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, 2022~~March 31, 2023


☐			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 001-40982

HireRight Holdings Corporation

(Exact name of registrant as specified in its charter)


Delaware									~~82-1092072~~83-1092072
(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 (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 ~~79,484,907~~73,837,499 shares of common stock as of ~~October 27, 2022.~~

~~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 “~~Part I, Item 1. Financial Statements (Unaudited) - Note 1 — Organization, Basis of Presentation and Consolidation, and Significant Accounting Policies” in this Quarterly Report on Form 10-Q for further information.~~

For convenience, we often refer to the individuals about whom we prepare screening reports as “applicants” because the majority of our screening reports are ordered by our customers to assist in their evaluation of applicants for employment or engagement as contractors. However, we also prepare screening reports on our customers’ existing employees, vendor personnel, volunteers, and others, and our references to “applicants” refer to all subjects of our screening reports.May 2, 2023.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)


			Page
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Operations			2
Condensed Consolidated Statements of Comprehensive Income			3
Condensed Consolidated Statements of Stockholders’ Equity			4
Condensed Consolidated Statements of Cash Flows			65
Notes to Condensed Consolidated Financial Statements			76

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

I t em 2 . Unregistered Sales of Equity Securities and Use of Proceeds

Item 6. Exhibits

Signatures

Part I - FINANCIAL INFORMATION

Item 1. Financial Statements

HireRight Holdings Corporation

Condensed Consolidated Balance Sheets (Unaudited)


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
		(in thousands, except share and per share data)					(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	$	146,508	$	111,032	Cash and cash equivalents	$	127,410	$	162,092
Restricted cash	Restricted cash	1,306		5,182		Restricted cash	—		1,310
Accounts receivable, net of allowance for doubtful accounts of $5,170 and $4,284 at September 30, 2022 and December 31, 2021, respectively		165,944		142,473
Accounts receivable, net of allowance for credit losses of $5,365 and $5,812 at March 31, 2023 and December 31, 2022, respectively						Accounts receivable, net of allowance for credit losses of $5,365 and $5,812 at March 31, 2023 and December 31, 2022, respectively	134,306		136,656
Prepaid expenses and other current assets	Prepaid expenses and other current assets	17,067		18,583		Prepaid expenses and other current assets	20,208		18,745
Total current assets	Total current assets	330,825		277,270		Total current assets	281,924		318,803
Property and equipment, net	Property and equipment, net	9,492		11,127		Property and equipment, net	8,374		9,045
Right-of-use assets, net	Right-of-use assets, net	8,802		—		Right-of-use assets, net	6,921		8,423
Intangible assets, net	Intangible assets, net	343,025		389,483		Intangible assets, net	318,057		331,598
Goodwill	Goodwill	801,674		819,538		Goodwill	811,338		809,463
Cloud computing software, net	Cloud computing software, net	29,844		8,133		Cloud computing software, net	39,785		35,230
Deferred tax assets	Deferred tax assets	63,167		—		Deferred tax assets	80,612		74,236
Other non-current assets	Other non-current assets	18,811		18,211		Other non-current assets	20,583		18,949
Total assets	Total assets	$	1,605,640	$	1,523,762	Total assets	$	1,567,594	$	1,605,747
Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Current liabilities	Current liabilities					Current liabilities
Accounts payable	Accounts payable	$	11,355	$	13,688	Accounts payable	$	9,442	$	11,571
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	79,867		75,294		Accrued expenses and other current liabilities	102,923		75,208
Accrued salaries and payroll	Accrued salaries and payroll	33,158		29,280		Accrued salaries and payroll	26,085		31,075
Derivative instruments, short-term		—		16,662

Debt, current portion	Debt, current portion	8,350		8,350		Debt, current portion	8,350		8,350
Total current liabilities	Total current liabilities	132,730		143,274		Total current liabilities	146,800		126,204
Debt, long-term portion	Debt, long-term portion	684,565		688,683		Debt, long-term portion	681,853		683,206
Derivative instruments, long-term		—		11,444
Tax receivable agreement liability		211,438		210,639

Tax receivable agreement liability, long-term portion						Tax receivable agreement liability, long-term portion	183,504		210,543
Deferred tax liabilities	Deferred tax liabilities	5,760		14,765		Deferred tax liabilities	5,617		5,748
Operating lease liabilities, long-term		11,051		—
Other non-current liabilities	Other non-current liabilities	2,394		9,240		Other non-current liabilities	10,845		11,728
Total liabilities	Total liabilities	1,047,938		1,078,045		Total liabilities	1,028,619		1,037,429
Commitments and contingent liabilities (Note 12)	Commitments and contingent liabilities (Note 12)					Commitments and contingent liabilities (Note 12)
Preferred stock, $0.001 par value, authorized 100,000,000 shares; none issued and outstanding as of September 30, 2022 and December 31, 2021		—		—
Common stock, $0.001 par value, authorized 1,000,000,000 shares; 79,482,612 and 79,392,937 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively		79		79
Preferred stock, $0.001 par value, authorized 100,000,000 shares; none issued and outstanding as of March 31, 2023 and December 31, 2022						Preferred stock, $0.001 par value, authorized 100,000,000 shares; none issued and outstanding as of March 31, 2023 and December 31, 2022	—		—
Common stock, $0.001 par value, authorized 1,000,000,000 shares; 79,665,328 and 79,660,397 shares issued, and 75,874,099 and 78,131,568 shares outstanding as of March 31, 2023 and December 31, 2022, respectively						Common stock, $0.001 par value, authorized 1,000,000,000 shares; 79,665,328 and 79,660,397 shares issued, and 75,874,099 and 78,131,568 shares outstanding as of March 31, 2023 and December 31, 2022, respectively	80		80
Additional paid-in capital	Additional paid-in capital	802,484		793,382		Additional paid-in capital	809,627		805,799
Treasury stock, at cost; 3,791,229 and 1,528,829 shares repurchased at March 31, 2023 and December 31, 2022, respectively						Treasury stock, at cost; 3,791,229 and 1,528,829 shares repurchased at March 31, 2023 and December 31, 2022, respectively	(42,337)		(16,827)
Accumulated deficit	Accumulated deficit	(231,065)		(360,364)		Accumulated deficit	(223,701)		(215,790)
Accumulated other comprehensive income (loss)		(13,796)		12,620
Accumulated other comprehensive loss						Accumulated other comprehensive loss	(4,694)		(4,944)
Total stockholders’ equity	Total stockholders’ equity	557,702		445,717		Total stockholders’ equity	538,975		568,318
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,605,640	$	1,523,762	Total liabilities and stockholders’ equity	$	1,567,594	$	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 March 31,
		2022		2021		2022		2021			2023		2022
		(in thousands, except share and per share data)									(in thousands, except share and per share data)
Revenues	Revenues	$	210,303	$	204,981	$	631,306	$	531,522	Revenues	$	175,447	$	198,711

Expenses	Expenses									Expenses
Cost of services (exclusive of depreciation and amortization below)	Cost of services (exclusive of depreciation and amortization below)	110,848		111,328		343,241		295,832		Cost of services (exclusive of depreciation and amortization below)	98,451		112,403
Selling, general and administrative	Selling, general and administrative	49,378		47,652		152,032		130,261		Selling, general and administrative	59,726		48,267
Depreciation and amortization	Depreciation and amortization	17,946		19,531		54,056		56,013		Depreciation and amortization	18,417		18,061
Total expenses	Total expenses	178,172		178,511		549,329		482,106		Total expenses	176,594		178,731
Operating income		32,131		26,470		81,977		49,416
Operating income (loss)										Operating income (loss)	(1,147)		19,980

Other expenses	Other expenses									Other expenses
Interest expense		8,457		18,518		20,971		54,674
Interest expense, net										Interest expense, net	12,402		7,557
Other expense, net	Other expense, net	89		22		163		125		Other expense, net	306		41
Total other expenses, net		8,546		18,540		21,134		54,799
Total other expenses										Total other expenses	12,708		7,598
Income (loss) before income taxes	Income (loss) before income taxes	23,585		7,930		60,843		(5,383)		Income (loss) before income taxes	(13,855)		12,382
Income tax (benefit) expense		(69,704)		649		(68,456)		2,954
Income tax expense (benefit)										Income tax expense (benefit)	(5,944)		818
Net income (loss)	Net income (loss)	$	93,289	$	7,281	$	129,299	$	(8,337)	Net income (loss)	$	(7,911)	$	11,564

Net income (loss) per share:	Net income (loss) per share:									Net income (loss) per share:
Basic	Basic	$	1.17	$	0.13	$	1.63	$	(0.15)	Basic	$	(0.10)	$	0.15
Diluted	Diluted	$	1.17	$	0.13	$	1.63	$	(0.15)	Diluted	$	(0.10)	$	0.15
Weighted average shares outstanding:	Weighted average shares outstanding:									Weighted average shares outstanding:
Basic	Basic	79,459,633		57,168,291		79,419,725		57,168,291		Basic	77,285,116		79,392,937
Diluted	Diluted	79,542,715		57,199,204		79,476,574		57,168,291		Diluted	77,285,116		79,392,937

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

HireRight Holdings Corporation

Condensed Consolidated Statements of Comprehensive Income (Unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
		(in thousands)									(in thousands)
Net income (loss)	Net income (loss)	$	93,289	$	7,281	$	129,299	$	(8,337)	Net income (loss)	$	(7,911)	$	11,564

Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax									Other comprehensive income (loss), net of tax
Unrealized gain (loss) on derivatives qualified for hedge accounting:	Unrealized gain (loss) on derivatives qualified for hedge accounting:									Unrealized gain (loss) on derivatives qualified for hedge accounting:
Unrealized gain (loss) on interest rate swaps		—		(991)		7,981		973
Unrealized gain on interest rate swaps										Unrealized gain on interest rate swaps	—		7,981
Reclassification adjustments included in earnings (1)	Reclassification adjustments included in earnings (1)	(3,413)		5,018		(7,997)		14,733		Reclassification adjustments included in earnings (1)	(2,527)		(502)
Total unrealized gain (loss)	Total unrealized gain (loss)	(3,413)		4,027		(16)		15,706		Total unrealized gain (loss)	(2,527)		7,479
Currency translation adjustment, net of tax benefit (expense) of ($64) and ($16) for the three months ended September 30, 2022 and 2021, respectively, and ($210) and ($1) for the nine months ended September 30, 2022, and 2021, respectively		(12,565)		(3,595)		(26,400)		(2,333)
Currency translation adjustment, net of tax expense of $20 and $63 for the three months ended March 31, 2023 and 2022, respectively										Currency translation adjustment, net of tax expense of $20 and $63 for the three months ended March 31, 2023 and 2022, respectively	2,777		(3,793)

Other comprehensive income (loss)		(15,978)		432		(26,416)		13,373
Comprehensive income		$	77,311	$	7,713	$	102,883	$	5,036
Other comprehensive income										Other comprehensive income	250		3,686
Comprehensive income (loss)										Comprehensive income (loss)	$	(7,661)	$	15,250

(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 ~~income (loss)~~loss on the condensed consolidated balance sheet related to the interest rate swap agreements terminated on February 18, 2022. See Note 910 for additional information.

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

HireRight Holdings Corporation

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

Three Months Ended September 30, 2022
Common Stock
Shares Amount Additional Paid in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity
(in thousands, except share data)
Balances at June 30, 2022 79,432,321 $ 79 $ 800,566 $ (324,354) $ 2,182 $ 478,473
Common stock issuance for vesting of restricted stock units and exercise of stock options 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


	Three Months Ended March 31, 2023
	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 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	4,931	—		—	—		—		—		—		—
Net loss	—	—		—	—		—		(7,911)		—		(7,911)
Stock-based compensation	—	—		—	—		3,828		—		—		3,828
Repurchase of common stock	(2,262,400)	—		2,262,400	(25,510)		—		—		—		(25,510)
Other comprehensive income	—	—		—	—		—		—		250		250
Balances at March 31, 2023	75,874,099	$	80	3,791,229	$	(42,337)	$	809,627	$	(223,701)	$	(4,694)	$	538,975


		Three Months Ended September 30, 2021												Three Months Ended March 31, 2022
		Class A Member Units												Common Stock			Treasury Stock
		Units	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders’ Equity			Shares	Amount		Shares	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
		(in thousands, except unit data)												(in thousands, except unit data)
Balances at June 30, 2021		57,168,291	$	590,711	$	17,012	$	(354,679)	$	2,818	$	255,862
Balances at December 31, 2021													Balances at December 31, 2021	79,392,937	$	79	—	$	—	$	793,382	$	(360,364)	$	12,620	$	445,717
Net income	Net income	—	—		—		7,281		—		7,281		Net income	—	—		—	—		—		11,564		—		11,564
Stock-based compensation	Stock-based compensation	—	—		841		—		—		841		Stock-based compensation	—	—		—	—		2,794		—		—		2,794

Other comprehensive income	Other comprehensive income	—	—		—		—		432		432		Other comprehensive income	—	—		—	—		—		—		3,686		3,686
Balances at September 30, 2021		57,168,291	$	590,711	$	17,853	$	(347,398)	$	3,250	$	264,416
Balances at March 31, 2022													Balances at March 31, 2022	79,392,937	$	79	—	$	—	$	796,176	$	(348,800)	$	16,306	$	463,761

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

~~HireRight Holdings Corporation~~

~~Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)~~

Nine Months Ended September 30, 2022
Common Stock
Shares Amount Additional Paid in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity
(in thousands, except share data)
Balances at December 31, 2021 79,392,937 $ 79 $ 793,382 $ (360,364) $ 12,620 $ 445,717
Common stock issuance for vesting of restricted stock units and exercise of stock options 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

Nine Months Ended September 30, 2021
Class A Member Units
Units Amount Additional Paid in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity
(in thousands, except unit data)
Balances at December 31, 2020 57,168,291 $ 590,711 $ 15,360 $ (339,061) $ (10,123) $ 256,887
Net loss — — — (8,337) — (8,337)
Stock-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

~~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,					Three Months Ended March 31,
		2022		2021			2023		2022
		(in thousands)					(in thousands)
Cash flows from operating activities	Cash flows from operating activities					Cash flows from operating activities
Net income (loss)	Net income (loss)	$	129,299	$	(8,337)	Net income (loss)	$	(7,911)	$	11,564
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
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	54,056		56,013		Depreciation and amortization	18,417		18,061
Deferred income taxes	Deferred income taxes	(70,954)		1,933		Deferred income taxes	(6,590)		205
Amortization of debt issuance costs	Amortization of debt issuance costs	2,549		3,139		Amortization of debt issuance costs	803		821
Amortization of contract assets	Amortization of contract assets	3,312		2,782		Amortization of contract assets	1,212		1,091
Amortization of right-of-use assets	Amortization of right-of-use assets	2,094		—		Amortization of right-of-use assets	2,384		686
Amortization of unrealized gains on terminated interest rate swap agreements	Amortization of unrealized gains on terminated interest rate swap agreements	(9,676)		—		Amortization of unrealized gains on terminated interest rate swap agreements	(2,527)		(2,181)
Amortization of cloud computing software costs	Amortization of cloud computing software costs	1,446		—		Amortization of cloud computing software costs	1,571		151
Stock-based compensation	Stock-based compensation	8,587		2,493		Stock-based compensation	3,828		2,794
Increase in tax receivable agreement liability		800		—

