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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-31666

 

First Advantage Corporation

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

84-3884690

(State or other jurisdiction of

incorporation or organization)

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

1 Concourse Parkway NE, Suite 200

Atlanta, GA

30328

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (888) 314-9761

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.001 par value per share

 

FA

 

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

As of May 4, 2023, the registrant had 146,259,519 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

 

 

 

PART I.

FINANCIAL INFORMATION

2

 

 

 

Item 1.

Financial Statements (Unaudited)

2

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations and Comprehensive Income

3

 

Condensed Consolidated Statements of Cash Flows

4

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

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

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

34

 

 

 

PART II.

OTHER INFORMATION

35

 

 

 

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

36

Item 6.

Exhibits

38

Signatures

39

 

1


 

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

First Advantage Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

 

(in thousands, except share and per share amounts)

 

March 31, 2023

 

 

December 31, 2022

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

400,156

 

 

$

391,655

 

Restricted cash

 

 

140

 

 

 

141

 

Short-term investments

 

 

1,954

 

 

 

1,956

 

Accounts receivable (net of allowance for doubtful accounts of $1,344 and $1,348 at March 31, 2023 and December 31, 2022, respectively)

 

 

127,962

 

 

 

143,811

 

Prepaid expenses and other current assets

 

 

22,780

 

 

 

25,407

 

Income tax receivable

 

 

2,482

 

 

 

3,225

 

Total current assets

 

 

555,474

 

 

 

566,195

 

Property and equipment, net

 

 

103,301

 

 

 

113,529

 

Goodwill

 

 

793,293

 

 

 

793,080

 

Trade name, net

 

 

69,387

 

 

 

71,162

 

Customer lists, net

 

 

312,568

 

 

 

326,014

 

Deferred tax asset, net

 

 

2,405

 

 

 

2,422

 

Other assets

 

 

11,235

 

 

 

13,423

 

TOTAL ASSETS

 

$

1,847,663

 

 

$

1,885,825

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

Accounts payable

 

$

47,484

 

 

$

54,947

 

Accrued compensation

 

 

12,990

 

 

 

22,702

 

Accrued liabilities

 

 

16,782

 

 

 

16,400

 

Current portion of operating lease liability

 

 

5,640

 

 

 

4,957

 

Income tax payable

 

 

808

 

 

 

724

 

Deferred revenues

 

 

1,256

 

 

 

1,056

 

Total current liabilities

 

 

84,960

 

 

 

100,786

 

Long-term debt (net of deferred financing costs of $7,613 and $8,075 at March 31, 2023 and December 31, 2022, respectively)

 

 

557,111

 

 

 

556,649

 

Deferred tax liability, net

 

 

88,422

 

 

 

90,556

 

Operating lease liability, less current portion

 

 

6,673

 

 

 

7,879

 

Other liabilities

 

 

3,170

 

 

 

3,337

 

Total liabilities

 

 

740,336

 

 

 

759,207

 

COMMITMENTS AND CONTINGENCIES (Note 11)

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

Common stock - $0.001 par value; 1,000,000,000 shares authorized, 147,026,264 and 148,732,603 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively

 

 

147

 

 

 

149

 

Additional paid-in-capital

 

 

1,179,595

 

 

 

1,176,163

 

Accumulated deficit

 

 

(50,953

)

 

 

(27,363

)

Accumulated other comprehensive loss

 

 

(21,462

)

 

 

(22,331

)

Total equity

 

 

1,107,327

 

 

 

1,126,618

 

TOTAL LIABILITIES AND EQUITY

 

$

1,847,663

 

 

$

1,885,825

 

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

2


 

First Advantage Corporation

Condensed Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

 

 

 

Three Months Ended March 31,

 

(in thousands, except share and per share amounts)

 

2023

 

 

2022

 

REVENUES

 

$

175,520

 

 

$

189,881

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization below)

 

 

91,061

 

 

 

96,431

 

Product and technology expense

 

 

12,624

 

 

 

13,773

 

Selling, general, and administrative expense

 

 

28,682

 

 

 

28,545

 

Depreciation and amortization

 

 

31,866

 

 

 

34,034

 

Total operating expenses

 

 

164,233

 

 

 

172,783

 

INCOME FROM OPERATIONS

 

 

11,287

 

 

 

17,098

 

 

 

 

 

 

 

OTHER EXPENSE, NET:

 

 

 

 

 

 

Interest expense, net

 

 

8,681

 

 

 

(850

)

Total other expense, net

 

 

8,681

 

 

 

(850

)

INCOME BEFORE PROVISION FOR INCOME TAXES

 

 

2,606

 

 

 

17,948

 

Provision for income taxes

 

 

681

 

 

 

4,935

 

NET INCOME

 

$

1,925

 

 

$

13,013

 

 

 

 

 

 

 

Foreign currency translation income (loss)

 

 

869

 

 

 

(1,517

)

COMPREHENSIVE INCOME

 

$

2,794

 

 

$

11,496

 

 

 

 

 

 

 

NET INCOME

 

$

1,925

 

 

$

13,013

 

Basic net income per share

 

$

0.01

 

 

$

0.09

 

Diluted net income per share

 

$

0.01

 

 

$

0.09

 

Weighted average number of shares outstanding - basic

 

 

145,862,562

 



 

150,538,700

 

Weighted average number of shares outstanding - diluted

 

 

147,031,866

 

 

 

152,348,806

 

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

3


 

First Advantage Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2023

 

 

2022

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

1,925

 

 

$

13,013

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

31,866

 

 

 

34,034

 

Amortization of deferred financing costs

 

 

461

 

 

 

445

 

Bad debt recovery

 

 

(40

)

 

 

(184

)

Deferred taxes

 

 

(2,144

)

 

 

1,698

 

Share-based compensation

 

 

2,058

 

 

 

1,859

 

Gain on foreign currency exchange rates

 

 

(10

)

 

 

(411

)

Loss on disposal of fixed assets and impairment of ROU assets

 

 

1,222

 

 

 

163

 

Change in fair value of interest rate swaps

 

 

1,879

 

 

 

(5,260

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

15,980

 

 

 

8,862

 

Prepaid expenses and other assets

 

 

2,933

 

 

 

1,151

 

Accounts payable

 

 

(7,618

)

 

 

(1,329

)

Accrued compensation and accrued liabilities

 

 

(11,828

)

 

 

(13,215

)

Deferred revenues

 

 

209

 

 

 

(254

)

Operating lease liabilities

 

 

(110

)

 

 

(405

)

Other liabilities

 

 

980

 

 

 

(26

)

Income taxes receivable and payable, net

 

 

836

 

 

 

1,442

 

Net cash provided by operating activities

 

 

38,599

 

 

 

41,583

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Acquisitions of businesses, net of cash acquired

 

 

 

 

 

(18,920

)

Purchases of property and equipment

 

 

(42

)

 

 

(2,909

)

Capitalized software development costs

 

 

(6,056

)

 

 

(4,643

)

Other investing activities

 

 

15

 

 

 

 

Net cash used in investing activities

 

 

(6,083

)

 

 

(26,472

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Share repurchases

 

 

(25,266

)

 

 

 

Payments on finance lease obligations

 

 

(37

)

 

 

(238

)

Payments on deferred purchase agreements

 

 

(234

)

 

 

(349

)

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

 

 

1,399

 

 

 

547

 

Net settlement of share-based compensation plan awards

 

 

(25

)

 

 

 

Net cash used in financing activities

 

 

(24,163

)

 

 

(40

)

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

 

 

147

 

 

 

58

 

Increase in cash, cash equivalents, and restricted cash

 

 

8,500

 

 

 

15,129

 

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

 

 

391,796

 

 

 

292,790

 

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

 

$

400,296

 

 

$

307,919

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

Cash paid for income taxes, net of refunds received

 

$

2,049

 

 

$

1,713

 

Cash paid for interest

 

$

10,625

 

 

$

4,774

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

Property and equipment acquired on account

 

$

275

 

 

$

206

 

Excise taxes on share repurchases incurred but not paid

 

$

252

 

 

$

 

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

4


 

First Advantage Corporation

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

(in thousands)

 

Common Stock

 

 

Additional
Paid-In-Capital

 

 

Accumulated
Deficit

 

 

Accumulated Other
Comprehensive
Loss

 

 

Total Stockholders’
Equity

 

BALANCE – December 31, 2022

 

$

149

 

 

$

1,176,163

 

 

$

(27,363

)

 

$

(22,331

)

 

$

1,126,618

 

Share-based compensation

 

 

 

 

 

2,058

 

 

 

 

 

 

 

 

 

2,058

 

Repurchases of common stock

 

 

(2

)

 

 

 

 

 

(25,515

)

 

 

 

 

 

(25,517

)

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

 

 

0

 

 

 

1,399

 

 

 

 

 

 

 

 

 

1,399

 

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

 

 

0

 

 

 

(25

)

 

 

 

 

 

 

 

 

(25

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

869

 

 

 

869

 

Net income

 

 

 

 

 

 

 

 

1,925

 

 

 

 

 

 

1,925

 

BALANCE – March 31, 2023

 

$

147

 

 

$

1,179,595

 

 

$

(50,953

)

 

$

(21,462

)

 

$

1,107,327

 

 

(in thousands)

 

Common Stock

 

 

Additional
Paid-In-Capital

 

 

Accumulated
Deficit

 

 

Accumulated Other
Comprehensive
Loss

 

 

Total Stockholders’
Equity

 

BALANCE – December 31, 2021

 

$

153

 

 

$

1,165,163

 

 

$

(31,441

)

 

$

(1,637

)

 

$

1,132,238

 

Share-based compensation

 

 

 

 

 

1,859

 

 

 

 

 

 

 

 

 

1,859

 

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

 

 

0

 

 

 

547

 

 

 

 

 

 

 

 

 

547

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

(1,517

)

 

 

(1,517

)

Net income

 

 

 

 

 

 

 

 

13,013

 

 

 

 

 

 

13,013

 

BALANCE – March 31, 2022

 

$

153

 

 

$

1,167,569

 

 

$

(18,428

)

 

$

(3,154

)

 

$

1,146,140

 

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

5


 

First Advantage Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

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

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

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

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

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

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

Basis of Presentation —The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. The Company includes the results of operations of acquired companies prospectively from the date of acquisition.

The condensed consolidated financial statements included herein are unaudited, but in the opinion of management, such financial statements include all adjustments, consisting of normal recurring adjustments, necessary to summarize fairly the Company’s financial position, results of operations, and cash flows for the interim periods presented. The interim results reported in these condensed consolidated financial statements should not be taken as indicative of results that may be expected for future interim periods or the full year. For a more comprehensive understanding of the Company and its condensed consolidated financial statements, these interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

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

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

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

6


 

Note 2. Summary of Significant Accounting Policies

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

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

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

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

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

The carrying amounts of cash and cash equivalents, short-term investments, receivables, short-term debt, and accounts payable approximate fair value due to the short-term maturities of these financial instruments (Level 1). The fair values and carrying values of the Company’s long-term debt are disclosed in Note 5.

