | 7,281 | | | $ | (27,042) | | | $ | (8,337) | | | $ | (72,936) | | Net income (loss) | $ | (1,589) | | | $ | 93,289 | | | $ | (6,988) | | | $ | 129,299 | |
Less: Net income attributable to noncontrolling interest (1) | | Less: Net income attributable to noncontrolling interest (1) | 66 | | | — | | | 66 | | | — | |
| Net income (loss) attributable to HireRight Holdings Corporation | | Net income (loss) attributable to HireRight Holdings Corporation | $ | (1,655) | | | $ | 93,289 | | | $ | (7,054) | | | $ | 129,299 | |
| | Net income (loss) per unit: | | |
| Net income (loss) per share attributable to HireRight Holdings Corporation: | | Net income (loss) per share attributable to HireRight Holdings Corporation: | |
| Basic | Basic | $ | 0.13 | | | $ | (0.47) | | | $ | (0.15) | | | $ | (1.28) | | Basic | $ | (0.02) | | | $ | 1.17 | | | $ | (0.10) | | | $ | 1.63 | |
| Diluted | Diluted | $ | 0.13 | | | $ | (0.47) | | | $ | (0.15) | | | $ | (1.28) | | Diluted | $ | (0.02) | | | $ | 1.17 | | | $ | (0.10) | | | $ | 1.63 | |
| Weighted average units outstanding: | | |
| Weighted average shares outstanding: | | Weighted average shares outstanding: | |
| Basic | Basic | 57,168,291 | | 57,168,291 | | 57,168,291 | | 57,168,291 | Basic | 69,090,882 | | 79,459,633 | | 73,080,851 | | 79,419,725 |
| Diluted | Diluted | 57,199,204 | | 57,168,291 | | 57,168,291 | | 57,168,291 | Diluted | 69,090,882 | | 79,542,715 | | 73,080,851 | | 79,476,574 |
(1) See Note 1 — Organization, Basis of Presentation and Consolidation, and Significant Accounting Policies for a description of noncontrolling interest.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HireRight Holdings Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands) |
| Net income (loss) | | $ | 7,281 | | | $ | (27,042) | | | $ | (8,337) | | | $ | (72,936) | |
| | | | | | | | |
| Other comprehensive income (loss), net of tax | | | | | | | | |
| Unrealized gain (loss) on derivatives qualified for hedge accounting: | | | | | | | | |
| Unrealized gain (loss) on interest rate swaps | | (991) | | | (1,426) | | | 973 | | | (35,137) | |
Reclassification adjustments included in earnings (1) | | 5,018 | | | 4,854 | | | 14,733 | | | 11,136 | |
| Total unrealized gain (loss) | | 4,027 | | | 3,428 | | | 15,706 | | | (24,001) | |
| Currency translation adjustment, net of taxes of $16 and $0 for the three months ended September 30, 2021 and 2020, respectively, and $1 and $0 for the nine months ended September 30, 2021 and 2020, respectively. | | (3,595) | | | 4,616 | | | (2,333) | | | (2,011) | |
| | | | | | | | |
| Other comprehensive income (loss) | | 432 | | | 8,044 | | | 13,373 | | | (26,012) | |
| Comprehensive income (loss) | | $ | 7,713 | | | $ | (18,998) | | | $ | 5,036 | | | $ | (98,948) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended
September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands) |
| Net income (loss) | $ | (1,589) | | | $ | 93,289 | | | $ | (6,988) | | | $ | 129,299 | |
| | | | | | | |
| Other comprehensive income (loss), net of tax | | | | | | | |
| Unrealized (loss) gain on derivatives qualified for hedge accounting: | | | | | | | |
| Unrealized gain on interest rate swaps | — | | | — | | | — | | | 7,981 | |
Reclassification adjustments included in earnings (1) | (2,088) | | | (3,413) | | | (6,890) | | | (7,997) | |
| Total unrealized loss | (2,088) | | | (3,413) | | | (6,890) | | | (16) | |
| Currency translation adjustment, net of tax expense of $16 and $64 for the three months ended September 30, 2023 and 2022, respectively, and $102 and $210 for the nine months ended September 30, 2023 and 2022, respectively | (4,318) | | | (12,565) | | | 414 | | | (26,400) | |
| | | | | | | |
| Other comprehensive loss | (6,406) | | | (15,978) | | | (6,476) | | | (26,416) | |
| Comprehensive income (loss) | $ | (7,995) | | | $ | 77,311 | | | $ | (13,464) | | | $ | 102,883 | |
| Less: comprehensive income attributable to noncontrolling interest, net of tax | 66 | | | — | | | 66 | | | — | |
| Comprehensive income (loss) attributable to HireRight Holdings Corporation | $ | (8,061) | | | $ | 77,311 | | | $ | (13,530) | | | $ | 102,883 | |
(1) Represents the reclassification of the effective portion of the gain on the Company's interest rate swaps into interest expense. Includes reclassification to earnings as a reduction to interest expense of unrealized gains included in accumulated other comprehensive loss on the condensed consolidated balance sheet related to the interest rate swap agreements terminated on February 18, 2022. See Note 12 for additional information.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HireRight Holdings Corporation
Condensed Consolidated Statements of Members'Stockholders’ Equity (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 |
| Class A Member Units Outstanding | | Class A Member Unit Amount | | Additional Paid in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total Members’ Equity |
| (in thousands, except unit amounts) |
| Balances at June 30, 2021 | 57,168,291 | | | $ | 590,711 | | | $ | 17,012 | | | $ | (354,679) | | | $ | 2,818 | | | $ | 255,862 | |
| Net income | — | | | — | | | — | | | 7,281 | | | — | | | 7,281 | |
| Equity-based compensation | — | | | — | | | 841 | | | — | | | — | | | 841 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 432 | | | 432 | |
| Balances at September 30, 2021 | 57,168,291 | | | $ | 590,711 | | | $ | 17,853 | | | $ | (347,398) | | | $ | 3,250 | | | $ | 264,416 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 |
| Common Stock | | Treasury Stock | | | | | | | | | | |
| Shares | | Amount | | Shares | | Amount | | Additional Paid in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest | | Total Stockholders’ Equity |
| (in thousands, except share data) |
| Balances at June 30, 2023 | 70,326,266 | | | $ | 80 | | | 9,524,029 | | | $ | (102,889) | | | $ | 815,411 | | | $ | (221,189) | | | $ | (5,014) | | | $ | — | | | $ | 486,399 | |
| Issuance of common stock under stock-based compensation plans, net of shares withheld for employee taxes | 33,930 | | | — | | | — | | | — | | | (139) | | | — | | | — | | | — | | | (139) | |
| Net loss attributable to HireRight Holdings Corporation | — | | | — | | | — | | | — | | | — | | | (1,655) | | | — | | | — | | | (1,655) | |
| Acquisition date fair value of noncontrolling interest (Note 3) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 17,647 | | | 17,647 | |
| Net income attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 66 | | | 66 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 4,818 | | | — | | | — | | | — | | | 4,818 | |
| Repurchase of common stock | (2,221,558) | | | — | | | 2,221,558 | | | (23,853) | | | — | | | — | | | — | | | — | | | (23,853) | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (6,406) | | | — | | | (6,406) | |
| Balances at September 30, 2023 | 68,138,638 | | | $ | 80 | | | 11,745,587 | | | $ | (126,742) | | | $ | 820,090 | | | $ | (222,844) | | | $ | (11,420) | | | $ | 17,713 | | | $ | 476,877 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| Class A Member Units Outstanding | | Class A Member Unit Amount | | Additional Paid in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Members’ Equity |
| (in thousands, except unit amounts) |
| Balances at June 30, 2020 | 57,168,291 | | | $ | 590,711 | | | $ | 13,832 | | | $ | (292,878) | | | $ | (28,817) | | | $ | 282,848 | |
| Net loss | — | | | — | | | — | | | (27,042) | | | — | | | (27,042) | |
| Equity-based compensation | — | | | — | | | 880 | | | — | | | — | | | 880 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 8,044 | | | 8,044 | |
| Balances at September 30, 2020 | 57,168,291 | | | $ | 590,711 | | | $ | 14,712 | | | $ | (319,920) | | | $ | (20,773) | | | $ | 264,730 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| Common Stock | | Treasury Stock | | | | | | | | |
| Shares | | Amount | | Shares | | Amount | | Additional Paid in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
| (in thousands, except unit data) |
| Balances at June 30, 2022 | 79,432,321 | | | $ | 79 | | | — | | | $ | — | | | $ | 800,566 | | | $ | (324,354) | | | $ | 2,182 | | | $ | 478,473 | |
| Issuance of common stock in connection with stock-based compensation | 50,291 | | | — | | | — | | | — | | | 803 | | | — | | | — | | | 803 | |
| Net income | — | | | — | | | — | | | — | | | — | | | 93,289 | | | — | | | 93,289 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 1,115 | | | — | | | — | | | 1,115 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (15,978) | | | (15,978) | |
| Balances at September 30, 2022 | 79,482,612 | | | $ | 79 | | | — | | | $ | — | | | $ | 802,484 | | | $ | (231,065) | | | $ | (13,796) | | | $ | 557,702 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HireRight Holdings Corporation
Condensed Consolidated Statements of Members'Stockholders’ Equity (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Class A Member Units Outstanding | | Class A Member Unit Amount | | Additional Paid in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Members’ Equity |
| (in thousands, except unit amounts) |
| Balances at December 31, 2020 | 57,168,291 | | | $ | 590,711 | | | $ | 15,360 | | | $ | (339,061) | | | $ | (10,123) | | | $ | 256,887 | |
| Net loss | — | | | — | | | — | | | (8,337) | | | — | | | (8,337) | |
| Equity-based compensation | — | | | — | | | 2,493 | | | — | | | — | | | 2,493 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 13,373 | | | 13,373 | |
| Balances at September 30, 2021 | 57,168,291 | | | $ | 590,711 | | | $ | 17,853 | | | $ | (347,398) | | | $ | 3,250 | | | $ | 264,416 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2023 |
| Common Stock | | Treasury Stock | | | | | | | | | | |
| Shares | | Amount | | Shares | | Amount | | Additional Paid in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest | | Total Stockholders’ Equity |
| (in thousands, except share data) |
| Balances at December 31, 2022 | 78,131,568 | | | $ | 80 | | | 1,528,829 | | | $ | (16,827) | | | $ | 805,799 | | | $ | (215,790) | | | $ | (4,944) | | | $ | — | | | $ | 568,318 | |
| Issuance of common stock under stock-based compensation plans, net of shares withheld for employee taxes | 223,828 | | | — | | | — | | | — | | | 402 | | | — | | | — | | | — | | | 402 | |
| Net loss attributable to HireRight Holdings Corporation | — | | | — | | | — | | | — | | | — | | | (7,054) | | | — | | | — | | | (7,054) | |
| Acquisition date fair value of noncontrolling interest (Note 3) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 17,647 | | | 17,647 | |
| Net income attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 66 | | | 66 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 13,889 | | | — | | | — | | | — | | | 13,889 | |
| Repurchase of common stock | (10,216,758) | | | — | | | 10,216,758 | | | (109,915) | | | — | | | — | | | — | | | — | | | (109,915) | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (6,476) | | | — | | | (6,476) | |
| Balances at September 30, 2023 | 68,138,638 | | | $ | 80 | | | 11,745,587 | | | $ | (126,742) | | | $ | 820,090 | | | $ | (222,844) | | | $ | (11,420) | | | $ | 17,713 | | | $ | 476,877 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Class A Member Units Outstanding | | Class A Member Unit Amount | | Additional Paid in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Members’ Equity |
| (in thousands, except unit amounts) |
| Balances at December 31, 2019 | 57,168,291 | | | $ | 590,711 | | | $ | 12,142 | | | $ | (246,984) | | | $ | 5,239 | | | $ | 361,108 | |
| Net loss | — | | | — | | | — | | | (72,936) | | | — | | | (72,936) | |
| Equity-based compensation | — | | | — | | | 2,570 | | | — | | | — | | | 2,570 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (26,012) | | | (26,012) | |
| Balances at September 30, 2020 | 57,168,291 | | | $ | 590,711 | | | $ | 14,712 | | | $ | (319,920) | | | $ | (20,773) | | | $ | 264,730 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Common Stock | | Treasury Stock | | | | | | | | |
| Shares | | Amount | | Shares | | Amount | | Additional Paid in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
| (in thousands, except unit data) |
| Balances at December 31, 2021 | 79,392,937 | | | $ | 79 | | | — | | | $ | — | | | $ | 793,382 | | | $ | (360,364) | | | $ | 12,620 | | | $ | 445,717 | |
| Issuance of common stock in connection with stock-based compensation | 89,675 | | | — | | | — | | | — | | | 803 | | | — | | | — | | | 803 | |
| Net income | — | | | — | | | — | | | — | | | — | | | 129,299 | | | — | | | 129,299 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 8,299 | | | — | | | — | | | 8,299 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (26,416) | | | (26,416) | |
| Balances at September 30, 2022 | 79,482,612 | | | $ | 79 | | | — | | | $ | — | | | $ | 802,484 | | | $ | (231,065) | | | $ | (13,796) | | | $ | 557,702 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HireRight Holdings Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | | Nine Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2021 | | 2020 | | 2023 | | 2022 |
| | (in thousands) | | (in thousands) |
| Cash flows from operating activities | Cash flows from operating activities | | Cash flows from operating activities | |
| Net loss | $ | (8,337) | | | $ | (72,936) | | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | |
| Net income (loss) | | Net income (loss) | $ | (6,988) | | | $ | 129,299 | |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | | Adjustments to reconcile net income (loss) to net cash used in operating activities: | |
| Depreciation and amortization | Depreciation and amortization | 56,013 | | | 58,283 | | Depreciation and amortization | 56,246 | | | 54,056 | |
| Deferred income taxes | Deferred income taxes | 1,933 | | | 2,601 | | Deferred income taxes | (1,021) | | | (70,954) | |
| Amortization of debt issuance costs | Amortization of debt issuance costs | 3,139 | | | 3,012 | | Amortization of debt issuance costs | 2,404 | | | 2,549 | |
| Amortization of contract assets | Amortization of contract assets | 2,782 | | | 2,159 | | Amortization of contract assets | 3,742 | | | 3,312 | |
| Equity-based compensation | 2,493 | | | 2,570 | | |
| Amortization of right-of-use assets | | Amortization of right-of-use assets | 3,715 | | | 2,094 | |
| Amortization of unrealized gains on terminated interest rate swap agreements | | Amortization of unrealized gains on terminated interest rate swap agreements | (6,890) | | | (9,676) | |
| Amortization of cloud computing software costs | | Amortization of cloud computing software costs | 5,012 | | | 1,446 | |
| Stock-based compensation | | Stock-based compensation | 13,889 | | | 8,587 | |
| Change in tax receivable agreement liability | | Change in tax receivable agreement liability | — | | | 800 | |
| Loss on modification and extinguishment of debt | | Loss on modification and extinguishment of debt | 7,745 | | | — | |
| Other non-cash charges, net | Other non-cash charges, net | (541) | | | 1,457 | | Other non-cash charges, net | 1,010 | | | 524 | |
| Changes in operating assets and liabilities: | | |
| Changes in operating assets and liabilities (net of acquisitions): | | Changes in operating assets and liabilities (net of acquisitions): | |
| Accounts receivable | Accounts receivable | (44,715) | | | 3,229 | | Accounts receivable | (1,546) | | | (24,521) | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | (2,327) | | | 2,471 | | Prepaid expenses and other current assets | (6,850) | | | 1,516 | |
| Cloud computing software | | Cloud computing software | (8,465) | | | (23,158) | |
| Other non-current assets | Other non-current assets | (4,157) | | | (3,275) | | Other non-current assets | (4,960) | | | (3,934) | |
| Accounts payable | Accounts payable | (13,736) | | | (7,932) | | Accounts payable | 156 | | | (5,212) | |
| Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | 19,676 | | | 14,241 | | Accrued expenses and other current liabilities | 259 | | | 5,498 | |
| Accrued salaries and payroll | Accrued salaries and payroll | 6,194 | | | 1,504 | | Accrued salaries and payroll | (661) | | | 3,631 | |
| Operating lease liabilities, net | | Operating lease liabilities, net | (3,759) | | | (4,125) | |
| Other non-current liabilities | Other non-current liabilities | 626 | | | 337 | | Other non-current liabilities | (2,410) | | | (805) | |
| Net cash provided by operating activities | Net cash provided by operating activities | 19,043 | | | 7,721 | | Net cash provided by operating activities | 50,628 | | | 70,927 | |
| Cash flows from investing activities | Cash flows from investing activities | | | | Cash flows from investing activities | | | |
| Purchases of property and equipment | Purchases of property and equipment | (5,092) | | | (4,156) | | Purchases of property and equipment | (2,049) | | | (3,973) | |
| Capitalized software development | Capitalized software development | (4,891) | | | (5,024) | | Capitalized software development | (8,829) | | | (9,149) | |
| Cash paid for acquisitions, net of cash acquired | Cash paid for acquisitions, net of cash acquired | — | | | (96) | | Cash paid for acquisitions, net of cash acquired | (21,653) | | | — | |
| Other investing | | Other investing | (2,000) | | | — | |
| Net cash used in investing activities | Net cash used in investing activities | (9,983) | | | (9,276) | | Net cash used in investing activities | (34,531) | | | (13,122) | |
| Cash flows from financing activities | Cash flows from financing activities | | | | Cash flows from financing activities | | | |
| Repayments of debt | Repayments of debt | (6,263) | | | (6,263) | | Repayments of debt | (638,653) | | | (6,263) | |
| Borrowings on line of credit | 30,000 | | | 50,000 | | |
| Repayments on line of credit | (30,000) | | | (40,000) | | |
| Payment of holdbacks | — | | | (1,000) | | |
| Payment of capital lease obligations | — | | | (402) | | |
| Other financing | (1,240) | | | — | | |
| Net cash (used in) provided by financing activities | (7,503) | | | 2,335 | | |
| Net increase in cash, cash equivalents and restricted cash | 1,557 | | | 780 | | |
| | Proceeds from Second Amended First Lien Term Loan Facility, net of debt discount | | Proceeds from Second Amended First Lien Term Loan Facility, net of debt discount | 677,890 | | | — | |
| Payments for termination of interest rate swap agreements | | Payments for termination of interest rate swap agreements | — | | | (18,445) | |
| Payment of issuance costs | | Payment of issuance costs | (6,252) | | | (342) | |
| Repurchases of common stock | | Repurchases of common stock | (109,642) | | | — | |
| Proceeds from issuance of common stock in connection with stock-based compensation plans | | Proceeds from issuance of common stock in connection with stock-based compensation plans | 613 | | | — | |
| Taxes paid related to net share settlement of equity awards | | Taxes paid related to net share settlement of equity awards | (211) | | | — | |
| | Net cash used in financing activities | | Net cash used in financing activities | (76,255) | | | (25,050) | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | Net increase (decrease) in cash, cash equivalents and restricted cash | (60,158) | | | 32,755 | |
| Effect of exchange rates | Effect of exchange rates | (978) | | | (642) | | Effect of exchange rates | (26) | | | (1,155) | |
| Cash, cash equivalents and restricted cash | Cash, cash equivalents and restricted cash | | Cash, cash equivalents and restricted cash | |
| Beginning of period | 24,059 | | | 21,180 | | |
| Beginning of year | | Beginning of year | 163,402 | | | 116,214 | |
| End of period | End of period | $ | 24,638 | | | $ | 21,318 | | End of period | $ | 103,218 | | | $ | 147,814 | |
| Cash paid for | Cash paid for | | | | Cash paid for | | | |
| Interest | Interest | $ | 51,355 | | | $ | 36,279 | | Interest | $ | 47,234 | | | $ | 27,890 | |
| Income taxes | Income taxes | 787 | | | (21) | | Income taxes | $ | 1,804 | | | $ | 2,718 | |
| Supplemental schedule of non-cash operating activities | | |
| Unpaid deferred offering costs | $ | 2,975 | | | $ | — | | |
| Supplemental schedule of non-cash investing and financing activities | | |
| Supplemental schedule of non-cash activities | | Supplemental schedule of non-cash activities | |
| | Unpaid property and equipment and capitalized software purchases | Unpaid property and equipment and capitalized software purchases | $ | 468 | | | $ | 433 | | Unpaid property and equipment and capitalized software purchases | $ | 654 | | | $ | 1,102 | |
| Acquisition cash holdback | | Acquisition cash holdback | $ | 2,250 | | | — | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Organization, Basis of Presentation and Consolidation, and Use of EstimatesSignificant Accounting Policies
Organization
HireRight GIS Group Holdings LLC (“HGGH”), was formed in July 2018 through the combinationDescription of two groups of companies: the HireRight Group and the GIS Group, each of which include a number of wholly-owned subsidiaries that conduct the Company’s business within the United States of America (the “U.S.”), as well as countries outside the U.S. Since July 2018 the combined group of companies and their subsidiaries have operated as a unified operating company providing screening and compliance services, predominantly under the HireRight brand.Business
On October 15, 2021, HGGH converted into a Delaware corporation and changed its name to HireRight Holdings Corporation (“HireRight” or the “Company”). In conjunction with is incorporated in Delaware.
The Company is a leading global provider of technology-driven workforce risk management and compliance solutions, providing comprehensive background screening, verification, identification, monitoring, and drug and health screening services for customers across the conversion, all of HGGH’s outstanding equity interests were converted into shares of common stock ofglobe, predominantly under the HireRight Holdings Corporation. The foregoing conversion and related transactions are referred to herein as the “Corporate Conversion”. The Corporate Conversion did not affect the assets and liabilities of HGGH, which became the assets and liabilities of HireRight Holdings Corporation.brand.
Income Tax Receivable Agreement
On October 18, 2021, HireRight Holdings Corporation effected a one-for-15.969236 reverse stock split (the “Stock Split”). The accompanying condensed consolidated financial statements give retroactive effect toIn connection with the Stock Split for all periods presented.
On November 2, 2021, the Company completed itsCompany’s initial public offering (“IPO”), in which the Company sold 22,222,222 shares of its common stock, $0.001 par value per share atentered into an offering price of $19.00 per share. The Company received net proceeds of $393.5 million, after deducting underwriting discounts and commissions of $23.2 million and other offering costs payableincome tax receivable agreement (“TRA”), which provides for the payment by the Company of approximately $5.5 million. The Company granted the underwriters an option forover a period of approximately 12 years to pre-IPO equityholders or their permitted transferees of 85% of the benefits, if any, that the Company and its subsidiaries realize, or are deemed to realize (calculated using certain assumptions) in U.S. federal, state, and local income tax savings as a result of the utilization (or deemed utilization) of certain existing tax attributes. As of September 30, days2023 and December 31, 2022, the Company had a total liability of $210.5 million in connection with the projected obligations under the TRA, for which annual payments will begin in the first quarter of 2024. TRA related liabilities are classified as current or non-current based on the expected date of payment and are included on the Company’s condensed consolidated balance sheets under the captions accrued expenses and other current liabilities and tax receivable agreement liability, long-term portion, respectively. See Note 7 — Accrued Expenses and Other Current Liabilities for further details related to purchase up to an additional 3,333,333 sharesthe current portion of common stock at $19.00 per share less discounts and commissions. The underwriters have until November 27, 2021 to exercise their option to purchase additional shares.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiaries.wholly and majority-owned subsidiaries for which the Company has a controlling interest. The Company accounts for investments in unconsolidated entities where it exercises significant influence, but does not have control, using the equity method. The unaudited condensed consolidated financial statements are presented in accordance with generally accepted accounting principles in the United States ("GAAP"of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting.
Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s audited consolidated financial statementsAnnual Report on Form 10-K for the year ended December 31, 2020, included in the Company’s prospectus, dated October 28, 2021,2022, as filed with the SEC in accordance with Rule 424(b) of the Securities Act on November 1, 2021 (the “Prospectus”March 10, 2023 (“Annual Report”). The year-endDecember 31, 2022 condensed consolidated balance sheet data included herein was derived from audited financial statements but does not include all disclosures required by GAAP.
In the opinion of management, all adjustments, consisting of normal recurring items, necessary for the fair statement of the condensed consolidated financial statements have been included. All intercompany balances and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Note 1 of the notes to the audited consolidated financial statements for the year ended December 31, 2020,2022, included in the Prospectus. Certain reclassifications have been made to prior year presentation to conform to current year presentationAnnual Report.
Significant Accounting Policies
.
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Accounting Policies
The Company’s significant accounting policies are discussed in Note 1 of the notes to the audited consolidated financial statements for the year ended December 31, 2020,2022, included in the Prospectus.Annual Report. There have been no significant changes to these policies which have had a material impact on the Company’s unaudited condensed consolidated financial statements during the three and nine months ended September 30, 2021,2023, except as noted below.
Deferred Offering CostsBusiness Combinations
Deferred offering—Business Combinations for additional information. Business combinations are accounted for under Accounting Standards Codification (“ASC”) 805—Business Combinations, using the acquisition method of accounting under which all acquired tangible and identifiable intangible assets and assumed liabilities and applicable noncontrolling interests are recognized at fair value as of the respective acquisition date, while the costs consist of costs incurred in connectionassociated with the saleacquisition of a business are expensed as incurred.
The allocation of purchase consideration requires management to make significant estimates and assumptions, especially with respect to identifiable intangible assets. These estimates can include, but are not limited to, a market participant’s expectation of future cash flows from acquired platforms, acquired trade names, useful lives of acquired assets, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. As a result, actual results may differ from such estimates.
Noncontrolling Interest
As a result of the Company’s common stockacquisition of a majority interest in its IPO, including certain legal, accounting, and other IPO-related costs. At the completion of the IPO, the deferred offering costs will be recorded as a reduction from the proceeds of the offering. As of September 30, 2021 and December 31, 2020, $4.2 million and zero, respectively, of deferred offering costs had been recorded within prepaid expenses and other current assetsprivately-held company on July 3, 2023, the Company’s condensed consolidated balance sheets.
financial statements present noncontrolling interest. Noncontrolling interest represents the portion of profit or loss, comprehensive profit or loss, and net assets of the acquired company that are not allocable to the Company. See Note 3 —
Use of Estimates
Preparation of the Company’s unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates, judgments, and assumptions that affect the amounts reported and disclosed in the financial statements. The Company believes that the estimates, judgments, and assumptions used to determine certain amounts that affect the financial statements are reasonable based upon information available at the time they are made. The Company uses such estimates, judgments, and assumptions when accounting for items and matters such as, but not limited to, the allowance for doubtful accounts,credit losses, customer rebates, impairment assessments and charges, recoverability of long-lived assets, deferred tax assets, lease accounting, uncertain tax positions, income tax expense, liabilities under the TRA, derivative instruments, fair value of debt, equity-basedstock-based compensation expense, useful lives assigned to long-lived assets, the allocation of purchase consideration, and the stand-alone selling price of performance obligations for revenue recognition purposes. Results and outcomes could differ materially from these estimates, judgments, and assumptions due to risks and uncertainties, including uncertainty in the current economic environment due to the potential impact of the coronavirus (“COVID-19”).
Correction of Immaterial Misstatement
In connection with the preparation of its condensed consolidated financial statements for the quarter ended September 30, 2021, the Company identified immaterial errors in its historical financial statements. The errors resulted in understatement of goodwill, provision for income taxes, and deferred tax liability and overstatement of prepaid expenses and other current assets, accrued expenses and other current liabilities, and selling, general and administrative expenses. The Company evaluated the effect of these errors on prior periods under the guidance of SEC Staff Accounting Bulletin (“SAB”) No. 99 - Materiality, and determined the amounts were not material to any previously-issued financial statements. The Company also evaluated the effect of correcting these errors through a cumulative adjustment to the condensed consolidated financial statements and concluded, based on the guidance within SAB No. 108 - Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, it was appropriate to correct these errors out of period during the quarter ended September 30, 2021.
COVID-19
In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption in the financial and capital markets, which could continue to negatively impact the Company’s customers’ access to working capital necessary to fund their operations, resulting in lower revenue for the Company. The COVID-19 pandemic and the resulting economic conditions and government shut down orders resulted in a decrease in total employment and hiring on a global level.
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company’s financial results and prospects are impacted by the number of hires and the total level of employment. The Company’s results for the year ended December 31, 2020 were negatively impacted by the temporary drop in hiring and the associated pre-employment background screen demand, which peaked during the second quarter of 2020. The temporary drop in order volume negatively impacted total revenues, net income and cash flows from operations during 2020. While the peak of the pandemic impact on the Company occurred during April and May of 2020, the Company began to see a steady recovery beginning in June 2020, which continued throughout the year and into 2021.
2. Recently Issued Accounting Pronouncements
Recently Issued Accounting Pronouncements Adopted
Accounting Pronouncements Adopted in 20212023
In August 2018,June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15,2016-13, “Intangibles-GoodwillFinancial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” to provide financial statement users with more useful information about the expected credit losses on financial instruments and Other-Internal Use Software (Subtopic 350-40): Customer’s Accountingother commitments to extend credit held by a reporting entity at each reporting date. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” which delayed the effective date for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”), which clarifiesthis guidance until the accounting for implementation costs in cloud computing arrangements. The guidance is effective for the Company for annual periodsfiscal year beginning after December 15, 2020.2022 including interim periods within those fiscal years. Early adoption is
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
permitted. The Company adopted this ASU 2016-13 effective January 1, 2021.2023, using the modified retrospective transition method. The Company adoptedadoption of this ASU prospectively, and the adoption did not have a material impact on the condensed consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”Customers,”, which aims to improve the accounting for acquired revenue contracts with customers in a business combination. The ASU requires an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The new guidance is effective for the Company for annual periods beginning after December 15, 2023 and interim periods within those fiscal years. The Company is currently evaluating the impact and applicabilityadopted ASU 2021-08 effective January 1, 2023. The adoption of this new standardASU did not have a material impact on the condensed consolidated financial statements.
In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope,” which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The amendments in this update are elective and apply to all entities that have derivative instruments that use various reference rates, including the London Interbank Offered Rate (“LIBOR”) and other reference rates expected to be discontinued. The new guidance is effective immediately for all entities and amendments may be applied on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020. The Company is currently evaluating the impact of this standard on the condensed consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848),”, which provides temporary, optional practical expedients and exceptions to enable a smoother transition to the new reference rates which will replace LIBORthe London Interbank Offered Rate (“LIBOR”) and other reference rates expected to be discontinued. The new guidance is effective at any time after March 12, 2020 but no later thanIn January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope,” which expanded the scope of Topic 848 to include derivative instruments impacted by the discounting transition. In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848,” which extended the temporary accounting rules under Topic 848 from December 31, 2022.2022 to December 31, 2024. The Company is currently evaluatingdoes not expect the impactadoption of this standardguidance to have a material impact on the condensed consolidated financial statements.
3. Business Combinations
In June 2016,On December 31, 2022, and February 16, 2023, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): MeasurementCompany entered into definitive agreements to purchase 60% of Credit Lossesthe equity interests in Digital Technology Identity Services, LLC (“DTIS”), a privately held company that specializes in collecting and processing biometric and biographical data, for a total purchase price of $26.5 million, including a one-year $2.3 million cash holdback, which, subject to claims by the Company under the purchase agreement, is due no later than 15 days following the first anniversary of the closing date (the “DTIS Acquisition”). The purchase of 60% of the equity interests represents a controlling interest in DTIS. The purchase was completed on Financial Instruments", to provide financial statement usersJuly 3, 2023 and was funded with more decision-useful information aboutavailable cash. The remaining 40% of the expected credit losses on financial instruments and other commitments to extend credit heldequity interest in DTIS is retained by a reporting entityleading professional organization representing individuals who work at each reporting date.public-use commercial and general aviation airports. The guidance is effectiveDTIS Acquisition expands the Company’s biometric-based screening capabilities as a critical component for customers in both regulated and non-regulated industries.
Acquisition-related costs incurred by the Company during the three and nine months ended September 30, 2023 related to the DTIS Acquisition were $0.1 million and $0.4 million, respectively, and are included in selling, general and administrative expenses in the condensed consolidated statements of operations.
The acquisition constitutes a business combination and therefore was accounted for annual periods beginning after December 15, 2020as an acquisition of a business under the applicable guidance. The Company fully consolidated the assets and interim periods within those fiscal years. ASU 2019-10 delayedliabilities of DTIS, with a corresponding noncontrolling interest classified as equity in the effectiveCompany’s condensed consolidated balance sheets. The following table summarizes the purchase consideration.
| | | | | |
| As of
July 3, 2023 |
| (in thousands) |
Consideration transferred, net of cash acquired (1) | $ | 23,903 | |
| Estimated fair value of noncontrolling interest | 17,647 | |
| Total consideration | $ | 41,550 | |
(1)Consideration transferred includes a one-year $2.3 million cash holdback.
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
The total purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values on the date for this guidance untilof acquisition. The following table presents the fiscal year beginning after December 15, 2022. Early adoption is permitted. preliminary allocation of the fair value of consideration transferred:
| | | | | | | | |
| | As of
July 3, 2023 |
| | (in thousands) |
| Current assets | | $ | 1,742 | |
| Other non-current assets | | 470 | |
| Intangible assets | | 24,100 | |
| Goodwill | | 22,669 | |
| Total assets acquired | | 48,981 | |
| Accounts payable and accrued liabilities | | 814 | |
| Long-term deferred tax liabilities | | 6,333 | |
| Other non-current liabilities | | 284 | |
| Total liabilities assumed | | 7,431 | |
| Net assets acquired | | $ | 41,550 | |
Identifiable intangible assets acquired in the DTIS Acquisition and their useful lives consist of the following:
| | | | | | | | | | | | | | |
| | Useful lives | | As of
July 3, 2023 |
| | | | (in thousands) |
| Biometric screening platform | | 12.5 years | | $ | 23,700 | |
| Trade names | | 8.5 years | | 400 | |
| Total | | | | $ | 24,100 | |
The Company used a third-party valuation specialist to determine the acquisition-date fair value of the intangible assets using various methods. The biometric screening platform was valued using the income method, specifically the Greenfield Method, which estimates the present value of future cash flows associated with developing an operating business assuming an entity holds only the identified intangible asset. Key assumptions in valuing the biometric screening platform included significant judgments and assumptions relating to (i) forecasted revenue attributable to the platform, (ii) costs incurred, and (iii) a discount rate of 19%. Trade names were valued using the relief from royalty method. Key assumptions in valuing the acquired trade names included (i) a royalty rate of 1%, (ii) forecasted revenue attributable to the trade names, and (iii) a discount rate of 19%. The results of the valuation are preliminary and may change as the Company continues to evaluate key assumptions.
The goodwill represents the excess of the purchase price over the fair value of the assets acquired less liabilities assumed. The Company expects to realize strategic benefits by offering enhanced biometric-based screening from the DTIS Acquisition, which can be integrated into the Company’s current service offerings. None of the goodwill is currently evaluatingdeductible for tax purposes.
Revenue and earnings of the impact of this standard onentity acquired were not presented as they were not material to the condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,“Leases (Topic 842)” (“ASU 2016-02”) related to the reporting of leases. The guidance requires recognition of most leases on the balance sheet as a right-of-use asset and a lease liability. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)” which deferred adoption until periods after December 15, 2020. In June 2020, the FASB issued ASU 2020-05,“Topic 606 and Topic 842: Effective Dates for Certain Entities”, which defers the effective date of ASU 2016-02 for one year for entities in the “all other” category. Therefore, the standard is now effective for the Company for annual periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted.
In March 2021, the Company established an implementation team and engaged external advisers and solution providersHireRight Holdings Corporation
Notes to develop a multi-phase plan to assess the Company’s leasing arrangements, as well as any changes to accounting policies, processes, or necessary systems. The Company has entered into agreements to procure software and services to facilitate adoption of the guidance. The Company is performing a detailed review of its leases and other contractual arrangements, system implementation requirements, and practical expedient alternatives available.Condensed Consolidated Financial Statements (Unaudited)
While the Company continues to assess all of the effects of the new standard, the Company expects the adoption of ASU 2016-02 to result in recognition of right-of-use assets and lease liabilities in the Company’s condensed consolidated balance sheet, and new disclosures in the footnotes to the Company’s condensed consolidated financial statements. The Company is unable to quantify the impact on the condensed consolidated financial statements at this time but expects the new standard to have a material effect on its condensed consolidated balance sheet.
3.4. Prepaid Expenses and Other Current Assets, and Other Non-Current Assets
The components of prepaid expenses and other current assets were as follows:
| | | | | | | | | | | |
| September 30,
2021 | | December 31,
2020 |
| (in thousands) |
| Prepaid software licenses, maintenance, and insurance | $ | 12,882 | | | $ | 13,105 | |
| Other prepaid expenses and current assets | 9,110 | | | 5,116 | |
| Total prepaid expenses and other current assets | $ | 21,992 | | | $ | 18,221 | |
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (in thousands) |
| Prepaid software licenses, maintenance and insurance | $ | 13,381 | | | $ | 9,237 | |
| Other prepaid expenses and current assets | 12,737 | | | 9,508 | |
| Total prepaid expenses and other current assets | $ | 26,118 | | | $ | 18,745 | |
The components of other non-current assets were as follows:
| | | September 30,
2021 | | December 31,
2020 | | September 30, 2023 | | December 31, 2022 |
| | (in thousands) | | (in thousands) |
| Contract implementation costs | $ | 17,041 | | | $ | 15,768 | | |
| Contract implementation assets | | Contract implementation assets | $ | 18,838 | | | $ | 17,983 | |
| Other non-current assets | Other non-current assets | 1,217 | | | 1,470 | | Other non-current assets | 2,137 | | | 966 | |
| Total other non-current assets | Total other non-current assets | $ | 18,258 | | | $ | 17,238 | | Total other non-current assets | $ | 20,975 | | | $ | 18,949 | |
Interest expense includes theSee Note 16 — Revenues for further discussion on contract implementation costs and related amortization included in cost of $0.1 million of debt issuance costs forservices in the Company’s revolving credit agreement for bothcondensed consolidated statements of operations.
5.Right-of-Use Assets and Lease Liabilities
The Company leases office facilities under operating leases in various domestic and foreign locations with initial terms ranging from 1 to 12 years. Some leases include one or more options to extend the three months ended September 30, 2021 and 2020 and $0.3 million for bothterm of the nine months ended September 30, 2021 and 2020. Amortization of debt issuance costs forlease, generally at the Company’s revolving credit agreement issole discretion, with renewal terms that can extend the lease term up to 5 years.
The Company’s operating leases were as follows:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (in thousands) |
Right-of-use assets, net (1) | $ | 6,352 | | | $ | 8,423 | |
| | | |
Current operating lease liabilities (2) | $ | 4,316 | | | $ | 5,509 | |
Operating lease liabilities, long-term (2) | 9,313 | | | 10,055 | |
| Total operating lease liabilities | $ | 13,629 | | | $ | 15,564 | |
(1)Includes impact of accelerated expense on abandoned right-of-use assets related to the global restructuring plan, see Note 21 — Restructuring and Related Charges for additional information.
(2)Current and long-term operating lease liabilities are recorded in accrued expenses and other current liabilities, and other non-current assetsliabilities, respectively, on the Company’s condensed consolidated balance sheets.
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Please see Note 14 — Revenues for further discussion on contract implementation assetsSupplemental cash flow information related to leases was as follows:
| | | | | | | | | | | |
| Nine Months Ended
September 30, |
| 2023 | | 2022 |
| (in thousands) |
| Cash paid for amounts included in measurement of operating lease liabilities | $ | 4,641 | | | $ | 4,193 | |
| ROU assets obtained in exchange for operating lease liabilities | $ | 897 | | | $ | 10,896 | |
The weighted average remaining lease term and related amortization included in cost of services inweighted average discount rate for the Company’s accompanying condensed consolidated statements of operations.operating leases were as follows:
| | | | | | | | | | | |
| September 30, |
| 2023 | | 2022 |
| Weighted average remaining lease term (in years) | 4.12 | | 4.22 |
| Weighted average discount rate | 5.3 | % | | 4.6 | % |
4.6. Goodwill
The changes in the carrying amount of goodwill from December 31, 2020 tofor the nine months ended September 30, 20212023, were as follows:
| | | | | |
| (in thousands) |
Balance at December 31, 20202022 | $ | 820,032809,463 | |
| Foreign currency translation | (1,083)585 | |
Other Acquired goodwill(1)
| 69023,216 | |
Balance atas of September 30, 20212023 | $ | 819,639833,264 | |
(1)Includes $0.7Acquired goodwill includes $0.5 million of acquired goodwill related to the out-of-period adjustment discussed in Note 1.
5.7. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities were as follows:
| | | | | | | | | | | |
| September 30,
2021 | | December 31,
2020 |
| (in thousands) |
| Accrued data and direct labor costs | $ | 31,966 | | | $ | 20,064 | |
| Litigation settlements (Note 13) | 13,424 | | | 12,916 | |
Other (1) | 31,098 | | | 23,829 | |
| Total accrued expenses and other current liabilities | $ | 76,488 | | | $ | 56,809 | |
________________ | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (in thousands) |
| Accrued data costs | $ | 38,509 | | | $ | 34,080 | |
| Tax receivable agreement liability, current portion | 27,039 | | | — | |
| Other | 36,641 | | | 41,128 | |
| Total accrued expenses and other current liabilities | $ | 102,189 | | | $ | 75,208 | |
(1)As of both September 30, 2021 and December 31, 2020, the Company had $1.1 million held in escrow for the benefit of former investors in a subsidiary of the Company pursuant to the terms of its divestiture of a former affiliate in April 2018. A total of $3.9 million was held in escrow as of both September 30, 2021 and December 31, 2020 related to prior restructurings from predecessor entities.
HireRight Holdings Corporation
6.Notes to Condensed Consolidated Financial Statements (Unaudited)
8. Accrued Salaries and Payroll
The components of accrued salaries and payroll were as follows:
| | | September 30,
2021 | | December 31,
2020 | | September 30, 2023 | | December 31, 2022 |
| | (in thousands) | | (in thousands) |
Wages, benefits and taxes | Wages, benefits and taxes | $ | 17,158 | | | $ | 14,719 | | Wages, benefits and taxes | $ | 18,418 | | | $ | 15,198 | |
| Accrued bonus | Accrued bonus | 12,161 | | | 8,406 | | Accrued bonus | 12,383 | | | 15,877 | |
| Total accrued salaries and payroll | Total accrued salaries and payroll | $ | 29,319 | | | $ | 23,125 | | Total accrued salaries and payroll | $ | 30,801 | | | $ | 31,075 | |
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
7.9. Debt
The components of debt were as follows:
| | | September 30,
2021 | | December 31,
2020 | | September 30, 2023 | | December 31, 2022 |
| | (in thousands) | | (in thousands) |
| First Lien Term Loan Facility | $ | 809,951 | | | $ | 816,213 | | |
| Second Lien Term Loan Facility | 215,000 | | | 215,000 | | |
| Revolving Credit Facility | 10,000 | | | 10,000 | | |
| Second Amended First Lien Term Loan Facility | | Second Amended First Lien Term Loan Facility | $ | 750,000 | | | $ | 699,513 | |
| Second Amended Revolving Credit Facility | | Second Amended Revolving Credit Facility | — | | | — | |
| Total debt | Total debt | 1,034,951 | | | 1,041,213 | | Total debt | 750,000 | | | 699,513 | |
| Less: Original issue discount | (3,892) | | | (4,499) | | |
| Less: Unamortized original issue discount | | Less: Unamortized original issue discount | (11,852) | | | (1,464) | |
| Less: Unamortized debt issuance costs | Less: Unamortized debt issuance costs | (12,773) | | | (14,967) | | Less: Unamortized debt issuance costs | (4,310) | | | (6,493) | |
| Less: Current portion of long-term debt | Less: Current portion of long-term debt | (8,350) | | | (8,350) | | Less: Current portion of long-term debt | (7,500) | | | (8,350) | |
| Long-term debt, less current portion | Long-term debt, less current portion | $ | 1,009,936 | | | $ | 1,013,397 | | Long-term debt, less current portion | $ | 726,338 | | | $ | 683,206 | |
|
On July 12, 2018, the Company entered into the following credit arrangements:arrangements with the lenders party thereto and Bank of America, N.A. as administrative agent, collateral agent and a letter of credit issuer:
•a first lien senior secured term loan facility, in an aggregate principal amount of $835.0 million, maturing on July 12, 2025 (the “First(“First Lien Term Loan Facility”);
•a first lien senior secured revolving credit facility, in an aggregate principal amount of up to $100.0 million, including a $40.0 million letter of credit sub-facility, maturing on July 12, 2023 (the “Revolving(“Revolving Credit Facility” and, together with the First Lien Term Loan Facility, the “First Lien Facilities”); and.
•a second lien senior secured term loan facility, inThe following discussion summarizes historical amendments to the First Lien Facilities and various terms thereunder.
Amended First Lien Facilities
On June 3, 2022, the Company entered into an amendment to the First Lien Facilities under which, (i) the aggregate principal amountcommitments under the Company’s Revolving Credit Facility were increased from $100.0 million to $145.0 million; (ii) the maturity date of $215.0 million, maturing onthe Revolving Credit Facility was extended from July 12, 2026 (the “Second2023 to June 3, 2027 or, if earlier, 91 days prior to the maturity of the Company’s term loans under the Amended First Lien Facilities, subject to extension or refinancing; and (iii) the interest rate benchmark applicable to the Revolving Credit Facility was converted from LIBOR to term Secured Overnight Financing Rate (“SOFR”). The First Lien Term Loan Facility as amended is hereinafter referred to as the “Amended First Lien Term Loan Facility” and the
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Revolving Credit Facility as amended is herein after referred to as the “Amended Revolving Credit Facility” (and together with the Amended First Lien Term Loan Facility, the “Amended First Lien Facilities”). The Company’s existing term loans under the Amended First Lien Facilities remained in effect. Upon the effectiveness of the Amended First Lien Facilities, the “Senior Facilities”).
Company did not have any outstanding principal balance on the Amended Revolving Credit Facility. The Amended First Lien Facilities did not modify the financial covenants, negative covenants, mandatory prepayment events or security provisions or arrangements under the First Lien Facilities.
Second Amended First Lien Facilities
On September 28, 2023, the Company entered into a second amendment to the Amended First Lien Facilities by which, (i) the aggregate commitments under the Company’s Amended Revolving Credit Facility were increased from $145.0 million to $160.0 million; (ii) the maturity date of the Amended First Lien Term Loan Facility was extended from July 12, 2025 to September 30, 2030 by providing for the refinancing and replacement in full of the term loan outstanding thereunder with a new term loan in an aggregate initial principal amount of $750.0 million, subject to an original issue discount of 1.5%; and (iii) the interest rate benchmark applicable to the First Amended First Lien Term Loan Facility was converted from LIBOR to term SOFR. As so amended, the First Lien Term Loan Facility is hereinafter referred to as the “Second Amended First Lien Term Loan Facility” and the Amended Revolving Credit Facility is hereinafter referred to as the “Second Amended Revolving Credit Facility” (and together with the Second Amended First Lien Term Loan Facility, the “Second Amended First Lien Facilities”). Upon the effectiveness of the Second Amended First Lien Facilities, no revolving loans were outstanding under the Second Amended Revolving Credit Facility. The Second Amended First Lien Facilities did not modify the financial covenants, negative covenants, mandatory prepayment events or security provisions or arrangements under the Amended First Lien Facilities.