Other non-cash charges, net	Other non-cash charges, net	524		(541)		Other non-cash charges, net	(383)		496
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable	Accounts receivable	(24,521)		(44,715)		Accounts receivable	2,838		(29,852)
Prepaid expenses and other current assets	Prepaid expenses and other current assets	1,516		(2,327)		Prepaid expenses and other current assets	(1,465)		4,115
Cloud computing software	Cloud computing software	(23,158)		—		Cloud computing software	(6,125)		(8,548)
Other non-current assets	Other non-current assets	(3,934)		(4,157)		Other non-current assets	(1,893)		(1,411)
Accounts payable	Accounts payable	(5,212)		(13,736)		Accounts payable	(1,804)		(7,095)
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	5,498		19,676		Accrued expenses and other current liabilities	(771)		14,920
Accrued salaries and payroll	Accrued salaries and payroll	3,631		6,194		Accrued salaries and payroll	(5,140)		(6,240)

Operating lease liabilities, net	Operating lease liabilities, net	(4,125)		—		Operating lease liabilities, net	(1,284)		(1,068)
Other non-current liabilities	Other non-current liabilities	(805)		626		Other non-current liabilities	(175)		(524)
Net cash provided by operating activities		70,927		19,043
Net cash used in operating activities						Net cash used in operating activities	(5,015)		(2,015)
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	(3,973)		(5,092)		Purchases of property and equipment	(693)		(1,867)
Capitalized software development	Capitalized software development	(9,149)		(4,891)		Capitalized software development	(2,918)		(2,662)

Other investing						Other investing	(1,000)		—
Net cash used in investing activities	Net cash used in investing activities	(13,122)		(9,983)		Net cash used in investing activities	(4,611)		(4,529)
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	(2,088)		(2,088)
Borrowings on line of credit		—		30,000
Repayments on line of credit		—		(30,000)

Payments for termination of interest rate swap agreements	Payments for termination of interest rate swap agreements	(18,445)		—		Payments for termination of interest rate swap agreements	—		(18,445)
Payment of issuance costs - revolving credit facility		(342)		—
Other financing		—		(1,240)
Repurchase of common stock						Repurchase of common stock	(24,584)		—

Net cash used in financing activities	Net cash used in financing activities	(25,050)		(7,503)		Net cash used in financing activities	(26,672)		(20,533)
Net increase in cash, cash equivalents and restricted cash		32,755		1,557
Net decrease in cash, cash equivalents and restricted cash						Net decrease in cash, cash equivalents and restricted cash	(36,298)		(27,077)
Effect of exchange rates	Effect of exchange rates	(1,155)		(978)		Effect of exchange rates	306		(420)
Cash, cash equivalents and restricted cash	Cash, cash equivalents and restricted cash					Cash, cash equivalents and restricted cash
Beginning of period		116,214		24,059
Beginning of year						Beginning of year	163,402		116,214
End of period	End of period	$	147,814	$	24,638	End of period	$	127,410	$	88,717
Cash paid for	Cash paid for					Cash paid for
Interest	Interest	$	27,890	$	51,355	Interest	$	15,221	$	8,772
Income taxes paid		2,718		787
Income taxes						Income taxes	$	639	$	902
Supplemental schedule of non-cash activities	Supplemental schedule of non-cash activities					Supplemental schedule of non-cash activities
Unpaid deferred offering costs		$	—	$	2,975

Unpaid property and equipment and capitalized software purchases	Unpaid property and equipment and capitalized software purchases	1,102		468		Unpaid property and equipment and capitalized software purchases	$	821	$	561

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 Significant Accounting Policies

Organization

Description of Business

HireRight GIS Group Holdings LLC (“HGGH”) was formed in July 2018 in connection with the combination of two groups of companies: the HireRight Group and the General Information Services (“GIS”) Group, each of which includes a number of wholly-owned subsidiaries that conduct the Company’s business in the United States, as well as other countries. 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.

~~Corporate Conversion and Stock Split~~

~~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. The Company provides 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 of HireRight Holdings Corporation. The 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.

On October 18, 2021, HireRight Holdings Corporation effected a one-for-15.969236 reverse stock split (“Stock Split”). All shares of the Company’s common stock, stock-based instruments, and per-share data included in the condensed consolidated financial statements give retroactive effect to the Stock Split.

~~Initial Public Offering~~

On November 2, 2021, the Company completed its initial public offering (“IPO”), in which the Company issued 22,222,222 shares of its common stock. The shares began trading on the New York Stock Exchange on October 29, 2021globe, predominantly under the symbol “HRT.” The shares were sold at an IPO price of $19.00 per share for 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 $5.5 million. On November 30, 2021, the Company issued an additional 2,424 shares pursuant to the partial exercise of the underwriters’ option to purchase additional shares for net proceeds of an immaterial amount.

HireRight brand.

Income Tax Receivable Agreement

In connection with the Company’s ~~IPO,~~initial public offering (“IPO”), the Company entered into an income tax receivable agreement (“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. During the three months ended September 30, 2022, the Company recognized an expense of $0.8 million related to an increase in the estimated liability pertaining to the TRA as a result of federal return-to-provision adjustments. The expense is included in Other expense, net in the Company’s condensed consolidated statements of operations. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had a total liability of ~~$211.4~~$210.5 million ~~and $210.6 million, respectively,~~ in connection with the projected obligations under the TRA. TRA related liabilities are classified as current or non-current based on ~~its~~the expected date of payment and are included on the Company’s condensed consolidated balance ~~sheets.~~

sheets under the captions accrued expenses and other current liabilities and tax receivable agreement liability, long-term portion, respectively. See Note 5 —
Accrued Expenses and Other Current Liabilities

~~HireRight Holdings Corporation~~

~~Notes~~ for further details related to ~~Condensed Consolidated Financial Statements (Unaudited)~~

the current portion of the TRA liability.

Basis of Presentation and Principles of Consolidation

The unaudited condensed consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiaries. 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 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 Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, as filed with the SEC on March ~~21, 2022~~9, 2023 (“Annual Report”). The December 31, ~~2021~~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, ~~2021,~~2022, included in the Annual Report. Certain reclassifications have been made to prior year presentation to conform to current year presentation.

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Significant Accounting Policies

The Company’s significant accounting policies are discussed in “Note 1 — Organization, Basis of Presentation and Consolidation, and Significant Accounting Policies” of the notes to the audited consolidated financial statements for the year ended December 31, ~~2021,~~2022, included in the Annual Report. ~~Except as noted below and in Note 2 —~~ ~~Recently Issued Accounting Pronouncements~~ ~~regarding leases, there~~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 ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023.

~~Implementation Costs Incurred in Cloud Computing Arrangements~~

For cloud computing arrangements that are a service contract, the Company capitalizes certain implementation costs incurred, including employee costs and third-party costs, during the application development stage, and expenses costs as incurred during the preliminary project and post-implementation stages. Capitalized implementation costs are expensed on a straight-line basis over the estimated useful life. Capitalized amounts related to such arrangements are recorded within prepaid expenses and other current assets and within cloud computing software in the condensed consolidated balance sheets and amortized to selling, general and administrative expenses in the condensed consolidated statement of operations.

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, stock-based compensation expense, useful lives assigned to long-lived assets, 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.

~~HireRight Holdings Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

Goodwill

The change in goodwill during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 was driven by foreign currency translation, as the U.S. dollar strengthened against the British pound and other currencies.

2. Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements Adopted

Accounting Pronouncements Adopted in ~~2022~~2023

In ~~February~~June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2016-02, “Leases (Topic 842)~~” (“Topic 842”) to increase transparency and comparability among organizations related to their leasing arrangements. The update requires lessees to recognize most leases, with the exception of short-term leases if a policy election is made, on their balance sheets as a right-of-use (“ROU”) asset representing the right to use an underlying asset and a lease liability representing the obligation to make lease payments over the lease term, measured on a discounted basis, while recognizing lease expense on their income statements in a manner similar to current GAAP. The guidance also requires an entity to disclose key quantitative and qualitative information about its leasing arrangements.

The Company leases office facilities under operating lease agreements. All of the Company’s leases are operating leases. The Company adopted Topic 842 on January 1, 2022 using the modified retrospective transition approach. Under this transition provision, results for the reporting period beginning on January 1, 2022 are presented under Topic 842 while prior period amounts continue to be reported and disclosed in accordance with the Company’s historical accounting treatment under ASC Topic 840, ~~Leases~~.

The Company elected the “package of practical expedients” permitted under the transition guidance, which among other things, does not require reassessment of whether contracts entered into prior to adoption are or contain leases, and allows carryforward of the historical lease classification for existing leases. The Company did not elect the “hindsight” practical expedient, and therefore measured the ROU asset and lease liability using the remaining portion of the lease term at adoption on January 1, 2022.

The Company made an accounting policy election not to recognize ROU assets and lease liabilities for leases with a term of twelve months or less. For all other leases, the Company recognizes ROU assets and lease liabilities based on the present value of lease payments over the lease term at the commencement date of the lease (or January 1, 2022 for existing leases upon the adoption of Topic 842). Lease payments may include fixed rent escalation clauses or payments that depend on an index (such as the consumer price index). Subsequent changes to an index and any other periodic market-rate adjustments to base rent are recorded in variable lease expense in the period incurred. The ROU assets also include any initial direct costs incurred and lease payments made at or before the commencement date and are reduced by any lease incentives.

The Company has made an accounting policy election to account for lease and non-lease components in its contracts as a single lease component. The non-lease components typically represent additional services transferred to the Company, such as common area maintenance for real estate, which are variable in nature and recorded in variable lease expense in the period incurred.

The Company uses its incremental borrowing rate which is the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term and amount in a similar economic environment to determine the present value of lease payments as the Company’s leases do not have a readily determinable implicit discount rate. Judgment is applied in assessing factors such as Company specific credit risk, lease term, nature and quality of the underlying collateral, currency, and economic environment in determining the incremental borrowing rate to apply to each lease.

~~HireRight Holdings Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

Upon adoption, the Company recorded ROU assets and operating lease liabilities of $9.9 million and $18.9 million, respectively, related to the Company’s operating leases. The adoption of the new lease standard did not materially impact the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2022, or the condensed consolidated statements of cash flows for the nine months ended September 30, 2022.

~~In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.~~” The ASU requires additional disclosures for transactions with a government accounted for by applying a grant or contribution accounting model by analogy, including: (i) information about the nature of the transactions and related accounting policy used to account for the transactions; (ii) the line items on the balance sheet and income statement affected by these transactions including amounts applicable to each line; and (iii) significant terms and conditions of the transactions, including commitments and contingencies. The Company adopted this ASU effective January 1, 2022. The adoption of this ASU 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,”~~ 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. Early adoption is permitted. 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 the London Interbank Offered Rate (“LIBOR”) and other reference rates expected to be discontinued. In January 2021, the FASB issued ASU No. 2021-01, ~~“Reference Rate Reform (Topic 848): Scope,~~” which expanded the scope of Topic 848 to include derivative instruments impacted by the discounting transition. This collective guidance is effective at any time after March 12, 2020 but no later than December 31, 2022. The Company does not expect the adoption of this guidance to have a material impact on the condensed consolidated financial statements.

~~In June 2016, the FASB issued ASU~~ 2016-13, “Financial 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 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 this guidance until the fiscal year beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted. The Company ~~expects there to be no~~adopted ASU 2016-13 effective January 1, 2023, using the modified retrospective transition method. The adoption of this ASU did not have a material impact on the condensed consolidated financial ~~statements~~statements.

In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which aims to improve the ~~adoption of this ASU.~~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

107

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

and interim periods within those fiscal years. The Company adopted ASU 2021-08 effective January 1, 2023. The adoption of this ASU did not have a material impact on the condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

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 the London Interbank Offered Rate (“LIBOR”) and other reference rates expected to be discontinued. In 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 to December 31, 2024. The Company does not expect the adoption of this guidance to have a material impact on the condensed consolidated financial statements.

3. 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, 2022		December 31, 2021			March 31, 2023		December 31, 2022
		(in thousands)					(in thousands)
Prepaid software licenses, maintenance, and insurance		$	10,433	$	11,668
Prepaid software licenses, maintenance and insurance						Prepaid software licenses, maintenance and insurance	$	11,570	$	9,237
Other prepaid expenses and current assets	Other prepaid expenses and current assets	6,634		6,915		Other prepaid expenses and current assets	8,638		9,508
Total prepaid expenses and other current assets	Total prepaid expenses and other current assets	$	17,067	$	18,583	Total prepaid expenses and other current assets	$	20,208	$	18,745

The components of other non-current assets were as follows:


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
		(in thousands)					(in thousands)
Contract implementation costs		$	17,680	$	17,242
Contract implementation assets						Contract implementation assets	$	18,237	$	17,983
Other non-current assets	Other non-current assets	1,131		969		Other non-current assets	2,346		966
Total other non-current assets	Total other non-current assets	$	18,811	$	18,211	Total other non-current assets	$	20,583	$	18,949

See Note 14 — Revenues for further discussion on contract implementation costs and related amortization included in cost of services in the Company’s condensed consolidated statements of operations.

4. Right-of-Use Assets and Lease Liabilities

The Company determines if an arrangement is or contains a lease at inception, which is the date on which the terms of the contract are agreed, and if the arrangement creates enforceable rights and obligations. Under Topic 842, a contract is or contains a lease when (i) explicitly or implicitly identified assets have been deployed in the contract and (ii) the customer obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract. See Note 2 — ~~Recently Issued Accounting Pronouncements~~ ~~for more information on the Company’s accounting policies for leases.~~

The Company leases office facilities under operating ~~lease agreements that have~~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 term of the lease, generally at the Company’s sole discretion, with renewal terms that can extend the lease term up to 5 years. In addition, certain leases give the Company, the lessor, or both parties the right to terminate. Options to extend a lease are included in the lease term when it is reasonably certain that the Company will exercise the option. Options to terminate a lease are excluded from the lease term when it is reasonably certain that the Company will not exercise the option. The Company’s leases generally do not contain any material restrictive covenants or residual value guarantees.

~~The Company’s operating leases were as follows:~~

118

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)


	~~September 30, 2022~~
	~~(in thousands)~~
~~Right-of-use assets, net~~	$	~~8,802~~

~~Current operating lease liabilities~~ ~~(1)~~	$	~~5,207~~
~~Operating lease liabilities, long-term~~	~~11,051~~
~~Total operating lease liabilities~~	$	~~16,258~~

The Company’s operating leases were as follows:


	March 31, 2023		December 31, 2022
	(in thousands)
Right-of-use assets, net (1)	$	6,921	$	8,423

Current operating lease liabilities (2)	$	5,752	$	5,509
Operating lease liabilities, long-term (2)	9,357		10,055
Total operating lease liabilities	$	15,109	$	15,564

(1)Includes impact of accelerated expense on abandoned right-of-use assets related to the global restructuring plan, see Note 18 — 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 liabilities, respectively, on the Company’s condensed consolidated balance sheets.