The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis and their assigned levels within the valuation hierarchy as of March 31, 2023 (in thousands):

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

Interest rate collars

 

$

 

 

$

9,007

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

 

 

$

1,444

 

 

$

 


Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

Impairment of Long-Lived Assets — The Company regularly evaluates whether events and circumstances have occurred that indicate the carrying amount of property and equipment, ROU assets, and finite-life intangible assets may not be recoverable or that indicate useful lives warrant revision. The Company determined that triggering events occurred for certain leases exited during the three months ended March 31, 2023 which required an impairment review of certain ROU assets. Based on the results of the analysis, the Company recorded non-cash impairment charges of $1.1 million for the three months ended March 31, 2023, primarily related to office space exited during the year. Write down of abandoned property and equipment no longer in use was less than $0.2 million for the three months ended March 31, 2023.

Concentrations of Credit Risk — Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Cash is deposited with major financial institutions and, at times, such balances with each financial institution may be in excess of insured limits. The Company has not experienced, and does not anticipate, any losses with respect to its cash deposits. Accounts receivable represent credit granted to customers for services provided. The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on accounts receivable. The Company did not have any customers which represented 10% or more of consolidated revenues for the three months ended March 31, 2023 and 2022. Additionally, the Company did not have any customers which represented 10% or more of consolidated accounts receivable, net for any period presented.

7


 

Foreign Currency — The functional currency of all of the Company’s foreign subsidiaries is the applicable local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenues and expense accounts using average exchange rates prevailing during the fiscal year. Adjustments resulting from the translation of foreign currency financial statements are accumulated net of tax in a separate component of equity. Currency translation (loss) income included in accumulated other comprehensive income (loss) was approximately $0.9 million and $(1.5) million for the three months ended March 31, 2023 and 2022, respectively.

Gains or losses resulting from foreign currency transactions are included in the accompanying condensed consolidated statements of operations and comprehensive income, except for those relating to intercompany transactions of a long-term investment nature, which are captured in a separate component of equity as accumulated other comprehensive income (loss). Currency transaction (loss) income included in the accompanying condensed consolidated statements of operations and comprehensive income was approximately $(0.5) million and $1.0 million for the three months ended March 31, 2023 and 2022, respectively.

Recent Accounting Pronouncements — There were no accounting pronouncements issued during the three months ended March 31, 2023 that are expected to have a material impact on the condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements — In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. Prior to the issuance of this guidance, contract assets and contract liabilities were recognized by the acquirer at fair value on the acquisition date. This guidance is effective for annual reporting periods beginning after December 15, 2022 including interim periods therein. Adoption of this standard on January 1, 2023 did not have a material impact on the condensed consolidated financial statements. However, if the Company acquires material customer contracts in the future, this standard will impact the accounting for those arrangements which may have a material effect on future results.

Note 3. Property and Equipment, net

Property and equipment, net as of March 31, 2023 and December 31, 2022 consisted of the following (in thousands):

 

 

March 31, 2023

 

 

December 31, 2022

 

Furniture and equipment

 

$

23,189

 

 

$

23,422

 

Capitalized software for internal use, acquired by business combination

 

 

227,405

 

 

 

227,405

 

Capitalized software for internal use, developed internally or otherwise purchased

 

 

66,369

 

 

 

60,187

 

Leasehold improvements

 

 

2,802

 

 

 

2,957

 

Total property and equipment

 

 

319,765

 

 

 

313,971

 

Less: accumulated depreciation and amortization

 

 

(216,464

)

 

 

(200,442

)

Property and equipment, net

 

$

103,301

 

 

$

113,529

 

Depreciation and amortization expense of property and equipment was approximately $16.4 million and $16.8 million for the three months ended March 31, 2023 and 2022, respectively.

8


 

Note 4. Goodwill, Trade Name, and Customer Lists

The changes in the carrying amount of goodwill for the three months ended March 31, 2023 by reportable segment were as follows (in thousands):

 

 

Americas

 

 

International

 

 

Total

 

Balance – December 31, 2022

 

$

677,171

 

 

$

115,909

 

 

$

793,080

 

Foreign currency translation

 

 

37

 

 

 

176

 

 

 

213

 

Balance – March 31, 2023

 

$

677,208

 

 

$

116,085

 

 

$

793,293

 

The following summarizes the gross carrying value and accumulated amortization for the Company’s trade name and customer lists as of March 31, 2023 and December 31, 2022 (in thousands):

 

 

March 31, 2023

 

 

Gross
Carrying Value

 

 

Accumulated
Amortization

 

 

Net
Carrying Value

 

 

Useful Life
(in years)

Trade name

 

$

94,000

 

 

$

(24,613

)

 

$

69,387

 

 

20 years

Customer lists

 

 

516,009

 

 

 

(203,441

)

 

 

312,568

 

 

13-14 years

Total

 

$

610,009

 

 

$

(228,054

)

 

$

381,955

 

 

 

 

 

 

December 31, 2022

 

 

Gross
Carrying Value

 

 

Accumulated
Amortization

 

 

Net
Carrying Value

 

 

Useful Life
(in years)

Trade name

 

$

93,959

 

 

$

(22,797

)

 

$

71,162

 

 

20 years

Customer lists

 

 

515,762

 

 

 

(189,748

)

 

 

326,014

 

 

13-14 years

Total

 

$

609,721

 

 

$

(212,545

)

 

$

397,176

 

 

 

Amortization expense of trade name and customer lists was approximately $15.4 million and $17.2 million for the three months ended March 31, 2023 and 2022, respectively. Trade name and customer lists are amortized on an accelerated basis based upon their estimated useful life.

Note 5. Long-term Debt

The fair value of the Company’s long-term debt obligations approximated their book value as of March 31, 2023 and December 31, 2022 and consisted of the following (in thousands):

 

 

March 31, 2023

 

 

December 31, 2022

 

First Lien Credit Facility

 

$

564,724

 

 

$

564,724

 

Less: Deferred financing costs

 

 

(7,613

)

 

 

(8,075

)

Long-term debt, net

 

$

557,111

 

 

$

556,649

 

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

9


 

Note 6. Derivatives

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

As of March 31, 2023, the Company had the following outstanding derivatives that were not designated as a hedge in qualifying hedging relationships:

Product

 

Effective Date

 

Maturity Date

 

Notional

 

Rate

Interest rate collars

 

February 29, 2020

 

February 29, 2024

 

$300.0 million

 

0.48% floor/1.50% cap

Interest rate swap

 

February 28, 2023

 

February 28, 2026

 

$100.0 million

 

4.36%

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

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

 

 

 

 

Fair Value

 

Derivatives not designated
as hedging instruments

 

Balance Sheet Location

 

As of
March 31, 2023

 

 

As of
 December 31, 2022

 

Interest rate collars

 

Prepaid expenses and other current assets

 

$

9,007

 

 

$

11,570

 

Interest rate swap

 

Accrued liabilities

 

$

1,444

 

 

$

 

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

 

 

 

 

Gain/(Loss)

 

 

 

 

 

Three Months Ended March 31,

 

Derivatives not designated
as hedging instruments

 

Income Statement Location

 

2023

 

 

2022

 

Interest rate collars

 

Interest expense, net

 

$

(435

)

 

$

5,260

 

Interest rate swap

 

Interest expense, net

 

$

(1,444

)

 

$

 

 

Note 7. Income Taxes

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

For the three months ended March 31, 2023, the Company estimated the annual effective tax rate based on projected income for the full year and recorded a quarterly tax provision in accordance with the annual effective tax rate and adjusted for discrete tax items in the period.

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

The effective income tax rate for the three months ended March 31, 2022 was 27.5%. The Company’s effective income tax rate for the three months ended March 31, 2022 was higher than the U.S. federal statutory rate of 21%, primarily due to GILTI inclusion, nondeductible share-based compensation, and U.S. state income taxes.

10


 

Note 8. Revenues

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

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

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

Contract balances are generated when the revenues recognized in a given period varies from billing. A contract asset is created when the Company performs a service for a customer and recognizes more revenues than what has been billed. The contract asset balance was $7.2 million and $6.5 million as of March 31, 2023 and December 31, 2022, respectively, and is included in accounts receivable, net in the accompanying condensed consolidated balance sheets.

A contract liability is created when the Company transfers a good or service to a customer and recognizes less than what has been billed. The Company recognizes these contract liabilities as deferred revenues when the Company has an obligation to perform services for a customer in the future and has already received consideration from the customer. The contract liability balance was $1.3 million and $1.1 million as of March 31, 2023 and December 31, 2022, respectively, and is included in deferred revenues in the accompanying condensed consolidated balance sheets. An immaterial amount of revenues was recognized in the current period related to the beginning balance of deferred revenues.

For additional disclosures about the disaggregation of our revenues see Note 14, “Reportable Segments.”

11


 

Note 9. Share-based Compensation

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

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Share-based compensation expense

 

 

 

 

 

 

Cost of services

 

$

275

 

 

$

274

 

Product and technology expense

 

 

457

 

 

 

204

 

Selling, general, and administrative expense

 

 

1,326

 

 

 

1,381

 

Total share-based compensation expense

 

$

2,058

 

 

$

1,859

 

2020 Equity Plan

Prior to the Company’s Initial Public Offering (“IPO”), all share-based awards were issued by Fastball Holdco, L.P., the Company’s previous parent company, under individual grant agreements and the partnership agreement of such parent company (collectively the “2020 Equity Plan”). Awards issued under the 2020 Equity Plan consist of options. No awards were issued under the plan during the period from January 1, 2023 through March 31, 2023.

A summary of the option and profits interests activity for the three months ended March 31, 2023 is as follows

 

 

 

 

Options

 

 

Weighted Average
Exercise Price

 

 

Weighted Average Remaining Contractual Term

 

Aggregate Intrinsic Value

December 31, 2022

 

Grants outstanding

 

 

2,843,342

 

 

$

6.66

 

 

 

 

 

 

 

Grants exercised

 

 

(85,760

)

 

$

6.68

 

 

 

 

 

 

 

Grants cancelled/forfeited

 

 

(250,856

)

 

$

6.69

 

 

 

 

 

March 31, 2023

 

Grants outstanding

 

 

2,506,726

 

 

$

6.66

 

 

6.8 Years

 

$18.3 million

March 31, 2023

 

Grants vested

 

 

806,379

 

 

$

6.64

 

 

6.6 Years

 

$5.9 million

March 31, 2023

 

Grants unvested

 

 

1,700,347

 

 

$

6.67

 

 

 

 

 

2021 Equity Plan

The 2021 Equity Plan is intended to provide a means through which to attract and retain key personnel and to provide a means whereby our directors, officers, employees, consultants, and advisors can acquire and maintain an equity interest in us, or be paid incentive compensation, including incentive compensation measured by reference to the value of our common stock, thereby strengthening their commitment to our welfare and aligning their interests with those of our stockholders. The 2021 Equity Plan provides for the grant of awards of stock options, stock appreciation rights, restricted shares, restricted stock units, and other equity-based or cash-based awards as determined by the Company’s Compensation Committee. The 2021 Equity Plan initially had a total of 17,525,000 shares of common stock reserved. The number of reserved shares automatically increases on the first day of each calendar year commencing on January 1, 2022 and ending on January 1, 2030, in an amount equal to the lesser of (x) 2.5% of the total number of shares of common stock outstanding on the last day of the immediately preceding calendar year and (y) a number of shares as determined by the Board of Directors. As of March 31, 2023, 17,204,287 shares were available for issuance under the 2021 Equity Plan.