The Company is required to make scheduled quarterly payments equal to 0.25% of the aggregate initial outstanding principal amount of the Second Amended First Lien Term Loan Facility, or approximately $2.1$1.9 million per quarter, with the remaining balance payable at maturity.
The Company may make voluntary prepayments on the Second Amended First Lien Term Loan Facility at any time prior to maturity at par.
The Company is required to make prepayments on the Second Amended First Lien Term Loan Facility with the net cash proceeds of certain asset sales, debt incurrences, casualty events and sale-leaseback transactions, subject to certain specified limitations, thresholds and reinvestment rights. Additionally, the Company is required to make annual prepayments on the outstandingSecond Amended First Lien Term Loan Facility with a percentage (subject to leverage-based reductions) of the Company’s excess cash flow, as defined therein, if the excess cash flow exceeds a certain specified threshold. For the three and nine months ended September 30, 20212023 and 2020,2022, the Company was not required to make a prepayment under the Amended First Lien Term Loan Facility or the Second Amended First Lien Term Loan Facility based on the Company’s excess cash flow.
The Second Amended First Lien Term Loan Facility has an interest rate calculated as,at a per annum rate of, at the Company’s option, either (a) LIBOR determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs with a floor of 0.00%SOFR rate, plus 4.00% or (b) aan alternative base rate, plus 3.00%, with the alternative base rate (“ABR”) determined by reference to the highest of (i) the federal funds effective rate plus 0.50% per annum,, (ii) the rate the Administrative Agent announces from time to time as its prime lending rate in New York City, and (iii) one-month adjusted LIBORSOFR plus 1.00% per annum (“ABR”), in each case, plus the applicable margin of 3.75% for LIBOR loans and 2.75% for ABR loans, and is payable on each interest payment date, at least quarterly, in arrears.(iv) zero%. The applicable margin for
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
borrowings under the First LienSecond Amended Revolving Credit Facility is 3.00% for LIBORSOFR loans and 2.00% for ABR loans, in each case, subject to adjustment pursuant to a leverage-based pricing grid. As of September 30, 2021,2023, the Second Amended First Lien
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Term Loan Facility accrued interest at one-month LIBORSOFR plus 3.75%4.00%, and the Second Amended Revolving Credit Facility accrued interest at one-month LIBORSOFR plus 3.00%.2.50% based upon the current pricing grid.
The Company’s obligations under the Second Amended First Lien Facilities are guaranteed, jointly and severally, on a senior secured first-priority basis, by substantially all of the Company’s domestic wholly-owned material subsidiaries, as defined in the agreement, and are secured by first-priority security interests in substantially all of the assets of the Company and its domestic wholly-owned material subsidiaries, subject to certain permitted liens and exceptions.
As of September 30, 2021,2023, the Company had approximately $88.2$158.7 million in available borrowing under the Second Amended Revolving Credit Facility, after utilizing approximately $1.8$1.3 million for letters of credit. The Company is required to pay a quarterly fee of 0.50%0.38% on unutilized commitments under the Second Amended Revolving Credit Facility, subject to adjustment pursuant to a leverage-based pricing grid. As of both September 30, 20212023 and December 31, 2020,2022, the quarterly fee on unutilized commitments under the Second Amended Revolving Credit Facility and the Amended Revolving Credit Facility, respectively, was 0.50%0.38%.
Second Lien Term Loan Facility
The Company may make voluntary prepayments on the Second Lien Term Loan Facility at any time prior to maturity at par.
The Company is required to make prepayments on the Second Lien Term Loan Facility with the net cash proceeds of certain asset sales, debt incurrences, casualty events and sale-leaseback transactions, subject to certain specified limitations, thresholds and reinvestment rights, in each case to the extent permitted under the First Lien Facilities prior to the repayment in full and discharge thereof. Additionally, the Company is required to make annual prepayments on the outstanding Second Lien Term Loan Facility with a percentage (subject to leverage-based reductions) of the Company’s excess cash flow, as defined therein, if the excess cash flow exceeds a certain specified threshold, to the extent permitted under the First Lien Facilities prior to the repayment in full and discharge thereof. For the three and nine months ended September 30, 2021 and 2020, the Company was not required to make an annual prepayment under the Second Lien Term Loan Facility based on the Company’s excess cash flow.
The Second Lien Term Loan Facility has an interest rate calculated as, at the Company’s option, either (a) LIBOR with a floor of 0.00% or (b) ABR, in each case, plus the applicable margin of 7.25% for LIBOR loans and 6.25% for ABR loans, and is payable on each interest payment date, at least quarterly, in arrears. As of September 30, 2021 and December 31, 2020 the Second Lien Term Loan Facility accrued interest at one-month LIBOR plus 7.25%.
The Company’s obligations under the Second Lien Term Loan Facility are guaranteed, jointly and severally, on a senior secured second-priority basis, by substantially all of the Company’s domestic wholly-owned material subsidiaries and are secured by second-priority security interests in substantially all of the assets of the Company and its domestic wholly-owned material subsidiaries, subject to certain permitted liens and exceptions.
Debt Covenants
The SeniorSecond Amended First Lien Facilities contain certain covenants and restrictions that limit the Company’s ability to, among other things: (a) incur additional debt or issue certain preferred equity interests; (b) create or permit the existence of certain liens; (c) make certain loans or investments (including acquisitions); (d) pay dividends on or make distributions in respect of the capital stock or make other restricted payments; (e) consolidate, merge, sell, or otherwise dispose of all or substantially all of the Company’s assets; (f) sell assets; (g) enter into certain transactions with affiliates; (h) enter into sale-leaseback transactions; (i) restrict dividends from the Company’s subsidiaries or restrict liens; (j) change the Company’s fiscal year; and (k) modify the terms of certain debt agreements. In addition, the SeniorSecond Amended First Lien Facilities also provide for customary events of default. The Company was in compliance with the covenants under the Senior Facilities forthrough the three and nine months ended September 30, 2021.
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company is also subject to a springing financial maintenance covenant under the Second Amended Revolving Credit Facility, which requires the Company to not exceed a specified first lien leverage ratio at the end of each fiscal quarter if the outstanding loans and letters of credit under the Second Amended Revolving Credit Facility, subject to certain exceptions, exceed 35% of the total commitments under the Second Amended Revolving Credit Facility at the end of such fiscal quarter. The Company was not subject to this covenant as of September 30, 20212023 and December 31, 2020,2022, as outstanding loans and letters of credit under the Revolving Credit Facility did not exceed 35% of the total commitments under the facility.
Other
Interest expense includes the amortizationAmortization of debt discount and debt issuance costs related to the Second Amended First Lien Term Loan Facility and the Second Lien Term Loan Facility of $0.2 million and $0.7 million, respectively, for both of the three months ended September 30, 2021 and 2020. The amortization of debt discount and debt issuance costs for the nine months ended September 30, 2021 amounted to $0.6 million and $2.2 million, respectively, and $0.6 million and $2.1 million, respectively, for the nine months ended September 30, 2020. In addition,are included in interest expense in the condensed consolidated statements of operations and were as follows:
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended
September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands) |
| Debt discount amortization | $ | 139 | | | $ | 133 | | | $ | 413 | | | $ | 395 | |
| Debt issuance costs amortization | 609 | | | 588 | | | 1,812 | | | 1,750 | |
| Total debt discount and issuance costs | $ | 748 | | | $ | 721 | | | $ | 2,225 | | | $ | 2,145 | |
Interest expense also includes the amortization of debt issuance costs for the Second Amended Revolving Credit Facility of $0.1 million for botheach of the three months ended September 30, 20212023 and 20202022 and $0.3$0.2 million and $0.4 million, for both of the nine months ended September 30, 20212023 and 2020.2022, respectively. Unamortized debt issuance costs for the Second Amended Revolving Credit Facility are recorded in other non-current assets on the Company’s condensed consolidated balance sheets.
The weighted average interest rate on outstanding borrowings as ofduring the nine months ended September 30, 20212023 and the year ended December 31, 20202022 was 4.57%8.8% and 5.06%5.5%, respectively.
See Note 19 — Subsequent Events included in these condensed consolidated financial statements for a description of the repayment of certain of the outstanding debt with proceeds from the IPO.
8.10. Fair Value Measurements
The accounting standard for fair value measurements defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and requires disclosures about fair value measurements. The standard is applicable whenever assets and liabilities are measured at fair value.
The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:
| | | | | |
Level 1 Quoted prices in active markets for identical assets and liabilities;
Level 2 Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in inactive markets, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data; or
Level 3 Amounts derived from valuation models in which unobservable inputs reflect the reporting entity’s own assumptions about the assumptions of market participants that would be used in pricing the asset or liability, such as discounted cash flow models or valuations.
Recurring Fair Value Measurements
The carrying amounts of the Company’s cash, cash equivalents, restricted cash, accounts receivable, and accounts payable approximate their fair value due to the short-term maturity of these instruments.
| Quoted prices in active markets for identical assets and liabilities; |
| |
| Level 2 | Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in inactive markets, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data; or |
| |
| Level 3 | Amounts derived from valuation models in which unobservable inputs reflect the reporting entity’s own assumptions about the assumptions of market participants that would be used in pricing the asset or liability, such as discounted cash flow models or valuations. |
The Company’s outstanding debt instruments are recorded at their carrying values in the condensed consolidated balance sheets, which may differ from their respective fair values. The estimated fair value of the Company’s debt, which is Level 2 of the fair value hierarchy, is based on quoted prices for similar instruments in active markets or identical instruments in markets that are not active.
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company’s derivative instruments consist of interest rate swap contracts which are Level 2 of the fair value hierarchy and reported in the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020 as derivative liabilities current and derivative liabilities long-term. Please see Note 9 — Derivative Instrumentsfor more information.
The fair value of the Company’s Second Amended First Lien Term Loan Facility and Second Lien Term Loan Facility is calculated based upon market price quotes obtained for the Company’s debt agreements (Level 2 fair value inputs). The fair value of the
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Second Amended Revolving Credit Facility approximates carrying value, based upon the short-term duration of the interest rate periods currently available to the Company. The estimated fair values were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| (in thousands) |
| First Lien Term Loan Facility | $ | 807,529 | | | $ | 800,972 | | | $ | 813,361 | | | $ | 784,894 | |
| Second Lien Term Loan Facility | 213,528 | | | 202,453 | | | 213,353 | | | 160,014 | |
| Revolving Credit Facility | 10,000 | | | 10,000 | | | 10,000 | | | 10,000 | |
| Total | $ | 1,031,057 | | | $ | 1,013,425 | | | $ | 1,036,714 | | | $ | 954,908 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| (in thousands) |
| Second Amended First Lien Term Loan Facility | $ | 738,148 | | | $ | 739,070 | | | $ | 698,049 | | | $ | 673,617 | |
| Second Amended Revolving Credit Facility | — | | | — | | | — | | | — | |
| Total debt | $ | 738,148 | | | $ | 739,070 | | | $ | 698,049 | | | $ | 673,617 | |
9.11. Derivative Instruments
The Company is exposed to changes in interest rates as a result of the Company’s financing activities used to fund business operations. Primary exposures include movements in LIBOR. The nature and amount of the Company’s long-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. To minimize this risk, the Company entered into interest rate swap agreements effective September 26, 2019 forwith a total notional amount of $700 million (the “Interestwith an effective date of December 31, 2018 (“Interest Rate Swap Agreements”). The Interest Rate Swap Agreements are designed with a scheduled expiration date of December 31, 2023.
Prior to provide predictability against changes in the interest rates on the Company’s debt, astermination discussed herein, the Interest Rate Swap Agreements convert a portion ofwere determined to be effective hedging agreements. Effective February 18, 2022, the variable interest rate on the Company’s debt to a fixed rate. The Interest Rate Swap Agreements expire on December 31, 2023.
The Company has elected hedge accounting treatment forterminated the Interest Rate Swap Agreements. To ensureIn connection with the effectivenesstermination of the Interest Rate Swap Agreements, the Company electedmade a payment of $18.4 million to the one-month LIBOR rate option for its variable rate interest payments on term balances equalswap counterparties. Following these terminations, $21.5 million of unrealized gains related to or in excess of the applicable notional amount of the interest rate swap agreement as of each reset date. The reset dates and other critical terms on the term loans perfectly match with the interest rate cap reset dates and other critical terms during the three and nine months ended September 30, 2021 and 2020. At September 30, 2021 and December 31, 2020, the effective portion of theterminated Interest Rate Swap Agreements was included on the condensed consolidated balance sheet in accumulated other comprehensive income (loss). will be reclassified to earnings as reductions to interest expense through December 31, 2023.
During the three and nine months ended September 30, 2021 and 2020, theThe Company reclassified interest expense related to hedges of these transactions into earnings in the following amounts:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands) |
| Interest expense reclassified into earnings | | $ | 5,018 | | | $ | 4,854 | | | $ | 14,733 | | | $ | 11,136 | |
For derivative instruments that qualify for hedge accounting treatment, the fair value is recognized on the Company’s condensed consolidated balance sheets as derivative assets or liabilities with offsetting changes in fair
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
value, to the extent effective, recognized in accumulated other comprehensive income (loss) until reclassified into earnings when the related transaction occurs. The portion of a cash flow hedge that does not offset the change in the fair value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. No portion of the cash flow hedge was ineffective during the three and nine months ended September 30, 2021 and 2020.
The fair value of the Interest Rate Swap Agreements was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 |
| Markets for Identical
Assets
(Level 1) | | Observable Inputs
(Level 2) | | Unobservable Inputs
(Level 3) | | Total |
| (in thousands) |
| Derivative instruments, current | $ | — | | | $ | 18,772 | | | $ | — | | | $ | 18,772 | |
| Derivative instruments, long-term | — | | | 19,097 | | | — | | | 19,097 | |
| Total liabilities measured at fair value | $ | — | | | $ | 37,869 | | | $ | — | | | $ | 37,869 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Markets for Identical
Assets
(Level 1) | | Observable Inputs
(Level 2) | | Unobservable Inputs
(Level 3) | | Total |
| (in thousands) |
| Derivative instruments, current | $ | — | | | $ | 18,258 | | | $ | — | | | $ | 18,258 | |
| Derivative instruments, long-term | — | | | 35,317 | | | — | | | 35,317 | |
| Total liabilities measured at fair value | $ | — | | | $ | 53,575 | | | $ | — | | | $ | 53,575 | |
There were no amounts excluded from the measurement of hedge effectiveness at September 30, 2021 and December 31, 2020. Please see Note 10— Accumulated Other Comprehensive Income (Loss) for further information. Also see Note 7 — Fair Value Measurements for further information on the Company’s derivative instruments.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended
September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands) |
| Reclassification of the effective portion of the gain on the Interest Rate Swap Agreements into interest expense | $ | — | | | $ | — | | | $ | — | | | $ | 1,679 | |
| Reclassification of unrealized gains related to terminated Interest Rate Swap Agreements into interest expense | (2,088) | | | (3,413) | | | (6,890) | | | (9,676) | |
| Total reclassification adjustments included in earnings | $ | (2,088) | | | $ | (3,413) | | | $ | (6,890) | | | $ | (7,997) | |
The results of derivative activities are recorded in cash flows from operating activities on the condensed consolidated statements of cash flows.
10.12. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consists primarily of unrealized changes in fair value of derivative instruments that qualify for hedge accountinggains related to the terminated Interest Rate Swap Agreements and cumulative foreign currency translation adjustments.
The components of accumulated other comprehensive income (loss) as of September 30, 20212023 and December 31, 20202022 were as follows:
| | | | | | | | | | | | | | | | | |
| Derivative
Instruments | | Currency
Translation
Adjustment | | Total |
| (in thousands) |
| Balance at December 31, 2020 | $ | (13,646) | | | $ | 3,523 | | | $ | (10,123) | |
| Other comprehensive income (loss) | 15,706 | | | (2,333) | | | 13,373 | |
| Balance at September 30, 2021 | $ | 2,060 | | | $ | 1,190 | | | $ | 3,250 | |
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | |
| Derivative
Instruments | | Currency
Translation
Adjustment | | Total |
| (in thousands) |
| Balance at December 31, 2022 | $ | 8,849 | | | $ | (13,793) | | | $ | (4,944) | |
| Other comprehensive loss | (6,890) | | | 414 | | | (6,476) | |
| Balance at September 30, 2023 | $ | 1,959 | | | $ | (13,379) | | | $ | (11,420) | |
As of September 30, 2023, the remaining $2.0 million of the accumulated other comprehensive income related to terminated Interest Rate Swap Agreements is expected to be reclassified into earnings as a reduction to interest expense through December 31, 2023.
13. Segments and Geographic Information
The Company operates in one reportable segment.
Revenues are attributed to each geographic region based on the location of the HireRight entity that has contracted for the services that result in the revenues. The following table summarizes the Company’s revenues by region:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended
September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands, except percent) |
| Revenues: | | | | | | | | | | | | | | | |
| United States | $ | 174,632 | | | 92.8 | % | | $ | 194,081 | | | 92.3 | % | | $ | 513,592 | | | 92.4 | % | | $ | 582,817 | | | 92.3 | % |
| International | 13,630 | | | 7.2 | % | | 16,222 | | | 7.7 | % | | 42,241 | | | 7.6 | % | | 48,489 | | | 7.7 | % |
| Total revenues | $ | 188,262 | | | 100.0 | % | | $ | 210,303 | | | 100.0 | % | | $ | 555,833 | | | 100.0 | % | | $ | 631,306 | | | 100.0 | % |
The following table summarizes the Company’s long-lived assets, which consist of property and equipment, net, and operating lease ROU assets, net, by geographic region:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (in thousands) |
| Long-lived assets: | | | |
| United States | $ | 7,739 | | | $ | 10,811 | |
| International | 5,803 | | | 6,657 | |
| Total long-lived assets | $ | 13,542 | | | $ | 17,468 | |
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
The maximum period over which the Interest Rate Swap Agreements are designated is December 31, 2023. Assuming interest rates at September 30, 2021 remain constant, approximately $18.8 million of interest expense related to hedges of these transactions is expected to be reclassified into earnings over the next 12 months. Actual amounts ultimately reclassified into earnings over the next 12 months could vary materially from this estimated amount as a result of changes in interest rates.
11. Segments and Geographic Information
The Company determines its operating segments based on how the chief operating decision maker (“CODM”) manages the business, allocates resources, makes operating decisions and evaluates operating performance. The Company’s President and Chief Executive Officer is the Company’s CODM. The Company’s operating segments may not be comparable to similar companies in similar industries. The Company has determined it operates in one reportable segment.
Revenues are attributed to each geographic region based on the location of the entity for which the Company’s services and revenue originate. The following tables summarize the Company’s revenues by region:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands, except percent) |
| Revenues | | | | | | | | | | | | | | | |
| United States | $ | 189,097 | | | 92.3 | % | | $ | 122,966 | | | 94.1 | % | | $ | 491,490 | | | 92.5 | % | | $ | 363,846 | | | 93.3 | % |
| International | 15,884 | | | 7.7 | % | | 7,708 | | | 5.9 | % | | 40,032 | | | 7.5 | % | | 26,275 | | | 6.7 | % |
| Total revenues | $ | 204,981 | | | 100.0 | % | | $ | 130,674 | | | 100.0 | % | | $ | 531,522 | | | 100.0 | % | | $ | 390,121 | | | 100.0 | % |
The following table summarizes the Company’s property and equipment, net by geographic region:
| | | | | | | | | | | |
| September 30,
2021 | | December 31,
2020 |
| (in thousands) |
| Property and equipment, net | | | |
| United States | $ | 8,897 | | | $ | 12,613 | |
| International | 5,560 | | | 4,873 | |
| Total property and equipment, net | $ | 14,457 | | | $ | 17,486 | |
12.14. Commitments and ContingenciesContingent Liabilities
Indemnification
In the ordinary course of business, the Company enters into agreements with customers, providers of services and data that the Company uses in its business operations, and other third parties pursuant to which the Company agrees to indemnify and defend them and their affiliates for losses resulting from claims of intellectual property infringement, damages to property or persons, business losses, and other costs and liabilities. Generally, these indemnity and defense obligations relate to claims and losses that result from the Company’s acts or omissions, including actual or alleged process errors, inclusion of erroneous or impermissible information, or omission of includable information in background screening reports that the Company prepares. In addition, under some circumstances, the Company agrees to indemnify and defend contract counterparties against losses resulting from their own business operations, obligations, and acts or omissions, or the business operations, obligations, and acts or omissions of third
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
parties. For example, its business interposes the Company between suppliers of information that the Company includes in its background screening reports and customers that use those reports; the Company generally agrees to indemnify and defend its customers against claims and losses that result from erroneous information provided by its suppliers, and also to indemnify and defend its suppliers against claims and losses that result from misuse of their information by its customers.
The Company’s agreements with customers, suppliers, and other third parties typically include provisions limiting its liability to the counterparty, and the counterparty’s liability to the Company. However, these limits often do not apply to indemnity obligations. The Company’s rights to recover from one party for its acts or omissions may be capped below itsthe Company’s obligation to another party for those same acts or omissions, and itsthe Company’s obligation to provide indemnity and defense for its own acts or omissions in any particular situation may be uncapped.
The Company has also entered into indemnification agreements with the members of its board of managersdirectors and executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service. In addition, customers of the Company may seek indemnity for negligent hiring claims that result from the Company’s alleged failure to identify or report adverse background information about an individual.
The Company is not aware of any pending demands to provide indemnity or defense under such agreements that would reasonably be expected to have a material adverse effect on its condensed consolidated financial statements, financial condition or results of operations.statements.
13.15. Legal Proceedings
The Company is subject to claims, investigations, audits, and enforcement proceedings by private plaintiffs, third parties the Company does business with, and federal, stategovernmental and foreignregulatory authorities charged with overseeing the enforcement of laws and regulations that govern the Company’s business. In the U.S., most of these matters arise under the federal Fair Credit Reporting Act and various state and local laws focused on privacy and the conduct and content of background reports. These claims are typically brought by individuals alleging process errors, inclusion of erroneous or impermissible information, or failure to include appropriate information in background reports prepared about them by the Company. Proceedings related to the Company’s U.S. operations may also be brought under the same laws by the Consumer Financial Protection Bureau or Federal Trade Commission, or by state authorities. Claims or proceedings may also arise under the European Union (“E.U.”) and U.K. General Data Protection RegulationRegulations and other laws around the world addressing privacy and the use of background information such as criminal and credit histories and may be brought by individuals about whom the Company has prepared background reports or by the Data Protection Authorities of E.U. member states and other governmental authorities.
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
In addition, customers of the Company may seek indemnity for negligent hiring claims that result from the Company’s alleged failure to identify or report adverse background information about an individual.
In addition to claims related to privacy and background checks, the Company is also subject to other claims and proceedings arising in the ordinary course of its business, including without limitation claims for indemnity by customers and vendors, employment-related claims, and claims for alleged taxes owed, infringement of intellectual property rights, and breach of contract.
The Company accrues for contingent liabilities if it is probable that a liability has been incurred and the amount iscan be reasonably estimable.estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote.
Although the Company and its subsidiaries are subject to various claims and proceedings from time to time in the ordinary course of business, the Company and its subsidiaries are not party to any pending legal proceedings that the Company believes to be material except as set forth below.material.