~~The components of lease cost are recorded in selling, general, and administrative expenses for the three and nine months ended September 30, 2022 and were as follows:~~

Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022
(in thousands)
Operating lease cost $ 981 $ 2,764
Short-term lease cost 137 470
Variable lease cost 12 36
Total lease cost $ 1,130 $ 3,270

~~Operating lease cost is recognized on a straight-line basis over the lease term.~~

Supplemental cash flow information related to leases was as follows:


	~~Nine Months Ended September 30, 2022~~
	~~(in thousands)~~
~~Cash paid for amounts included in measurement of operating lease liabilities~~	$	~~4,193~~
~~ROU assets obtained in exchange for operating lease liabilities~~	$	~~10,896~~


	Three Months Ended March 31,
	2023		2022
	(in thousands)
Cash paid for amounts included in measurement of operating lease liabilities	$	1,549	$	1,301
ROU assets obtained in exchange for operating lease liabilities	$	824	$	10,445

The ~~weighted-average~~weighted average remaining lease term and ~~weighted-average~~weighted average discount rate for the Company’s operating leases were as follows:


	~~September 30, 2022~~
~~Weighted-average remaining lease term (in years)~~	~~4.22~~
~~Weighted-average discount rate~~	~~4.6~~	%


	Three Months Ended March 31,
	2023		2022
Weighted average remaining lease term (in years)	3.92		4.60
Weighted average discount rate	4.9	%	4.6	%

~~HireRight Holdings Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~Maturities of the Company’s operating lease liabilities were as follows:~~
September 30, 2022
(in thousands)
2022 (excluding the nine months ended September 30, 2022) $ 1,499
2023 5,958
2024 3,636
2025 2,166
2026 1,357
Thereafter 3,392
Total lease payments 18,008
Less amount representing interest (1,750)
Total present value of lease liabilities $ 16,258

~~Cease-use Liabilities~~

The Company periodically identifies opportunities for cost savings through office consolidations or by exit from certain underutilized facilities. Cease-use costs represent lease obligation charges and executory costs for exited facilities. The Company accounts for cease-use costs pursuant to guidance under ASC 420, ~~Costs Related to Exit or Disposal Activities~~. Charges related to these cease-use costs are estimated based on the discounted future cash flows of rent expense and executory costs that the Company is obligated to pay under the lease agreements, partially offset by projected sublease income, which is calculated based on certain sublease assumptions.

As a result of the exit from certain facilities, the Company recorded a cease-use liability in 2021. The cease-use liability of $9.0 million was reclassified and treated as a reduction to the beginning ROU asset recorded upon adoption of ASC 842, ~~Leases~~, on January 1, 2022. Cease-use costs were $0.2 million during the nine months ended September 30, 2022, and are included as a component of selling, general and administrative expenses in the condensed consolidated statements of operations. No cease-use costs were incurred during the three months ended September 30, 2022. Cease-use costs were $1.5 million during the three and nine months ended September 30, 2021.

Cease-use costs are included in other non-current liabilities and accrued expenses and other current liabilities on the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021. The following table summarizes the activity for the liability for cease-use costs for the periods presented:


	~~Cease-use Liability~~
	~~(in thousands)~~
~~Balance at December 31, 2021~~	$	~~11,588~~
~~Cease-use costs~~	~~160~~
~~Reclassified as a reduction to the beginning ROU asset upon adoption of ASC 842~~	~~(9,001)~~
~~Accretion of liability~~	~~(146)~~
~~Payments~~	~~(874)~~
~~Foreign currency translation~~	~~(390)~~
~~Balance at September 30, 2022~~	$	~~1,337~~

~~HireRight Holdings Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

5. Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities were as follows:


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
		(in thousands)					(in thousands)
Accrued data costs	Accrued data costs	$	39,017	$	34,632	Accrued data costs	$	35,084	$	34,080
Litigation settlements (Note 13)		607		3,310
Other (1)		40,243		37,352
Tax receivable agreement liability, current portion						Tax receivable agreement liability, current portion	27,039		—
Accrued contract labor						Accrued contract labor	8,235		5,554
Other						Other	32,565		35,574
Total accrued expenses and other current liabilities	Total accrued expenses and other current liabilities	$	79,867	$	75,294	Total accrued expenses and other current liabilities	$	102,923	$	75,208

~~(1)~~During the nine months ended September 30, 2022, the Company paid $3.9 million, which was previously held in escrow as of December 31, 2021, as unsecured creditors’ funds pursuant to plans of liquidation and restructurings of predecessor entities.

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

6. Accrued Salaries and Payroll

The components of accrued salaries and payroll were as follows:


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
		(in thousands)					(in thousands)
Wages, benefits and taxes(1)	Wages, benefits and taxes(1)	$	18,258	$	12,017	Wages, benefits and taxes(1)	$	20,921	$	15,198
Accrued bonus	Accrued bonus	14,900		17,263		Accrued bonus	5,164		15,877
Total accrued salaries and payroll	Total accrued salaries and payroll	$	33,158	$	29,280	Total accrued salaries and payroll	$	26,085	$	31,075

(1)Accrued wages, benefits and taxes for the three months ended March 31, 2023 includes $4.4 million in accrued employee severance and benefits related to the workforce reduction. See Note 18 — Restructuring and Related Charges for additional information.

7. Debt

The components of debt were as follows:


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
		(in thousands)					(in thousands)
Amended First Lien Term Loan Facility	Amended First Lien Term Loan Facility	$	701,600	$	707,863	Amended First Lien Term Loan Facility	$	697,425	$	699,513
Amended Revolving Credit Facility	Amended Revolving Credit Facility	—		—		Amended Revolving Credit Facility	—		—
Total debt	Total debt	701,600		707,863		Total debt	697,425		699,513
Less: Original issue discount		(1,598)		(1,993)
Less: Unamortized original issue discount						Less: Unamortized original issue discount	(1,328)		(1,464)
Less: Unamortized debt issuance costs	Less: Unamortized debt issuance costs	(7,087)		(8,837)		Less: Unamortized debt issuance costs	(5,894)		(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	(8,350)		(8,350)
Long-term debt, less current portion	Long-term debt, less current portion	$	684,565	$	688,683	Long-term debt, less current portion	$	681,853	$	683,206

On July 12, 2018, the Company entered into the following credit arrangements:

•a first lien senior secured term loan facility, in an aggregate principal amount of $835.0 million, maturing on July 12, 2025 (“First Lien Term Loan Facility”);

~~HireRight Holdings Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

•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 (“Revolving Credit Facility” and, together with the First Lien Term Loan Facility, the “First Lien Facilities”).

On June 3, 2022, the Company entered into an amendment to the First Lien Term Loan Facility (“Amended First Lien Term Loan Facility”) with the lenders party thereto and Bank of America, N.A. as administrative agent. The Amended First Lien Term Loan Facility amends the Company’s First Lien Facilities, by and among the Company, the lending institutions from time to time party thereto and Bank of America, N.A. as administrative agent, collateral agent and a letter of credit issuer (as amended through the Amended First Lien Term Loan Facility, the “Amended First Lien Facilities”).

Under the Amended First Lien Facilities, (i) the aggregate commitments under the Company’s Revolving Credit Facility were increased from $100.0 million to $145.0 million; (ii) the maturity date of the Revolving Credit Facility was extended from July 12, 2023 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, as may be extended or refinanced; and (iii) the interest rate benchmark applicable to the Revolving Credit Facility was converted from LIBOR to term Secured Overnight

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Financing Rate (“SOFR”). The Revolving Credit Facility as amended is herein after referred to as the “Amended Revolving Credit Facility.” The Company’s existing term loans under the Amended First Lien Facilities remained in effect. Upon the effectiveness of the Amended First Lien Term Loan Facilities, the Company did not have any outstanding principal balance on the Revolving Credit Facility. The Amended First Lien Term Loan Facilities did not modify the financial covenants, negative covenants, mandatory prepayment events or security provisions or arrangements under the Amended First Lien Facilities.

The Amended First Lien Term Loan Facility was accounted for as a modification for certain lenders and an extinguishment for other lenders and debt issuance costs and lender fees were accounted for in proportion to whether the related borrowing commitment was considered modified or extinguished. Accordingly, newly incurred and existing deferred debt issuance costs of $0.4 million and $0.4 million, respectively, will be amortized to interest expense over the new remaining term of the Amended Revolving Credit Facility. Additionally, the Company wrote off unamortized debt issuance costs of $0.1 million related to the modification of the Revolving Credit Facility, which is recorded in interest expense in the condensed consolidated statements of operations.

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 Amended First Lien Term Loan Facility, or approximately $2.1 million per quarter, with the remaining balance payable at maturity. The Company may make voluntary prepayments on the Amended First Lien Term Loan Facility at any time prior to maturity at par.

The Company is required to make prepayments on the 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 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,~~March 31, 2023 and 2022, ~~and 2021,~~ the Company was not required to make a prepayment under the Amended First Lien Term Loan Facility based on the Company’s excess cash flow.

The Amended First Lien Term Loan Facility has an interest rate calculated as, 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 (“LIBOR Reference Rate”) with a floor of 0.00% or (b) a base rate 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 LIBOR plus 1.00% per annum (“ABR”), in each case, plus the applicable margin of 3.75% for

~~HireRight Holdings Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

LIBOR loans and 2.75% for ABR loans, and is payable on each interest payment date, at least quarterly, in arrears. The applicable margin for borrowings under the Revolving Credit Facility is 3.00% for SOFR loans and 2.00% for ABR loans, in each case, subject to adjustment pursuant to a leverage-based pricing grid. As of ~~September 30, 2022,~~March 31, 2023, the Amended First Lien Term Loan Facility accrued interest at one-month LIBOR plus 3.75%, and the Amended Revolving Credit Facility accrued interest at one-month SOFR plus 2.50% based upon the current pricing grid.

Unlike the Amended Revolving Credit Facility, the interest rates for the Amended First Lien Term Loan Facility are calculated using LIBOR, which is scheduled to become unavailable in June 2023. The credit agreement underlying the Amended First Lien Term Loan Facility contemplates that, if the administrative agent determines that LIBOR is unavailable or is replaced by a new benchmark interest rate to replace LIBOR for syndicated loans, then, the administrative agent and the Borrower may amend the Amended First Lien Term Loan Facility to replace LIBOR with an alternate benchmark rate (“LIBOR Successor Rate”) unless lenders holding more than 50% in value of the loans or commitments under the credit agreement do not accept such amendment. If no LIBOR Successor Rate has been determined, the obligation of lenders to make or maintain LIBOR loans will be suspended (to the extent of the affected LIBOR rate loans or interest periods), and the LIBOR component will no longer be utilized in determining an alternative benchmark rate. Under such circumstances, the Borrower can revoke any pending request for a new borrowing, conversion to, or continuation of LIBOR loans or such loans will be deemed to be ABR loans of the same amount.

The Borrower ~~also has the ability~~from time to time may elect to convert all or a portion ~~equal to at least $2.5 million~~ of ~~LIBOR loans to ABR~~its SOFR loans under the ~~credit agreement.~~

Revolving Credit Facility into ABR loans, and may elect to convert all or a portion of its LIBOR loans under the Amended First Lien Term Loan Facility into ABR loans, in each case, subject to a minimum conversion amount of $2.5 million.

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

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.

As of ~~September 30, 2022,~~March 31, 2023, the Company had $143.7 million in available borrowing under the Amended Revolving Credit Facility, after utilizing $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 Amended Revolving Credit Facility, subject to adjustment pursuant to a leverage-based pricing grid. As of ~~September 30, 2022~~both March 31, 2023 and December 31, ~~2021,~~2022, the quarterly fee on unutilized commitments under the Amended Revolving Credit Facility was 0.38% ~~and 0.50%, respectively.~~

Debt Covenants

The 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 Amended First Lien Facilities also provide for customary events of default. The Company was in compliance with the covenants under the Amended First Lien Facilities ~~for~~through the three ~~and nine~~ months ended ~~September 30, 2022.~~

March 31, 2023.

The Company is also subject to a springing financial maintenance covenant under the 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 Amended Revolving Credit Facility, subject to certain exceptions, exceed 35% of the total commitments under the Amended Revolving Credit Facility at the end of such fiscal quarter. The Company was not subject to this covenant as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, as outstanding loans and letters of credit under the Amended Revolving Credit Facility did not exceed 35% of the total commitments under the facility.

~~HireRight Holdings Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

Other

Amortization of debt discount and debt issuance costs related to the Amended First Lien Term Loan Facility are included into interest expense in the condensed consolidated statements of operations and were as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
		(in thousands)									(in thousands)
Debt discount amortization	Debt discount amortization	$	133	$	146	$	395	$	431	Debt discount amortization	$	136	$	130
Debt issuance costs amortization	Debt issuance costs amortization	588		658		1,750		1,955		Debt issuance costs amortization	599		578
Total debt discount and issuance cost amortization		$	721	$	804	$	2,145	$	2,386
Total debt discount and issuance costs										Total debt discount and issuance costs	$	735	$	708

~~In addition, interest~~Interest expense also includes the amortization of debt issuance costs for the Amended Revolving Credit Facility of $0.1 million for each of the three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021, and $0.4 million and $0.3 million, for the nine months ended September 30, 2022 and 2021, respectively.~~2022. Unamortized debt issuance costs for the Amended Revolving Credit Facility are recorded in other non-current assets on the Company’s condensed consolidated balance sheets.

Interest expense for the three and nine months ended September 30, 2021 includes $4.2 million and $12.4 million, respectively, related to a second lien senior secured term loan facility which was repaid in full on November 3, 2021 using proceeds from the IPO.

The weighted average interest rate on outstanding borrowings ~~as of September 30, 2022~~during the three months ended March 31, 2023 and the year ended December 31, ~~2021~~2022 was ~~4.8%~~8.5% and ~~4.5%~~5.5%, respectively.

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

8. 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, and restricted cash approximate their fair value due to the short-term maturity of these instruments.~~

~~HireRight Holdings Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

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.

The Company’s derivative instruments, all of which the Company terminated during the quarter ended March 31, 2022, consisted of interest rate swap contracts which were Level 2 of the fair value hierarchy and reported in the condensed consolidated balance sheet as of December 31, 2021 as derivative liabilities current and derivative liabilities long-term. See Note 9 — ~~Derivative Instrumentsfor more information.~~

The fair value of the Company’s Amended First 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 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, 2022				December 31, 2021					March 31, 2023				December 31, 2022
		Carrying Value		Fair Value		Carrying Value		Fair Value			Carrying Value		Fair Value		Carrying Value		Fair Value
		(in thousands)									(in thousands)
Amended First Lien Term Loan Facility	Amended First Lien Term Loan Facility	$	700,002	$	684,693	$	705,870	$	704,550	Amended First Lien Term Loan Facility	$	696,097	$	693,055	$	698,049	$	673,617
Amended Revolving Credit Facility	Amended Revolving Credit Facility	—		—		—		—		Amended Revolving Credit Facility	—		—		—		—
Total	Total	$	700,002	$	684,693	$	705,870	$	704,550	Total	$	696,097	$	693,055	$	698,049	$	673,617

9. Derivative Instruments

The Company entered into interest rate swap agreements with a total notional amount of $700 million with an effective date of December 31, 2018 (“Interest Rate Swap Agreements”)~~. The Interest Rate Swap Agreements were designed to provide predictability against changes in the interest rates on the Company’s debt, as the Interest Rate Swap Agreements converted~~ with a ~~portion~~scheduled expiration date of ~~the variable interest rate on the Company’s debt to a fixed rate. The Interest Rate Swap Agreements were originally scheduled to expire on~~ December 31, 2023.

