S-1/A 1 d174750ds1a.htm FORM S-1/A Form S-1/A
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As filed with the Securities and Exchange Commission on September 13, 2021

Registration No. 333-259113

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Sterling Check Corp.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7374   37-1784336
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
 

(I.R.S. Employer

Identification No.)

1 State Street Plaza

24th Floor

New York, New York 10004

1 (800) 853-3228

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Joshua Peirez

Chief Executive Officer

1 State Street Plaza

24th Floor

New York, New York 10004

1 (800) 853-3228

(Name, address, including zip code, and telephone number including area code, of agent for service)

 

 

Copies to:

 

Daniel J. Bursky, Esq.
Andrew B. Barkan, Esq.
Fried, Frank, Harris, Shriver &
Jacobson LLP
One New York Plaza
New York, New York 10004
(212) 859-8000
 

Steven L. Barnett
Executive Vice President, Secretary
and Chief Legal & Risk Officer

1 State Street Plaza

24th Floor
New York, New York 10004
1 (800) 853-3228

 

Gregory P. Rodgers, Esq.

Benjamin J. Cohen, Esq.

Latham & Watkins LLP

1271 Avenue of the Americas

New York, New York 10020

(212) 906-1200


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Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

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. (Check One):

 

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 not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Amount
to be
registered(1)
  Proposed
maximum offering
price per share(2)
  Proposed Maximum
Aggregate Offering
Price(1)(2)
  Amount of
Registration
Fee(3)

Common stock, par value $0.01 per share

 

16,427,750

  $22.00   $361,410,500   $39,430

 

 

(1)

Includes 2,142,750 shares of common stock that the underwriters have the option to purchase.

(2)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

(3)

The registrant previously paid a total of $10,910 in connection with the prior filing of the registration statement.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell, and it is not soliciting an offer to buy, these securities in any state where the offer or sale is not permitted.

 

Subject to Completion. Dated September 13, 2021.

PRELIMINARY PROSPECTUS

LOGO

14,285,000 Shares

Sterling Check Corp.

Common Stock

 

 

This is the initial public offering of Sterling Check Corp. We are selling 4,760,000 shares of our common stock and the selling stockholders identified in this prospectus are offering 9,525,000 shares of our common stock. We will not receive any proceeds from the sale of the shares of common stock by the selling stockholders.

Prior to this offering, there has been no public market for our common stock. The initial public offering price is expected to be between $20.00 and $22.00 per share of our common stock. We have applied to list our common stock on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “STER.”

The underwriters have an option for a period of 30 days from the date of this prospectus to purchase up to a maximum of 2,142,750 additional shares of common stock from the selling stockholders.

Following this offering, our Sponsor (as defined herein) will own 65.9% of the voting power in the company (assuming no exercise of the underwriters’ option to purchase additional shares of common stock from the selling stockholders). As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of Nasdaq.

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”) and, as such, may elect to comply with certain reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 22 to read about factors you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per share      Total  

Price to public

   $                    $                

Underwriting discounts and commissions(1)

   $                    $                

Proceeds, before expenses, to us

   $                    $                

Proceeds, before expenses, to the selling stockholders

   $                    $                

 

(1)

See “Underwriting (Conflicts of Interest)” for additional information regarding underwriting compensation.

Delivery of the shares of common stock is expected to be made on or about                 , 2021.

 

Goldman Sachs & Co. LLC    J.P. Morgan    Morgan Stanley

 

Baird           William Blair

 

KeyBanc Capital Markets    Nomura           Stifel

 

ING         R. Seelaus & Co., LLC

 

 

The date of this prospectus is                 , 2021.


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LOGO

Sterling provides the foundation of trust and safety our clients need to create great environments for their most essential resource, people. We believe everyone has the right to feel safe.    


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LOGO

Comprehensive Suite of Tech-Enabled Services Criminal Record Checks Civil Court Records Motor Vehicle Records Executive Investigations Credit Reports Social Media Screens Liens, Judgments, &Bankruptcies Education Verifications Employment Verifications License Verifications Reference Checks Sanctions, Risk&Compliance Identity-asa- Service Fingerprinting Drug&Health Screening Random&Post Accident Drug Testing Testing NewHire Forms & Onboarding Form I-9 &E-Verify Workforce Monitoring Medical License Monitoring Driver Monitoring ContingentWorkforce Solution Sex O.ender Registries Covid-19


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LOGO

Robust Platform Integrations Over 75 integrations with leading providers in the HCM and ATS ecosystem 50+% of revenue is integrated Highly Automated Fulfillment Process 90% of U.S. criminal screens automated 70% of criminal screens completed within the 1st hour and 90% within the 1st day Over 95% of Revenue in the Cloud 99.9% platform availability Localized services Rapid product launches Scalable Seamless User Experience Mobile-friendly, intuitive, easy-to-use client and candidate interfaces Actionable, real-time, data-driven insights Proprietary and Cloud-Based Technology Platform


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LOGO

A Market Leader with Significant Scale and Breadth 40K+ Clients2 75M+ Screens annually1 240+ Countries and territories where Sterling has screening capabilities 50%+ Of the Fortune 100 45% of the Fortune 5002 9 Years Average tenure for top 100 clients2 57 Average client NPS in 20203 1For the last twelve months ended June 30, 2021 2As of June 30, 2021 3NPS refers to net promoter score, which we use to measure our clients’ brand loyalty and satisfaction with our products and services. For additional information, see “Market and Industry Data.”


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TABLE OF CONTENTS

 

MARKET AND INDUSTRY DATA

     ii  

CERTAIN TRADEMARKS, TRADE NAMES AND SERVICE MARKS

     iii  

BASIS OF PRESENTATION

     iv  

USE OF NON-GAAP FINANCIAL MEASURES

     iv  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     22  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     66  

USE OF PROCEEDS

     68  

DIVIDEND POLICY

     70  

CAPITALIZATION

     71  

DILUTION

     73  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     75  

BUSINESS

     113  

MANAGEMENT

     137  

EXECUTIVE COMPENSATION

     145  

PRINCIPAL AND SELLING STOCKHOLDERS

     167  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     171  

DESCRIPTION OF CAPITAL STOCK

     174  

SHARES ELIGIBLE FOR FUTURE SALE

     179  

MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF OUR COMMON STOCK

     182  

UNDERWRITING (CONFLICTS OF INTEREST)

     187  

LEGAL MATTERS

     195  

EXPERTS

     195  

WHERE YOU CAN FIND MORE INFORMATION

     195  

INDEX TO FINANCIAL STATEMENTS

     F-1  

 

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Neither we, the selling stockholders, nor the underwriters have authorized anyone to provide you with any information other than that included in this prospectus or in any free writing prospectus prepared by or on behalf of us. We do not take any responsibility for, and can provide no assurance as to the reliability of, any information that others may give you. Offers to sell, and solicitations of offers to buy, shares of our common stock are being made only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since such date.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restriction as to this offering and the distribution of this prospectus applicable to those jurisdictions. See “Underwriting (Conflicts of Interest).”

MARKET AND INDUSTRY DATA

This prospectus includes estimates regarding market and industry data. Unless otherwise indicated, information concerning our industry and the markets in which we operate, including our general expectations, market position, market opportunity and market size, are based on our management’s knowledge and experience in the markets in which we operate, together with currently available information obtained from various sources, including publicly available information, industry reports (including a report by Acclaro Growth Partners, Inc. (“Acclaro Growth Partners”) that we commissioned in July 2021) and publications, surveys, our clients, trade and business organizations and other contacts in the markets in which we operate. In particular, in the first quarter of fiscal 2021, we conducted a survey of our approximately 5,000 employees located in the United States, Canada, the United Kingdom, the Netherlands, Poland, the United Arab Emirates, Singapore, Malaysia, China, India, the Philippines, Hong Kong and Australia, to which we received over 2,700 responses. We designed this survey in accordance with what we believe are best practices for conducting a survey. In particular, we asked six questions and provided a scale of four responses from Strongly Agree, Agree, Disagree, to Strongly Disagree. This survey was voluntary and responses were kept confidential to lower the risk of untruthful answers. We believe that we made reasonable assumptions in designing our surveys.

In presenting this information, we have made certain assumptions that we believe to be reasonable based on such data and other similar sources and on our knowledge of, and our experience to date in, the markets in which we operate. While we believe the estimated market and industry data included in this prospectus are generally reliable, such information, which is derived in part from management’s estimates and beliefs, is inherently uncertain and imprecise. Market and industry data are subject to change and may be limited by the availability of raw data, the voluntary nature of the data gathering process and other limitations inherent in any statistical survey of such data. In addition, projections, assumptions and estimates of the future performance of the markets in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by third parties and by us. Accordingly, you are cautioned not to place undue reliance on such market share data or any other such estimates.

This prospectus also includes references to our client net promoter score (“NPS”), which we use to measure our clients’ brand loyalty and satisfaction with our products and services, and which can range from -100 to +100 based on the question “How likely are you to recommend Sterling to a friend or colleague?” Responses were solicited on a scale ranging from 0, Not Likely, to 10, Very Likely. Our

 

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NPS is based on over 1,200 respondents from approximately 700 clients who responded to the survey question, between January 1, 2020 and December 31, 2020. Our NPS was calculated by using the standard methodology of subtracting the percentage of clients who responded that they are not likely to recommend Sterling (6 or lower) from the percentage of clients who responded that they are very likely to recommend Sterling (9 or 10). The NPS gives no weight to respondents who declined to answer the survey question. This method is substantially consistent with how we believe businesses across our industry and other industries typically calculate their NPS.

While we believe such information is reliable, neither we nor the underwriters can guarantee the accuracy or completeness of this information, and neither we nor the underwriters have independently verified any third-party information and data from our internal research has not been verified by any independent source.

CERTAIN TRADEMARKS, TRADE NAMES AND SERVICE MARKS

This prospectus includes trademarks and service marks owned by us. This prospectus also contains trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this prospectus may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

 

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BASIS OF PRESENTATION

As used in this prospectus, unless the context otherwise requires, references to “Sterling,” “we,” “us,” “our,” the “Company,” and similar references refer to Sterling Check Corp. (formerly Sterling Ultimate Parent Corp.).

This prospectus includes references to our “gross retention rate.” Gross retention rate is a percentage, where the numerator is prior year revenues less the revenue impact from accounts considered lost, and the denominator is prior year revenues. The revenue impact is calculated as revenue decline of lost accounts in the current year from the prior year for the months after which they were considered lost. Therefore, the attrition impact of clients lost in the current year may be partially captured in both the current and the following years’ retention rates depending on the point during the year at which they are lost. This calculation excludes our Asia Pacific revenues, which account for less than approximately 6% of annual revenues in each of the periods presented. Our gross retention rate does not factor in revenue impact, whether growth or decline, attributable to existing clients or the incremental revenue impact of new clients.

Numerical figures included in this prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them. In addition, we round certain percentages presented in this prospectus to the nearest whole number. As a result, figures expressed as percentages in the text may not total 100% or, when aggregated, may not be the arithmetic aggregation of the percentages that precede them.

USE OF NON-GAAP FINANCIAL MEASURES

This prospectus contains “non-GAAP financial measures,” which are financial measures that are not calculated and presented in accordance with generally accepted accounting principles in the United States (“GAAP”).

Specifically, we make use of the non-GAAP financial measures “Adjusted EBITDA,” “Adjusted EBITDA Margin,” “Adjusted Net Income,” and “Adjusted Earnings Per Share” in evaluating our past results and future prospects. For the definitions of Adjusted EBITDA and Adjusted Net Income and a reconciliation to net income, their most directly comparable financial measure presented in accordance with GAAP, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.” Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenue for the applicable period. Adjusted Earnings Per Share is defined as Adjusted Net Income divided by diluted weighted average shares for the applicable period.

We present Adjusted EBITDA and Adjusted EBITDA Margin because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management and our board of directors use Adjusted EBITDA and Adjusted EBITDA Margin to evaluate the factors and trends affecting our business to assess our financial performance and the effectiveness of our business strategies, in preparing and approving our annual budget and to compare our performance against that of other peer companies using similar measures, and believe they are helpful in highlighting trends in our core operating performance. Further, our executive incentive compensation is based in part on components of Adjusted EBITDA.

We present Adjusted Net Income and Adjusted Earnings Per Share because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a

 

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consistent basis by excluding certain material non-cash items and unusual items that we do not expect to continue at the same level in the future, including the amortization of assets resulting from purchase accounting and normalizing our tax rate. Management and our board of directors use Adjusted Net Income to evaluate the factors and trends affecting our business to assess our financial performance and in preparing and approving our annual budget and believe it is helpful in highlighting trends in our core operating performance.

Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income and Adjusted Earnings Per Share have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP. Some of these limitations include the following:

 

   

Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income and Adjusted Earnings Per Share do not reflect every expenditure, future requirements for capital expenditures or contractual commitments;

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect income tax expense;

 

   

Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income and Adjusted Earnings Per Share do not reflect the non-cash component of employee compensation;

 

   

Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income and Adjusted Earnings Per Share do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative, on a recurring basis, of our ongoing operations; and

 

   

other companies in our industry may calculate Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income and Adjusted Earnings Per Share or similarly titled measures differently than we do, limiting their usefulness as comparative measures.

We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income and Adjusted Earnings Per Share only as supplemental information.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and related notes thereto included elsewhere in this prospectus and the information in “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Sterling Overview

We are a leading global provider of technology-enabled background and identity verification services. We provide the foundation of trust and safety our clients need to create great environments for their most essential resource—people. We offer a comprehensive hiring and risk management solution that begins with identity verification, followed by criminal background screening, credential verification, drug and health screening, processing of employee documentation required for onboarding and ongoing risk monitoring. Our services are delivered through our purpose-built, proprietary, cloud-based technology platform that empowers organizations with real-time and data-driven insights to conduct and manage their employment screening programs efficiently and effectively. Our clients face a dynamic and rapidly evolving global labor market with increasing complexity and regulatory requirements. We believe that our services and platform enable organizations to make more informed employment decisions, improve workplace safety, protect their brand and mitigate risk. As a result, we believe our solutions are mission-critical to their core human resources, risk management and compliance functions. During the twelve months ended June 30, 2021, we completed over 75 million searches for over 40,000 clients, including over 50% of the Fortune 100 and over 45% of the Fortune 500.

We have built an award-winning proprietary and cloud-based technology platform. Our client and candidate interfaces provide easy-to-use and mobile-first ordering, task and program management, results delivery and reporting analytics. This enables our clients to gain meaningful insights into their risk mitigation programs, all while creating exceptional candidate and employee experiences. Our interfaces are supported by our powerful artificial intelligence (“AI”)-driven fulfillment platform, which leverages more than 3,300 automation integrations, including Application Programming Interfaces (“APIs”) and Robotic Process Automation (“RPA”) bots. This enables 90% of U.S. criminal searches to be automated and allows us to complete 70% of U.S. criminal searches within the first hour and 90% within the first day. As of December 31, 2020, 95% of our revenue is processed through platforms hosted in the cloud, which allows us to consistently maintain 99.9% platform availability while being prepared to scale into the future. These platforms are seamlessly integrated into over 75 applicant tracking systems (“ATS”), human capital management (“HCM”) systems and our clients’ in-house supply chain systems, thus creating relatively frictionless, fast and unified candidate hiring experiences. When combined, we believe our solutions deliver convenient and easy-to-use front-end interfaces, accurate and fast results, and enable our clients to effectively manage complex programs in a compliant and cost-effective manner. We believe that our technology cannot be easily replicated without substantial investment.

As part of our continued evolution, in early 2019, we launched Project Ignite, a three-phase strategic investment initiative to create an enterprise-class global platform. We are already benefiting from the delivery of our new client and candidate interfaces, scalable cloud-based infrastructure for our global and local production platforms and an improved security environment through new business wins, improved client retention and the ability to launch products rapidly to meet immediate client


 

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needs, as we did with our full suite of novel coronavirus (“COVID-19”) testing products in 2020. The remaining investment, which we expect to complete in 2022, will migrate our corporate technological infrastructure to the cloud and unify our clients onto a single global production platform. Over the long term, we expect these investments to further enhance our margins, improve time to market as we build once and deploy globally and allow us to increase innovation.

Our client-centric approach underpins everything we do. We serve a diverse and global client base in a wide range of industries, such as healthcare, gig economy, financial and business services, industrials, retail, contingent, technology, media and entertainment, transportation and logistics, hospitality, education and government. Employers are facing numerous challenges, including complex and changing legal and regulatory requirements, a rise in fraudulent job applications, a growing spotlight on reputation and more complex global workforces. Successfully navigating these challenges requires an industry-specific perspective, given differing candidate profiles, economics, competitive dynamics and regulatory demands. To serve these differing needs, our sales and support delivery model is organized around industry-specific teams (“Verticals”) and geographic markets (“Regions”). Experienced client success, sales, product and operations teams dedicated to individual Verticals collaborate with our clients to address their unique challenges and compliance requirements while providing industry best practice guidance. Our delivery model provides our clients with both the personal touch and consultative partnership of a small boutique firm and the global reach, scale, innovation and resources of an industry leader; all of which benefit small- and mid-sized businesses (“SMB”), global multinational enterprises and everyone in between. Additionally, this delivery model supports our principle of “Compliance by Design”, enabling clients to maintain compliance globally. We believe the combination of our deep market expertise from our sales and support verticalization combined with the flexibility of our proprietary technology platform enable us to deliver industry-relevant, highly specialized solutions to our clients in a scalable manner, driving growth and differentiating us from our competitors. This has allowed us to develop long-standing relationships with our clients as evidenced by the average tenure of our top 100 clients, based on 2019 and 2020 total revenue, at nine years, our average client NPS of 57 and a gross retention rate of 96% for the first half of 2021.

Throughout our 45-year operating history, innovation and self-disruption have been at the core of what we do every day. Our history of unique, industry-oriented market insights allows us to be at the forefront of innovation which includes multiple industry-leading solutions. For example, we pioneered criminal fulfilment technology (CourtDirect), arrest record and incarceration alert products, post-hire monitoring capabilities, AI-enhanced record review and validation process and the industry’s only proprietary technology in a single-sourced U.S.-nationwide fingerprint network. Our commitment to innovation has continued with the recent development and introduction of enhanced global language support capabilities, a cloud-based operating platform and a comprehensive identity verification solution. Enabled by our market leadership and platform investments, we have established a foundation and roadmap for future innovation which includes industry-specific products, growing our Identity-as-a-Service capabilities and further geographic expansion.

For the years ended December 31, 2019 and 2020, our revenues were $497.1 million and $454.1 million, respectively. For the six months ended June 30, 2020 and 2021, our revenues were $207.9 million and $298.7 million, respectively. Our net loss was $46.7 million and $52.3 million and our operating loss was $13.4 million and $23.1 million for the years ended December 31, 2019 and 2020, respectively. Our net loss for the six months ended June 30, 2020 was $40.8 million and our net income for the six months ended June 30, 2021 was $4.0 million. Our operating loss for the six months ended June 30, 2020 was $19.6 million and our operating income for the six months ended June 30, 2021 was $23.2 million. For the years ended December 31, 2019 and 2020, our Adjusted EBITDA was $119.0 million and $99.8 million, respectively, and our Adjusted Net Income was


 

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$38.0 million and $26.7 million, respectively. For the six months ended June 30, 2020 and 2021, our Adjusted EBITDA was $41.5 million and $83.8 million, respectively, and our Adjusted Net Income was $6.5 million and $40.0 million, respectively. For the definitions of Adjusted EBITDA and Adjusted Net Income and a reconciliation to net income, their most directly comparable financial measure presented in accordance with GAAP, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

Our Market Opportunity

The global background and identity verification market in which we operate is large, growing and highly fragmented—representing a $16 billion total addressable market as of 2020, which is expected to grow at a 12% compound annual growth rate (“CAGR”) to $29 billion in 2025. The total addressable market comprises three distinct components as follows: the $6 billion global pre-hire employment screening services market (source: Acclaro Growth Partners, July 2021), expected to grow at a 7% CAGR to $8 billion in 2025, the $3 billion global post-hire employment screening services market (source: Acclaro Growth Partners, July 2021), expected to grow at a 13% CAGR to $5 billion in 2025, as well as the $8 billion global identity verification market (source: Markets and Markets, October 2020), expected to grow at a 16% CAGR to $16 billion in 2025.

 

LOGO


 

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Our addressable market is rapidly evolving and benefits from a number of key demand drivers, many of which increase the need for more flexible, comprehensive screening and hiring solutions, including the following:

 

LOGO

 

   

Growing participation in the gig economy and contingent workforce

According to Gallup, 36% of the U.S. workforce participates in the gig economy and contingent workforce, and this proportion is expected to increase. The gig economy and contingent workforce consists of independent contractors, online platform workers, contract firm workers, and contingent workers. Gallup further estimates that 44% of gig workers hold multiple jobs. The rise and expansion of the gig economy and contingent workforce results in a greater portion of the workforce being sourced from temporary or on-demand labor pools. Additionally, the rise of competing gig platforms has made it easier for gig workers to shift between platforms, thus increasing the demand for screening. As the gig economy caters to clients in a very direct and personal way (e.g., rideshare, goods delivery, household services) and large corporations continue to increase utilization of a contingent workforce that may access sensitive information, safe and effective background screening capabilities have become critical. We believe that continued growth in the gig and contingent workforce model for the foreseeable future will support clear demand for Sterling’s deep expertise and tailored solutions.

 

   

Increasing voluntary employee churn

Generational and structural shifts in the workforce have led to increasing voluntary employee churn, particularly with younger workers. Members of the millennial and Gen-Z generations switch jobs more frequently than previous generations. According to a recent Gallup report, only half of millennials strongly agreed that they plan to be working at their company one year from now; similarly, 60% of millennials say they are open to a different job opportunity—15 percentage points higher than older generation workers. Moreover, the generational movement away from unions and defined benefit plans reduces contractual and financial incentives to stay in a


 

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particular role, reducing switching costs for employees. The ongoing structural shift from in-office to remote work further reduces the historical geographic matching challenge employers and employees faced, further reducing switching costs for employees and expanding talent pools for employers. These trends support increasing demand for global, fast and efficient employment screening and identity verification services that only providers of scale, like Sterling, can sufficiently address.

 

   

The rise of fraudulent job applications and growing spotlight on a company’s reputational risk

False claims within job applications are a growing concern for employers. According to The Insight Partners, approximately 51% of resumes submitted to employers contain inaccuracies in employment history and performance as well as educational history and achievement. False claims by candidates can put an organization at significant risk. Costs include not only salary but also incentives, benefits, recruiting expenses, administrative costs and the cost to restart the process in recruiting a candidate. In extreme cases, the employee may cause harm in the workplace, leading to a claim of negligent hiring, forcing the employer to contend with the cost and time of litigation and possible significant damages or settlements. Additionally, there may be considerable reputational risk to the employer, whose safety and trust may be called into question. Utilizing background and identification verification services helps organizations to mitigate these risks.

 

   

Proliferation of personal data driving need for identity verification

According to a recent Risk Based Security report, the total number of data records compromised in 2020 exceeded 37 billion, a 141% increase compared to 2019 and by far the most records exposed in a single year since Risk Based Security began reporting on data breach activity in 2011. This number excludes the nearly 50% of breaches (1,923 of 3,932 publicly reported breaches) that did not report the number of records compromised. With this growth in exposed records, more identities are at risk of exposure and theft. Verifying identity is a powerful tool that employers can use to help ensure that their candidates and workers are who they claim to be, and that fraudulent data is not used during the hiring and onboarding process.

 

   

Increase in background screening adoption outside the U.S.

We believe that pre-hire candidate screening is significantly less common outside of the U.S. Many international markets are beginning to view employment background checks as a critical component of their hiring functions. Additionally, the international expansion of U.S.-based global companies and their desire to offer centralized and comparable hiring practices has introduced the benefits of background screening to foreign markets. For these employers, global background checks are critical in order to comply with regulatory requirements, standardize their quality of hires and protect against negligent hiring risks. However, international background checks or verifying foreign credentials presents additional complexities, as employers may not be familiar with foreign customs or information sources, and the time and cost to hire employees with international histories are often much more significant. Background and identity verification service firms that can navigate these international challenges present a clear advantage for employers.

 

   

Increase in continuous post-hire screening processes

While some industries have regulatory requirements for post-hire screening, employers from all industries are increasingly focused on managing risk in the workplace through continuous


 

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screening and monitoring. According to a 2020 report by the Professional Background Screening Association (“PBSA”), 12% of U.S. companies currently perform background checks annually or more regularly, up from 9% in 2019. Continuous screening allows for greater mobility and safety for remote, onsite and contingent jobs and also ensures prompt risk warnings on any changes to an employee’s profile, including any criminal activity, drug use or health changes and compliance with on-going certification and licensing requirements, amongst others.

 

   

Increasing regulatory, compliance and risk management requirements

Increasing regulation is creating a heightened and complex risk of potential liabilities related to hiring and workforce management that is increasingly difficult for employers to manage. U.S. employee privacy and data protection laws are complicated and vary state-to-state. In addition, the interpretation of the Fair Credit Reporting Act (“FCRA”) is continuously evolving. Other complexities include variations in drug testing laws by industry and state and the introduction of “ban the box” and “fair chance” laws at the local, state, and federal level, which limit an employer’s ability to inquire about criminal histories and to consider them in making employment decisions. Outside the U.S., the European Union General Data Protection Regulation (“GDPR”) introduced significant changes in the way personal data is protected and handled in the European Union (the “EU”). In response, organizations are increasing their focus on compliance functions to ensure they meet these evolving legal and regulatory requirements, often turning to outsourced service providers. As they do, large players like Sterling with the depth and experience to help companies navigate these intricacies will continue to benefit from the increase in regulatory complexity.

Our Competitive Strengths

We believe we differentiate ourselves through the following key competitive strengths:

 

   

A market leader with significant scale and breadth. We are a leading global provider of technology-enabled background and identity verification services across a wide array of industries and geographies—completing 75 million searches across over 240 countries and territories in 35 languages for over 40,000 highly-diversified clients during the twelve months ended June 30, 2021. We are a market leader in the U.S., Canada, Europe, the Middle East and Africa (“EMEA”) and the Asia Pacific (“APAC”). Our global fulfillment capabilities are supported by operations in 13 jurisdictions—the U.S., Canada, the U.K., the Netherlands, Poland, the United Arab Emirates, Singapore, Malaysia, China, India, the Philippines, Hong Kong and Australia. We believe this differentiates Sterling with large, marquee clients, who demand sophisticated solutions across broad enterprises with nuanced operating priorities, as well as SMB clients that are experiencing hyper-growth and need to hire employees rapidly but lack the systems, infrastructure, and regulatory expertise to do so.

 

   

Award-winning, proprietary technology platform and extensive global product suite.

We believe our proprietary technology platform and global product suite provide us with a number of competitive advantages, including the following:

Proprietary Technology and Analytics Platform: We operate a global cloud-based platform, purpose-built to address the unique needs of our clients. With over 95% of our revenue processed through platforms in the cloud, our technology platform is scalable to serve our global client base and flexible to adapt to changing dynamics within industries. We deliver a seamless user experience—our mobile-friendly client and candidate interfaces (Sterling Client Hub, Sterling Candidate Hub and Sterling Analytics Hub) are intuitive and easy-to-use. Our customizable, powerful data analytics platform provides clients with the information they need to gain real-time


 

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insights and make data-driven decisions as they seek to manage, streamline and optimize their programs. Our proprietary fulfilment platform technologically sets us apart in our ability to manage the complexities of background screening. Sterling’s fulfilment platform is AI-driven and augmented with RPA, which results in high accuracy, low hiring costs and low time-to-hire rates, with 70% of U.S. criminal searches completed within the first hour and 90% within the first day. Integrated clients represent a growing share of our business, with over 50% of revenue now integrated. We expect this percentage to continue to increase as adoption of ATS and HCM software solutions grows. We have developed a comprehensive integration platform by partnering with many of the leading HCM and ATS platforms. Those clients with third-party HCM and ATS systems may integrate with Sterling through one of our over 75 platform integrations. Gig economy and contingent workforce clients, who utilize proprietary candidate workflow systems, may integrate into Sterling’s platform by leveraging our well-documented public RESTful API. This API provides clients with access to Sterling’s powerful services along with a wide range of capabilities, customization options and mobility solutions. All of our platform integrations create opportunities for our clients to improve productivity and profitability, and in turn create stickier client relationships for Sterling. We believe that these proprietary systems cannot be easily replicated without substantial investment.

Global Product Suite: We offer an extensive suite of global products addressing a wide range of complex client needs. Our solutions include identity verification, comprehensive background screening, credential verification, drug and health screening, processing of employee documentation required for onboarding and ongoing risk monitoring. Sterling’s background screening solutions utilize proprietary automation technology that we believe delivers thorough, fast and accurate records with global criminal screening capabilities in over 240 countries and territories. Our credential verification services are backed by a proprietary fulfillment engine. We provide comprehensive drug and health screenings with access to over 15,000 U.S. Department of Transportation (“DOT”)-compliant collection sites in the U.S. Sterling provides onboarding document management services as well as ongoing workforce and medical license monitoring. We believe our global product suite positions us well to access a broader set of clients and future revenue and growth opportunities.

 

   

Highly diversified and long-tenured client base. Our deep insight into the industries and geographies we serve through 45 years of experience has allowed us to develop a client base that is diversified across size, industry and geography with minimal concentration. This is enabled by our deep market expertise and our delivery model where we have verticalized around specific industries and geographic markets. This go-to-market approach creates a cycle of innovation, product development, benchmarking and consultative best-practices with the “voice of the client” at the center of everything we do. We currently serve over 40,000 clients, including over 50% of the Fortune 100, over 45% of the Fortune 500 and tens of thousands of SMB clients across the world. Our gross retention rate for the first half of 2021 was 96%. In 2020, no single client accounted for more than 5% of our revenue and our top 25 clients accounted for less than 30% of our revenue. The average relationship for our top 100 clients, based on 2019 and 2020 total revenue, is nine years and growing. These metrics reflect how deeply embedded we are in our clients’ daily HR and compliance workflows. We are well diversified across healthcare, the gig economy, financial and business services, industrials, retail, contingent, technology, media and entertainment, transportation and logistics, hospitality, education and government industries. We believe we have established a highly trusted brand in the industry, as evidenced by our average client NPS of 57. As the complexity and nuances of acquiring talent increases for organizations, we believe we are well-positioned to grow with our clients.

 

   

Attractive financial profile. We have an attractive business model underpinned by recurring revenues, significant operating leverage and low capital requirements that contribute to strong


 

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free cash flow. A majority of our U.S. enterprise client contracts are exclusive to Sterling or require Sterling to be used as the primary provider. Additionally, they are typically multi-year agreements with automatic renewal terms, no termination for convenience clauses and set pricing with Sterling’s right to increase prices upon notice. The strength of our contract terms combined with our high levels of client retention results in a high degree of revenue visibility. The vast majority of our revenues are either recurring or re-occurring in nature. Additionally, we benefit from natural operating leverage, utilizing our robust automation processes that result in high contribution margins associated with incremental revenue generated from our solutions. Our capital requirements remain minimal with capital expenditures (including capitalized software development costs) of 6.4% of revenues in 2019 and 3.6% of revenues in 2020. While we have incurred operating losses in recent years, including net losses of $46.7 million and $52.3 million for the years ended December 31, 2019 and 2020, respectively, the foregoing factors contribute to strong free cash flow generation, allowing us the financial flexibility to invest in the business and pursue growth through acquisitions.

 

   

Experienced management team with depth of experience and track record of success. Our senior management team has a track record of strong performance and significant expertise in the markets we serve and technology-enabled businesses, with 80% of our senior management team being new or in new roles since 2018. Our Chief Executive Officer, Josh Peirez, has extensive strategy, product and operational experience and plays an instrumental role in driving Sterling toward our global vision. Our President and Chief Operating Officer, Lou Paglia, leads global operations and is responsible for driving revenue growth, delivering client service, and ensuring our services meet the evolving market needs. Our Chief Financial Officer, Peter Walker, has over 10 years of experience as a CFO and oversees Sterling’s global finance operations and has responsibility for investor relations, internal audit, procurement and tax functions. We also maintain a strong core of General Managers dedicated to specific Verticals and Managing Directors tasked with operating and expanding our international Regions that average over 13 years across the background screening, risk management and information services industries. We believe this management team is well positioned to lead our business into the future.

Growth Strategy

We intend to capitalize on our attractive market opportunity by continuing to execute across the following key revenue and profit growth strategies:

 

   

Expand existing client relationships. Our substantial base of over 40,000 existing clients presents a significant opportunity to increase adoption of new services. Since 2019, over 55% of new clients in the U.S. have contracted for more than one product line, which demonstrates our ability to grow within our client base. We have implemented rigorous client success programs to better anticipate our clients’ needs and identify appropriate solutions. For example, we conduct quarterly business reviews with our enterprise clients, where we review program performance, client needs, industry trends and potential enhancement opportunities. Through this collaborative approach, we cultivate long-term client relationships primed for adoption of new services. Further, we are seeing global clients that use different providers in different geographies consolidate into one platform, and we believe we are well positioned to take advantage of this trend.

 

   

Win new clients. We have an established track record of new client wins and believe there is substantial opportunity to further grow our client base. Operating in a large and highly fragmented addressable market, we win against both large and small competitors due to our deep market expertise from our sales and support verticalization combined with the flexibility of our proprietary technology platform. This combination enables us to deliver industry-relevant, highly specialized solutions to our clients in a scalable manner, driving profitable growth and differentiating us from


 

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our competitors. Our size and scale positions us to serve enterprise organizations well. We believe that many competitors, especially smaller ones, will continue to be challenged in meeting enterprise client needs, including sophisticated and flexible platforms, global capabilities and the ability to handle large volumes, complex programs and varying compliance requirements. Our differentiated product and service offerings, platform capabilities, and go-to-market strategy have resulted in significant new business momentum and, since January 2019, we have won new clients representing Annual Contract Values (“ACV”) of more than $150 million combined.

 

   

Grow Identity-as-a-Service offering. Based upon our 45 years of industry experience, we believe that most background screening companies in the U.S. do not typically check identities or verify candidate-provided biographical data—two things that are critical for a successful background check. When clients select Sterling’s comprehensive and fully customizable identity verification solution, candidates are guided through a simple process that verifies their identity. All relevant biographic data is then automatically imported, with the candidate’s consent, into Sterling Candidate Hub and used to initiate the background check, resulting in greater accuracy and reduced fraud. We believe that the strong value proposition for clients coupled with the strength of Sterling’s offering will make Identity-as-a-Service a key contributor to our success in expanding existing client relationships and winning new clients.

 

   

Introduce new products and penetrate adjacent markets. We have a robust new product roadmap. Project Ignite has enabled us to launch products rapidly to meet immediate client needs, as we did with our full suite of COVID-19 testing services in 2020. We intend to continue to invest in developing industry-first solutions, further innovating in our existing Verticals as well as pursuing adjacent market opportunities that leverage our existing technology platform. For example, our digital wallet credentials solution is being designed to provide candidates with a user-centric, verified profile to prove their identity and share verified credentials with employers. We anticipate this solution will provide us with a new opportunity to monetize our services and the ability to further penetrate the business-to-consumer (“B2C”) market. Another product innovation is the continued enhancement of post-hire monitoring solutions, which track, among other things, healthcare sanctions, medical licenses, recent arrests and motor vehicle registration monitoring. We have also developed industry-specific solutions, such as a progressive ordering solution for the gig economy, where screens at the next level are only run once a candidate has passed the prior level, providing speed and cost savings to clients. Lastly, we plan to pursue new and underpenetrated adjacent market opportunities including talent assessment, reference checking, onboarding and investigative due diligence.

 

   

Pursue further geographic expansion. For the twelve months ended June 30, 2021, 19% of Sterling revenue was generated outside of the U.S., an increase from 17% for the year ended December 31, 2020 and an increase from 15% for the year ended December 31, 2019. We see compelling opportunities to extend our operating presence in other geographies and unify the global experience for clients as our international business continues to expand profitably, benefiting from operating leverage due to investments made in a global technology infrastructure and global fulfillment. We expect continued adoption of outsourced background screening outside the U.S. and are well positioned to benefit from this trend. We continue to introduce innovative region-specific products to best meet the needs of clients within each geography. We believe we have a unique ability to translate client needs into superior local market solutions through a combination of portfolio depth and breadth, local know-how and language capabilities. We have seen strong growth in EMEA, resulting from significant new client wins in the U.K., including many of the leading food delivery gig companies. In parallel, we are growing our presence in continental Europe and the Middle East and established a global multilingual hub in Poland to facilitate this expansion. We entered the APAC market through two acquisitions and continue to drive growth organically, within both established and emerging screening markets in the region. In addition, we have a strong


 

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business in Canada, particularly among Canadian-domiciled companies, and are focused on the significant opportunity to serve more of the Canadian operations of our U.S. clients with our unified global platform.

 

   

Pursue strategic M&A. We view a targeted, disciplined approach to strategic M&A as highly complementary to our other key growth objectives, compounding and/or accelerating related opportunities. Historically, Sterling has successfully identified, acquired and integrated several businesses that broaden and enhance our suite of client solutions and geographic presence. We will continue to execute a rigorous framework for building an actionable pipeline of acquisitions, with a focus on both (i) strategic benefits such as depth and breadth of capabilities, regional presence, and end market exposure and (ii) tangible opportunities to generate synergies and strong financial returns on capital deployed. With hundreds of smaller competitors in our space, we see M&A as a strategic opportunity to increase market share while realizing synergies. Through our investments in technology, we have established a unified platform, allowing us to quickly integrate targets and drive synergies. Sterling’s proven track record of M&A—with 10 acquisitions over the last 10 years—will continue to support and elevate the various layers of our future growth profile.