HireRight Holdings Corporation
NotesOn November 6, 2020, the Company entered into a settlement agreement related to Condensed Consolidated Financial Statements (Unaudited)
In24 lawsuits that had been filed in 2009 and 2010 approximately 24 lawsuits were filed against HireRight Solutions, Inc. (“Old HireRight”), which is the predecessor to the Company’s subsidiary HireRight, LLC, by approximately 1,400 individuals alleging violation of the California Investigative Consumer Reporting Agencies Act by Old HireRight and one of its customers (the “Customer”(“Customer”) related to background reports that Old HireRight prepared for the Customer about those individuals (the “Action”). The Customer was also named as a defendant in the Action.
In February of 2015, for unrelated reasons, Old HireRight’s former parent company and certain of its domestic affiliates, including Old HireRight, each filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. §§ 101-1532, thereby commencing Chapter 11 cases (the “Bankruptcy”). Each plaintiff in the Action filed proofs of claim in the Bankruptcy against Old HireRight asserting an unliquidated general unsecured claim based upon the Action. In August 2015, the Bankruptcy court entered an order confirming the debtors’ Chapter 11 plan of reorganization in the Bankruptcy (the “Plan”).
Plaintiffs’ recovery from HireRight, LLC for claims accrued prior to the filing of the Bankruptcy is limited by the Plan to the Plaintiffs’ pro-rata portion of the Bankruptcy unsecured creditors’ pool. However, the Plan does not limit HireRight, LLC’s liability for claims accrued after the filing of the Bankruptcy, plaintiffs’ recovery from the Customer, or claims against Old HireRight’s insurer.individuals.
Following a complex procedural history and unsuccessful mediation sessions over an extended period of time, in October 2020, plaintiffs’ counsel made a settlement offer. While the Company believed and continues to believe it has valid defenses, the Company engaged in negotiations with the plaintiffs’ counsel and on November 6, 2020 was able to reach a settlement agreement that the Company viewed as acceptable to avoid the expense and risk of further litigation.
Based upon the foregoing, the Company accrued $12.1 million pursuantPursuant to the settlement agreement, the Company paid $11.2 million on November 15, 2021, and potential separate individual settlements with plaintiffs who did not subscribe to the settlement agreement. See Note 19 — Subsequent Events included in these condensed consolidated financial statements for more information regarding paymentremaining balance of this legal settlement liability.
While$0.3 million on March 31, 2022. The Company subsequently sued Old HireRight’s insurer has denied coverage,to recover the costs of the settlement. The litigation involved substantial issues of law, and in order to avoid the risks of litigation, the Company believes it has valid claims againstand the carrierinsurer reached a settlement on September 14, 2023, pursuant to which the Company and intendsthe insurer agreed to pursue them. Any insurance recovery would offsetrelease each other and the costinsurer agreed to pay the Company $7.0 million.Upon completion of the definitive settlement agreement, the Company’s recovery will be approximately $5.9 million, net of fees payable to HireRight, LLC, but at this time the Company is not able to assessCompany’s outside counsel in connection with the likelihood or amountlitigation. The settlement has been recorded within prepaid expenses and other current assets in the condensed consolidated balance sheets and within selling, general and administrative expenses in the condensed consolidated statements of any potential insurance recovery.operations.
14.16. Revenues
Revenues consist of service revenue and surcharge revenue. Service revenue representsconsists of fees charged to customers for performing screening and compliance services.services provided by the Company. Surcharge revenue consists of fees charged to customers for obtainingthe Company’s acquisition of data from federal, state and local jurisdictions and certain services from commercial data wholesalers,which areproviders required to fulfill the Company’s screening and compliance serviceperformance obligations. These fees are predominantly charged to the Company’s customers at cost. Revenue is recognized when the Company satisfies its obligation to complete the service and delivers the screening report to the customer.
Disaggregated revenues were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in thousands) |
| Revenues: | | | | | | | | |
| Service revenues | | $ | 135,922 | | | $ | 151,256 | | | $ | 396,794 | | | $ | 451,184 | |
| Surcharge revenues | | 52,340 | | | 59,047 | | | 159,039 | | | 180,122 | |
| Total revenues | | $ | 188,262 | | | $ | 210,303 | | | $ | 555,833 | | | $ | 631,306 | |
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Disaggregated revenues were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands) |
| Revenues | | | | | | |
| Service revenues | | $ | 152,332 | | | $ | 98,587 | | | $ | 395,624 | | | $ | 294,175 | |
| Surcharge revenues | | 52,649 | | | 32,087 | | | 135,898 | | | 95,946 | |
| Total revenues | | $ | 204,981 | | | $ | 130,674 | | | $ | 531,522 | | | $ | 390,121 | |
Contract Implementation Costs
Contract implementation costs represent incremental set up costs to fulfill contracts with customers, including, for example, salaries and wages incurred to onboard the customer oncustomers onto the Company’s platform to enable the customer's abilitycustomers to request and access completed background screening reports. Contract implementation costs, net of accumulated amortization are recorded in other non-current assets on the Company’s condensed consolidated balance sheets. Includedsheets and amortization expense is recorded in cost of services is $1.0 million(exclusive of depreciation and $2.8 million related toamortization) in the Company’s condensed consolidated statements of operations. Amortization of contract implementation costs for the threeincluded in cost of services (exclusive of depreciation and nine months ended September 30, 2021, respectively, and $0.8amortization) was $1.3 million and $2.2$3.7 million for the three and nine months ended September 30, 2020,2023, respectively, and $1.1 million and $3.3 million for the three and nine months ended September 30, 2022, respectively. See Note 34 — Prepaid Expenses and Other Current Assets, and Other Non-Current Assets for contract implementation costs included in the Company’s condensed consolidated balance sheets.
15.17. Income Taxes
Income tax expense (benefit) and effective tax rates were:were as follows:
| | | Three Months Ended September 30, | | Nine Months Ended
September 30, | | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2023 | | 2022 | | 2023 | | 2022 |
| | (in thousands, except effective tax rate) | | (in thousands, except effective tax rate) |
| Income (loss) before income taxes | Income (loss) before income taxes | | $ | 7,930 | | | $ | (25,576) | | | $ | (5,383) | | | $ | (69,446) | | Income (loss) before income taxes | | $ | 2,861 | | | $ | 23,585 | | | $ | (6,125) | | | $ | 60,843 | |
| Income tax expense | | 649 | | | 1,466 | | | 2,954 | | | 3,490 | | |
| Income tax expense (benefit) | | Income tax expense (benefit) | | 4,450 | | | (69,704) | | | 863 | | | (68,456) | |
| Effective tax rate | Effective tax rate | | 8.2 | % | | 5.7 | % | | 54.9 | % | | 5.0 | % | Effective tax rate | | 155.5 | % | | (295.5) | % | | (14.1) | % | | (112.5) | % |
In general, with certain exceptions ASC 740-270, Income Taxes, requires the use of an estimated annualThe effective tax rate to compute the tax provision during an interim period.The Company has used a discrete-period effective tax rate, which reflects the actual tax attributable to year-to-date earnings and losses for the three and nine months ended September 30, 20212023, differs from the federal statutory rate of 21% primarily due to state taxes, non-deductible stock-based compensation expense, and 2020.Due to operating losses,U.S. tax on foreign operations partially offset by the Company has determined that it is unable to reliably estimate its annual effective tax rate. A small change in the Company’s estimated marginal pretax results for the year ending December 31, 2021 may result in a material change in the expected annual effective tax rate.
On July 22, 2020, the United Kingdom enacted a law that increased the corporate income tax rate from 17% to 19% beginning in April 2021.As a resultrecognition of the tax rate change, the Company re-valued itsstranded deferred taxes in the United Kingdom and recognizedaccumulated comprehensive loss. The effective tax expense of $0.7 millionrate for the three and nine months ended September 30, 2020.
On June 10, 2021, the United Kingdom enacted a law that increased the corporate income tax rate from 19% to 25% beginning in April 2023.As of result of the tax rate change, the Company re-valued its deferred taxes in the United Kingdom and recognized tax expense of $1.5 million for the nine months ended September 30, 2021.
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Income tax expense for the three months ended September 30, 2021 and 2020 was $0.6 million and $1.5 million, respectively.The rate for the three months ended September 30, 20212022 differs from the Federal statutory rate of 21% primarily due to valuation allowances and state taxes. The rate for the three months ended September 30, 2020 differs from the Federalfederal statutory rate of 21% primarily due to the revaluationrelease of deferred taxes in the United Kingdom,federal and state valuation allowances and state taxes.
Income tax expense forduring the ninethree months ended September 30, 20212022 as discussed below, state taxes, and 2020 was $3.0 million and $3.5 million, respectively.The rate for the nine months endedU.S. tax on foreign operations.
Prior to September 30, 2021 differs from the Federal statutory rate of 21% primarily due to the revaluation of deferred taxes in the United Kingdom, valuation allowances, and state taxes. The rate for the nine months ended September 30, 2020 differs from the Federal statutory rate of 21% primarily due to the revaluation of deferred taxes in the United Kingdom, valuation allowances and state taxes.
Realization of the Company’s deferred tax assets is dependent upon future earnings, if any. The timing and amount of future earnings are uncertain. Because of the Company’s lack of U.S. earnings history,2022, the Company’s net U.S. federal and state deferred tax assets have beenwere fully offset by a valuation allowance, excluding a portion of its deferred tax liabilities for tax deductible goodwill.goodwill, primarily as a result of the Company’s lack of U.S. earnings history and cumulative loss position. The Company prepares a quarterly analysis of its deferred tax assets which considers positive and negative evidence, including its cumulative income (loss) position, revenue growth, continuing and improved profitability, and expectations regarding future profitability. Although the Company believes its estimates are reasonable, the ultimate determination of the appropriate amount of valuation allowance involves significant judgment.
During the three months ended September 30, 2022, the Company determined sufficient positive evidence existed to conclude that the U.S. deferred tax assets are more likely than not realizable. As a result, the Company released the valuation allowance attributed to the deferred tax assets associated with the Company’s operations in the U.S. during the third quarter of 2022. There is no change in assessment as of September 30, 2023.
On August 16, 2022, the “Inflation Reduction Act” (H.R. 5376) was signed into law in the United States. Among other things, the Act imposes a 15% corporate alternative minimum tax for tax years beginning after December 31, 2022, levies a 1% excise tax on net stock repurchases after December 31, 2022, and provides tax incentives to promote clean energy. During the nine months ended September 30, 2023, the Company recorded $1.1 million of excise tax related to share repurchases, which are recorded in Treasury stock on the Company’s
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
condensed consolidated balance sheets. The Company does not currently expect the Inflation Reduction Act to have a material impact on the condensed consolidated financial statements.
In connection with
18. Stock-Based Compensation
Equity Incentive Plans
The Company issues stock-based compensation awards under the 2021 Omnibus Incentive Plan (“Omnibus Incentive Plan”), and prior to the IPO the Company executed an income tax receivable agreement (the “TRA”) with certain pre-IPO owners. See Note 19 — Subsequent Events included in these condensed consolidated financial statements for more information regarding the TRA.
16. Equity-Based Compensation
On October 22, 2018, the Company implementedissued stock-based compensation under the HireRight GIS Group Holdings LLC Equity Incentive Plan (“Equity Plan”). The EquityAt September 30, 2023, the total number of shares authorized for issuance under the Omnibus Incentive Plan provideswas 14.2 million shares and 7.9 million shares remain available for issuance.
Stock-Based Compensation Expense
Stock-based compensation expense recognized in the issuancecondensed consolidated statements of up to 4,573,463 Class A Units of the Company (“Units”) pursuant to awards madeoperations was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | (in thousands) |
| Selling, general and administrative | | $ | 4,691 | | | $ | 1,089 | | | $ | 12,844 | | | $ | 8,083 | |
| Cost of services (exclusive of depreciation and amortization) | | 127 | | | 193 | | | 1,045 | | | 504 | |
| Total stock-based compensation expense | | $ | 4,818 | | | $ | 1,282 | | | $ | 13,889 | | | $ | 8,587 | |
Stock Options under the Equity Plan to members of the board of managers, officers and employees as determined by the Company’s compensation committee. Outstanding Unit
For stock options vest based either upon continued service (“Time-Vesting Options”), or upon attainment of specified levels of cash-on-cash return to the Company’s investors as a multiple of invested capital (“MOIC”) on their investments in the Company (“Performance-Vesting Options”). Outstanding Unit option awards issued to officers and employees consist of half Time-Vesting Options and half Performance-Vesting Options.
The Company did not grant any options during the three months ended September 30, 2021. During the nine months ended September 30, 2021, the Company granted option awards covering 229,195 units, of which 53,858 units are Time-Vesting Options and the remaining option awards covering 175,337 units are half Time-Vesting Options and half Performance-Vesting Options. The Time-Vesting Options and Performance Vesting Options granted during 2021 under the Equity Plan had a weighted-average grant date fair value of $7.98 and $5.12, respectively, calculated using the Monte Carlo simulation.
Included in selling, general and administrative expenses is equity-based compensation expense of $0.8 million and $0.9 million for the three months ended September 30, 2021 and 2020, respectively, and $2.5 million and $2.6 million for the nine months ended September 30, 2021 and 2020, respectively. For Time-Vesting Options and Performance-Vesting Optionsthat were outstanding and unvested as of September 30, 2021,2023, the Company willexpects to recognize future compensation expense of approximately $5.1$4.9 million and $13.1 million, respectively, over a weighted average remaining vesting period of 1.4 years and 1.3 years, respectively.2.2 years.
In connection withThe Company granted 46,081 options during the IPO, the Company entered into new compensation plans. See Note 19 — Subsequent Events included in these condensed consolidated financial statements for more information regarding the adoption ofnine months ended September 30, 2023 under the Omnibus Incentive Plan, with a weighted average grant date fair value of $3.96 calculated using the Black-Scholes option pricing model. For options under the Omnibus Incentive Plan outstanding and unvested as of September 30, 2023, the Employee Stock Purchase Plan in connectionCompany expects to recognize future compensation expense of $4.9 million over a weighted average remaining vesting period of 2.2 years.
The Company granted 3,389,064 restricted stock units (“RSU”), including the performance RSUs discussed below, with a weighted average grant date fair value of $9.11 per share during the IPO.nine months ended September 30, 2023 under the Omnibus Incentive Plan. For RSUs outstanding and unvested as of September 30, 2023, the Company expects to recognize future compensation expense of $31.2 million over a weighted average remaining vesting period of 2.4 years.
On March 20, 2023, the Company approved a grant of a total of 2,561,275 performance RSUs. A total of 1,116,323 of these performance RSUs had a grant-date fair value of $5.67 per unit based on a Monte Carlo valuation model and may vest based upon the achievement of a market condition related to achievement of stock price targets of the Company's common stock, and are subject to continued service. The expected stock-based compensation expense for the market condition performance RSUs is $6.3 million and is expected to be recognized over the period
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
17. Members'from grant date through March 2026. The remaining portion, 1,444,952 units, of these performance RSUs granted on March 20, 2023, had a grant date fair value of $10.90 per unit and may vest upon the achievement of AEBITDA performance targets and are subject to continued service. The total expected stock-based compensation expense for the AEBITDA performance RSUs is $15.8 million and is expected to be recognized over the period from grant date through March 2026.
19. Stockholders' Equity
Repurchase of Common Stock
On November 14, 2022, the Company announced that its Board of Directors authorized a $100.0 million share repurchase program that was completed on June 21, 2023 (the “Initial Program”). Pursuant to the Initial Program, the Company repurchased a total of approximately 9.3 million shares of the Company’s common stock at an average price paid of $10.79 per share, including commissions paid and excise taxes.
On June 22, 2023, the Company announced that its Board of Directors authorized an additional share repurchase program for repurchase of up to an additional $25.0 million of the Company's common stock (the “Second Program”). The Second Program was completed on August 28, 2023. Pursuant to the Second Program, the Company repurchased a total of approximately 2.4 million shares of the Company’s common stock at an average price paid of $10.82 per share, including commissions paid and excise taxes.
On September 12, 2023, the Company announced a third share repurchase program for repurchase of up to an additional $25.0 million of the Company’s common stock (the “Third Program”). As of September 30, 2021 and prior to the Corporate Conversion, outstanding equity interests in2023, the Company consisted only of Class A Units, as defined in the operating agreement of the Company (“Operating Agreement”), and outstanding equity-based compensation awards consisted only of options exercisable for Class A Units. The rights, powers, duties, obligations, and liabilitiespurchased approximately 0.1 million shares of the Company’s members as holderscommon stock at an average price paid of $9.57 per share, including commissions paid and excise taxes. Approximately $24.3 million remained available for future purchases under the Third Program. Repurchases under the Third Program continued at similar rates through the date of filing of this report, and the Board of Directors has not yet determined whether to implement any further stock repurchase program after termination of the Company’s Class A Units (“Members”)Third Program.
The repurchased shares under the Initial program, the Second Program, and the Third Program are set forthrecorded as Treasury stock on the Company's condensed consolidated balance sheets.
The Initial Program and the Second Program authorized, and the Third Program authorizes, repurchases in the Operating Agreement. Under the Operating Agreement, distributions, if any, were to be made to Members, at such times as the Company’s board of managers determined, pro rataopen market in accordance with their respective ownershipthe requirements of Class A Units. In conjunctionRule 10b-18, in privately negotiated transactions or otherwise, including through Rule 10b5-1 trading plans, with the Corporate Conversion in October 2021, allamount and timing of repurchases depending on stock price, trading volume, market conditions and other general business considerations. The Initial Program and the Company’s outstanding equity interests were converted into sharesSecond Program did not obligate the Company to acquire any particular amount of common stock. See Note 19 — Subsequent Events included in these condensed consolidated financial statements for more information aboutstock and could be extended, modified, suspended, or discontinued at any time at the Corporate Conversion.
18.20. Earnings Per UnitShare
Basic net income (loss) per unitshare (“EPU”EPS”) is computed by dividing net income (loss) attributable to HireRight Holdings Corporation stockholders by the weighted-averageweighted average number of outstanding Class A units.
The weighted average outstanding Class A unitsshares may include potentially dilutive units. Atequity awards. Diluted net income (loss) per share includes the effects of potentially dilutive equity awards, which include stock options, restricted stock units, and other potentially dilutive equity awards outstanding during the year. For the three and nine months ended September 30, 2020, 3,927,3592023, there were 6,274,784, and 9,136,703 potentially dilutive optionsequity awards, respectively, which were excluded from the calculations of diluted EPUEPS because including them would have had an anti-dilutive effect. For the three and nine months ended September 30, 2022, there were 6,630,588 and 6,799,424 potentially dilutive awards, which were excluded from the calculation of diluted EPS because including them would have had an anti-dilutive effect.
Basic and diluted EPU for the three and nine months ended September 30, 2021 and 2020 were:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended
September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands, except unit and per unit data) |
| Numerator: | | | | | | | |
| Net income (loss) | $ | 7,281 | | | $ | (27,042) | | | $ | (8,337) | | | $ | (72,936) | |
| Denominator: | | | | | | | |
| Weighted average units outstanding - basic | 57,168,291 | | 57,168,291 | | 57,168,291 | | 57,168,291 |
| Effect of dilutive options | 30,913 | | | — | | | — | | | — | |
| Weighted average units outstanding - diluted | 57,199,204 | | 57,168,291 | | 57,168,291 | | 57,168,291 |
| | | | | | | |
| Net income (loss) per unit: | | | | | | | |
| Basic | $ | 0.13 | | | $ | (0.47) | | | $ | (0.15) | | | $ | (1.28) | |
| Diluted | $ | 0.13 | | | $ | (0.47) | | | $ | (0.15) | | | $ | (1.28) | |
19. Subsequent Events
The following material events occurred subsequent to September 30, 2021.
Initial Public Offering
On November 2, 2021, the Company completed the initial public offering of its common stock. See Note 1 — Organization, Basis of Presentation and Consolidation, and Significant Accounting Policies included in these condensed consolidated financial statements for more information about the IPO.
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Corporate ConversionBasic and Stock Splitdiluted EPS for the three and nine months ended September 30, 2023 and 2022 were:
In preparation for its IPO, on October 15, 2021, the Company converted into a Delaware corporation and changed its name to HireRight Holdings Corporation, and on October 18, 2021, HireRight Holdings Corporation effected a one-for-15.969236 reverse stock split. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended
September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands, except share and per share data) |
| Numerator: | | | | | | | |
| Net income (loss) attributable to HireRight Holdings Corporation | $ | (1,655) | | | $ | 93,289 | | | $ | (7,054) | | | $ | 129,299 | |
| Denominator: | | | | | | | |
| Weighted average shares outstanding - basic | 69,090,882 | | 79,459,633 | | 73,080,851 | | 79,419,725 |
| Effect of dilutive equity awards | — | | | 83,082 | | | — | | | 56,849 | |
| Weighted average shares outstanding - diluted | 69,090,882 | | 79,542,715 | | 73,080,851 | | 79,476,574 |
| | | | | | | |
| Net income (loss) per share attributable to HireRight Holdings Corporation: | | | | | | | |
| Basic | $ | (0.02) | | | $ | 1.17 | | | $ | (0.10) | | | $ | 1.63 | |
| Diluted | $ | (0.02) | | | $ | 1.17 | | | $ | (0.10) | | | $ | 1.63 | |
Use
21. Restructuring and Related Charges
Global Restructuring Plan
In the first quarter of Proceeds
On November 3, 2021,2023, the Company used approximately $215.0began a global restructuring plan intended to improve the Company’s cost structure, operating efficiency, and profitability as part of its ongoing margin improvement initiatives. The plan involves reduction in force, offshoring certain functions, and other measures designed to reduce costs to achieve the Company’s long term margin goals. The plan was approved and initiated in the first quarter of 2023 and is expected to continue throughout 2023 and the first half of 2024.
During the three and nine months ended September 30, 2023, the Company recognized restructuring charges of $4.6 million ofand $15.3 million respectively, primarily for employee severance and benefits in connection with the net proceeds from the IPO to repay, in full, indebtedness under the Second Lien Term Loan Facility.workforce reduction, accelerated expense on abandoned right-of-use assets, and other restructuring charges. In addition, the Company recorded a $3.4incurred professional service fees of $1.4 million write off of unamortized deferred financing fees and unamortized original issue discounts$8.6 million during the three and nine months ended September 30, 2023, respectively, for consulting costs related to the repaymentexecution of debt under the Second Lien Term Loan Facility.Company’s global restructuring plan. All charges were recorded as selling, general and administrative expenses and cost of services (exclusive of depreciation and amortization) in the condensed consolidated statements of operations.
The Company expects to recognize additional restructuring charges in 2023 through the first half of 2024 of $6.0 million to $8.0 million, primarily for severance and benefits, professional service fees, and transition costs. The Company is continuing to evaluate operating costs and outsourcing opportunities and the expected charges related to our global restructuring plan may be greater than expected, including charges for additional severance and professional service fees.
Income Tax Receivable Agreement
In connection with the Company’s IPO during the fourth quarter of 2021, the Company entered into the TRA, which provides for the payment by the Company over a period of approximately 12 years to pre-IPO equityholders or their permitted transferees of 85% of the benefits, if any, that the Company and its subsidiaries realize, or are deemed to realize (calculated using certain assumptions) in U.S. federal, state, and local income tax savings as a result of the utilization (or deemed utilization) of certain existing tax attributes. Based on our current taxable income estimates, we expect to repay the majority of this obligation by the end of our 2025 fiscal year. Actual tax benefits realized by the Company may differ from tax benefits calculated under the TRA as a result of the use of certain assumptions in the TRA, including assumptions relating to state and local income taxes, to calculate tax benefits. The Company will record an estimated total liability of approximately $209.9 million and a reduction to Additional paid-in capital of approximately $209.9 million in connection with the TRA during the fourth quarter of 2021 on its condensed consolidated balance sheets.