On September 26, 2019, the Company modified the terms of the Interest Rate Swap Agreements with the then existing counterparties to change the LIBOR reference period to one month. The notional amount and maturities of the Interest Rate Swap Agreements remained unchanged. The Company elected hedge accounting treatment at that time. To ensure the effectiveness of the Interest Rate Swap Agreements, the Company elected the one-month LIBOR rate option for its variable rate interest payments on term balances equal to or in excess of the applicable notional amount of the Interest Rate Swap Agreements as of each reset date. The reset dates and other critical terms on the term loans perfectly matched with the interest rate cap reset dates and other critical terms through February 18, 2022, the date the Interest Rate Swap Agreements were terminated, and during the three and nine months ended September 30, 2021. At September 30, 2022 and December 31, 2021, the effective portion of the Interest Rate Swap Agreements was included on the condensed consolidated balance sheets in accumulated other comprehensive income (loss).

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 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. Prior to termination discussed ~~below,~~herein, the Interest Rate Swap Agreements were determined to be effective hedging agreements.

~~HireRight Holdings Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

Effective February 18, 2022, the Company terminated the Interest Rate Swap Agreements. In connection with the termination of the Interest Rate Swap Agreements, the Company made a payment of $18.4 million to the swap counterparties. Following these terminations, $21.5 million of unrealized gains related to the terminated Interest Rate Swap Agreements included in accumulated other comprehensive income (loss) will be reclassified to earnings as reductions to interest expense through December 31, 2023.

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

The Company reclassified interest expense related to hedges of these transactions into earnings as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
2022 2021 2022 2021
(in thousands)
Reclassification of the effective portion of the gain on the Interest Rate Swap Agreements into interest expense
$ — $ 5,018 $ 1,679 $ 14,733
Reclassification of unrealized gains related to terminated Interest Rate Swap Agreements into interest expense (3,413) — (9,676) —
Total reclassification adjustments included in earnings $ (3,413) $ 5,018 $ (7,997) $ 14,733

~~The fair value of the Interest Rate Swap Agreements was as follows:~~

December 31, 2021
Markets for Identical
Assets
(Level 1) Observable Inputs
(Level 2) Unobservable Inputs
(Level 3) Total
(in thousands)
Derivative instruments, current $ — $ 16,662 $ — $ 16,662
Derivative instruments, long-term — 11,444 — 11,444
Total liabilities measured at fair value $ — $ 28,106 $ — $ 28,106

~~There were no amounts excluded from the measurement of hedge effectiveness at February 18, 2022, the date of termination, and December 31, 2021. See Note 10~~— ~~Accumulated Other Comprehensive Income (Loss)~~ ~~for further information.~~


	Three Months Ended March 31,
	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	(2,527)		(2,181)
Total reclassification adjustments included in earnings	$	(2,527)	$	(502)

The results of derivative activities are recorded in cash flows from operating activities on the condensed consolidated statements of cash flows.

10. Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) consists primarily of unrealized ~~changes in fair value of derivative instruments that qualified for hedge accounting prior~~gains related to ~~termination~~the terminated Interest Rate Swap Agreements and cumulative foreign currency translation adjustments.

The components of accumulated other comprehensive income (loss) as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 were as follows:

~~HireRight Holdings Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

Derivative
Instruments Currency
Translation
Adjustment Total
(in thousands)
Balance at December 31, 2021 $ 11,823 $ 797 $ 12,620
Other comprehensive income (loss) (16) (26,400) (26,416)
Balance at September 30, 2022 $ 11,807 $ (25,603) $ (13,796)


	Derivative Instruments		Currency Translation Adjustment		Total
	(in thousands)
Balance at December 31, 2022	$	8,849	$	(13,793)	$	(4,944)
Other comprehensive income (loss)	(2,527)		2,777		250
Balance at March 31, 2023	$	6,322	$	(11,016)	$	(4,694)

The accumulated net loss in foreign currency translation adjustment primarily reflects the strengthening of the U.S. dollar against the British pound and the Japanese yen.

~~The Company terminated the Interest Rate Swap Agreements effective February 18, 2022.~~ As of ~~September 30, 2022, $9.8~~March 31, 2023, the remaining $6.3 million of the ~~remaining~~ accumulated other comprehensive income related to ~~hedge accounting~~terminated Interest Rate Swap Agreements is expected to be reclassified into earnings ~~over the next 12 months.~~as a reduction to interest expense through December 31, 2023.

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

11. 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,									Three Months Ended March 31,
		2022				2021				2022				2021					2023				2022
		(in thousands, except percent)																	(in thousands, except percent)
Revenues
Revenues:																		Revenues:
United States	United States	$	194,081	92.3	%	$	189,097	92.3	%	$	582,817	92.3	%	$	491,490	92.5	%	United States	$	161,694	92.2	%	$	183,377	92.3	%
International	International	16,222		7.7	%	15,884		7.7	%	48,489		7.7	%	40,032		7.5	%	International	13,753		7.8	%	15,334		7.7	%
Total revenues	Total revenues	$	210,303	100.0	%	$	204,981	100.0	%	$	631,306	100.0	%	$	531,522	100.0	%	Total revenues	$	175,447	100.0	%	$	198,711	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, 2022		December 31, 2021			March 31, 2023		December 31, 2022
		(in thousands)					(in thousands)
Long-lived assets:	Long-lived assets:					Long-lived assets:
United States	United States	$	12,047	$	7,154	United States	$	9,208	$	10,811
International	International	6,247		3,973		International	6,087		6,657
Total long-lived assets	Total long-lived assets	$	18,294	$	11,127	Total long-lived assets	$	15,295	$	17,468

~~HireRight Holdings Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

12. Commitments and Contingent 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 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.

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 ~~its~~the Company’s obligation to another party for those same acts or omissions, and ~~its~~the Company’s obligation to provide indemnity and defense for its own acts or omissions in any particular situation may be uncapped.

The Company has entered into indemnification agreements with the members of its board of directors and executive officers that 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.

As of December 31, 2021, the Company included $1.4 million in accrued expenses and other current liabilities in the condensed consolidated balance sheets as a result of the Company agreeing to indemnify a customer from a negligent hiring claim. While the Company did not believe it had legal responsibility, the Company chose to indemnify the customer against the negligent hiring claim in the interests of customer relations and to limit risk. On January 11, 2022, the Company paid the $1.4 million to the customer. The Company is not aware of any ~~other~~ 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.

On December 31, 2022 and February 16, 2023, the Company entered into definitive agreements to purchase 60% of the equity interests in a privately held company for a total purchase price of approximately $26.5 million, subject to closing conditions that have not yet been satisfied.

13. Legal Proceedings

The Company is subject to claims, investigations, audits, and enforcement proceedings by private plaintiffs, third parties the Company does business with, and governmental and regulatory 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 Regulations and other laws around the world addressing privacy and the use of background information

~~HireRight Holdings Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

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. 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 can be reasonably 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.

On November 6, 2020, the Company entered into a settlement agreement related to 24 lawsuits that had been filed in 2009 and 2010 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 (“Customer”) related to background reports that Old HireRight prepared for the Customer about those individuals.

Pursuant to the settlement agreement the Company paid $11.2 million on November 15, 2021, and the remaining balance of $0.3 million on March 31, 2022. No amounts related to the settlement agreement are accrued at September 30, 2022.

While Old HireRight’s insurer has denied coverage, the Company believes it has valid claims against the carrier and is pursuing those claims. Any insurance recovery would defray 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.

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

14. Revenues

Revenues consist of service revenue and surcharge revenue. Service revenue consists of fees charged to customers for services provided by the Company. Surcharge revenue consists of fees charged to customers for obtaining data from federal, state and local jurisdictions, and certain commercial data providers required to fulfill the Company’s performance obligations. ~~These fees are generally 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.

~~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,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
		(in thousands)									(in thousands)
Revenues
Revenues:										Revenues:
Service revenues	Service revenues	$	151,256	$	152,332	$	451,184	$	395,624	Service revenues	$	123,696	$	141,503
Surcharge revenues	Surcharge revenues	59,047		52,649		180,122		135,898		Surcharge revenues	51,751		57,208
Total revenues	Total revenues	$	210,303	$	204,981	$	631,306	$	531,522	Total revenues	$	175,447	$	198,711

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 customers onto the Company’s platform to enable the customers to request and access completed background screening reports. Contract implementation costs, ~~and the related~~net of accumulated amortization are recorded in other non-current assets on the Company’s condensed consolidated balance sheets and amortization expense is recorded in cost of services (exclusive of depreciation and amortization) in the Company’s condensed consolidated statements of ~~operations, respectively.~~operations. Amortization of contract implementation costs included in cost of services (exclusive of depreciation and amortization) was ~~$1.1~~$1.2 million and ~~$3.3~~$1.1 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023, and 2022, ~~respectively, and $1.0 million and $2.8 million for the three and nine months ended September 30, 2021,~~ respectively. See Note 3 — 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. Income Taxes

Income tax expense (benefit) and effective tax rates were as follows:

Three Months Ended September 30, Nine Months Ended
September 30,
2022 2021 2022 2021
(in thousands, except effective tax rate)
Income (loss) before income taxes $ 23,585 $ 7,930 $ 60,843 $ (5,383)
Income tax (benefit) expense (69,704) 649 (68,456) 2,954
Effective tax rate (295.5) % 8.2 % (112.5) % 54.9 %

~~In general, with certain exceptions, ASC 740-270,~~ ~~Income Taxes,~~ requires the use of an estimated annual effective tax rate to compute the tax provision during an interim period. For the three and nine months ended September 30, 2022, the Company has net income before income taxes and used an estimated annual effective tax rate to compute the income tax provision. However, due to operating losses for the nine months ended September 30, 2021, the Company determined that it was unable to reliably estimate its annual effective tax rate. As such, for the three and nine months ended September 30, 2021, the Company used a discrete method, which reflected the actual tax attributable to year-to-date earnings and losses for the period.

~~The Company recorded income tax benefit of $69.7 million and income tax expense of $0.6 million for the three months ended September 30, 2022 and 2021, respectively.~~The effective tax rate for the three months ended September 30, 2022 was negative 295.5% compared to 8.2% for the three months ended September 30, 2021. The effective tax rate for the three months ended September 30, 2022, differs from the Federal statutory rate of 21%


	Three Months Ended March 31,
	2023			2022
	(in thousands, except effective tax rate)
Income (loss) before income taxes	$	(13,855)		$	12,382
Income tax expense (benefit)	(5,944)			818
Effective tax rate	42.9		%	6.6		%

2317

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~primarily due to~~

The Company recorded income tax benefit of $5.9 million and income tax expense of $0.8 million for the ~~release of federal~~three months ended March 31, 2023, and ~~state valuation allowances during the quarter as discussed below, state taxes, and U.S. tax on foreign operations.~~2022, respectively. The effective tax rate for the three months ended ~~September 30, 2021~~March 31, 2023 was 42.9% compared to 6.6% for the three months ended March 31, 2022. The effective tax rate for the three months ended March 31, 2023, differs from the ~~Federal~~federal statutory rate of 21% primarily due to state taxes and non-deductible stock-based compensation expense. The effective tax rate for the three months ended March 31, 2022 differs from the federal statutory rate of 21% primarily due to valuation allowances, ~~and state taxes.~~

The Company recorded income tax benefit of $68.5 million and income tax expense of $3.0 million for the nine months ended September 30, 2022 and 2021, respectively. The effective tax rate for the nine months ended September 30, 2022 was negative 112.5% compared to 54.9% for the nine months ended September 30, 2021. The effective tax rate for the nine months ended September 30, 2022, differs from the Federal statutory rate of 21% primarily due to the release of federal and state valuation allowances during the quarter as discussed below, state taxes, and U.S. tax on foreign operations. ~~The effective tax rate for~~

Prior to September 2022, the ~~nine months ended September 30, 2021 differs from the Federal statutory rate of 21% primarily due to revaluation of deferred taxes in the United Kingdom, valuation allowances and state taxes.~~

~~The~~ Company’s net U.S. federal and state deferred tax assets were ~~previously~~ fully offset by a valuation allowance, excluding a portion of its deferred tax liabilities for tax deductible 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.

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 three months ended September 30, 2022. In making the determination to release the valuation allowance, the Company considered its movement into a cumulative income position for the most recent three-year period, the significant decrease in interest expense from the paydown of debt in the fourththird quarter of ~~2021 using IPO proceeds, its seventh consecutive quarter~~2022. There is no change in assessment as of operating income, forecasts for future earnings for its U.S. operations, and other factors. The release of the valuation allowance resulted in a non-cash deferred tax benefit of $70.2 million, which materially decreased the Company’s income tax expense during the three months ended September 30, 2022.

March 31, 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. The Company ~~is still in the process of analyzing the provisions of the Act. The Company~~ does not currently expect the Inflation Reduction Act to have a material impact on the condensed consolidated financial statements.

16. Stock-Based Compensation

Equity Incentive Plans

~~On October 22, 2018,~~The Company issues stock-based compensation awards under the ~~Company implemented~~2021 Omnibus Incentive Plan (“Omnibus Incentive Plan”), and prior to the IPO under the HireRight GIS Group Holdings LLC Equity Incentive Plan (“Equity Plan”) ~~providing~~. At March 31, 2023, the total number of shares authorized for ~~the~~ issuance ~~of up to 4,573,463 of its Class A Units (“Units”) pursuant to awards made~~ under ~~the Equity Plan to members of the board of managers, officers and employees as determined by the Company’s compensation committee. Following the adoption of~~ the Omnibus Incentive Plan ~~(as defined below),~~was 14.2 million shares and 7.3 million shares remain available for issuance.