Recent Developments

On August 11, 2021, our subsidiary, Sterling Infosystems, Inc. (as successor to Sterling Midco Holdings, Inc.), entered into the sixth amendment (the “Sixth Amendment”) to our first lien credit agreement, dated as of June 19, 2015, by and among Sterling Midco Holdings, Inc., Sterling Intermediate Corp., the guarantors party thereto, KeyBank National Association, as administrative agent, and the lenders party thereto (as amended, the “Credit Agreement”). Pursuant to the Sixth Amendment, our $85.0 million revolving credit facility (the “Revolving Credit Facility”) will (i) automatically increase to $140.0 million upon the consummation of this offering and (ii) mature (a) with respect to $81.25 million of the revolving credit commitments (or, upon the consummation of this offering, the full $140.0 million of revolving credit commitments), the earlier of (x) August 11, 2026 and (y) December 31, 2023 unless, on or prior to December 31, 2023, the Term loan (as defined below) has been (I) refinanced with the proceeds of indebtedness with a final maturity date that is no earlier than February 11, 2027 or (II) amended, modified or waived, such that the final maturity date of the Term loan is no earlier than February 11, 2027 and (b) if this offering is not consummated, with respect to $3.75 million of the revolving credit commitments, June 19, 2022.

Summary Risk Factors

Our business is subject to numerous risks, including risks that may prevent us from achieving the successful implementation of our strategy or that may materially adversely affect our business, financial condition or results of operations. You should carefully consider the risks described in “Risk Factors” immediately following this prospectus summary and elsewhere in this prospectus, including the following principal risks, before investing in our common stock:

 

   

We could face liability based on the nature of our services and the information we report or fail to report in our background screening, which may not be covered or fully covered by insurance.

 

   

We are subject to significant governmental regulation, and changes in law or regulation, or a failure to correctly identify, interpret, comply with and reconcile the laws and regulations to which we are subject, could result in substantial liability or materially adversely affect our product and service offerings, revenue or profitability.


 

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Our international operations subject us to a broad range of laws and regulations that may be difficult to manage and could expose us to numerous risks that, individually or together, could materially and adversely affect our business.

 

   

Failure to comply with economic sanctions, anti-corruption and anti-money laundering laws and similar laws primarily associated with our activities outside of the United States could subject us to penalties and other material adverse consequences.

 

   

We collect, host, store, transfer, disclose, use, secure and retain and dispose of personal information. Security breaches may result in the disclosure of confidential information and improper use of information may negatively affect our business and harm our reputation.

 

   

Failure to comply with privacy, data protection and cybersecurity laws and regulations could have a materially adverse effect on our reputation, results of operations or financial condition, or have other material adverse consequences.

 

   

If a third party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or expensive licenses, and our business may be harmed.

 

   

If our trademarks, trade names, and confidential information are not adequately protected, we may lose our competitive advantage in our target markets.

 

   

Our growth depends on the success of our strategic relationships with third parties as well as our ability to successfully integrate our applications with a variety of third-party technologies.

 

   

The success of our business depends in part on our relationships with our partners.

 

   

A failure, disruption or change to the cost of the computing services that we utilize could have a materially adverse effect on our business and results of operations.

 

   

Systems failures, interruptions or delays in service, including due to natural disasters or other catastrophic events, could delay and disrupt our services, which could materially harm our business and reputation.

 

   

Our business, financial condition and results of operations could be materially adversely affected by unfavorable conditions in the general economy.

 

   

We are subject to significant competition, and if we fail to compete successfully, our sales could decline and our business, financial condition and results of operations could be materially adversely affected.

 

   

A significant portion of our fulfillment operations, and certain of our technology development operations, subject us to particular risks inherent in operating overseas.

 

   

If we fail to upgrade, enhance and expand our technology and services to meet client needs and preferences, or fail to successfully manage the transition to new products and services, the demand for our products and services may materially diminish.

 

   

We have incurred operating losses in the past, may incur operating losses in the future, and may not achieve or maintain profitability in the future.

 

   

Our recent growth rates may not be sustainable or indicative of future growth.

 

   

Our growth depends, in part, on increasing our presence in the markets that we currently serve, and we may not be successful in doing so.


 

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We acquire information from a variety of sources to conduct our business, and if some of these sources are not available to us in the future, or if the fees charged by such sources significantly increase, our business may be materially and adversely affected and our profit margins may decline.

 

   

We are subject to payment-related risks that may result in higher operating costs or the inability to process payments, either of which could harm our business, financial condition and results of operations.

 

   

Sales to government entities and higher-tier contractors to governmental clients involve unique competitive, procurement, budget, administrative and contractual risks, any of which could materially adversely impact our business, financial condition and results of operations.

 

   

We may incur impairment charges for our goodwill which would negatively affect our operating results.

 

   

The economic, health and business disruption caused by the COVID-19 pandemic could continue to adversely affect our business, financial condition and results of operations.

 

   

We have identified a material weakness in our internal control over financial reporting. If this material weakness is not remediated, or if we experience additional material weaknesses in the future or otherwise fail in the future to maintain an effective system of internal control over financial reporting or effective disclosure controls and procedures, we may not be able to accurately or timely report our financial condition or results of operations, which may materially adversely affect investor confidence in us and, as a result, the price of our common stock.

 

   

Our Sponsor controls us and their interests may conflict with ours or yours in the future.

 

   

To service our indebtedness, we require a significant amount of cash, which depends on many factors beyond our control.

 

   

We are a “controlled company” within the meaning of the corporate governance standards of Nasdaq and, as a result, will qualify for, and may rely on, exemptions from certain corporate governance requirements.

Our Sponsor

Certain affiliates of The Goldman Sachs Group, Inc. (“Goldman Sachs”) and Caisse de dépôt et placement du Québec (“CDPQ” and, together with Goldman Sachs, our “Sponsor”) are the owners of a majority of our common stock. CDPQ owns its equity interest in us indirectly through a limited partnership controlled by Goldman Sachs.

Bringing together traditional and alternative investments, Goldman Sachs Asset Management provides clients around the world with a dedicated partnership and focus on long-term performance. As the primary investing area within Goldman Sachs, Goldman Sachs Asset Management delivers investment and advisory services for the world’s leading institutions, financial advisors and individuals, drawing from its deeply connected global network and tailored expert insights, across every region and market—overseeing more than $2 trillion in assets under supervision worldwide as of June 30, 2021. Driven by a passion for its clients’ performance, Goldman Sachs Asset Management seeks to build long-term relationships based on conviction, sustainable outcomes and shared success over time.

CDPQ is a global investment group managing funds for public retirement and insurance plans, investing constructively to generate sustainable returns over the long term. CDPQ is active in the major financial markets, private equity, infrastructure, real estate and private debt. As at December 31, 2020, CDPQ’s net assets were CAD $365.5 billion.


 

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After completion of this offering, we expect to be a “controlled company” within the meaning of the corporate governance standards of Nasdaq. See “Risk Factors—Risks Relating to This Offering and Ownership of Our Common Stock—We are a “controlled company” within the meaning of the corporate governance standards of Nasdaq and, as a result, will qualify for, and may rely on, exemptions from certain corporate governance requirements. You may not have the same protections afforded to stockholders of other companies that are subject to such requirements.”

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include:

 

   

we are required to have only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure;

 

   

we are not required to engage an auditor to report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);

 

   

we are not required to submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes”; and

 

   

we are not required to disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.

The JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period and, as a result, we expect to adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for private companies. As a result, our operating results and consolidated financial statements may not be comparable to the operating results and financial statements of other companies who have adopted the new or revised accounting standards.

We have elected to take advantage of some of the reduced disclosure obligations listed above in this prospectus and may elect to take advantage of other reduced reporting requirements in future filings. In particular, we have elected to adopt the reduced disclosure with respect to our executive compensation disclosure. Further, we are including only two years of audited financial statements, compared to three years for comparable data reported by other public companies. As a result of this election, the information that we provide stockholders may be different than you might get from other public companies.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of this offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest of: (i) the last day of the first fiscal year in which our annual gross revenues are $1.07 billion or more; (ii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iii) the date on which we are deemed to be a “large accelerated filer,” which will occur as of the end of any fiscal year in which we (a) have an aggregate market value of our common


 

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stock held by non-affiliates of $700 million or more as of the last business day of our most recently completed second fiscal quarter, (b) have been required to file annual and quarterly reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for a period of at least 12 months and (c) have filed at least one annual report pursuant to the Exchange Act.

Corporate Information

Sterling Check Corp. (formerly Sterling Ultimate Parent Corp.), the issuer of the common stock in this offering, was incorporated as a Delaware corporation on May 4, 2015. Our corporate headquarters are located at 1 State Street Plaza, 24th Floor, New York, NY 10004. Our telephone number is 1 (800) 853-3228. Our principal website address is www.sterlingcheck.com. We have included our website address in this prospectus as an inactive textual reference only. The information contained on, or that can be accessed through, our website is deemed not to be incorporated in this prospectus or to be part of this prospectus.


 

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The Offering

 

Issuer

Sterling Check Corp., a Delaware corporation.

 

Common stock offered by us

4,760,000 shares.

 

Common stock offered by the selling stockholders

9,525,000 shares.

 

Option to purchase additional shares of common stock

The underwriters have an option to purchase up to an aggregate of 2,142,750 additional shares of common stock from the selling stockholders at the initial public offering price, less underwriting discounts and commissions. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Common stock to be outstanding after this offering

93,963,234 shares.

 

Controlled company

We will be a “controlled company” within the meaning of the corporate governance standards of Nasdaq. See “Management—Director Independence and Controlled Company Exception.”

 

Dividend policy

We do not expect to pay any dividends on our common stock for the foreseeable future. See “Dividend Policy.”

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $85.5 million, assuming an initial public offering price of $21.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We currently intend to use the net proceeds from this offering, together with cash on hand, to repay approximately $100.0 million outstanding under our Term loan (as defined below). We intend to use the remainder, if any, of the net proceeds to us from this offering for general corporate purposes. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders in this offering. The selling stockholders will receive all of the net proceeds and bear the underwriting discount, if any, attributable to their sale of our common stock. We will pay certain expenses associated with this offering. See “Use of Proceeds” and “Principal and Selling Stockholders.”

 

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Conflicts of interest

Some of the Sponsor entities are affiliates of Goldman Sachs & Co. LLC, an underwriter of this offering, beneficially own 78% of our outstanding capital stock prior to the consummation of this offering and will be selling stockholders in this offering and, as such, will receive in excess of 5% of the net proceeds of this offering. Therefore, Goldman Sachs & Co. LLC is deemed to have a “conflict of interest” under the Financial Industry Regulatory Authority, Inc. (“FINRA”) Rule 5121. Accordingly, this offering is being conducted in compliance with the applicable provisions of FINRA Rule 5121. FINRA Rule 5121 prohibits Goldman Sachs & Co. LLC from making sales to discretionary accounts without the prior written approval of the account holder and requires that a “qualified independent underwriter,” as defined in FINRA Rule 5121, participate in the preparation of the registration statement of which this prospectus forms a part and exercise its usual standards of due diligence with respect thereto. J.P. Morgan Securities LLC is assuming the responsibilities of acting as the “qualified independent underwriter” in this offering and is undertaking the legal responsibilities and liabilities of an underwriter under the Securities Act, which specifically include those inherent in Section 11 of the Securities Act.

 

Proposed stock exchange symbol

“STER.”

 

Risk factors

Investing in our common stock involves a high degree of risk. See “Risk Factors” in this prospectus for a discussion of factors you should carefully consider before investing in our common stock.

The number of shares of our common stock to be outstanding after this offering is based on 89,203,234 shares of our common stock outstanding as of August 31, 2021 and excludes:

 

   

9,547,808 shares of common stock issuable upon the exercise of options outstanding under the Sterling Ultimate Parent Corp. 2015 Long-Term Equity Incentive Plan as of August 31, 2021 at a weighted average exercise price of approximately $9.73 per share;

 

   

9,433,000 shares of common stock reserved for issuance under the Sterling Check Corp. 2021 Omnibus Incentive Plan (the “2021 Equity Plan”), which includes approximately 1,972,366 shares of common stock to be issued as restricted stock and approximately 3,916,768 shares of common stock issuable upon the exercise of options at an exercise price equal to the initial public offering price (in each case based on the midpoint of the price range set forth on the cover page of this prospectus and, with respect to the options, the Black Scholes value thereof), each to be granted in connection with this offering under our 2021 Equity Plan; and


 

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1,886,000 shares of common stock reserved for issuance under the Sterling Check Corp. Employee Stock Purchase Plan (the “ESPP”).

Unless otherwise expressly stated or the context otherwise requires, all information contained in this prospectus:

 

   

gives effect to the 1,198-for-one stock split effected on September 10, 2021;

 

   

assumes the underwriters’ option to purchase additional shares of common stock from the selling stockholders will not be exercised; and

 

   

gives effect to our amended and restated certificate of incorporation and our amended and restated bylaws, which will become effective prior to or upon the closing of this offering.


 

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Summary Historical Consolidated Financial and Other Data

The following tables summarize our consolidated financial and other data for the periods and as of the dates indicated. The summary consolidated statements of operations data and consolidated statements of cash flows data for the years ended December 31, 2019 and 2020 and the consolidated balance sheet data as of December 31, 2019 and 2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data for the six months ended June 30, 2020 and 2021 and the consolidated balance sheet data as of June 30, 2021 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The consolidated balance sheet data as of June 30, 2020 has been derived from our unaudited consolidated financial statements not included in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for those periods. The results for any interim period are not necessarily indicative of the results that may be expected for a full year. Our historical results are not necessarily indicative of the results to be expected in the future. You should read the following information in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, the accompanying notes and other financial information included elsewhere in this prospectus.

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2019     2020     2020     2021  
     (dollars in thousands, except per share amounts)  

Statements of Operations Data:

        

Revenues

   $ 497,116     $ 454,053     $ 207,948     $ 298,698  

Cost of revenues (exclusive of depreciation and amortization below)

     221,347       217,310       98,345       143,159  
  

 

 

   

 

 

   

 

 

   

 

 

 

Corporate technology and production systems

     44,923       44,296       22,080       20,351  

Selling, general and administrative

     147,198       122,554       61,457       68,211  

Depreciation and amortization

     93,802       91,199       45,578       40,848  

Impairments of long-lived assets

     3,220       1,797       59       2,925  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     510,490       477,156       227,519       275,494  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (13,374     (23,103     (19,571     23,204  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expense (income)

        

Interest expense, net

     39,316       32,947       17,293       15,173  

Loss on interest rate swap

     7,324       9,451       9,654       87  

Other income

     (1,529     (1,646     (662     (633
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     45,111       40,752       26,285       14,627  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss (income) before income taxes

     (58,485     (63,855     (45,856     8,577  

Income tax (benefit) expense

     (11,803     (11,562     (5,009     4,552  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (46,682   $ (52,293   $ (40,847   $ 4,008  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share—basic

   $ (0.53   $ (0.59   $ (0.46   $ 0.05  

Net (loss) income per share—diluted

   $ (0.53   $ (0.59   $ (0.46   $ 0.05  

Weighted average number of shares outstanding—basic

     88,154,830       88,345,312       88,322,550       88,717,890  

Weighted average number of shares outstanding—diluted

     88,154,830       88,345,312       88,322,550       88,802,948  

 

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     Year Ended
December 31,
    Six
Months Ended

June 30,
 
     2020     2021  
     (dollars in thousands, except
per share amounts)
 

Pro forma net (loss) income(1)

   $ (85,054   $ 7,571  

Pro forma net (loss) income per share—basic(1)

     (0.91     0.08  

Pro forma net (loss) income per share—diluted(1)

     (0.91     0.08  

Pro forma weighted average number of shares outstanding—basic(1)

     93,475,494       93,848,072  

Pro forma weighted average number of shares outstanding—diluted(1)

     93,475,494       98,134,516  

 

     As of December 31,      As of June 30,  
     2019      2020      2020      2021  
     (dollars in thousands)  

Balance Sheet Data:

           

Cash and cash equivalents

   $ 50,299      $ 66,633      $ 56,663      $ 94,291  

Goodwill

     830,252        831,800        829,890        831,344  

Total assets

     1,390,749        1,316,118        1,339,846        1,336,372  

Long term debt, including current portion

     619,557        615,453        617,501        606,692  

Total stockholders’ equity

     627,111        583,184        586,694        591,584  

 

     Year Ended
December 31,
    Six Months Ended
June 30,
 
     2019     2020     2020     2021  
     (dollars in thousands, except per share
amounts)
 

Cash Flows Data:

        

Net cash provided by operating activities

   $ 36,204     $ 36,185     $ 20,226     $ 45,290  

Net cash used in investing activities

     (33,869     (16,266     (9,310     (9,295

Net cash used in financing activities

     (7,873     (3,218     (2,032     (8,234

Operational and Other Data:

        

Capital expenditures

   $ 31,883     $ 16,502     $ 9,310     $ 9,295  

Adjusted EBITDA(2)

     118,984       99,834       41,530       83,837  

Adjusted Net Income(2)

     38,032       26,665       6,534       40,024  

Adjusted Earnings Per Share—Basic(2)

     0.43       0.30       0.07      
0.45
 

Adjusted Earnings Per Share—Diluted(2)

     0.43       0.30       0.07       0.45  

Net (Loss) Income Margin

     (9.4 )%      (11.5 )%      (19.6 )%      1.3

Adjusted EBITDA Margin(2)

     23.9     22.0     20.0     28.1

 

(1)

Unaudited pro forma basic and diluted net (loss) income per share is calculated by dividing pro forma net (loss) income by pro forma weighted-average common shares outstanding. For the year ended December 31, 2020 and the six months ended June 30, 2021, pro forma net (loss) income is computed by giving effect to the pro forma adjustments described in the immediately succeeding reconciliation table. Pro forma weighted average common shares outstanding is computed by giving effect to the common shares outstanding for these items, as applicable, and the sale and issuance by us of shares of common stock in this offering. This pro forma data is presented for informational purposes only and does not purport to represent what our net (loss) income or net (loss) income per share actually would have been had these events occurred on January 1, 2020 or to project our net (loss) income or net (loss) income per share for any future period.


 

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The table below provides a reconciliation of net (loss) income used in the calculation of basic and diluted pro forma net (loss) income per share for the periods presented:

 

    Year Ended
December 31, 2020
    Six Months Ended
June 30, 2021
 
    (dollars in thousands)  

Net (loss) income

  $ (52,293   $ 4,025  

Interest expense reduced for repayment on Term loan(a)

    3,096       2,263  

Stock compensation expense increased for accelerated option vesting(b)

    (18,709     1,526  

Stock compensation expense increased for forgiveness of promissory notes(c)

    (7,640     (23

Stock compensation expense increased based on reassessment of fair value(d)

    (291      

Investor management fee expense related to termination of Management Services Agreement(e)

    (6,746     1,026  

Compensation expense based on agreement between stockholder and former executive(f)

    (13,981      

Tax effect of pro forma adjustments to net (loss) income(g)

    11,510       (1,246
 

 

 

   

 

 

 

Pro forma net (loss) income

  $ (85,054   $ 7,571  
 

 

 

   

 

 

 

The table below provides a reconciliation of the weighted-average number of shares outstanding—basic used in computing pro forma net (loss) income per share—basic for the periods presented:

 

    Year Ended
December 31, 2020
    Six Months Ended
June 30, 2021
 

Weighted average number of shares outstanding—basic

    88,345,312       88,717,890  

Common shares issued upon forgiveness of promissory notes

    370,182       370,182  

Common shares issued in this offering

    4,760,000       4,760,000  
 

 

 

   

 

 

 

Pro forma weighted-average number of shares outstanding—basic

    93,475,494       93,848,072  
 

 

 

   

 

 

 

The table below provides a reconciliation of the weighted-average number of shares outstanding—diluted used in computing pro forma net (loss) income per share—diluted for the periods presented:

 

    Year Ended
December 31, 2020
    Six Months Ended
June 30, 2021
 

Weighted average number of shares outstanding—diluted

    88,345,312       88,802,948  

Common shares issued upon forgiveness of promissory notes

    370,182       370,182  

Common shares issued in this offering

    4,760,000       4,760,000  

Impact of accelerated option vesting under the treasury stock method

          4,201,386  
 

 

 

   

 

 

 

Pro forma weighted-average number of shares outstanding—diluted(h)

    93,475,494       98,134,516  
 

 

 

   

 

 

 

Pro forma net (loss) income per share—basic

  $ (0.91   $ 0.08  

Pro forma net (loss) income per share—diluted(h)

  $ (0.91   $ 0.08  

 

  (a)

Represents estimated impact of reduced interest expense and write-off of a proportional amount of deferred debt issuance costs as a result of the repayment of approximately $100.0 million outstanding under our Term loan following the application of the net proceeds to us from this offering together with cash on hand.

  (b)

Represents estimated impact of stock-based compensation expense related to the accelerated vesting of all outstanding options under the 2015 Long-Term Equity Incentive Plan, which are expected to vest 100% on this offering. Included in this amount is $1.6 million of incremental stock-based compensation expense resulting from the reassessment of fair value as described in note (d) below.


 

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  (c)

Represents estimated impact of stock-based compensation expense related to the forgiveness of promissory notes exchanged for common stock prior to this offering. The forgiveness of each promissory note by us is treated as an option modification, resulting in the recognition of the cumulative compensation cost equal to the grant-date fair value of the original award plus the incremental value of the award on the date of forgiveness. The midpoint of the preliminary anticipated price range for this offering was used as the fair value on the date of forgiveness.

  (d)

Represents incremental stock-based compensation expense for the six months ended June 30, 2021 as a result of our reassessment of equity awards granted from February 2021 through April 2021 using a linear interpolation between a June 2020 valuation and the midpoint of the preliminary anticipated price range for this offering. We expect to record approximately $0.3 million related to this incremental expense for these awards in our financial statements for the third quarter of 2021. For additional information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Pre-IPO Valuation of Equity.”

  (e)

Represents expenses related to the termination of the Fourth Amended and Restated Management Services Agreement in connection with this offering, offset by investor management fees previously expensed and paid in the period. Investor management fee expenses will cease upon the final termination payment in connection with this offering.

  (f)

Represents deemed compensation expense to us related to an agreement between our stockholder, founder and former chief executive officer, together with trusts (the “Greenblatt Trusts”), and another stockholder and former executive of Sterling, pursuant to which proceeds from the sale of certain shares in this offering by the Greenblatt Trusts will be paid to such former executive in full settlement of obligations between them pursuant to a prior agreement entered into in 2015 in connection with the acquisition of Sterling by our Sponsor. We will be deemed to incur approximately $14.0 million of non-cash compensation expense in the third quarter of 2021 related to this payment between our stockholders, and any associated withholding and payroll tax payments to be paid by us will be funded entirely by the Greenblatt Trusts. For additional information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of our Results of Operations—Operating Expenses—Selling, General and Administrative.”

  (g)

Reflects the tax impact of pro forma adjustments based on an approximate statutory tax rate of 26%.

  (h)

In periods of net loss, the number of shares used to calculate diluted net (loss) income per share is the same as basic net (loss) income per share. Therefore, for the year ended December 31, 2020, diluted net (loss) income per share equals basic net (loss) income per share, as the impact of accelerated option vesting is anti-dilutive because we incurred a net loss in this period.

 

(2)

Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income and Adjusted Earnings Per Share are non-GAAP financial measures. For the definitions of Adjusted EBITDA and Adjusted Net Income and a reconciliation to net income, their most directly comparable financial measure presented in accordance with GAAP, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.” Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenue for the applicable period. Adjusted Earnings Per Share is defined as Adjusted Net Income divided by diluted weighted average shares for the applicable period.


 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties, together with all of the other information contained in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before deciding whether to invest in our common stock. In addition to the risks relating to the COVID-19 pandemic that are specifically described below, the effects of the COVID-19 pandemic may also have the effect of significantly heightening many of the other risks associated with our business and an investment in our common stock, including the other risks described in this prospectus. The occurrence of any of the following risks, or additional risks not presently known to us or that we currently believe to be immaterial, could materially and adversely affect our business, financial condition, results of operations and prospects. In such case, the trading price of our common stock could decline, and you could lose all or part of your investment.

Risks Relating to Our Business and Industry

Regulatory and Legal Risks

We could face liability based on the nature of our services and the information we report or fail to report in our background screening, which may not be covered or fully covered by insurance.

We face potential liability from individuals, classes of individuals, clients or regulatory bodies for claims based on the nature, content or accuracy of our services and the information we use and report and depending on our compliance with the FCRA, U.S. state consumer reporting agency laws or regulations, foreign regulations and applicable employment laws. Our potential exposure to lawsuits or government investigations may increase depending in part on our clients’ compliance with these laws and regulations and applicable employment laws in their procurement and use of our screening reports as part of their hiring process, which is generally outside of our control. Our potential liability includes claims of non-compliance with the FCRA and other laws and regulations governing our services, as well as other claims of defamation, invasion of privacy, negligence, copyright, patent or trademark infringement. In some cases we may be subject to strict liability.

We also face potential liability from our clients, and possibly third parties, in the event we fail to report information, particularly criminal records or other potentially negative information. For example, should we fail to identify and report an available and reportable criminal felony record which our client hired us to report, or should we fail to correctly report such information to our client, then we may face potential liability in the event that the employer hires such candidate, later discovers such record, terminates such employee and is in turn sued by such employee. We may also face liability in the event the employer hires such candidate and that employee then causes personal or monetary injury or damage to the employer, its other employees or other third parties. From time to time, we have been subject to claims and lawsuits by current and potential employees of our clients, alleging that we provided to our clients inaccurate or improper information that negatively affected the clients’ hiring decisions. Although the resolutions of these lawsuits have not had a material adverse effect on us to date, the costs of such claims, including settlement amounts or punitive damages, could be material in the future, could cause adverse publicity and reputational damage, could divert the attention of our management, could subject us to equitable remedies relating to the operation of our business and provision of services and result in significant legal expenses, all of which could have a material adverse effect on our business, financial condition and results of operations and adverse publicity, and could result in the loss of existing clients and make it difficult to attract new clients. Insurance may not be adequate to cover us for all risks to which we are exposed or may not be available to cover these claims at all. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of our insurance coverage, could have a material adverse effect on our business, financial

 

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condition or results of operations. Additionally, we cannot be certain that our insurance coverage, including any applicable deductibles, copays and other policy limits, will continue to be available to us at a reasonable cost or will be adequate to cover any claims or lawsuits we may face in the future or that we will be able to renew our insurance policies on favorable terms, or at all.

We are subject to significant governmental regulation, and changes in law or regulation, or a failure to correctly identify, interpret, comply with and reconcile the laws and regulations to which we are subject, could result in substantial liability or materially adversely affect our product and service offerings, revenue or profitability.

Because we are a consumer reporting agency relating to many of our services and we deal primarily in searching and reporting public and non-public consumer information and records, including criminal records, employment and education history, credit history, driving records and drug screening results, we are subject to extensive, evolving and often complex governmental laws and regulations, such as the FCRA, the Drivers’ Privacy Protection Act (“DPPA”), state consumer reporting agency laws as well as state licensing and registration requirements, including as a consumer reporting agency and a private investigator, and various other foreign, federal, state and local laws and regulations, including the Investigative Consumer Reporting Agency Act and case law relating to the FCRA and such other law and regulations. The restrictions and process requirements largely relate to what may be reported about an individual, when, to whom, and for what purposes, and how the subjects of consumer reports are to be treated. Compliance with these laws and regulations requires significant expense and resources, which could increase significantly as these laws and regulations evolve. Additionally, our identity verification business could also be adversely impacted if we fail to comply with the rules and regulations of the Federal Bureau of Investigation (“FBI”). Our failure to comply with FBI regulations could result in loss of our status as an FBI channeler, which could have a material adverse effect on our business, financial condition, results of operations or growth strategy.

Further, as discussed below under “Risks Related to Intellectual Property, Information Technology and Data Privacy—Failure to comply with privacy, data protection and cybersecurity laws and regulations could have a materially adverse effect on our reputation, results of operations or financial condition, or have other material adverse consequences,” we are subject to laws that restrict access to, use and disclosure of certain types of personal information and regulate the protection, storage and disposal of such information. We are also subject to similar laws and regulations in other jurisdictions. Identifying, interpreting and complying with foreign laws and regulations is particularly difficult due to the broad range of such foreign laws and regulations, as well as uncertainties with respect to the applicability and interpretation of such laws and regulations. Failure to comply with these domestic and foreign laws and regulations, to the extent applicable, may harm our reputation and result in the imposition of civil and criminal penalties and fines, private litigation, restrictions on our operations, and breach of contract or indemnification claims by our clients and vendors including data suppliers, which may not be covered by insurance. Further, laws and regulations governing investment migration programs are subject to regulatory interpretation. Should it be determined that these programs violate any laws or regulations, our Sterling Diligence business, specifically with respect to our Citizenship-by-Investment diligence solutions, could be adversely impacted, which could have a material adverse effect on our business, financial conditions and results of operations.

In addition to the challenges of identifying, interpreting and complying with such laws and regulations, and changes to such laws and regulations over time, we face the challenge of reconciling the many potential conflicts between such laws and regulations among the various domestic and international jurisdictions that may be involved in the provision of our services. These challenges may require us to incur additional compliance costs, and could also increase our exposure to potential lawsuits, fines and penalties. A failure to correctly identify, interpret, comply with and reconcile the laws and regulations to which we are subject could result in substantial liability and could have a material

 

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adverse effect on us. The expansion of our business into areas other than employment screening may require compliance with additional laws and regulations.

Changes to law, regulation, or administrative enforcement and interpretations or other prohibitions could materially adversely affect our offerings, revenue, or profitability. For example, numerous states have implemented “ban the box” and “fair chance” hiring laws that prohibit employers from inquiring or using a candidate’s criminal history to make employment decisions. Many states have in recent years amended their “ban the box” and “fair chance” laws to increase the restrictions on the use of such information. If the U.S. federal government, a foreign government or additional states were to pass regulations precluding or limiting the use of pre-employment screening in hiring decisions, our ability to conduct our current business in the applicable jurisdiction could be materially reduced or eliminated.

Our international operations subject us to a broad range of laws and regulations that may be difficult to manage and could expose us to numerous risks that, individually or together, could materially and adversely affect our business.

In 2020, we performed screening services in over 240 countries and territories worldwide. We expect to continue to provide screening services in a large number of countries and territories worldwide and we intend to expand our international operations. Privacy and other laws and regulations governing our operations in these jurisdictions may not be fully developed, may vary significantly, are subject to change from time to time, and may sometimes conflict or be subject to multiple interpretations. Identifying, interpreting and complying with these laws and regulations is difficult, and we cannot be certain we have done so or will correctly do so. As a result, we rely on outside counsel or business personnel in interpreting or applying local laws and regulations, which generally is limited, or on our clients’ or local vendors’ knowledge of such laws and regulations. In addition, a significant portion of our operations, including screening fulfillment, are conducted through subsidiaries in Mumbai, India and Manila, the Philippines.

Our international operations, including our screening fulfillment operations in India and the Philippines, may subject us to additional risks and challenges, particularly with respect to:

 

   

obtaining qualified, reliable data sources and vendors that cover international markets on reasonable terms, if at all;

 

   

the need to develop, localize, and adapt our products and services for specific countries, including translation into foreign languages, localization of contracts for different legal jurisdictions, and associated expenses;

 

   

compliance challenges related to the complexity of multiple, conflicting, and changing governmental laws and regulations, including employment, tax, privacy, intellectual property and data protection laws and regulations;

 

   

potentially weaker protection for intellectual property and other legal rights than in the United States and practical difficulties in enforcing intellectual property and other rights;

 

   

laws, customs and business practices favoring local competitors;

 

   

foreign exchange controls that might prevent us from repatriating cash to the United States;

 

   

increased financial accounting and reporting burdens and complexities;

 

   

potential negative consequences from changes to taxation policies, including unfavorable foreign tax rules;

 

   

enforcing contracts under foreign legal systems, as well as defending claims brought in jurisdictions outside the United States;

 

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difficulties in appropriately staffing and managing foreign operations and providing appropriate compensation for local markets;

 

   

increased costs and risks of developing and managing global operations, including our potential failure to implement global best practices, experiences of employee dissatisfaction and the improper allocation of resources, as a result of distance as well as language and cultural differences;

 

   

labor disturbances;

 

   

new and different sources of competition;

 

   

currency fluctuations that could affect our margins on international services or could increase the cost of labor at our India and Philippines subsidiaries;

 

   

non-compliance with applicable currency exchange control regulations, transfer pricing regulations, or other similar regulations;

 

   

geopolitical unrest, which could cause disruptions in our business, limit our ability to conduct business in certain jurisdictions or cause us to change our business practices; and

 

   

trade relations, security and economic instability, regional or international conflicts and the outbreak of pandemics or diseases.

Operating and expanding our business internationally could require us to incur additional compliance costs, which may be significant, or could subject us to substantial liability, including civil and criminal penalties and fines, restrictions on our operations, and breach of contract or indemnification claims by our clients and data suppliers, for failure to adequately comply in any or all of these jurisdictions. Any such cost or liability could have a material adverse effect on our business, financial condition and results of operations.

Failure to comply with economic sanctions, anti-corruption and anti-money laundering laws and similar laws associated primarily with our activities outside of the United States could subject us to penalties and other material adverse consequences.

We are subject to various trade restrictions, including economic sanctions and export controls, imposed by governments around the world with jurisdiction over our operations. Such trade controls prohibit or restrict transactions involving certain persons and certain designated countries or territories, including Cuba, Iran, Syria, North Korea and the Crimea Region of Ukraine. We maintain policies and procedures designed to ensure compliance with applicable sanctions and export controls, including those imposed by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the U.S. Department of Commerce’s Bureau of Industry and Security, Her Majesty’s Treasury and the EU or EU member states. As part of our business, we engage in limited interactions involving certain countries that are targets of economic sanctions, including obtaining or verifying information that is located in such countries. We believe that such interactions are conducted in compliance with applicable trade controls in accordance with relevant legal exemptions and authorizations. However, our employees, contractors, and agents, and companies to which we outsource certain of our business operations, may take actions in violation of laws and regulations and our policies for which we may be ultimately responsible and our policies and procedures may not be adequate in protecting us from liability. Any such violation could have a material adverse effect on our reputation, client relationships, business, results of operations and prospects.

We operate a global business and may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We are subject to anti-bribery, anti-corruption and anti-money laundering laws in the countries in which we operate, including the U.S.

 

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Foreign Corrupt Practices Act (the “FCPA”), the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act and the U.K. Bribery Act. These laws generally prohibit companies and their employees and third-party intermediaries from corruptly promising, authorizing, offering, or providing, directly or indirectly, improper payments of anything of value to foreign government officials, political parties and private-sector recipients for the purpose of obtaining or retaining business, directing business to any person, or securing any improper advantage. Many anti-corruption laws also prohibit commercial bribery (i.e., bribery involving private parties) and soliciting and receiving bribes. In addition, U.S. public companies are required to maintain books and records that accurately and fairly represent their transactions and to have an adequate system of internal accounting controls. In many foreign countries, including countries in which we may conduct business, it may be a local custom that businesses engage in practices that are prohibited by the FCPA or other applicable laws and regulations. We face significant risks if we or any of our directors, officers, employees, agents or other partners or representatives fail to comply with these laws, and governmental authorities in the United States and elsewhere could seek to impose substantial civil or criminal fines and penalties which could have a material adverse effect on our business, reputation, results of operations and financial condition.

We have implemented an anti-corruption compliance program and policies, procedures and training designed to foster compliance with these laws. However, our employees, contractors, and agents, and companies to which we outsource certain of our business operations, may take actions in violation of our policies or applicable law. Such actions could have a material adverse effect on our reputation, business, results of operations and prospects.

Violation of applicable trade controls, anti-corruption laws, or anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, disgorgement of profits, injunctions, suspension or debarment from U.S. government contracts and other remedial measures, any of which could have a materially adverse effect on our reputation, business, financial condition, results of operations and prospects. In addition, responding to any enforcement action may result in a significant diversion of management’s attention and resources and significant defense costs and other professional fees. Further, we cannot predict the nature, scope or effect of future regulatory requirements, including changes that may affect existing regulatory exceptions, and we cannot predict the manner in which existing laws and regulations might be administered or interpreted.

Risks Related to Intellectual Property, Security and Data Privacy

We collect, host, store, transfer, disclose, use, secure and retain and dispose of personal information. Security breaches may result in the disclosure of confidential information and improper use of information may negatively affect our business and harm our reputation.

Our products and services involve the collection and transmission of confidential and sensitive information of our clients and their existing and potential employees, including personal information such as: social security numbers and their foreign equivalents, driver’s license numbers, dates of birth, addresses, identity verification information (such as government issued identification or passport numbers) and other sensitive personal and business information, which subjects us to potential liability from clients, consumers, data subjects, third parties and government authorities relating to claims of legal or regulatory non-compliance, defamation, invasion of privacy, false light, negligence, intellectual property infringement, misappropriation or other violation and/or other related causes of action. A security breach in our facilities, platforms, computer networks, systems or databases (or those of our third-party service providers) or employee error or misconduct could expose us to a risk of loss of, or unauthorized access to and misappropriation or compromise of, this personal information, which could result in adverse publicity and harm our business and reputation and result in a loss of clients, system

 

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interruptions or the imposition of fines or other penalties by governmental agencies and claims by our clients and their candidates and employees. Further, the global security environment grows increasingly challenging as attacks on information technology systems continue to grow in frequency, complexity and sophistication and our systems may be targeted and vulnerable to physical break-ins, computer viruses, ransomware, loss or destruction of data, other malicious code, or unauthorized access or attacks by hackers, employee malfeasance and similar intrusions. Outside parties may also attempt to fraudulently induce employees to take actions, including the release of proprietary business or personal information or to make fraudulent payments through illegal electronic spamming, phishing, spear phishing or other tactics. Certain of these malicious parties may be state-sponsored and supported by significant financial and technological resources. Although this is a global problem, it may affect us more than other businesses because malevolent parties may focus on the amount and type of personal and business information that we collect, host, store, transfer, process, disclose, use, secure, retain and dispose of. If unauthorized parties gain access to our products or services or our platforms, computer networks, systems or databases, or if authorized parties utilize our products or services for non-permissible purposes, they may be able to steal, publish, delete or modify the confidential and third-party personal information in our control. Any inability to protect the security, integrity and privacy of our data and electronic transactions, or any misuse of our information services by our clients, employees or hackers, could cause significant harm to our business and reputation and result in significant liability. Additionally, due to the COVID-19 pandemic, there is an increased risk that we may experience cybersecurity related incidents as a result of our employees, service providers and third parties working remotely on less secure systems. Techniques used to obtain unauthorized access or to sabotage systems change frequently, are increasingly complex and sophisticated and may be difficult to detect for long periods of time and generally are not discovered until after they have been launched against or infiltrated a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures.