Employee Stock Purchase Plan
On October 18, 2021, the Company’s stockholders adopted the Company’s Employee Stock Purchase Plan (the “ESPP”), which became effective on October 28, 2021. The Company initially reserved 1,587,810 shares of common stock for future issuance under the ESPP, subject to an annual increase on the first day of each calendar year, beginning on January 1, 2022 and ending on and including January 1, 2031. The annual increase is equal to the least of (i) 1% of the aggregate number of shares of common stock outstanding on the final day of the immediately preceding calendar year, (ii) 1,587,810 shares of common stock, and (iii) such smaller number of shares as determined by the board of directors. No offering periods under the ESPP had been initiated as of September 30, 2021.
Omnibus Incentive plan
On October 18, 2021, the Company’s stockholders adopted the Company’s 2021 Omnibus Incentive Plan (the “Omnibus Incentive Plan”). The Omnibus Incentive Plan was approved by the Company’s stockholders on October 18, 2021 and became effective on October 15, 2021. Upon the adoption of the Omnibus Incentive Plan, the Company will not grant further awards under the Equity Plan. The Omnibus Incentive Plan provides for the grant of awards of non-qualified stock options, incentive (qualified) stock options, stock appreciation rights, restricted stock awards, restricted stock units, other stock-based awards, other cash-based awards or any combination of the foregoing to eligible employees, consultants, directors, and officers. The Omnibus Incentive Plan has a term of 10 years. Pursuant to the Omnibus Incentive Plan, the Company has reserved an aggregate of 7,939,051 shares of the Company’s common stock for issuance of awards to be granted thereunder, subject to an annual increase equal to the lesser of (a) 4% of the aggregate number of shares of common stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as is determined by our board of directors. No more than 7,939,051 shares of the Company’s common stock may be issued pursuant to the exercise of incentive stock options granted under the Omnibus Incentive Plan.
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
IPO Equity GrantsThe components of the restructuring charges (including professional service fees) are as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 |
| | (in thousands) |
Severance and benefits (1) | | $ | 3,325 | | | $ | 11,152 | |
Accelerated expense on abandoned right-of-use assets (2) | | 350 | | | 2,560 | |
Professional fees (3) | | 1,373 | | | 8,628 | |
Other (4) | | 927 | | | 1,624 | |
| Total restructuring charges | | $ | 5,975 | | | $ | 23,964 | |
In October 2021, the Company's board(2)Charges for accelerated expense and additional costs associated with abandoned right-of-use assets recorded in selling, general and administrative expenses.
(3)Professional service fees consist of directors granted 1,035,986 equity awards to certain named executive officers under the Omnibus Incentive Plan. The total dollar amount of equity awards grantedconsulting costs related to the named executive officers was $9,250,000, $4,625,000 of which was granted in the form of options to purchase sharesexecution of the Company’s common stockglobal restructuring plan to improve the Company’s cost structure, operating efficiency, and $4,625,000redesign and right size the organization. These charges are recorded in selling, general and administrative expenses.
(4)Other charges recorded in selling, general and administrative expenses.
The following table provides the components of and changes in the Company’s restructuring and related charges, included in accrued salaries and payroll and accrued expenses and other current liabilities on the condensed consolidated balance sheets:
| | | | | | | | |
| | September 30, 2023 |
| | (in thousands) |
| Balance at December 31, 2022 | | $ | — | |
Charges incurred (1) | | 21,404 | |
| Payments | | (18,176) | |
| Balance at September 30, 2023 | | $ | 3,228 | |
(1)Includes $11.2 million in charges for employee severance and benefits related to the workforce reduction, $1.9 million of which was granted in the formremains unpaid as of Restricted Stock Units (“RSUs”) covering shares of the Company’s common stock. The options will vest with respect to 25% of the underlying shares on the first anniversary of their grant date, and with respect to the remaining 75% of the underlying shares in 12 equal quarterly installments thereafter.The RSUs will vest in four installments, each with respect to 25% of the underlying shares, on November 15, 2022, November 15, 2023, November 15, 2024, and November 15, 2025. Each equity award is subject to the terms and conditions of the Omnibus Incentive Plan and an award agreement with the applicable grantee.
In addition to the awards to certain named executive officers, the Company granted equity awards to approximately 106 employees in senior leadership positions.These awards are structured like the executive officer awards, except that some individuals’ awards will be divided 75% RSUs and 25% options. The aggregate equity awards issued consisted of 436,375 RSUs and 1,142,308 options to purchase shares of the Company’s common stock. Further, the Company granted equity awards to the Company’s eight non-employee directors.The aggregate of the non-employee director awards granted was 34,736 equity awards, entirely in the form of RSUs. The equity awards for the Company’s 8 non-employee directors shall, subject to continued service, vest on the first anniversary of the date of their issuance, or if earlier, upon (but effective immediately prior to) the occurrence of a change in control as defined in the governing plan, or the annual meeting of stockholders next following the grant of such annual equity awards.
Revolving Credit Facility
On November 5, 2021, the Company repaid the $10.0 million outstanding principal amount on the Revolving Credit Facility.
Legal Settlement Payment
On November 15, 2021, the Company paid $11.2 million of the $12.1 million legal settlement agreement discussed in Note 13 — Legal Proceedings and expects to pay the balance by the end of 2021.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of theour financial condition and results of operations for HireRight together with our condensed consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements for the fiscal year ended December 31, 2022, as disclosed in the Company’s prospectus, dated October 28, 2021,Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) in accordance with Rule 424(b) of the Securities Act on November 1, 2021 (the “Prospectus”) in connection with our initial public offeringMarch 10, 2023 (“IPO”Annual Report”). See Initial Public Offering below for additional information.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q and related statements by the Company contain forward-looking statements within the meaning of the federal securities laws that are subject to risks and uncertainties. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business.laws. You can often identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may includefacts, or by their use of words such as “anticipate,” “estimate,” “expect,” “project,” “forecast,” “plan,” “intend,” “believe,” “seek,” “could,” “targets,” “potential,” “may,” “will,” “should,” “can have,” “likely,” “continue,” and other terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. Forward-looking statements may include, but are not limited to, statements concerning our anticipated financial performance, including, without limitation, revenue, profitability, net income (loss), adjusted EBITDA, adjusted EBITDA margin, adjusted net income, earnings per unit,share, adjusted diluted earnings per share, and cash flow; strategic objectives; investments in our business, including development of our technology and introduction of new offerings; sales growth and customer relationships; our competitive differentiation; our market share and leadership position in the industry; market conditions, trends, and opportunities; future operational performance; pending or threatened claims or regulatory proceedings; and factors that could affect these and other aspects of our business. These
Forward-looking statements are not guarantees of future performance; theyguarantees. They reflect our current viewsexpectations and projections with respect to future events and are based on assumptions and estimates and subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements. These risks
Factors that could affect the outcome of the forward-looking statements include, among other things, our vulnerability to adverse economic conditions, including without limitation inflation and recession, which could increase our costs and suppress labor market activity and our revenue; the following, as well as other risksmarket uncertainty and uncertainties not listed herepotential disruption resulting from geopolitical tensions and armed conflicts of potentially significant scope; the aggressive competition we face; our heavy reliance on information management systems, vendors, and information sources that may be importantnot perform as we expect; the significant risk of liability we face in the services we perform; the fact that data security, data privacy and data protection laws, emerging restrictions on background reporting due to you.
•We have no assurance of future business from anyalleged discriminatory impacts and adverse social consequences, and other evolving regulations and cross-border data transfer restrictions may increase our costs, limit the use or value of our customers;
•We rely upon third parties for the data we need to deliver our services;
•We rely upon third parties to fulfill our service obligations to our customers;
•We rely upon third parties for integration with many of our customers;
•Third parties are the sole available source for some of the dataservices and services upon which we rely;
•We intend to rely, in part, on acquisitions to help grow our business, and such acquisitions may not produce the benefits we expect or may adversely affect or disrupt our business;
•We must attract, motivate, train, and retain the management, technical, market-facing, and operational personnel we need to enable the success and growth of our business;
•COVID-19 has had, and may continue to have, a materially adverse effect on our business;
•Forecasts of market growth may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business may not grow at similar rates, if at all;
•Our operating results may fluctuate significantly, be difficult to predict, and fall below analysts' and investors' expectations;
•Significant governmental regulation exposes us to substantial costs and liabilities and can limit our business opportunities;
•Current or potential legal proceedings could subject us to significant monetary damages or restrictions on our ability to do business;
•Credit reporting laws that regulatemaintain our business impose significant operational requirementsprofessional reputation and liability risks;
•Domesticbrand name; social, political, regulatory and international data privacy laws impose significant operational requirementslegal risks in markets where we operate; the impact of foreign currency exchange rate fluctuations; unfavorable tax law changes and liability risks;
•We can incur significant liability for information that we omit in background reports;
•We may be subject to and in violation of state private investigator licensing laws and regulations;
•We are subject to government regulations concerning our employees, including wage-hour laws and taxes;
•We may be subject to intellectual property rights claims by third parties;
•Our contractual indemnities, limitations of liability, and insurance may not adequately protect us;
•Liabilities we incur in the coursetax authority rulings; any impairment of our business may be uninsurable, or insurance may be very expensive and limited in scope;
•Security breaches and improper use of information may negatively impact our business and harm our reputation;
•System failures could delay and disrupt our services, cause harm to our business and reputation and result in a loss of customers;
•If we fail to upgrade, enhance and expand our technology and services to meet customer needs and preferences, the demand for our services may materially diminish;
•Our technology development operations are centered in Estonia, exposing us to risks that may be difficult to manage;
•If we are unable to protect our proprietary technologygoodwill, other intangible assets and other intellectual property rights, it may reducelong-lived assets; our ability to compete for businessexecute and we may experience reduced revenue and incur costly litigation to protect our rights;
•Changes to the availability and permissible uses of consumer data may reduce the demand for our services;
•We operate in an intensely competitive market and we may not be able to develop and maintain competitive advantages necessary to support our growth and profitability;
•Growth will require us to improve our operating capabilities;
•Our business is vulnerable to economic downturns;
•If we do not introduce successful new products, services and analytical capabilities in a timely manner, or if the market does not adopt our new services, our competitiveness and operating results will suffer;
•Our existing indebtedness could adversely affect our business and growth prospects;
•The terms and conditions of our credit agreements restrict our current andintegrate future operations, particularlyacquisitions; our ability to respondaccess additional credit or other sources of financing; and the increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted cyber-related attacks that could pose a risk to changesour systems, networks, solutions, services and data. For more information on the business risks we face and factors that could affect the outcome of forward-looking statements, refer to our Annual Report, in particular the sections of that document entitled “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements and Risk Factors Summary,” and “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and other filings we make from time to time with the SEC. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or to take certain actions;otherwise.
•We may not be able to generate sufficient cash flow to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under such indebtedness, including refinancing such indebtedness, which may not be successful;
•Inability to obtain financing could limit our ability to conduct necessary operating activities and make strategic investments;
•Failure to successfully execute our international plans will adversely affect our growth and operating results;
•Operating in multiple countries requires us to comply with different legal and regulatory requirements;
•We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets;
•Fluctuations in the exchange rates of foreign currencies could result in currency transaction losses;
•Investment funds managed by General Atlantic and investment funds managed by Stone Point (together, the “Principal Stockholders”) control us, and their interests may conflict with ours or yours in the future;
•We are an “emerging growth company,” and we expect to elect to comply with reduced public company reporting requirements, which could make our common stock less attractive to investors;
•The requirements of being a public company strain our resources and distract our management, which could make it difficult to manage our business;
•Failure to maintain effective internal controls over financial reporting could cause our investors to lose confidence in us and adversely affect the market price of our common stock. If our internal control over financial reporting is not effective, we may not be able to accurately report our financial results or prevent fraud;
•We have identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.
•Provisions of our corporate governance documents could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management;
•Our certificate of incorporation limits the forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees;
•We will be required to pay certain pre-IPO owners or their transferees for certain tax benefits over a period of approximately 12 years pursuant to the income tax receivable agreement (the “TRA”), which amounts to an estimated total liability of approximately $209.9 million. Based on our current taxable income estimates, we expect to repay the majority of this obligation by the end of our 2025 fiscal year;
•We will not be reimbursed for any payments made to certain pre-IPO owners (or their transferees or assignees) under the TRA in the event that any tax benefits are disallowed;
•In certain cases, payments under the TRA to certain pre-IPO owners or their transferees may be accelerated or significantly exceed any actual benefits we realize in respect of the tax attributes subject to the TRA;
•We may have exposure to greater than anticipated tax liabilities and may be affected by changes in tax laws or interpretations;
•The multinational nature of our business can expose us to unexpected tax consequences, which may be adverse;
•We may be subject to examinations of our tax returns by the IRS or other tax authorities, and an adverse outcome could have a material adverse effect on our business;
•An active, liquid trading market for our common stock may not develop, which may constrain the market price of our common stock and limit your ability to sell your shares;
•Our operating results and stock price may be volatile, and the market price of our common stock may drop below the price you pay;
•Future sales of substantial amounts of our common stock, or the possibility that such sales could occur, could adversely affect the market price of our common stock;
•You may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it;
•Our stock price and trading volume could decline due to the action or inaction of securities or industry analysts;
•Our equity-based compensation and acquisition practices expose our stockholders to dilution;
•We could be negatively affected by actions of activist stockholders;
•We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock.
All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other filings with the Securities and Exchange Commission (SEC) and public communications. We discuss many of these risks and additional factors that could cause actual results to differ materially from those anticipated by our forward-looking statements under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in the Prospectus, this Quarterly Report on Form 10-Q, and in other filings we have made and will make from time to time with the Securities and Exchange Commission. These forward-looking statements represent our estimates and assumptions only as of the date made. Unless required by federal securities laws, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made. Without limiting the foregoing, any guidance we may provide will generally be given only in connection with quarterly and annual earnings announcements, without interim updates, and we may appear at industry conferences or make other public statements without disclosing material nonpublic information in our possession. Given these uncertainties, investors should not place undue reliance on these forward-looking statements.
Investors should read this Quarterly Report on Form 10-Q and the documents that we reference in this report and have filed or will file with the SEC completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Business Overview
HireRight Holdings Corporation (“HireRight” or the “Company”) is a leading global provider of technology-driven workforce risk management and compliance solutions. We provide comprehensive background screening, verification, identification, monitoring, and drug and health screening services for more than 40,000approximately 37,000 customers across the globe. We offer our services via a unified global software and data platform that tightly integrates into our customers’ human capital management (“HCM”) systems enabling highly effective and efficient workflows for workforce hiring, onboarding, and monitoring. In 2020,2022, we
delivered reports on screened over 2024 million job applicants, employees and contractors for our customers and processed over 80107 million screens.
HireRight GIS Group Holdings LLC (“HGGH”), was formed in July 2018 through the combination of two groups of companies, the HireRight Group and the GIS Group (“GIS”), each of which includes a number of wholly owned subsidiaries that conduct the Company’s business within the United States of America ( the “U.S.”), as well as countries outside the U.S. Since July 2018, the combined group of companies and their subsidiaries have operated as a unified operating company providing background screens globally, predominantly under the HireRight brand.
On October 15, 2021, HGGH converted into a Delaware corporation and changed its name to HireRight Holdings Corporation (“HireRight” or the “Company”). In conjunction with the conversion, all of HGGH’s outstanding equity interests were converted into shares of common stock of HireRight Holdings Corporation. The foregoing conversion and related transactions are referred to herein as the “Corporate Conversion”. The Corporate Conversion did not affect the assets and liabilities of HGGH, which became the assets and liabilities of HireRight Holdings Corporation.
Initial Public Offering
On November 2, 2021, the Company completed its IPO in which the Company issued and sold 22,222,222 shares of its common stock, $0.001 par value per share at an offering price of $19.00 per share. The Company received net proceeds of $393.5 million, after deducting underwriting discounts and commissions of $23.2 million and other offering costs payable by the Company of approximately $5.5 million. The Company granted the underwriters an option for a period of 30 days to purchase up to an additional 3,333,333 shares of common stock at $19.00 per share less discounts and commissions. The underwriters have until November 27, 2021 to exercise their option to purchase additional shares.
Use of Proceeds
On November 3, 2021, the Company used approximately $215.0 million of the net proceeds from the IPO to repay, in full, indebtedness under the Second Lien Term Loan Facility. In addition, the Company recorded a $3.4 million write off of unamortized deferred financing fees and unamortized original issue discounts related to the repayment of debt under the Second Lien Term Loan Facility. The Company plans to use approximately $100.0 million of proceeds of the IPO to repay, in part, the First Lien Term Loan Facility and no longer expects to incur swap breakage fees of approximately $4.2 million.
Factors Affecting Our Results of Operations
Economic Conditions
Our business is impacted by the overall economic environment and COVID-19
total employment and hiring. The global COVID-19 pandemic has caused significant disruption torapidly changing dynamics of the global workforce are increasing complexity and regulatory scrutiny for employers, bolstering the importance of the solutions we deliver. We have benefited from key demand drivers, which increase the need for more flexible, comprehensive screening and hiring solutions in the current environment. Our customers are a diverse set of organizations, from large-scale multinational businesses to small and medium businesses across a broad range of industries, including transportation, healthcare, technology, financial services, business and consumer services, manufacturing, education, retail, gig economy, and not-for-profit. Hiring requirements and regulatory considerations can vary significantly across the different types of customers, geographies and industry sectors we serve, creating demand for the extensive institutional knowledge we have developed from our decades of experience.
While we have benefited in particular,the past from the changing dynamics of the labor market. There is considerablemarket, including strength in hiring as the economy recovered from the effects of the COVID pandemic, our business has been adversely affected by recent and continuing uncertainty regarding the extentaround near-term macroeconomic conditions. This uncertainty stems from elevated inflation, declining customer confidence, volatile energy prices, rising interest rates, and geopolitical concerns including armed conflicts of thepotentially significant scope. Each of these drivers has its own adverse impact and the duration ofnear-term outlook for our business remains uncertain, with order volumes and revenue anticipated to fall below 2022 levels. In 2022, the annual inflation rate in the United States reached nearly the highest rate in more than three decades, as measured by the Consumer Price Index, and while it has recently been falling by some measures, inflation remains elevated. Inflation puts pressure on our suppliers, resulting in increased data costs, and also increases our employment and other expenses. A sustained recession would have an adverse impact on the global COVID-19 pandemic. Thehiring market and therefore the demand for our services. Slowing demand for our services will adversely affect our future results. Additionally, rising interest rates will lead directly to higher interest expense. See “Item 3. Quantitative and Qualitative Disclosures about Market Risk” for additional information on the impact of COVID-19interest rates and inflation on our operationalbusiness. Although the majority of our cost of services is variable in nature and financial performance will depend onmove in tandem with revenue increases or decreases, there can be no assurance that we can reduce our cost of services in proportion to changes in revenue.
2023 Developments
On September 28, 2023, the effect on our customers and vendors, all of which continue to be uncertain at this time. Our financial results and prospects are largely dependent on the number of hires and the total level of employment. Unemployment in our primary market, the US, reached nearly 15% during the peak of the 2020 pandemic and monthly hiring slowed to less than 4 million in April 2020 accordingCompany entered into a second amendment to the BureauFirst Lien Term Loan Facility (“Second Amended First Lien Term Loan Facility”) with the lenders party thereto and Bank of Labor Statistics.
Our resultsAmerica, N.A. as administrative agent, collateral agent and a letter of operationscredit issuer. The Second Amended First Lien Term Loan Facility amends the Company’s First Lien Facilities, (as amended through the Second Amended First Lien Term Loan Facility, the “Second Amended First Lien Facilities”). See Note 9 — Debt for the three and nine months ended September 30, 2021 show a significant increase from the prior year period, due to improvement in the global employment market. The peak of the pandemic impact occurred during April and May of 2020, and we began toadditional information. Also see a steady recovery in the second half of the year. The weakness experienced in the first half of 2020 and the associated recovery largely impacted all industries we serve. We are a highly diversified business with no industry representing more than 15% of our total revenue. Transportation, healthcare and technology customers represent the largest contributors to revenue. Transportation
— Results of Operations for additional information on the impacts of the second amendment to certain line items of our condensed consolidated statements of operations.
On September 14, 2023, the Company reached a settlement to recover a portion of the costs associated with a litigation settlement related to 24 lawsuits that had been filed in 2009 and healthcare annual revenues declined2010 against HireRight Solutions, Inc., which is the predecessor to the Company’s subsidiary HireRight, LLC (“Old HireRight”). Recovery was sought from Old HireRight’s insurer. The settlement has been recorded within prepaid expenses and other current assets in conjunctionthe condensed consolidated balance sheets and within selling, general and administrative expenses in the condensed consolidated statements of operations. See Note 15 — Legal Proceedings for additional information.
On July 3, 2023, the Company completed the acquisition of 60% of the equity interests of Digital Trusted Identity Services, LLC (“DTIS”), an FBI-approved channeler (which submits fingerprints to the FBI and receives FBI criminal history record information) specializing in collecting and processing biometric and biographical data. See Note 3 — Business Combinations for additional information.
On November 14, 2022, the Company announced a $100.0 million share repurchase program that was completed on June 21, 2023 (the “Initial Program”). On June 22, 2023, the Company announced and implemented an additional share repurchase program for repurchase of up to an additional $25.0 million of the Company's common stock (the “Second Program”). The Second Program was completed on August 28, 2023. On September 12, 2023, the Company announced a third share repurchase program for repurchase of up to an additional $25.0 million of the Company’s common stock (the “Third Program”).
The Initial Program and the Second Program did not obligate the Company to acquire any particular amount of common stock and could be extended, modified, suspended, or discontinued at any time at the Company's discretion. The Third Program has the same characteristics. The repurchased shares under the Initial Program, the Second Program, and the Third Program are recorded as “Treasury stock” on the Company's condensed consolidated balance sheets. See “— Liquidity and Capital Resources — Share Repurchase Program” for additional information.
In the first quarter of 2023, the Company began a global restructuring plan intended to improve the Company’s cost structure, operating efficiency, and profitability in response to ongoing uncertain macroeconomic conditions. The plan, which involves a reduction in force, offshoring of certain functions, and other measures designed to reduce cost and compensate for reduced order volumes, was initiated in the first quarter of 2023 and is expected to continue throughout 2023 through 2024 as the Company implements existing plans and evaluates further opportunities. During the three and nine months ended September 30, 2023, the Company recognized restructuring charges of $4.6 million and $15.3 million, respectively, primarily for employee severance and benefits in connection with overall revenue declines while technology showed limited growth largely driven by the workforce reduction, accelerated rent expense on abandoned right-of-use assets, and other restructuring charges. In addition, of two larger customersthe Company incurred professional service fees during the year.
In responsethree and nine months ended September 30, 2023, of $1.4 million and $8.6 million, respectively, for consulting costs related to the pandemic,execution of the Company’s global restructuring plan.
The Company expects to recognize additional restructuring charges in early 2020,2023 through the first half 2024 of $6.0 million to $8.0 million, primarily for severance and benefits, professional service fees, and transition costs. Once completed we implementedestimate annualized gross savings of approximately $50.0 million under the global restructuring plan. Additionally, we may not be able to fully realize the cost savings and benefits initially anticipated from the global restructuring plan, and the expected charges may be greater than expected, including charges for additional operational processes to monitor customer salesseverance and collections, taking precautionary measures to ensure sufficient liquidity and adjusting operations to ensure business continuity, including borrowing $50 million against our $100 million revolving credit facility, of which $40 million was repaid by December 31, 2020. Since April 2020, substantially all of our employees have been working from home. To the extent we are operating from our facilities, we have implemented protocols reflecting the recommendations published by the U.S. Centers for Disease Control, the World Health Organization and country, state and local governments.professional service fees.