Stock Options

A summary of the option activity for the three months ended March 31, 2023 is as follows:

 

 

 

 

Options

 

 

Weighted Average
Exercise Price

 

 

Weighted Average Remaining Contractual Term

 

Aggregate Intrinsic Value

 

December 31, 2022

 

Grants outstanding

 

 

4,311,662

 

 

$

15.24

 

 

 

 

 

 

 

 

Grants issued

 

 

71,099

 

 

$

13.70

 

 

 

 

 

 

March 31, 2023

 

Grants outstanding

 

 

4,382,761

 

 

$

15.21

 

 

8.4 Years

 

$0.0 million

 

March 31, 2023

 

Grants vested

 

 

1,392,123

 

 

$

15.16

 

 

8.3 Years

 

 

 

March 31, 2023

 

Grants unvested

 

 

2,990,638

 

 

$

15.23

 

 

 

 

 

 

 

12


 

The fair value for stock options granted for the three months ended March 31, 2023 was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

 

Options

 

Expected stock price volatility

 

 

35.48

%

Risk-free interest rate

 

 

4.22

%

Expected term (in years)

 

 

6.25

 

Fair-value of the underlying unit

 

$

13.70

 

Restricted Stock Units

A summary of the restricted stock units (“RSU”) activity for the three months ended March 31, 2023 is as follows:

 

 

 

 

Shares

 

 

Weighted Average
Grant Date Fair Value

 

December 31, 2022

 

Nonvested RSUs

 

 

472,332

 

 

$

16.00

 

 

 

Granted

 

 

21,202

 

 

$

13.70

 

 

 

Vested

 

 

(5,077

)

 

$

16.33

 

March 31, 2023

 

Nonvested RSUs

 

 

488,457

 

 

$

15.90

 

Restricted Stock

A summary of the restricted stock activity for the three months ended March 31, 2023 is as follows:

 

 

 

 

Shares

 

 

Weighted Average
Grant Date Fair Value

 

December 31, 2022

 

Nonvested restricted stock

 

 

2,281,300

 

 

$

3.85

 

 

 

Vested

 

 

(326,670

)

 

$

3.85

 

March 31, 2023

 

Nonvested restricted stock

 

 

1,954,630

 

 

$

3.85

 

As of March 31, 2023, the Company had approximately $33.2 million of unrecognized pre-tax non-cash compensation expense, comprised of approximately $7.3 million related to restricted stock, $6.1 million related to RSUs, and approximately $19.8 million related to stock options, which the Company expects to recognize over a weighted average period of 2.7 years.

2021 Employee Stock Purchase Plan

The Company adopted the First Advantage Corporation 2021 Employee Stock Purchase Plan (“ESPP”) that allows eligible employees to voluntarily make after-tax contributions of up to 15% of such employee’s cash compensation to acquire Company stock during designated offering periods. During each offering period, there is one six-month purchase period. During the holding period, ESPP purchased shares are not eligible for sale or broker transfer. The Company recorded an associated expense of approximately $0.2 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively.

13


 

Note 10. Equity

Stock Repurchase Program

On August 2, 2022, the Company’s Board of Directors authorized the repurchase of up to $50.0 million of the Company’s common stock over the 12-month period ending August 2, 2023 (the “Repurchase Program”). On November 8, 2022, the Company’s Board of Directors authorized an increase to the total available amount under its Repurchase Program to $150.0 million and extended the program through December 31, 2023. In February 2023, the Company’s Board of Directors further increased the total available amount under the Repurchase Program to $200.0 million effective February 28, 2023.

Stock repurchases may be effected through open market repurchases at prevailing market prices, including through the use of block trades and trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, privately-negotiated transactions, through other transactions in accordance with applicable securities laws, or a combination of these methods on such terms and in such amounts as the Company deems appropriate and will be funded from available capital. The Company is not obligated to repurchase any specific number of shares, and the timing, manner, value, and actual number of shares repurchased will depend on a variety of factors, including the Company’s stock price and liquidity requirements, other business considerations and general market and economic conditions. No shares will be purchased from SLP Fastball Aggregator, L.P. and its affiliates. The Company may discontinue or modify purchases without notice at any time.

A summary of the stock repurchase activity under the Repurchase Program, is summarized as follows (in thousands, except share and per share amounts):

 

 

Three Months Ended
March 31, 2023

 

Shares repurchased

 

 

1,871,691

 

Average price per share

 

$

13.50

 

Costs recorded to accumulated deficit

 

 

 

Total repurchase costs

 

$

25,228

 

Additional associated costs

 

 

289

 

Total costs recorded to accumulated deficit

 

$

25,517

 

As of March 31, 2023, the remaining authorized value of shares available to be repurchased under this program was approximately $114.2 million.

Repurchased shares of common stock are retired. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is reflected as a reduction to accumulated deficit. Additional associated costs include the related brokerage commissions and excise taxes on share repurchases.

Preferred Stock

As of March 31, 2023 and December 31, 2022, 250,000,000 shares of Preferred Stock were authorized, and no Preferred Stock was issued or outstanding.

Note 11. Commitments and Contingencies

There have been no material changes to the Company’s contractual obligations as compared to December 31, 2022.

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

For all pending matters, the Company believes it has meritorious defenses and intends to defend vigorously or otherwise seek indemnification from other parties as appropriate. However, the Company has recorded a liability of $4.1 million and $4.4 million at March 31, 2023 and December 31, 2022, respectively, for matters that it believes a loss is both probable and estimable. This is included in accrued liabilities in the accompanying condensed consolidated balance sheets.

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

Note 12. Related Party Transactions

The Company had no material related party transactions.

14


 

Note 13. Net Income Per Share

Basic weighted-average shares outstanding excludes nonvested restricted stock. Diluted weighted average shares outstanding is similar to basic weighted-average shares outstanding, except that the weighted-average number of shares is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common share had been issued, including the dilutive impact of nonvested restricted stock. Basic and diluted net income per share was calculated as follows:

 

 

Three Months Ended March 31,

 



 

2023

 

 

2022

 

Basic net income per share

 

$

0.01

 

 

$

0.09

 

Diluted net income per share

 

$

0.01

 

 

$

0.09

 

Numerator:

 



 





 

Net income (in thousands)

 

$

1,925

 

 

$

13,013

 

Denominator:

 



 





 

Weighted average number of shares outstanding - basic

 

 

145,862,562

 



 

150,538,700

 

Add stock options to purchase shares and restricted stock units

 

 

1,169,304

 

 

 

1,810,106

 

Weighted average number of shares outstanding - diluted

 

 

147,031,866

 

 

 

152,348,806

 

For the three months ended March 31, 2023 and 2022, 2,913,298 and 2,099,781 stock options were excluded from the calculation of diluted net income per share, respectively, because their effects were anti-dilutive.

15


 

Note 14. Reportable Segments

We have two reportable segments, Americas and International. Our chief operating decision maker (“CODM”) uses the profit measure of Adjusted EBITDA, on both a consolidated and a segment basis, to allocate resources and assess performance of our businesses. We use Adjusted EBITDA as our profit measure because it eliminates the impact of certain items that we do not consider indicative of operating performance, which is useful to compare operating results between periods. Our Board of Directors and executive management team also use Adjusted EBITDA as a compensation measure for both segment and corporate management under our incentive compensation plans. Adjusted EBITDA is also a measure frequently used by securities analysts, investors, and other interested parties in their evaluation of the operating performance of companies similar to ours.

We define Adjusted EBITDA as net income before interest, taxes, depreciation, and amortization, and as further adjusted for loss on extinguishment of debt, share-based compensation, transaction and acquisition-related charges, integration and restructuring charges, and other non-cash charges. We exclude the impact of share-based compensation because it is a non-cash expense and we believe that excluding this item provides meaningful supplemental information regarding performance and ongoing cash generation potential. We exclude loss on extinguishment of debt, transaction and acquisition related charges, integration and restructuring charges, and other charges because such expenses are episodic in nature and have no direct correlation to the cost of operating our business on an ongoing basis.

The segment financial information below aligns with how we report information to our CODM to assess operating performance and how the Company manages the business. Corporate costs are generally allocated to the segments based upon estimated revenue levels and other assumptions that management considers reasonable. The CODM does not review the Company’s assets by segment; therefore, such information is not presented. The accounting policies of the segments are the same as described in Note 2, “Summary of Significant Accounting Policies” and Note 8, “Revenues.”

The following is a description of our two reportable segments:

Americas. This segment performs a variety of background check and compliance services across all phases of the workforce lifecycle from pre-onboarding services to post-onboarding and ongoing monitoring services, covering employees, contractors, contingent workers, tenants, and drivers. We generally classify our service offerings into three categories: pre-onboarding, post-onboarding, and adjacent products. We deliver our solutions across multiple vertical industries in the United States, Canada, and Latin America markets.

International. The International segment provides services similar to our Americas segment in regions outside of the Americas. We primarily deliver our solutions across multiple vertical industries in the Europe, India, and Asia Pacific markets.

A reconciliation of Segment Adjusted EBITDA to net income for the three months ended March 31, 2023 and 2022 is as follows (in thousands):

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Adjusted EBITDA

 

 

 

 

 

 

Americas

 

$

44,656

 

 

$

46,819

 

International

 

 

3,904

 

 

 

6,781

 

Total

 

$

48,560

 

 

$

53,600

 

Adjustments to reconcile to net income:

 

 

 

 

 

 

Interest expense, net

 

 

8,681

 

 

 

(850

)

Provision for income taxes

 

 

681

 

 

 

4,935

 

Depreciation and amortization

 

 

31,866

 

 

 

34,034

 

Share-based compensation

 

 

2,058

 

 

 

1,859

 

Transaction and acquisition-related charges (a)

 

 

1,071

 

 

 

1,498

 

Integration, restructuring, and other charges (b)

 

 

2,278

 

 

 

(889

)

Net income

 

$

1,925

 

 

$

13,013

 

(a)
Represents charges incurred related to acquisitions and similar transactions, primarily consisting of change in control-related costs, professional service fees, and other third-party costs. Additionally includes incremental professional service fees incurred related to the initial public offering and subsequent one-time compliance efforts. The three months ended March 31, 2023 and 2022 include a transaction bonus expense related to one of the Company’s 2021 acquisitions.
(b)
Represents charges from organizational restructuring and integration activities, non-cash, and other charges primarily related to legal exposures inherited from legacy acquisitions, foreign currency (gains) losses, and (gains) losses on the sale of assets.