Stock-Based Compensation Expense

Stock-based compensation expense recognized in the Company did not grant further awards under the Equity Plan. However, any outstanding awards granted under the Equity Plan remain subject to the Equity Plan and applicable award agreement. In connection with the Corporate Conversion, each option to purchase unitscondensed consolidated statements of ~~HireRight GIS Group Holdings LLC~~operations was ~~converted into an option to purchase shares of common stock of HireRight Holdings Corporation.~~as follows:

On October 18, 2021, the Company’s stockholders adopted the Company’s 2021 Omnibus Incentive Plan (“Omnibus Incentive Plan”), which became effective on October 28, 2021. The Omnibus Incentive Plan provides for the grant of awards of non-qualified stock options, incentive (qualified) stock options, stock appreciation rights,


	Three Months Ended March 31,
	2023		2022
	(in thousands)
Selling, general and administrative	$	3,181	$	2,627
Cost of services (exclusive of depreciation and amortization)	647		167
Total stock-based compensation expense	$	3,828	$	2,794

2418

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

restricted stock awards, restricted stock units (“RSU”), other stock-based awards, other cash-based awards or any combination of the foregoing to eligible employees, consultants, directors, and officers. At September 30, 2022, 6,332,851 shares were available for issuanceStock Options under the ~~Omnibus Incentive Plan.~~

~~Modification of Certain Pre-IPO Equity Awards~~

~~The stock option awards issued prior to the Company’s IPO pursuant to the~~ Equity Plan had vesting schedules based either upon continued service (“Time-Vesting Options”), or upon attainment of specified levels of cash-on-cash return to the Company’s pre-IPO investors as a multiple of invested capital (“MOIC”) on their investments in the Company (“Performance-Vesting Options”). On March 19, 2022, the compensation committee of the Company’s Board of Directors approved a modification of outstanding Performance-Vesting Options to vest based solely on continued service rather than MOIC attainment. Under the modified vesting terms, the amended Performance-Vesting Options vest quarterly starting March 31, 2022 and ending December 31, 2024 based solely on continued service.

~~Stock-Based Compensation Expense~~

~~Stock-based compensation expense recognized in the condensed consolidated statements of operations was as follows:~~

Three Months Ended September 30, Nine Months Ended
September 30,
2022 2021 2022 2021
(in thousands)
Selling, general and administrative $ 1,089 $ 841 $ 8,083 $ 2,493
Cost of services (exclusive of depreciation and amortization) 193 — 504 —
Total stock-based compensation expense $ 1,282 $ 841 $ 8,587 $ 2,493

~~Equity Plan Awards (Pre-IPO)~~

For stock options issued under the Equity Plan that were outstanding and unvested as of ~~September 30, 2022,~~March 31, 2023, the Company expects to recognize future compensation expense of ~~$6.0~~$4.1 million over a weighted average remaining vesting period of ~~2.19~~1.8 years.

~~Omnibus Incentive Plan~~ Awards

~~During the three months ended September 30, 2022, the Company determined that it is no longer probable that the target performance conditions will be achieved for certain awards granted~~ under the Omnibus Incentive Plan

The Company granted 46,081 options during the three months ended March 31, 2022. Accordingly, the Company reversed $1.8 million of previously recognized stock-based compensation expense and no stock-based compensation expense was recognized in the current period for these awards.

~~The Company granted 1,167,199 options during the nine months ended September 30, 2022~~2023 under the Omnibus Incentive Plan, with a ~~weighted-average~~weighted average grant date fair value of ~~$5.14~~$3.96 calculated using the Black-Scholes option valuation model. For options under the Omnibus Incentive Plan outstanding and unvested as of ~~September 30, 2022,~~March 31, 2023, the Company expects to recognize future compensation expense of ~~$14.2~~$7.2 million over a weighted average remaining vesting period of ~~2.70~~2.7 years.

The Company granted ~~1,134,464~~3,171,925 restricted stock units (“RSU”), including the performance RSUs discussed below, with a ~~weighted-average~~weighted average grant date fair value of ~~$15.30~~$9.06 per share during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 under the Omnibus Incentive Plan. For RSUs outstanding and unvested

~~HireRight Holdings Corporation~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

as of ~~September 30, 2022,~~March 31, 2023, the Company expects to recognize future compensation expense of ~~$11.5~~$41.4 million over a weighted average remaining vesting period of ~~2.99~~2.9 years.

On ~~June 1, 2022,~~March 20, 2023, the Company approved a grant of a total of ~~422,143~~2,561,275 performance RSUs. A total of 1,116,323 of these performance RSUs ~~with~~had a grant-date fair value of ~~$14.45~~$5.67 per ~~unit. A portion of these RSUs~~unit based on a Monte Carlo valuation model and may vest upon the achievement of a ~~series of goal-based performance milestones, and the balance of these RSUs may vest based upon~~market condition related to total shareholder return, achievement of all aggregated milestones by a final target date, followed by subsequent continued service for a specified period of time. The fair value of these awards, until vested, is included in accrued expenses and other current liabilities and other non-current liabilities in the condensed consolidated balance sheets. The Company measures stock-based compensation cost for liability classified awards based on the fair valuestock price targets of the ~~award at each quarterly reporting date~~Company's common stock, and ~~recognizes the expense over the vesting period.~~subject to continued service. The expected stock-based compensation expense ~~of these June 1, 2022 approved~~for the market condition performance RSUs is ~~$6.1~~$6.3 million ~~which~~and is expected to be recognized over the period from grant date through ~~April 2024.~~

~~For the three and nine months ended September 30, 2022, compensation expense associated with~~March 2026. The remaining portion, 1,444,952 units, of these ~~awards totaled $0.3 million and $0.4 million, respectively.~~

~~Employee Stock Purchase Plan~~

~~The first offering period for the Company’s Employee Stock Purchase Plan (“ESPP”) began~~performance RSUs granted on ~~May~~March 20, ~~2022 and will continue for six months until the purchase~~2023, had a grant date on November 19, 2022. Thereafter, offerings will begin on November 20 and May 20 and will end on the following May 19 and November 19, respectively. Such shares will be purchased at an amount equal to 85% of the fair ~~market~~ value of ~~a share on (i)~~$10.90 per unit and may vest upon the ~~purchase date or (ii) the offering date, whichever amount is lower; provided, that the purchase price will in no event be less than the par value~~achievement of ~~a share.~~

AEBITDA performance targets and are subject to continued service. The ~~Company recognized $0.1 million and $0.2 million of~~expected stock-based compensation expense ~~related~~for the AEBITDA performance RSUs is $15.8 million and is expected to ~~the ESPP during the three and nine months ended September 30, 2022, respectively. As of September 30, 2022, total unrecognized compensation expense related to the ESPP was $0.1 million, which will~~ be recognized ~~on a straight-line basis~~ over ~~a weighted-average remaining~~the period ~~of 0.14 years.~~

from grant date through March 2026.

17. Earnings Per Share

Basic net income (loss) per share (“EPS”) is computed by dividing net income (loss) by the ~~weighted-average~~weighted average number of outstanding shares during the period.

The weighted average outstanding shares may include potentially dilutive ~~options.~~equity awards. Diluted net income (loss) per share includes the effects of potentially dilutive ~~awards.~~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,~~March 31, 2023, and 2022 there were ~~6,630,588,~~8,338,300, and ~~6,799,424~~8,039,980 potentially dilutive equity awards, respectively, which were excluded from the calculations of diluted EPS because including them would have had an anti-dilutive effect. For the three and nine months ended September 30, 2021, there were 3,927,359 potentially dilutive awards, which were excluded from the calculation of diluted EPS because including them would have had an anti-dilutive effect.

2619

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Basic and diluted EPS for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ were:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
		(in thousands, except share and per share data)									(in thousands, except share and per share data)
Numerator:	Numerator:									Numerator:
Net income (loss)	Net income (loss)	$	93,289	$	7,281	$	129,299	$	(8,337)	Net income (loss)	$	(7,911)	$	11,564
Denominator:	Denominator:									Denominator:
Weighted average shares outstanding - basic	Weighted average shares outstanding - basic	79,459,633		57,168,291		79,419,725		57,168,291		Weighted average shares outstanding - basic	77,285,116		79,392,937
Effect of dilutive options		83,082		30,913		56,849		—
Effect of dilutive equity awards										Effect of dilutive equity awards	—		—
Weighted average shares outstanding - diluted	Weighted average shares outstanding - diluted	79,542,715		57,199,204		79,476,574		57,168,291		Weighted average shares outstanding - diluted	77,285,116		79,392,937

Net income (loss) per share:	Net income (loss) per share:									Net income (loss) per share:
Basic	Basic	$	1.17	$	0.13	$	1.63	$	(0.15)	Basic	$	(0.10)	$	0.15
Diluted	Diluted	$	1.17	$	0.13	$	1.63	$	(0.15)	Diluted	$	(0.10)	$	0.15

18. Restructuring and Related Charges

Global Restructuring Plan

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 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 early 2024.

During the three months ended March 31, 2023, the Company recognized restructuring charges of $5.9 million, primarily for employee severance and benefits in connection with the workforce reduction and accelerated expense on abandoned right-of-use assets. In addition, the Company incurred professional service fees of $4.0 million for consulting costs related to the execution of the 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 and early 2024 of approximately $15.0 million to $20.0 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.

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

The components of the restructuring charges (including professional service fees) are as follows:


	Three Months Ended March 31,
	2023
	(in thousands)
Severance and benefits (1)	$	4,386
Accelerated expense on abandoned right-of-use assets (2)	1,482
Professional fees (3)	4,006
Total restructuring charges	$	9,874

(1)Charges of $1.7 million recorded in cost of services (exclusive of depreciation and amortization) and charges of $2.7 million recorded in selling, general and administrative expenses.

(2)Charges for accelerated expense on abandoned right-of-use assets recorded in selling, general and administrative expenses.

(3)Professional service fees consist of consulting costs related to the execution of the Company’s global restructuring plan to improve the Company’s cost structure, operating efficiency, and redesign and right size the organization. These charges are 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:


	March 31, 2023
	(in thousands)
Balance at December 31, 2022	$	—
Charges incurred (1)	8,392
Payments	(971)
Balance at March 31, 2023	$	7,421

(1)Includes $4.4 million in charges for employee severance and benefits related to the workforce reduction, all of which remains unpaid as of March 31, 2023.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of ~~the~~our financial condition and results of operations 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, ~~2021,~~2022, as disclosed in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March ~~21, 2022~~9, 2023 (“Annual Report”). The statements in the following discussion and analysis regarding expectations about our future performance, liquidity and capital resources and any other non-historical statements in this discussion and analysis are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those described immediately below.

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. You can often identify forward-looking statements by the fact that they do not relate strictly to historical or current facts, 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 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.

Forward-looking statements are not guarantees. They reflect our current expectations 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.

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 aggressive competition we face; our heavy reliance on information management systems, vendors, and information sources that may not 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 alleged 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 services and adversely affect our business; our ability to maintain our professional reputation and brand name; ~~the impacts, direct and indirect, of the COVID‐19 pandemic on our business, our personnel and vendors, and the overall economy;~~ social, political, regulatory and legal risks in markets where we operate; the impact of foreign currency exchange rate fluctuations; unfavorable tax law changes and tax authority rulings; any impairment of our goodwill, other intangible assets and other long-lived assets; our ability to execute and integrate future acquisitions; our ability to access 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 our 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 on Form 10-K filed with the SEC on March ~~21, 2022,~~9, 2023, in particular the sections of that document entitled "Risk Factors," ~~"Forward-Looking~~"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 otherwise.

2822

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 approximately ~~39,000~~38,000 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 ~~2021,~~2022, we screened over 2924 million job applicants, employees and contractors for our customers and processed over ~~110~~107 million screens.

HireRight GIS Group Holdings LLC (“HGGH”), was formed in July 2018 in connection with the combination of two groups of companies: the HireRight Group and the General Information Services (“GIS”) Group, each of which includes a number of wholly-owned subsidiaries that conduct the Company’s business in the United States, as well as other countries. 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.

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.

Factors Affecting Our Results of Operations

Economic Conditions

Our business is impacted by the overall economic environment and total employment and hiring. The rapidly changing dynamics of the global workforce are creating increased 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 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 the past from the changing dynamics of the labor market, including strength in hiring as ~~well as a strong hiring environment, there continues to be~~the economy recovered from the effects of the COVID pandemic, our business has been adversely affected by recent and continuing uncertainty around ~~the~~ near term macroeconomic ~~environment.~~conditions. This uncertainty stems from high inflation, declining customer confidence, volatile energy prices, rising interest rates, geopolitical concerns, supply chain disruptions and labor shortages. Each of these drivers has its own adverse impact and the outlook for our business in 2023 remains ~~uncertain.~~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 remains elevated. Inflation puts pressure on our suppliers, resulting in increased data costs, and also increases our employment and other expenses. A sustained recession will have an adverse impact on the global hiring 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~~“Item 3. Quantitative and Qualitative Disclosures about Market ~~Risk — Inflation Risk~~”Risk” for additional information on the impact of interest rates and inflation on our business. Although the majority of our cost of services ~~are~~is variable in nature and will move 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 November 13, 2022, the Company's Board of Directors authorized a share repurchase program (“Program”). The Program authorizes the Company to repurchase up to $100.0 million of the Company’s common stock, par value $0.001, and will expire on November 14, 2024, or earlier if the repurchases reach $100.0 million before that date. Through March 31, 2023, the Company repurchased 3,791,229 shares of common stock for $42.3 million, including commissions paid and excise taxes, at an average price paid of $11.17 per share. The repurchased shares are recorded as “Treasury stock” on the Company's consolidated balance sheets. As of March 31, 2023, approximately $57.7 million remained available for future purchases under the Program. Repurchases under the

2923

~~changes~~Program continued at similar rates through the date of filing of this report, and the Board of Directors has not yet determined whether to renew the Program following its termination.

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 ~~revenue.~~response to ongoing uncertain macroeconomic conditions. The ~~Company has taken steps~~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 ~~to improve its profitability, including the impact of lowering interest expense through the voluntary repayment of debt.~~

~~The Company’s net U.S. federal~~throughout 2023 and ~~state deferred tax assets were previously fully offset by a valuation allowance, excluding a portion of its deferred tax liabilities for tax deductible goodwill, primarily~~early 2024 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.~~

Even though there are factors creating uncertainty in the future financial results of the business as described above, 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. duringimplements existing plans and evaluates further opportunities. During the three months ended ~~September 30, 2022. In making the determination to release the valuation allowance,~~March 31, 2023, the Company ~~considered its movement into a cumulative income position~~recognized restructuring charges of $5.9 million, primarily for ~~the most recent three-year period, the significant decrease~~employee severance and benefits in its interest expense from the paydown of debt in the fourth quarter of 2021 using IPO proceeds, its seventh consecutive quarter of operating income, forecasts of future earnings for its U.S. operations, and other factors. The release of the valuation allowance resulted in a non-cash deferred tax benefit of $70.2 million, which materially decreased the Company’s income tax expense during the three months ended September 30, 2022.

~~2022 Developments~~

On June 3, 2022, the Company entered into an amendment to its First Lien Term Loan Facility, as defined below under “Liquidity and Capital Resources”, (“Amended First Lien Term Loan Facility”) with the lenders party thereto and Bank of America, N.A. as administrative agent. The Amended First Lien Term Loan Facility amended the Company’s revolving credit facility (“Amended Revolving Credit Facility”) to increase the aggregate commitments under the facility from $100.0 million to $145.0 million and extend the maturity date from July 12, 2023 to the earlier of June 3, 2027 or 91 days prior to the maturity of the First Lien Term Loan Facility. The interest rate benchmark applicable to the Amended Revolving Credit Facility was converted from the London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”).

~~Effective February 18, 2022, the Company terminated the Interest Rate Swap Agreements, as defined below, prior to their stated termination dates. In~~ connection with the ~~termination of the Interest Rate Swap Agreements,~~workforce reduction and accelerated rent expense on abandoned right-of-use assets. In addition, the Company ~~made a payment~~incurred professional service fees of ~~$18.4~~$4.0 million ~~to the swap counterparties. Following these terminations, $21.5 million of unrealized gains~~for consulting costs related to the ~~terminated Interest Rate Swap Agreements included~~execution of the Company’s global restructuring plan.