Key Components of Our Results from Operations
Revenues
The Company generates revenues from background screening and related compliance services delivered in online reports. Our customers place orders for our services and reports either individually or through batch ordering. Each report is accounted for as a single order which is then typically consolidated and billed to our customers on a
monthly basis. Approximately 29% and 30%25% of revenues for each of the three and nine months ended September 30, 20212023 and 2020, respectively,28% of revenues for each of the three and nine months ended September 30, 2022 were generated from the Company’s top 50 customers, which consist of large U.S. and multinational companies across diversified industries such as transportation, healthcare, technology, business and consumer services, financial services, manufacturing, education, retail, gig economy, and not-for-profit. None of the Company’s customers individually accounted for greater than 5% and 6%3% of revenues duringfor each of the three and nine months ended September 30, 20212023, and 2020,2022, respectively.
Healthcare, technology, financial services, and transportation customers represent the largest contributors to revenues. Revenues consist of service revenues and surcharge revenues. Service revenues represent fees charged tofrom these customers for performing screeningthe three and compliance services. Surcharge revenues consist of fees charged to customers for obtaining data required to fulfillnine months ended September 30, 2023, decreased 14% and 15%, respectively, from the Company’s performance obligationsprior year periods, led by reductions in order volumes from federal, statetechnology and local jurisdictions as well as fees charged by certain commercial data wholesalers. These fees are predominantly charged to the Company’s customers at cost. Revenue is recognized when the Company satisfies its obligation to complete the service and delivers the screening report to the customer. The Company relies on service revenue to generate cash from operations. Furthermore, only service revenue impacts the operating income or loss as surcharge revenue is predominantly offset by corresponding expenses recognized in costfinancial services companies.
Expenses
Cost of services (excluding depreciation and amortization) on theconsists of data acquisition costs, medical laboratory and collection fees, personnel-related costs for operations, customer service and customer onboarding functions, as well as other direct costs incurred to fulfill our services. Approximately 80% of cost of services is variable in nature.
Selling, general and administrative expenses consist of personnel-related costs for sales, technology, administrative and corporate management functions in addition to costs for third-party technology, professional and consulting services, advertising, and facilities expenses. Selling, general and administrative expenses also include amortization of capitalized cloud computing software costs.
Depreciation and amortization expenses consist of depreciation of property and equipment, as well as amortization of purchased and developed software and other intangible assets.
Other expenses consist of interest expense relating to our credit facilities and interest rate swap agreements, foreign exchange gains and losses, as well as other expenses. On our condensed consolidated statementstatements of operations.operations, interest expense is netted with interest income, which is derived primarily from cash and cash equivalent balances held in interest-bearing accounts. The majority of our receivables and payables are denominated in U.S. dollars, but we also earn revenue, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar, including the Euro, the British pound, the Polish zloty, the Australian dollar, the Canadian dollar, the Singapore dollar, the Mexican peso, the Japanese yen, and the Indian rupee, among others. Therefore, increases or decreases in the value of the U.S. dollar against these currencies could result in realized and unrealized gains and losses in foreign exchange. However, to the extent we earn revenues in currencies other than the U.S. dollar, we generally pay a corresponding amount of expenses in such currency and therefore the cumulative impact of these foreign exchange fluctuations is not generally deemed material to our financial performance.
Income tax expense (benefit) consists of international, U.S. federal, state and local income taxes based on income in multiple jurisdictions for our subsidiaries.
Results of Operations
Comparison of Results of Operations for the three and nine months ended September 30, 20212023 and 20202022
The following table presentstables present operating results for the three and nine months ended September 30, 20212023 and 2020.2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2023 | | 2022 |
| (in thousands, except percent of revenues) |
| Revenues | $ | 188,262 | | | 100.0 | % | | $ | 210,303 | | | 100.0 | % |
| | | | | | | |
| Expenses | | | | | | | |
| Cost of services (exclusive of depreciation and amortization below) | 94,422 | | | 50.2 | % | | 110,848 | | | 52.7 | % |
| Selling, general and administrative | 48,588 | | | 25.8 | % | | 49,378 | | | 23.5 | % |
| Depreciation and amortization | 19,063 | | | 10.1 | % | | 17,946 | | | 8.5 | % |
| Total expenses | 162,073 | | | 86.1 | % | | 178,172 | | | 84.7 | % |
| Operating income | 26,189 | | | 13.9 | % | | 32,131 | | | 15.3 | % |
| | | | | | | |
| Other expenses | | | | | | | |
| Interest expense, net | 22,447 | | | 11.9 | % | | 8,457 | | | 4.0 | % |
| Other expense, net | 881 | | | 0.5 | % | | 89 | | | — | % |
| Total other expenses | 23,328 | | | 12.4 | % | | 8,546 | | | 4.1 | % |
| Income before income taxes | 2,861 | | | 1.5 | % | | 23,585 | | | 11.2 | % |
| Income tax expense (benefit) | 4,450 | | | 2.4 | % | | (69,704) | | | (33.1) | % |
| Net income (loss) | $ | (1,589) | | | (0.8) | % | | $ | 93,289 | | | 44.4 | % |
| Less: Net income attributable to noncontrolling interest | 66 | | | — | % | | — | | | — | % |
| Net income (loss) attributable to HireRight Holdings Corporation | $ | (1,655) | | | (0.9) | % | | $ | 93,289 | | | 44.4 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands) |
| Revenues | $ | 204,981 | | | $ | 130,674 | | | $ | 531,522 | | | $ | 390,121 | |
| | | | | | | |
| Expenses | | | | | | | |
| Cost of services (exclusive of depreciation and amortization below) | 111,328 | | | 69,683 | | | 295,832 | | | 215,143 | |
| Selling, general and administrative | 47,652 | | | 48,347 | | | 130,261 | | | 128,583 | |
| Depreciation and amortization | 19,531 | | | 19,808 | | | 56,013 | | | 58,283 | |
| Total expenses | 178,511 | | | 137,838 | | | 482,106 | | | 402,009 | |
| Operating income (loss) | 26,470 | | | (7,164) | | | 49,416 | | | (11,888) | |
| | | | | | | |
| Other expenses | | | | | | | |
| Interest expense | 18,518 | | | 18,597 | | | 54,674 | | | 56,930 | |
| Other expense (income), net | 22 | | | (185) | | | 125 | | | 628 | |
| Total other expense | 18,540 | | | 18,412 | | | 54,799 | | | 57,558 | |
| Income (loss) before income taxes | 7,930 | | | (25,576) | | | (5,383) | | | (69,446) | |
| Income tax expense | 649 | | | 1,466 | | | 2,954 | | | 3,490 | |
| Net income (loss) | $ | 7,281 | | | $ | (27,042) | | | $ | (8,337) | | | $ | (72,936) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands) |
| Revenues | | | |
| Service revenues | $ | 152,332 | | | $ | 98,587 | | | $ | 395,624 | | | $ | 294,175 | |
| Surcharge revenues | 52,649 | | | 32,087 | | | 135,898 | | | 95,946 | |
| Total revenues | $ | 204,981 | | | $ | 130,674 | | | $ | 531,522 | | | $ | 390,121 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
| (in thousands, except percent of revenues) |
| Revenues | $ | 555,833 | | | 100.0 | % | | $ | 631,306 | | | 100.0 | % |
| | | | | | | |
| Expenses | | | | | | | |
| Cost of services (exclusive of depreciation and amortization below) | 291,449 | | | 52.4 | % | | 343,241 | | | 54.4 | % |
| Selling, general and administrative | 164,442 | | | 29.6 | % | | 152,032 | | | 24.1 | % |
| Depreciation and amortization | 56,246 | | | 10.1 | % | | 54,056 | | | 8.6 | % |
| Total expenses | 512,137 | | | 92.1 | % | | 549,329 | | | 87.0 | % |
| Operating income | 43,696 | | | 7.9 | % | | 81,977 | | | 13.0 | % |
| | | | | | | |
| Other expenses | | | | | | | |
| Interest expense, net | 48,392 | | | 8.7 | % | | 20,971 | | | 3.3 | % |
| Other expense, net | 1,429 | | | 0.3 | % | | 163 | | | — | % |
| Total other expenses | 49,821 | | | 9.0 | % | | 21,134 | | | 3.3 | % |
| Income (loss) before income taxes | (6,125) | | | (1.1) | % | | 60,843 | | | 9.6 | % |
| Income tax expense (benefit) | 863 | | | 0.2 | % | | (68,456) | | | (10.8) | % |
| Net income (loss) | $ | (6,988) | | | (1.3) | % | | $ | 129,299 | | | 20.5 | % |
| Less: Net income attributable to noncontrolling interest | 66 | | | — | % | | — | | | — | % |
| Net income (loss) attributable to HireRight Holdings Corporation | $ | (7,054) | | | (1.3) | % | | $ | 129,299 | | | 20.5 | % |
Revenues
Three months ended
Total revenues increased by $74.3 million, or 56.9%, to $205.0 million,Revenues for the three months ended September 30, 20212023 decreased to $188.3 million, a decrease of $22.0 million, or 10.5%, from the prior year period, primarily driven by lower order volumes from existing customers due to their efforts to rightsize their workforces in response to macroeconomic pressures and uncertainties. These effects were more pronounced in our technology and services verticals, which represented $12.1 million of the total $22.0 million decrease. Revenues from our remaining customer groups represented a net decrease of $9.9 million for the same reasons noted above.
From a geographical perspective, revenues from international regions decreased by $2.6 million, or 16.0%, and revenues from the United States decreased by $19.4 million, or 10.0%, during the three months ended September 30, 2023, compared to the three months ended September 30, 2020. We continued2022. Declining revenues from our technology and services verticals were particularly noted in our APAC and India regions.
Revenues for the nine months ended September 30, 2023 decreased to see$555.8 million, a recoverydecrease of $75.5 million, or 12.0%, from the impact of COVID-19, with strengthening client volumes surpassing the COVID-impacted prior year period. The increase in total revenues was broad-basedperiod, primarily across existing customers, while new business revenue, as defined below, increased from $9.4 million to $10.9 million, driven by saleslower order volumes from existing customers. As with the three-month period, these effects were more pronounced in our technology and services verticals, which represented $48.3 million of the total $75.5 million decrease. Revenues from our remaining customer groups represented a net decrease of $27.2 million for the same reasons noted above.
Revenues from international and United States regions decreased by $6.2 million, or 12.9%, and by $69.2 million, or 11.9%, respectively, during the nine months ended September 30, 2023, compared to a recently acquired large customer. Servicethe nine months ended September 30, 2022. The strengthening of the U.S. dollar against the British pound and other currencies in the nine months ended September 30, 2023, compared to the same period in 2022, had an unfavorable impact on revenues from international regions.
increased $53.7 million, or 54.5%,Cost of Services (exclusive of depreciation and surcharge revenues increased $20.6 million, or 64.1%, compared toamortization)
Cost of services for the three months ended September 30, 2020. Revenues from international and domestic regions increased by $8.22023 decreased to $94.4 million, a decrease of $16.4 million, or 106.1%14.8%, from the prior year period, primarily due to lower order volumes, decreased use of contract labor, decreased data costs, and by $66.1 million, or 53.8%, respectively, duringlower average labor costs per background screen. Cost of services as a percent of revenues decreased to 50.2% for the three months ended September 30, 20212023, compared to 52.7% for the three months ended September 30, 2020. Both service and surcharge revenue increases were2022, primarily volume driven. Also contributing to the increases in surcharge revenues were increases in data supplierdriven by lower average labor costs which are charged toper background screen as a result of process improvements associated with our customers in the formtechnology initiatives, increased usage of increased surcharges.offshore labor as well as lower cost of our contract labor.
Nine months ended
Total revenues increased by $141.4 million, or 36.2%, to $531.5 million,Cost of services for the nine months ended September 30, 2021 compared2023 decreased to $291.4 million, a decrease of $51.8 million, or 15.1%, from the prior year period, primarily due to lower order volumes, decreased data costs, lower contract labor costs, and lower average labor costs per background screen. For the same reasons noted in the preceding paragraph, cost of services as a percent of revenues decreased to 52.4% for the nine months ended September 30, 2020, primarily due2023, compared to increases in volume, which surpassed the COVID-impacted prior year period. Revenues from international and domestic regions increased $13.8 million, or 52.4% and by $127.6 million, or 35.1%, respectively, during54.4% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Service revenues increased $101.4 million, or 34.5%,2022.
Selling, General and surcharge revenues increased $40.0 million, or 41.6% compared to the prior year period. While growth was primarily volume driven, a portion of the increase in surcharge revenues was due to data supplier cost increases, which are charged to our customers in the form of increased surcharges.Administrative
Cost of Services (exclusive of depreciationSelling, general and amortization below)
Three months ended
Cost of services increased $41.6 million, or 59.8%, to $111.3 million,administrative expenses (“SG&A”) for the three months ended September 30, 20212023 improved $0.8 million to $48.6 million, or (1.6)%, compared to the three months ended September 30, 2020prior year period primarily due to higher client order volumes overa decrease in legal settlement expenses and related professional service fees of $6.8 million, primarily associated with a single litigation matter related to a predecessor entity of the COVID- impacted prior year period. CostCompany for a claim dating back to 2009. Other decreases included reductions in advertising costs, facility related costs, and various other costs, amounting to $1.4 million. These decreases were offset primarily by increases in technology maintenance and telecom costs of services$2.8 million. Personnel expenses increased $0.7 million, primarily attributable to employee benefits and employee severance related to our global restructuring plan. Excluding severance and stock compensation expense, personnel related expenses would have declined by $3.9 million. Other offsetting increases included professional service fees of $0.6 million related to other financing activities. SG&A as a percent of revenue increased to 54.3%revenues for the three months ended September 30, 2021 compared2023 increased to 53.3%25.8% from 23.5% for the three months ended September 30, 20202022, primarily driven by increased third-party data costs.due to the impact of lower revenues and expenses related to the global restructuring plan.
Nine months ended
Cost of services increased $80.7 million, or 37.5%, to $295.8 million,SG&A expenses for the nine months ended September 30, 20212023 increased $12.4 million to $164.4 million, or 8.2%, compared to the nine months ended September 30, 2020prior year period primarily due to higher volumesan increase in professional service fees of $7.3 million related to our technology initiatives and our global restructuring plan. Technology maintenance and telecom costs increased $7.2 million, and personnel related expenses increased $5.6 million, primarily attributable to employee severance and employee benefits related to our global restructuring plan. Excluding severance and stock compensation expense, personnel related expenses would have decreased by $3.3 million. Additionally, costs of $0.6 million related to other financing activities contributed to the increase in SG&A expense. The increases in SG&A expenses were partially offset by a decrease in legal settlement expenses and related professional services fees of $6.8 million, primarily associated with a single litigation matter related to a lesser extent, increased datapredecessor entity of the Company for a claim dating back to 2009. Other offsetting decreases included a reduction in bad debt expense of $1.4 million and reductions in insurance and audit expenses, and various other costs. Cost of servicesSG&A as a percent of revenue increased slightly to 55.7%revenues for the nine months ended September 30, 2021 compared2023 increased to 55.1%29.6% from 24.1% for the nine months ended September 30, 20202022, primarily driven by increased third-party data costs.due to the impact of lower revenues and expenses related to the global restructuring plan.
Selling, General and AdministrativeInterest Expense, net
Three months ended
Selling, general and administrative expenses (“SG&A”) decreased $0.7 million, or 1.4% to $47.7 million,Interest expense, net for the three months ended September 30, 20212023, increased $14.0 million, to $22.4 million, or 165.4%, compared to the comparable prior year period. The increase in interest expense was primarily due to rising interest rates on our variable rate term loan facility, which increased interest expense by $5.6 million in the three months ended September 30, 2020. The decrease was driven by reductions in legal settlement fees of $12.1 million and $1.9 million of other merger integration expenses during thethree months ended September 30, 20212023 compared to the three months ended September 30, 2020. These decreases were mostly offset by increases in personnel costs associated with incentive compensationcomparable prior year period. Additionally, we recorded a loss on modification and fringe benefit programsextinguishment of $5.5 million and investments associated with incremental technology and product resources, which amounted to $3.5 million. In addition, various other and indirect expenses increased $4.3debt of $7.7 million during the three months ended September 30, 2021 compared2023 related to the three months ended September 30, 2020, which included $1.5 millionwrite-off of higher technology costsunamortized deferred financing fees, unamortized original issue discounts and $0.9 million associated with marketing programs to support increased business volumes.
Nineissuance costs in conjunction with the second amendment to the First Lien Term Loan Facility. Reclassifications from accumulated other comprehensive loss on the condensed consolidated balance sheet of unrealized gains related to our terminated interest rate swap agreements reduce interest expense. The reduction to interest expense associated with the terminated interest rate swap agreements decreased $1.3 million compared to the prior year period for the three months ended September 30, 2023, contributing to the increase in interest expense during the three month period. The increase in interest expense was partially offset by interest income earned from interest bearing cash and cash equivalent accounts of $0.3 million during the three months ended September 30, 2023.
SG&A increased $1.7 million, or 1.3%, to $130.3 million,Interest expense, net for the nine months ended September 30, 20212023, increased $27.4 million to $48.4 million, or 130.8%, compared to the comparable prior year period. The increase in interest expense was primarily due to rising interest rates on our variable rate term loan facility, which increased interest expense by $21.2 million, compared to the comparable prior year periods. Additionally, we recorded a loss on modification and extinguishment of debt of $7.7 million during the three months ended September 30, 2023 related to the write-off of unamortized deferred financing fees, unamortized original issue discounts and new debt issuance costs in conjunction with the second amendment to the First Lien Term Loan Facility. The reduction to interest expense associated with the terminated interest rate swap agreements decreased $2.8 million during the nine months ended September 30, 2020 primarily due2023, compared to increasesthe comparable prior year period contributing to the increase to interest expense. The increase in personnel costs and other indirect costs, amounting to $19.2 million and $5.8 million, respectively, for the reasons noted above. These increases wereinterest expense was partially offset by a reduction in legal settlement fees and merger integration and employee severance expensesinterest income earned from interest bearing cash equivalent accounts of $12.1$2.0 million and $8.9 million, respectively. Various other costs accounted for $2.3 million of the offsetting decreases in SG&A forduring the nine months ended September 30, 2021 compared to2023, respectively.
On September 28, 2023, we entered into the nine months ended September 30, 2020.
Depreciation and Amortization
Three months ended
Depreciation and amortization expense decreased $0.3 million, or 1.4% to $19.5 million, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The decrease was primarily due to certain computer equipment assets reaching the end of their useful lives in the prior year.
Nine months ended
Depreciation and amortization expense decreased $2.3 million, or 3.9%, to $56.0 million, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The decrease was primarily due to certain computer equipment assets reaching the end of their useful lives in the prior year.
Interest Expense
Three months ended
Interest expense, net decreased $0.1 million, or 0.4% to $18.5 million, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The decrease was primarily due to lower outstanding balance due to scheduled principal repayments on theSecond Amended First Lien Term Loan Facility, as defined below, and lower outstanding balance on the Revolving Credit Facility, as defined below. As of September 30, 2021, the balance on the Revolving Credit Facility was $10.0bringing total indebtedness thereunder to $750.0 million, compared to $30.0approximately $699.5 million as of September 30, 2020.
Nine months ended
Interestindebtedness under that facility during the portion of 2023 preceding that date. This increase in indebtedness will add approximately $1.2 million in interest expense net decreased $2.3 million,per quarter under the facility, assuming no changes in interest rates or 4.0%, to $54.7 million, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The decrease was primarily due to lower outstanding balance due to scheduled principal repayments on the First Lien Term Loan Facility, and lower outstanding balance on the Revolving Credit Facility.
Income Tax Expense
Three months endedprincipal.
Income tax expense decreased $0.8 million, or 55.7%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to revaluation of deferred taxes in the United Kingdom during the third quarter of 2020. Income tax expense for the three months ended September 30, 2021 and 2020 was $0.6 million and $1.5 million, respectively. Tax Expense (Benefit)
The effective tax rate for the three months ended September 30, 2021 differs from the Federal statutory rate of 21% primarily due2023, was 155.5% compared to valuation allowances and state taxes. The
ratenegative 295.5% for the three months ended September 30, 2020 differs from the Federal statutory rate of 21% primarily due to revaluation of deferred taxes in the United Kingdom, valuation allowances, and state taxes.
Nine months ended
Income tax expense decreased $0.5 million, or 15.4%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to revaluation of deferred taxes in the United Kingdom and valuation allowances. Income tax expense for the nine months ended September 30, 2021 and 2020 was $3.0 million and $3.5 million, respectively.2022. The effective tax rate for the nine months ended September 30, 2021 differs from2023, was 14.1% compared to negative 112.5% for the Federal statutorynine months ended September 30, 2022. The effective tax rate of 21%for the three and nine months ended September 30, 2023, compared to the prior year periods, changed primarily due to revaluationthe release of deferred taxes in the United Kingdom,our federal and state valuation allowances and state taxes. during the three months ended September 30, 2022.
The effective tax rate for the nine months ended September 30, 20202023, differs from the Federalfederal statutory rate of 21% primarily due to revaluationstate taxes, non-deductible stock-based compensation expense, and U.S. tax on foreign operations partially offset by the recognition of stranded deferred taxes in other accumulated comprehensive loss. The effective tax rate for the United Kingdom,nine months ended September 30, 2022, differs from the federal statutory rate of 21% primarily due to valuation allowances, state taxes, and state taxes.U.S. tax on foreign operations.