16


 

Geographic Information

The Company bases revenues by geographic region in which the revenues and invoicing are recorded. Other than the United States, no single country accounted for 10% or more of our total revenues during these periods.

The following summarizes revenues by geographical region (in thousands):

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Revenues

 

 

 

 

 

 

Americas

 

$

152,056

 

 

$

160,088

 

International

 

 

24,848

 

 

 

31,741

 

Eliminations

 

 

(1,384

)

 

 

(1,948

)

Total revenues

 

$

175,520

 

 

$

189,881

 

The following table sets forth net long-lived assets by geographic area (in thousands):

 

March 31, 2023

 

 

December 31, 2022

 

Long-lived assets, net

 

 

 

 

 

 

United States, country of domicile

 

$

1,110,915

 

 

$

1,134,201

 

All other countries

 

 

176,848

 

 

 

180,258

 

Total long-lived assets, net

 

$

1,287,763

 

 

$

1,314,459

 

 

Note 15. Subsequent Events

Effective as of May 10, 2023, the Company’s Board of Directors approved a modification of the vesting terms of outstanding unvested and unearned performance-based options, RSUs, and restricted stock. The modification offers eligible employees incremental vesting criteria which allows the currently unvested and unearned performance-based options, RSUs, and restricted stock to vest based on time on the fourth, fifth, and sixth anniversaries of the Vesting Commencement Date, as defined in each grant agreement, subject to continued service. The related accounting will be recorded prospectively on a straight-line basis beginning in the second quarter of 2023.

17


 

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

The following discussion and analysis of First Advantage Corporation’s financial condition and results of operations is provided as a supplement to the condensed consolidated financial statements for the three months ended March 31, 2023, and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2022, our “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, our operations and financial performance. Forward-looking statements include all statements that are not historical facts. These forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. In some cases, you can identify these forward-looking statements by the use of words such as “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “future,” “will,” “seek,” “foreseeable,” the negative version of these words, or similar terms and phrases.

These forward-looking statements are subject to various risks, uncertainties, assumptions, or changes in circumstances that are difficult to predict or quantify. Such risks and uncertainties include, but are not limited to, the following: negative changes in external events beyond our control, including our customers’ onboarding volumes, economic drivers which are sensitive to macroeconomic cycles, such as interest rate volatility and inflation, geopolitical unrest, uncertainty in financial markets (including as a result of recent bank failures and events affecting financial institutions), and the COVID-19 pandemic; our operations in a highly regulated industry and the fact that we are subject to numerous and evolving laws and regulations, including with respect to personal data and data security; inability to identify and successfully implement our growth strategies on a timely basis or at all; potential harm to our business, brand, and reputation as a result of security breaches, cyber-attacks, or the mishandling of personal data; operating in a penetrated and competitive market; our reliance on third-party data providers; due to the sensitive and privacy-driven nature of our products and solutions, we could face liability and legal or regulatory proceedings, which could be costly and time-consuming to defend and may not be fully covered by insurance; our international business exposes us to a number of risks; real or perceived errors, failures, or bugs in our products could adversely affect our business, results of operations, financial condition, and growth prospects; our ability to identify attractive targets or successfully complete such transactions; the timing, manner and volume of repurchases of common stock pursuant to our share repurchase program; failure to comply with anti-corruption laws and regulations; disruptions at our Global Operating Center and other operating centers; our contracts with our customers, which do not guarantee exclusivity or contracted volumes; disruptions, outages, or other errors with our technology and network infrastructure, including our data centers, servers, and third-party cloud and internet providers and our migration to the cloud; the continued integration of our platforms and solutions with human resource providers such as applicant tracking systems and human capital management systems as well as our relationships with such human resource providers; risks relating to public opinion, which may be magnified by incidents or adverse publicity concerning our industry or operations; our reliance on third-party vendors to carry out certain portions of our operations; our dependence on the service of our key executive and other employees, and our ability to find and retain qualified employees; our ability to obtain, maintain, protect and enforce our intellectual property and other proprietary information; our ability to maintain, protect, and enforce the confidentiality of our trade secrets; the use of open-source software in our applications; the indemnification provisions in our contracts with our customers and third-party data suppliers; seasonality in our operations from quarter to quarter; our indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, and prevent us from meeting our obligations; Silver Lake’s control of us and the potential conflict of its interest with ours or those of our stockholders; and changing interpretations of tax laws.

For additional information on these and other factors that could cause First Advantage’s actual results to differ materially from expected results, please see our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (the “SEC”), as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. The forward-looking statements included in this Quarterly Report on Form 10-Q speak only as of the date of this Form 10-Q, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.

18


 

Glossary of Selected Terminology

The following terms are used in this Form 10-Q, unless otherwise noted or indicated by the context:

“Americas” in regards to our business, means the United States, Canada, and Latin America;
“Enterprise customers” means our customers who contribute $500,000 or more to our revenues in a calendar year;
“First Advantage,” the “Company,” “we,” “us,” and “our” mean the business of First Advantage Corporation and its subsidiaries;
“International” in regards to our business, means all geographical regions outside of the United States, Canada, and Latin America;
“Revenues attributable to the Company’s acquisitions” means revenues recognized in the first year following each acquisition; and
“Silver Lake” means Silver Lake Group, L.L.C., together with its affiliates, successors, and assignees.

Certain monetary amounts, percentages, and other figures included in this Quarterly Report on Form 10-Q have been subject to rounding adjustments. Percentage amounts included in this Quarterly Report on Form 10-Q have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this Quarterly Report on Form 10-Q may vary from those obtained by performing the same calculations using the figures in our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Certain other amounts that appear in this Quarterly Report on Form 10-Q may not sum due to rounding.

Website and Social Media Disclosure

We use our websites (https://fadv.com/ and https://investors.fadv.com/) to distribute company information. We make available free of charge a variety of information for investors, including our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file that material with or furnish it to the Securities and Exchange Commission (“SEC”). The information we post on our websites may be deemed material. Accordingly, investors should monitor our websites, in addition to following our press releases, filings with the SEC, and public conference calls and webcasts. In addition, you may opt in to automatically receive email alerts and other information about First Advantage when you enroll your email address by visiting the “Email Alerts” section of our investor website at https://investors.fadv.com/. The contents of our websites and social media channels are not, however, a part of this Quarterly Report on Form 10-Q.

19


 

Overview

First Advantage is a leading global provider of employment background screening and verification solutions. We deliver innovative services and insights that help our customers manage risk and hire the best talent. Enabled by our proprietary technology, our products help companies protect their brands and provide safer environments for their customers and their most important resources: employees, contractors, contingent workers, tenants, and drivers.

Our comprehensive product suite includes criminal background checks, drug / health screening, extended workforce screening, biometrics and identity, education / work verifications, resident screening, fleet / driver compliance, executive screening, data analytics, continuous monitoring, social media monitoring, and hiring tax incentives. We derive a substantial majority of our revenues from pre-onboarding screening and perform screens in over 200 countries and territories, enabling us to serve as a one-stop-shop provider to both multinational companies and growth companies. Our approximately 33,000 customers are global enterprises, mid-sized companies, and small companies, and our products and solutions are used by personnel in recruiting, human resources, risk, compliance, vendor management, safety, and/or security.

Our products are sold both individually and packaged. The First Advantage platform offers flexibility for customers to specify which products to include in their screening package, such as Social Security numbers, criminal records, education and work verifications, sex offender registry, and global sanctions. Generally, our customers order a background screening package or selected combination of screens related to a single individual before they onboard that individual. The type and mix of products and solutions we sell to a customer vary by customer size, their screening requirements, and industry vertical. Therefore, order volumes are not comparable across both customers and periods. Pricing can also vary considerably by customer depending on the product mix in their screening packages, order volumes, screening requirements and preferences, pass-through and third-party out of pocket costs, and bundling of products.

We enter into contracts with our customers that are typically three years in length. These contracts set forth the general terms and pricing of our products and solutions but generally do not include minimum order volumes or committed order volumes. Accordingly, contracts do not provide guarantees of future revenues. Due to our contract terms and the nature of the background screening industry, we determined our contract terms for ASC 606 purposes are less than one year. Through our ongoing dialogue with our customers, we have visibility into their expected future order volumes, although these can be difficult to accurately forecast due to the dynamic nature of forecasting hiring and business needs. We typically bill our customers at the end of each month and recognize revenues as completed orders are reported or otherwise made available to our customers. Over 92% of the criminal searches performed in the United States are completed the same day they are submitted.

We generated revenues of $175.5 million for the three months ended March 31, 2023, as compared to $189.9 million for the three months ended March 31, 2022. Approximately 86% of our revenues for the three months ended March 31, 2023 was generated in the Americas, predominantly in the United States, while the remaining 14% was generated in our International segment. Other than the United States, no single country accounted for 10% or more of our total revenues for the three months ended March 31, 2023. Please refer to “Results of Operations” for further details.

Segments

During the first quarter of 2022, the Company made organizational changes and modified additional information provided to its chief operating decision maker (“CODM”) to better align with how its CODM assesses performance and allocates resources. As a result, the Company has two reportable segments, Americas and International:

Americas. This segment performs a variety of background check and compliance services across all phases of the workforce lifecycle from pre-onboarding services to post-onboarding and ongoing monitoring services, covering employees, contractors, contingent workers, tenants, and drivers. We generally classify our service offerings into three categories: pre-onboarding, post-onboarding, and adjacent products. We deliver our solutions across multiple vertical industries in the United States, Canada, and Latin America markets.
International. The International segment provides services similar to our Americas segment in regions outside of the Americas. We primarily deliver our solutions across multiple vertical industries in the Europe, India, and Asia Pacific markets.

20


 

Seasonality

We experience seasonality with respect to certain industries due to fluctuations in hiring volumes and other economic activity. For example, pre-onboarding revenues generated from our customers in the retail and transportation industries are historically highest during the months of October and November, leading up to the holiday season and lowest at the beginning of the new year, following the holiday season. Certain customers across various industries also historically ramp up their hiring throughout the second quarter 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, apartment rental activity and associated screening activity typically decline in the fourth quarter heading into the holiday season. We expect that further growth in e-commerce, the continued digital transformation of the economy, and other economic forces may impact future seasonality, but we are unable to predict these potential shifts and how our business may be impacted.

Recent Developments

Current Economic Conditions

Macroeconomic factors, including inflation, increased interest rates, significant capital market volatility, uncertainty in financial markets (including as a result of recent bank failures and events affecting financial institutions), the prolonged COVID-19 pandemic, global supply chain constraints, and global economic and geopolitical developments, have negatively impacted significant portions of the global economy, and created volatility in the financial markets.