An actual or perceived breach of our security could have one or more of the following material and adverse effects:

 

   

deter clients from using our products and services and harm our reputation;

 

   

expose clients to the risk of financial or medical identity theft;

 

   

expose us to liability;

 

   

increase operating expenses to correct problems caused by the breach;

 

   

deter data suppliers from supplying information to us;

 

   

affect our ability to meet clients’ expectations;

 

   

divert management focus; or

 

   

lead to inquiries from, or sanctions or penalties imposed by, governmental authorities, such as the Federal Trade Commission, data protection supervisory authorities or state attorneys general, each of which has imposed significant penalties on companies that have failed to adequately protect personal data, and U.S. states’ attorneys general, who have authority to impose fines or penalties with respect to breaches under state laws.

We rely on a variety of security measures, software, tools and monitoring to provide security for our processing, transmission and storage of personal information and other confidential information. We also rely on third-party service providers to process some of our data and any failure by such third parties to prevent or mitigate security breaches or improper access to, or disclosure of, such information could have adverse consequences for us similar to an incident directly on our systems. Although none of the data or cybersecurity incidents that we have encountered to date have materially affected us, we cannot assure that we or our third-party service providers will not experience any future

 

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security breaches, cyber-attacks or unauthorized disclosures, particularly given the continuously evolving nature of tools and methods used by hackers and cyber criminals. Our information technology systems may be vulnerable to computer viruses or physical or electronic intrusions that our security measures may not detect.

Furthermore, federal and state regulators and many federal and state laws and regulations require notice of certain data security breaches that involve personal information, which, if applicable, could lead to widespread negative publicity, which may cause our clients to lose confidence in the effectiveness of our data security measures. In addition, we may incur significant costs and operational consequences in connection with investigating, mitigating, remediating, eliminating, and putting in place additional measures designed to prevent future actual or perceived security incidents, as well as in connection with complying with any notification or other obligations resulting from any security incidents. These costs may include, but are not limited to, retaining the services of cybersecurity vendors and service providers, compliance costs arising out of existing and future cybersecurity, data protection and privacy laws and regulations and costs related to maintaining redundant networks, data backups and other damage-mitigation measures. While we maintain insurance coverage that, subject to policy terms and conditions, is designed to cover losses or claims that may arise in connection with certain aspects of data and cyber risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise. Furthermore, we cannot be certain that insurance coverage will continue to be available on acceptable terms or at all, or that the insurer will not deny coverage as to any future claim.

If we are unable to fully protect the security and privacy of our data and electronic transactions, including through updates to our products and applications, or if we or our third-party service providers are unable to prevent any data security breach, incident, unauthorized access, and/or misuse of our information by our clients, employees, vendors, or hackers, it could result in significant liability (including litigation and regulatory actions and fines), cause lasting harm to our brand and reputation and cause us to lose existing clients and fail to win new clients.

Failure to comply with privacy, data protection and cybersecurity laws and regulations could have a materially adverse effect on our reputation, results of operations or financial condition, or have other material adverse consequences.

The collection, storage, hosting, transfer, processing, disclosure, use, security and retention and destruction of personal information required to provide our products and services is subject to federal, state and foreign privacy, data and consumer protection and cybersecurity laws. These laws, which are not uniform, generally do one or more of the following: regulate the collection, storage, hosting, transfer (including in some cases, the transfer outside the country of collection), processing, disclosure, use, security and retention and destruction of personal information; require notice to individuals of privacy practices; and give individuals certain rights with respect to their personal information. A growing trend of laws and regulations in this area is to provide for mandatory consumer notification to affected individuals, clients, data protection authorities and/or other regulators in the event of a data breach, and further expansion of requirements is possible. Further, if our practices or products are perceived to constitute an invasion of privacy, we may be subject to increased scrutiny and public criticism, litigation, and reputational harm, which could disrupt our business and expose us to liability. In many cases, these laws apply not only to third-party transactions, but also to transfers of information among us and our subsidiaries. The GDPR, the U.K. data protection regime (“U.K. GDPR”) consisting primarily of the UK General Data Protection Regulation, effective as of January 1, 2021, and the UK Data Protection Act 2018, as amended on January 1, 2021, which supplements the UK General Data Protection Regulation, and the Health Insurance Portability and Accountability Act in the United States (“HIPAA”), and the California Consumer Privacy Act (“CCPA”) are among some of the more comprehensive of these laws.

 

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The scope and interpretation of data privacy and cybersecurity regulations continues to evolve, and we believe that the adoption of increasingly restrictive regulations in this area is likely in the near future internationally and within the U.S. at both state and federal levels. For example, the CCPA, which came into effect on January 1, 2020, requires companies that collect personal information about California residents to make new disclosures to those residents about their data collection, use and sharing practices, allows residents to opt out of certain data sharing with third parties, and provides a new cause of action for data breaches. Additionally, although not effective until January 1, 2023, the California Privacy Rights Act (“CPRA”), which expands upon the CCPA, was passed on November 3, 2020. The CCPA requires (and the CPRA will require) covered companies to, among other things, provide new disclosures to California consumers, and affords such consumers new privacy rights such as the ability to opt-out of certain sales of personal information and expanded rights to access and require deletion of their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is collected, used and shared. The CCPA exempts much of the data that is covered by FCRA and DPPA and, therefore, much of our data is not subject to the CCPA. However, information we hold about individual residents of California that is not subject to FCRA and DPPA would be subject to the CCPA. The CCPA provides for civil penalties for violations, as well as a private right of action for security breaches that may increase security breach litigation. Further, Virginia enacted the Virginia Consumer Data Protection Act (“CDPA”), another comprehensive state privacy law, which will also be effective January 1, 2023. The CCPA, CPRA, and CDPA may increase our compliance costs and potential liability, particularly in the event of a data breach, and could have a material adverse effect on our business, including how we use personal information, our financial condition, and the results of our operations or prospects. There are also laws and regulations governing the collection and use of biometric information, such as fingerprints and face prints. For example, Illinois Biometric Information Privacy Act (“BIPA”) applies to the collection and use of “biometric identifiers” and “biometric information” which include finger and face prints. A business required to comply with BIPA is not permitted to sell, lease, trade or otherwise profit from biometric identifiers or biometric information it collects, and is also under obligations to have a written policy with respect to the retention and destruction of all biometric identifiers and biometric information; ensure that it informs the subject of the collection and the purpose of the collection and obtains consent for such collection; and obtain consent for any disclosure of biometric identifiers or biometric information. Individuals are afforded a private right of action under BIPA and may recover statutory damages equal to the greater of $1,000 or actual damages and reasonable attorneys’ fees and costs. Several class action lawsuits have been brought under BIPA, as the statute is broad and still being interpreted by the courts. Additionally, a number of other proposals exist for new federal and state privacy legislation that, if passed, could increase our potential liability, increase our compliance costs and materially adversely affect our business. To the extent that regulation of data privacy and cybersecurity continues to increase, we may incur additional compliance costs and may be exposed to increased noncompliance risk.

Both the GDPR and the U.K. GDPR impose stringent operational requirements for entities processing personal information including requirements to provide detailed disclosures about how personal information is processed, demonstrate an appropriate legal basis and grant significant rights for data subjects. The GDPR, national implementing legislation in European Economic Area (“EEA”) member states, and the UK GDPR impose a strict data protection compliance regime including: providing detailed disclosures about how personal data is collected and processed (in a concise, intelligible and easily accessible form); demonstrating that an appropriate legal basis is in place or otherwise exists to justify data processing activities; granting rights for data subjects in regard to their personal data (including the right to access, to be “forgotten” and the right to data portability), imposing an obligation to notify data protection regulators or supervisory authorities (and in certain cases, affected individuals) of significant data breaches; maintaining a record of data processing; and complying with the principle of accountability and the obligation to demonstrate compliance through policies, procedures, training and audit. In addition, both regimes impose significant penalties for

 

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non-compliance. In particular, under the GDPR/U.K. GDPR, fines of up to 20 million euros / £17.5 million or up to 4% of the annual global revenue of the noncompliant company, whichever is greater, could be imposed for violations of certain of the GDPR/U.K. GDPR requirements. Such penalties are in addition to any civil litigation claims by data subjects (which may result in significant compensation or damages liabilities), potential regulatory investigations, reputational damage, consent orders, orders to cease/change the way we process or transfer personal information, enforcement notices, compulsory audits, resolution agreements, requirements to take particular actions with respect to training, policies or other activities.

Complying with these laws and requirements, including the enhanced obligations imposed by the GDPR/U.K. GDPR, HIPAA, CCPA and BIPA may result in significant costs to our business and require us to modify our data processing practices and policies, cease offering certain products and services, and incur substantial costs and potential liability in an effort to comply with such laws and regulation. While the GDPR applies uniformly across the EU, each EU member state is permitted to issue nation-specific data protection legislation, which has created inconsistencies on a country-by-country basis. Moreover, Brexit (as defined below) has created further uncertainty and could result in the application of new data privacy and protection laws and standards to our operations in the United Kingdom, our handling of personal data of users located in the United Kingdom, and transfers of personal data between the EU and the United Kingdom. Today, U.K. GDPR largely mirrors the GDPR. Reflecting this, on June 28, 2021, the European Commission adopted an adequacy decision which provides for the free transfer of personal data from the EU to the United Kingdom. In its decision, the European Commission included a sunset clause, which provides that it will automatically expire four years from its entry into force subject to renewal only if the United Kingdom continues to ensure an adequate level of data protection. In announcing the decision, it was further noted that there will be close monitoring of the United Kingdom system as it evolves and that the European Commission may intervene at any time if the level of data protection in the United Kingdom deviates from the level of protection in place at the time of the decision. If the United Kingdom does not retain its positive adequacy decision from the EU, we may be required to implement new processes and put new agreements in place, such as standard contractual clauses, to govern any transfers of personal data from the EU to the United Kingdom. In addition, Brexit and the subsequent implementation of the U.K. GDPR will expose us to two parallel data protection regimes, each of which potentially authorizes similar significant fines and other potentially divergent enforcement actions for certain violations. On July 16, 2020, the European Court of Justice invalidated the EU-U.S. Privacy Shield Framework, a mechanism under which personal data could be transferred from the EEA to U.S. entities that had self-certified under the Privacy Shield Framework. The court also called into question the Standard Contractual Clauses (“SCCs”), another lawful mechanism for cross-border transfers of personal data, noting adequate safeguards must be met for SCCs to be valid. Any unauthorized disclosure of personal information could also be expensive to defend, damage our reputation and materially adversely affect our business, financial condition and results of operations. Further, enforcement actions and investigations by regulatory authorities related to data security incidents and privacy violations continue to increase. The future enactment of more restrictive laws, rules or regulations and/or future enforcement actions or investigations could have a materially adverse impact on us through increased costs or restrictions on our businesses and noncompliance could result in significant regulatory penalties and legal liability and damage our reputation. Due to the substantial number of state, local and international jurisdictions in which we operate, there also is a risk that we may be unable to adequately monitor actual or proposed changes in, or the interpretation of, the laws or governmental regulations of such U.S. states and localities. Although we make reasonable efforts to comply with all applicable data protection laws and regulations, our interpretations and such measures may have been or may prove to be insufficient or incorrect, and any delay in our compliance with changes in such laws or governmental regulations could result in potential fines, penalties, or other sanctions for non-compliance. In addition, data security events and concerns about privacy abuses by other companies are changing consumer and social expectations for enhanced privacy and data protection. Any failure or perceived failure by us or

 

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any other third parties with whom we do business to comply with these laws, rules, regulations, and standards, or with other obligations (including contractual obligations) to which we or they may be or may become subject, may result in actions against us or them by governmental entities, private claims and litigations, fines, penalties, or other liabilities or result in orders or consent decrees forcing us or them to modify our or their business practices. Additionally, changes in these laws and requirements, including limitations on information permitted to be used in employment-related screenings, could limit our clients’ uses of personal information and could result in reduced demand for our products and services.

If a third party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or expensive licenses, and our business may be harmed.

Third parties may assert patent and other intellectual property infringement claims against us in the form of lawsuits, letters or other forms of communication. If a third party successfully asserts a claim that we are infringing its proprietary rights, then royalty or licensing agreements might not be available on terms we find acceptable or at all. As currently pending patent applications are not publicly available, we cannot anticipate all such claims or know with certainty whether our technology infringes the intellectual property rights of third parties. These claims, whether or not successful, could require significant management time and attention; result in costly and time-consuming litigation and the payment of substantial damages; require us to expend additional development resources to redesign our products and services to avoid infringement or discontinue the sale of our products and services; create negative publicity that adversely affects our reputation and brand and the demand for our products and services; or require us to indemnify our clients. Even if we have not infringed any third parties’ intellectual property rights, we cannot be sure our legal defenses will be successful, and even if we are successful in defending against such claims, our legal defense could require significant financial resources and management’s time, which could adversely affect our business.

If our trademarks, trade names, and confidential information are not adequately protected, we may lose our competitive advantage in our target markets.

If our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our target markets and our business may be adversely affected. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity, possibly leading to market confusion and potentially leading us to pursue legal action. In addition, there could be trade name or trademark infringement allegations brought by owners of other trademarks or trademarks that incorporate variations of our unregistered trademarks or trade names. Our efforts to enforce or protect our proprietary rights related to trademarks, copyrights, or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could materially adversely affect our business, financial condition or results of operations.

We currently rely upon trade secret protection, as well as non-disclosure agreements with our employees, consultants and third parties, to protect our confidential and proprietary information. We cannot guarantee that we will be successful in maintaining, protecting, or enforcing the confidentiality of our trade secrets or that our non-disclosure agreements will provide sufficient protection of our trade secrets, know-how, or other proprietary information in the event of any unauthorized use, misappropriation, or other disclosure. Further, we cannot provide any assurances that our employees, consultants and third parties will not breach the agreements and disclose our proprietary information, including our trade secrets. Additionally, we rely upon invention assignment agreements with our employees and certain of our consultants and other third parties. If we do not protect our intellectual property adequately, competitors may be able to use our methods and databases and thereby erode any competitive advantages we may have.

 

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We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary methods and technologies are effectively maintained as trade secrets, and we have taken necessary security measures to protect this information. These measures alone, however, may not provide adequate protection for our trade secrets, know-how or other confidential information. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, our competitive position could be harmed. Additionally, enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive, and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. It is also possible that our trade secrets will become known by some other mechanism or independently developed by our competitors, and we would have no right to prevent them from using that technology or information to compete with us.

Risks Generally Related to Our Business

Our growth depends on the success of our strategic relationships with third parties as well as our ability to successfully integrate our applications with a variety of third-party technologies.

We depend on relationships with third parties and are also dependent on third parties for the license of certain software and development tools that are incorporated into or used with our applications. If the operations of these third parties are disrupted or any of these third parties are unwilling or unable to continue to provide a critical product or service, and we are unable to make alternative arrangements for the supply of such product or service on commercially reasonable terms or a timely basis, or at all, our own operations may suffer, which could materially adversely affect our operating results. In addition, we rely upon licensed third-party software to help improve our internal systems, processes, and controls. Identifying partners, and negotiating and documenting relationships with them, requires significant time and resources. The priorities and objectives of these third-party service providers may differ from ours and we may be at a disadvantage if our competitors are effective in providing incentives to third parties to favor their products or services or to prevent or reduce use of our services, or in negotiating better rates or terms with such third parties. Acquisitions of our partners by our competitors could end our strategic relationship with the acquired partner and result in a decrease in the number of our current and potential clients, or the support services available for third-party technology may be negatively affected by mergers and consolidation in the software industry. In addition, like us, third parties are vulnerable to operational and technological disruptions, and we may have limited remedies against these third parties in the event of product or service disruptions. If we are unsuccessful in establishing or maintaining our relationships with these third parties, or in monitoring the quality of their products and services or performance, our ability to compete in the marketplace or to grow our revenues could be impaired and our operating results may suffer.

To the extent that our applications depend upon the successful integration and operation of third-party software in conjunction with our software, any current or future undetected errors, failures, bugs or defects in our applications or this third-party software, especially when updates or new products or software are released, as well as cybersecurity threats or attacks related to such software, could prevent the deployment or impair the functionality of our applications, delay new application introductions, result in a failure of our applications, result in increased costs, including claims from clients, and injure our reputation. Our applications and third-party software are used in IT environments with different operating systems, system management software, devices, databases, servers, storage, middleware, custom, and third-party applications and equipment and networking configurations, which may cause errors, failures, bugs, or defects in the IT environment into which such software and technology are deployed. This diversity increases the likelihood of errors, failures, bugs, or defects in those IT environments. Any real or perceived errors, failures, bugs or defects in our products could

 

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result in negative publicity, loss of or delay in market acceptance of our products and harm to our brand, weakening of our competitive position, claims by clients for losses sustained by them or failure to meet the stated service level commitments in our client agreements as well as impair our ability to attract new clients or retain existing clients. Furthermore, software may not continue to be available to us on commercially reasonable terms. Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, this may not always be the case, or it may be difficult or costly to replace. Integration of new software into our applications may require significant work and require substantial investment of our time and resources.

We also need to continuously modify and enhance our applications to keep pace with changes in third-party technologies, and other third-party software, communication, browser and database technologies. We must also appropriately balance the application capability demands of our current clients with the capabilities required to serve the broader market. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our product development expenses. Any failure of our applications to operate effectively with future network platforms and other third-party technologies could reduce the demand for our applications, result in client and end user dissatisfaction, and materially adversely affect our business and operating results. We may experience difficulties in managing improvements to our systems, processes and controls or in connection with third-party software, which could materially impair our ability to provide products and services to our clients in a timely manner, cause us to lose clients, limit us to smaller deployments of our products and services, or increase our technical support costs.

The success of our business depends in part on our relationships with our partners and vendors.

From time to time we enter into relationships with certain partners and vendors, some of which offer highly specialized services. If any of these partners or vendors were to cease providing their services, elect to not renew their agreements with us on commercially reasonable terms or at all, breach their agreements with us or fail to satisfy our expectations, whether due to exclusivity arrangements with our competitors, acquisition by one of our competitors, vendor consolidation, regulation or otherwise, we may not be able to find a suitable replacement on commercially reasonable terms or at all. If a vendor raises the costs for its services, we may not be able to pass through such cost increases to our clients. If a partner or vendor updates its products without providing sufficient notice to us, there could be disruptions, which could result in errors, delays, and interruptions.

We have developed a comprehensive integration platform by partnering with leading HCM and ATS platforms to integrate our front-end client interface into our clients’ systems. However, if any of these HCM or ATS platforms were to enter into an exclusivity arrangement with one of our competitors or we were to otherwise lose the partnership, we could lose not only the partnership with the HCM or ATS platform but the clients using the platform as well. Further, if any of these platforms were to be disrupted, our ability to deliver our products and services would be adversely affected.

Losses of our partner or vendor relationships as described above, disruptions of our partner platforms, or changes to partners’ or vendors’ capabilities or the terms or our relationships could materially adversely affect our business, financial condition and results of operations.

A failure, disruption or change to the cost of the computing services that we utilize could have a materially adverse effect on our business and results of operations.

Our technology infrastructure is critical to the performance of our front-end client interface as well as our fulfillment and operating systems. Substantially all of our technology platform and company

 

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systems run on a complex distributed system, commonly referred to as cloud computing. There can be no assurance that our transition to cloud computing will be without operational interruptions or other disruptions. We own, operate and maintain elements of this system, but significant elements of this system are operated by third parties that we do not control and which would require significant time and expense to replace. We rely on these third parties to host our applications and to provide continuous power, cooling, internet connectivity and physical and technological security for our servers, and our operations depend in part on their ability to protect their systems and facilities against any damage or interruption from natural disasters, such as earthquakes and hurricanes, power or telecommunication failures, human error, usage spikes, fires, floods and other catastrophic events, terrorist attacks, malicious attacks, vandalism, sabotage and similar events. The occurrence of such an event or other damage to, failure of, or unanticipated problem at a facility, or a decision to close a facility without adequate notice, could result in lengthy interruptions to our cloud-based technology platform. The third parties that we rely on to host our technology infrastructure may not have redundancy for all of their systems, and even with current and planned disaster recovery arrangements, any failure or interruption in the services provided by these third parties could disrupt our business, including by preventing clients from accessing our products and services, and we could suffer financial loss, liability to clients, loss of clients, regulatory intervention or damage to our reputation, any of which could have a material adverse effect on our business, financial condition and results of operations. Further, we cannot guarantee that our current or future third-party cloud providers will keep up with our increasing capacity needs or client demand. In addition, our users depend on internet service providers, online service providers, and other website operators for access to our systems. These providers could experience outages, delays, and other difficulties due to system failures unrelated to our systems, events which are beyond our control, or mitigation. Also, in the event of such a failure or interruption, insurance may not be adequate to cover us for all risks to which we are exposed or may not be available to cover any losses that we may incur.

We incur significant costs with our third-party data hosting services. If the costs for such services increase due to vendor consolidation, regulation, contract renegotiation, or otherwise, we may not be able to pass through such fee increases to our clients. In addition, if any of these third-party vendors cease providing services, elect to not renew their agreements with us on commercially reasonable terms or at all, breach their agreements with us or fail to satisfy our expectations, our operations could be disrupted and we could be required to incur significant costs, which could materially adversely affect our business, financial condition and results of operations.

Additionally, any inability of these third parties to keep up with our needs for capacity could have a material adverse effect on our business. Any changes in these third parties’ service levels, or any errors, defects, disruptions, or other performance problems with our applications or the infrastructure on which they run, could materially adversely affect our reputation and may damage our clients’ or other users’ stored files or result in lengthy interruptions in our products and services. Interruptions in our products or services might materially adversely affect our reputation and operating results, cause us to issue refunds or service credits to clients, subject us to potential liabilities, or result in contract terminations or loss of clients.

Systems failures, interruptions or delays in service, including due to natural disasters or other catastrophic events, could delay and disrupt our services, which could materially harm our business and reputation.

Our business depends on the efficient and uninterrupted operation of our systems, networks and infrastructure. We cannot assure you that we, or our third-party service providers, will not experience systems failures or business interruptions. Our systems, networks, infrastructure and other operations are vulnerable to impact or interruption from a wide variety of causes, including: power, internet or telecommunications failures; hardware failures or software errors; human error, acts of vandalism or

 

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sabotage; catastrophic events, such as natural disasters, extreme weather events or acts of war or terrorism; malicious cyber-attacks or cyber incidents, such as unauthorized access, ransomware, loss or destruction of data, computer viruses or other malicious code; and the loss or failure of systems over which we have no control, such as loss of support services from critical third-party service providers. In addition, we may also face significant increases in our use of power and data storage and may experience a shortage of capacity or increased costs associated with such usage.

Any failure of, or significant interruption, delay or disruption to, or security breaches affecting, our platforms, systems, networks or infrastructure could result in disruption to our operations, including disruptions in service to our clients; cause us to incur significant expense to repair, replace or remediate systems, networks or infrastructure; harm our brand and reputation; divert our employees’ attention; reduce our revenue; subject us to liability; cause us to breach service level contract obligations or cause us to issue credits or lose clients, any of which could materially adversely affect our business, financial condition and results of operations.

We internally support and maintain many of our systems and networks, including those underlying our products and services; however, we may not have sufficient personnel to properly respond to all system, network or infrastructure problems. Our failure to monitor or maintain our systems, networks and infrastructure, including those maintained or supported by our third-party service providers, or to find a replacement for defective or obsolete components within our systems, networks and infrastructure in a timely and cost-effective manner when necessary, would have a material adverse effect on our business, financial condition and results of operations. While we generally have disaster recovery and business continuity plans for much of our business, including redundant systems, networks, computer software and hardware and data centers to mitigate interruption to our normal course of business, our systems, networks and infrastructure may not always be fully redundant and our disaster recovery and business continuity plans may not always be sufficient, effective or implemented properly. Similarly, although some contracts with our third-party service providers require adequate disaster recovery or business continuity capabilities, we cannot be certain that these will be adequate or implemented properly. Our disaster recovery and business continuity plans are heavily reliant on the availability of the internet and mobile phone technology, so any disruption of those systems would likely affect our ability to recover promptly from a crisis situation. If we are unable to execute our disaster recovery and business continuity plans, or if our plans prove insufficient for a particular situation or take longer than expected to implement in a crisis situation, it could have a material adverse effect on our business, financial condition and results of operations, and our business interruption insurance may not adequately compensate us for losses that may occur.

Our business, financial condition and results of operations could be materially adversely affected by unfavorable conditions in the general economy.

The substantial majority of our revenues are derived from pre-employment screening services. Unfavorable conditions in the general economy, such as the downturn experienced as a result of the COVID-19 pandemic, could result in reduced demand for our products and services, as our revenues are dependent upon general economic and hiring conditions and upon conditions in the industries we serve. To the extent that the economy in general or labor market conditions in particular deteriorate, our existing and potential clients may slow or defer hiring, and may be reluctant to increase expenditures on employee screening. In addition, individuals may choose to change employment less frequently during an economic downturn. This could interfere with our growth strategy of increasing the number of background screens performed by, and average revenue per order of, our client base, and could have a material adverse effect on our business, financial condition and results of operations.

The COVID-19 pandemic has disrupted the U.S. and global economies and put an unprecedented strain on businesses around the world. In response to the COVID-19 pandemic, many

 

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companies temporarily closed their offices and instituted hiring freezes. These measures had a negative effect on our revenue growth rates and other financial metrics from mid-March through October 2020. We have experienced and may continue to experience increased delays in hiring activity from existing and prospective clients and a reduction in client demand, particularly in the industries most affected by the COVID-19 pandemic. We may also experience a reduction in client spend and delayed payments, which could materially affect our business, financial condition and results of operations.

It is not possible for us to estimate the duration or magnitude of the adverse results of the COVID-19 pandemic and its effects on our business, financial condition or results of operations at this time. Any future economic downturn may have a material adverse effect on our business, financial condition and results of operations.

We are subject to significant competition, and if we fail to compete successfully, our sales could decline and our business, financial condition and results of operations could be materially adversely affected.

The market for global background screening and identity verification services is highly fragmented and competitive. We compete for business based on numerous factors, including service speed, accuracy and results, ease-of-use, breadth of offering, fulfillment reliability, reputation, client service, platform quality, and price. We compete with a diverse group of screening companies, including global full-suite players characterized by their global scale and enterprise offerings; mid-tier players that tend to focus on a particular geographic region, industry or product line; and small independent background screening players that typically serve small- to medium-sized businesses. New entrants to the market have in the past emerged, both as start-ups as well as participants in adjacent sectors such as applicant tracking systems and payroll processing companies that seek to integrate background screening into their onboarding products and solutions, and may emerge in the future, which would further increase competition. Additionally, our clients may also decide to insource work that has been traditionally outsourced to us. Some of our competitors are larger than us, have more resources than we do, have more expertise in certain industries than we do, are better financed than we are, or provide more specialized or diversified services than we do. Due in part to their size and resources, certain competitors may be in a better position to reallocate resources and anticipate and respond to existing and changing client preferences and requirements, emerging technologies and market trends. Also, our status as a public company will give our competitors access to information about us and our business, while we may not have access to similar information about them. Our competitors have imitated or attempted to imitate, and will likely continue to imitate or attempt to imitate, our services and branding, which could harm our business and results of operations. We cannot guarantee that others will not independently develop technology and products with the same or similar function to any proprietary technology we rely on to conduct our business and differentiate ourselves from our competitors. Further, the intellectual property used in our business generally is not patented, and we therefore rely primarily on other forms of protection, including trade and service marks, trade dress and the strength of our brand. It is also possible that new competitors or alliances or consolidation among competitors may emerge and significantly increase competition. In addition, we face difficulties in competing for clients who already have long-standing relationships with other screening service providers, especially if the products and services provided by such competitors are already integrated into the client’s technology platform or hiring processes, which often creates a barrier to switching providers and increases switching costs for the potential client. Continuing strong competition could result in pricing pressure, increased sales and marketing expenses, loss of clients, and greater investments in research and development. If we fail to successfully compete, our business, financial condition and results of operations could be materially and adversely affected.

While a majority of our U.S. enterprise client contracts are exclusive to us or require Sterling to be used as the primary provider for the duration of their contract, we still rely on our clients’ continuing

 

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demand for our products and solutions, our technology, our value proposition, and our brand and reputation to compete. The loss of a significant client or any reduced demand for our products and services by our clients, especially our large clients, would have a negative impact on our business. We cannot guarantee that we will maintain relationships with any of our clients on acceptable terms or at all or retain, renew or expand upon our existing agreements. The failure to do so could negatively affect our business, financial condition, and results of operations.

We may also face increased competition in the identity verification market, including both our online identity-as-a-service suite and our fingerprinting services. Our competitors may develop identity verification services that compete with ours, including biometrics technology that directly competes with or is superior to our own. Additionally, if we are unable to develop new hardware and software or enhance our existing technology in a timely manner in response to technological changes, we will be unable to compete in our chosen markets. Any of these factors as well as any security breaches that affect our identity verification business may make it difficult for us to retain existing clients or attract new clients and may cause our business, financial condition and results of operations to be harmed.

A significant portion of our fulfillment operations, and certain of our technology development operations, subject us to particular risks inherent in operating overseas.

A significant portion of our fulfillment operations and certain of our technology development operations, are conducted, through subsidiaries, in Mumbai, India and Manila, the Philippines, which subjects us to particular risks and challenges inherent in operating overseas. In particular, these operations are subject to local political, security and economic instability, regional conflicts and local risks with respect to the spread of COVID-19 and the responses of local governments, institutions and healthcare providers thereto. If our operations at these sites are disrupted, even for a brief period of time, whether due to malevolent acts, defects, computer viruses, climate change, natural disasters such as earthquakes, fires, hurricanes or floods, power telecommunications failures, or other external events beyond our control, it could result in interruptions in service to our clients, damage to our reputation, harm our client relationships, and reduced revenues and profitability. We may not have sufficient protection or recovery plans in certain circumstances, such as a significant natural disaster, and our business interruption insurance may be insufficient to compensate us for losses that occur. In the case of such an event, client could elect to terminate our relationship, delay or withhold payment to us, or even make claims against us. Such events could have negative impacts on client relationships. Further, misconduct by our overseas employees could result in infringement or misappropriation of our intellectual property, which may be exacerbated by potentially weaker protection for intellectual property and other legal rights than in the United States as well as practical difficulties in enforcing intellectual property and other rights. In addition, currency fluctuations that could increase the cost of labor at our India and Philippines subsidiaries. These risks could prevent us from achieving cost savings or efficiencies from our international operations, and could have a material adverse effect on our business, financial condition and results of operations.

If we fail to upgrade, enhance and expand our technology and services to meet client needs and preferences, or fail to successfully manage the transition to new products and services, the demand for our products and services may materially diminish.

We operate in an industry that is subject to rapid technological advances and changing client needs and preferences. In order to remain competitive and responsive to client demands, we continually upgrade, enhance, and expand our technology, products and services. Our competitors may introduce new products and services that might offer better combinations of price and performance or better address our clients’ needs as compared to our current or future products and services. If we fail to respond successfully to technology challenges and client needs and preferences, the demand for our products and services may diminish. In addition, investment in product

 

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development often involves a long return on investment cycle. We have made and expect to continue to make significant investments in product development. We must continue to dedicate a significant amount of resources to our development efforts before knowing to what extent our investments will result in products the market will accept and we cannot assure you that any such products that we develop or offer will be produced economically. The expenses or losses associated with unsuccessful product development, or a lack of market acceptance of new products, could materially adversely affect our business, financial condition and results of operation. For example, the final phase of Project Ignite may not be successful and we may not be able to unify our clients onto a single global platform. In addition, our business could be adversely affected in periods surrounding our new product introductions if clients delay purchasing decisions to evaluate the new product offerings. Furthermore, we may not execute successfully on our product development strategy, including because of challenges with regard to product planning and timing and technical hurdles that we fail to overcome in a timely fashion.

Additionally, unexpected delays and difficulties can occur as clients implement and test our products and services. Implementation typically involves integration with our clients’ and third-party systems and internal processes, as well as adding client and third-party data to our platform. This can be complex and time-consuming for our clients and can result in delays. We provide our clients with upfront estimates regarding the duration and resources associated with the implementation of our products and solutions. However, delays may occur due to discoveries made during the implementation process, such as unique or unusual client requirements or our internal limitations. If we are unable to resolve these issues and we fail to meet the upfront estimates and the expectations of our clients, it could result in client dissatisfaction, loss of clients, delays in generating revenues, or negative brand perception about us and our products and services. Our implementation cycles could also be disrupted by factors outside of our control, such as deficiencies in the platform of our clients or third-party ATS or HCM systems, which could materially adversely affect our business, financial condition and results of operations.

We have incurred operating losses in the past, may incur operating losses in the future, and may not achieve or maintain profitability in the future.

We have incurred operating losses in recent years, including net losses of $46.7 million and $52.3 million for the years ended December 31, 2019 and 2020, respectively, and may continue to incur net losses in the future. We expect our operating expenses to increase in the future as we continue our growth initiatives by focusing on expanding into new geographies, developing new products and services and investing in our technology, focusing on new partnerships and as a result of legal, accounting, and other expenses related to operating as a public company. These initiatives and additional expenses may be more costly than we expect, and we cannot guarantee that we will be able to increase our revenue to offset our operating expenses. Our revenue growth may slow or our revenue may decline for a number of other reasons, including reduced demand for our products and services, increased competition, a decrease in the growth or reduction in size of our overall market, the impacts to our business from the COVID-19 pandemic or if we cannot capitalize on growth opportunities. If our revenue does not grow at a greater rate than our operating expenses, we will not be able to achieve and maintain profitability.

Our recent growth rates may not be sustainable or indicative of future growth.

We have experienced significant growth in several recent periods. Revenue increased from $460.0 million for the year ended December 31, 2018 to $497.1 million for the year ended December 31, 2019. While revenue for the year ended December 31, 2020 was $454.1 million, reflecting the effects of the COVID-19 pandemic, revenue for the quarter ended December 31, 2020 increased 5.8% compared to the quarter ended December 31, 2019, and revenue for the six months

 

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ended June 30, 2021 increased 43.6% compared to the six months ended June 30, 2020. These historical rates of growth may not be sustainable or indicative of our future rate of growth. We have also recently experienced increased demand for our products and services as hiring demand increased in the fourth quarter of 2020 as a result of reduced shelter-in-place orders, quarantine restrictions and other preventative measures that were instituted to slow the global spread of the COVID-19 pandemic. We cannot predict the extent to which such increased hiring trends will continue. Furthermore, any future outbreaks or resurgences may result in additional preventative measures, which may cause business slowdowns or shutdowns in affected areas and significant economic disruption both globally and in the United States.

Our ability to grow our business will depend, in large part, on our ability to further penetrate our existing markets, attract new clients and identify and effectively invest in growing Verticals. We believe that our continued revenue growth, as well as our ability to improve or maintain margins and profitability, will depend upon, among other factors, our ability to respond to the challenges, risks and difficulties described elsewhere in this prospectus and the extent to which use of our various products and services grows and contributes to our results of operations. Additionally, growing our existing business or executing our business strategy may place significant demands on and strain our personnel and organizational structure, including our management, staff and information systems. To successfully manage our growth, we will also need to maintain appropriate staffing levels and update our operating, financial and other systems, procedures, and controls accordingly and we cannot provide assurance that we will be able to successfully manage any such challenges or risks to our future growth. Our growth could be limited if we fail to innovate or adapt to market trends and product innovations adequately. Any new products and services we develop or acquire may not be introduced in a timely or cost-effective manner and may not achieve the market acceptance necessary to generate significant revenues, and any new markets in which we attempt to sell our products and services, including new countries or regions, may not be receptive or implementation may be delayed. Our future growth will be adversely affected if we do not identify and invest in faster-growing Verticals. In addition, our number of clients and markets may not continue to grow or may decline due to a variety of possible risks, including increased competition. Any of these factors could cause our revenue growth to decline and may materially adversely affect our margins and profitability. Failure to continue our revenue growth or improve margins could have a material adverse effect on our business, financial condition and results of operations. You should not rely on our historical rate of revenue growth as an indication of our future performance.

Our growth depends, in part, on increasing our presence in the markets that we currently serve, and we may not be successful in doing so.

We believe that our future growth depends not only on continuing to reach our current core market, but also continuing to broaden our client base in the United States; EMEA; APAC and Canada. In these markets, we have faced and may continue to face challenges that are different from those we encounter elsewhere, including competitive, hiring, legal, regulatory, economic, political and other difficulties, such as understanding and accurately predicting the needs and preferences of clients in these markets. We may also encounter difficulties in attracting clients due to a lack of familiarity with or acceptance of our brand. We continue to evaluate marketing efforts and other strategies to expand our client base. In addition, although we are investing in marketing activities to increase market penetration, we cannot assure you that we will be successful. If we are not successful, our business, financial condition and results of operations may be harmed.