The Company expects to recognize additional restructuring charges in ~~accumulated other comprehensive income (loss) on~~2023 and early 2024 of approximately $15.0 million to $20.0 million, primarily for severance and benefits, professional service fees, and transition costs. Once completed we estimate annualized gross savings of approximately $50.0 million under the ~~condensed consolidated balance sheet will~~global restructuring plan. Additionally, we may not be ~~reclassified~~able to ~~earnings as reductions to interest expense through December 31, 2023. See “Liquidity~~fully realize the cost savings and ~~Capital Resources — Interest Rate Swaps” below~~benefits initially anticipated from the global restructuring plan, and the expected charges may be greater than expected, including charges for additional ~~information.~~severance and 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 ~~28%~~27% and 29% of revenues for each of the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023, and 2022, ~~and 32% and 29% of revenues for the three and nine months ended September 30, 2021,~~ respectively, 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, ~~financial services,~~ business and consumer services, financial services, manufacturing, education, retail and not-for-profit. None of the Company’s customers individually accounted for greater than 3% of revenues ~~during~~for each of the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023, and 2022, ~~and~~

~~5% of revenues during each of the three and nine months ended September 30, 2021. Technology, healthcare,~~respectively. Healthcare, technology, financial services, and transportation customers represent the largest contributors to revenues. Revenues for the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, from these customers ~~increased 5% and 24%, respectively, over~~decreased 15% from the prior year ~~periods.~~period, led by reductions in order volumes from technology companies.

Expenses

Cost of services (excluding depreciation and amortization) consists 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, principally resulting from the acquisition of GIS in 2018.~~assets.

Other expenses consist of interest expense relating to our credit facilities and interest rate swap agreements, gains and losses on asset disposal, foreign exchange gains and losses, as well as other expenses. On our condensed consolidated statements of 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 ~~other~~these currencies could result in realized and unrealized gains and losses in foreign exchange. However, to the extent we earn ~~revenue~~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,~~March 31, 2023 and 2022 ~~and 2021~~

The following tables present operating results for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.


	Three Months Ended March 31,
	2023				2022
	(in thousands, except percent of revenues)
Revenues	$	175,447	100.0	%	$	198,711	100.0	%

Expenses
Cost of services (exclusive of depreciation and amortization below)	98,451		56.1	%	112,403		56.6	%
Selling, general and administrative	59,726		34.0	%	48,267		24.3	%
Depreciation and amortization	18,417		10.5	%	18,061		9.1	%
Total expenses	176,594		100.7	%	178,731		89.9	%
Operating income (loss)	(1,147)		(0.7)	%	19,980		10.1	%

Other expenses
Interest expense, net	12,402		7.1	%	7,557		3.8	%
Other expense, net	306		0.2	%	41		—	%
Total other expenses	12,708		7.2	%	7,598		3.8	%
Income (loss) before income taxes	(13,855)		(7.9)	%	12,382		6.2	%
Income tax expense (benefit)	(5,944)		(3.4)	%	818		0.4	%
Net income (loss)	$	(7,911)	(4.5)	%	$	11,564	5.8	%

Revenues

Revenues for the three months ended March 31, 2023 decreased to $175.4 million, a decrease of $23.3 million, or 11.7%, from the prior-year period, primarily driven by lower order volume from existing customers. Of the total $23.3 million decrease, $19.0 million was related to volume reductions associated with our technology and services customers, as both have recently undertaken efforts to rightsize their workforce in response to macroeconomic

3125

Three Months Ended September 30,
2022 2021
(in thousands, except percent of revenues)
Revenues $ 210,303 100.0 % $ 204,981 100.0 %
Expenses
Cost of services (exclusive of depreciation and amortization below) 110,848 52.7 % 111,328 54.3 %
Selling, general and administrative 49,378 23.5 % 47,652 23.2 %
Depreciation and amortization 17,946 8.5 % 19,531 9.5 %
Total expenses 178,172 84.7 % 178,511 87.1 %
Operating income 32,131 15.3 % 26,470 12.9 %
Other expenses
Interest expense 8,457 4.0 % 18,518 9.0 %
Other expense, net 89 — % 22 — %
Total other expenses, net 8,546 4.1 % 18,540 9.0 %
Income before income taxes 23,585 11.2 % 7,930 3.9 %
Income tax (benefit) expense (69,704) (33.1) % 649 0.3 %
Net income $ 93,289 44.4 % $ 7,281 3.6 %
pressures. Revenues from our remaining customer groups represented a net decrease of $4.3 million due to lower volumes.

Nine Months Ended September 30,
2022 2021
(in thousands, except percent of revenues)
Revenues $ 631,306 100.0 % $ 531,522 100.0 %
Expenses
Cost of services (exclusive of depreciation and amortization below) 343,241 54.4 % 295,832 55.7 %
Selling, general and administrative 152,032 24.1 % 130,261 24.5 %
Depreciation and amortization 54,056 8.6 % 56,013 10.5 %
Total expenses 549,329 87.0 % 482,106 90.7 %
Operating income 81,977 13.0 % 49,416 9.3 %
Other expenses
Interest expense 20,971 3.3 % 54,674 10.3 %
Other expense, net 163 — % 125 — %
Total other expenses, net 21,134 3.3 % 54,799 10.3 %
Income (loss) before income taxes 60,843 9.6 % (5,383) (1.0) %
Income tax (benefit) expense (68,456) (10.8) % 2,954 0.6 %
Net income (loss) $ 129,299 20.5 % $ (8,337) (1.6) %

~~Revenues~~

~~Revenues for the three months ended September 30, 2022 increased to $210.3 million, an increase of $5.3~~From a geographical perspective, revenues from international regions decreased by $1.6 million, or ~~2.6%~~10.3%, and revenues from the ~~prior-year period, primarily driven by increases in surcharge revenues. Surcharge~~

~~revenues increased due to price increases. Revenues from international and~~ United States ~~regions increased~~decreased by ~~$0.3~~$21.7 million, or ~~2.1%~~11.8%, ~~and by $5.0 million, or 2.6%, respectively,~~ during the three months ended ~~September 30, 2022,~~March 31, 2023, compared to the three months ended ~~September 30, 2021.~~March 31, 2022. The strengthening of the U.S. dollar against the British pound in the three months ended ~~September 30, 2022,~~March 31, 2023, compared to the same period in ~~2021~~2022 had an unfavorable impact on revenue from international regions. On a constant currency basis, United Kingdom revenues would have been ~~$2.0~~$1.1 million higher than actual revenues. Constant currency represents current period results that have been retranslated using exchange rates in effect in the prior comparable period.

Revenues for the nine months ended September 30, 2022 increased to $631.3 million, an increase of $99.8 million, or 18.8%, from prior-year period, primarily driven by higher order volume and higher average order values associated with existing customers and sales to new customers. Revenues from international and United States regions increased by $8.5 million, or 21.1%, and by $91.3 million, or 18.6%, respectively, during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. For the same reasons noted in the preceding paragraph, on a constant currency basis, United Kingdom revenues would have been $3.5 million higher than actual revenues for the nine months ended September 30, 2022.

Cost of Services (exclusive of depreciation and amortization)

Cost of services for the three months ended ~~September 30, 2022~~March 31, 2023 decreased to ~~$110.8~~$98.5 million, a decrease of ~~$0.5~~$14.0 million, or ~~0.4%~~12.4%, from the prior-year period, primarily due to lower order volumes, decreased use of contract labor, and lower average labor costs per background ~~screen~~screen. The decreases in costs of services were partially offset by ~~increased~~higher data ~~supplier~~ costs, increases in severance expenses, and increased incentive compensation and fringe benefit programs to keep up with market conditions. Cost of services as a percent of revenues decreased to ~~52.7%~~56.1% for the three months ended ~~September 30, 2022,~~March 31, 2023, compared to ~~54.3%~~56.6% for the three months ended ~~September 30, 2021,~~March 31, 2022, primarily driven by lower average labor costs per background screen as a result of process improvements associated with our ~~ongoing~~ technology initiatives as well as ~~an increase~~a decrease in the use of ~~offshore~~contract labor.

Cost of services for the nine months ended September 30, 2022 increased to $343.2 million, an increase of $47.4 million, or 16.0%, from the prior-year period, primarily due to higher volumes and increased incentive compensation and fringe benefit programs to keep up with market conditions. For the same reasons noted in the preceding paragraph, cost of services as a percent of revenues decreased to 54.4% for the nine months ended September 30, 2022, compared to 55.7% for the nine months ended September 30, 2021.

Selling, General and Administrative

Selling, general and administrative expenses (“SG&A”) for the three months ended ~~September 30, 2022~~March 31, 2023 increased ~~$1.7~~$11.5 million to ~~$49.4~~$59.7 million primarily due to increases in personnel costs of ~~$3.4~~$4.6 million and increases in professional service fees of ~~$1.3~~$4.6 million ~~partially offset~~primarily due to consulting costs related to our global restructuring plan. Other increases were technology expenses increased by ~~a decrease~~$2.9 million partly due to ongoing operating system improvements and increasing software maintenance costs, as well as increases in facility related expenses of ~~$2.7 million.~~$1.1 million, driven by acceleration of expense associated with cessation of use of certain office facilities. Of the ~~$3.4~~$4.6 million increase in personnel costs, ~~$3.2~~$1.3 million was driven in part by hiring in technology and go to market positions as well as increases in healthcare costs, and $2.7 million was related to ~~increased salary expenses, incentive compensation~~employee severance and ~~fringe benefit programs.~~benefits in connection with the workforce reduction. SG&A as a percent of revenues for the three months ended ~~September 30, 2022~~March 31, 2023 increased to ~~23.5%~~34.0% from ~~23.2%~~24.3% for the three months ended ~~September 30, 2021.~~

SG&A expenses for the nine months ended September 30, 2022 increased $21.8 million to $152.0 million primarily due to increases in personnel costs of $19.1 million, investments in technology of $3.3 million, and the addition of public company costs of $3.2 million. Of the $19.1 million increase in personnel costs, $5.6 million was related to stock-based compensation and $13.5 million was related to increased salary expenses, incentive compensation and fringe benefit programs. The increases were partially offset by a decrease in facility related expenses of $4.9 million. SG&A as a percent of revenues for the nine months ended September 30, 2022 decreased slightly to 24.1% from 24.5% for the nine months ended September 30, 2021.March 31, 2022.

The increases in personnel costs ~~in both periods~~ were attributable to ~~responses~~employee severance and employee benefits related to our global restructuring plan, increases in market compensation rates, ~~the~~and increased use of stock-based compensation following our initial public offering in November 2021, and staffing to support growth. Our initial public offering also drove the addition of public company costs including incremental audit, accounting and legal fees as well as premiums for increased insurance coverage, which were not present in the 2021 periods but which will continue.compensation. The increases in SG&A expenses

were partially offset ~~in each period~~ by decreases in various other costs, including a reduction of ~~facility~~insurance and audit expenses ~~resulting~~ from ~~exiting unused office space during 2021.~~the prior year period.

Interest Expense, net

Interest expense, ~~decreased by $10.1 million to $8.5 million~~net for the three months ended ~~September 30, 2022, and by $33.7~~March 31, 2023 increased to $12.4 million, ~~to $21.0~~an increase of $4.8 million, ~~for~~or 64.1%, from the ~~nine months ended September 30, 2022.~~prior year period. The ~~decreases in both periods were~~increase was primarily due to ~~a reduction in outstanding indebtedness~~increased interest expense under our credit facilities as a result of voluntary principal prepayments using IPO proceeds during the fourth quarter of 2021, and scheduled principal repayments. Interest expense for the three and nine months ended September 30, 2021 includes $4.2 million and $12.4 million, respectively, related to a second lien senior securedvariable rate term loan facility ~~which~~of $8.0 million associated with rising interest rates over the prior year period. The increase in interest expense was ~~repaid on November 3, 2021. Additionally,~~partially offset by reclassifications from accumulated other comprehensive income (loss) on the condensed consolidated balance sheet of unrealized gains related ~~to the~~our terminated ~~Interest Rate Swap Agreements,~~interest rate swap agreements, which reduced interest expense by ~~$3.4 million and $9.7~~$2.5 million during the three ~~and nine~~ months ended ~~September 30, 2022, respectively. The decreases~~March 31, 2023 and is expected to reduce interest expense by $6.3 million for the ~~three~~remainder of 2023. Additionally, interest income, which

is derived primarily from cash and ~~nine months ended September 30, 2022 were partially offset by~~cash equivalent balances held in interest-bearing accounts, increased ~~interest expense of $3.7~~$0.9 million ~~and $4.9 million, respectively, associated with rising interest rates during those periods.~~over the prior year period.

Income Tax Expense (Benefit) ~~Expense~~

The effective tax rate for the three months ended ~~September 30, 2022,~~March 31, 2023, was ~~negative 295.5%~~42.9% compared to ~~8.2%~~6.6% for the three months ended September 30, 2021. The effective tax rate for the nine months ended September 30, 2022, was negative 112.5% compared to 54.9% for the nine months ended September 30, 2021. The effective tax rate for the three and nine month periods ended September 30, 2022, compared to the prior year periods, changed primarily due to the release of the federal and state valuation allowances in 2022 and revaluation of deferred taxes in the United Kingdom in 2021.

The effective tax rate for the three and nine months ended September 30, 2022, differs from the Federal statutory rate of 21% primarily due to the release of federal and state valuation allowances, state taxes, and U.S. tax on foreign operations.March 31, 2022. The effective tax rate for the three months ended ~~September 30, 2021,~~March 31, 2023, compared to the prior year period, changed primarily due to federal and state valuation allowances and non-deductible stock compensation expense.

The effective tax rate for the three months ended March 31, 2023, differs from the ~~Federal~~federal statutory rate of 21% primarily due to state taxes and non-deductible stock-based compensation expense. The effective tax rate for the three months ended March 31, 2022, differs from the federal statutory rate of 21% primarily due to valuation allowances, state taxes, and U.S. tax on foreign operations. ~~The effective tax rate for the nine months ended September 30, 2021, differs from the Federal statutory rate of 21% primarily due to the revaluation of deferred taxes in the United Kingdom.~~

Non-GAAP Financial Measures

We believe that the presentation of our non-GAAP financial measures 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 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 by~~to the extent that other companies in our industry ~~our definitions~~define 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) before interest expense, income taxes, depreciation and amortization expense, 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. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenues for the period. Adjusted EBITDA and Adjusted EBITDA margin are supplemental financial

measures that management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess our:

•Operating performance as compared to other publicly traded companies without regard to capital structure or historical cost basis;

•Ability to generate cash flow;

•Ability to incur and service debt and fund capital expenditures; and

•Viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

The following table reconciles our non-GAAP financial measure of Adjusted EBITDA to net income (loss), our most directly comparable financial measures calculated and presented in accordance with GAAP, for the periods presented.