Non-GAAP Financial Measures and Key Metrics
We believe that the presentation of our Non-GAAPnon-GAAP financial measures and key metrics provides information useful to investors in assessing our financial condition and results of operations. These measures should not be considered an alternative to net income (loss) or any other measure of financial performance or liquidity presented in accordance with GAAP.accounting principles generally accepted in the United States (“GAAP”). These measures have important limitations as analytical tools because they exclude some but not all items that affect the most directly comparable
GAAP measures. Additionally, because they may be defined differently byto the extent that other companies in our industry our definitionsdefine similar non-GAAP measures differently than we do, the utility of those measures for comparison purposes may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.limited.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA represents, as applicable for the period, net income (loss) attributable to HireRight Holdings Corporation before provision forincome attributable to noncontrolling interest, interest expense, income taxes, interest expense and depreciation and amortization expense, equity-basedstock-based compensation, realized and unrealized gain (loss) on foreign exchange, merger integration expenses,restructuring charges, amortization of cloud computing software costs, legal settlement costs deemed by management to be outside the normal course of business, and other items management believes are not representative of the Company’s core operations. Adjusted EBITDA Margin is adefined as Adjusted EBITDA divided by revenues for the period. Adjusted EBITDA and Adjusted EBITDA Margin are supplemental financial measuremeasures that management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:assess our:
•our operatingOperating performance as compared to other publicly traded companies without regard to capital structure or historical cost basis;
•our abilityAbility to generate cash flow;
•our abilityAbility to incur and service debt and fund capital expenditures; and
•the viabilityViability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
Adjusted EBITDA Service Margin
Adjusted EBITDA Service Margin is calculated as Adjusted EBITDA as a percentage of service revenue. Because we are able to chargeThe following table reconciles our customers for direct access to certain data suppliers and we generally do not mark up those charges, we focus on the managementnon-GAAP financial measure of Adjusted EBITDA as a percentage of service revenue, as we believe this non-GAAP measure more accurately reflectsto net income (loss), our most directly comparable financial measures calculated and presented in accordance with GAAP, for the management of our controllable costs and profitability.periods presented.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended
September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands, except percents) |
| Net income (loss) attributable to HireRight Holdings Corporation | $ | (1,655) | | $ | 93,289 | | $ | (7,054) | | $ | 129,299 |
| Income attributable to noncontrolling interest | 66 | | — | | | 66 | | — | |
Income tax expense (benefit) (1) | 4,450 | | (69,704) | | 863 | | (68,456) |
| Interest expense, net | 22,447 | | 8,457 | | 48,392 | | 20,971 |
| Depreciation and amortization | 19,063 | | 17,946 | | 56,246 | | 54,056 |
| EBITDA | 44,371 | | 49,988 | | 98,513 | | 135,870 |
| Stock-based compensation | 4,818 | | 1,282 | | 13,889 | | 8,587 |
| Realized and unrealized gain (loss) on foreign exchange | (212) | | (780) | | 337 | | (795) |
| | | | | | | |
Restructuring charges (2) | 5,975 | | — | | 23,964 | | — |
Technology investments (3) | 1,193 | | 559 | | 1,193 | | 559 |
Amortization of cloud computing software costs (4) | 1,727 | | 980 | | 5,012 | | 1,446 |
Other items (5) | (5,761) | | 1,943 | | (5,059) | | 3,706 |
| Adjusted EBITDA | $ | 52,111 | | $ | 53,972 | | $ | 137,849 | | $ | 149,373 |
Net income (loss) margin (6) | (0.9)% | | 44.4% | | (1.3)% | | 20.5% |
| Adjusted EBITDA margin | 27.7% | | 25.7% | | 24.8% | | 23.7% |
The following table reconciles our non-GAAP financial measure of Adjusted EBITDA and Adjusted EBITDA Service Margin to our most directly comparable financial measures calculated and presented in accordance with GAAP.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands, except percent) |
| Net income (loss) | $ | 7,281 | | | $ | (27,042) | | | $ | (8,337) | | | $ | (72,936) | |
| Income tax expense | 649 | | | 1,466 | | | 2,954 | | | 3,490 | |
| Interest expense | 18,518 | | | 18,597 | | | 54,674 | | | 56,930 | |
| Depreciation and amortization | 19,531 | | | 19,808 | | | 56,013 | | | 58,283 | |
| EBITDA | 45,979 | | | 12,829 | | | 105,304 | | | 45,767 | |
| Equity-based compensation | 841 | | | 880 | | | 2,493 | | | 2,570 | |
| Realized and unrealized gain (loss) on foreign exchange | 24 | | | (185) | | | 125 | | | 628 | |
| Merger integration expenses (1) | 193 | | | 2,138 | | | 1,174 | | | 9,255 | |
| | | | | | | |
Technology investments (2) | 1,690 | | | — | | | 1,690 | | | — | |
| Other items (3) | 2,895 | | | 12,380 | | | 6,659 | | | 14,676 | |
| Adjusted EBITDA | $ | 51,622 | | | $ | 28,042 | | | $ | 117,445 | | | $ | 72,896 | |
| Service Revenue | $ | 152,332 | | | $ | 98,587 | | | $ | 395,624 | | | $ | 294,175 | |
Net income (loss) service margin (4) | 4.8 | % | | 27.4 | % | | 2.1 | % | | 24.8 | % |
Adjusted EBITDA service margin (5) | 33.9 | % | | 28.4 | % | | 29.7 | % | | 24.8 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1)Merger integration expenses consist primarily of information technology (“IT”) related costs including personnel expenses, professional and service fees associated with the integration of customers and operations of GIS, which commenced in July 2018 and was substantially completed by the end of 2020.
(2)Technology investments represent discovery phase costs associated with the build out and implementation of various technologies that will be used to achieve greater operational efficiencies.
(3)Other items include (i) exit costs associated with one of our facilities duringDuring the three months ended September 30, 2021, (ii) costs related2022, the Company determined sufficient positive evidence existed to reverse the Company’s valuation allowance attributable to the preparation ofdeferred tax assets associated with the Company’s initial public offeringoperations in the U.S. This reversal resulted in a non-cash deferred tax benefit of $70.2 million, which materially decreased the Company’s income tax expense during 2021, (iii) $12.1 million of legal settlement costs in the three and nine months ended September 30, 20202022.
(2)Restructuring charges represent costs incurred in connection with the Company’s global restructuring plan. Costs incurred in connection with the plan include: (i) $3.3 million and $11.1 million of severance and benefits related to impacted employees during the three and nine months ended September 30, 2023, respectively, (ii) $1.4 million and $8.6 million of professional service fees related to the execution of our cost savings initiatives during the three and nine months ended September 30, 2023, respectively, (iii) $0.4 million and $2.6 million related to the abandonment of certain of our leased facilities during the three and nine months ended September 30, 2023, respectively, and (iv) $0.9 million and $1.6 million related to the replacement of certain internal technology systems during the three and nine months ended September 30, 2023, respectively.
(3)Technology investments represent costs associated with a singlethe impairment of certain of our cloud computing software costs during the three and nine months ended September 30, 2023 and discovery phase costs associated with various platform and fulfillment technology initiatives that are intended to achieve greater operational efficiencies during the three and nine months ended September 30, 2022.
(4)Amortization of cloud computing software costs consists of expense recognized in selling, general and administrative expenses for capitalized implementation costs for cloud computing IT systems incurred in connection with our platform and fulfillment technology initiatives that are intended to achieve greater operational efficiencies. This expense is not included in depreciation and amortization above.
(5)Other items for the three and nine months ended September 30, 2023 consist primarily of (i) an insurance recovery and related professional services fees of $6.8 million, net of fees payable to the Company’s outside counsel, in connection with litigation matter related to a predecessor entity of the Company for a claim dating back to 2009 (for additional information see Note 13and deemed to be outside the ordinary course of business. The reduction related to the accompanying condensed consolidated financial statementsinsurance recovery is offset by (i) professional services fees of $0.6 million pertaining to other financing activities for additional information),both the three and (iv) $0.3nine months ended September 30, 2023, and (ii) $0.5 million and $2.5$1.2 million of severance costs incurred in connection with reducing our employee headcount in an effortprofessional services fees not related to right-size our business in response to COVID-19core operations during the three and nine months ended September 30, 2020,2023, respectively. Other items for the three and nine months ended September 30, 2022 include (i) costs of $0.4 million and $1.7 million associated with the implementation of a company-wide enterprise resource planning system during the three and nine months ended September 30, 2022, respectively, (ii) $1.0 million and $1.6 million of severance costs during the three and nine months ended September 30, 2022, (iii) $0.4 million related to professional services fees not related to core operations for the three and nine months ended September 30, 2022, and (iv) $0.2 million related to loss on disposal of assets and exit costs associated with one of our short-term leased facilities during the nine months ended September 30, 2022. These costs were partially offset by a reduction in previously accrued legal settlement expense of $0.6 million during the nine months ended September 30, 2022 due to a more favorable outcome than originally anticipated in a claim outside the ordinary course of business.
(4)(6)Net income (loss) service margin is calculated asrepresents net income (loss) as a percentage of service revenue.
(5)Adjusted EBITDA service margin is calculated as Adjusted EBITDA as a percentage of service revenue.
Adjusted Net Income (Loss)and Adjusted Diluted Earnings Per Share
In addition to Adjusted EBITDA, management believes that Adjusted Net Income (Loss) is a strong indicator of our overall operating performance and is useful to our management and investors as a measure of comparative operating performance from period to period. We define Adjusted Net Income (Loss) as net income (loss) attributable to HireRight Holdings Corporation adjusted for equity-basedincome attributable to noncontrolling interest, amortization of acquired intangible assets, loss on modification and extinguishment of debt, stock-based compensation, realized and unrealized gain (loss) on foreign exchange, merger integration expenses,restructuring charges, amortization of cloud computing software costs, legal settlement costs deemed by management to be outside the normal course of business, and other items management believes are not representative of the Company’s core operations, to which we apply an adjusted effectivea blended statutory tax rate. See the footnotes to the table below for a description of certain of these adjustments. We define Adjusted Diluted Earnings Per Share as Adjusted Net Income divided by the weighted average number of shares outstanding (diluted) for the applicable period. We believe Adjusted Diluted Earnings Per Share is useful to investors and analysts because it enables them to better evaluate per share operating performance across reporting periods and to compare our performance to that of our peer companies.
The following table sets forth a reconciliationreconciles our non-GAAP financial measure of Adjusted Net Income to net income (loss) to Adjusted Net Income (Loss), our most directly comparable financial measure calculated and presented in accordance with GAAP, for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands) |
Net income (loss) | $ | 7,281 | | | $ | (27,042) | | | $ | (8,337) | | | $ | (72,936) | |
| Income tax expense | 649 | | | 1,466 | | | 2,954 | | | 3,490 | |
| Income (loss) before income taxes | 7,930 | | | (25,576) | | | (5,383) | | | (69,446) | |
| Equity-based compensation | 841 | | | 880 | | | 2,493 | | | 2,570 | |
| Realized and unrealized gain (loss) on foreign exchange | 24 | | | (185) | | | 125 | | | 628 | |
Merger integration expenses(1) | 193 | | | 2,138 | | | 1,174 | | | 9,255 | |
| | | | | | | |
Technology investments (2) | 1,690 | | | — | | | 1,690 | | | — | |
Other items (3) | 2,895 | | | 12,380 | | | 6,659 | | | 14,676 | |
| Adjusted income (loss) before income taxes | 13,573 | | | (10,363) | | | 6,758 | | | (42,317) | |
Adjusted income taxes (4) | 360 | | | 732 | | | 1,619 | | | 2,063 | |
| Adjusted Net Income (Loss) | $ | 13,213 | | | $ | (11,095) | | | $ | 5,139 | | | $ | (44,380) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended
September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands) |
| Net income (loss) attributable to HireRight Holdings Corporation | $ | (1,655) | | | $ | 93,289 | | | $ | (7,054) | | | $ | 129,299 | |
| Income attributable to noncontrolling interest | 66 | | | — | | | 66 | | | — | |
Income tax (benefit) expense (1) | 4,450 | | | (69,704) | | | 863 | | | (68,456) | |
| Income (loss) before income taxes | 2,861 | | | 23,585 | | | (6,125) | | | 60,843 | |
| Amortization of acquired intangible assets | 16,142 | | | 15,353 | | | 47,020 | | | 46,335 | |
Loss on modification and extinguishment of debt (2) | 7,745 | | | — | | | 7,745 | | | — | |
Interest expense swap adjustments (3) | (2,088) | | | (3,413) | | | (6,890) | | | (9,676) | |
Interest expense discounts (4) | 789 | | | 790 | | | 2,402 | | | 2,549 | |
| Stock-based compensation | 4,818 | | | 1,282 | | | 13,889 | | | 8,587 | |
| Realized and unrealized gain (loss) on foreign exchange | (212) | | | (780) | | | 337 | | | (795) | |
Restructuring charges (5) | 5,975 | | | — | | | 23,964 | | | — | |
| | | | | | | |
Technology investments (6) | 1,193 | | | 559 | | | 1,193 | | | 559 | |
Amortization of cloud computing software costs (7) | 1,727 | | | 980 | | | 5,012 | | | 1,446 | |
Other items (8) | (5,761) | | | 1,943 | | | (5,059) | | | 3,706 | |
| Adjusted income before income taxes | 33,189 | | | 40,299 | | | 83,488 | | | 113,554 | |
Adjusted income taxes (9) | 8,629 | | | 10,478 | | | 21,707 | | | 29,524 | |
| Adjusted Net Income | $ | 24,560 | | | $ | 29,821 | | | $ | 61,781 | | | $ | 84,030 | |
The following table sets forth the calculation of Adjusted Diluted Earnings Per Share for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended
September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| | | | | |
| Diluted net income (loss) per share attributable to HireRight Holdings Corporation | $ | (0.02) | | | $ | 1.17 | | | $ | (0.10) | | | $ | 1.63 | |
| Income attributable to noncontrolling interest | — | | | — | | | — | | | — | |
Income tax (benefit) expense (1) | 0.06 | | | (0.88) | | | 0.01 | | | (0.86) | |
| Amortization of acquired intangible assets | 0.23 | | | 0.19 | | | 0.65 | | | 0.58 | |
Loss on modification and extinguishment of debt (2) | 0.11 | | | — | | | 0.11 | | | — | |
Interest expense swap adjustments (3) | (0.03) | | | (0.04) | | | (0.09) | | | (0.12) | |
Interest expense discounts (4) | 0.01 | | | 0.01 | | | 0.03 | | | 0.03 | |
| Stock-based compensation | 0.07 | | | 0.02 | | | 0.19 | | | 0.11 | |
| Realized and unrealized gain (loss) on foreign exchange | — | | | (0.01) | | | — | | | (0.01) | |
Restructuring charges (5) | 0.09 | | | — | | | 0.33 | | | — | |
Technology investments (6) | 0.02 | | | 0.01 | | | 0.02 | | | 0.01 | |
Amortization of cloud computing software costs (7) | 0.02 | | | 0.01 | | | 0.07 | | | 0.02 | |
Other items (8) | (0.08) | | | 0.02 | | | (0.07) | | | 0.04 | |
| Adjusted income before income taxes | 0.48 | | | 0.50 | | | 1.15 | | | 1.43 | |
Adjusted income taxes (9) | (0.12) | | | (0.13) | | | (0.30) | | | (0.37) | |
| Adjusted Diluted Earnings Per Share | $ | 0.36 | | | $ | 0.37 | | | $ | 0.85 | | | $ | 1.06 | |
| | | | | | | |
| Weighted average number of shares outstanding - diluted | 69,090,882 | | 79,542,715 | | 73,080,851 | | 79,476,574 |
| | | | | | | |
| | | | | | | |
(1)Merger integration expenses consist primarily of IT related costs including personnel expenses, professional and service fees associated with the integration of GIS, as discussed in footnote 1 to the immediately preceding table, which commenced in July 2018 and was substantially completed by the end of 2020.
(2)Technology investments represent discovery phase costs associated with the build out and implementation of various technologies that will be used to achieve greater operational efficiencies.
(3)Other items include (i) exit costs associated with one of our facilities duringDuring the three months ended September 30, 2021, (ii) costs related2022, the Company determined sufficient positive evidence existed to reverse the Company’s valuation allowance attributable to the preparation ofdeferred tax assets associated with the Company’s initial public offeringoperations in the U.S. This reversal resulted in a non-cash deferred tax benefit of $70.2 million, which materially decreased the Company’s income tax expense during 2021, (iii) $12.1 million of legal settlement costs in the three and nine months ended September 30, 20202022.
(2)Loss on modification and extinguishment of debt is reported in interest expense and is related to the write-off of unamortized deferred financing fees, unamortized original issue discounts and new debt issuance costs in conjunction with the amendment to our amended first lien facilities during the three and nine months ended September 30, 2023.
(3)Interest expense swap adjustments consist of amortization of unrealized gains on our terminated interest rate swap agreements, which will be recognized through December 2023 as a reduction in interest expense.
(4)Interest expense discounts consist of amortization of original issue discount and debt issuance costs.
(5)Restructuring charges represent costs incurred in connection with the Company’s global restructuring plan. Costs incurred in connection with the plan include: (i) $3.3 million and $11.1 million of severance and benefits related to impacted employees during the three and nine months ended September 30, 2023, respectively, (ii) $1.4 million and $8.6 million of professional service fees related to the execution of our cost savings initiatives during the three and nine months ended September 30, 2023, respectively, (iii) $0.4 million and $2.6 million related to the abandonment of certain of our leased facilities during the three and nine months ended September 30, 2023, respectively, and (iv) $0.9 million and $1.6 million related to the replacement of certain internal technology systems during the three and nine months ended September 30, 2023, respectively.
(6)Technology investments represent costs associated with a singlethe impairment of certain of our cloud computing software costs during the three and nine months ended September 30, 2023 and discovery phase costs associated with various platform and fulfillment technology initiatives that are intended to achieve greater operational efficiencies.
(7)Amortization of cloud computing software costs consists of expense recognized in selling, general and administrative expenses for capitalized implementation costs for cloud computing IT systems incurred in connection with our platform and fulfillment technology initiatives that are intended to achieve greater operational efficiencies. This expense is not included in depreciation and amortization above.
(8)Other items for the three and nine months ended September 30, 2023 consist primarily of (i) an insurance recovery and related professional services fees of $6.8 million, net of fees payable to the Company’s outside counsel, in connection with litigation matter related to a predecessor entity of the Company for a claim dating back to 2009 (for additional information see Note 13and deemed to be outside the ordinary course of business. The reduction related to the accompanying condensed consolidated financial statementsinsurance recovery is offset by (i) professional services fees of $0.6 million pertaining to other financing activities for additional information),both the three and (iv) $0.3nine months ended September 30, 2023, and (ii) $0.5 million and $2.5$1.2 million of severance costs incurred in connection with reducing our employee headcount in an effortprofessional services fees not related to right-size our business in response to COVID-19core operations during the three and nine months ended September 30, 2020,2023, respectively.
(4)An adjusted effective income tax rate has been determined Other items for each period presented by applying the statutory income tax rate and the provision for deferred income taxes to the pre-tax adjustments, which was used to compute Adjusted Net Income (Loss) for the periods presented.
Key Metrics
The key metrics used to help us evaluate our business, identify trends and formulate business plans and strategy are set forth in the table below and described in the following text:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands, except percent) |
| | | | | | | |
| New business revenue | $ | 10,873 | | | $ | 9,354 | | | $ | 24,117 | | | $ | 23,075 | |
We measure net revenue retention on a year-to-date basis. Net revenue retention for the nine months ended September 30, 2021 and 2020 was 133.8% and 75.7%, respectively.
Net Revenue Retention
We generally have long standing relationships with our customers as evidenced by the nine-year average tenure of our enterprise customers. The revenue from these customers is highly reoccurring in nature. In addition, our ability to cross sell and expand our services with our existing customers is an important component of our growth strategy. We measure the success of our customer retention and expansion through net revenue retention particularly among our top 1,250 customers who represent approximately 70% of our total revenue. Net revenue retention is a measure of our ability to retain and grow business from our customer base. It is calculated as the total revenue derived in the current fiscal period by our top 1,250 customers, divided by the total revenue derived in the prior fiscal period from the same 1,250 customers based on the prior fiscal period revenue composition. The 1,250 customers used for this metric may vary from period to period, as defined by the revenue composition of the period immediately preceding the presented fiscal year. Net revenue retention increased in the 2021 periods as general client ordering patterns showed a significant volume and product mix improvement over the COVID impacted prior year quarter and year to date periods.
New Business Revenue
In addition to expanding revenue with our existing customer base, adding new customers to our portfolio is an important driver of growth. New business revenue is a measure of our ability to establish new sources of business from customers outside of our existing base of business. New business represents revenue recognized under a new customer contract during the first year of the contract term. We have a sales and sales support staff in nine countries focused on expanding our reach and penetration into new markets and regions. Although new contracts are typically three years in duration, new business revenue is determined over the first year of the contract. Continuing to grow this important metric is critical to the success of our business. New business revenue increased in the three and nine months ended September 30, 2021 compared2022 include (i) costs of $0.4 million and $1.7 million associated with the implementation of a company-wide enterprise resource planning system during the three and nine months ended September 30, 2022, respectively, (ii) $1.0 million and $1.6 million of severance costs during the three and nine months ended September 30, 2022, (iii) $0.4 million related to professional services fees not related to core operations for the three and nine months ended September 30, 2022, and (iv) $0.2 million related to loss on disposal of assets and exit costs associated with one of our short-term leased facilities during the nine months ended September 30, 2022. These costs were partially offset by a reduction in previously accrued legal settlement expense of $0.6 million during the nine months ended September 30, 2022 due to a more favorable outcome than originally anticipated in a claim outside the ordinary course of business.
(9)Adjusted income taxes are based on the tax laws in the jurisdictions in which the Company operates and exclude the impact of net operating losses and valuation allowances to calculate a non-GAAP blended statutory rate of 26% for the three and nine months ended September 30, 2023 and 2022. Adjusted income taxes for the three and nine months ended September 30, 2022 have been updated to conform to the priorcurrent year period due to methodology.volume and product mix improvement over the COVID impacted prior year quarter and year to date periods.
Liquidity and Capital Resources
General
Our primary sources of liquidity and capital resources are cash generated from our operating activities, cash on hand, and borrowings under our long-term debt arrangements. Income taxes are currentlyhave historically not been a significant use of funds but after the benefits of our net operating loss (“NOL”) carryforwards are fully recognized, could become a material use of funds, depending on our future profitability and future tax rate. Additionally, as a result of the income tax receivable agreement (“TRA”) we entered into in connection with the IPO, we will be required to pay certain pre-IPO ownersequityholders or their transferees 85% of the benefits, if any, that the Company and its subsidiaries realize, or are deemed to realize in income tax savings due to our utilization of the NOLs and other tax attributes, for certain tax benefits over a period of approximately 12 years pursuant towhich the TRA, which amounts toCompany recognized an estimated total liability of approximately $209.9 million.$210.5 million, including a current portion of $27.0 million, as of September 30, 2023. Based on our current taxable income estimates, we expect to repay the majority of this obligation by the end of our 2025 fiscal year.2030. Payments on the TRA will begin in the first quarter of 2024. These payments will result in cash outflows of amounts we would otherwise have retained in the form of tax savings from the application of the NOLs and other tax attributes.
Unrestricted cash and cash equivalents as of September 30, 2021 totaled $19.72023 was $103.2 million. As of September 30, 2021,2023, cash held in foreign jurisdictions was approximately $4.7$22.0 million and is primarily related to international operations.
Restricted cash of $5.0 million as of September 30, 2021 consists of $1.1 million held in escrow for the benefit of former investors in a subsidiary of the Company pursuant to the terms of its divestiture of a former affiliate in April 2018, and the remainder is related to prior restructurings from predecessor entities.
The Company proactively drew down $50.0 million under its Revolving Credit Facility, during the quarter ended March 31, 2020 in preparation for the impact of the COVID-19 pandemic. The Company repaid $20.0 million on the Revolving Credit Facility during each of the second and third quarters of the year ended December 31, 2020. The Company had $10.0 million outstanding under the Revolving Credit Facility and $88.2 million of availability remained as of September 30, 2021. On November 5, 2021, the Company repaid the $10.0 million outstanding principal amount on the Revolving Credit Facility.
Debt
The Company currently has two long-term debt arrangements:
•The Second Amended First Lien Term Loan Facility, a first lien senior secured term loan facility, bearing interest payable monthly at a Secured Overnight Financing Rate (“SOFR”) variable rate (5.39% at September 30, 2023) + 4.00%, maturing on September 30, 2030. Total principal outstanding balance on our debt was $750.0 million as of September 30, 2023 and $699.5 million as of December 31, 2022.
•The Second Amended Revolver Credit Facility, a first lien senior secured revolving credit facility in an aggregate principal amount of up to $160.0 million, including a $40.0 million letter of credit sub-facility, bearing interest monthly at a SOFR variable rate (5.39% at September 30, 2023) + 2.5% (subject to adjustment pursuant to a leverage-based pricing grid) and maturing on June 3, 2027 or, if earlier, 91 days prior to the maturity of the Company’s term loans under the Second Amended First Lien Term Loan Facility. The Company had $158.7 million in available borrowing capacity under the Amended Revolving Credit Facility, after utilizing $1.3 million for letters of credit as of September 30, 2023.
The Second Amended First Lien Term Loan Facility includes a springing financial maintenance covenant for the benefit of the revolving lenders thereunder, which requires us to maintain a maximum first lien leverage ratio as of the last day of any fiscal quarter on which greater than 35% of the revolving commitments are drawn (excluding for this purpose up to $15.0 million of undrawn letters of credit). The Company was not subject to this covenant as of September 30, 2023, as outstanding loans and letters of credit under the Second Amended Revolving Credit Facility did not exceed 35% of the total commitments under the facility.