We acquire information from a variety of sources to conduct our business, and if some of these sources are not available to us in the future, or if the fees charged by such sources

 

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significantly increase, our business may be materially and adversely affected and our profit margins may decline.

We rely extensively upon information derived from a wide variety of sources. We rely on automated technology, our employees and third parties to search public and private sources and obtain data from information companies. We generally do not have long-term agreements with our data suppliers. Some data suppliers, as well as some service suppliers, such as the drug testing laboratories we use, are also owned, or may in the future be acquired, by our competitors, which may make us vulnerable to unpredictable price increases or delays and refusals to renew agreements. Because our contracts with our clients often contain restrictions on the amounts or types of costs that may be passed through to our clients, we may not be able to recover certain of the costs charged to us by our data and service suppliers. Further, our data and service suppliers could increase their fees in the future and we may not be able to pass through such fee increases to our clients. If our data and service suppliers or data sources are no longer able or are unwilling to provide us with certain data or services, including as a result of our noncompliance with laws, regulations or our contractual agreements with them, we will need to find alternative data and service suppliers with comparable breadth and accuracy, which may not be available on acceptable terms or at all. If we are unable to identify and contract with suitable alternative data and service suppliers and integrate them into our service offerings, we could experience service disruptions, increased costs and reduced quality of our products and services, which could have a material adverse effect on our business, financial condition and results of operations.

We are subject to payment-related risks that may result in higher operating costs or the inability to process payments, either of which could harm our business, financial condition and results of operations.

We accept a variety of payment methods, including bank checks, electronic funds transfers and electronic payment systems. Accordingly, we are, and will continue to be, subject to significant and evolving regulations and compliance requirements, including obligations to implement enhanced authentication processes that could result in increased costs and liability, and reduce the ease of use of certain payment methods. For certain payment methods, including credit and debit cards, as well as electronic payment systems, we pay certain fees that we currently pass through to our clients. However, these fees may increase over time and we may not be able to pass through such fee increases to our clients. We rely on independent service providers for payment processing, including credit and debit cards. If these independent service providers become unwilling or unable to provide these services to us, or if the cost of using these providers increases, our business could be harmed. We and our payment processing providers are also subject to payment card association operating rules and agreements, including data security rules and agreements, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules, agreements or requirements, or if our data security systems are breached or compromised, we may be liable for losses incurred by card issuing banks or clients, subject to fines and higher transaction fees, lose our ability to accept credit or debit card payments from our clients, or process electronic fund transfers or facilitate other types of payments. Any failure to comply could significantly harm our brand, reputation, business, financial condition, and results of operations.

Additionally, clients may dispute their invoices or otherwise fail to pay for our products and services on a timely basis or at all. In the past, certain clients have sought to slow their payments to us or have filed for bankruptcy protection, resulting in delay or cancelation of their payments to us. If we are unable to collect clients’ fees on a timely basis or at all, bad debt may exceed reserves for such contingencies, and our bad debt exposure may increase over time. Write-offs for bad debt could have a materially negative effect on our business, financial condition and results of operations. Further, we

 

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incur costs for any products and services delivered; to the extent that we are not paid timely or at all, our results of operations and financial condition would be adversely impacted.

Sales to government entities and higher-tier contractors to governmental clients involve unique competitive, procurement, budget, administrative and contractual risks, any of which could materially adversely impact our business, financial condition and results of operations.

We derive a portion of our revenues, and intend to derive an increasing portion of our revenues in the future, from sales to U.S. federal, state and local governmental and education clients and higher-tier contractors to governmental clients. Doing business with government entities and their higher-tier contractors presents a variety of risks in addition to those involved in sales to other clients. The procurement process for governments and their agencies is highly competitive, can be time-consuming, requires us to incur significant up-front time and expense, and subjects us to additional compliance risks and costs, without any assurance that we will win a contract. In certain jurisdictions, our ability to win business may be constrained by political and other factors unrelated to our competitive position in the market. Demand for our products and services may be affected by public sector budgetary cycles and changes in funding, including reduced, delayed, or unavailable funding or changed spending priorities in any given fiscal cycle, and extended federal government shutdowns, any of which could materially adversely affect demand for our products and services and could impact our ongoing government contracts if government funding for such projects is reduced or eliminated.

We must comply with laws and regulations relating to government contracts, which affect how we do business with our clients and may result in additional costs to our business. Any failure to comply with applicable laws and regulations, including as a result of misconduct by employees, subcontractors, agents, suppliers, business partners and others working on our behalf, could result in contract termination, damage to our reputation, price or fee reductions or suspension or debarment from contracting with the government, each of which could materially adversely affect our business, financial condition and results of operations. Significant laws and regulations that affect sales to government entities and higher-tier contractors to governmental clients include:

 

   

federal, state, and local laws and regulations regarding the formation, administration, and performance of government contracts;

 

   

the federal Civil False Claims Act (and similar state and local false claims acts), which provides for substantial civil penalties for violations, including for submission of or causing the submission of a false or fraudulent claim to the U.S. government for payment or approval; and

 

   

federal, state, and local laws and regulations regarding procurement integrity, including gratuity, bribery and anti-corruption requirements as well as limitations on political contributions and lobbying.

Further, entities providing services to governments are required to comply with a variety of complex laws, regulations and contractual provisions relating to the formation, administration, or performance of government contracts that give public sector clients substantial rights and remedies, many of which are not typically found in commercial contracts. These may include rights with respect to price protection, the accuracy of information provided to the government, contractor compliance with supplier equal opportunity, socio-economic and affirmative action policies and reporting requirements and other terms that are particular to government contracts. Federal, state and local governments routinely investigate and audit contractors for compliance with these requirements, and the qui tam provisions of the federal Civil False Claims Act (and similar state and local false claims acts) authorize a private person to file civil actions on behalf of the federal and state governments and retain a share of any recovery, which can include treble damages and civil penalties. If it is determined that we have failed to comply with these requirements, we may be subject to civil and criminal penalties and

 

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administrative sanctions, including termination of contracts, forfeiture of profits, costs associated with the triggering of price reduction clauses, fines and suspension or debarment from future government business, and we may suffer reputational damage. Further, the negative publicity that could arise from any such penalties, sanctions or findings could have a material adverse effect on our reputation and reduce our ability to compete for new contracts with both government and commercial clients.

In addition, governmental clients and higher-tier contractors may have contractual, statutory or regulatory rights to modify without our consent or terminate current contracts with us for convenience (for any reason or no reason) or due to a default. If a contract is terminated for convenience, we may only be able to collect fees for products or services delivered prior to termination and settlement expenses. If a contract is terminated due to a default, we may be liable for excess costs incurred by the client for procuring alternative products or services or be precluded from doing further business with government entities. Governmental clients and higher-tier contractors may also have broad intellectual property rights in products and data developed under our contracts. Compliance with complex regulations and contracting provisions in a variety of jurisdictions can be expensive and consume significant management resources. In addition, government entities may revise existing contract rules and regulations or adopt new contract rules and regulations at any time. Any of these changes could impair our ability to obtain new contracts or renew contracts under which we currently perform when those contracts are eligible for re-competition.

We may incur impairment charges for our goodwill which would negatively affect our operating results.

As of December 31, 2020, we had goodwill of $831.8 million. The carrying value of goodwill represents the fair value of an acquired business in excess of identifiable assets and liabilities as of the date the business was acquired. Our goodwill is predominantly a result of the acquisition of Sterling by our Sponsor on June 19, 2015 (the “Sponsor Acquisition”). Determining the fair value of certain assets acquired and liabilities assumed is judgmental in nature and requires management to use significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates, growth rates and asset lives. We do not amortize goodwill that we expect to contribute indefinitely to our cash flows, but instead we evaluate these assets for impairment at least annually, or more frequently if changes in circumstances indicate that a potential impairment could exist. Significant negative industry or economic trends, disruptions to our business, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the acquired assets, divestitures and market capitalization declines may impair our goodwill. Any charges relating to such impairment could materially adversely affect our financial condition and results of operations.

The economic, health and business disruption caused by the COVID-19 pandemic could continue to adversely affect our business, financial condition and results of operations.

Since being reported in December 2019, COVID-19 has spread globally and has been declared a pandemic by the World Health Organization. The COVID-19 pandemic and actions by public health and governmental authorities, businesses, other organizations and individuals to respond to the outbreak, including travel bans and restrictions, quarantines, shelter in place, stay at home or total lock-down orders and business limitations and shutdowns have resulted in an economic slowdown and an unprecedented disruption to our business and the businesses of our clients. We cannot predict or control these disruptions, and any such disruptions may have a material adverse effect on our business, financial condition and results of operations. The impacts include, but are not limited to:

 

   

the increased risk that we may experience cybersecurity related incidents as a result of our employees, service providers, and third parties working remotely on less secure systems;

 

   

diversion of our management team’s time and attention to respond to the effects of the COVID-19 pandemic on our business and operations;

 

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our service levels or ability to fulfill client orders being affected as a result of our employees and their immediate families becoming ill as a result of the COVID-19 pandemic; and

 

   

a significant disruption of global financial markets, which could negatively affect our ability to access capital in the future.

Our financial performance in 2020 was impacted by the general economic downturn experienced as a result of the COVID-19 pandemic. In response to the COVID-19 pandemic, many of our clients froze headcount, furloughed and terminated employees, deferred hiring and partially or completely shut down their business operations and as a result, we experienced reduced demand for our products and services in industries impacted severely by the COVID-19 pandemic such as brick-and-mortar retail, entertainment, and hospitality. We also incurred incremental costs in connection with the COVID-19 pandemic, including temporarily transitioning our fulfillment teams to a virtual operating model. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of the COVID-19 Pandemic.”

Additionally, new laws and programs have been enacted, and may continue to be enacted, to respond to the COVID-19 pandemic and its effects on the economy. For example, the Families First Coronavirus Response Act (“FFCRA”) and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) were signed into law in March 2020 and additional relief bills were passed into law in December 2020 and March 2021, each creating numerous new programs, including a paycheck protection program (“PPP”), mandatory employee leave requirements, payroll tax deferral and tax credit programs and other employment- and employment tax-related incentives. We believe that these programs have caused individuals to change employment less frequently and as a result, reduced the demand for our products and services.

Any of these COVID-19 pandemic-related risks could have a material adverse effect on our business, financial condition or results of operations. The extent to which the COVID-19 pandemic will affect our business remains uncertain and will depend on a variety of changing factors that we may not be able to accurately predict, such as the duration and scope of the pandemic, the potential for a resurgence of cases, the impact of variants, the disruption of the national and global economy, the duration of the economic downturn, the laws, programs and actions that governments will enact or take, including the continuing rollout of vaccines and the availability of vaccine doses to the general public, the extent to which our clients’ businesses contract or fail, the extent to which our own operations are affected by office closures, remote work or infections, and how quickly and to what extent normal economic and operating conditions can resume. Any of these factors could exacerbate the risks and uncertainties identified above.

To the extent our clients reduce their operations, downsize their screening programs, or otherwise demand fewer of our products and solutions, our business could be materially adversely impacted.

Demand for our products and services is subject to our clients’ continual evaluation of their need for our products and services and is impacted by several factors, including their budget availability, hiring, and workforce needs, and a changing regulatory landscape. Demand for our offerings is also dependent on the size of our clients’ operations. Our clients could reduce their operations for a variety of reasons, including general economic slowdown, divestitures and spin-offs, business model disruption, poor financial performance, or as a result of increasing workforce automation. Demand for drug screenings may decline as a result of evolving U.S. drug laws. For example, the legalization of cannabis in several U.S. states has led to a decrease in orders for marijuana screenings. Our revenues may be significantly reduced should our clients decide to downsize their screening programs or take such programs in-house.

 

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We are subject to risks relating to public opinion, which may be magnified by incidents or adverse publicity concerning our industry or operations.

We operate in an industry that involves the risk of negative publicity, especially relating to cybersecurity, privacy, and data protection, and adverse developments with respect to our industry may also, by association, negatively impact our reputation. For example, when information services companies are involved in high-profile events involving data theft, these events could result in increased legal and regulatory scrutiny, adverse publicity, and potential litigation concerning the commercial use of such information for our industry in general. If there is a perception that the practices of our business or our industry constitute an invasion of privacy, our business and results of operations may be negatively impacted. There have been and may continue to be perception issues, social stigmas and negative media attention regarding the collection, use, accuracy, correction and sharing of personal data, which could materially adversely affect our business, financial condition and results of operations.

Seasonality may cause our operating results to fluctuate from quarter to quarter.

Demand for our products and services, and our revenue, is affected seasonally by macroeconomic hiring trends. Typically, revenue acceleration begins towards the end of the first quarter, peaking in the third quarter as hiring accelerates across Verticals. The fourth quarter, ending December 31, is typically our lowest revenue quarter due to a general market trend of lower hiring during the latter half of December due to the holidays. Certain clients across various industries also historically ramp up their hiring throughout the first half of the year as winter concludes, commercial activity tied to outdoor activities increases, and the school year ends, giving rise to student and graduate hiring.

In addition, clients may elect to complete post-onboarding screening such as workforce re-screens and other products at different periods and intervals during any given year. It is not always possible to accurately forecast the timing and magnitude of these projects.

Further, digital transformation, growth in e-commerce, and other economic shifts can impact seasonality trends, making it difficult for us to predict how our seasonality may evolve in the future. As a result, it may be difficult to forecast our results of operations accurately, and there can be no assurance that the results of any particular quarter or other period will serve as an indication of our future performance.

Risks Related to our Capital Structure, Indebtedness and Capital Requirements

Our Sponsor controls us and their interests may conflict with ours or yours in the future.

Immediately following this offering, our Sponsor will control approximately 65.9% of the voting power of our common stock (or 63.8%, if the underwriters exercise in full their option to purchase additional shares of common stock). For so long as our Sponsor continues to own a significant percentage of our common stock, our Sponsor will still be able to significantly influence the composition of our board of directors and the approval of actions requiring stockholder approval through its voting power, including potential mergers or acquisitions, payment of dividends, asset sales, amendment of our amended and restated certificate of incorporation or amended and restated bylaws and other significant corporate transactions. Accordingly, for such period of time as our Sponsor holds a controlling interest in us, our Sponsor will have significant influence with respect to our management, business plans and policies. In particular, our Sponsor will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. The concentration of voting power could deprive

 

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you of an opportunity to receive a premium for your shares of common stock as part of a sale of our company and ultimately might affect the market price of our common stock.

Our Sponsor and its affiliates engage in a broad spectrum of activities. In the ordinary course of their business activities, our Sponsor and its affiliates may engage in activities where their interests conflict with our interests or those of our stockholders. Following this offering, four of our ten directors will be affiliated with our Sponsor. These persons will have fiduciary duties both to us and to our Sponsor. As a result, they may have real or apparent conflicts of interest on matters affecting both us and our Sponsor, which in some circumstances may have interests adverse to ours. Our amended and restated certificate of incorporation will generally permit our Sponsor, its affiliates, our non-employee directors and their affiliates to engage, directly or indirectly, in the same lines of business in which we operate or otherwise to compete with us. Our Sponsor and its affiliates may also pursue acquisition opportunities that would be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, our Sponsor and its affiliates may have an interest in us pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their investment, even though such transactions might involve risks to you.

Our substantial indebtedness could adversely affect our financial condition and limit our ability to raise additional capital to fund our operations.

We have a substantial amount of indebtedness. As of June 30, 2021, we had total indebtedness of $613.6 million remaining on our original principal amount of term loan (the “Term loan”) of $655.0 million. Additionally, we have $0.9 million of letters of credit outstanding under our $85.0 million Revolving Credit Facility, with $84.1 million in additional borrowing capacity thereunder and upon the consummation of this offering, our Revolving Credit Facility will automatically increase to $140.0 million.

Our high level of indebtedness could have important consequences to us, including:

 

   

making it more difficult for us to satisfy our obligations with respect to our debt;

 

   

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, investments or acquisitions or other general corporate requirements;

 

   

requiring a substantial portion of our cash flows to be dedicated to debt service payments or debt repayment instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, investments or acquisitions or other general corporate purposes;

 

   

increasing our vulnerability to adverse changes in general economic, industry and competitive conditions;

 

   

exposing us to the risk of increased interest rates as borrowings under our Credit Agreement (to the extent not hedged) bear interest at variable rates, which could further adversely affect our cash flows;

 

   

limiting our flexibility in planning for and reacting to changes in our business and the industry in which we compete;

 

   

restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

   

requiring us to repatriate cash from our foreign subsidiaries to accommodate debt service payments;

 

   

placing us at a disadvantage compared to other, less leveraged competitors; and

 

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increasing our cost of borrowing.

Any one of these limitations could have a material effect on our business, financial condition, results of operations, prospects and our ability to satisfy our obligations in respect of our outstanding debt. In addition, the Credit Agreement governing our Term loan and Revolving Credit Facility contains, and the agreements governing future indebtedness may contain, restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our indebtedness.

Despite our current debt levels, we may incur substantially more indebtedness, which could further exacerbate the risks associated with our substantial leverage.

We and our subsidiaries may be able to incur additional indebtedness in the future, which may be secured. While our Credit Agreement limits our ability and the ability of our subsidiaries to incur additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and thus, notwithstanding these restrictions, we may still be able to incur substantially more debt and the indebtedness incurred in compliance with these restrictions could be substantial. Also, these restrictions do not prohibit us from incurring obligations that do not constitute indebtedness as defined therein. To the extent that we incur additional indebtedness, the risks that we now face related to our substantial indebtedness could increase. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility.”

To service our indebtedness, we require a significant amount of cash, which depends on many factors beyond our control.

We cannot assure you that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our Credit Agreement in amounts sufficient to enable us to fund our liquidity needs. Additionally, our operations are conducted entirely through our subsidiaries and our ability to generate cash to meet our debt service obligations is highly dependent on the earnings and the receipt of funds from our subsidiaries via dividends or intercompany loans.

If we do not generate sufficient cash flow from operations to satisfy our debt obligations, we may have to undertake alternative financing plans, such as:

 

   

refinancing or restructuring our debt;

 

   

reducing or delaying capital investments;

 

   

selling assets; or

 

   

seeking to raise additional capital.

We cannot assure you that we would be able to enter into these alternative financing plans on commercially reasonable terms or at all. Our ability to restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on commercially reasonable terms or at all. Any alternative financing plans that we may be required to undertake would still not guarantee that we would be able to meet our debt obligations. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to obtain alternative financing, could materially adversely affect our business, financial condition, results of operations or prospects. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

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We will need to repay or refinance borrowings under our Credit Agreement.

The Term loan and borrowings under our Credit Agreement are scheduled to mature in June 2024, and the Revolving Credit Facility is scheduled to begin to expire in June 2022, subject to certain extensions as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility.” We will need to repay, refinance, replace or otherwise extend the maturity of our Credit Agreement. Our ability to repay, refinance, replace or extend these facilities by their maturity date will be dependent on, among other things, business conditions, our financial performance and the general condition of the financial markets. If a financial disruption were to occur at the time that we are required to repay indebtedness outstanding under our Credit Agreement, we could be forced to undertake alternate financings, including a sale of additional common stock, negotiate for an extension of the maturity of our Credit Agreement or sell assets or delay capital expenditures and other investments in our business in order to generate proceeds that could be used to repay indebtedness under our Credit Agreement. We cannot assure you that we will be able to consummate any such transaction on terms that are commercially reasonable, on terms acceptable to us or at all.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Borrowings under our Credit Agreement are at variable rates of interest and expose us to interest rate risk. Interest rates are still near historically low levels and are projected to rise in the future. We are party to two interest rate swaps to hedge the future cash flows on approximately 50% of the outstanding principal balance of the aggregate amounts due under the Term loan. The terms of the swaps allow us to effectively set London Interbank Offered Rate (“LIBOR”) to 2.0266% through June 30, 2021, and to 2.9235% through June 30, 2022. If interest rates rise, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed may remain the same, and our net income and cash flows will correspondingly decrease. Based on the $613.6 million outstanding under the Term loan as of June 30, 2021 until LIBOR is at 1.0%, our total interest expense on the Term loan would remain unchanged. If LIBOR exceeds 1.0%, our total interest expense on the Term loan would increase by $0.6 million for every 10 basis points increase in LIBOR. The interest expense on the fully drawn revolver increases by $0.1 million for every 10 basis points increase in LIBOR. The interest expense on the swap would decrease by $0.3 million for each 10 basis points increase in LIBOR.

In various pronouncements since July 2017, the United Kingdom’s Financial Conduct Authority announced it intends to stop compelling banks to submit rates for the calculation of certain tenors of LIBOR after 2021 and with the cessation of all available tenors of LIBOR in 2023. It is unclear if LIBOR will cease to exist at that time, if a new method of calculating LIBOR will be established, or if an alternative reference rate will be established. The Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee, which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to U.S. dollar LIBOR in derivatives and other financial contracts. We are not able to predict when LIBOR will cease to be available or if SOFR, or another alternative reference rate, attains market traction as a LIBOR replacement. LIBOR is used as the reference rate for Eurocurrency borrowings under our credit facilities. If LIBOR ceases to exist, we and the administration agent for our credit facilities may seek to amend our Credit Agreement to replace LIBOR with a different benchmark index that is expected to mirror what is happening in the rest of the debt markets at the time and make certain other conforming changes to our Credit Agreement. We may also propose to amend the Credit Agreement in advance of the cessation of LIBOR being available to hardwire methodologies so as to make the transition smoother than it would otherwise be. As such, the interest rate on Eurocurrency borrowings under our credit facilities may change. The new rate may not be as favorable as those in effect prior to any LIBOR phase-out. Furthermore, the

 

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transition process may result in delays in funding, higher interest expense, additional expenses, and increased volatility in markets for instruments that currently rely on LIBOR, all of which could negatively impact our interest expense, results of operations, and cash flow.

The covenants in our Credit Agreement impose restrictions that may limit our operating and financial flexibility.

Our Credit Agreement contains a number of significant operating and financial restrictions and covenants that limit our ability, among other things, to:

 

   

incur additional indebtedness;

 

   

pay dividends or distributions on our capital stock or repurchase or redeem our capital stock;

 

   

prepay, redeem or repurchase specified indebtedness;

 

   

create certain liens;

 

   

sell, transfer or otherwise convey certain assets;

 

   

make certain investments;

 

   

create dividend or other payment restrictions affecting subsidiaries;

 

   

engage in transactions with affiliates;

 

   

create unrestricted subsidiaries;

 

   

consolidate, merge or transfer all or substantially all of our assets or the assets of our subsidiaries;

 

   

enter into agreements containing certain prohibitions affecting us or our subsidiaries; and

 

   

enter into new lines of business.

In addition, the Credit Agreement contains a financial covenant requiring us to maintain a specified leverage ratio of 6.75:1.00 whenever the aggregate amount of revolving loans and letters of credit outstanding under the Revolving Credit Facility exceeds 35% of the total commitments thereunder. This financial covenant is solely for the benefit of the lenders under our Revolving Credit Facility and is tested as of the last day of the quarter. Further, any decrease in revenue or earnings could cause our leverage ratio to increase, which could require us to make a partial mandatory prepayment of our outstanding Term loan.

These covenants could materially adversely affect our ability to finance our future operations or capital needs. Furthermore, they may restrict our ability to expand and pursue our business strategies and otherwise conduct our business. Our ability to comply with these covenants may be affected by circumstances and events beyond our control, such as prevailing economic conditions and changes in regulations, and we cannot assure you that we will be able to comply with such covenants. These restrictions also limit our ability to obtain future financings or to withstand a future downturn in our business or the economy in general. In addition, complying with these covenants may also cause us to take actions that may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.

A breach of any covenant in our Credit Agreement or the agreements and indentures governing any other indebtedness that we may have outstanding from time to time would result in a default under that agreement or indenture after any applicable grace periods. A default, if not waived, could result in acceleration of the debt outstanding under the agreement or indenture and in a default with respect to, and an acceleration of, the debt outstanding under other debt agreements. If that occurs, we may not

 

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be able to make all of the required payments or borrow sufficient funds to refinance such debt. Even if new financing were available at that time, it may not be on terms that are acceptable to us or terms as favorable as our current agreements. If our debt is in default for any reason, our business, financial condition and results of operations could be materially and adversely affected.

Changes in our effective tax rate or exposure to additional income tax liabilities could adversely affect our financial results.

Taxation and tax policy changes, tax rate changes, new tax laws, revised tax law interpretations, and changes in accounting standards and guidance related to tax matters may cause fluctuations in our effective tax rate. For example, the Biden administration has proposed to increase the U.S. corporate income tax rate to 28% from 21%, increase the U.S. taxation of international business operations and impose a 15% minimum tax on worldwide book income. Our effective tax rate may also be affected by changes in the geographic mix of our earnings.

Our ability to use net operating loss carryforwards to offset future income taxes may be subject to limitation.

As of December 31, 2020, we had approximately $107.0 million of U.S. federal net operating loss carryforwards (“NOLs”), a portion of which will begin to expire in 2027. Utilization of our NOLs depends on many factors, including our future income, which cannot be assured. In addition, Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), generally imposes an annual limitation on the amount of NOLs that may be used to offset taxable income by a corporation that has undergone an “ownership change” (as determined under Section 382). An ownership change generally occurs if one or more stockholders (or groups of stockholders) that are each deemed to own at least 5% of our stock increase their ownership percentage by more than 50 percentage points over their lowest ownership percentage during a rolling three-year period.

We have experienced an ownership change under Section 382 of the Code in the past. Thus, our ability to utilize NOLs existing at the time of this offering may be subject to limitation under Section 382 of the Code. The application of such limitation may cause U.S. federal income taxes to be paid by us earlier than they otherwise would be paid if such limitation was not in effect and could cause such NOLs to expire unused, in each case reducing or eliminating the benefit of such NOLs. To the extent we are not able to offset our future taxable income with our NOLs, this would adversely affect our operating results and cash flows if we have taxable income in the future. In addition to the aforementioned federal income tax implications pursuant to Section 382 of the Code, most U.S. states follow the general provisions of Section 382 of the Code, either explicitly or implicitly resulting in separate state net operating loss limitations. We have recorded a valuation allowance of $11.3 million related to our NOLs as of December 31, 2020.

Risks Relating to This Offering and Ownership of Our Common Stock

There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity to sell our common stock at prices equal to or greater than the price you paid in this offering.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in us will lead to the development of a trading market on Nasdaq or otherwise or how active and liquid that market may come to be. Although we have applied to list our common stock on Nasdaq, if an active trading market for our common stock does not develop following this offering, you may not be able to sell your shares quickly or at or above the initial public offering price. The initial public offering price for our shares will be determined by negotiations between us, our

 

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Sponsor and the representatives of the underwriters, and this price may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common stock at prices equal to or greater than the price you paid in this offering.

The market price of our common stock may be highly volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the public offering price, and you could lose all or part of your investment as a result.

The trading price of our common stock could be volatile, and you could lose all or part of your investment. Stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. The following factors, in addition to other factors described in this “Risk Factors” section, may have a significant effect on the market price of our common stock:

 

   

our actual results of operations may vary from the expectations of securities analysts and investors;

 

   

our results of operations may vary from those of our competitors;

 

   

actual or anticipated fluctuations in our quarterly or annual operating results, including as a result of our ability to retain existing clients and attract new clients, the timing and success of new service offerings or product introductions, geographic expansion, or the seasonality of our business cycle;

 

   

the financial projections we may provide to the public, any changes in these projections or our ability to meet these projections;

 

   

investor perceptions of the investment opportunity associated with our common stock relative to other investment alternatives;

 

   

the extent or lack of securities analyst coverage of us or changes in analysts’ financial estimates;

 

   

announcements by us or our competitors of significant contracts, price reductions, new products or technical innovations, acquisitions, dispositions, strategic partnerships, joint marketing relationships, joint ventures, results of operations or capital commitments;

 

   

changes in our relationship with our clients or in client needs or expectations or trends in the markets in which we operate;

 

   

changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business;

 

   

investigations or regulatory scrutiny of our operations or lawsuits filed or threatened against us;

 

   

our ability to implement our business strategy;

 

   

our ability to complete and integrate acquisitions;

 

   

trading volume of our common stock;

 

   

changes in accounting principles;

 

   

the loss of any of our management or key personnel;

 

   

sales of our common stock by us, our executive officers and directors or our stockholders (including our Sponsor or its affiliates) in the future;

 

   

changes in our capital structure, such as future issuances of debt or equity securities;

 

   

short sales, hedging, and other derivative transactions involving our common stock;

 

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economic, political, legal and regulatory factors unrelated to our performance;

 

   

negative trends in global economic conditions, including as a result of the COVID-19 pandemic, or activity levels in our industry;

 

   

other events or factors, including severe weather, natural disasters, those resulting from war, incidents of terrorism, pandemics, or other public health emergencies or external events or responses to these events; and

 

   

overall fluctuations in the U.S. equity markets.

In addition, broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance, and factors beyond our control may cause our stock price to decline rapidly and unexpectedly.

We are a “controlled company” within the meaning of the corporate governance standards of Nasdaq and, as a result, will qualify for, and may rely on, exemptions from certain corporate governance requirements. You may not have the same protections afforded to stockholders of other companies that are subject to such requirements.

Following this offering, our Sponsor will continue to own a majority of the voting power in the Company. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of Nasdaq. A company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” within the meaning of the corporate governance standards of Nasdaq and may elect not to comply with certain corporate governance requirements of Nasdaq, including:

 

   

the requirement that a majority of our board of directors consist of independent directors;

 

   

the requirement that director nominations be made, or recommended to the full board of directors, by its independent directors or by a nominations committee comprised solely of independent directors; and

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

Following this offering, we intend to rely on all of the exemptions listed above. As a result, we will not have a majority of independent directors and our nominating/corporate governance and compensation committees do not consist entirely of independent directors. As a result, our board of directors and those committees will have more directors who do not meet Nasdaq independence standards than they would if those standards were to apply. The independence standards are intended to ensure that directors who meet those standards are free of any conflicting interest that could influence their actions as directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

You will experience an immediate and substantial dilution of the net tangible book value of the shares of common stock you purchase in this offering, and will be subject to further dilution.

The assumed initial public offering price of $21.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, is substantially higher than our net tangible book value per share of common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur immediate dilution of $25.55 in the pro forma as adjusted net tangible book value per share from the price you paid assuming that stock price. In addition, following this offering, purchasers who bought shares from us in this offering will have contributed

 

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10.9% of the total consideration paid to us by our stockholders to purchase 4,760,000 shares of common stock to be sold by us in this offering, in exchange for acquiring approximately 5.1% of our total outstanding shares as of August 31, 2021 after giving effect to this offering.

Further, we may need to raise additional funds in the future to finance our operations or acquire complementary businesses. If we obtain capital in future offerings on a per-share basis that is less than the initial public offering price per share, the value of the price per share of your common stock will likely be reduced. In addition, if we issue additional equity securities in a future offering and you do not participate in such offering, there will effectively be dilution in your percentage ownership interest in us.

We will in the future grant stock options and other awards to certain of our current or future officers, directors, employees, and consultants under additional plans or individual agreements. The grant, exercise, vesting, and/or settlement of these awards, as applicable, will have the effect of diluting your ownership interests in us. We also may issue additional equity securities in connection with other types of transactions, including as part of the purchase price for acquisitions of assets or other companies from time to time or in connection with strategic partnerships or joint ventures, or as incentives to management or other providers of resources to us. Such additional issuances are likely to have a dilutive effect.

Our management team will have immediate and broad discretion over the use of the net proceeds to us from this offering and may not use them effectively.

We currently intend to use the net proceeds from this offering, together with cash on hand, to repay approximately $100.0 million outstanding under our Term loan. We intend to use the remainder, if any, of the net proceeds to us from this offering for general corporate purposes. See “Use of Proceeds.” The expected use of net proceeds to us from this offering represents our intentions based upon our current plans and business conditions, and we may find it necessary or advisable to use the net proceeds to us for other purposes. Accordingly, our management will have broad discretion in the application and specific allocations of the net proceeds to us from this offering. Our stockholders may not agree with the manner in which our management chooses to allocate the net proceeds from this offering and will not have the opportunity as part of their investment decision to assess whether the net proceeds are being used appropriately. The failure by our management to apply these funds effectively could have a material adverse effect on our business, financial condition and results of operation. Pending their use, we may invest the net proceeds to us from this offering in a manner that does not produce value. The decisions made by our management may not result in positive returns on your investment and you will not have an opportunity to evaluate the economic, financial or other information upon which our management bases its decisions.

Sales, or the potential for sales, of a substantial number of shares of our common stock in the public market could cause our stock price to drop significantly.

Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, including sales by our Sponsor, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Of the 93,963,234 outstanding shares, the 14,285,000 shares sold in this offering (or 16,427,750 shares if the underwriters exercise in full their option to purchase additional shares) will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, or Rule 144, including our directors, executive officers and other affiliates (including our Sponsor), may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.” The holders of all of our outstanding common stock prior to this offering are subject to lock-up agreements with the underwriters of this offering that restrict the stockholders’ ability to transfer shares of our common stock

 

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for at least 180 days from the date of this prospectus, subject to waiver by two of Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC and certain other exceptions. The lock-up agreements limit the number of shares of common stock that may be sold immediately following the public offering. Upon the closing of this offering, we will have 93,963,234 outstanding shares of common stock. Subject to certain contractual, volume and Securities Act restrictions (and except to the extent earlier sold pursuant to a waiver or exception), approximately 79,678,234 shares will become eligible for sale upon expiration of the lock-up period, as calculated and described in more detail under “Shares Eligible for Future Sale.” In addition, shares of common stock issued or issuable upon exercise of options as of the expiration of the lock-up period will be eligible for sale at that time, subject to the transfer restrictions set forth under “Executive Compensation—Narrative Disclosure to Summary Compensation Table—2015 LTIP—Option Agreement Amendments.” Sales of stock by these stockholders could have a material adverse effect on the trading price of our common stock.

Moreover, after this offering, we intend to file one or more registration statements on Form S-8 under the Securities Act to register all shares of common stock issued or issuable under our equity incentive plans. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market following the expiration of the applicable lock-up period and transfer restrictions. We expect that the initial registration statement on Form S-8 will cover approximately 20,866,808 shares of our common stock. Further, our amended and restated certificate of incorporation to become effective immediately prior to the consummation of this offering will authorize us to issue shares of common stock and options relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. Any common stock that we issue, including under the 2021 Equity Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase common stock in this offering. In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

Additionally, after this offering, holders of an aggregate of 79,678,234 shares of our common stock will have rights, subject to certain conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock. See “Certain Relationships and Related Party Transactions—Related Party Transactions Entered Into in Connection With This Offering—Stockholders’ Agreement.”

As restrictions on resale end, or if the existing stockholders exercise their registration rights, the market price of our shares of common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of common stock or other securities.

 

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If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our markets, or if they adversely change their recommendations or publish negative reports regarding our business or our common stock, our stock price and trading volume could materially decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our markets or our competitors. We do not have any control over these analysts and we cannot provide any assurance that analysts will cover us or provide favorable coverage. If one or more of the analysts who do cover us downgrade our stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business, or if we fail to meet their expectations for our financial results, the price of our stock could materially decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to materially decline.

We do not currently expect to pay any cash dividends.

We do not currently expect to pay any cash dividends on our common stock for the foreseeable future. Instead, we intend to retain future earnings, if any, for the future operation and expansion of our business. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, cash requirements, financial condition, contractual restrictions, restrictions imposed by applicable laws, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and other factors that our board of directors deems relevant. Because we are a holding company and all of our business is conducted through our subsidiaries, dividends, distributions and other payments from, and cash generated by, our subsidiaries will be our principal sources of cash to fund operations and pay dividends. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries. Under our Credit Agreement, we and our subsidiaries are limited in our ability to pay cash dividends. Our ability to pay dividends may also be similarly restricted by the terms of any future credit agreement or any future debt or preferred equity securities we or our subsidiaries may issue. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking dividend income should not purchase our common stock.

We may issue preferred stock the terms of which could adversely affect the voting power or value of our common stock.

Our amended and restated certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the common stock.

 

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Anti-takeover provisions in our organizational documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws will become effective immediately prior to the consummation of this offering and will contain provisions that may have an anti-takeover effect and may delay, defer or prevent a merger, acquisition, tender offer, takeover attempt, or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders, and may make changes in our management more difficult without the approval of our board of directors. Among other things, these provisions:

 

   

establish a classified board of directors such that only a portion of the board of directors is elected at each annual meeting;

 

   

allow the authorized number of our directors to be determined exclusively by resolution of our board of directors and grant our board of directors the sole power to fill any vacancy on the board of directors;

 

   

limit the ability of stockholders to remove directors without cause if our Sponsor ceases to own 50% or more of the voting power of our common stock;

 

   

eliminate the ability of our stockholders to call special meetings of stockholders, if our Sponsor ceases to own 50% or more of the voting power of our common stock;

 

   

would allow us to authorize the issuance of undesignated preferred stock in connection with a stockholder rights plan or otherwise, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of our common stock;

 

   

prohibit stockholder action by written consent from and after the date on which our Sponsor ceases to beneficially own 50% or more of the voting power of our common stock;

 

   

provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws and that our stockholders may only amend our bylaws with the approval of 66 2/3% or more in voting power of all outstanding shares of our capital stock, if our Sponsor ceases to own 50% or more of the voting power of our common stock;

 

   

restrict the forum for certain litigation against us to Delaware; and

 

   

establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

In addition, while we have opted out of Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”), our amended and restated certificate of incorporation will contain similar provisions providing that we may not engage in certain “business combinations” with any “interested stockholder” for a three-year period following the time that the stockholder became an interested stockholder, unless:

 

   

prior to such time, our board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

 

   

upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding certain shares; or

 

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at or subsequent to that time, the business combination is approved by our board of directors and by the affirmative vote of holders of at least 66 2/3% of our outstanding voting stock that is not owned by the interested stockholder.