While our overall productivity has not been materially adversely impacted, recently, we have started to experience, and may continue to experience, the lengthening of certain sales cycles as cyclical concerns begin to factor into customer hiring plans. If the economic uncertainty is sustained or increases, we may experience a negative impact on new business, customer renewals and demand levels, sales and marketing efforts, revenues growth rates, customer deployments, customer collections, product development, or other financial metrics. Any of these factors could harm our business, financial condition, and operating results.

Despite the continuing uncertainty associated with these events, we are confident in the long-term overall health of our business, the strength of our product offerings, and our ability to continue to execute on our strategy and help our customers hire smarter and onboard faster. Our ability to deliver innovative products and solutions that enhance workplace safety and address compliance risks has contributed to the durability of our financial results. For additional information, see our “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Recently Issued Accounting Standards

See Note 2 to the condensed consolidated financial statements for disclosure of the impact that recent accounting pronouncements may have on the condensed consolidated financial statements.

Components of our Results of Operations

Revenues

The Company derives revenues from a variety of background screening and adjacent products that cover all phases of the workforce lifecycle from pre-onboarding screening services to post-onboarding and ongoing monitoring services, covering employees, contractors, contingent workers, tenants, and drivers. We generally classify our products and solutions into three major categories: pre-onboarding, post-onboarding, and adjacent products, each of which is enabled by our technology, proprietary internal databases, and data analytics capabilities. Pre-onboarding products, which comprise the substantial majority of our revenues, span an extensive array of products that customers typically utilize to enhance their applicant evaluation process and ensure compliance with their workforce onboarding criteria from the time an application is submitted to an applicant’s successful onboarding. Post-onboarding products are comprised of continuous monitoring, re-screening, and other solutions to help our customers keep their end customers, workforces, and other stakeholders safer, more productive, and more compliant. Adjacent products include products that complement our pre-onboarding and post-onboarding solutions such as fleet / vehicle compliance, hiring tax credits and incentives, resident / tenant screening, employment eligibility, and investigative research.

Our suite of products is available individually or through packaged solutions that can be configured and tailored according to our customers’ needs. We typically bill our customers at the end of each month and recognize revenues after completed orders are reported or otherwise made available to our customers, with a substantial majority of our customers’ orders completed the same day they are submitted. We recognize revenues for other products over time as the customer simultaneously receives and consumes the benefits of the products and solutions delivered.

21


 

Operating Expenses

We incur the following expenses related to our cost of revenues and operating expenses:

Cost of Services: Consists of amounts paid to third parties for access to government records, other third-party data and services, and our internal processing fulfillment and customer care functions. In addition, cost of services includes expenses from our drug screening lab and collection site network as well as our court runner network. Third-party cost of services are largely variable in nature and are typically invoiced to our customers as direct pass-through costs. Cost of services also includes our salaries and benefits expense for personnel involved in the processing and fulfillment of our screening products and solutions, as well as our customer care organization and robotics process automation implementation team. Other costs included in cost of services relate to allocations of certain overhead costs for our revenue-generating products and solutions, primarily consisting of certain facility costs and administrative services allocated by headcount or another related metric. We do not allocate depreciation and amortization to cost of services.
Product and Technology Expense: Consists of salaries and benefits of personnel involved in the maintenance of our technology and its integrations and APIs, product marketing, management of our network and infrastructure capabilities, and maintenance of our information security and business continuity functions. A portion of the personnel costs are related to the development of new products and features that are primarily developed through agile methodologies. These costs are partially capitalized, and therefore, are partially reflected as amortization expense within the depreciation and amortization cost line item. Product and technology expense also includes third-party costs related to our cloud computing services, software licensing and maintenance, telecommunications, and other data processing functions. We do not allocate depreciation and amortization to product and technology expense.
Selling, General, and Administrative Expense: Consists of sales, customer success, marketing, and general and administrative expenses. Sales, customer success, and marketing expenses consist primarily of employee compensation such as salaries, bonuses, sales commissions, stock-based compensation, and other employee benefits for our verticalized Sales and Customer Success teams. General and administrative expenses include travel expenses and various corporate functions including finance, human resources, legal, and other administrative roles, in addition to certain professional service fees and expenses incurred in connection with our IPO and now as a public company. We expect our selling, general, and administrative expenses to increase in the short-term, primarily as a result of additional public company related reporting and compliance costs. Over the long-term, we expect our selling, general, and administrative expenses to decrease as a percentage of revenues as we leverage our past investments. We do not allocate depreciation and amortization to selling, general, and administrative expenses.
Depreciation and Amortization: Property and equipment consisting mainly of capitalized software costs, furniture, hardware, and leasehold improvements are depreciated or amortized and reflected as operating expenses. We also amortize the capitalized costs of finite-life intangible assets acquired in connection with business combinations.

We have a flexible cost structure that allows our business to adjust quickly to the impacts of macroeconomic events and scale to meet the needs of large new customers. Operating expenses are influenced by the amount of revenues, customer mix, and product mix that contribute to our revenues for any given period. As revenues grow, we would generally expect cost of services to grow in a similar fashion, albeit influenced by the effects of automation, productivity, and other efficiency initiatives as well as customer and product mix shifts and third-party pass-through costs. We regularly review expenses and investments in the context of revenues growth and any shifts we see in the business in order to align with our overall financial objectives. While we expect internal operating expenses to increase in absolute dollars to support our continued growth, we believe that, in the long term, operating expenses will decline gradually as a percentage of total revenues in the future as our business grows and our operating efficiency and automation initiatives continue to advance.

Other Expense, Net

Our other expense, net consists of the following:

Interest Expense, Net: Relates primarily to our debt service costs, the interest-related unrealized gains and losses of our interest rate swaps and, to a lesser extent, the interest on our capital lease obligations and the amortization of deferred financing costs. Additionally, interest expense, net includes interest income earnings on our cash and cash equivalent balances held in interest-bearing accounts. We also earn interest income on our short-term investments which are fixed-time deposits having a maturity date within twelve months.

22


 

Provision for Income Taxes

Provision for income taxes consists of domestic and foreign corporate income taxes related to earnings from our sale of services, with statutory tax rates that differ by jurisdiction. Our effective tax rate may 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. For example, there are several proposals to change the current tax law, including changes in GILTI. If any or all of these (or similar) proposals are ultimately enacted into law, in whole or in part, they could increase our effective tax rate.

Results of Operations

The information contained below should be read in conjunction with our accompanying historical condensed consolidated financial statements and the related notes.

Comparison of Results of Operations for the three months ended March 31, 2023 compared to the three months ended March 31, 2022

 

 

Three Months Ended March 31,

 

(in thousands, except percentages)

 

2023

 

 

2022

 

Revenues

 

$

175,520

 

 

$

189,881

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization below)

 

 

91,061

 

 

 

96,431

 

Product and technology expense

 

 

12,624

 

 

 

13,773

 

Selling, general, and administrative expense

 

 

28,682

 

 

 

28,545

 

Depreciation and amortization

 

 

31,866

 

 

 

34,034

 

Total operating expenses

 

 

164,233

 

 

 

172,783

 

Income from operations

 

 

11,287

 

 

 

17,098

 

 

 

 

 

 

 

Other Expense, Net:

 

 

 

 

 

 

Interest expense, net

 

 

8,681

 

 

 

(850

)

Total other expense, net

 

 

8,681

 

 

 

(850

)

Income before provision for income taxes

 

 

2,606

 

 

 

17,948

 

Provision for income taxes

 

 

681

 

 

 

4,935

 

Net income

 

$

1,925

 

 

$

13,013

 

Net income margin

 

 

1.1

%

 

 

6.9

%

 

 

23


 

Revenues

 

 

Three Months Ended March 31,

 

(in thousands)

 

2023

 

 

2022

 

Revenues

 

 

 

 

 

 

Americas

 

$

152,056

 

 

$

160,088

 

International

 

 

24,848

 

 

$

31,741

 

Eliminations

 

 

(1,384

)

 

$

(1,948

)

Total revenues

 

$

175,520

 

 

$

189,881

 

Revenues were $175.5 million for the three months ended March 31, 2023, compared to $189.9 million for the three months ended March 31, 2022. Revenues for the three months ended March 31, 2023 decreased by $14.4 million, or 7.6%, compared to the three months ended March 31, 2022.

The decrease in revenues was primarily due to:

a net decrease of $22.0 million in existing customer revenues primarily driven by reduced demand from customers more impacted by macro-economic events, the elevated levels of growth experienced in 2022 due to the post-pandemic recovery, and the impact of lost accounts. In the Americas segment, certain industry verticals were more impacted by lower hiring activity resulting in lower revenues. In the International segment, declines were more significantly experienced in the India and APAC markets, which was offset by growth in our Europe operations. These decreases were partially offset by ongoing strength in upselling and cross-selling existing customers, contributing $9.3 million of additional revenues, and increased revenues from certain existing customers lesser impacted by the macro-economic declines.

The decrease in revenues was offset by:

increased revenues of $7.6 million attributable to new customers in our Americas segment.

Pricing remained relatively stable across all periods.

Cost of Services

 

 

Three Months Ended March 31,

 

(in thousands, except percentages)

 

2023

 

 

2022

 

Revenues

 

$

175,520

 

 

$

189,881

 

Cost of services

 

 

91,061

 

 

 

96,431

 

Cost of services as a % of revenue

 

 

51.9

%

 

 

50.8

%

Cost of services was $91.1 million for the three months ended March 31, 2023, compared to $96.4 million for the three months ended March 31, 2022. Cost of services for the three months ended March 31, 2023 decreased by $5.4 million, or 5.6%, compared to the three months ended March 31, 2022.

The decrease in cost of services was primarily due to:

a $3.2 million decrease in personnel related expenses in our operations and customer service functions as a result of cost savings actions taken by the Company in late 2022 and 2023, as well as productivity efficiencies from the implementation of additional automation programs; and
a decrease in variable third-party data expenses of $2.9 million as a result of continued automation, decreased revenues, and variation in customer ordering mix.

Cost of services as a percentage of revenues was 51.9% for the three months ended March 31, 2023, compared to 50.8% for the three months ended March 31, 2022. The cost of services percentage of revenues in the first quarter of 2023 was impacted by increases in certain third-party data costs due to variation in customer ordering mix. This increase was partially offset by cost savings from the Company’s continued implementation of automation and other process efficiencies, as well as certain cost savings actions taken by the Company in late 2022 and 2023.

24


 

Product and Technology Expense

 

 

Three Months Ended March 31,

 

(in thousands)

 

2023

 

 

2022

 

Product and technology expense

 

$

12,624

 

 

$

13,773

 

Product and technology expense was $12.6 million for the three months ended March 31, 2023, compared to $13.8 million for the three months ended March 31, 2022. Product and technology expense for the three months ended March 31, 2023 decreased by $1.1 million, or 8.3%, compared to the three months ended March 31, 2022.