The Company’s obligations under the Second Amended First Lien Facilities are guaranteed, jointly and severally, on a senior secured first-priority basis, by substantially all of the Company’s domestic wholly-owned material subsidiaries, as defined in the agreement, and are secured by first-priority security interests in substantially all of the assets of the Company and its domestic wholly-owned material subsidiaries, subject to certain permitted liens and exceptions. Collateral includes all outstanding equity interests in whatever form of the borrower and each restricted subsidiary that is owned by any credit party.
Operating Commitments
As of September 30, 20212023, the Company had purchase obligations of approximately $27.2 million withto various parties of which approximately $21.7$35.3 million is expected to be paid within one year. These purchase commitments are associated with agreements that are enforceable and legally binding. They arein the aggregate, primarily commitments to purchase data and other screening services in the ordinary course of business withbusiness. These purchase obligations have varying expiration terms through 2023.2025, and approximately $25.8 million of the total is expected to be paid within one year.
In addition to our regular investment in capital expenditures, we plan to invest $40-$45 million in a capital expenditure program through the end of fiscal year 2023 to continue to enhance our operating systems and technologies to improve operational efficiency. We expect that cash flow from operations and current cash balances, together with available borrowings under the Second Amended Revolving Credit Facility, will be sufficient to meet operating requirements as well as the obligations under the TRA as discussed below, through the next twelve months. Although we believe we have adequate sources of liquidity over the long term, cash available from operations could be affected by any general economic downturn or any decline or adverse changes in our business such as a loss of customers, market and or competitive pressures, unanticipated liabilities, or other significant changes in business environment. Additional future financing may be necessary to fund our operations, and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all.
Debt
Effective with the combination of the HireRight and GIS groups of companies on July 12, 2018, the Company has three long-term debt arrangements as described below. Collateral includes all outstanding equity interests in whatever form of the borrower and each restricted subsidiary that is directly owned by or on behalf of any credit party. The credit agreement has a restrictive covenant for leverage ratios. The Company was in compliance with the covenants under the credit agreement for the three and nine months ended September 30, 2021. Accordingly, the amount payable under the credit agreement is classified as long-term debt in the accompanying condensed consolidated balance sheet.
At September 30, 2021, we had the following long-term debt arrangements:
•a first lien senior secured term loan facility, in an aggregate principal amount of $835.0 million, bearing interest payable monthly at a London Interbank Offered Rate (“LIBOR”) variable rate (0.08% at September 30, 2021) + 3.75%, due July 12, 2025 (the “First Lien Term Loan Facility”).
•a first lien senior secured revolving credit facility, in an aggregate principal amount of up to $100.0 million, including a $40.0 million letter of credit sub-facility, bearing interest monthly at 3.5% and maturing on July 12, 2023 (the “Revolving Credit Facility”).
•a second lien senior secured term loan facility, in an aggregate principal amount of $215.0 million, bearing interest payable monthly at a LIBOR variable rate (0.08% at September 30, 2021) + 7.25%, due July 12, 2026 (the “Second Lien Term Loan Facility”).
The Company used $215.0 million of the proceeds from the IPO to repay, in full, the Second Lien Term Loan Facility. The Company plans to use approximately $100.0 million of proceeds of the IPO to repay, in part, the First Lien Term Loan Facility and no longer expects to incur swap breakage fees of approximately $4.2 million.
Cash Flow
The following table sets forth a summary ofsummarizes our condensed consolidated cash flows for the nine months ended September 30, 20212023 and 2020:2022:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2021 | | 2020 |
| (in thousands) |
| Net cash provided by operating activities | $ | 19,043 | | | $ | 7,721 | |
| Net cash used in investing activities | (9,983) | | | (9,276) | |
| Net cash (used in) provided by financing activities | (7,503) | | | 2,335 | |
| Net increase in cash, cash equivalents and restricted cash | $ | 1,557 | | | $ | 780 | |
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
| (in thousands) |
| Net cash provided by operating activities | $ | 50,628 | | | $ | 70,927 | |
| Net cash used in investing activities | (34,531) | | | (13,122) | |
| Net cash used in financing activities | (76,255) | | | (25,050) | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | (60,158) | | | $ | 32,755 | |
Operating Activities
Cash provided by operating activities reflects net income (loss) adjusted for certain non-cash items and changes in operating assets and liabilities. Total cashCash provided by operating activities was $19.0$50.6 million for the nine months ended September 30, 20212023 compared to cash provided of $7.7$70.9 million for the nine months ended September 30, 2020.2022. The increasedecrease in cash flows provided by operating activities was due primarily to a lower net loss of $7.0 million for the current period compared to net income of $129.3 million for the prior year period, partly offset by a higherthe tax benefit from the release of the valuation allowance during the nine months ended September 30, 2022, and lower use of cash fromfor working capital in the current period compared to the prior year period.
Investing Activities
Cash used in investing activities was approximately $10.0$34.5 million during the nine months ended September 30, 2021,2023, compared to approximately $9.3$13.1 million during the nine months ended September 30, 2020.2022. The increase was due primarily to an increase in cash used inof $21.7 million related to the DTIS Acquisition. No comparable acquisition activity occurred during the nine months ended September 30, 2022. Other investing activities was due primarilyincreased $2.0 million compared to slight increases inthe prior period, partly offset by decreases to purchases of property and equipment, and capitalized software development costs compared toas the prior period.company continues its cost savings initiatives.
Financing Activities
Cash used in financing activities was approximately $7.5$76.3 million for the nine months ended September 30, 20212023 compared to cash provided by financing activities of approximately $2.3$25.1 million during the nine months ended September 30, 2020.2022. The changeincrease in cash used was due primarily to $109.6 million of repurchases of our common stock made under the share repurchase programs during the nine months ended September 30, 2023. This increase was partially offset by net proceeds from the Second Amended First Lien Term Loan Facility of approximately $37.2 million. Also offsetting the increase in cash used in financing activities is due primarily towere payments of $18.4 million for termination of interest rate swap agreements during the Company’s draw down of $50.0 million on the Revolving Credit Facility in the same period last year. We had netprior year period. Mandatory repayments on our debt facilities ofwere $4.2 million and $6.3 million in the nine months ended September 30, 2021 compared2023 and 2022, respectively.
Share Repurchase Program
On November 14, 2022, the Company announced the Initial Program. Pursuant to net borrowingsthe Initial Program, the Company repurchased a total of $3.79,340,029 shares of the Company’s common stock at an average price paid of $10.79 per share.
On June 22, 2023, the Company announced the Second Program, which authorized the Company to repurchase up to an additional $25.0 million inof the nine months endedCompany’s common stock. The Second Program was completed on August 28, 2023. Pursuant to the Second Program, the Company purchased a total of 2,334,511 shares of the Company’s common stock at an average price paid of $10.82 per share, including commissions paid and excise taxes.
On September 30, 2020.
Financing and Financing Capacity
Total principal outstanding on our debt was $1.0 billion as12, 2023, the Company announced the Third Program for repurchase of up to an additional $25.0 million of the Company’s common stock. As of September 30, 2021 and $1.0 billion as of December 31, 2020.
Income Tax Receivable Agreement
In connection with2023, the Company’s IPO during the fourth quarter of 2021, we entered into the TRA with our pre-IPO equityholders or their permitted transferees that will provide for the payment by us over a period of approximately 12 years to our pre-IPO equityholders or their permitted transferees of 85% of the benefits, if any, that we and our subsidiaries realize, or are deemed to realize (calculated using certain assumptions) in U.S. federal,Company purchased 71,047 shares
state, and local income tax savings as a result of the utilization (or deemed utilization)Company’s common stock at an average price paid of certain existing tax attributes. Based on our current taxable income estimates, we expect to repay$9.57 per share, including commissions paid and excise taxes. Approximately $24.3 million remained available for future purchases under the majorityThird Program. Repurchases under the Third Program continued at similar rates through the date of filing of this obligation byreport, and the endBoard of our 2025 fiscal year. Actual tax benefits realized by usDirectors has not yet determined whether to renew the Third Program following its termination.
Under the Third Program, the Company may differpurchase shares of its common stock on a discretionary basis from tax benefits calculated under the TRA astime to time through open market repurchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. The timing and actual number of shares repurchased will depend on a resultvariety of the use of certain assumptions in the TRA,factors, including assumptions relating to statestock price, trading volume, market conditions and local income taxes, to calculate tax benefits.other general business considerations. The Company will record an estimated total liability of approximately $209.9 million and a reduction to Additional paid-in capital of approximately $209.9 million in connection with the TRA during the fourth quarter of 2021 on its condensed consolidated balance sheets.Third Program may be modified, suspended, or terminated at any time.
Off-Balance Sheet Arrangements
As of September 30, 2021,2023, we did not have anyhad no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K, other than operating leases, primarilyS-K.
Recently Issued Accounting Pronouncements
See “Part I, Item 1. Financial Statements (unaudited) - Note 2 — Recently Issued Accounting Pronouncements” of this Quarterly Report on Form 10-Q for our leased facilities.further information on recently adopted accounting pronouncements and those not yet adopted.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impactto our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure due to potential changesinterest rate risk, potential foreign exchange risk and potential increases in inflation. We do not hold financial instruments for trading purposes.
Interest Rate Risk
We are exposed to changes in interest rates as a result of the outstanding balance under the Second Amended First Lien Term Loan Facility, as well as any borrowings under the Second Amended Revolving Credit Facility. Our primary exposure is an increase in SOFR, which increases the interest rate we pay on the outstanding principal balance of our financing activities used to fund business operations. Primary exposures include movements in LIBOR.debt. The nature and amount of our long-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. To minimize this risk, we have entered intoAny increases in our outstanding indebtedness will amplify the effects of increased interest rate swap agreements to hedge our risk to changes in LIBOR.rates.
As of September 30, 2021,2023, the outstanding balancesprincipal balance of $750.0 million on our credit agreements werethe Second Amended First Lien Term Loan Facility was subject to variable interest rates. We repaid $215.0 million of the amount outstanding under our Second Lien Term Loan Facility usingBased upon a portion of the proceeds from the IPO.
The Financial Conduct Authoritysensitivity analysis, a hypothetical 1% change in the United Kingdom intends to phase out LIBOR by the end of 2021. We have negotiated terms in consideration of this discontinuation and do not expect that the discontinuation of the LIBOR rate, including any legal or regulatory changes made in response to its future phase out, will have a material impactinterest rates on our liquidity or results of operations.debt outstanding would change our annual interest expense by approximately $7.5 million.
Foreign Currency Exchange Risk
The significant majority of our revenue is denominated in U.S. dollars,dollars; however, we do earn revenue, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar, including among others,the Euro, the British pound, the Polish zloty, the Australian dollar, the Canadian dollar, the Euro, the Polish Zloty, the Singapore dollar, the Mexican peso, the Japanese yen, and the Indian rupee.rupee, among others. Because our condensed consolidated financial statements are presented in U.S. dollars, we must translate revenue, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Therefore, increases or decreases in the value of the U.S. dollar against majorother currencies will affect our operating revenues, operating incomestatements of operations and the value of balance sheet items denominated in foreign currencies. We generally do not mitigate the risks associated with fluctuating exchange rates however, because we generallytypically incur expenses and generate revenue in these currencies and the cumulative impact of these foreign exchange fluctuations are not deemed material to our financial performance.
Inflation Risk
Recent growth in inflation has increased and may continue to increase our operating costs. In response to inflation, the Federal Reserve has been raising interest rates and has indicated that it will continue to monitor economic data and some observers foresee possible future interest rate increases. Higher interest rates imposed by the Federal Reserve to address inflation will increase our interest expense. We also expect our labor costs to continue to increase due to the growing competition for labor and the effect of inflation on wage rates. We continue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. However, we may not be able to raise our pricing sufficiently to offset our increased costs, for competitive reasons or because some of our customer agreements fix the prices we may charge for some period of time and/or limit permissible price increases. There can be no assurance that future inflation will not have an adverse impact on our operating results and financial condition.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, Act)as amended (the “Exchange Act”)) as of September 30, 2021.2023. Based on the evaluation, of the design and operation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2021 due2023.
(b) Limitations on effectiveness of controls and procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain material weaknessesassumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
(c) Changes in Internal Control over Financial Reporting
We have implemented business combination controls in connection with an acquisition during the quarter ended September 30, 2023.
There were no other changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2023, as described below. In light of this fact, our management has performed additional analyses, reconciliations, and other post-closing procedures and has concludeddefined under Rule 13a-15(f) under the Exchange Act, that notwithstanding the material weakness inhave materially affected, or are reasonably likely to materially affect, our internal control over financial reporting,reporting. On July 3, 2023, we completed the financial statements foracquisition of 60% of the periods covered by and includedequity interests in this Quarterly Report fairly present, in all material respects, our financial position, resultsDigital Trust Identity Services (“DTIS”). We are permitted to omit an assessment of operations and cash flows for the periods presented in conformity with GAAP.
(b) Material weaknesses inan acquired business' internal control over financial reporting
In preparing from our assessment of internal control over financial statements, managementreporting for a period not to exceed one year from the date of the Company identified material weaknesses in ouracquisition. Accordingly, we anticipate that the internal control over financial reporting of DTIS will be excluded from management's assessment of internal control over financial reporting as of December 31, 2020. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses we identified were as follows:
•We did not design and maintain an effective control environment commensurate with our financial reporting requirements. Specifically, we lacked a sufficient number of professionals with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately. This material weakness further contributed to the material weaknesses described below.
•We did not design and maintain sufficient formal accounting policies, procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over the preparation and review of journal entries and account reconciliations. Additionally, the Company did not design and maintain sufficient controls to assess the reliability of reports and spreadsheets used in controls.
These material weaknesses did not result in a material misstatement to the consolidated financial statements included herein, however, they did result in adjustments to substantially all accounts and disclosures. Additionally, these material weaknesses could result in a misstatement of substantially all of the financial statement accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
•We did not design and maintain effective controls over certain information technology (“IT”) general controls for information systems that are relevant to the preparation of the financial statements. Specifically, we did not design and maintain: (i) program change management controls for certain financial systems to ensure that information technology program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately, (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs, and data to appropriate Company personnel and (iii) computer operations controls to ensure that data backups are authorized and monitored. These IT deficiencies did not result in a material misstatement to the financial statements, however, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement
accounts and disclosures that would not be prevented or detected. Accordingly, management has determined these deficiencies in the aggregate constitute a material weakness.
We have implemented or are in the process of implementing measures designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weaknesses. Specifically, we have undertaken the following remedial actions:
•We have hired several additional accounting and finance personnel with the appropriate level of public accounting knowledge and experience.
•We have engaged a nationally recognized public accounting firm to assist us in creating comprehensive process narratives and Company policies and procedures.
•Our Internal Audit team, along with a third party consultant, are assisting us to evaluate our current internal control over financial reporting (ICFRs) and make recommendations for findings noted. We have been enhancing our controls and documentation support as issues are identified.
•We are in the process of implementing several new systems that should assist us to process transactions more efficiently and effectively, ensuring better control and documentation support.
•We are working with our information security and technology and accounting systems teams to develop enhanced procedures around user provisioning and maintenance to ensure access is restricted to appropriate personnel.
(c) Changes in Internal Control over Financial Reporting
Other than the changes intended to remediate the material weaknesses noted above, there was no change in our internal controls over financial reporting, as defined under Rule 13a-af(f) under the Exchange Act, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to claims, investigations, audits, and enforcement proceedings by private plaintiffs, third parties the Company does business with, and federal, state and foreign authorities charged with overseeing the enforcement of laws and regulations that govern the Company’s business. In the U.S., most of these matters arise under the federal Fair Credit Reporting Act and various state and local laws focused on privacy and the conduct and content of background reports. In addition to claims related to privacy and background checks, the Company is also subject to other claims and proceedings arising in the ordinary course of its business, including without limitation claims for indemnity by customers and vendors, employment-related claims, and claims for alleged taxes owed, infringement of intellectual property rights, and breach of contract. The Company and its subsidiaries are not party to any pending legal proceedings that the Company believes to be material except as set forth below.
In 2009 and 2010, approximately 24 lawsuits were filed against HireRight Solutions, Inc. (“Old HireRight”), which is the predecessor to the Company’s subsidiary HireRight, LLC, by approximately 1,400 individuals alleging violation of the California Investigative Consumer Reporting Agencies Act by Old HireRight and one of its customers (the “Customer”) related to background reports that Old HireRight prepared for the Customer about those individuals (the “Action”). The Customer was also named as a defendant in the Action.
In February of 2015, for unrelated reasons, Old HireRight’s former parent company and certain of its domestic affiliates, including Old HireRight, each filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. §§ 101-1532, thereby commencing Chapter 11 cases (the “Bankruptcy”). Each plaintiff in the Action filed proofs of claim in the Bankruptcy against Old HireRight asserting an unliquidated general unsecured claim based upon the Action. In August 2015, the Bankruptcy court entered an order confirming the debtors’ Chapter 11 plan of reorganization in the Bankruptcy (the “Plan”).
Plaintiffs’ recovery from HireRight, LLC for claims accrued prior to the filing of the Bankruptcy is limited by the Plan to the Plaintiffs’ pro-rata portion of the Bankruptcy unsecured creditors’ pool. However, the Plan does not limit HireRight, LLC’s liability for claims accrued after the filing of the Bankruptcy, plaintiffs’ recovery from the Customer, or claims against Old HireRight’s insurer.material.
Following a complex procedural history and unsuccessful mediation sessions over an extended period of time, in October 2020, plaintiffs’ counsel made a settlement offer. While the Company believed and continues to believe it has valid defenses, the Company engaged in negotiations with the plaintiffs’ counsel and on November 6, 2020 was able to reach a settlement agreement that the Company viewed as acceptable to avoid the expense and risk of further litigation.
While Old HireRight’s insurer has denied coverage, the Company believes it has valid claims against the carrier and intends to pursue them. Any insurance recovery would offset the cost of the settlement to HireRight, LLC, but at this time the Company is not able to assess the likelihood or amount of any potential insurance recovery.
Item 1A. Risk Factors
InvestingCurrent macroeconomic conditions are volatile and the near-term macroeconomic outlook is uncertain due to high inflation, rising interest rates, geopolitical concerns, supply chain disruptions and labor disruptions. These factors have led to reduction in our common stock involves aorder volumes, and consequently we expect 2023 revenue below 2022 levels. We do not know how long these conditions will persist.
Inflation puts pressure on our suppliers, resulting in increased data costs, and also increases our employment and other expenses. We may not be able to raise our pricing sufficiently to offset increased costs, for competitive reasons or because some of our customer agreements limit price increases. Further, portions of our costs are relatively fixed so it may not be possible for us to cut costs quickly or deeply enough to keep cost increases from adversely affecting our margins.
In response to high degreeinflation, the Federal Reserve has been raising interest rates and has not indicated when interest rate increases will be paused or reversed. Higher interest rates increase our interest expense on variable-rate borrowings under our credit facilities. Further, interest rate hikes or other factors could lead to recessionary conditions, which could adversely affect the global hiring market and therefore the demand for our services.
Market uncertainty and potential disruption resulting from geopolitical tensions and armed conflicts of risk. We describepotentially significant scope represent material risks associated withto the global economy and our business under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewherebusiness.
Customers have been reacting to these uncertainties by reducing hiring, which in turn causes uncertainty in our Prospectus dated October 28, 2021, filed with the SEC in accordance with Rule 424(b) under the Securities Act on November 1, 2021 in connection with our IPO, this report, and in other filings we have made and will make from timerevenue outlook.
In addition to time with the Securities and Exchange Commission (the "Risk Factors"). Each of the risks described in our Risk Factors may be relevant to decisions regarding an investment in or ownership of our stock. The occurrence of any such risks could have a significant adverse effect on our reputation, business, financial condition, revenue, results of operations, growth, or ability to accomplish our strategic objectives, and could cause the trading price of our common stock to decline. You should carefully consider such risks and the other information contained in this report, including our condensed consolidated financial statements and related notes and
Management's Discussion and Analysis of Financial Condition and Results of Operations, before making investment decisions related to our common stock. There are no material changes toQuarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A. Risk Factors set forth in the Prospectus of which we are currently aware. However, our Risk Factors cannot anticipate and fully address all possible risks of investing in our common stock, theAnnual Report. The risks of investingdiscussed in our common stockAnnual Report could materially affect our business, financial condition, and future results. The risks described in our Annual Report may change over time, and additional risks and uncertainties that we are not aware of, or that we do not consider to be material, may emerge. Accordingly, you are advised to consider additional sources of information and exercise your own judgment in addition to the information we provide.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases of Common Stock
The following table summarizes the Company’s share repurchase program during the three months ended September 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| Period | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs (1) | | Approximate dollar value of shares that may yet be purchased under the plans or programs |
| | | | | | | (in millions) |
| July 1 — July 31, 2023 | 637,672 | | $ | 11.09 | | | 637,672 | | $ | 15.9 | |
| August 1 — August 31, 2023 | 1,512,839 | | 10.64 | | | 1,512,839 | | — | |
| September 1 — September 30, 2023 | 71,047 | | 9.57 | | | 71,047 | | 24.3 | |
| Total | 2,221,558 | | $ | 10.62 | | | 2,221,558 | | $ | 24.3 | |
(1)On November 14, 2022, the Company announced a $100.0 million share repurchase program that was completed on June 21, 2023 (the “Initial Program”). Pursuant to the Initial Program, the Company repurchased a total of 9,340,029 shares of the Company’s common stock at an average price paid of $10.79 per share, including commissions paid and excise taxes. On June 22, 2023, the Company announced an additional share repurchase program for repurchase of up to an additional $25.0 million of the Company's common stock, par value $0.001 (the “Second Program”). The Second Program was completed on August 28, 2023. Pursuant to the Second Program, the Company repurchased a total of 2,334,511 shares of the Company’s common stock, at an average price paid of $10.82 per share, including commissions paid and excise taxes. On September 12, 2023, the Company announced a third share repurchase program for repurchase of up to an additional $25.0 million of the Company’s common stock, par value $0.001 (the “Third Program”). Repurchases under the Third Program continues through the date of filing of this report, and the Board of Directors has not yet determined whether to renew the Third Program following its termination.The Initial Program and the Second Program authorized, and the Third Program authorizes, repurchases in the open market in accordance with the requirements of Rule 10b-18, in privately negotiated transactions or otherwise, including through Rule 10b5-1 trading plans, with the amount and timing of repurchases depending on stock price, trading volume, market conditions and other general business considerations. The Initial Program and the Second Program did not obligate the Company to acquire any particular amount of common stock and could be extended, modified, suspended, or discontinued at any time at the Company's discretion. The Third Program has the same characteristics. All of the repurchases shown in the table were purchased as part of the Second Program or the Third Program, all of which were publicly announced and were structured to satisfy the conditions of Rule 10b-18. The table above shows repurchases under the Second Program during July and August, 2023 and the Third Program during September 2023. The fourth column in the table indicates the authorized dollar value remaining under the Second Program at the end of July and August and under the Third Program at the end of September.
Item 5. Other Information
Insider trading arrangements and policies
During the quarter ended September 30, 2023, none of our directors or officers adopted or terminated any “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as defined in Item 408(a) of Regulation S-K.
Item 6. Exhibits
| | | | | | | | |
| Exhibit Number | | Exhibit Description |
| 10.1 | | |
| 31.1 | | |
| 31.2 | | |
| 32.1 | | |
32.2 | | |
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.
HireRight Holdings Corporation
Date: November 18, 20217, 2023
| | | | | |
| By: | /s/ Thomas M. Spaeth |
| Name: | Thomas M. Spaeth |
| Title: | Chief Financial Officer |
| (Principal Financial Officer) |
Date: November 7, 2023
| | | | | |
| By: | /s/ Laurie Blanton |
| Name: | Laurie Blanton |
| Title: | Chief Accounting Officer |
| (Principal Accounting Officer) |