Three Months Ended
September 30, Nine Months Ended
September 30,
2022 2021 2022 2021
(in thousands)
Net income (loss) $93,289 $7,281 $129,299 $(8,337)
Income tax (benefit) expense (1)
(69,704) 649 (68,456) 2,954
Interest expense 8,457 18,518 20,971 54,674
Depreciation and amortization 17,946 19,531 54,056 56,013
EBITDA 49,988 45,979 135,870 105,304
Stock-based compensation 1,282 841 8,587 2,493
Realized and unrealized (gain) loss on foreign exchange (780) 24 (795) 125
Merger integration expenses (2)
— 193 205 1,174
Technology investments (3)
559 1,690 559 1,690
Amortization of cloud computing software costs (4)
980 — 1,446 —
Other items (5)
1,943 2,895 3,501 6,659
Adjusted EBITDA $53,972 $51,622 $149,373 $117,445
Net income (loss) margin (6)
44% 4% 20% 2%
Adjusted EBITDA margin 26% 25% 24% 22%


	Three Months Ended March 31,
	2023			2022
	(in thousands, except percents)
Net income (loss)	$	(7,911)		$	11,564
Income tax (benefit) expense	(5,944)			818
Interest expense, net	12,402			7,557
Depreciation and amortization	18,417			18,061
EBITDA	16,964			38,000
Stock-based compensation	3,828			2,794
Realized and unrealized gain (loss) on foreign exchange	307			(79)
Restructuring charges (1)	9,874			—
Amortization of cloud computing software costs (2)	1,571			151
Other items (3)	497			860
Adjusted EBITDA	$	33,041		$	41,726
Net income (loss) margin (4)	(4.5)		%	5.8		%
Adjusted EBITDA margin	18.8		%	21.0		%

(1)During the three months ended September 30, 2022, the Company determined sufficient positive evidence existed to reverse the Company’s valuation allowance attributable to the deferred tax assets associatedRestructuring charges represent costs incurred in connection with the Company’s ~~operations~~global restructuring plan. Costs incurred in connection with the ~~U.S. This reversal resulted in a non-cash deferred tax benefit~~plan include: (i) $4.4 million of ~~$70.2~~severance and benefits related to impacted employees, (ii) $4.0 million ~~which materially decreased~~of professional service fees related to the ~~Company’s income tax expense during~~execution of our cost savings initiatives, and (iii) $1.4 million related to the ~~three and nine months ended September 30, 2022.~~abandonment of certain of our leased facilities,

(2)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.

~~(3)Technology investments represent discovery phase costs associated with various platform and fulfillment technology initiatives that are intended to achieve greater operational efficiencies.~~

~~(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)~~(3)Other items for the three months ended March 31, 2023 comprise professional services fees not related to core operations. Other items for the three months ended March 31, 2022 include (i) costs of ~~$0.4 million and $1.7~~$0.9 million associated with the implementation of a company-wide ~~enterprise resource planning (“ERP”)~~ERP 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, respectively, and (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$0.3 million related to loss on disposal of assets and exit costs associated with one of our short-term leased facilities, ~~during~~(iii) $0.2 million of information technology related costs including personnel expenses and professional service fees associated with the ~~nine months ended September 30, 2022. These~~integration of customers and operations of an entity with which the Company merged, and (iv) a partial offset of these costs ~~were partially offset~~ by a reduction in previously accrued legal settlement expense of $0.6 million during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 due to a more favorable outcome than originally anticipated in a claim outside the ordinary course of business. Other items for the three and nine months ended September 30, 2021 include (i) $1.1 million and $4.3 million, respectively, related to the preparation of the Company’s initial public offering during 2021, (ii) $1.5 million related to loss on disposal of assets and exit costs associated with one of our short-term leased facilities during the three and nine months ended September 30, 2021, and (iii) costs of $0.3 million and $0.8 million associated with the implementation of an ERP system during the three and nine months ended September 30, 2021.

~~(6)~~(4)Net income (loss) margin represents net income (loss) divided by revenues for the period.

Adjusted Net Income and Adjusted Diluted Earnings Per Share

In addition to Adjusted EBITDA, management believes that Adjusted Net Income 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 as net income (loss) adjusted for amortization of acquired intangible assets, 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 effective 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 ~~adjusted~~ 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 reconciles our non-GAAP financial measure of Adjusted Net Income to 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,
2022 2021 2022 2021
(in thousands)
Net income (loss)
$ 93,289 $ 7,281 $ 129,299 $ (8,337)
Income tax (benefit) expense (1)
(69,704) 649 (68,456) 2,954
Income (loss) before income taxes 23,585 7,930 60,843 (5,383)
Amortization of acquired intangible assets 15,353 16,226 46,335 47,518
Interest expense swap adjustments (2)
(3,413) — (9,676) —
Interest expense discounts (3)
790 1,057 2,549 3,139
Stock-based compensation 1,282 841 8,587 2,493
Realized and unrealized (gain) loss on foreign exchange (780) 24 (795) 125
Merger integration expenses (4)
— 193 205 1,174
Technology investments (5)
559 1,690 559 1,690
Amortization of cloud computing software costs (6)
980 — 1,446 —
Other items (7)
1,943 2,895 3,501 6,659
Adjusted income before income taxes 40,299 30,856 113,554 57,415
Adjusted income taxes (8)
(71,216) 662 (70,951) 2,533
Adjusted Net Income $111,515 $30,194 $184,505 $54,882


	Three Months Ended March 31,
	2023		2022
	(in thousands)
Net income (loss)	$	(7,911)	$	11,564
Income tax (benefit) expense	(5,944)		818
Income (loss) before income taxes	(13,855)		12,382
Amortization of acquired intangible assets	15,394		15,505

Interest expense swap adjustments (1)	(2,527)		(2,181)
Interest expense discounts (2)	803		821
Stock-based compensation	3,828		2,794
Realized and unrealized gain (loss) on foreign exchange	307		(79)
Restructuring charges (3)	9,874		—
Amortization of cloud computing software costs (4)	1,571		151
Other items (5)	497		860
Adjusted income before income taxes	15,892		30,253
Adjusted income taxes (6)	2,346		439
Adjusted Net Income	$13,546		$29,814

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,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022

Diluted net income (loss) per share	Diluted net income (loss) per share	$	1.17	$	0.13	$	1.63	$	(0.15)	Diluted net income (loss) per share	$	(0.10)	$	0.15
Income tax (benefit) expense ~~(1)~~	Income tax (benefit) expense ~~(1)~~	(0.88)		0.01		(0.86)		0.05		Income tax (benefit) expense ~~(1)~~	(0.08)		0.01
Amortization of acquired intangible assets	Amortization of acquired intangible assets	0.19		0.29		0.58		0.83		Amortization of acquired intangible assets	0.20		0.19
Interest expense swap adjustments (2)		(0.04)		—		(0.12)		—
Interest expense discounts (3)		0.01		0.02		0.03		0.06

Interest expense swap adjustments (1)										Interest expense swap adjustments (1)	(0.03)		(0.03)
Interest expense discounts (2)										Interest expense discounts (2)	0.01		0.01
Stock-based compensation	Stock-based compensation	0.02		0.01		0.11		0.04		Stock-based compensation	0.05		0.04
Realized and unrealized loss on foreign exchange		(0.01)		—		(0.01)		—
Merger integration expenses (4)		—		—		—		0.02
Technology investments (5)		0.01		0.03		0.01		0.03
Realized and unrealized gain (loss) on foreign exchange										Realized and unrealized gain (loss) on foreign exchange	—		—
Restructuring charges (3)										Restructuring charges (3)	0.13		—
Amortization of cloud computing software costs ~~(6)~~(4)	Amortization of cloud computing software costs ~~(6)~~(4)	0.01		—		0.02		—		Amortization of cloud computing software costs ~~(6)~~(4)	0.02		—
Other items ~~(7)~~(5)	Other items ~~(7)~~(5)	0.02		0.05		0.04		0.12		Other items ~~(7)~~(5)	0.01		0.01
Adjusted income taxes ~~(8)~~(6)	Adjusted income taxes ~~(8)~~(6)	0.90		(0.01)		0.89		(0.04)		Adjusted income taxes ~~(8)~~(6)	(0.03)		(0.01)
Adjusted Diluted Earnings Per Share	Adjusted Diluted Earnings Per Share	$	1.40	$	0.53	$	2.32	$	0.96	Adjusted Diluted Earnings Per Share	$	0.18	$	0.37

Weighted average number of shares outstanding - diluted	Weighted average number of shares outstanding - diluted	79,542,715		57,199,204		79,476,574		57,168,291		Weighted average number of shares outstanding - diluted	77,285,116		79,392,937

~~(1)~~
During the three months ended September 30, 2022, the Company determined sufficient positive evidence existed to reverse the Company’s valuation allowance attributable to the deferred tax assets associated with the Company’s operations 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 the three and nine months ended September 30, 2022.

~~(2)~~(1)Interest expense swap adjustments consist of amortization of unrealized gains on ~~the~~our terminated ~~Interest Rate Swap Agreements,~~interest rate swap agreements, which will be recognized through December 2023 as a reduction in interest expense.

~~(3)~~(2)Interest expense discounts consist of amortization of original issue discount and debt issuance costs.

~~(4)~~(3)~~Merger integration expenses consist primarily~~Restructuring charges represent costs incurred in connection with the Company’s global restructuring plan. Costs incurred in connection with the plan include: (i) $4.4 million of ~~information technology (“IT”)~~severance and benefits related ~~costs including personnel expenses,~~to impacted employees, (ii) $4.0 million of professional ~~and~~ service fees ~~associated with~~related to the ~~integration~~execution of ~~customers~~our cost savings initiatives, and ~~operations~~(iii) $1.4 million related to the abandonment of ~~GIS, which commenced in July 2018 and was substantially completed by the end~~certain of ~~2020.~~our leased facilities,

~~(5)Technology investments represent discovery phase costs associated with various platform and fulfillment technology initiatives that are intended to achieve greater operational efficiencies.~~

~~(6)~~(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.

~~(7)~~(5)Other items for the three months ended March 31, 2023 comprise professional services fees not related to core operations. Other items for the three months ended March 31, 2022 include (i) costs of ~~$0.4 million and $1.7~~$0.9 million associated with the implementation of a company-wide ~~enterprise resource planning (“ERP”)~~ERP 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, respectively, and (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$0.3 million related to loss on disposal of assets and exit costs associated with one of our short-term leased facilities, ~~during~~(iii) $0.2 million of information technology related costs including personnel expenses and professional service fees associated with the ~~nine months ended September 30, 2022. These~~integration of customers and operations of an entity with which the Company merged, and (iv) a partial offset of these costs

~~were partially offset~~ by a reduction in previously accrued legal settlement expense of $0.6 million during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 due to a more favorable outcome than originally anticipated in a claim outside the ordinary course of business. Other items for the three and nine months ended September 30, 2021 include (i) $1.1 million and $4.3 million, respectively, related to the preparation of the Company’s initial public offering during 2021, (ii) $1.5 million related to loss on disposal of assets and exit costs associated with one of our short-term leased facilities during the three and nine months ended September 30, 2021, and (iii) costs of $0.3 million and $0.8 million associated with the implementation of an ERP system during the three and nine months ended September 30, 2021.

~~(8)~~(6)The tax effect of each adjustment is determined based on the tax laws and valuation allowance status of the jurisdiction to which the adjustment relates. An adjusted effective income tax rate has been determined for each period presented by applying the statutory income tax rate, net of applicable adjustments for valuation allowances, which was used to compute Adjusted Net Income for the periods presented. Due to the existence of a U.S. tax valuation allowance, the tax impact of the pre-tax adjustments for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 is immaterial. During the ~~three months~~year ended ~~September 30,~~December 31, 2022, the Company determined sufficient positive evidence existed to reverse the Company’s valuation allowance attributable to the deferred tax assets associated with the Company’s operations in the U.S. ~~This reversal resulted in a non-cash deferred~~There is no change to the manner by which the tax ~~benefit~~effect of ~~$70.2 million, which materially decreased the Company’s income tax expense during the three and nine months ended September 30, 2022. As~~each adjustment is determined as a result of the reversal of the valuation ~~allowance, the U.S. tax provision for the remainder of the year is expected to be immaterial.~~

allowance.

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 have 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 equityholders 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 which the Company recognized an estimated total liability of ~~$211.4~~$210.5 million, including a current portion of $27.0 million, as of ~~September 30, 2022.~~March 31, 2023. Based on our current taxable income estimates, we expect to repay the majority of this obligation by the end of 2030. 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, 2022~~March 31, 2023 was ~~$146.5~~$127.4 million. As of ~~September 30, 2022,~~March 31, 2023, cash held in foreign jurisdictions was approximately ~~$17.1~~$16.1 million and is primarily related to international operations.

~~Restricted cash of $1.3 million as of September~~

30 ~~2022 consists primarily 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.~~

Debt

The Company currently has two long-term debt arrangements:

•The Amended First Lien Term Loan Facility, a first lien senior secured term loan facility, bearing interest payable monthly at a LIBOR variable rate ~~(3.12%~~(4.84% at ~~September 30, 2022)~~March 31, 2023) + 3.75%, maturing on July 12, 2025. Total principal outstanding balance on our debt was ~~$701.6~~$697.4 million as of ~~September 30, 2022~~March 31, 2023 and ~~$707.9~~$699.5 million as of December 31, ~~2021.~~2022.

•The Amended Revolver Credit Facility, a first lien senior secured revolving credit facility in an aggregate principal amount of up to $145.0 million, including a $40.0 million letter of credit sub-facility, bearing

interest monthly at a ~~SOFR~~Secured Overnight Financing Rate (“SOFR”) variable rate ~~(2.47%~~(4.63% at ~~September 30, 2022)~~March 31, 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 Amended First Lien Term Loan Facility. The Company had $143.7 million in available borrowing capacity under the Amended Revolving Credit Facility, after utilizing $1.3 million for letters of credit as of ~~September 30, 2022.~~March 31, 2023.

The 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 ~~in compliance with the covenants~~not subject to this covenant as of March 31, 2023, as outstanding loans and letters of credit under the Amended ~~First Lien Facilities for~~Revolving Credit Facility did not exceed 35% of the ~~three and nine months ended September 30, 2022.~~

total commitments under the facility.

The Company’s obligations under the 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, 2022,~~March 31, 2023, the Company had purchase obligations to various parties of approximately ~~$28.9~~$49.7 million in the aggregate, primarily to purchase data and other screening services in the ordinary course of business. These purchase obligations have varying expiration terms through 2023, and approximately ~~$25.8~~$47.9 million of the total is expected to be paid within one year. ~~Our obligations as of September 30, 2022, have increased from $21.7 million as of~~

On December 31, ~~2021, due~~2022 and February 16, 2023, the Company entered into definitive agreements to ~~the extension of a service agreement with one~~purchase 60% of the ~~Company’s current vendors.~~

~~In addition to our regular capital expenditures, we expect to invest approximately $45 to $50 million~~equity interests in a ~~capital expenditure program, expected~~privately held company for a total purchase price of approximately $26.5 million, subject to ~~extend through the end of fiscal year 2023 to continue to enhance our operating systems and technologies to improve operational efficiency.~~ closing conditions that have not yet been satisfied.