Our amended and restated certificate of incorporation will provide that our Sponsor and its affiliates, and any of their respective direct or indirect transferees and any group as to which such persons are a party, do not constitute “interested stockholders” for purposes of this provision. Further, as a Delaware corporation, we are also subject to provisions of Delaware law, which may impair a takeover attempt that our stockholders may find beneficial. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire. See “Description of Capital Stock.”

Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware or the federal district courts of the United States as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain what such stockholders believe to be a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our amended and restated certificate of incorporation will provide that, unless we otherwise consent in writing, (A) (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, other employee or stockholder of us to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws (as either may be amended or restated) or as to which the DGCL confers exclusive jurisdiction on the Court of Chancery of the State of Delaware or (iv) any action asserting a claim governed by the internal affairs doctrine of the law of the State of Delaware shall, to the fullest extent permitted by law, be exclusively brought in the Court of Chancery of the State of Delaware or, if such court does not have subject matter jurisdiction thereof, the federal district court of the State of Delaware; and (B) the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act; however, there is uncertainty as to whether a court would enforce such provision, and investors cannot waive compliance with federal securities laws and the rules and regulations thereunder.

Notwithstanding the foregoing, the exclusive forum provision shall not apply to claims seeking to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts of the United States have exclusive jurisdiction. The choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers, and other employees, although our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management and board of directors. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation.

 

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Taking advantage of the reduced disclosure requirements applicable to “emerging growth companies” may make our common stock less attractive to investors.

The JOBS Act provides that, so long as a company qualifies as an “emerging growth company,” it will, among other things:

 

   

be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that its independent registered public accounting firm provide an attestation report on the effectiveness of its internal control over financial reporting;

 

   

be exempt from the “say on pay” and “say on golden parachute” advisory vote requirements of the Dodd-Frank Act; and

 

   

be exempt from certain disclosure requirements of the Dodd-Frank Act relating to compensation of its executive officers and be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Exchange Act.

We currently intend to take advantage of each of the exemptions described above. In addition, the JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies, meaning that the company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period and, as a result, our financial statements may not be comparable with similarly situated public companies.

We will remain an emerging growth company until the earliest of (i) the last day of the year in which we have total annual gross revenue of $1.07 billion or more; (ii) the last day of the year following the fifth anniversary of the date of the closing of this offering; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission (“SEC”). We cannot predict if investors will find our common stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions would result in less active trading or more volatility in the price of our common stock.

We have identified a material weakness in our internal control over financial reporting. If this material weakness is not remediated, or if we experience additional material weaknesses in the future or otherwise fail in the future to maintain an effective system of internal control over financial reporting or effective disclosure controls and procedures, we may not be able to accurately or timely report our financial condition or results of operations, which may materially adversely affect investor confidence in us and, as a result, the price of our common stock.

We are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, and other federal regulations implementing Section 906 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of internal control over financial reporting. In addition, we will be required to evaluate the effectiveness of our disclosure controls and procedures in our quarterly and annual reports. If we are unable to establish or maintain appropriate internal control over financial reporting or effective disclosure controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis or result in material misstatements in our consolidated financial statements. Although we will be required to disclose changes made in our internal control over financial reporting on a quarterly basis, we will not be required to make our first annual assessment of the effectiveness of our internal control over financial reporting pursuant to Section 404 until the year

 

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following our first annual report required to be filed with the SEC. However, as an emerging growth company, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating.

During the course of preparing for this offering, we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

We lacked a sufficient number of tax professionals with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose tax accounting matters timely and accurately. This material weakness contributed to us not being able to design and maintain appropriate accounting policies, procedures and controls over income and other taxes, including controls over the completeness and accuracy of deferred income taxes, sales tax liabilities, and the global income tax provision, and maintain appropriate segregation of duties within the tax process.

This material weakness resulted in immaterial adjustments to deferred income taxes, accrued expenses, income tax benefit, selling, general and administrative expense and goodwill as of December 31, 2020 and 2019 and for the years then ended. Additionally, this material weakness could result in a misstatement of the aforementioned account balances or disclosures that would result in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected.

We are implementing measures designed to improve our internal control over financial reporting to remediate this material weakness, primarily through a search for tax personnel with the appropriate knowledge, training and experience to appropriately analyze, record and disclose tax accounting matters timely and accurately, and to design and maintain appropriate accounting policies, procedures and controls over income and other taxes, commensurate with our financial reporting requirements. Additionally, we are currently supplementing our resources through the use of a third-party tax advisor and intend to continue utilizing the third-party tax advisor until we have hired sufficient tax personnel. We cannot at this time estimate how long it will take to complete our remediation efforts and we cannot assure you that these measures will be sufficient to remediate the material weakness we have identified or avoid potential future material weaknesses.

To comply with the requirements of being a public company, we have undertaken various actions, and will take additional actions, such as remediating the material weakness described above, implementing additional internal controls and procedures and hiring additional accounting or internal audit staff or consultants. Testing and maintaining internal controls can divert our management’s attention from other matters that are important to the operation of our business. Additionally, when evaluating our internal control over financial reporting, we may identify additional material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. If we identify any additional material weaknesses in our internal control over financial reporting or are unable to remediate the material weakness described above and comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, if our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial

 

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reporting once we are no longer an emerging growth company, or if we are unable to conclude in our quarterly and annual reports that our disclosure controls and procedures are effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources. In addition, if we fail to remediate any material weakness, including the material weakness described above, our financial statements could be inaccurate and we could face restricted access to capital markets.

The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act and Nasdaq, may strain our resources, increase our costs and divert management’s attention, and we may be unable to comply with these requirements in a timely or cost-effective manner.

As a public company, we will incur significant legal, regulatory, finance, accounting, investor relations and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements of the Exchange Act, and the corporate governance standards of the Sarbanes-Oxley Act and Nasdaq. These requirements will place a strain on our management, systems and resources and we will incur significant legal, accounting, insurance and other expenses that we have not incurred as a private company. The Exchange Act will require us to file annual, quarterly and current reports with respect to our business and financial condition within specified time periods and to prepare a proxy statement with respect to our annual meeting of stockholders. The Sarbanes-Oxley Act will require that we maintain effective disclosure controls and procedures and internal controls over financial reporting. Nasdaq will require that we comply with various corporate governance requirements. To maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting and comply with the Exchange Act and Nasdaq requirements, significant resources and management oversight will be required. This may divert management’s attention from other business concerns and lead to significant costs associated with compliance, which could have a material adverse effect on us and the price of our common stock.

The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or its committees or as our executive officers. Advocacy efforts by stockholders and third parties may also prompt even more changes in governance and reporting requirements. We cannot predict or estimate the amount of additional costs we may incur or the timing of these costs. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

General Risks

We may undertake acquisitions or divestitures, which may not be successful, and which could materially adversely affect our business, financial condition and results of operations.

From time to time, we may consider acquisitions, which may not be completed or, if completed, may not be ultimately beneficial to us. We also may consider potential divestitures of businesses from

 

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time to time. We routinely evaluate potential acquisition and divestiture candidates and engage in discussions and negotiations regarding potential acquisitions and divestitures on an ongoing basis; however, even if we execute a definitive agreement, there can be no assurance that we will consummate the transaction within the anticipated closing timeframe, or at all. Moreover, there is significant competition for acquisition and expansion opportunities in our industry.

Acquisitions involve numerous risks, including: (i) failing to properly identify appropriate acquisition targets and to negotiate acceptable terms; (ii) incurring the time and expense associated with identifying and evaluating potential acquisition targets and negotiating potential transactions; (iii) diverting management’s attention from the operation of our existing business; (iv) using inaccurate estimates and judgments to evaluate credit, operations, funding, liquidity, business, management and market risks with respect to the acquisition target or assets; (v) litigation relating to an acquisition, particularly in the context of a publicly held acquisition target, that could require us to incur significant expenses, result in or delay or enjoin the transaction; (vi) failing to properly identify an acquisition target’s significant problems, liabilities or risks; (vii) not receiving required regulatory approvals on the terms expected or such approvals being delayed or restrictively conditional; and (viii) failing to obtain financing on favorable terms, or at all. In addition, in connection with any acquisitions, we must comply with various antitrust requirements. In addition, it is possible that perceived or actual violations of these requirements could give rise to litigation or regulatory enforcement action or result in us not receiving the necessary approvals to complete a desired acquisition.

Furthermore, even if we complete an acquisition, the anticipated benefits from such acquisition may not be achieved unless the operations of the acquired business are integrated in an efficient, cost-effective and timely manner. The integration of any acquired business includes numerous risks, including an acquired business not performing to our expectations, our not integrating it appropriately and failing to realize anticipated synergies and cost savings as a result, and difficulties, inefficiencies or cost overruns in integrating and assimilating the organizational cultures, operations, technologies, products and services of the acquired business with ours and maintaining uniform standards, policies, and procedures across multiple platforms and locations, including for those located outside the United States. This may result in a greater than anticipated increase in the transaction, remediation, and integration costs and could discourage us from entering into acquisitions where the potential for such costs outweigh the perceived benefit. Further, although we conduct due diligence with respect to the business and operations of each of the companies we acquire, we may not have identified all material facts concerning these companies, which could result in unanticipated events or liabilities. The integration of our acquisitions will require substantial attention from management and operating personnel to ensure that the acquisition does not disrupt any existing operations, or affect our reputation or our clients’ opinions and perceptions of our products and services. We may spend time and resources on acquisitions that do not ultimately increase our profitability or that cause loss of, or harm to, relationships with employees and clients. We cannot guarantee that any acquisitions we seek to enter into will be carried out on favorable terms or that the anticipated benefits of any acquisition, investment, or business relationship will materialize as intended or that no unanticipated liabilities will arise.

Divestitures also involve numerous risks, including: (i) failing to properly identify appropriate assets or businesses for divestiture and buyers; (ii) inability to negotiate favorable terms for the divestiture of such assets or businesses; (iii) incurring the time and expense associated with identifying and evaluating potential divestitures and negotiating potential transactions; (iv) management’s attention being diverted from the operation of our existing business, including to provide on-going services to the divested business; (v) encountering difficulties in the separation of operations, products, services or personnel; (vi) retaining future liabilities as a result of contractual indemnity obligations; and (vii) loss of, or damage to our relationships with, any of our key employees, clients, suppliers or other business partners.

 

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We cannot readily predict the timing or size of any future acquisition or divestiture, and there can be no assurance that we will realize any anticipated benefits from any such acquisition or divestiture. If we do not realize any such anticipated benefits, our business, financial condition and results of operations could be materially adversely affected.

If we enter into strategic alliances, partnerships or joint ventures, we may not realize the anticipated strategic goals for any such transactions.

From time to time, we may enter into strategic alliances, partnerships or joint ventures as a means to accelerate our entry into new markets, provide new products or services or enhance our existing capabilities. Entering into strategic alliances, partnerships and joint ventures entails risks, including: (i) difficulties in developing or expanding the business of newly formed alliances, partnerships and joint ventures; (ii) exercising influence over the activities of joint ventures in which we do not have a controlling interest; (iii) potential conflicts with or among our partners; (iv) the possibility that our partners could take action without our approval or prevent us from taking action; and (v) the possibility that our partners become bankrupt or otherwise lack the financial resources to meet their obligations.

In addition, there may be a long negotiation period before we enter into a strategic alliance, partnership or joint venture or a long preparation period before we commence providing products or services or begin earning revenues pursuant to such arrangement. We typically incur significant business development expenses, and management’s attention may be diverted from the operation of our existing business, during the discussion and negotiation period with no guarantee of consummation of the proposed transaction. Even if we succeed in developing a strategic alliance, partnership or joint venture with a new partner, we may not be successful in maintaining the relationship, which may have a material adverse effect on our business, financial condition or results of operations.

We cannot assure you that we will be able to enter into strategic alliances, partnerships or joint ventures on terms that are favorable to us, or at all, or that any strategic alliance, partnership or strategic alliance we have entered into or may enter into will be successful. In particular, these arrangements may not generate the expected number of new clients or engagements or other benefits we seek. Unsuccessful strategic alliances, partnerships or joint ventures could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.

We are exposed to litigation risk.

We are from time to time involved in various litigation matters and claims, including lawsuits regarding employment matters, breach of contract matters, alleged violations of the FCRA and other business and commercial matters. See “Business—Legal Proceedings.” Many aspects of our business, and the businesses of our clients, involve substantial risks of liability. These risks include, among others, claims that we provided to our clients inaccurate or improper information or that we failed to correctly report information to a client. These are typically claims by private plaintiffs, including subjects of our background reports and third parties with which we do business, but can also include regulatory investigations and enforcement proceedings. Many of these matters arise in the United States under the FCRA and other laws of U.S. states focused on privacy and the conduct and content of background reports, and relate to actual or alleged process errors, inclusion of erroneous or impermissible information, or failure to include appropriate information in background reports that we prepare. Since the introduction of the GDPR and the UK GDPR, the market has also witnessed an increase in collective privacy actions in other jurisdictions across Europe and the U.K. Investigations, enforcement actions, claims or proceedings may also arise under other laws addressing privacy and the use of background information such as criminal and credit histories around the world.

 

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Although we carry insurance that may limit our risk of damages in some matters, we may still sustain uncovered losses or losses in excess of available insurance, and we could incur significant legal expenses defending claims, even those without merit. For example, in September 2020 we settled a class action lawsuit alleging violations of the FCRA for $15.0 million, which was covered by our insurers after we met our retention. Additionally, in November 2019, we settled a matter with the Consumer Financial Protection Bureau (the “CFPB”). The CFPB’s allegations generally related to the period from December 2012 to July 2016 and we neither admitted nor denied any of the allegations as part of the settlement. As part of the settlement, we paid redress of $6.0 million to pay certain consumers and paid the CFPB $2.5 million in civil money penalty, neither of which were covered by our insurers. Due to the uncertain nature of the litigation process, it is not possible to predict with certainty the outcome of any particular litigation matter or claim, and we could in the future incur judgments or enter into settlements that could have a material adverse effect on our business, financial condition and results of operations. The ultimate outcome of lawsuits against us may require us to change or cease certain operations and may result in higher operating costs. An adverse resolution of any litigation matter or claim could cause damage to our reputation and could have a material adverse effect on our business, financial condition and results of operations.

We may be subject to securities litigation, which is expensive and could divert management attention.

Our share price may be volatile and, in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could have a material adverse effect on our business, financial condition and results of operations. Any adverse determination in litigation could also subject us to significant liabilities.

Fluctuations in foreign currency exchange rates may materially adversely affect our financial results.

We operate in several different countries outside the United States, most notably the United Kingdom and Canada, and historically, approximately 15–20% of our revenue has been denominated in currencies other than the U.S. dollar. Portions of our expenses, assets and liabilities are denominated in non-U.S. dollar currencies as well. Because our consolidated financial statements are presented in U.S. dollars, we must translate non-U.S. dollar denominated revenues, 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. Accordingly, increases or decreases in the value of the U.S. dollar against other currencies may affect our business, financial condition and results of operations. As we increase the extent of our international operations, such foreign currency exchange rate fluctuations could make it more difficult to detect underlying trends in our business and results of operations, such as our margins and cash flows. Foreign currency exchange rate fluctuations may also adversely impact third-party vendors we rely on for services, which may be passed along to us in the form of price increases. In recent years, external events, such as Brexit, the COVID-19 pandemic, uncertainty regarding actual and potential shifts in U.S. and foreign trade, economic and other policies and the passage of U.S. tax reform legislation, have caused significant volatility in currency exchange rates, especially among the U.S. dollar, the pound sterling and the euro, and these or other external events may continue to cause such volatility.

While we engage in hedging activity to attempt to mitigate currency exchange rate risk with respect to our expenses denominated in the Indian rupee, our hedging activities may not be effective, particularly in the event of inaccurate forecasts of the levels of our Indian rupee-denominated assets and liabilities. Accordingly, if there are adverse movements in the U.S. dollar-Indian rupee exchange

 

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rate, we may suffer significant losses, which would materially adversely affect our financial condition and results of operations.

The United Kingdom’s exit from the EU could have a material adverse effect on our business, financial condition and results of operations.

On January 31, 2020, the United Kingdom formally withdrew from the EU (“Brexit”), entering into a transition period that ended on December 31, 2020. This process is unprecedented in EU history and the effects of Brexit remain uncertain. Although the United Kingdom entered into a trade and cooperation agreement with the EU on December 24, 2020 that provides for, among other things, the free movement of goods between the United Kingdom and the EU, continued legal uncertainty and potentially divergent national laws and regulations in relation to financial laws and regulations, tax and free trade agreements, immigration laws and employment laws may adversely affect economic or market conditions in the United Kingdom, Europe or globally, which could contribute to instability in global financial and foreign exchange markets, including volatility in the value of the British pound, or the euro, which could negatively affect our revenues and the broader economic environment on which our business and industry depend.

The United Kingdom’s departure from the EU and the terms of the future relationship between the United Kingdom and the EU could significantly impact the business environment in which we and our clients operate, increase the costs of conducting business in both the United Kingdom and the EU, impair or prohibit access to EU clients, create challenges in attracting or retaining non-British EU employees and introduce significant new uncertainties with respect to the legal and regulatory requirements to which we and our clients are subject. In particular, Brexit is expected to significantly affect the regulatory landscape in both the United Kingdom and the EU, and may have a material impact on their respective economies, which could have a materially adverse impact on us despite our international client base.

Failure to retain our existing senior management team or the inability to attract and retain qualified personnel could materially adversely affect our ability to operate or grow our business.

The success of our business depends upon the skills, experience and efforts of our executive officers, particularly Joshua Peirez, our Chief Executive Officer and Director, Lou Paglia, our President and Chief Operating Officer and Peter Walker, our Executive Vice President and Chief Financial Officer. There is a risk that any of Messrs. Peirez, Paglia or Walker could leave the Company at any time, subject to certain notice requirements, although each is subject to post-termination restrictive covenants including non-compete covenants, as further described under “Executive Compensation—Summary Compensation Table—Narrative Disclosure to Summary Compensation Table—Employment Agreements.” Although we have invested in succession planning, the loss of key members of our senior management team could nevertheless have a material adverse effect on our business, financial condition and results of operations. Should we lose the services of any member of our senior management team, we would have to conduct a search for a qualified replacement. This search may be prolonged, and we may not be able to locate and hire a qualified replacement.

Our business also depends on our ability to continue to attract, motivate and retain a large number of highly qualified personnel in order to support our clients and achieve business results. There is a limited pool of employees who have the requisite skills, training and education. Identifying, recruiting, training, integrating and retaining qualified personnel requires significant time, expense and attention, and the market for qualified personnel, particularly those with experience in background screening, has become increasingly competitive as an increasing number of companies seek to enhance their positions in the markets we serve. Our inability to attract, retain and motivate personnel

 

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with the requisite skills could impair our ability to develop new products and services, enhance our existing products and services, grow our client base, enter into new markets or manage our business effectively.

Increases in labor costs, potential labor disputes and work stoppages or an inability to hire skilled personnel could materially adversely affect our business.

An increase in labor costs, work stoppages or disruptions at our officers or those of our service providers, or other labor disruptions, could decrease our revenue and increase our expenses. In addition, although our employees are not represented by a union, our labor force may become subject to labor union organizing efforts, which could cause us to incur additional labor costs and increase the related risks that we now face. It is also possible that a union seeking to organize one subset of our employee population could also mount a corporate campaign, resulting in negative publicity or other actions that require attention by our management team and our employees. Negative publicity, work stoppages, or strikes by unions could have a material adverse effect on our business, prospects, financial condition, and results of operations.

The competition for skilled sales and other personnel can be intense in the regions in which our offices are located. A significant increase in the salaries and wages paid in these regions or by competing employers could result in a reduction of our labor force, increases in the salaries and wages that we must pay or both. If we are unable to hire skilled manufacturing, sales and other personnel or retain our existing personnel, our ability to execute our business plan, and our results of operations, would suffer.

Our ability to conduct our business may be materially adversely affected by unforeseen or catastrophic events. In addition, our U.S. and European operations are heavily concentrated in particular areas and may be adversely affected by events in those areas.

We may incur losses as a result of unforeseen or catastrophic events, including fire, natural disasters, extreme weather events, power loss, telecommunications failure, software or hardware malfunctions, theft, cyber-attacks, war or terrorist attacks. In addition, employee misconduct or error could expose us to significant liability, losses, regulatory sanctions and reputational harm. Misconduct or error by employees could include engaging in improperly using confidential information or engaging in improper or unauthorized activities or transactions. These unforeseen or catastrophic events could adversely affect our clients’ levels of business activity and precipitate sudden significant changes in regional and global economic conditions and cycles. Certain of these events also pose significant risks to our employees and our physical facilities and operations around the world, whether the facilities are ours or those of our third-party service providers or clients. If our systems were to fail or be negatively affected as a result of an unforeseen or catastrophic event, our business functions could be interrupted, our ability to make our products and services available to our clients could be impaired and we could lose critical data. If we are unable to develop adequate plans to ensure that our business functions continue to operate during and after an unforeseen or catastrophic event, and successfully execute on those plans should such an event occur, our business, financial condition, results of operations and reputation could be materially harmed.

In addition, although we believe our virtual-first policy has reduced our geographic concentration while it has broadened our exposure to multiple geographies, our U.S. operations are heavily concentrated in the New York metropolitan area and our European operations are heavily concentrated in London, England, Swansea, Wales and Wroclaw, Poland. Any event that affects these geographic areas could particularly affect our ability to operate our business.

 

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If our estimates or judgments relating to our critical accounting policies prove to be incorrect or change significantly, our results of operations could be harmed.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity and the amount of sales and expenses that are not readily apparent from other sources. Our results of operations may be harmed if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors and could result in a decline in our stock price.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. You can generally identify forward-looking statements by our use of forward-looking terminology such as “aim,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “projection,” “seek,” “should,” “will” or “would,” or the negative thereof or other variations thereon or comparable terminology. In particular, statements about the markets in which we operate, including our expectations about market trends, our market opportunity and the growth of our various markets, our expansion into new markets, the size of our total addressable market, market trends, and our expectations, beliefs, plans, strategies, objectives, prospects, assumptions, or future events or performance contained in this prospectus under the headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” are forward-looking statements.

We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in this prospectus under the headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” may cause our actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements, or could affect our share price. Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:

 

   

changes in economic, political and market conditions and the impact of these changes on our clients’ hiring trends;

 

   

the sufficiency of our cash to meet our liquidity needs;

 

   

the possibility of cyberattacks, security vulnerabilities and internet disruptions, including breaches of data security and privacy leaks, data loss and business interruptions;

 

   

our ability to comply with the extensive U.S. and foreign laws, regulations and policies applicable to our industry, and changes in such laws, regulations and policies;

 

   

our compliance with data privacy laws and regulations;

 

   

potential liability for failures to provide accurate information to our clients, which may not be covered, or may be only partially covered, by insurance;

 

   

the possible effects of negative publicity on our reputation and the value of our brand;

 

   

our failure to compete successfully;

 

   

our ability to keep pace with changes in technology and to provide timely enhancements to our products and services;

 

   

the impact of COVID-19 on global markets, economic conditions and the response by governments and third parties;

 

   

our ability to cost-effectively attract new clients and retain our existing clients;

 

   

our ability to grow our Identity-as-a-service offerings;

 

   

our success in new product introductions and adjacent market penetrations;

 

   

our ability to expand into new geographies;

 

   

our ability to pursue strategic mergers and acquisitions;

 

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design defects, errors, failures or delays with our products and services;

 

   

systems failures, interruptions, delays in services, catastrophic events and resulting interruptions;

 

   

our ability to implement our business strategies profitably;

 

   

our ability to retain the services of certain members of our management;

 

   

inadequate protection of our intellectual property;

 

   

our ability to implement, maintain and improve effective internal controls and remediate the material weakness described elsewhere in this prospectus; and

 

   

the other risk factors described under “Risk Factors.”

Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements contained in this prospectus are not guarantees of future performance and our actual results of operations, financial condition, and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements contained in this prospectus. In addition, even if our results of operations, financial condition, and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements contained in this prospectus, they may not be predictive of results or developments in future periods.

Any forward-looking statement that we make in this prospectus speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of shares of our common stock in this offering will be approximately $85.5 million after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $21.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $4.5 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million shares in the number of shares sold in this offering by us, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $19.7 million, assuming an initial public offering price of $21.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

We currently intend to use the net proceeds to us from this offering, together with cash on hand, to repay approximately $100.0 million outstanding under our Term loan. We intend to use the remainder, if any, of the net proceeds to us from this offering for general corporate purposes.

As of June 30, 2021 we had $613.6 million outstanding under the Term loan. Amounts outstanding under the Term loan bear interest under either of the following two rates, elected in advance quarterly by the borrower for periods of either one month, two months, three months or six months: (1) an applicable rate of 2.5% plus a base rate (equal to the greater of (a) the prime rate (b) the federal funds rate plus 1/2 of 1% or (c) the one-month LIBOR plus 1%, subject to a 2% floor); or (2) an applicable rate of 3.5% plus one-month LIBOR which is subject to a 1% floor. Interest on LIBOR borrowings is payable on the last business day of the interest period selected except in the case of a six-month election, in which case it is payable on the last day of the third and sixth month. The interest rate in effect for the Term loan as of June 30, 2021 was 4.5%. For additional information about our Term loan, see “Management’s Discussion and Analysis—Liquidity and Capital Resources—Credit Facility.” Certain of the underwriters and/or their respective affiliates are lenders of the Term loan and, as a result, will receive a portion of the net proceeds from this offering that we intend to allocate to the repayment of such borrowings, on a pro rata basis across all applicable lenders thereunder. See “Underwriting (Conflicts of Interest).”

The expected use of net proceeds to us from this offering represents our intentions based upon our current plans and business conditions, and we may find it necessary or advisable to use the net proceeds to us for other purposes. Accordingly, we will have broad discretion in the application and specific allocations of the net proceeds to us from this offering. Pending their use, we intend to invest the net proceeds to us from this offering in a variety of capital preservation investments, including short- and intermediate-term investments, interest-bearing obligations, investment-grade instruments or securities, government securities, certificates of deposit and money market funds.

We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders in this offering. The selling stockholders will bear the underwriting discount, if any, attributable to their sale of our common stock. See “Principal and Selling Stockholders.”

Some of the Sponsor entities are affiliates of Goldman Sachs & Co. LLC, an underwriter of this offering, beneficially own 78% of our outstanding capital stock prior to the consummation of this

 

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offering and will be selling stockholders in this offering and, as such, will receive in excess of 5% of the net proceeds of this offering. Therefore, Goldman Sachs & Co. LLC is deemed to have a “conflict of interest” under FINRA Rule 5121. Accordingly, this offering is being conducted in compliance with the applicable provisions of FINRA Rule 5121. FINRA Rule 5121 prohibits Goldman Sachs & Co. LLC from making sales to discretionary accounts without the prior written approval of the account holder and requires that a “qualified independent underwriter,” as defined in FINRA Rule 5121, participate in the preparation of the registration statement of which this prospectus forms a part and exercise its usual standards of due diligence with respect thereto. J.P. Morgan Securities LLC is assuming the responsibilities of acting as the “qualified independent underwriter” in this offering and is undertaking the legal responsibilities and liabilities of an underwriter under the Securities Act, which specifically include those inherent in Section 11 of the Securities Act.

 

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DIVIDEND POLICY

We do not currently expect to pay any cash dividends on our common stock for the foreseeable future. Instead, we intend to retain future earnings, if any, for the future operation and expansion of our business. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, cash requirements, financial condition, contractual restrictions, restrictions imposed by applicable laws and other factors that our board of directors may deem relevant. Because our business is conducted through our subsidiaries, dividends, distributions and other payments from, and cash generated by, our subsidiaries will be our principal sources of cash to fund operations and pay dividends. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries. Our ability to pay dividends may also be restricted by the terms of our Credit Agreement and any future credit agreement or any future debt or preferred equity securities of Sterling Check Corp. or its subsidiaries. Accordingly, you may need to sell your shares of our common stock to realize a return on your investment and you may not be able to sell your shares at or above the price you paid for them. See “Risk Factors—Risks Relating to This Offering and Ownership of our Common Stock—We do not currently expect to pay any cash dividends.”

 

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CAPITALIZATION

The following table sets forth the cash and cash equivalents and the total capitalization as of June 30, 2021.

 

   

on an actual basis, after giving effect to the split of our common stock that occurred on September 10, 2021; and

 

   

on an as adjusted basis, after giving effect to (i) the accelerated vesting of all outstanding options under the 2015 Long-Term Equity Incentive Plan, which are expected to vest 100% on this offering, (ii) the forgiveness of promissory notes exchanged for common stock prior to this offering, (iii) the termination of the Fourth Amended and Restated Management Services Agreement in connection with this offering, (iv) deemed compensation expense to us related to an agreement between our stockholder, founder and former chief executive officer, together with the Greenblatt Trusts, and another stockholder and former executive of Sterling, pursuant to which proceeds from the sale of certain shares in this offering by the Greenblatt Trusts will be paid to such former executive in full settlement of obligations between them pursuant to a prior agreement entered into in 2015 in connection with the acquisition of Sterling by our Sponsor, (v) the issuance and sale by us of 4,760,000 shares of our common stock in this offering at an assumed initial public offering price of $21.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and (vi) the application of the net proceeds to us from this offering, together with cash on hand, to repay approximately $100.0 million outstanding under our Term loan, as set forth in “Use of Proceeds.”

The information below is illustrative only, and our cash and cash equivalents and capitalization following the consummation of this offering (including the use of proceeds therefrom) are subject to change based on the actual initial public offering price and the other terms of this offering determined at pricing. You should read this information in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Capital Stock” and other financial information contained in this prospectus.

 

     As of June 30, 2021
     Actual   As Adjusted  
     (in thousands, except share
and per share data)

Cash and cash equivalents

   $ 94,291       $79,786  
  

 

 

 

 

 

 

 

Long-term indebtedness (including current portion)(1)

   $ 606,692     $ 507,813  
  

 

 

 

 

 

 

 

Stockholders’ equity:

    

Common stock, par value $0.01 per share; 1,000,000,000 shares authorized; 88,826,908 shares issued and outstanding, actual; 93,963,234 shares issued and outstanding, as adjusted.

     1       49  

Additional paid-in capital

     774,817       903,191  

Common Stock held in treasury (107,820 shares actual and as adjusted)

     (897     (897)  

Accumulated deficit

     (183,666     (219,953)  

Accumulated other comprehensive income

     1,329       1,329  
  

 

 

 

 

 

 

 

Total stockholders’ equity

     591,584       683,719  
  

 

 

 

 

 

 

 

Total capitalization

   $ 1,198,276       $1,191,532  
  

 

 

 

 

 

 

 

 

(1)

As of June 30, 2021, there was $84.1 million in additional borrowing capacity available under the Revolving Credit Facility. Upon consummation of this offering, the Revolving Credit Facility will automatically increase to $140.0 million. See “Prospectus Summary—Recent Developments.”

 

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Each $1.00 increase (decrease) in the assumed initial public offering price of $21.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the as adjusted amount of each of additional paid-in capital, total stockholders’ equity and total capitalization, in each case by $4.5 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million shares in the number of shares sold in this offering by us, as set forth on the cover page of this prospectus, would increase (decrease) the as adjusted amount of each of additional paid-in capital, total stockholders’ equity and total capitalization, in each case by $19.7 million, assuming an initial public offering price of $21.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares of common stock to be outstanding after this offering is based on 89,203,234 shares of our common stock outstanding as of August 31, 2021 and excludes 9,547,808 shares of common stock issuable upon the exercise of options outstanding under the 2015 Long-Term Incentive Plan, and 9,433,000 shares (which includes approximately 1,972,366 shares of common stock to be issued as restricted stock and approximately 3,916,768 shares of common stock issuable upon the exercise of options at an exercise price equal to the initial public offering price (in each case based on the midpoint of the price range set forth on the cover page of this prospectus and, with respect to the options, the Black Scholes value thereof)) and 1,886,000 shares of common stock reserved for future issuance under the 2021 Equity Plan and ESPP, respectively.

 

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DILUTION

If you purchase any of the shares offered by this prospectus, you will experience dilution to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value (deficit) per share of our common stock immediately after this offering.

Our historical net tangible book value as of June 30, 2021 was $(509.6) million, or $(5.74) per share, after giving effect to the split of our common stock that occurred on September 10, 2021. Historical net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of our common stock. After giving effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $21.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and the application of the net proceeds from this offering as described in “Use of Proceeds,” our pro forma as adjusted net tangible book value as of June 30, 2021 would have been $(418.2) million, or $(4.45) per share. This represents an immediate increase in net tangible book value of $1.19 per share to our existing stockholders and an immediate dilution of $25.45 per share to new investors purchasing shares of common stock in this offering.

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

                 $ 21.00  

Historical net tangible book (deficit) value per unit as of June 30, 2021

   $ (5.74)     

Increase per share attributable to the pro forma adjustments described above

   $ 0.10     
  

 

 

    

Pro forma net tangible book (deficit) value per share as of June 30, 2021

   $ (5.64)     

Increase attributable to new investors in this offering

   $ 1.19     

Pro forma as adjusted net tangible book (deficit) value per share after this offering

                 $ (4.45)  
     

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering

                 $ 25.45  
     

 

 

 

Each $1.00 increase (decrease) in the assumed initial offering price of $21.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by $4,462,500, or $0.05 per share, and the dilution per share of common stock to new investors in this offering by $0.95 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. An increase of 1.0 million shares in the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, would increase the pro forma as adjusted net tangible book value per share by $0.21 and decrease the dilution per share to new investors by $0.21, assuming no change in the assumed initial public offering price and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A decrease of 1.0 million shares in the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, would decrease the pro forma as adjusted net tangible book value per share by $0.21 and increase the dilution per share to new investors by $0.21, assuming an initial public offering price of $21.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes, on a pro forma as adjusted basis, as of June 30, 2021, the differences between the number of shares of common stock purchased or to be purchased from us, the

 

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total consideration paid or to be paid to us and the average price per share paid by existing stockholders or to be paid by new investors purchasing shares of common stock in this offering at an assumed initial public offering price of $21.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average
Price
Per
Share
 
     Number      Percent     Amount      Percent    

 

 

Existing stockholders before this offering

     89,203,234        94.9   $ 813,038,927        89.1   $ 9.11  

New investors participating in this offering

     4,760,000        5.1     99,960,000        10.9     21.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     93,963,234        100.0   $ 912,998,927        100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

Sales by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to 79,678,234, or approximately 84.8% of the total shares of common stock outstanding after this offering, which will increase the number of shares held by new investors to 14,285,000, or approximately 15.2% of the total shares of common stock outstanding after this offering.

Each $1.00 increase (decrease) in the assumed initial public offering price of $21.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) total consideration paid by new investors by $4.5 million and total consideration paid by all stockholders by $4.5 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. An increase (decrease) of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) total consideration paid by new investors by $19.7 million and total consideration paid by all stockholders by $19.7 million, assuming the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The dilution information discussed above is illustrative only and may change based on the actual initial public offering price and other terms of this offering. In addition, to the extent we issue any additional stock options or any outstanding stock options are exercised, or if we issue any other securities or convertible debt in the future, investors will experience further dilution.

The number of shares of common stock to be outstanding after this offering is based on 89,203,234 shares of our common stock outstanding as of August 31, 2021 and excludes 9,547,808 shares of common stock issuable upon the exercise of options outstanding under the 2015 Long-Term Incentive Plan, and 9,433,000 and 1,886,000 shares of common stock reserved for future issuance under the 2021 Equity Plan and ESPP, respectively.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the sections titled “Basis of Presentation” and our consolidated financial statements and related notes and other information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results described in or implied by the forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this prospectus.

Overview

We are a leading global provider of technology-enabled background and identity verification services. We provide the foundation of trust and safety our clients need to create great environments for their most essential resource—people. We offer a comprehensive hiring and risk management solution that begins with identity verification, followed by criminal background screening, credential verification, drug and health screening, processing of employee documentation required for onboarding and ongoing risk monitoring. Our services are delivered through our purpose-built, proprietary, cloud-based technology platform that empowers organizations with real-time and data-driven insights to conduct and manage their employment screening programs efficiently and effectively. Our interfaces are supported by our powerful artificial intelligence (“AI”)-driven fulfillment platform, which leverages more than 3,300 automation integrations, including Application Programming Interfaces (“APIs”) and Robotic Process Automation (“RPA”) bots. This enables 90% of U.S. criminal searches to be automated and allows us to complete 70% of U.S. criminal searches within the first hour and 90% within the first day. As of December 31, 2020, 95% of our revenue is processed through platforms hosted in the cloud, which allows us to consistently maintain 99.9% platform availability while being prepared to scale into the future.

Our client-centric approach underpins everything we do. We serve a diverse and global client base in a wide range of industries, such as healthcare, gig economy, financial and business services, industrials, retail, contingent, technology, media and entertainment, transportation and logistics, hospitality, education and government. To serve these differing needs, our sales and support delivery model is organized around industry-specific teams (“Verticals”) and geographic markets (“Regions”). Our clients face a dynamic and rapidly evolving global labor market with increasing complexity and regulatory requirements. As a result, we believe our solutions are mission-critical to their core human resources, risk management and compliance functions. During the twelve months ended June 30, 2021, we completed over 75 million searches for over 40,000 clients, including over 50% of the Fortune 100 and over 45% of the Fortune 500. We believe the combination of our deep market expertise from our sales and support combined with the flexibility of our proprietary technology platform enable us to deliver industry-relevant, highly specialized solutions to our clients in a scalable manner, driving growth and differentiating us from our competitors.