The decrease in product and technology expense was primarily due to:

a $2.2 million decrease in personnel-related expenses due to decreases in bonus-related expenses and higher capitalization of certain qualified costs related to the development of internal use software in 2023, relative to 2022, due to greater investment in our products that better align with our strategic product initiatives.

The decrease in cost of services was partially offset by:

a $1.1 million increase in software licensing related expenses.

Selling, General, and Administrative Expense

 

 

Three Months Ended March 31,

 

(in thousands)

 

2023

 

 

2022

 

Selling, general, and administrative expense

 

$

28,682

 

 

$

28,545

 

Selling, general, and administrative expense was $28.7 million for the three months ended March 31, 2023, compared to $28.5 million for the three months ended March 31, 2022. Selling, general, and administrative expense for the three months ended March 31, 2023 increased by $0.1 million, or 0.5%, compared to the three months ended March 31, 2022.

Selling, general, and administrative expense increased primarily due to:

a $1.4 million increase in expenses related to litigation activities in the ordinary course of business;
foreign currency exchange losses of $1.1 million due to the impact of foreign exchange rate volatility; and
a $1.1 million increase in expenses related to the impairment of certain operating lease assets resulting from office space exited during the quarter.

The increase in selling, general, and administrative expense was partially offset by:

a $1.9 million decrease in commissions and bonus related expenses due to lower performance against internal targets; and
a $0.6 million decrease in personnel related expenses as well as certain other cost savings actions taken by the Company in late 2022 and 2023.

Depreciation and Amortization

 

 

Three Months Ended March 31,

 

(in thousands)

 

2023

 

 

2022

 

Depreciation and amortization

 

$

31,866

 

 

$

34,034

 

Depreciation and amortization was $31.9 million for the three months ended March 31, 2023, compared to $34.0 million for the three months ended March 31, 2022. Depreciation and amortization for the three months ended March 31, 2023 decreased by $2.2 million, or 6.4%, compared to the three months ended March 31, 2022. This decrease was partially offset by increases in depreciation related to assets placed in service during the three months ended March 31, 2023.

25


 

Interest Expense, Net

 

 

Three Months Ended March 31,

 

(in thousands)

 

2023

 

 

2022

 

Interest expense, net

 

$

8,681

 

 

$

(850

)

Interest expense, net was $8.7 million for the three months ended March 31, 2023, compared to $(0.9) million for the three months ended March 31, 2022. Interest expense for the three months ended March 31, 2023 increased by $9.5 million, compared to the three months ended March 31, 2022.

The increase in interest expense was primarily attributable to higher interest expense on the First Lien Credit Facility and $1.9 million of unrealized losses on the interest rate swaps as a result of rising interest rates. Increases in interest expense were offset by interest income of $3.8 million earned on cash held within interest bearing accounts.

Provision for Income Taxes

 

 

Three Months Ended March 31,

 

(in thousands)

 

2023

 

 

2022

 

Provision for income taxes

 

$

681

 

 

$

4,935

 

Our provision for income taxes was $0.7 million for the three months ended March 31, 2023, compared to $4.9 million for the three months ended March 31, 2022. Our provision for income taxes for the three months ended March 31, 2023 decreased by $4.3 million, compared to the three months ended March 31, 2022.

The decrease in our provision for income taxes was primarily due to the decrease of income before income taxes during the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.

Net Income and Net Income Margin

 

 

Three Months Ended March 31,

 

(in thousands, except percentages)

 

2023

 

 

2022

 

Net income

 

$

1,925

 

 

$

13,013

 

Net income margin

 

 

1.1

%

 

 

6.9

%

Net income was $1.9 million for the three months ended March 31, 2023, compared to $13.0 million for the three months ended March 31, 2022. Net income for the three months ended March 31, 2023 decreased by $11.1 million compared to the three months ended March 31, 2022.

Net income margin was 1.1% for the three months ended March 31, 2023 compared to 6.9% for three months ended March 31, 2022, as reduced demand from customers more impacted by macro-economic events contributed to lower revenues and profitability, particularly as the Company cycled over the growth experienced in 2022 due to the post-pandemic recovery.

 

26


 

Key Operating and Financial Metrics

In addition to our results determined in accordance with GAAP, we believe certain measures are useful in evaluating our operating performance. Management believes these non-GAAP measures are useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate, and capital investments. Management uses Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, and Adjusted Diluted Earnings Per Share to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation, and to compare our performance against that of other peer companies using similar measures. Management supplements GAAP results with non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone.

The presentations of these measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because not all companies use identical calculations, the presentations of these measures may not be comparable to other similarly titled measures of other companies and can differ significantly from company to company. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP.

Adjusted EBITDA and Adjusted EBITDA Margin

Management believes that Adjusted EBITDA is a strong indicator of our overall operating performance and is useful to management and investors as a measure of comparative operating performance from period to period. We define Adjusted EBITDA as net income before interest, taxes, depreciation, and amortization, and as further adjusted for loss on extinguishment of debt, share-based compensation, transaction and acquisition-related charges, integration and restructuring charges, and other non-cash charges. We exclude the impact of share-based compensation because it is a non-cash expense and we believe that excluding this item provides meaningful supplemental information regarding performance and ongoing cash generation potential. We exclude loss on extinguishment of debt, transaction and acquisition related charges, integration and restructuring charges, and other charges because such expenses are episodic in nature and have no direct correlation to the cost of operating our business on an ongoing basis.

Adjusted EBITDA was $48.6 million for the three months ended March 31, 2023 and represented an Adjusted EBITDA Margin of 27.7%. Adjusted EBITDA was $53.6 million for the three months ended March 31, 2022 and represented an Adjusted EBITDA Margin of 28.2%. Adjusted EBITDA for the three months ended March 31, 2023 decreased by $5.0 million, or 9.4%, compared to the three months ended March 31, 2022.

Adjusted EBITDA declined as macro-economic events impacted our revenues attributed to existing customers. Decreases were further impacted by the effects of changes in foreign currencies. These decreases were partially offset by increased revenues from certain existing and new customers, including ongoing strength in upselling and cross-selling, cost structure benefits due to increased automation, operational efficiencies, and certain other cost savings actions taken by the Company in late 2022 and 2023.

The following table presents a reconciliation of Adjusted EBITDA for the periods presented.

 

 

Three Months Ended March 31,

 

(in thousands)

 

2023

 

 

2022

 

Net income

 

$

1,925

 

 

$

13,013

 

Interest expense, net

 

 

8,681

 

 

 

(850

)

Provision for income taxes

 

 

681

 

 

 

4,935

 

Depreciation and amortization

 

 

31,866

 

 

 

34,034

 

Share-based compensation

 

 

2,058

 

 

 

1,859

 

Transaction and acquisition-related charges (a)

 

 

1,071

 

 

 

1,498

 

Integration, restructuring, and other charges (b)

 

 

2,278

 

 

 

(889

)

Adjusted EBITDA

 

$

48,560

 

 

$

53,600

 

(a)
Represents charges incurred related to acquisitions and similar transactions, primarily consisting of change in control-related costs, professional service fees, and other third-party costs. Additionally includes incremental professional service fees incurred related to the initial public offering and subsequent one-time compliance efforts. The three months ended March 31, 2023 and 2022 include a transaction bonus expense related to one of the Company’s 2021 acquisitions.
(b)
Represents charges from organizational restructuring and integration activities, non-cash, and other charges primarily related to legal exposures inherited from legacy acquisitions, foreign currency (gains) losses, and (gains) losses on the sale of assets.

27


 

We define Adjusted EBITDA Margin as Adjusted EBITDA divided by total revenues. The following table presents the calculation of Adjusted EBITDA Margin for the periods presented.

 

 

Three Months Ended March 31,

 

(in thousands, except percentages)

 

2023

 

 

2022

 

Adjusted EBITDA

 

$

48,560

 

 

$

53,600

 

Revenues

 

 

175,520

 

 

 

189,881

 

Adjusted EBITDA Margin

 

 

27.7

%

 

 

28.2

%

The following table presents a calculation of Adjusted EBITDA by segment for the periods presented. Refer to Note 14 to the condensed consolidated financial statements for a reconciliation of Adjusted EBITDA for the periods presented by segment.

 

 

Three Months Ended March 31,

 

(in thousands, except percentages)

 

2023

 

 

2022

 

Adjusted EBITDA (1):

 

 

 

 

 

 

Americas

 

$

44,656

 

 

$

46,819

 

International

 

 

3,904

 

 

 

6,781

 

Adjusted EBITDA

 

$

48,560

 

 

$

53,600

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

Americas

 

$

152,056

 

 

$

160,088

 

International

 

 

24,848

 

 

 

31,741

 

Less: intersegment eliminations

 

 

(1,384

)

 

 

(1,948

)

Total revenues

 

$

175,520

 

 

$

189,881

 

 

 

 

 

 

 

 

Adjusted EBITDA Margin

 

 

 

 

 

 

Americas

 

 

29.4

%

 

 

29.2

%

International

 

 

15.7

%

 

 

21.4

%

Adjusted EBITDA Margin

 

 

27.7

%

 

 

28.2

%

(1)
See the reconciliation of net income to Adjusted EBITDA above. Segment Adjusted EBITDA margins are calculated using segment gross revenues and segment Adjusted EBITDA. Consolidated Adjusted EBITDA margin is calculated using consolidated revenues and consolidated Adjusted EBITDA.

 

28


 

Adjusted Net Income and Adjusted Diluted Earnings Per Share

Similar to Adjusted EBITDA, management believes that Adjusted Net Income and Adjusted Diluted Earnings Per Share are strong indicators of our overall operating performance and are useful to our management and investors as measures of comparative operating performance from period to period. We define Adjusted Net Income for a particular period as net income before taxes adjusted for debt-related costs, acquisition-related depreciation and amortization, share-based compensation, transaction and acquisition related charges, integration and restructuring charges, and other non-cash charges, to which we then apply the related effective tax rate. We define Adjusted Diluted Earnings Per Share as Adjusted Net Income divided by adjusted weighted average number of shares outstanding—diluted.

Adjusted Net Income was $28.4 million for the three months ended March 31, 2023, compared to $33.5 million for the three months ended March 31, 2022. Adjusted Net Income for the three months ended March 31, 2023 decreased by $5.1 million, or 15.3%, compared to the three months ended March 31, 2022.

Adjusted Diluted Earnings Per Share was $0.19 for the three months ended March 31, 2023 decreased by $0.03, or 13.6% compared to the three months ended March 31, 2022.

Adjusted Net Income and Adjusted Diluted Earnings Per Share declined as reduced demand from customers more impacted by macro-economic events contributed to lower revenues and profitability. Adjusted Net Income and Adjusted Diluted Earnings Per Share were further impacted by changes in acquisition-related depreciation and amortization and changes in our capital structure that are captured in interest expense. Gains or losses and actual cash payments and receipts on the Company’s interest rate swaps impact the comparability of Adjusted Net Income and Adjusted Diluted Earnings Per Share across historical periods.