We expect that cash flow from operations and current cash balances, together with available borrowings under the Amended Revolving Credit Facility, will be sufficient to meet operating requirements as well as the obligations under the TRA 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.

~~Cash Flow Analysis~~

~~Comparison of Cash Flows for the nine months ended September 30, 2022 versus the nine months ended September 30, 2021.~~

~~The following table sets forth a summary of our condensed consolidated cash flows for the nine months ended September 30, 2022 and 2021:~~

4031

Nine Months Ended September 30,
2022 2021
(in thousands)
Net cash provided by operating activities $ 70,927 $ 19,043
Net cash used in investing activities (13,122) (9,983)
Net cash used in financing activities (25,050) (7,503)
Net increase in cash, cash equivalents and restricted cash $ 32,755 $ 1,557
Cash Flow Analysis

The following table summarizes our condensed consolidated cash flows for the three months ended March 31, 2023 and 2022:


	Three Months Ended March 31,
	2023		2022
	(in thousands)
Net cash used in operating activities	$	(5,015)	$	(2,015)
Net cash used in investing activities	(4,611)		(4,529)
Net cash used in financing activities	(26,672)		(20,533)
Net decrease in cash, cash equivalents and restricted cash	$	(36,298)	$	(27,077)

Operating Activities

Cash provided by operating activities reflects net income (loss) adjusted for certain non-cash items and changes in operating assets and liabilities. Cash ~~provided by~~used in operating activities was ~~$70.9~~$5.0 million for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 compared to cash ~~provided by~~used in operating activities of ~~$19.0~~$2.0 million for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. The increase in cash ~~provided by~~used in operating activities was due primarily to ~~higher~~net loss of $7.9 million for the current period compared to net income of $11.6 million for the prior year period, partly offset by lower use of cash for working capital in the current period compared to the prior year period, partly offset by the tax benefit from the release of the valuation allowance and higher use of cash for working capital which includes our expenditures related to our cloud computing platform modernization and automation efforts.period.

Investing Activities

Cash used in investing activities was approximately ~~$13.1~~$4.6 million during the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, compared to approximately ~~$10.0~~$4.5 million during the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. The increase was due primarily to increases in other investing and increases in capitalized software development costs under our program to enhance operational efficiencies compared to the prior period, partly offset by a decrease of purchases of property and equipment.

Financing Activities

Cash used in financing activities was approximately ~~$25.1~~$26.7 million for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 compared to cash used in financing activities of approximately ~~$7.5~~$20.5 million during the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. The increase was due primarily to the $24.6 million of cash used for repurchases of our common stock made under the Program during the three months ended March 31, 2023, partly offset by $18.4 million payment ~~related to the~~for termination of interest rate swap agreements during the ~~Interest Rate Swap Agreements, as defined below.~~prior year period. Mandatory repayments on our debt facilities were ~~$6.3~~$2.1 million in in each of the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022.

Share Repurchase Program

On November 13, 2022, ~~and 2021.~~

~~Interest Rate Swaps~~

~~Effective December 31, 2018,~~the Company's Board of Directors authorized the Program. The Program authorizes the Company ~~had entered into interest rate swap agreements~~to repurchase up to $100.0 million of the Company’s common stock and will expire on November 14, 2024, or earlier if repurchases reach $100.0 million before that date. Repurchases under the Program may be made in the open market, in privately negotiated transactions or otherwise, including through Rule 10b5-1 trading plans, with ~~a total notional~~the amount and timing of repurchases depending on stock price, trading volume, market conditions and other general business considerations. This Program does not obligate the Company to acquire any particular amount of ~~$700.0 million (“Interest Rate Swap Agreements”). The Interest Rate Swap Agreements were designed to provide predictability against changes in~~common stock and the ~~interest rates on~~Program may be extended, modified, suspended or discontinued at any time at the Company’s debt, as the Interest Rate Swap Agreements converted a portion of the variable interest rate on the Company’s debt to a fixed rate. The Interest Rate Swap Agreements were originally scheduled to expire on December 31, 2023.

On September 26, 2019, the Company modified the terms of the Interest Rate Swap Agreements with the then existing counterparties to change the LIBOR reference period to one month. The notional amount and maturities of the Interest Rate Swap Agreements remained unchanged. The Company elected hedge accounting treatment at that time. To ensure the effectiveness of the Interest Rate Swap Agreements, the Company elected the one-month LIBOR rate option for its variable rate interest payments on term balances equal 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 matched with the interest rate cap reset dates and other critical terms through February 18, 2022, the date the Interest Rate Swap Agreements were terminated, and during the three and nine months ended September 30, 2021. At September 30, 2022 and December 31, 2021, the effective portion of the Interest Rate Swapdiscretion.

4132

~~Agreements was included on the condensed consolidated balance sheets in accumulated other comprehensive income (loss).~~

~~Effective February 18, 2022,~~Through March 31, 2023, the Company ~~terminated~~repurchased 3,791,229 shares of Common stock for $42.3 million, including commissions paid, at an average price paid of $11.17 per share. As of March 31, 2023, approximately $57.7 million remained available for future purchases under the ~~Interest Rate Swap Agreements. In connection with~~Program. Repurchases under the ~~termination~~Program continued at similar rates through the date of filing of this report, and the ~~Interest Rate Swap Agreements,~~Board of Directors has not yet determined whether to renew the Company made a payment of $18.4 million to the swap counterparties. Following these terminations, $21.5 million of unrealized gains related to the terminated Interest Rate Swap Agreements included in accumulated other comprehensive income (loss) will be reclassified to earnings as reductions to interest expense through December 31, 2023.Program following its termination.

Off-Balance Sheet Arrangements

As of ~~September 30, 2022,~~March 31, 2023, we had no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

Recently Issued Accounting Pronouncements

See Note 2 — Recently Issued Accounting Pronouncements for 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 impact~~to our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily due to potential interest 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 Amended First Lien Term Loan Facility, as well as any borrowings under the Amended Revolving Credit Facility. Primary exposures include movements in LIBOR and SOFR. 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. Rising interest rates could also limit our ability to refinance our debt when it matures or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness.

As of ~~September 30, 2022,~~March 31, 2023, the outstanding principal balance of ~~$701.6~~$697.4 million on the Amended First Lien Term Loan Facility was subject to variable interest rates. Based upon a sensitivity analysis, a hypothetical 1% change in interest rates on our debt outstanding would change our annual interest expense by approximately $7.0 million.

The last publication date of LIBOR rates against various currencies by the Financial Conduct Authority in the United Kingdom was December 31, 2021, with the publication of certain United States dollar rates being phased out after June 30, 2023. 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 impact on our liquidity or results of operations.

Foreign Exchange Risk

The majority of our revenue is denominated in U.S. dollars; however, we do 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. Because our 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 other currencies will affect our statements 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 because we typically 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

~~Based on our analysis of the periods presented, we believe that inflation has not had a material effect on our operating results. However, recent~~Recent growth in inflation has increased and may continue to increase our operating costs. In response to high inflation rates, the Federal Reserve has been raising interest rates and has indicated that ~~it foresees further~~a decision on pausing the interest rate increases ~~throughout~~has not been made but instead the ~~year and into next year.~~Federal Reserve will continue to monitor economic data. 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 asdue to the growing competition for labor ~~has a greater impact~~and the effect of inflation on ~~our business.~~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, as ~~amended)~~amended (the “Exchange Act”)) as of ~~September 30, 2022.~~March 31, 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, 2022 due to the material weaknesses in our internal control over financial reporting as described below.~~March 31, 2023.

(b) ~~Material weaknesses in internal control over financial reporting~~Limitations on effectiveness of controls and procedures

In ~~preparing~~designing and evaluating our ~~financial statements,~~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 ~~Company identified material weaknesses in our internal~~desired control ~~over financial reporting as~~objectives. In addition, the design of December 31, 2020. These material weaknesses continued to exist as of September 30, 2022. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting suchdisclosure controls and procedures must reflect the fact 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 for the year ended December 31, 2020 and prior. Additionally, these material weaknesses resulted in immaterial adjustments to goodwill, prepaid expenses, accrued expenses and other current liabilities, and selling, general and administrative expenses for the quarters ended March 31, 2021, June 30, 2021 and September 30, 2021. Furthermore, these

material weaknesses could result in a misstatement of substantially all of our 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 dutiesresource constraints and that ~~adequately restrict user and privileged access~~management is required 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 resultapply judgment in ~~a material misstatement to~~evaluating the ~~financial statements, however, the deficiencies, when aggregated, could impact maintaining effective segregation~~benefits 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~~possible controls and ~~underlying data that support the effectiveness~~procedures relative to their costs. The design 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.

~~(c) Remediation plan for the previously identified material weaknesses~~

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 hired several accounting and finance personnel with the appropriate level of public accounting knowledge and experience.~~

•~~We engaged a nationally recognized public accounting firm that assisted us in creating comprehensive process narratives and Company policies and procedures.~~

•Our Internal Audit team, along with a third-party consultant, assisted us in evaluating our internal control over financial reporting (“ICFR”) and made several recommendations for findings noted. We enhanced ourany disclosure controls and ~~documentation support~~procedures also is based ~~on these recommendations.~~in part upon certain assumptions 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.

•We implemented a new ERP system to assist us in processing transactions more efficiently and effectively. The new ERP system provides significant enhancements to our internal control and reporting environment.

•We have designed and implemented controls related to user provisioning and maintenance to ensure access is restricted to appropriate personnel. In addition, we have strengthened procedures and controls around program change management and computer operations.

While we believe that these efforts have improved and will continue to improve our internal control over financial reporting, the newly implemented controls have not been in place and operating for a sufficient period to evaluate if the material weakness has been remediated. Therefore, these material weaknesses have not been remediated as of September 30, 2022.

~~(d)~~(c) Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended ~~September 30, 2022,~~March 31, 2023, as defined under Rule 13a-15(f) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

4434

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.

See “Part I, Item 1. Financial Statements (unaudited) - Note 13 — Legal Proceedings” of this Quarterly Report on Form 10-Q for additional information on legal proceedings.

Item 1A. Risk Factors

Current 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 shortages. These factors have led to reduction in order 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 inflation, the Federal Reserve has been raising interest rates and has indicated that ~~it foresees further~~a decision on pausing the interest rate ~~increases.~~increases has not been made but instead the Federal Reserve will continue to monitor economic data. 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.

Customers have ~~begun to react~~been reacting to these uncertainties by reducing hiring, which in turn causes uncertainty in our near-term revenue outlook.

In addition to the other information contained in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A. Risk Factors in our Annual ~~Report on Form 10-K for the year ended December 31, 2021.~~Report. The risks discussed in our Annual Report ~~on Form 10-K~~ could materially affect our business, financial condition, and future results. The risks described in our Annual Report ~~on Form 10-K~~ 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.

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 March 31, 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)
January 1 — January 31, 2023	577,300	$	11.79	577,300	$	76.4
February 1 — February 28, 2023	463,166	11.65		463,166	71.0
March 1 — March 31, 2023	1,221,934	10.89		1,221,934	57.7
Total	2,262,400	$	11.28	2,262,400	$	57.7

(1)On November 13, 2022, the Company's Board of Directors authorized a share repurchase program. The share repurchase program authorizes the Company to repurchase up to $100.0 million of the Company’s common stock, par value $0.001 and will expire on November 14, 2024, or earlier if repurchases reach $100.0 million before that date. Repurchases under the program may be made in the open market, 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. Open market repurchases will be structured to occur within the pricing and volume requirements of Rule 10b-18. This program does not obligate the Company to acquire any particular amount of common stock and the program may be extended, modified, suspended or discontinued at any time at the Company’s discretion. Repurchases under the Program continued at similar rates through the date of filing of this report, and the Board of Directors has not yet determined whether to renew the Program following its termination.

Item 6. Exhibits


Exhibit Number						Exhibit Description
31.1						Certification of Principal Executive Officer pursuant to Exchange Act Rules 13(a)-14(a) and 15(d)-14(a), as adopted
31.2						Certification of Principal Financial Officer pursuant to Exchange Act Rules 13(a)-14(a) and 15(d)-14(a), as adopted
32.1						Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

4536

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 3, 2022~~May 9, 2023


By:			/s/ Thomas M. Spaeth
Name:			Thomas M. Spaeth
Title:			Chief Financial Officer
			(Principal Financial Officer)

Date: ~~November 3, 2022~~May 9, 2023


By:			/s/ Laurie Blanton
Name:			Laurie Blanton
Title:			Chief Accounting Officer
			(Principal Accounting Officer)

4637


	Three Months Ended September 30, 2022
	Common Stock
	Shares	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	(in thousands, except share data)
Balances at June 30, 2022	79,432,321	$	79	$	800,566	$	(324,354)	$	2,182	$	478,473
Common stock issuance for vesting of restricted stock units and exercise of stock options	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


	Nine Months Ended September 30, 2022
	Common Stock
	Shares	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	(in thousands, except share data)
Balances at December 31, 2021	79,392,937	$	79	$	793,382	$	(360,364)	$	12,620	$	445,717
Common stock issuance for vesting of restricted stock units and exercise of stock options	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


	Nine Months Ended September 30, 2021
	Class A Member Units
	Units	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	(in thousands, except unit data)
Balances at December 31, 2020	57,168,291	$	590,711	$	15,360	$	(339,061)	$	(10,123)	$	256,887
Net loss	—	—		—		(8,337)		—		(8,337)
Stock-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


	September 30, 2022
	(in thousands)
2022 (excluding the nine months ended September 30, 2022)	$	1,499
2023	5,958
2024	3,636
2025	2,166
2026	1,357
Thereafter	3,392
Total lease payments	18,008
Less amount representing interest	(1,750)
Total present value of lease liabilities	$	16,258


	December 31, 2021
	Markets for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)		Total
	(in thousands)
Derivative instruments, current	$	—	$	16,662	$	—	$	16,662
Derivative instruments, long-term	—		11,444		—		11,444
Total liabilities measured at fair value	$	—	$	28,106	$	—	$	28,106


	Nine Months Ended September 30,
	2022				2021
	(in thousands, except percent of revenues)
Revenues	$	631,306	100.0	%	$	531,522	100.0	%

Expenses
Cost of services (exclusive of depreciation and amortization below)	343,241		54.4	%	295,832		55.7	%
Selling, general and administrative	152,032		24.1	%	130,261		24.5	%
Depreciation and amortization	54,056		8.6	%	56,013		10.5	%
Total expenses	549,329		87.0	%	482,106		90.7	%
Operating income	81,977		13.0	%	49,416		9.3	%

Other expenses
Interest expense	20,971		3.3	%	54,674		10.3	%
Other expense, net	163		—	%	125		—	%
Total other expenses, net	21,134		3.3	%	54,799		10.3	%
Income (loss) before income taxes	60,843		9.6	%	(5,383)		(1.0)	%
Income tax (benefit) expense	(68,456)		(10.8)	%	2,954		0.6	%
Net income (loss)	$	129,299	20.5	%	$	(8,337)	(1.6)	%