Trends and Other Factors Affecting Our Performance

Macroeconomic and Job Environment

Our business is impacted by the overall economic environment and our clients’ hiring volumes. Despite fluctuations in the macroeconomic environment, we have benefited recently from a number of key demand drivers, many of which increase the need for more flexible, comprehensive screening and hiring solutions.

 

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The American gig economy and contingent workforce accounts for a large and growing proportion of the U.S. workforce. As the gig economy caters to clients in a very direct and personal way (e.g., rideshare, goods delivery, household services), safe and effective background screening capabilities have become critical. In addition, generational and structural shifts in the workforce have led to increasing voluntary employee churn, particularly with younger workers. The ongoing structural shift from in-office to remote work further reduces the historical geographic matching challenge employers and employees faced, further reducing switching costs for employees and expanding talent pools for employers. Further, the proliferation of personal data has exposed many identities to risk of exposure and theft, driving the need for identity verification. Verifying identity is a powerful tool that employers can use to help ensure that their candidates and workers are who they claim to be, and that fraudulent data is not used during the hiring and onboarding process. As false claims within job applications are an area of growing concern for employers, our clients use our background and identification verification services to mitigate reputational risks.

Background screening is also gaining broader adoption outside the U.S. Globally, companies are consistently competing for the best talent, regardless of location, and are therefore putting greater emphasis on reducing time-to-hire in a compliant manner as well as creating a positive onboarding experience for the candidate. Additionally, the international expansion of U.S.-based global companies and their desire to offer centralized and comparable hiring practices has introduced the benefits of background screening to foreign markets. Our ability to navigate the complexities of international background checks and verifying foreign credentials drives demand for our products and services.

Our clients are increasingly utilizing ongoing post-hire screening. This allows for greater mobility and safety for remote, onsite and contingent jobs and also ensures prompt risk warnings on any changes to an employee’s profile, including any criminal activity, drug use or health changes and compliance with on-going certification and licensing requirements, amongst others. This has further accelerated demand for our screening products and services.

New Product and Service Development

Our success depends on our ability to develop new products and services and introduce technological enhancements for our current products and services that meet the demands of existing and new clients. We have a robust new product roadmap focused on enhancing our ability to address the constantly evolving needs of our clients and their candidates.

As part of our continued evolution, in early 2019, we launched Project Ignite, a three-phase strategic investment initiative to create an enterprise-class global platform. We are already benefiting from the delivery of our new client and candidate interfaces, scalable cloud-based infrastructure for our global and local production platforms and an improved security environment through new business wins, improved client retention and the ability to launch products rapidly to meet immediate client needs, as we did with our full suite of COVID-19 testing products in 2020. The remaining investment, which we expect to complete in 2022, will migrate our corporate technological infrastructure to the cloud and unify our clients onto a single global production platform. Over the long term, we expect these investments to further enhance our margins, improve time to market as we build once and deploy globally and allow us to increase innovation. We intend to continue to invest in developing industry-first solutions, further innovating in our existing Verticals as well as pursuing adjacent market opportunities that leverage our existing technology platform. We plan to pursue new and underpenetrated adjacent market opportunities, including talent assessment, reference checking, onboarding and investigative due diligence.

 

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Clients

Our results of operations depend on our ability to retain existing clients, offer new products and services to existing clients, attract new clients and maintain a diverse client base. We serve the background and identity verification services needs of more than 40,000 clients. Our client base is diversified in size of client and industry and includes over 50% of the Fortune 100, over 45% of the Fortune 500 and numerous small- and mid-sized business (“SMB”) clients across the world. We have minimal client concentration with no client accounting for more than 5% of revenue, and our top 25 clients accounting for less than 30% of revenue. We serve the healthcare, gig, financial and business services, industrials, retail, contingent, technology, media and entertainment, transportation and logistics, hospitality, education and government industries. We employ an operating model organized by Vertical and Region that produces differentiated end-market insights and allows us to tailor solutions to meet the needs of each industry we serve.

A majority of our U.S. enterprise client contracts are exclusive to Sterling or require Sterling to be used as the primary provider. Additionally, they are typically multi-year agreements with automatic renewal terms, no termination for convenience clauses and set pricing with Sterling’s right to increase prices upon notice. Our success is driven by a competitive service offering of fast, reliable, and accurate screening information delivered on a cost-effective basis. Additionally, our offerings are tightly integrated with our clients’ applicant tracking systems (“ATS”) and human capital management (“HCM”) systems, further cementing our services into our clients’ daily HR workflows. Taken together, these factors have yielded strong client relationships with an average tenure of nine years across our top 100 clients based on 2019 and 2020 total revenue.

Our ability to retain our existing clients and attract new clients will depend on our ability to continue to deliver superior client service and on the quality of the products and services that we provide, including the accuracy and speed of the background checks that we perform and the protection of the data we collect. Our gross retention rate in 2018, 2019 and 2020 was 88%, 91% and 94%, respectively. Our gross retention rate in 2018 and 2019 reflected the loss of two of our top five clients in 2018, prior to the formation of our new management team, investment in our cloud-based technology platform, and verticalization of the business. For the six months ended June 30, 2021, our gross retention rate was 96% as compared to 93% for the six months ended June 30, 2020, reflecting the positive impact of our strategic initiatives.

Regulatory Environment

Our business is subject to extensive regulations in the U.S. and internationally, which may expose us to significant regulatory risk and cause additional legal costs to ensure compliance. See “Business—Regulation.” We are subject to a number of laws and regulations regarding protection of the security and privacy of certain healthcare and personal information. While the overarching principles of security and privacy laws and regulations are similar across geographies, the specific laws within each region are not uniform and are often evolving, placing increasingly complicated operational requirements on our business.

However, under certain circumstances, regulation may increase demand for our products and services, and we believe we are well positioned to benefit from any potential increased screenings due to regulatory changes as clients seek products and services that meet regulatory requirements and solutions that help them comply with their regulatory obligations. A growing number of laws and regulations has led to greater complexities and potential legal liabilities related to hiring and workforce management policies that are increasingly difficult to navigate for employers. In response, our clients are increasing their focus on compliance functions to ensure they are meeting these changing legal and regulatory demands.

 

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Competitive Environment

The market for global background and identity verification services is highly fragmented and competitive. To our knowledge, no single private or public firm possesses a market share of greater than 10%. We compete with a diverse group of screening companies, including global full-suite players characterized by their global scale and enterprise offerings; mid-tier players that tend to focus on a particular geographic region, industry or product line; and small and independently-owned background screening players that typically serve SMBs. It is also possible that new competitors or alliances or consolidation among competitors may emerge and significantly increase competition. We expect our market to remain highly competitive.

We believe that reporting accurate information and maintaining security of sensitive information are two fundamental requirements to compete successfully as a reputable background screening provider. We also compete on the basis of a number of factors, including: the technology-enabled, ease-of-use, level of functionality and end-to-end efficiency of our solution; our ability to integrate with client systems and major software applications; the breadth and geographical reach of our service offerings; the speed of our screening results; pricing and return on investment for our clients; and our successful track record and reference base with similarly situated companies. See “Business—Competition” for more detail on our competitors.

Technology and Cybersecurity Environment

We operate in industries that are subject to rapid technological advances and changing client needs and preferences. In order to remain competitive and responsive to client demands, we continually upgrade, enhance, and expand our security, technology, products and services. If we experience cyber-threats and attempted security breaches or fail to respond successfully to technology challenges and client needs and preferences, the demand for our products and services may diminish.

Foreign Currency Exchange Rate Environment

We earn revenues, pay expenses, hold assets and incur liabilities in currencies other than the U.S. dollar. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations from period to period. In particular, fluctuations in exchange rates for non-U.S. dollar currencies may reduce the U.S. dollar value of revenues, earnings and cash flows we receive from non-U.S. markets, increase our operating expenses (as measured in U.S. dollars) in those markets, negatively impact our competitiveness in those markets or otherwise adversely impact our results of operations or financial condition. Key currencies affecting our results of operations at this time are the Canadian dollar (CAD), Euro (EUR), British pound (GBP), Australian dollar (AUD), Indian rupee (INR) and Philippine peso (PHP). As we expand into other markets, other currencies may become relevant. Future fluctuations of foreign currency exchange rates and their impact on our results of operations and financial condition are inherently uncertain. As we continue to pursue growth of our global operations, these fluctuations may be material. See “—Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency and Derivative Risk.”

Impact of the COVID-19 Pandemic

Since the onset of the COVID-19 pandemic, we have been focused on keeping our employees safe and maintaining our clients’ uninterrupted access to our services. We have implemented a series of measures to protect the health and safety of our employees. The global impact of the outbreak has continued to evolve rapidly. Many countries reacted by instituting quarantines and restrictions on travel and limiting operations of non-essential businesses. Such actions created disruption in global supply chains, increased rates of unemployment and adversely impacted many industries. While some

 

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governmentally and institutionally mandated restrictions and limitations have been relaxed as local populations have been vaccinated or the outbreak has locally subsided, the outbreak has continued to spread globally and the COVID-19 virus has mutated into new strains. The COVID-19 pandemic could have a continued adverse impact on economic and market conditions, and the full extent of the impact and duration of the COVID-19 pandemic will depend on future developments, including, among other factors, spread of the outbreak and the success of vaccination programs, along with related travel advisories, quarantines and restrictions, the recovery times of disrupted supply chains and industries, the impact of labor market interruptions, the impact of government interventions, and uncertainty with respect to the duration of the global economic slowdown.

As the COVID-19 pandemic continues, it may also have the effect of heightening many of the risks described in “Risk Factors” of this prospectus, including, but not limited to, those relating to changes in economic, political, social and market conditions; systems failures, interruptions, delays in services, cybersecurity incidents, unforeseen or catastrophic events and any resulting interruptions; our international operations; and our dependence on our senior management team and other qualified personnel.

Operational Enablement

In February 2020, we set up a COVID-19 Business Continuity Planning and Crisis Management Task force led by our Chief Risk Officer. By mid-March 2020, we had successfully executed a virtual operating model and nearly all of our employees around the globe were working remotely. We have continued to be successful in executing a virtual-first strategy, as a result of which most of our employees have continued to work remotely. Operating in a virtual model has required us to hire employees remotely, train them virtually and expand our network capabilities.

Revenue and Sales Generation

Our financial performance in 2020 was impacted by the general economic downturn experienced as a result of the COVID-19 pandemic. In response to the COVID-19 pandemic, many of our clients froze headcount, furloughed and terminated employees, deferred hiring and partially or completely shut down their business operations and as a result, we experienced reduced demand for our products and services, particularly in industries impacted severely by the COVID-19 pandemic such as brick-and-mortar retail, entertainment, and hospitality. However, we saw increased demand for our products and services in industries such as healthcare and gig, both in the U.S. and internationally, which we believe is attributable to changing consumer behavior. Our lack of industry concentration with a highly diversified client base provided a natural hedge against industry-specific effects of the COVID-19 pandemic. Additionally, due to our increased investment in automation, we were able to fulfill searches in at least 98% of U.S. jurisdictions throughout the COVID-19 pandemic, while certain competitors struggled to operate. Beginning in the third quarter of 2020, as shelter-in-place policies were relaxed, businesses began to reopen and general economic conditions began to improve, we experienced an increase in the demand for our products and services. This increase in demand continued through the end of 2020 with the business moving into year over year revenue growth for November and December. In June 2020, we expanded our services to include COVID-19 testing and are pursuing new opportunities in vaccination tracking and antibody testing for our clients, which has resulted in an increase in demand for our services.

Cost Optimization and Cash Management

Beginning in March 2020, as a result of the COVID-19 pandemic, we implemented robust cost reduction measures across the organization, reducing selling, general and administrative expenses. We recognized this as an opportunity to implement strategic structural changes to improve operating

 

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leverage and accelerate the modernization of our technological infrastructure. We moved to a virtual-first strategy, closed or reduced the size of eight offices globally, began reducing our data center footprint to prioritize moving our revenue to platforms hosted in the cloud, and streamlined our sales and operations organization for greater operational efficiency. We derived additional cost savings from reducing variable spending, such as bonus expense, lower commissions, and lower marketing, travel, and entertainment expenses due to business performance being impacted by the COVID-19 pandemic. During the three months ended June 30, 2020, we incurred $1.3 million in incremental costs as we were unable to right-size our fulfillment organization due to a mandate by the Maharashtra state government that prohibited employers from terminating any local employees until July 2020.

On March 27, 2020, the U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits the deferral of employer taxes. We chose to avail ourselves of this provision, resulting in the deferral of $2.7 million of employer taxes from 2020, payable in 2021 and 2022. We did not participate in any other benefits of the CARES Act or in any other government programs globally related to the COVID-19 pandemic.

In March 2020, we drew down $83.8 million from our revolving line of credit as a liquidity precaution due to the uncertainty of a credit crisis in the macroeconomic environment as a result of the COVID-19 pandemic. However, we repaid this amount in full in May 2020, once we had sufficiently established there was no macroeconomic ongoing credit concern.

Components of our Results of Operations

The following discussion summarizes the key components of our consolidated statements of operations. We have one operating and reporting segment.

Revenues

We generate revenue by providing background and identity verification services to our clients. We have an attractive business model underpinned by stable and highly recurring transactional revenues, significant operating leverage and low capital requirements that contribute to strong cash flow generation. We recognize revenue under Accounting Standard Codification (“ASC”) Topic 606 “Revenue from Contracts with Customers” (“ASC 606”). Under ASC 606, we recognize revenue when control of the promised goods or services is transferred to clients, generally at a point in time, in an amount that reflects the consideration that we are entitled to for those goods or services. A majority of our U.S. enterprise client contracts are exclusive to Sterling or require Sterling to be used as the primary provider. Additionally, they are typically multi-year agreements with automatic renewal terms, no termination for convenience clauses and set pricing with Sterling’s right to increase prices upon notice. The strength of our contracts combined with our high levels of client retention results in a high degree of revenue visibility.

Our revenue drivers are acquiring new clients (which we measure by new client growth, calculated as discussed in the following paragraph), retaining existing clients (which we measure by gross retention rate, calculated as discussed in the following paragraph), and growing our existing client relationships through upselling, cross-selling, and organic and inorganic growth in our client’s operations that lead to an increase in hiring (which we measure by base growth, calculated as discussed in the following paragraph).

New client growth for the relevant period is calculated as revenues from clients that are in the first twelve months of billing with Sterling divided by total revenues from the prior period, expressed as a percentage. Base growth is defined as growth in revenues in the current period, from clients that have

 

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been billing with us for longer than twelve calendar months divided by total revenues from the prior period, expressed as a percentage. Gross retention rate is a percentage, the numerator of which is prior period revenues less the revenue impact from accounts considered lost and the denominator is prior period revenues. The revenue impact is calculated as revenue decline of lost accounts in the relevant period from the prior period for the months after they were considered lost. Therefore, the attrition impact of clients lost in the current year may be partially captured in both the current and following period’s retention rates depending on what point during the period they are lost. Our gross retention rate does not factor in revenue impact, whether growth or decline, attributable to existing clients or the incremental revenue impact of new clients. The calculations of our growth drivers exclude our APAC revenues which account for less than 6% of annual revenues in the periods presented.

In addition to organic growth through the drivers mentioned above, we may from time to time consider acquisitions that drive growth in our business. In those instances, inorganic growth will refer to the revenue from acquisitions for the twelve months following an acquisition. Any incremental revenue generation thereafter will be considered organic growth.

Our revenues come from the following services which are sold as a bundle or individually, with revenue recognized at the time of delivery of background screening reports.

 

   

Identity Verification—Leveraging innovative technologies in fingerprinting, facial recognition and ID validation to verify that candidates are who they say they are.

 

   

Background Checks—County, state, and federal criminal checks fulfilled through proprietary automation technology enabling global criminal screening capabilities in over 240 countries and territories. Other services include credit checks, civil checks, motor vehicle registration confirmation, and social media checks.

 

   

Credential Verification—Thorough employment and education verification services, and licensing certification backed by a powerful fulfillment engine.

 

   

Drug and Health Screening—Comprehensive, accurate, and fast drug and health screening services through a network of over 15,000 U.S. Department of Transportation (“DOT”)-compliant collection sites.

 

   

Onboarding—Custom forms including I-9 and eVerify employment eligibility, tax withholding forms and Equal Employment Opportunity disclosure forms, with built-in compliance and dynamic validation.

 

   

Post-hire Monitoring—Continuous screening allowing for greater mobility and safety for remote, onsite and contingent jobs and also ensuring prompt risk warnings on any changes to an employee’s profile.

Operating Expenses

Our cost structure is flexible and provides us with operational leverage to be able to effectively adapt to changing client needs and broader economic events. Additionally, in 2020, we implemented strategic structural changes in our business to improve operating leverage and accelerate modernizing our technological infrastructure including leveraging robotics process automation. We moved to a virtual-first strategy and closed or reduced the size of eight offices globally and began reducing our data center footprint as we executed moving our revenue to the cloud, and streamlined our sales and operations organization for greater operational efficiency. In any given period, operating expenses are driven by the amount of revenue, mix of clients and products, and impact of automation, productivity, and procurement initiatives. While we expect operating expenses to increase in absolute dollars to support our continued growth, we believe that operating expenses will decline gradually as a percentage of total revenues in the future as our business grows and our operating scale continues to improve.

 

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Operating expenses include the following costs:

Cost of Revenues

Cost of revenues includes costs related to delivery of services and includes third-party vendor costs associated with acquisition of data and to a lesser extent, costs related to our onshore and offshore fulfillment teams and facilities. Our ability to grow profitably depends on our ability to manage our cost structure. Our costs are affected by third-party costs including government fees and data vendor costs, as these third parties have discretion to adjust pricing.

Third-party data costs include amounts paid to third parties for access to government records, other third-party data and services, as well as costs related to our court runner network. Third-party cost of services are largely variable in nature. Where applicable, these are typically invoiced to our clients as direct pass-through costs. Additional vendor costs are third-party costs for robotics process automation related to fulfillment, and third-party costs related to hosting our fulfillment platforms in the cloud. Cost of services also includes salaries and benefits expense for personnel involved in the processing and fulfilment of our screening products and solutions, as well as our client care organization, and facilities costs for our onshore and offshore fulfillment centers. We do not allocate depreciation and amortization to cost of services.

Corporate Technology and Production Systems

Included in this line item are costs related to maintaining our corporate information technology infrastructure and non-capitalizable costs to develop and maintain our production systems.

Corporate information technology expenses consist of personnel costs supporting internal operations such as information technology support and the maintenance of our information security and business continuity functions. Also included are third-party costs including cloud computing costs that support our corporate internal systems, software licensing and maintenance, telecommunications and other technology infrastructure costs.

Production systems costs consist of non-capitalizable personnel costs including contractor costs incurred for the development of platform and product initiatives, and production support and maintenance. Platform and product initiatives facilitate the development of our technology platform and the launch of new screening products. Production support and maintenance includes costs to support and maintain the technology underlying our existing screening products, and to enhance the ease of use for our cloud applications. Certain personnel costs related to new products and features are capitalized and amortization of these capitalized costs is included in the depreciation and amortization line item.

Included within Corporate technology and production systems are non-capitalizable production system and corporate information technology expenses related to Project Ignite, a three-phase strategic investment initiative. Phase one of Project Ignite modernized client and candidate experiences and is complete. Phase two of Project Ignite focused on decommissioning our on-premises data centers and migrating our production systems and corporate information technological infrastructure to a managed service provider in the cloud. As of June 30, 2021, we have completed phase two related to the migration of our production and fulfillment systems to the cloud, and as a result, 95% of our revenue is processed through platforms hosted in the cloud. The remaining expense to complete phase two is the decommissioning of our on-premises data centers for our internal corporate technology infrastructure and migration to the cloud. This final component will be completed over the next twelve months. Phase three of Project Ignite is decommissioning of platforms purchased over the prior ten years and the migration of the clients to one global platform. This third and final phase, which we expect to complete in 2022, will unify our clients onto a single global platform. The future costs related to completing these initiatives will be included in our Corporate technology and production systems expense.

 

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Selling, General and Administrative

Selling expenses consist of personnel costs, travel expenses, and other expenses for our client success, sales and marketing teams. Additionally, selling expenses include the cost of marketing and promotional events, corporate communications, and other brand-building activities. General and administrative expenses consist of personnel and related expenses for human resources, legal and compliance, finance, global shared services, and executives. Additional costs include professional fees, stock-based compensation, insurance premiums, and other corporate expenses.

We expect our selling, general, and administrative expenses to increase in the future, primarily as a result of additional public company related reporting and compliance costs. In the near term, as a result of performance-based and time-based options that are expected to vest in connection with this offering, our reassessment of fair value of equity awards granted from February 2021 through April 2021 described below under “—Critical Accounting Policies and Estimates—Pre-IPO Valuation of Equity” and the forgiveness of promissory notes exchanged for common stock, we expect to incur approximately $25.1 million of non-cash stock-based compensation expense in the third quarter of 2021. In addition, we will be deemed to incur approximately $14.0 million of non-cash compensation expense in the third quarter of 2021 relating to an agreement between our stockholder, founder and former chief executive officer, together with the Greenblatt Trusts, and another stockholder and former executive of Sterling, pursuant to which proceeds from the sale of certain shares in this offering by the Greenblatt Trusts will be paid to such former executive in full settlement of obligations between them pursuant to a prior agreement entered into in 2015 in connection with the acquisition of Sterling by our Sponsor. The withholding and payroll taxes to be paid by us that are associated with this payment between our stockholders will be funded entirely by the Greenblatt Trusts and there will be no cash impact to us from this arrangement.

We expect the non-cash stock-based compensation expense associated with the special one-time bonus grants in connection with this offering of options and restricted stock under our 2021 Equity Plan to certain members of our senior management team and non-employee directors to be between approximately $36.5 million and $49.7 million, which will be incremental to our ongoing stock-based compensation expense. This stock-based compensation expense will be finalized upon the pricing of this offering and is expected to be expensed beginning in the third quarter of 2021 and continuing over the following four years. For additional information, please see “Executive Compensation—Narrative Disclosure to Summary Compensation Table—2021 Equity Plan Awards—Special IPO Transaction Bonus Grants.”

Over the long term, we expect our selling, general, and administrative expenses to decrease as a percentage of our revenue as we leverage our past investments.

Depreciation and Amortization

Definite-lived intangible assets consist of intangibles acquired through acquisition and the costs of developing internal-use software. They are amortized using a straight-line basis over their estimated useful lives except for client lists which use an accelerated method of amortization. The costs of developing internal-use software are capitalized during the application development stage. Amortization commences when the software is placed into service and is computed using the straight-line method over the useful life of the underlying software of three years.

Depreciation is computed on the straight-line basis over the estimated useful life of our property and equipment assets, generally three to five years or, for leasehold improvements, the shorter of seven years or the term of the lease.

 

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Impairment of Long-Lived Assets

Long-lived assets, such as property, equipment and capitalized internal use software subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, such as (i) a significant adverse change in the extent or manner in which it is being used or in its physical condition, (ii) a significant adverse change in legal factors or in business climate that could affect its value, or (iii) a current-period operation or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with its use. An asset is considered impaired if the carrying amount exceeds the undiscounted future net cash flows the asset is expected to generate. An impairment charge is recognized for the amount by which the carrying amount of the assets exceeds its fair value. The adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated or amortized over the remaining useful life of that asset. Assets held for sale are reported at the lower of the carrying amount or fair value, less selling costs.

Interest Expense, Net

Interest expense consists of interest and the amortization discount on the Term loan (as defined under “—Liquidity and Capital Resources—Credit Facility.”

Loss on Interest Rate Swap

Loss on interest rate swap consists of realized and unrealized gains and losses on our interest rate swaps, which we entered into to reduce our exposure to variability in expected future cash flows on the Term loan, which bears interest at a variable rate. Unrealized gains and losses result from changes in the fair value of the swaps and realized gains and losses reflect the amounts payable or receivable between the fixed rate on the swap and LIBOR. Our interest rate swaps expire in June 2022, and do not qualify for hedge accounting treatment.

Income Tax (Benefit) Expense

Income tax (benefit) expense consists of domestic and foreign corporate income taxes related to earning from our sale of services, with statutory tax rates that differ by jurisdiction. We expect the income earned by our international entities to grow over time as a percentage of total income, which may impact our effective income tax rate. However, our effective tax rate will be affected by many other factors including changes in tax laws, regulations or rates, new interpretations of existing laws or regulations, shifts in the allocation of income earned throughout the world, and changes in overall levels of income before tax. The computation of the provision for or benefit from income taxes for interim periods is determined by applying the estimated annual effective tax rate to year-to-date (loss) income before tax and adjusting for discrete tax items recorded in the period, if any.

 

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Results of Operations

Year Ended December 31, 2019 compared to the Year Ended December 31, 2020

The following table sets forth certain historical consolidated financial information for the year ended December 31, 2019 and compared to the year ended December 31, 2020.

 

     Year Ended
December 31,
    Increase/
(Decrease)
 
     2019     2020     $     %  
     (dollars in thousands, except per share amounts)  

Revenues

   $ 497,116     $ 454,053     $ (43,063     (8.7 )% 

Cost of revenues (exclusive of depreciation and amortization below)

     221,347       217,310       (4,037     (1.8 )% 

Corporate technology and production systems

     44,923       44,296       (627     (1.4 )% 

Selling, general and administrative

     147,198       122,554       (24,644     (16.7 )% 

Depreciation and amortization

     93,802       91,199       (2,603     (2.8 )% 

Impairments of long-lived assets

     3,220       1,797       (1,423     (44.2 )% 

Total operating expenses

     510,490       477,156       (33,333     (6.5 )% 

Operating loss

     (13,374     (23,103     (9,729     72.7

Interest expense, net

     39,316       32,947       (6,369     (16.2 )% 

Loss on interest rate swap

     7,324       9,451       2,127       29.0

Other income

     (1,529     (1,646     (117     7.7

Total other expenses, net

     45,111       40,752       (4,359     (9.7 )% 

Loss before income taxes

     (58,485     (63,855     (5,370     9.2

Income tax benefit

     (11,803     (11,562     241       (2.0 )% 

Net loss

   $ (46,682   $ (52,293   $ (5,611     12.0

Net Loss Margin

     (9.4 )%      (11.5 )%            (2.1 )% 

Net loss per share

   $ (0.53   $ (0.59   $ (0.06     11.3

Revenues

Revenues decreased by 8.7%, or $43.1 million, from $497.1 million for the year ended December 31, 2019 to $454.1 million for the year ended December 31, 2020. This was driven by a decline in demand beginning mid-March 2020, due to the impact of the global COVID-19 pandemic as some industry Verticals such as brick-and-mortar retail, travel, entertainment and hospitality, financial services, manufacturing and industrials were particularly impacted by the COVID-19 pandemic. However, this decline was partially offset by higher demand in the U.S. healthcare and U.S. and Europe, the Middle East and Africa (“EMEA”) gig businesses. Changing consumer behavior, consumer demand for healthcare services as well as increased at-home delivery of goods led to an increase in hiring in these sectors, particularly in the second half of 2020. In 2020 we experienced approximately 7% new client growth and an approximately 9% decline in base growth due to the COVID-19 pandemic. Our gross retention rate for the year ended December 31, 2019 was 91% compared to 94% for the year ended December 31, 2020. Pricing was relatively stable across the periods and not meaningful to the changes in revenues.

We started 2020 with 12.6% year over year revenue growth in the first two months and began experiencing the impact of the COVID-19 pandemic in the latter half of March 2020. Overall, revenue for the three months ended March 31, 2020 was 8.0% higher than revenue for the three months ended March 31, 2019. We experienced the most significant negative impact of the COVID-19 pandemic during the second quarter of 2020 with revenue approximately 33.1% lower than the corresponding period in 2019. As the local shelter-in-place orders began lifting, the business began experiencing some recovery in the third quarter of 2020 where revenue was approximately 11.4% lower than the corresponding period in 2019. The business moved into year over year revenue growth of approximately 5.8% for the fourth quarter of 2020 as compared to the fourth quarter of 2019, driven by a strong December 2020.

 

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Cost of Revenues

Cost of revenues decreased by 1.8%, or $4.0 million, from $221.3 million for the year ended December 31, 2019 to $217.3 million for the year ended December 31, 2020. This was driven by a $19.2 million reduction due to lower volume, partially offset by $12.5 million due to a change in the mix of business and $1.3 million in COVID-19 pandemic related costs, as we were temporarily unable to right-size our fulfillment team in India due to a mandate by the Maharashtra state government which prohibited termination of employees. The change in mix of business was driven by a temporary decrease in revenue from some of our higher-margin industry Verticals that were most severely impacted by the COVID-19 pandemic.

Cost of revenues as a percentage of revenues increased by 333 basis points from 44.5% for the year ended December 31, 2019 to 47.9% for the year ended December 31, 2020 due to a change in mix of business as some of our higher-margin industry Verticals were unfavorably impacted by the effects of the COVID-19 pandemic as well as increased hosting costs for cloud-based infrastructure for our platforms, including improvements to the security environment.

Corporate Technology and Production Systems

Corporate technology and production systems expenses decreased by 1.4%, or $0.6 million, from $44.9 million for the year ended December 31, 2019 to $44.3 million for the year ended December 31, 2020. Included in this line item are costs related to maintaining our corporate information technology infrastructure and non-capitalizable costs to develop and maintain our production systems. Costs related to maintaining our corporate information technology infrastructure decreased by $3.9 million from $23.6 million for the year ended December 31, 2019 to $19.7 million for the year ended December 31, 2020. The decrease was due primarily to reduced personnel-related costs. Costs to develop platform and product initiatives increased by $2.2 million, from $14.4 million for the year ended December 31, 2019 to $16.6 million for the year ended December 31, 2020. The increase was driven primarily by new product development including the launch of our full suite of COVID-19 testing products in 2020. Costs related to maintaining our production systems increased by $1.1 million from $6.9 million for the year ended December 31, 2019 to $8.0 million for the year ended December 31, 2020.

These expenses include non-capitalizable costs related to Project Ignite. We incurred $7.2 million related to phase one, $3.1 million related to phase two and $4.6 million related to phase three in the year ended December 31, 2019, and $3.2 million related to phase one, $4.1 million related to phase two and $4.9 million related to phase three in the year ended December 31, 2020. For detailed disclosure on Project Ignite, including information related to the anticipated completion and treatment of non-capitalizable expenses in future periods, please see “—Components of our Results of Operations—Operating Expenses—Corporate Technology and Production Systems.”

Selling, General and Administrative

Selling, general and administrative expenses decreased by 16.7%, or $24.6 million, from $147.2 million for the year ended December 31, 2019 to $122.6 million for the year ended December 31, 2020 primarily as a result of savings actions taken in response to the COVID-19 pandemic. Beginning in March 2020, we implemented robust cost reduction measures across the organization to reduce selling, general and administrative expenses. This was accomplished through structural changes like moving to a virtual-first strategy by reducing office space globally, streamlining our sales and operations organization, and variable spend reduction, such as lower bonus expense, lower commissions, and lower marketing, travel, and entertainment expenses due to business performance being impacted by the COVID-19 pandemic. 2019 also included a one-time settlement of approximately $8.5 million with the Consumer Financial Protection Bureau as discussed in “Risk Factors—General Risks—We are exposed to litigation risk.”

 

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Depreciation and Amortization

Depreciation and amortization decreased by 2.8%, or $2.6 million, from $93.8 million for the year ended December 31, 2019 to $91.2 million for the year ended December 31, 2020. Depreciation of property and equipment decreased from $8.6 million for the year ended December 31, 2019 to $7.1 million for the year ended December 31, 2020. The decrease was due to the write-down of the leasehold improvements and furniture and fixtures of closed office locations, partially offset by depreciation of computers and electronic equipment purchased in support of the company-wide virtual-first work from home policy. Amortization of intangible assets decreased from $85.2 million for the year ended December 31, 2019 to $84.1 million for the year ended December 31, 2020. Definite-lived intangible assets consist of intangible assets acquired through acquisition and the costs of developing internal-use software. These assets are amortized using a straight-line basis over their estimated useful lives except for client lists which use an accelerated method of amortization. The decrease in amortization on these assets can be attributed to the reducing amortization rate of the client lists.

Impairments of Long-Lived Assets

Impairment of property and equipment and capitalized software decreased from $3.2 million for the year ended December 31, 2019 to $1.8 million for the year ended December 31, 2020. In 2020, impairment costs were mainly driven by the write down of fixed assets in our exited offices in Roseville, California and Marietta, Georgia. There was no impairment of goodwill or other intangible assets.

Interest Expense, Net

Interest expense decreased by 16.2%, or $6.4 million, from $39.3 million for the year ended December 31, 2019 to $32.9 million for the year ended December 31, 2020. In 2019, interest expense on the Term loan was $36.2 million compared to $30.4 million in 2020. The reduction in 2020 was driven by the reduction in interest rate following the fall in LIBOR. Amortization expense of the loan discount was $2.4 million in 2019 and 2020.

Loss on Interest Rate Swap

Loss on interest rate swap consists of realized and unrealized gains and losses on our interest rate swaps, which we entered into to reduce our exposure to variability in expected future cash flows on our Term loan, which bears interest at a variable rate. Unrealized gains and losses result from changes in the fair value of the swaps and realized gains and losses reflect the amounts payable or receivable between the fixed rate on the swap and LIBOR. Loss on interest rate swap changed from a loss of $7.3 million for the year ended December 31, 2019 to a loss of $9.5 million for the year ended December 31, 2020. The loss for the twelve months ended December 31, 2020 was driven by the change in the mark to market (“MTM”) valuation of our interest rate swaps, which depends on LIBOR.

Income Tax Benefit

Benefit from income taxes decreased by 2.0%, or $0.2 million, from $(11.8) million for the year ended December 31, 2019 to $(11.6) million for the year ended December 31, 2020. This was primarily due to a decrease in the U.S. state and international deferred income tax provision.

Net Income/(Loss) and Net Loss Margin

Net loss increased by 12.0%, or $5.6 million, from $(46.7) million for the year ended December 31, 2019 to $(52.3) million for the year ended December 31, 2020. Net Loss Margin changed from (9.4)% to (11.5)% primarily driven by an 8.7% decrease in revenues due to the impact of the COVID-19 pandemic, partially offset by a 6.5% decrease in total operating expenses as a result of structural changes and cost savings initiatives implemented.

 

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Net Loss Per Share

Net Loss Per Share increased by 11.3%, or $(0.06), from $(0.53) for the year ended December 31, 2019 to $(0.59) for the year ended December 31, 2020.

Six Months Ended June 30, 2020 compared to the Six Months Ended June 30, 2021

The following table sets forth certain historical consolidated financial performance for the six months ended June 30, 2020 compared to the six months ended June 30, 2021.

 

     Six Months
Ended June 30,
    Increase/
(Decrease)
 
     2020     2021     $     %  
     (dollars in thousands, except per share amounts)  

Revenues

   $ 207,948     $ 298,698     $ 90,750       43.6

Cost of revenues (exclusive of depreciation and amortization below)

     98,345       143,159       44,814       45.6

Corporate technology and production systems

     22,080       20,351       (1,730     (7.8 )% 

Selling, general and administrative

     61,457       68,211       6,754       11.0

Depreciation and amortization

     45,578       40,848       (4,730     (10.4 )% 

Impairments of long-lived assets

     59       2,925       2,866       n.m.  

Total operating expenses

     227,519       275,494       47,975       21.1

Operating (loss) income

     (19,571     23,204       42,775       (218.6 )% 

Interest expense, net

     17,293       15,173       (2,120     (12.3 )% 

Loss on interest rate swap

     9,654       87       (9,567     (99.1 )% 

Other income

     (662     (633     29       (4.4 )% 

Total other expenses, net

     26,285       14,627       (11,658     (44.4 )% 

(Loss) income before income taxes

     (45,856     8,577       54,433       (118.7 )% 

Income tax (benefit) provision

     (5,009     4,552       9,561       (190.9 )% 

Net (loss) income

   $ (40,847   $ 4,025     $ 44,872       (109.9 )% 

Net (Loss) Income Margin

     (19.6 )%      1.3       20.9

Net (loss) income per share

   $ (0.46   $ 0.05     $ 0.51       (109.8 )% 

Revenues

Revenues increased by 43.6%, or $90.8 million, from $207.9 million for the six months ended June 30, 2020 to $298.7 million for the six months ended June 30, 2021. The growth was driven by approximately 13% new customer growth, approximately 31% base growth, and approximately 3% growth from APAC. Our gross retention rate for the six months ended June 30, 2021 was 96% compared to 93% for the six months ended June 30, 2020. Pricing was relatively stable across the periods and not meaningful to the change in revenues.

In our U.S. business, our healthcare, financial and business services, and technology and media industry Verticals experienced greater than 50% growth, as the U.S. economy continued its recovery from the impact of the COVID-19 pandemic. Our international business grew by approximately 80%, as our international gig business continued a high growth trajectory, primarily driven by our large market share of the U.K. food delivery industry, as well as growth in our U.K. government business.

Cost of Revenues

Cost of revenues increased by 45.6%, or $44.8 million, from $98.3 million for the six months ended June 30, 2020 to $143.2 million for the six months ended June 30, 2021. 97% of the cost increase, or $43.5 million, was due to increased volume, and $1.3 million was due to change in business mix and increased cloud expenses. Cost of revenues as a percentage of revenue was 47.3% for the six months ended June 30, 2020, and 47.9% for the six months ended June 30, 2021.