The following tables present a reconciliation of Adjusted Net Income for the periods presented.

 

 

Three Months Ended March 31,

 

(in thousands)

 

2023

 

 

2022

 

Net income

 

$

1,925

 

 

$

13,013

 

Provision for income taxes

 

 

681

 

 

 

4,935

 

Income before provision for income taxes

 

 

2,606

 

 

 

17,948

 

Debt-related charges(a)

 

 

4,468

 

 

 

(4,815

)

Acquisition-related depreciation and amortization(b)

 

 

25,485

 

 

 

29,115

 

Share-based compensation

 

 

2,058

 

 

 

1,859

 

Transaction and acquisition-related charges(c)

 

 

1,071

 

 

 

1,498

 

Integration, restructuring, and other charges (d)

 

 

2,278

 

 

 

(889

)

Adjusted Net Income before income tax effect

 

 

37,966

 

 

 

44,716

 

Less: Income tax effect(e)

 

 

9,602

 

 

 

11,219

 

Adjusted Net Income

 

$

28,364

 

 

$

33,497

 

 

29


 

The following table presents the calculation of Adjusted Diluted Earnings Per Share for the periods presented.

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Diluted net income per share (GAAP)

 

$

0.01

 

 

$

0.09

 

Adjusted Net Income adjustments per share

 

 

 

 

 

 

Income taxes

 

 

0.00

 

 

 

0.03

 

Debt-related charges (a)

 

 

0.03

 

 

 

(0.03

)

Acquisition-related depreciation and amortization (b)

 

 

0.17

 

 

 

0.19

 

Share-based compensation

 

 

0.01

 

 

 

0.01

 

Transaction and acquisition related charges (c)

 

 

0.01

 

 

 

0.01

 

Integration, restructuring, and other charges (d)

 

 

0.02

 

 

 

(0.01

)

Adjusted income taxes (e)

 

 

(0.07

)

 

 

(0.07

)

Adjusted Diluted Earnings Per Share (Non-GAAP)

 

$

0.19

 

 

$

0.22

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding used in computation of Adjusted Diluted Earnings Per Share:

 

 

 

 

 

 

Weighted average number of shares outstanding—diluted (GAAP and Non-GAAP)

 

 

147,031,866

 

 

 

152,348,806

 

(a)
Represents non-cash interest expense related to the amortization of debt issuance costs for the Company’s First Lien Credit Facility (as defined below). Beginning in 2022, this adjustment also includes the impact of the change in fair value of interest rate swaps. This adjustment, which represents the difference between the fair value gains or losses and actual cash payments and receipts on the interest rate swaps, was added as a result of the increased interest rate volatility observed in 2022.
(b)
Represents the depreciation and amortization expense related to intangible assets and developed technology assets recorded due to the application of ASC 805, Business Combinations. As a result, the purchase accounting related depreciation and amortization expense will recur in future periods until the related assets are fully depreciated or amortized, and the related purchase accounting assets may contribute to revenue generation.
(c)
Represents charges incurred related to acquisitions and similar transactions, primarily consisting of change in control-related costs, professional service fees, and other third-party costs. Additionally includes incremental professional service fees incurred related to the initial public offering and subsequent one-time compliance efforts. The three months ended March 31, 2023 and 2022 include a transaction bonus expense related to one of the Company’s 2021 acquisitions.
(d)
Represents charges from organizational restructuring and integration activities, non-cash, and other charges primarily related to legal exposures inherited from legacy acquisitions, foreign currency (gains) losses, and (gains) losses on the sale of assets.
(e)
Effective tax rates of approximately 25.3% and 25.1% have been used to compute Adjusted Net Income and Adjusted Diluted Earnings Per Share for the three months ended March 31, 2023 and 2022, respectively. As of December 31, 2022, we had net operating loss carryforwards of approximately $11.0 million for federal income tax purposes available to reduce future income subject to income taxes. As a result, the amount of actual cash taxes we may pay for federal income taxes differs significantly from the effective income tax rate computed in accordance with GAAP and from the normalized rate shown above.

 

30


 

Liquidity and Capital Resources

Liquidity

The Company’s primary liquidity requirements are for working capital, continued investments in software development and other capital expenditures, and other strategic investments. Income taxes are currently not a significant use of funds but after the benefits of our net operating loss carryforwards are fully recognized, in early 2023, will become a material use of funds, depending on our future profitability and future tax rates. The Company’s liquidity needs are met primarily through existing balance sheet cash, cash flows from operations, as well as funds available under our revolving credit facility and proceeds from our term loan borrowings. Our cash flows from operations include cash received from customers, less cash costs to provide services to our customers, which includes general and administrative costs and interest payments.

As of March 31, 2023, we had $400.2 million in cash and cash equivalents and $100.0 million available under our revolving credit facility. As of March 31, 2023, we had $564.7 million of total debt outstanding. We believe our cash on hand, together with amounts available under our revolving credit facility, and cash provided by operating activities are and will continue to be adequate to meet our operational and business needs in the next twelve months. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds. In the event that we need access to additional cash, we may not be able to access the credit markets on commercially acceptable terms or at all. Our ability to fund future operating expenses and capital expenditures and our ability to meet future debt service obligations or refinance our indebtedness will depend on our future operating performance, which will be affected by general economic, financial, and other factors that may be beyond our control, including those described under our “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Share Repurchase Program

On August 2, 2022, the Company’s Board of Directors authorized the repurchase of up to $50.0 million of the Company’s common stock over the 12-month period ending August 2, 2023 (the “Repurchase Program”). Stock repurchases may be effected through open market repurchases at prevailing market prices, including through the use of block trades and trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, privately-negotiated transactions, through other transactions in accordance with applicable securities laws, or a combination of these methods on such terms and in such amounts as the Company deems appropriate and will be funded from available capital. The Company is not obligated to repurchase any specific number of shares, and the timing, manner, value, and actual number of shares repurchased will depend on a variety of factors, including the Company’s stock price and liquidity requirements, other business considerations and general market and economic conditions. No shares will be purchased from SLP Fastball Aggregator, L.P. and its affiliates. The Company may discontinue or modify purchases without notice at any time. The Company has used and plans to use its existing cash to fund repurchases made under the share repurchase program.

On November 8, 2022, the Company’s Board of Directors authorized an increase to the total available amount under its Repurchase Program to $150.0 million and extended the program through December 31, 2023. On February 28, 2023, the Company’s Board of Directors authorized an increase to the total available amount under its Repurchase Program to $200.0 million. Through May 4, 2023, the Company repurchased $97.4 million of shares under the Repurchase Program.

 

31


 

Long-Term Debt

In February 2020, a new financing structure was established consisting of a new First Lien Credit Agreement (“First Lien Agreement”). The First Lien Agreement provided financing in the form of a $670.0 million term loan due January 31, 2027 (“First Lien Credit Facility”) and a $75.0 million new revolving credit facility due January 31, 2025 (“Revolver”).

On February 1, 2021, we amended the First Lien Agreement to fund $100.0 million of additional first lien term loans and reduce the applicable margins by 0.25%.

In connection with the IPO, the Company entered into an amendment to increase the borrowing capacity under the Revolver from $75.0 million to $100.0 million and extend the maturity date from January 31, 2025 to July 31, 2026.

Borrowings under the First Lien Agreement bear interest at a rate per annum equal to an applicable margin plus, at our option, either (a) a base rate or (b) LIBOR, which is subject to a floor of 0.00% per annum. The applicable margins under the First Lien Agreement are subject to stepdowns based on our first lien net leverage ratio. In connection with the closing of the IPO, each applicable margin was reduced further by 0.25%. In addition, the borrower, First Advantage Holdings, LLC, which is an indirect wholly-owned subsidiary of the Company, is required to pay a commitment fee on any unutilized commitments under the revolving credit facility. The commitment fee rate ranges between 0.25% and 0.50% per annum based on our first lien net leverage ratio. The borrower is also required to pay customary letter of credit fees.

The First Lien Credit Facility amortizes in equal quarterly installments in aggregate annual amounts equal to 1.00% of the principal amount. The Revolver has no amortization. The First Lien Credit Facility requires the borrower to prepay outstanding term loans, subject to certain exceptions, with certain proceeds from non-ordinary course asset sales, issuance of debt not permitted by the credit agreement to be incurred and annual excess cash flows. In addition, any voluntary prepayment of term loans in connection with certain repricing transactions on or prior to August 1, 2021 were subject to a 1.00% prepayment premium. Otherwise, the borrower may voluntarily repay outstanding loans without premium or penalty, other than customary “breakage” costs.

In connection with the closing of the IPO, on June 30, 2021, the Company repaid $200.0 million of the First Lien Credit Facility outstanding, of which $44.3 million was applied to all of the remaining quarterly amortizing principal payments due under the First Lien Agreement. The remaining $564.7 million term loan is scheduled to mature on January 31, 2027.

The First Lien Agreement is unconditionally guaranteed by Fastball Parent, Inc., a wholly-owned subsidiary of the Company and the direct parent of the borrower, and material wholly owned domestic restricted subsidiaries of Fastball Parent, Inc. The First Lien Agreement and the guarantees of such obligations, are secured, subject to permitted liens and other exceptions, by (1) a first priority security interest in certain tangible and intangible assets of the borrower and the guarantors and (2) a first-priority pledge of 100% of the capital stock of the borrower and of each wholly-owned material restricted subsidiary of the borrower and the guarantors (which pledge, in the case of any non-U.S. subsidiary of a U.S. subsidiary, does not include more than 65% of the voting stock of such non-U.S. subsidiary).

The First Lien Agreement contains customary affirmative covenants, negative covenants, and events of default (including upon a change of control). The First Lien Agreement also includes a “springing” first lien net leverage ratio test, applicable only to the Revolver, that requires such ratio to be no greater than 7.75:1.00 on the last day of any fiscal quarter if more than 35.0% of the Revolver is utilized on such date.

 

32


 

Cash Flow Analysis

Comparison of Cash Flows for the three months ended March 31, 2023 compared to the three months ended March 31, 2022

The following table is a summary of our cash flow activity for the periods presented:

 

 

Three Months Ended March 31,

 

(in thousands)

 

2023

 

 

2022

 

Net cash provided by operating activities

 

$

38,599

 

 

$

41,583

 

Net cash used in investing activities

 

 

(6,083

)

 

 

(26,472

)

Net cash used in financing activities

 

 

(24,163

)

 

 

(40

)

Cash Flows from Operating Activities

Net cash provided by operating activities was $38.6 million for the three months ended March 31, 2023, compared to $41.6 million for the three months ended March 31, 2022. Net cash provided by operating activities for the three months ended March 31, 2023 decreased by $3.0 million compared to the three months ended March 31, 2022. Cash flows from operating activities was impacted by the continuation of more modest hiring activity in the Americas and softness internationally resulting from the ongoing uncertainty from the economic environment that began to impact hiring demand in late 2022. This was offset in part by lower accounts receivable driven by increased cash collections from customers.