 

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Corporate Technology and Production Systems

Corporate technology and production systems expenses decreased by 7.8%, or $1.7 million, from $22.1 million for the six months ended June 30, 2020 to $20.4 million for the six months ended June 30, 2021. Included in this line item are costs related to maintaining our corporate information technology infrastructure and non-capitalizable costs to develop and maintain our production systems. Costs related to maintaining our corporate information technology infrastructure decreased by $0.7 million from $10.2 million for the six months ended June 30, 2020 to $9.5 million for the six months ended June 30, 2021, due primarily to personnel related costs. Costs to develop platform and product initiatives decreased by $0.7 million, from $8.0 million for the six months ended June 30, 2020 to $7.3 million for the six months ended June 30, 2021. Costs related to maintaining our production systems decreased by $0.3 million from $3.8 million for the six months ended June 30, 2020 to $3.5 million for the six months ended June 30, 2021.

These expenses include non-capitalizable costs related to Project Ignite. We incurred $1.5 million related to phase one, $1.9 million related to phase two and $2.3 million related to phase three in the six months ended June 30, 2020, and $0.9 million related to phase one, $3.2 million related to phase two and $2.8 million related to phase 3 in the six months ended June 30, 2021. For detailed disclosure on Project Ignite, including information related to the anticipated completion and treatment of non-capitalizable expenses in future periods, please see “—Components of our Results of Operations—Operating Expenses—Corporate Technology and Production Systems.”

Selling, General and Administrative

Selling, general and administrative expenses increased by 11.0%, or $6.8 million, from $61.5 million for the six months ended June 30, 2020 to $68.2 million for the six months ended June 30, 2021. The year-over-year increase was driven by approximately $5.0 million of higher professional fees, primarily in connection with our proposed initial public offering, as well as approximately $8.5 million of higher bonus expense, as bonuses were reduced in the prior year period due to the expected impact of the COVID-19 pandemic on our financial performance. These increases were partially offset by an approximately $4.0 million reduction in severance expense, an approximately $2.0 million reduction in rent and facilities expenses, and reduced marketing, travel and entertainment, and bad debt expenses. The severance expense incurred in the six months ended June 30, 2020, was primarily related to the executive team restructuring program that spanned 2019 to 2020. The lower rent and facilities expenses in the six months ended June 30, 2021 relate to our real estate consolidation efforts, including a credit from the release of deferred rent for our exited office in Bellevue, Washington.

Depreciation and Amortization

Depreciation and amortization expense decreased by 10.4%, or $4.7 million, from $45.6 million for the six months ended June 30, 2020 to $40.8 million for the six months ended June 30, 2021, due primarily to $3.2 million lower intangible asset amortization, as new intangible assets were added at a lower rate compared to those which became fully depreciated in the interim period. Fixed asset depreciation decreased by approximately $1.5 million, primarily as a result of fixed asset impairments associated with exited office locations.

Impairments of Long-Lived Assets

Impairments of long-lived assets increased by $2.9 million from $0.1 million for the six months ended June 30, 2020 to $2.9 million for the six months ended June 30, 2021, due primarily to the write-off of fixed assets in our exited office in Bellevue, Washington.

Interest Expense, Net

Interest expense decreased by 12.3%, or $2.1 million, from $17.3 million for the six months ended June 30, 2020 to $15.2 million for the six months ended June 30, 2021 due to the reduction in

 

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the interest rate on our Term loan resulting from the reduction in LIBOR. Amortization of the loan discount was $1.2 million for each of the six months ended June 30, 2020 and June 30, 2021.

Loss on Interest Rate Swap

Loss on interest rate swap consists of realized and unrealized gains and losses on our interest rate swaps, which we entered into to reduce our exposure to variability in expected future cash flows on our Term loan, which bears interest at a variable rate. Unrealized gains and losses result from changes in the fair value of the swaps and realized gains and losses reflect the amounts payable or receivable between the fixed rate on the swap and LIBOR. Loss on interest rate swap decreased by $9.6 million from $9.7 million for the six months ended June 30, 2020 to $0.1 million for the six months ended June 30, 2021. The reduction in LIBOR during the six months ended June 30, 2020 resulted in a mark to market (“MTM”) loss recorded in that period. As LIBOR was relatively stable for the six months ended June 30, 2021, the MTM loss and resulting expense was significantly lower than the prior year period.

Income Tax (Benefit) Expense

Income tax (benefit) expense changed from a benefit of $5.0 million for the six months ended June 30, 2020 to an expense of $4.6 million for the six months ended June 30, 2021, due primarily to the increase in income before income taxes and an unfavorable change in the jurisdictional mix of earnings as a result of fluctuations in operations, and certain non-deductible transaction costs. (Loss) income before income taxes increased from a loss of $45.9 million for the six months ended June 30, 2020 to income of $8.6 million for the six months ended June 30, 2021, driven primarily by increased revenue.

Net (Loss) Income and Net (Loss) Income Margin

Net (loss) income increased from a loss of $40.8 million for the six months ended June 30, 2020 to income of $4.0 million for the six months ended June 30, 2021. Net (Loss) Income Margin increased from (19.6)% for the six months ended June 30, 2020 to 1.3% for the six months ended June 30, 2021. The increase in both net income and net income margin resulted from improved operating leverage, as revenues increased by 43.6% while operating expenses grew by only 21.1%.

Net (Loss) Income Per Share

Net (loss) income per share—basic increased from a loss of $0.46 for the six months ended June 30, 2020 to income of $0.05 for the six months ended June 30, 2021. Net (loss) income per share—diluted increased from a loss of $0.46 for the six months ended June 30, 2020 to income of $0.05 for the six months ended June 30, 2021. The increase in net income per share—basic and income per share—diluted was primarily driven by the increase in net income.

Non-GAAP Financial Measures

Adjusted EBITDA and Adjusted EBITDA Margin

We use Adjusted EBITDA and Adjusted EBITDA Margin to assess the performance of our business. Adjusted EBITDA is defined as net income adjusted for provision for income taxes, interest expense, depreciation and amortization, stock-based compensation, transaction costs, costs related to restructuring, technology transformation costs, costs related to settlements impacting comparability, (gains) losses on interest rate swaps, foreign currency (gains) losses, and other costs affecting comparability. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by revenue. These measures are not recognized under accounting principles generally accepted in the United States of America (“GAAP”) and do not purport to be alternatives to net income/(loss) as a measure of our performance. Adjusted EBITDA and Adjusted EBITDA Margin have limitations as analytical tools and

 

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should not be considered in isolation or as substitutes for our results as reported under GAAP. Adjusted EBITDA excludes items that can have a significant effect on our profit or loss and should, therefore, be considered only in conjunction with net income/(loss) for the period. Our management uses Adjusted EBITDA and Adjusted EBITDA Margin to supplement GAAP results to evaluate the factors and trends affecting the business to assess our financial performance and the effectiveness of our business strategy, in preparing and approving our annual budget and to compare our performance against that of other peer companies using similar measures, and believe they are helpful in highlighting trends in our core operating performance. Further, our executive incentive compensation is based in part on components of Adjusted EBITDA. Because not all companies use identical calculations, these measures may not be comparable to other similarly titled measures of other companies.

Adjusted EBITDA decreased by 16.1%, or $19.2 million, from $119.0 million for the year ended December 31, 2019 to $99.8 million for the year ended December 31, 2020. Adjusted EBITDA Margin decreased by 190 basis points year over year from 23.9% in 2019 to 22.0% in 2020. This was due to the decline in revenues due to the COVID-19 pandemic, partially offset by cost savings from structural changes implemented in 2020.

Adjusted EBITDA increased by 101.9%, or $42.3 million, from $41.5 million for the six months ended June 30, 2020 to $83.8 million for the six months ended June 30, 2021. Adjusted EBITDA Margin increased by 810 basis points from 20.0% for the six months ended June 30, 2020 to 28.1% in the corresponding period in 2021. This improvement resulted from increased operational efficiency due to automation and robust cost management initiatives implemented in 2020.

The following table reconciles net income/(loss), the most directly comparable GAAP measure, to Adjusted EBITDA for the years ended December 31, 2019 and 2020 and for the six months ended June 30, 2020 and 2021.

 

     Year Ended
December 31,
    Six Months
Ended June 30,
 
     2019     2020     2020     2021  
     (dollars in thousands)  

Net (loss) income

   $ (46,682   $ (52,293   $ (40,847   $ 4,025  

Income tax (benefit) expense

     (11,803     (11,562     (5,009    
4,552
 

Interest expense, net

     39,316       32,947       17,293       15,173  

Depreciation & amortization

     93,802       91,199       45,578       40,848  

Stock-based compensation

     1,503       3,464       1,186       1,654  

Transaction expenses(1)

     2,617       3,029       1,084       7,258  

Restructuring(2)

     4,526       8,838       6,010       3,609  

Technology transformation(3)

     9,763       10,920       5,467       6,001  

Settlements impacting comparability(4)

     12,065       2,922       140        

Loss/gain on interest swap(5)

     7,324       9,452       9,654       87  

Other(6)

     6,553       918       974       630  

Adjusted EBITDA

   $ 118,984     $ 99,834     $ 41,530     $ 83,837  

Adjusted EBITDA Margin

     23.9     22.0     20.0     28.1

 

 

(1)

Consists of transaction expenses related to mergers and acquisitions, associated earn-outs, investor management fees (“investor management fees” in connection with the Fourth Amended and Restated Management Services Agreement, which will be terminated in connection with this offering), and costs related to preparation of this offering. For the year ended December 31, 2019, costs include $2.1 million in investor management fees and $0.5 million in M&A transaction costs. For the year ended December 31, 2020, costs include $2.0 million in investor management fees and $1.0 million in M&A transaction costs. For the six months ended June 30, 2020, costs include $1.0 million in investor management fees and approximately $0.1 million in M&A transaction costs. For the six months ended June 30, 2021, approximately $5.4 million was incurred in connection

 

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  with this offering, approximately $0.8 million was related to M&A transaction costs and $0.5 million was related to investor management fees.
(2)

Consists of restructuring-related costs, including executive recruiting and severance charges, and lease termination costs and disposal of fixed assets related to our real estate consolidation efforts. During 2019 and 2020, we executed an extensive restructuring program, significantly strengthening our management team and creating a client facing industry-specific Vertical organization. This program was completed by the end of 2020 and the final costs related to this program have been incurred through the first quarter of 2021. Beginning in 2020, we began executing a virtual-first strategy, closing offices and reducing office space globally. We expect this real estate consolidation effort to be completed by the end of 2021. For the year ended December 31, 2019, these costs included approximately $4.5 million of restructuring-related executive recruiting and severance charges. For the year ended December 31, 2020, costs include approximately $6.7 million of restructuring-related executive recruiting and severance charges, $2.1 million of lease termination costs and write-offs on disposal of fixed assets related to our real estate consolidation program. For the six months ended June 30, 2020, these costs include approximately $5.3 million of restructuring-related executive recruiting and severance charges, including the elimination of the vice-chairman position, and approximately $0.7 million of expenses related to our real estate consolidation program. For the six months ended June 30, 2021, approximately $3.1 million related to our real estate consolidation program, comprised primarily of the write-off on disposal of fixed assets for our exited facility in Bellevue, Washington.

(3)

Includes costs related to technology modernization efforts. We believe that these costs are discrete and non-recurring in nature, as they relate to a one-time restructuring and decommissioning of our on-premise production systems and corporate technological infrastructure and the move to a managed service provider, decommissioning redundant fulfillment systems, and modernizing internal functional systems. As such, they are not normal, recurring operating expenses and are not reflective of ongoing trends in the cost of doing business. The significant majority of these are related to the last two phases of Project Ignite, with the remainder related to an investment made to modernize internal functional systems in preparation for our public company infrastructure. For the year ended December 31, 2019, investments related to Project Ignite were $7.7 million, and for the year ended December 31, 2020, they were $9.0 million. Additional investment made to modernize internal functional systems was $2.1 million in 2019 and $1.9 million in 2020. For the six months ended June 30, 2020, we made investments of $4.2 million related to Project Ignite, and approximately $1.2 million to modernize internal functional systems. For the six months ended June 30, 2021, we made an investment of $6.0 million in Project Ignite.

(4)

Consists of non-recurring settlements impacting comparability. For the year ended December 31, 2019, the primary components were a settlement with the CFPB of approximately $8.5 million and discrete incremental charges related to the settlement of $1.7 million and a settlement related to sales tax of $1.8 million. For the year ended December 31, 2020, costs included $2.3 million in a settlement related to sales tax.

(5)

Consists of loss (gain) on interest rate swaps. See “—Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Risk” for additional information on interest rate swaps.

 

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(6)

Consists of costs related to a local government mandate in India, (gain) loss on foreign currency transactions, impairment of capitalized software and other costs outside of the ordinary course of business. The following table summarizes these costs for the years ended December 31, 2019 and 2020 and for the six months ended June 30, 2020 and 2021.

 

     Year Ended
December 31,
     Six Months Ended
June 30,
 
     2019      2020      2020      2021  
     (dollars in thousands)  

Other

           

Government mandate

   $      $ 1,291      $ 1,291      $  

(Gain) loss on foreign currency transactions

     505        (359      320        1,120  

Impairment of capitalized software

     3,219        695        72        30  

Duplicate fulfillment charges

     2,829        (709      (709      (520
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,553      $ 918      $ 974      $ 630  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the calculation of Net (Loss) Income Margin and Adjusted EBITDA Margin for the years ended December 31, 2019 and 2020 and for the six months ended June 30, 2020 and 2021.

 

     Year Ended
December 31,
    Six Months Ended
June 30,
 
     2019     2020     2020     2021  
     (dollars in thousands)  

Net (loss) income

   $ (46,682   $ (52,293   $ (40,847   $ 4,025  

Adjusted EBITDA

     118,984       99,834       41,530       83,837  

Revenues

     497,116       454,053       207,948       298,698  

Net (Loss) Income Margin

     (9.4 )%      (11.5 )%      (19.6 )%      1.3

Adjusted EBITDA Margin

     23.9     22.0     20.0     28.1

Adjusted Net Income and Adjusted Earnings Per Share

Adjusted Net Income is a non-GAAP profitability measure. Adjusted Net Income is defined as net income adjusted for amortization of acquired intangible assets, stock-based compensation, transaction costs, costs related to restructuring, technology transformation costs, costs related to settlements impacting comparability, (gains) losses on interest rate swaps, foreign currency (gains) and losses, and other costs affecting comparability adjusted for an applicable tax rate of 26%. Our management believes that the inclusion of supplementary adjustments to net income/(loss) applied in presenting Adjusted Net Income assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding certain material non-cash items and unusual items that we do not expect to continue at the same level in the future, including the amortization of assets resulting from purchase accounting and normalizing our tax rate. Management and our board of directors use Adjusted Net Income to evaluate the factors and trends affecting our business to assess our financial performance and in preparing and approving our annual budget and believe it is helpful in highlighting trends in our core operating performance.

Adjusted Net Income decreased by 29.7%, or $11.3 million, from $38.0 million for the year ended December 31, 2019 to $26.7 million for the year ended December 31, 2020. The decrease was primarily driven by a decrease in revenues due to impact of the COVID-19 pandemic, partially offset by a decrease in total operating expenses as a result of structural changes and cost savings initiatives implemented.

Adjusted Net Income increased by 515.4%, or $33.5 million, from $6.5 million for the six months ended June 30, 2020 to $40.0 million for the six months ended June 30, 2021. The primary drivers for the year over year increase are increased revenues and improved operational leverage.

 

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Adjusted Earnings Per Share—basic decreased by 30.2%, or $0.13, from $0.43 for the year ended December 31, 2019 to $0.30 for the year ended December 31, 2020. Adjusted Earnings Per Share—diluted decreased by 30.2%, or $0.13, from $0.43 for the year ended December 31, 2019 to $0.30 for the year ended December 31, 2020. The decrease in Earnings Per Share—basic and Earnings Per Share—diluted was primarily due to the decrease in Adjusted Net Income.

Adjusted Earnings Per Share—basic increased by 542.8%, or $0.38, from $0.07 for the six months ended June 30, 2020 to $0.45 for the six months ended June 30, 2021, and Adjusted Earnings Per Share—diluted increased by 542.8%, or $0.38, from $0.07 for the six months ended June 30, 2020 to $0.45 for the six months ended June 30, 2021, primarily due to the increase in Adjusted Net Income.

The following tables reconcile net (loss) income, the most directly comparable GAAP measure, to Adjusted Net Income and Adjusted Earnings Per Share for the years ended December 31, 2019 and 2020 and for the six months ended June 30, 2020 and 2021.

 

     Year Ended
December 31,
    Six Months Ended
June 30,
 
     2019     2020     2020     2021  
     (in thousands, except per share amounts)  

Net (loss) income

   $ (46,682   $ (52,293   $ (40,847   $ 4,025  

Income tax (benefit) expense

     (11,803     (11,562     (5,009     4,552  

(Loss) income before income taxes

     (58,485     (63,855     (45,856     8,577  

Amortization of acquired intangible assets

     65,529       60,346       30,171       26,270  

Stock-based compensation

     1,503       3,464       1,186       1,654  

Transaction expenses(1)

     2,617       3,029       1,084       7,258  

Restructuring(2)

     4,526       8,838       6,010       3,609  

Technology transformation(3)

     9,763       10,920       5,467       6,001  

Settlements impacting comparability(4)

     12,065       2,922       140        

Loss/gain on interest swap(5)

     7,324       9,452       9,654       87  

Other(6)

     6,553       918       974       630  

Adjusted Net Income before income tax effect

     51,395       36,034       8,830       54,086  

Income tax effect(7)

     13,363       9,369       2,296       14,062  

Adjusted Net Income

     38,032       26,665       6,534       40,024  

Net (loss) income per share—diluted

     (0.53     (0.59     (0.46     0.05  

Adjusted Earnings Per Share—basic

     0.43       0.30       0.07       0.45  

Adjusted Earnings Per Share—diluted

     0.43       0.30       0.07       0.45  

 

(1)

Consists of transaction expenses related to mergers and acquisitions, associated earn-outs, investor management fees, and costs related to preparation of this offering.

(2)

Consists of restructuring-related costs, including executive recruiting and severance charges, and lease termination costs and disposal of fixed assets related to our real estate consolidation efforts. During 2019 and 2020, we executed an extensive restructuring program, significantly strengthening our management team and creating a client facing industry-specific Vertical organization. This program was completed by the end of 2020 and the final costs related to this program have been incurred through the first quarter of 2021. Beginning in 2020, we began executing a virtual-first strategy, closing offices and reducing office space globally. We expect this real estate consolidation effort to be completed by the end of 2021.

(3)

Includes costs related to technology modernization efforts. We believe that these costs are discrete and non-recurring in nature, as they relate to a one-time restructuring and decommissioning of our on-premise production systems and corporate technological infrastructure and the move to a managed service provider, decommissioning redundant fulfillment systems, and modernizing internal functional systems. As such, they are not normal, recurring operating expenses and are not reflective of ongoing trends in the cost of doing business. The significant majority of these are

 

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  related to the last two phases of Project Ignite, with the remainder related to an investment made to modernize internal functional systems in preparation for our public company infrastructure.
(4)

Consists of non-recurring settlements impacting comparability.

(5)

Consists of loss (gain) on interest rate swaps. See “—Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Risk” for additional information on interest rate swaps.

(6)

Consists of costs related to a local government mandate in India, (gain) loss on foreign currency transactions, impairment of capitalized software and other costs outside of the ordinary course of business. The following table summarizes these costs for the years ended December 31, 2019 and 2020 and for the six months ended June 30, 2020 and 2021.

 

     Year Ended
December 31,
     Six Months Ended
June 30,
 
     2019      2020      2020      2021  
     (dollars in thousands)  

Other

           

Government mandate

   $      $ 1,291      $ 1,291      $  

(Gain) loss on foreign currency transactions

     505        (359      320        1,120  

Impairment of capitalized software

     3,219        695        72        30  

Duplicate fulfillment charges

     2,829        (709      (709      (520
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,553      $ 918      $ 974      $ 630  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(7)

A normalized effective tax rate of 26% has been used to compute Adjusted Net Income for the 2019, 2020 and 2021 periods. As of December 31, 2020, we had net operating loss carryforwards of approximately $120.6 million for federal, state, and foreign income tax purposes available to reduce future income subject to income taxes. The amount of actual cash taxes we pay for federal, state, and foreign income taxes differs significantly from the effective income tax rate computed in accordance with GAAP, and from the normalized rate shown above.

 

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The following tables reconcile net (loss) income per share, the most directly comparable GAAP measure, to Adjusted Earnings Per Share for the years ended December 31, 2019 and 2020 and for the six months ended June 30, 2020 and 2021.

 

    Year Ended December 31,     Six Months Ended June 30,  
    2019     2020     2020     2021  
   

(dollars in thousands,

except per share amounts)

 

Net (loss) income

  $ (46,682   $ (52,293   $ (40,847   $ 4,025  

Less: Undistributed amounts allocated to participating securities

                      17  

Undistributed (losses) earnings allocated to stockholders

  $ (46,682   $ (52,293   $ (40,847   $ 4,008  

Weighted average number of shares outstanding—basic

    88,154,830       88,345,312       88,322,550       88,717,890  

Weighted average number of shares outstanding—diluted

    88,154,830       88,345,312       88,322,550       88,802,948  

Net (loss) income per share—basic

  $ (0.53   $ (0.59   $ (0.46   $ 0.05  

Net (loss) income per share—diluted

    (0.53     (0.59     (0.46     0.05  

Adjusted Net Income

  $ 38,032     $ 26,665     $ 6,534     $ 40,024  

Less: Undistributed amounts allocated to participating securities

          9             166  

Undistributed (losses) earnings allocated to stockholders

  $ 38,032     $ 26,656     $ 6,534     $ 39,858  

Weighted average number of shares outstanding—basic

    88,154,830       88,345,312       88,322,550       88,717,890  

Weighted average number of shares outstanding—diluted

    88,173,998       88,419,588       88,399,222       88,802,948  

Adjusted Earnings Per Share—basic

  $ 0.43     $ 0.30     $ 0.07     $ 0.45  

Adjusted Earnings Per Share—diluted

    0.43       0.30       0.07       0.45  

Quarterly Results of Operations

 

    Three Months Ended  
    September 30,
2019
    December 31,
2019
        March 31,    
2020
        June 30,    
2020
    September 30,
2020
    December 31,
2020
        March 31,    
2021
        June 30,    
2021
 
    (dollars in thousands)  

Revenues

  $ 132,765     $ 121,429     $ 119,376     $ 88,571     $ 117,602     $ 128,503     $ 139,370     $ 159,328  

Operating expenses

    127,147       142,043       121,262       106,257       114,829       134,808       130,963       144,531  

Operating income (loss)

    5,618       (20,614     (1,886     (17,686     2,774       (6,304     8,407       14,797  

Interest expense, net

    9,784       9,199       9,056       8,237       7,817       7,837       7,570       7,603  

Loss (gain) on interest rate swap

    1,069       (1,181     8,755       899       (49     (153     (46     133  

Other income

    (347     (385     (241     (421     (336     (648     (271     (363

Total other expense, net

    10,506       7,633       17,570       8,715       7,432       7,035       7,253       7,373  

(Loss) income before income taxes

    (4,888     (28,247     (19,456     (26,401     (4,658     (13,340     1,154       7,424  

Provision for (benefit from) income taxes

    (979     (10,544     (3,556     (1,454     5,727       (12,280     526       4,026  

Net (loss) income

  $ (3,909   $ (17,702   $ (15,900   $ (24,948   $ (10,385   $ (1,060   $ 628     $ 3,398  

Net (loss) income margin

    (2.9 )%      (14.6 )%      (13.3 )%      (28.2 )%      (8.8 )%      (0.8 )%      0.5     2.1

 

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Quarterly Revenue Trends

Our quarterly revenues have generally increased over time on a year over year basis as a result of new clients, strong retention rates, and expansion of services provided to existing clients. Although we did experience a decline in revenues in the second and third quarters of 2020 due to the COVID-19 pandemic, the business moved into year over year revenue growth in the fourth quarter of 2020, driven by a strong December 2020. This growth has continued in the first and second quarters of 2021.

Our revenue trend is impacted by seasonality in macroeconomic hiring trends. Typically, revenue acceleration begins towards the end of the first quarter, peaking in the third quarter as hiring accelerates across industry Verticals. The fourth quarter, ending December 31, is typically our lowest revenue quarter due to a general market trend of lower hiring during the latter half of December due to the holiday season. Using fiscal year 2019, the last comparable 12-month period before the COVID-19 pandemic, as a representative year of typical business trends, the first quarter contributed to approximately 22% of total revenue, the second and third quarters contributed to approximately 27% of total revenue each and the fourth quarter contributed to approximately 24% of total revenue.

Quarterly Operating Expense Trends

Cost of revenues typically increases with revenue growth in the second and third quarter and is primarily related to delivery of services, primarily vendor costs associated with acquisition of data, third-party costs associated with robotics process automation related to fulfillment, third-party costs related to hosting our fulfillment platforms in the cloud, and, to a lesser extent, labor costs related to our client care organization and onshore and offshore fulfillment teams. Corporate technology and production systems expenses are costs related to maintaining our corporate information technology infrastructure and non-capitalizable costs to develop and maintain our production systems, and these are relatively fixed in the short term. Selling, general and administrative expenses are primarily compensation and other items which are relatively fixed in the short term, with the exception of commissions, marketing and incentive compensation.

 

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Quarterly Non-GAAP Financial Measures

The following tables reconcile net income/(loss), the most directly comparable GAAP measure, to Adjusted EBITDA and Adjusted Net Income.

 

    Three Months Ended  
    September 30,
2019
    December 31,
2019
        March 31,    
2020
        June 30,    
2020
    September 30,
2020
    December 31,
2020
        March 31,    
2021
        June 30,    
2021
 
    (dollars in thousands)  

Net (loss) income

  $ (3,909   $ (17,702   $ (15,900   $ (24,947   $ (10,385   $ (1,060   $ 628     $ 3,398  

(Benefit from) provision for income taxes

    (979     (10,544     (3,556     (1,453     5,727       (12,280     526       4,026  

Interest expense, net

    9,784       9,199       9,056       8,237       7,817       7,837       7,570       7,603  

Depreciation & amortization

    23,479       23,774       22,935       22,643       22,863       22,758       20,549       20,299  

Stock-based compensation

    249       504       545       641       570       1,708       898       756  

Transaction expenses(1)

    566       892       538       546       539       1,406       1,089       6,169  

Restructuring(2)

    1,150       1,335       526       5,484       1,060       1,768       3,035       574  

Technology transformation(3)

    2,297       3,015       3,009       2,458       2,581       2,872       2,059       3,942  

Settlements impacting comparability(4)

    287       11,219       97       43       120       2,662              

Loss/gain on interest swap(5)

    1,069       (1,181     8,755       899       (49     (153     (46     133  

Other(6)

    1,891       3,227       1,584       (610     (439     383       496       134  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 35,884     $ 23,738     $ 27,589     $ 13,941     $ 30,404     $ 27,901     $ 36,804     $ 47,034  

 

    Three Months Ended  
    September 30,
2019
    December 31,
2019
        March 31,    
2020
        June 30,    
2020
    September 30,
2020
    December 31,
2020
        March 31,    
2021
        June 30,    
2021
 
    (dollars in thousands)  

Net (loss) income

  $ (3,909   $ (17,702   $ (15,900   $ (24,947   $ (10,385   $ (1,060   $ 628     $ 3,398  

Adjusted EBITDA

  $ 35,884     $ 23,738     $ 27,589     $ 13,941     $ 30,404     $ 27,901     $ 36,804     $ 47,034  

Revenues

  $ 132,765     $ 121,429     $ 119,376     $ 88,571     $ 117,602     $ 128,503     $ 139,370     $ 159,328  

Net (loss) income margin

    (2.9 )%      (14.6 )%      (13.3 )%      (28.2 )%      (8.8 )%      (0.8 )%      0.5     2.1

Adjusted EBITDA margin

    27.0     19.5     23.1     15.7     25.9     21.7     26.4     29.5

 

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    Three Months Ended  
    September 30,
2019
    December 31,
2019
        March 31,    
2020
        June 30,    
2020
    September 30,
2020
    December 31,
2020
        March 31,    
2021
        June 30,    
2021
 
    (in thousands)  

Net (loss) income

  $ (3,909   $ (17,702   $ (15,900   $ (24,947   $ (10,385   $ (1,060   $ 628     $ 3,398  

Provision for (benefit from) income taxes

    (979     (10,544     (3,556     (1,453     5,727       (12,280     526       4,026  

(Loss) income before income taxes

    (4,888     (28,246     (19,456     (26,400     (4,658     (13,340     1,154       7,424  

Amortization of acquired intangible assets

    16,374       16,281       15,089       15,082       15,119       15,056       13,263       13,006  

Stock-based compensation

    249       504       545       641       570       1,708       898       756  

Transaction expenses(1)

    566       892       538       546       539       1,406       1,089       6,169  

Restructuring(2)

    1,150       1,335       526       5,484       1,060       1,768       3,035       574  

Technology transformation(3)

    2,297       3,015       3,009       2,458       2,581       2,872       2,059       3,942  

Settlements impacting comparability(4)

    287       11,219       97       43       120       2,662              

Loss/gain on interest swap(5)

    1,069       (1,181     8,755       899       (49     (153     (46     133  

Other(6)

    1,891       3,227       1,584       (610     (439     383       496       134  

Adjusted Net Income before income tax effect

    18,995       7,046       10,687       (1,857     14,843       12,362       21,948       32,138  

Income tax effect(7)

    4,939       1,832       2,779       (483     3,859       3,214       5,706       8,356  

Adjusted Net Income

    14,056       5,214       7,908       (1,374     10,984       9,148       16,242       23,782  

 

(1)

Consists of transaction expenses related to mergers and acquisitions, associated earn-outs, investor management fees, and costs related to preparation of this offering.

(2)

Consists of restructuring-related costs, including executive recruiting and severance charges, and lease termination costs and disposal of fixed assets related to our real estate consolidation efforts. During 2019 and 2020, we executed an extensive restructuring program, significantly strengthening our management team and creating a client facing industry-specific Vertical organization. This program was completed by the end of 2020 and the final costs related to this program have been incurred through the first quarter of 2021. Beginning in 2020, we began executing a virtual-first strategy, closing offices and reducing office space globally. We expect this real estate consolidation effort to be completed by the end of 2021.

(3)

Includes costs related to technology modernization efforts. We believe that these costs are discrete and non-recurring in nature, as they relate to a one-time restructuring and decommissioning of our on-premise production systems and corporate technological infrastructure and the move to a managed service provider, decommissioning redundant fulfillment systems, and modernizing internal functional systems. As such, they are not normal, recurring operating expenses and are not reflective of ongoing trends in the cost of doing business. The significant majority of these are related to the last two phases of Project Ignite, with the remainder related to an investment made to modernize internal functional systems in preparation for our public company infrastructure.

(4)

Consists of non-recurring settlements impacting comparability.

(5)

Consists of loss (gain) on interest rate swaps. See “—Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Risk” for additional information on interest rate swaps.

(6)

Consists of costs related to a local government mandate in India, (gain) loss on foreign currency transactions, impairment of capitalized software and other costs outside of the ordinary course of business.

(7)

A normalized effective tax rate of 26% has been used to compute Adjusted Net Income for the 2019, 2020 and 2021 periods. As of December 31, 2020, we had net operating loss carryforwards of approximately $120.6 million for federal, state, and foreign income tax purposes available to reduce

 

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  future income subject to income taxes. As a result, the amount of actual cash taxes we pay for federal, state, and foreign income taxes differs significantly from the effective income tax rate computed in accordance with GAAP, and from the normalized rate shown above.

Liquidity and Capital Resources

Overview

Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs to meet operating expenses, debt service, acquisitions, capital expenditures, other commitments and contractual obligations. We consider liquidity in terms of cash flows from operations and their sufficiency to fund our operating and investing activities.

Our primary cash needs are for day to day operations, working capital requirements, capital expenditures for ongoing development of our technological offering and other mandatory payments such as taxes, and debt principal and interest obligations. Following the consummation of this offering, we expect to fund our liquidity requirements through cash and cash equivalents and cash flows from operations.

Our capital expenditures can vary depending on the timing of the development of new products and services and technological enhancement-related investments. Capital expenditures for the year ended December 31, 2020 were approximately $16.5 million. We estimate that our capital expenditures for the year ending December 31, 2021 will be in the range of $18 million to $22 million, primarily related to capitalizable software development.

We believe that our projected cash position and cash flows from operations will be sufficient to fund our liquidity requirements for at least the next twelve months. However, our future liquidity requirements could be higher than we currently expect as a result of various factors. For example, any future investments, acquisitions, joint ventures or other similar transactions may require additional capital. In addition, our ability to continue to meet our future liquidity requirements will depend on, among other things, our ability to achieve anticipated levels of revenues and cash flows from operations and our ability to manage costs and working capital successfully, all of which are subject to general economic, financial, competitive and other factors beyond our control. In the event we require any additional capital, it will take the form of equity or debt financing, or both, and there can be no assurance that we will be able to raise any such financing on terms acceptable to us or at all.

As of June 30, 2021, we had cash and cash equivalents of approximately $94.3 million. As of December 31, 2019 and 2020, we had cash and cash equivalents of $50.3 million and $66.6 million respectively. This amount includes $6.7 million accrued at year-end 2020 for our 2020 excess cash flow payment paid to lenders under the Credit Agreement (as defined below) in April 2021. On a pro forma basis, after giving effect to this offering (including the application of net proceeds received by us in this offering together with cash on hand), our total principal amount of indebtedness outstanding would have been approximately $507.8 million under our Term loan as of June 30, 2021. All cash and cash equivalents are held with independent financial institutions with a minimum credit rating of A as defined by the three main credit rating agencies. As of June 30, 2021, all cash and cash equivalents were held in accounts with banks such that the funds are immediately available or in fixed term deposits with a maximum maturity of three months.

Credit Facility

In June 2015, our subsidiary Sterling Midco Holdings, Inc. entered into a first lien credit agreement as borrower (as most recently amended by the Sixth Amendment dated August 11, 2021, the “Credit

 

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Agreement”) with KeyBank National Association, as administrative agent (the “Administrative Agent”), certain guarantors party thereto and various lenders, including Goldman Sachs Lending Partners LLC, as lenders. The Credit Agreement provides for aggregate principal borrowings of $740.0 million (subject to the increase described below), comprising a $655.0 million original principal amount of term loan (the “Term loan”) which matures in June 2024 and an $85.0 million revolving credit facility, which automatically increases to $140.0 million upon the consummation of this offering (the “Revolving Credit Facility”), which matures (a) with respect to $81.25 million of the revolving credit commitments (or, upon the consummation of this offering, the full $140.0 million of revolving credit commitments), the earlier of (x) August 11, 2026 and (y) December 31, 2023 unless, on or prior to December 31, 2023, the Term loan has been (i) refinanced with the proceeds of indebtedness with a final maturity date that is no earlier than February 11, 2027 or (ii) amended, modified or waived, such that the final maturity date of the Term loan is no earlier than February 11, 2027 and (b) if this offering is not consummated, with respect to $3.75 million of the revolving credit commitments, June 19, 2022.

Amounts outstanding under the Term loan bear interest under either of the following two rates, elected in advance quarterly by the borrower for periods of either one month, two months, three months or six months: (1) an applicable rate of 2.5% plus a base rate (equal to the greater of (a) the prime rate (b) the federal funds rate plus 12 of 1% or (c) the one-month London Interbank Offered Rate (“LIBOR”) plus 1%, subject to a 2% floor); or (2) an applicable rate of 3.5% plus one-month LIBOR which is subject to a 1% floor. Interest on LIBOR borrowings is payable on the last business day of the interest period selected except in the case of a six-month election, in which case it is payable on the last day of the third and sixth month. The interest rate in effect for the Term loan as of June 30, 2021 was 4.5%. The Term loan requires $1.6 million repayment of principal on the last business day of each March, June, September and December. Under the Credit Agreement, we must also make a mandatory prepayment of principal in the amount of 50% of the excess cash, as defined in the Credit Agreement, generated in any given year, if our Net Leverage Ratio (as defined in the Credit Agreement) is greater than or equal to 2.95:1.00. In 2020, the mandatory prepayment was $6.7 million. We did not generate excess cash in 2019 and therefore there was no mandatory prepayment of principal. All remaining outstanding principal is due at maturity in June 2024. We have been in compliance with all our covenants under the Credit Agreement since origination.

Amounts outstanding under the Revolving Credit Facility bear interest at a tiered floating interest rate based on the Net Leverage Ratio of the borrower, elected in advance monthly by the borrower: (1) an applicable rate of 2.5% plus the greater of (a) the prime rate (b) the federal funds rate plus 12 of 1% (c) the one-month LIBOR plus 1%, or (d) a 2% floor or (2) an applicable rate of 3.5% plus one-month LIBOR. In addition, a fee is due quarterly in the amount of 0.50% or 0.375% on the unused portion of the commitments under the Revolving Credit Facility, depending on the Net Leverage Ratio. We drew down the full available amount of $83.8 million in March 2020 and repaid such amount in full in May 2020. Amounts available for borrowing under the Revolving Credit Facility, net of letters of credit, were $83.8 million as of December 31, 2019, $84.0 million as of December 31, 2020, and $84.1 million as of June 30, 2021.

The Credit Agreement contains covenants that, among other things restrict our ability to: incur certain additional indebtedness; transfer money between our various subsidiaries; pay dividends on, repurchase or make distributions with respect to our subsidiaries’ capital stock or make other restricted payments; issue stock of subsidiaries; make certain investments, loans or advances; transfer and sell certain assets; create or permit liens on assets; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; enter into certain transactions with our affiliates; and amend certain documents. The Credit Agreement also contains financial covenants that require us to maintain a total specified leverage ratio of less than 6.75:1.00 for so long as we have borrowed at least 35% or more of the total availability under the Revolving Credit Facility. Compliance with the financial covenants may be waived by lenders holding a majority of the Revolving Credit Facility.