Cash Flows from Investing Activities

Net cash used in investing activities was $6.1 million for the three months ended March 31, 2023, compared to $26.5 million for the three months ended March 31, 2022. Net cash used in investing activities for the three months ended March 31, 2023 decreased by $20.4 million compared to the three months ended March 31, 2022. The cash flows used in investing activities for the three months ended March 31, 2023 were driven primarily by capitalized software development costs, which increased in 2023 as the Company continued to make incremental investments in its technology platform. Cash flows used in investing activities for the three months ended March 31, 2022 were impacted by the $19.1 million acquisition of Form I-9 Compliance, net of cash acquired.

Cash Flows from Financing Activities

Net cash used in financing activities was $24.2 million for the three months ended March 31, 2023, compared to $0.0 million for the three months ended March 31, 2022. Cash flows from financing activities for the three months ended March 31, 2023 were primarily driven by share-based compensation activity. These inflows were offset by cash outflows related to payments on finance lease obligations, deferred purchase of a software platform, and shares repurchased under the Company’s Repurchase Program. During the three months ended March 31, 2023, 1,871,691 shares were repurchased under the program at a total cost of $25.3 million.

33


 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of March 31, 2023, no material change had occurred in our market risks, compared with the disclosure in our Annual Report on Form 10-K filed with the SEC on February 28, 2023.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosures.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving their desired control objectives. Based on the evaluation of management’s disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, the disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

During the quarter covered by this report, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

34


 

PART II—OTHER INFORMATION

Information in response to this Item is included in “Part I — Item 1. — Note 11 — Commitments and Contingencies” and is incorporated by reference into Part II of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors.

As of March 31, 2023, no material changes had occurred in our risk factors, compared with the disclosure in our Annual Report on Form 10-K filed with the SEC on February 28, 2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Use of Proceeds

On June 25, 2021, we completed our IPO. All shares sold were registered pursuant to a registration statement on Form S-1 (File No. 333-256622), declared effective by the SEC on June 22, 2021.

There has been no material change in the expected use of the net proceeds from our IPO as described in our Annual Report on Form 10-K filed with the SEC on February 28, 2023.

Issuer Purchases of Equity Securities

The following information relates to the Company’s purchase of its common stock during each month within the first quarter of 2023:

Period

 

Total Number of Shares Purchased

 

 

Average Price
Paid Per Share
(1)

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)

 

1/1/2023 - 1/31/2023

 

 

641,061

 

 

$

13.15

 

 

 

641,061

 

 

$

131,039,602

 

2/1/2023 - 2/28/2023

 

 

525,603

 

 

$

13.71

 

 

 

525,603

 

 

$

123,833,318

 

3/1/2023 - 3/31/2023

 

 

705,027

 

 

$

13.66

 

 

 

705,027

 

 

$

114,202,781

 

Total

 

 

1,871,691

 

 

$

13.50

 

 

 

1,871,691

 

 

$

114,202,781

 

(1)
Average price paid per share for shares purchased as part of our Repurchase Program (includes brokerage commissions).
(2)
On August 2, 2022, the Company’s Board of Directors authorized the repurchase of up to $50.0 million of the Company’s common stock over the 12-month period ending August 2, 2023 (the “Repurchase Program”). On November 8, 2022, the Company’s Board of Directors authorized an increase to the total available amount under its Repurchase Program to $150.0 million and extended the program through December 31, 2023. On February 28, 2023, the Company’s Board of Directors authorized an increase to the total available amount under its Repurchase Program to $200.0 million. Through May 4, 2023, the Company repurchased $97.4 million of shares under the Repurchase Program.

 

Stock repurchases may be effected through open market repurchases at prevailing market prices, including through the use of block trades and trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, privately-negotiated transactions, through other transactions in accordance with applicable securities laws, or a combination of these methods on such terms and in such amounts as the Company deems appropriate and will be funded from available capital. The Company is not obligated to repurchase any specific number of shares, and the timing, manner, value, and actual number of shares repurchased will depend on a variety of factors, including the Company’s stock price and liquidity requirements, other business considerations and general market and economic conditions. No shares will be purchased from SLP Fastball Aggregator, L.P. and its affiliates. The Company may discontinue or modify purchases without notice at any time.

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

Not applicable

 

35


 

Item 5. Other Information.

Performance-Based Vesting Modification

Effective as of May 10, 2023, the Company’s Board of Directors approved a modification of the vesting terms of unvested and unearned performance-based options, restricted stock units (“RSUs”), and restricted stock (collectively, “Performance Awards”). The modification offers eligible employees incremental vesting criteria which allows the currently unvested and unearned Performance Awards to vest based on time on the fourth, fifth, and sixth anniversaries of the relevant vesting commencement date, as set forth in each grant agreement (the “Vesting Commencement Date”), while preserving the eligibility to vest upon future “Realization Events” (as that term is defined in the award agreement(s) pursuant to which the relevant Performance Award was granted).

The below table summarizes the impact of the modification (assuming performance conditions are not realized) on each of our named executive officers, as identified in our definitive proxy statement, dated April 26, 2023, filed with the SEC. Through the applicable vesting dates set forth in the table below, a number of additional Performance Awards, if any, shall vest on each such vesting date as is necessary to ensure that the number of Performance Awards that is vested on such vesting date is equal to the number set forth in the table below, such that 100% of the Performance Awards will be vested on the sixth anniversary of the Vesting Commencement Date (as set forth in the applicable award) even if no performance conditions are satisfied (i.e., no “Realization Event” occurs) prior to the sixth anniversary of such Vesting Commencement Date.
 

Name Award

 

Grant
Date

 

Grant
Price

 

 

Number of Unearned
Performance-Based
Options, Shares, Units or
Other Rights That
Have Not Vested

 

 

Fourth Anniversary
of Vesting
Commencement Date

 

Number of
Awards to Vest

 

 

Fifth Anniversary
of Vesting
Commencement Date

 

Number of
Awards to Vest

 

 

Sixth Anniversary
of Vesting
Commencement Date

 

Number of
Awards to Vest

 

Scott Staples
Chief Executive Officer

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Nonqualified stock options

 

6/22/2021

 

$

15.00

 

 

 

854,861

 

 

1/31/2024

 

 

170,972

 

 

1/31/2025

 

 

341,944

 

 

1/31/2026

 

 

341,945

 

Restricted stock

 

2/9/2020

 

$

 

 

 

867,526

 

 

1/31/2024

 

 

173,505

 

 

1/31/2025

 

 

347,010

 

 

1/31/2026

 

 

347,011

 

David L. Gamsey
Executive Vice President and Chief Financial Officer

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

Nonqualified stock options

 

6/22/2021

 

$

15.00

 

 

 

178,473

 

 

1/31/2024

 

 

35,694

 

 

1/31/2025

 

 

71,389

 

 

1/31/2026

 

 

71,390

 

Restricted stock

 

2/9/2020

 

$

 

 

 

180,736

 

 

1/31/2024

 

 

36,147

 

 

1/31/2025

 

 

72,294

 

 

1/31/2026

 

 

72,295

 

Joseph Jaeger
President, Americas

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

Nonqualified stock options

 

6/22/2021

 

$

15.00

 

 

 

250,466

 

 

1/31/2024

 

 

50,093

 

 

1/31/2025

 

 

100,186

 

 

1/31/2026

 

 

100,187

 

Restricted stock

 

2/9/2020

 

$

 

 

 

253,028

 

 

1/31/2024

 

 

50,605

 

 

1/31/2025

 

 

101,211

 

 

1/31/2026

 

 

101,212

 

Restricted stock units

 

12/22/2021

 

$

 

 

 

19,918

 

 

6/23/2025

 

 

3,983

 

 

6/23/2026

 

 

7,967

 

 

6/23/2027

 

 

7,968

 

Joelle M. Smith
President, Data, Technology, and Experience

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

Nonqualified stock options

 

8/24/2020

 

$

6.61

 

 

 

8,590

 

 

8/15/2024

 

 

1,718

 

 

8/15/2025

 

 

3,436

 

 

8/15/2026

 

 

3,436

 

Nonqualified stock options

 

2/9/2020

 

$

6.61

 

 

 

96,911

 

 

1/31/2024

 

 

19,382

 

 

1/31/2025

 

 

38,764

 

 

1/31/2026

 

 

38,765

 

Bret T. Jardine
Executive Vice President, General Counsel and Corporate Secretary

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

Nonqualified stock options

 

2/9/2020

 

$

6.61

 

 

 

64,608

 

 

1/31/2024

 

 

12,921

 

 

1/31/2025

 

 

25,843

 

 

1/31/2026

 

 

25,844

 

 

36


 

Grant of Equity Award

Effective as of May 10, 2023, the Board of Directors authorized an equity grant to Mr. Bret T. Jardine, our executive Vice President, General Counsel and Corporate Secretary, having a fair value equal to $150,000, comprised of approximately two-thirds stock options and approximately one-third RSUs, with each grant vesting annually in four equal installments based on a grant date of May 11, 2023. The exact number of stock options and RSUs comprising the grant will be determined on May 11, 2023, based on the prior twenty day average closing price of the Company’s common stock in the case of the RSUs and using a Black-Scholes valuation for the stock options. The per share exercise price of the stock options will be the closing price on May 11, 2023.

 

37


 

Item 6. Exhibits.

Exhibit

Number

Description

3.1

 

Amended and Restated Certificate of Incorporation of First Advantage Corporation (incorporated herein by reference to Exhibit 3.1 of First Advantage’s Form 8-K filed on June 25, 2021).

3.2

 

Amended and Restated Bylaws of First Advantage Corporation (incorporated herein by reference to Exhibit 3.2 of First Advantage’s Form 8-K filed on June 25, 2021).

10.1

 

Employment Offer Letter, dated March 30, 2011, between STG-Fairway Holdings, Inc. (a predecessor to First Advantage Corporation) and Bret Jardine.

10.2

 

Employment Offer Letter, dated May 31, 2017, between First Advantage Corporation and Joelle Smith.

10.3

 

Form of Restrictive Covenant Agreement for Named Executive Officers.

31.1

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104

 

Cover Page Interactive Data File (formatted as inline XBRL and contained in the Exhibit 101 attachments).

 

† Compensatory arrangements for director(s) and/or executive officer(s).

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

38


 

SIGNATURES

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

 

FIRST ADVANTAGE CORPORATION

Date: May 10, 2023

By:

/s/ Scott Staples

Scott Staples

Chief Executive Officer

(principal executive officer)

 

Date: May 10, 2023

By:

/s/ David L. Gamsey

 

David L. Gamsey

Executive Vice President & Chief Financial Officer

(principal financial officer)

 

39