Obligations under the Credit Agreement are collateralized by a first lien on substantially all the assets and outstanding capital stock of the Company subject to exceptions. The Credit Agreement also contains

 

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various events of default, including, without limitation, the failure to pay interest or principal when the same is due, cross default and cross acceleration provisions, the failure of representations and warranties contained in the agreements to be true and certain insolvency events. If an event of default occurs and is continuing, the principal amounts outstanding under the Credit Agreement, together with all accrued and unpaid interest and other amounts owed thereunder, may be declared immediately due and payable by the lenders.

We can use available funding capacity under the Revolving Credit Facility to satisfy letters of credit related to leased office space and other obligations, subject to a sublimit equal to the lesser of $20.0 million or aggregate amounts available for borrowing under the Revolving Credit Facility. Amounts used to satisfy the letters of credit reduce the available capacity under the Revolving Credit Facility. We had outstanding letters of credit totaling $1.2 million as of December 31, 2019, $1.0 million as of December 31, 2020, and $0.9 million as of June 30, 2021.

Cash Flows

The following table presents a summary of our consolidated cash flows from operating, investing and financing activities for the year ended December 31, 2019 compared to the year ended December 31, 2020.

 

     Year Ended December 31,  
           2019                 2020        
     (in thousands)  

Net cash provided by operating activities

   $ 36,204     $ 36,185  

Net cash used in investing activities

     (33,869     (16,266

Net cash used in financing activities

     (7,873     (3,218

(Decrease) increase in cash and cash equivalents

     (5,538     16,701  

Effect of exchange rate changes on cash

     427       (367

Cash and cash equivalents at beginning of the period

     55,410       50,299  
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 50,299     $ 66,633  
  

 

 

   

 

 

 

Operating Activities

Net cash provided by operating activities for the year ended December 31, 2019 was $36.2 million and net cash provided by operating activities for the year ended December 31, 2020 was $36.2 million. Net cash provided by operating activities stayed flat year-over-year, despite the COVID-19 pandemic, due to enhanced cash management resulting in higher collections of receivables. Net cash provided by operating activities for the year ended December 31, 2019 reflects the adjustment to net income for non-cash charges totaling $94.6 million, primarily driven by $93.8 million in depreciation and amortization, including $65.5 million of acquired intangible asset amortization, an $11.1 million change in fair value of derivatives, $3.2 million impairment of long-lived assets, $2.4 million amortization of debt discount, and $1.5 million in stock based compensation, partially offset by $18.1 million in deferred income taxes. The non-cash charges were offset by changes in operating assets and liabilities of $11.7 million, primarily driven by an $11.6 million change in accounts receivable due to higher revenues.

Net cash provided by operating activities for the year ended December 31, 2020 reflects the adjustment to net income for non-cash charges totaling $87.1 million, primarily driven by $91.2 million in depreciation and amortization, including $60.3 million of acquired intangible asset amortization, a $5.8 million change in fair value of derivatives, $3.5 million of stock-based compensation, $2.4 million amortization of debt discount, and $1.8 million impairment of long-lived assets, partially offset by $17.0 million in deferred income taxes and $0.8 million in deferred rent. Changes in operating assets and liabilities provided an additional $1.7 million for the year.

 

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Investing Activities

Net cash used in investing activities for the year ended December 31, 2019 was $33.9 million and net cash used in investing activities for the year ended December 31, 2020 was $16.3 million. Net cash used in investing activities decreased primarily due to the decreased investment in hardware and capitalized software, due to technological transformation.

Net cash used in investing activities for the year ended December 31, 2019 primarily consisted of $26.6 million investment in capitalized software development and $5.3 million in computer hardware and other property, plant and equipment. Net cash used from investing activities for the year ended December 31, 2020 primarily consisted of $14.0 million investment in capitalized software development and $2.3 million in computer hardware and other property, plant and equipment. Net cash used in investing activities for the year ended December 31, 2020 primarily consisted of $14.0 million investment in capitalized software development and $2.3 million in computer hardware and other property, plant and equipment.

Financing Activities

Net cash used in financing activities for the year ended December 31, 2019 was $7.9 million and net cash used in financing activities for the year ended December 31, 2020 was $3.2 million. Net cash used in financing activities for the year ended December 31, 2019 primarily consisted of $6.5 million or principal payments on our long-term debt and $1.5 million of payment of earn-out contingent consideration related to our acquisition of National Crime Check, completed in November 2018. Net cash used in financing activities for the year ended December 31, 2020 consisted of $6.5 million of principal payments on our long-term debt, partially offset by $3.3 million in cash proceeds from the issuance of common stock.

The following table presents a summary of our consolidated cash flows from operating, investing and financing activities for the six months ended June 30, 2020 compared to the six months ended June 30, 2021.

 

     Six Months Ended
June 30,
 
     2020     2021  
     (in thousands)  

Net cash provided by operating activities

   $ 20,226     $ 45,290  

Net cash used in investing activities

     (9,310     (9,295

Net cash used in financing activities

     (2,032     (8,234

Increase in cash and cash equivalents

     8,884       27,761  

Effect of exchange rate changes on cash

     (2,520     (103

Cash and cash equivalents at beginning of the period

     50,299       66,633  
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 56,663     $ 94,291  
  

 

 

   

 

 

 

Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2020 was $20.2 million and net cash provided by operating activities for the six months ended June 30, 2021 was $45.3 million. The increase year-over-year was driven primarily by higher net income resulting from higher revenue.

Net cash provided by operating activities for the for the six months ended June 30, 2020 reflects the adjustment to net loss for non-cash charges totaling $48.7 million, primarily driven by $45.6 million

 

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in depreciation and amortization, an $8.9 million change in fair value of derivatives, $1.2 million of stock-based compensation, and $2.4 million amortization of debt discount, amortization of financing fees and other charges, partially offset by $8.7 million in deferred income tax benefit and $0.7 million in unrealized translation gain on investment in foreign subsidiaries. Changes in operating assets and liabilities provided an additional $12.3 million of operating cash flow due primarily to a $20.3 million reduction in accounts receivable driven by continued strong cash collections, a $7.1 million increase in other liabilities, and a $1.6 million decrease in other assets and accounts payable, partially offset by a $12.5 million decrease in accrued expenses which included the payment of annual bonuses, and a $4.2 million increase in prepaid expenses.

Net cash provided by operating activities for the six months ended June 30, 2021 reflects the adjustment to net income for non-cash charges totaling $42.1 million, primarily driven by $40.8 million of depreciation and amortization, $2.9 million of impairments of long-lived assets, $1.7 million of stock-based compensation, $1.9 million of amortization of debt discount, amortization of financing fees, and other charges, partially offset by a $2.9 million change in fair value of derivatives, a $1.2 million credit to deferred rent, $0.7 million in deferred income tax benefit, $0.2 million in unrealized translation gain on investment in foreign subsidiaries, and $0.2 million excess payment on contingent consideration for acquisition. Changes in operating assets and liabilities for the six months ended June 30, 2021 reduced cash flow from operating activities by less than $1.0 million. An increase in accounts receivable of $24.8 million, due to increased revenue, an increase in prepaid expenses of $2.4 million, and an increase in other assets of $1.1 million, was largely offset by increases in accounts payable and accrued expenses.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2020 was $9.3 million for both the six months ended June 30, 2020 and for the six months ended June 30, 2021.

Net cash used in investing activities for the six months ended June 30, 2020 consisted of a $7.8 million investment in capitalized software, and $1.7 million in purchases of computer hardware and other property, plant and equipment, partially offset by $0.2 million in proceeds from disposal of property, plant and equipment. Net cash used in investing activities for the six months ended June 30, 2021 consisted of an $8.0 million investment in capitalized software, and $1.3 million in purchases of computer hardware and other property, plant and equipment.

Financing Activities

Net cash used in financing activities for the six months ended June 30, 2020 was $2.0 million and net cash used in financing activities for the six months ended June 30, 2021 was $8.2 million. The increase year-over-year was due primarily to the mandatory additional principal payment on excess cash generated as required in our Credit Agreement. See “—Liquidity and Capital Resources—Credit Facility.” Net cash used in financing activities for the six months ended June 30, 2020 consisted of $3.2 million in principal payments on our long-term debt, partially offset by $1.2 million of proceeds received from the issuance of common stock. Net cash used in financing activities for the six months ended June 30, 2021 consisted of $9.9 million in principal payments on our long-term debt, including the $6.7 million mandatory prepayment of excess cash as required by our Credit Agreement and $0.7 million in payment of earn-out contingent consideration related to our November 2018 acquisition of NCC, partially offset by $2.4 million of proceeds received from the issuance of common stock.

Contractual Obligations

Our principal commitments consist of obligations for outstanding debt and leases for our office spaces.

 

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As of December 31, 2020, we had the following contractual obligations:

 

     Payments due by Period  
     Total      Less than
1 year
     1 to 3 years      3 to 5 years      More
than
5 years
 
     (in thousands)  

Operating lease obligations

   $ 24,145      $ 4,763      $ 7,124      $ 5,566      $ 6,692  

Capital lease obligations

     70        24        35        11         

Long-term debt obligations

     623,487        13,147        12,922        597,418         

Interest payments on long-term debt obligations

     95,893        23,143        55,354        17,396         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 743,595      $ 41,077      $ 75,435      $ 620,391      $ 6,692  

As of June 30, 2021, we had the following contractual obligations:

 

     Payments due by Period  
     Total      Less than
1 year
     1 to 3 years      3 to 5
years
     More
than 5
years
 
     (in thousands)  

Operating lease obligations

   $ 21,740      $ 4,206      $ 6,527      $ 5,608      $ 5,399  

Capital lease obligations

     54        19        32        3         

Long-term debt obligations

     613,570        6,461        607,109                

Interest payments on long-term debt obligations

     86,639        27,933        58,706                
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 722,003      $ 38,619      $ 672,374      $ 5,611      $ 5,399  

In addition, in the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify clients, vendors and other business partners with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements. We have not included any such indemnification provisions in the contractual obligations table above. Historically, we have not experienced significant losses on these types of indemnification obligations.

Off-Balance Sheet Arrangements

As of June 30, 2021, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with GAAP requires management to make estimates and judgments that can affect the reported amount of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Some of the significant estimates include the impairment of long-lived assets, goodwill impairment, the determination of the fair value of acquired assets and liabilities, the valuation of stock-based awards and stock-based compensation and sales and income tax liabilities. We believe that the estimates used in the preparation of our consolidated financial statements are reasonable; however, actual results could differ materially from these estimates.

The most significant accounting estimates involve a high degree of judgment or complexity. Management believes the estimates and judgments most critical to the preparation of our consolidated financial statements and to the understanding of our reported financial results are described below.

 

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See Note 2 to our audited consolidated financial statements included elsewhere in this prospectus for more information on our accounting policies.

Goodwill

Goodwill represents the excess of purchase price over fair value of net assets of acquired entities and is tested for impairment annually or when certain triggering events require additional testing. Our goodwill is predominantly a result of the acquisition of Sterling by our Sponsor on June 19, 2015. We perform an annual impairment assessment during the fourth quarter of each calendar year. We first assess qualitative factors to determine if it is more likely than not that the reporting unit’s carrying amount exceeds its fair value. If necessary, after the qualitative assessment, we will perform a goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. We performed a qualitative assessment in October 2020. Based on the results of this assessment, there are no reporting units at risk of having a carrying value in excess of the fair value and failing the step one test.

Intangible Assets, Net

Definite-lived intangible assets consist of intangibles acquired through acquisition and the costs of developing internal-use software and are reported net of amortization and are amortized using a straight-line basis over their estimated useful lives. Client lists are amortized using an accelerated method of amortization. Cost of acquisition, renewal and extension of intangible assets are capitalized. There are no significant renewal or extension provisions associated with our intangible assets. We have no indefinite-lived intangible assets.

The costs of developing internal-use software are capitalized during the application development stage and included in Intangible assets, net on the consolidated balance sheets. Amortization commences when the software is placed into service and is computed using the straight-line method over the useful life of the underlying software of three years.

Derivative Instruments and Hedging Activities

We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of our risk, even though hedge accounting does not apply or we elect not to apply hedge accounting.

Stock-Based Compensation

Stock-based payments are measured at the grant date, based on the fair value of the award, and are expensed over the requisite service period unless they are performance-based (see Note 11 to our audited consolidated financial statements included elsewhere in this prospectus). The equity incentive plans generally provide for stock options to vest over a 5-year period, unless otherwise stated in an individual award agreement. The incentive plans also provide performance-based share options, vesting of which is contingent upon the achievement of performance or other objectives. The time-based shares provide for accelerated vesting upon a change of control and performance-based shares provide for accelerated vesting immediately upon an initial public offering, or upon a change of control,

 

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as defined in the plan. Continued employment is a prerequisite for vesting. Stock-based compensation expense is recorded for each tranche of awards and is recorded over the requisite vesting period in Selling, general and administrative expense in the consolidated statements of operations.

Pre-IPO Valuation of Equity

We have granted employees stock-based compensation awards at exercise prices equal to the fair value of the underlying equity at the time of grant, as determined by our board of directors on a contemporaneous basis.

We engaged an independent valuation firm to perform valuation consulting services to provide an estimate of fair market value of our equity on an annual basis. To derive a business enterprise value, our valuation methodologies utilize a discounted cash flow method using our forecasted operating results and a market comparable method based on comparable companies and market observations. Adjustments for the amount of debt and cash on our balance sheet and the liquidity preference of our equity and outstanding share awards were made to determine the valuation of our equity on a per share basis. Additionally, to determine the fair value of our equity, our board of directors considered many factors, such as our expected future operating performance; our financial condition at the grant date; the liquidation rights and preferences of our equity; input from management; the amount of debt on our balance sheet; the business risks inherent in our business and industry generally; and the market performance of comparable public companies. Our board of directors used the fair value per share to grant awards during the subsequent period.

The analysis performed by the independent valuation firm is based upon data and assumptions provided to it by us and received from third-party sources, which the independent valuation firm relied upon as being accurate without independent verification. The results of the analyses performed by the independent valuation firm are among the factors our board of directors took into consideration in making its determination with respect to fair value of our equity, but are not determinative. Our board of directors is solely and ultimately responsible for determining the fair value of our equity in good faith.

The dates of our valuation reports, which were prepared on a periodic basis, were not contemporaneous with the grant dates of our stock-based compensation awards. Therefore, we considered the amount of time between the valuation report date and the grant date to determine whether to use the latest valuation report for the purposes of determining the fair value of our common stock for financial reporting purposes. We assessed the fair value of such equity-based awards used for financial reporting purposes after considering the fair value reflected in the most recent valuation report and various updated assumptions based on facts and circumstances on the date of grant. The additional factors considered when determining any changes in fair value between the most recent valuation report and the grant dates included, when available, the prices paid in recent transactions involving our securities, as well as our operating and financial performance, changes in volatility and other key valuation assumptions, current industry conditions, and the market performance of comparable publicly traded companies.

The fair value of the equity awards granted during February 2021 through April 2021 will be determined using a linear interpolation between a June 2020 valuation estimated by our board of directors and the midpoint of the preliminary pricing range of our initial public offering. We determined that the straight-line calculation provides the most reasonable basis for the valuations for equity awards granted during February 2021 through April 2021 because we did not identify any single event or series of events that occurred during this period that would have caused a material change in fair value. We expect to record additional stock-based compensation expense for these awards of approximately $0.3 million related to incremental expense through June 30, 2021 in our financial statements for the three months ending September 30, 2021. Please see “—Components of our Results of Operations—

 

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Operating Expenses—Selling, General and Administrative” regarding additional stock-based compensation expense that is expected to be incurred in the third quarter of 2021.

There were significant judgments and estimates inherent in the valuation of our equity prior to this offering, which included assumptions regarding our future operating performance and the time to complete a liquidity event. Such judgments and estimates will not be necessary to determine the fair value of underlying shares of common stock for new awards once the underlying shares begin trading following this offering.

Long-Lived Assets

Long-lived assets consist of property and equipment and definite-lived intangible assets. These assets are reviewed for impairment whenever events or changes indicate that the carrying value of the asset may not be recoverable. We also review the useful lives to determine if the period of economic benefit has changed. If the carrying value of the long-lived asset exceeds the fair value, an impairment charge would be recognized in an amount equal to the amount by which the carrying value of the long-lived asset exceeds its fair value. Based on a qualitative assessment of the carrying values, we recorded an impairment loss related to a write-down of capitalized software costs and property and equipment in the amount of $1.8 million and $3.2 million during the years ended December 31, 2020 and 2019, respectively.

Revenue Recognition

We adopted the new revenue standard set forth under ASC 606, as of January 1, 2019 using the modified retrospective approach and as such, applied the new revenue standard only to contracts that were not completed at the January 1, 2019 adoption date and did not adjust prior reporting periods. The adoption of ASC 606 did not materially change our revenue recognition as substantially all of our revenue is transaction based, delivered at a point in time. An adjustment to accumulated deficit was recorded within the consolidated balance sheets at January 1, 2019 of $1.0 million, net of tax, to reflect changes related to the adoption of ASC 606 under the modified retrospective approach.

Revenue is recognized when a performance obligation has been satisfied by transferring a promised good or service to a client and the client obtains control of the good or service. To recognize revenue, two parties must have an agreement that creates enforceable rights and obligations, the performance obligations must be identifiable, and the transaction price must be determinable. The agreement must also have commercial substance and collection must be probable.

Our contracts are primarily for screening service orders. Our screening services includes court record reports, credit reports, criminal background checks, and drug and health screenings, amongst others. The client takes control of the product when the screening report is completed. Accordingly, revenue is generally recognized at the point in time when the client receives and can use the report. Screening services comprised a substantial portion of the total revenues for the years ended December 31, 2020 and 2019, respectively. As such, significant changes in screening services could affect the nature, amount, timing, and uncertainty of revenue and related cash flows. Payment for screening reports generally occurs once the reports have been received by the client.

Our contracts generally do not include any obligations for returns, refunds, or similar obligations, nor do we have a practice of granting significant concessions. Payment terms and conditions vary by contract and client, although terms generally include a requirement of payment within 30 to 60 days of the invoice. Any advanced payments received from clients are initially deferred and subsequently recognized as revenue as the related performance obligations are satisfied. There is typically no variable consideration related to our contracts, nor do they include a significant financing component, non-cash consideration, or consideration payable to a client.

 

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For revenue arrangements containing multiple products or services, we account for the individual products or services as separate performance obligations if they are distinct, the product or service is separately identifiable from other terms in the contract, and if a client can benefit from it on its own or with other resources that are readily available to the client. If these criteria are not met, the promised products or services are accounted for as a combined performance obligation. We allocate the contract price to each performance obligation based on the standalone selling prices of each distinct product or service in the contract.

We did not have any material contract liabilities as of December 31, 2020 and 2019.

Sales taxes collected from clients are remitted to governmental authorities and are therefore excluded from revenues in the consolidated statements of comprehensive loss.

Upon our adoption of ASC 606 in January 2019, incremental costs of obtaining a contract with a client are recognized as an asset if the benefit of such costs is expected to be longer than one year, with a majority of contracts being multi-year. An adjustment to accumulated deficit was recorded within the consolidated balance sheets at January 1, 2019 of $4.4 million, net of tax, to reflect these changes related to the adoption of ASC 606 under the modified retrospective approach.

Incremental costs include commissions to the sales force and are amortized over three years, as we estimate that this corresponds to the period over which a client benefits from existing technology in the underlying product or service that was transferred to the client. As of December 31, 2019 and 2020, approximately $4.0 million and $3.3 million, respectively, of deferred commissions are included in Other current assets and approximately $2.1 million and $2.1 million, respectively, of deferred commissions are included in Other non-current assets, net on the consolidated balance sheets.

Income Tax Provision

We account for income taxes in accordance with ASC Topic 740 “Simplifying the Accounting for Income Taxes” (“ASC 740”). Income taxes are computed using a balance sheet approach reflecting both current and deferred taxes. Current and deferred taxes reflect the tax impact of all the events included in our financial statements. The basic principles employed in the balance sheet approach are to reflect a current tax liability or asset that is recognized for the estimated taxes payable or refundable on tax returns for the current and prior years, a deferred tax liability or asset that is recognized for the estimated future tax effects attributable to temporary differences and carryforwards, the measurement of current and deferred tax liability and assets that is based on provisions of the enacted tax law of which the effects of future changes in tax laws or rates are not anticipated, and that the measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

We regularly evaluate deferred tax assets for future realization and establish a valuation allowance to the extent that a portion is not more likely than not to be realized. We consider whether it is more likely than not that the deferred tax assets will be realized, included existing cumulative losses in recent years, expectations of future taxable income, carryforward periods, and other relevant quantitative and qualitative factors.

We also evaluate the events included in our financial statements under the two-step process prescribed under ASC 740 when determining whether a tax benefit will be sustained if challenged by a taxing authority. The comprehensive two-step method provides that a tax benefit of a financial statement event only be recognized if it is more likely than not to be sustained based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. Significant judgment is required in assessing and estimating the more likely

 

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than not tax consequences of the events included in our financial statements. We adjust our reserve tax estimates periodically because of changes in tax laws, regulations, and interpretations.

Risks and Uncertainties

We operate in an industry that is subject to intense competition, government regulation and rapid technological change. Our operations are subject to significant risk and uncertainties including financial, operational, technological, regulatory, foreign operations, and other risks.

Also, included in Other current liabilities on the consolidated balance sheets at December 31, 2019 and 2020, are liabilities for estimated state sales taxes in the U.S. of approximately $4.2 million and $6.5 million, respectively. This reflects our review of state sales tax where we have nexus and our best estimate of the cost to become compliant in those states in which we believe we may have nexus but had not historically collected sales tax from our clients. These estimates include the liability for both uncollected sales tax and interest. The calculation of these estimates involves judgment and uncertainty regarding various state sales tax laws, and there is a possibility that a particular state in which we have estimated a liability will disagree with our assessment. It is also possible that a state in which we have determined we do not have a liability will disagree with our evaluation and assess a retroactive liability for uncollected sales tax. Based on our assessment, we do not expect the resolution of these liabilities to have a material effect on our results of operations or cash flows.

Emerging Growth Company

The Jumpstart Our Business Startups Act of 2021 permits us, as an “emerging growth company,” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for private companies.

Recent Accounting Standard Updates

Refer to Note 3 of the consolidated financial statements included elsewhere in this prospectus for information about recent accounting pronouncements.

Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency and Derivative Risk

We have entered into foreign currency options and forward contracts to mitigate the foreign exchange risk on expected future cash outlays to fund our fulfillment centers. We hedge our Indian rupee (INR) denominated expenses through foreign exchange contracts. These contracts were designated as cash flow hedges and qualified for hedge accounting under GAAP. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis. The earnings recognition of excluded components is also presented in the same line of the consolidated statements of operations and Comprehensive Loss as the earnings effect of the hedged transaction. In the year ended December 31, 2020, there was a gain of $0.3 million related to the excluded components of the hedged transaction, which was reclassified into cost of revenues and selling, general and administrative expense in the consolidated statements of operations and comprehensive loss. At December 31, 2019, we had no foreign currency forward contracts.

Recognized realized net gains from remeasurement of foreign currency forward contracts were immaterial in 2020.

 

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At December 31, 2020, we had USD-INR foreign currency forward contracts with a notional value totaling approximately $16.8 million. The fair value of these contracts was $0.6 million and is included in Other current assets on the consolidated balance sheets.

Credit Risk

As of December 31, 2020, we had accounts receivable, net of allowance for doubtful accounts, of $80.6 million. For the years ended December 31, 2019 and 2020, no single client accounted for more than 5% of our revenue. No single client had an accounts receivable balance greater than 10% of total accounts receivable at December 31, 2019 or 2020.

Interest Rate Risk

Our exposure to market risk is influenced by the changes in interest rates paid on any outstanding balance on our borrowings, mainly under our Credit Agreement. Our Term loan accrues interest at either (1) an applicable rate of 2.5% plus the greater of (a) the prime rate or (b) the federal funds rate plus 12 of 1% (c) the one-month LIBOR plus 1%, or (d) a 2% floor; (2) an applicable rate of 3.5% plus one-month LIBOR which is subject to a 1% floor. Our borrowings as of December 31, 2020 accrue interest at 4.5%, based on an applicable rate of 3.5% plus LIBOR rate floor of 1% as per (2) above.

We hedge against changes in the interest rates through two interest rate swaps which hedge the future cash flows on approximately 50% of the outstanding principal balance of the aggregate amounts due under the Term loan. The terms of the swaps allow us to effectively set LIBOR to 2.0266% through June 30, 2021, and to 2.9235% through June 30, 2022.

Effects of Inflation

While inflation may impact our revenues and operating expenses, we believe the effects of inflation, if any, on our results of operations and financial condition have not been significant. However, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future.

Internal Control over Financial Reporting

The process of improving our internal controls has required and will continue to require us to expend resources to design, implement and maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. There can be no assurance that any actions we take will be completely successful. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an on-going basis. As part of this process, we may identify specific internal controls as being deficient.

We continue to evaluate our internal control procedures in order to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent auditors addressing these assessments; however, for so long as we qualify as an emerging growth company, we will not be required to engage an auditor to report on our internal controls over financial reporting. We will be required to comply with the management certification requirements of Section 404 in our annual report on Form 10-K for the year following our first annual report that is filed with the Securities and Exchange Commission (the “SEC”) (subject to any change in applicable SEC rules). We will be required to comply with Section 404 in full (including an auditor attestation on management’s internal controls report) in our annual report on Form 10-K at the later of the year following our first annual report required to be filed with the SEC or the date on which we are no longer an emerging growth company (subject to any change in applicable SEC rules).

 

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See “Risk Factors—Risks Relating to This Offering and Ownership of Our Common Stock—We have identified a material weakness in our internal control over financial reporting. If this material weakness is not remediated, or if we experience additional material weaknesses in the future or otherwise fail in the future to maintain an effective system of internal control over financial reporting or effective disclosure controls and procedures, we may not be able to accurately or timely report our financial condition or results of operations, which may materially adversely affect investor confidence in us and, as a result, the price of our common stock.”

 

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BUSINESS

Sterling Overview

We are a leading global provider of technology-enabled background and identity verification services. We provide the foundation of trust and safety our clients need to create great environments for their most essential resource—people. We offer a comprehensive hiring and risk management solution that begins with identity verification, followed by criminal background screening, credential verification, drug and health screening, processing of employee documentation required for onboarding and ongoing risk monitoring. Our services are delivered through our purpose-built, proprietary, cloud-based technology platform that empowers organizations with real-time and data-driven insights to conduct and manage their employment screening programs efficiently and effectively. Our clients face a dynamic and rapidly evolving global labor market with increasing complexity and regulatory requirements. We believe that our services and platform enable organizations to make more informed employment decisions, improve workplace safety, protect their brand and mitigate risk. As a result, we believe our solutions are mission-critical to their core human resources, risk management and compliance functions. During the twelve months ended June 30, 2021, we completed over 75 million searches for over 40,000 clients, including over 50% of the Fortune 100 and over 45% of the Fortune 500.

We have built an award-winning proprietary and cloud-based technology platform. Our client and candidate interfaces provide easy-to-use and mobile-first ordering, task and program management, results delivery and reporting analytics. This enables our clients to gain meaningful insights into their risk mitigation programs, all while creating exceptional candidate and employee experiences. Our interfaces are supported by our powerful AI-driven fulfillment platform, which leverages more than 3,300 automation integrations, including APIs and RPA bots. This enables 90% of U.S. criminal searches to be automated and allows us to complete 70% of U.S. criminal searches within the first hour and 90% within the first day. As of December 31, 2020, 95% of our revenue is processed through platforms hosted in the cloud, which allows us to consistently maintain 99.9% platform availability while being prepared to scale into the future. These platforms are seamlessly integrated into over 75 ATS, HCM systems and our clients’ in-house supply chain systems, thus creating relatively frictionless, fast and unified candidate hiring experiences. When combined, we believe our solutions deliver convenient and easy-to-use front-end interfaces, accurate and fast results, and enable our clients to effectively manage complex programs in a compliant and cost-effective manner. We believe that our technology cannot be easily replicated without substantial investment.

As part of our continued evolution, in early 2019, we launched Project Ignite, a three-phase strategic investment initiative to create an enterprise-class global platform. We are already benefiting from the delivery of our new client and candidate interfaces, scalable cloud-based infrastructure for our global and local production platforms and an improved security environment through new business wins, improved client retention and the ability to launch products rapidly to meet immediate client needs, as we did with our full suite of COVID-19 testing products in 2020. The remaining investment, which we expect to complete in 2022, will migrate our corporate technological infrastructure to the cloud and unify our clients onto a single global production platform. Over the long term, we expect these investments to further enhance our margins, improve time to market as we build once and deploy globally and allow us to increase innovation.

Our client-centric approach underpins everything we do. We serve a diverse and global client base in a wide range of industries, such as healthcare, gig economy, financial and business services, industrials, retail, contingent, technology, media and entertainment, transportation and logistics, hospitality, education and government. Employers are facing numerous challenges, including complex and changing legal and regulatory requirements, a rise in fraudulent job applications, a growing spotlight on reputation and more complex global workforces. Successfully navigating these challenges

 

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requires an industry-specific perspective, given differing candidate profiles, economics, competitive dynamics and regulatory demands. To serve these differing needs, our sales and support delivery model is organized around Verticals and Regions. Experienced client success, sales, product and operations teams dedicated to individual Verticals collaborate with our clients to address their unique challenges and compliance requirements while providing industry best practice guidance. Our delivery model provides our clients with both the personal touch and consultative partnership of a small boutique firm and the global reach, scale, innovation and resources of an industry leader; all of which benefit SMBs, global multinational enterprises and everyone in between. Additionally, this delivery model supports our principle of “Compliance by Design”, enabling clients to maintain compliance globally. We believe the combination of our deep market expertise from our sales and support verticalization combined with the flexibility of our proprietary technology platform enable us to deliver industry-relevant, highly specialized solutions to our clients in a scalable manner, driving growth and differentiating us from our competitors. This has allowed us to develop long-standing relationships with our clients as evidenced by the average tenure of our top 100 clients, based on 2019 and 2020 total revenue, at nine years, our average client NPS of 57 and a gross retention rate of 96% for the first half of 2021.

Throughout our 45-year operating history, innovation and self-disruption have been at the core of what we do every day. Our history of unique, industry-oriented market insights allows us to be at the forefront of innovation which includes multiple industry-leading solutions. For example, we pioneered criminal fulfilment technology (CourtDirect), arrest record and incarceration alert products, post-hire monitoring capabilities, AI-enhanced record review and validation process and the industry’s only proprietary technology in a single-sourced U.S.-nationwide fingerprint network. Our commitment to innovation has continued with the recent development and introduction of enhanced global language support capabilities, a cloud-based operating platform and a comprehensive identity verification solution. Enabled by our market leadership and platform investments, we have established a foundation and roadmap for future innovation which includes industry-specific products, growing our Identity-as-a-Service capabilities and further geographic expansion.

For the years ended December 31, 2019 and 2020, our revenues were $497.1 million and $454.1 million, respectively. For the six months ended June 30, 2020 and 2021, our revenues were $207.9 million and $298.7 million, respectively. Our net loss was $46.7 million and $52.3 million and our operating loss was $13.4 million and $23.1 million for the years ended December 31, 2019 and 2020, respectively. Our net loss for the six months ended June 30, 2020 was $40.8 million and our net income for the six months ended June 30, 2021 was $4.0 million. Our operating loss for the six months ended June 30, 2020 was $19.6 million and our operating income for the six months ended June 30, 2021 was $23.2 million. For the years ended December 31, 2019 and 2020, our Adjusted EBITDA was $119.0 million and $99.8 million, respectively, and our Adjusted Net Income was $38.0 million and $26.7 million, respectively. For the six months ended June 30, 2020 and 2021, our Adjusted EBITDA was $41.5 million and $83.8 million, respectively, and our Adjusted Net Income was $6.5 million and $40.0 million, respectively. For the definitions of Adjusted EBITDA and Adjusted Net Income and a reconciliation to net income, their most directly comparable financial measure presented in accordance with GAAP, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

Our Market Opportunity

The global background and identity verification market in which we operate is large, growing and highly fragmented—representing a $16 billion total addressable market as of 2020, which is expected to grow at a 12% CAGR to $29 billion in 2025. The total addressable market comprises three distinct components as follows: the $6 billion global pre-hire employment screening services market (source: Acclaro Growth Partners, July 2021), expected to grow at a 7% CAGR to $8 billion in 2025, the $3 billion global post-hire employment screening services market (source: Acclaro Growth Partners, July

 

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2021), expected to grow at a 13% CAGR to $5 billion in 2025, as well as the $8 billion global identity verification market (source: Markets and Markets, October 2020), expected to grow at a 16% CAGR to $16 billion in 2025.

LOGO

Our addressable market is rapidly evolving and benefits from a number of key demand drivers, many of which increase the need for more flexible, comprehensive screening and hiring solutions, including the following:

LOGO

 

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Growing participation in the gig economy and contingent workforce

According to Gallup, 36% of the U.S. workforce participates in the gig economy and contingent workforce, and this proportion is expected to increase. The gig economy and contingent workforce consists of independent contractors, online platform workers, contract firm workers, and contingent workers. Gallup further estimates that 44% of gig workers hold multiple jobs. The rise and expansion of the gig economy and contingent workforce results in a greater portion of the workforce being sourced from temporary or on-demand labor pools. Additionally, the rise of competing gig platforms has made it easier for gig workers to shift between platforms, thus increasing the demand for screening. As the gig economy caters to clients in a very direct and personal way (e.g., rideshare, goods delivery, household services) and large corporations continue to increase utilization of a contingent workforce that may access sensitive information, safe and effective background screening capabilities have become critical. We believe that continued growth in the gig and contingent workforce model for the foreseeable future will support clear demand for Sterling’s deep expertise and tailored solutions.

 

   

Increasing voluntary employee churn

Generational and structural shifts in the workforce have led to increasing voluntary employee churn, particularly with younger workers. Members of the millennial and Gen-Z generations switch jobs more frequently than previous generations. According to a recent Gallup report, only half of millennials strongly agreed that they plan to be working at their company one year from now; similarly, 60% of millennials say they are open to a different job opportunity—15 percentage points higher than older generation workers. Moreover, the generational movement away from unions and defined benefit plans reduces contractual and financial incentives to stay in a particular role, reducing switching costs for employees. The ongoing structural shift from in-office to remote work further reduces the historical geographic matching challenge employers and employees faced, further reducing switching costs for employees and expanding talent pools for employers. These trends support increasing demand for global, fast and efficient employment screening and identity verification services that only providers of scale, like Sterling, can sufficiently address.

 

   

The rise of fraudulent job applications and growing spotlight on a company’s reputational risk

False claims within job applications are a growing concern for employers. According to The Insight Partners, approximately 51% of resumes submitted to employers contain inaccuracies in employment history and performance as well as educational history and achievement. False claims by candidates can put an organization at significant risk. Costs include not only salary but also incentives, benefits, recruiting expenses, administrative costs and the cost to restart the process in recruiting a candidate. In extreme cases, the employee may cause harm in the workplace, leading to a claim of negligent hiring, forcing the employer to contend with the cost and time of litigation and possible significant damages or settlements. Additionally, there may be considerable reputational risk to the employer, whose safety and trust may be called into question. Utilizing background and identification verification services helps organizations to mitigate these risks.

 

   

Proliferation of personal data driving need for identity verification

According to a recent Risk Based Security report, the total number of data records compromised in 2020 exceeded 37 billion, a 141% increase compared to 2019 and by far the most records exposed in a single year since Risk Based Security began reporting on data breach activity in 2011. This number excludes the nearly 50% of breaches (1,923 of 3,932 publicly reported breaches) that did not report the number of records compromised. With this growth in exposed records, more identities are at risk of exposure and theft. Verifying identity is a powerful tool that employers can use to help ensure that their candidates and workers are

 

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who they claim to be, and that fraudulent data is not used during the hiring and onboarding process.

 

   

Increase in background screening adoption outside the U.S.

We believe that pre-hire candidate screening is significantly less common outside of the U.S. Many international markets are beginning to view employment background checks as a critical component of their hiring functions. Additionally, the international expansion of U.S.-based global companies and their desire to offer centralized and comparable hiring practices has introduced the benefits of background screening to foreign markets. For these employers, global background checks are critical in order to comply with regulatory requirements, standardize their quality of hires and protect against negligent hiring risks. However, international background checks or verifying foreign credentials presents additional complexities, as employers may not be familiar with foreign customs or information sources, and the time and cost to hire employees with international histories are often much more significant. Background and identity verification service firms that can navigate these international challenges present a clear advantage for employers.

 

   

Increase in continuous post-hire screening processes

While some industries have regulatory requirements for post-hire screening, employers from all industries are increasingly focused on managing risk in the workplace through continuous screening and monitoring. According to a 2020 report by the PBSA, 12% of U.S. companies currently perform background checks annually or more regularly, up from 9% in 2019. Continuous screening allows for greater mobility and safety for remote, onsite and contingent jobs and also ensures prompt risk warnings on any changes to an employee’s profile, including any criminal activity, drug use or health changes and compliance with on-going certification and licensing requirements, amongst others.

 

   

Increasing regulatory, compliance and risk management requirements

Increasing regulation is creating a heightened and complex risk of potential liabilities related to hiring and workforce management that is increasingly difficult for employers to manage. U.S. employee privacy and data protection laws are complicated and vary state-to-state. In addition, the interpretation of the FCRA is continuously evolving. Other complexi