a
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
(Address of principal executive offices) |
(Zip Code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
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).
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.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 November 8, 2024, the registrant had
Table of Contents
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Page |
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PART I. |
2 |
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Item 1. |
2 |
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2 |
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Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income |
3 |
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4 |
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Condensed Consolidated Statements of Changes in Stockholders’ Equity |
5 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
7 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
19 |
Item 3. |
36 |
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Item 4. |
36 |
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PART II. |
37 |
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Item 1. |
37 |
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Item 1A. |
37 |
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Item 2. |
37 |
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Item 3. |
38 |
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Item 4. |
38 |
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Item 5. |
38 |
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Item 6. |
39 |
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40 |
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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) |
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September 30, 2024 |
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December 31, 2023 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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Accounts receivable (net of allowance for doubtful accounts of $ |
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Prepaid expenses and other current assets |
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Income tax receivable |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Trade names, net |
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Customer lists, net |
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Other intangible assets, net |
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Deferred tax asset, net |
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Other assets |
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TOTAL ASSETS |
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$ |
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$ |
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LIABILITIES AND EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
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$ |
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$ |
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Accrued compensation |
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Accrued liabilities |
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Current portion of operating lease liability |
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Income tax payable |
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Deferred revenues |
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Total current liabilities |
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Long-term debt (net of deferred financing costs of $ |
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Deferred tax liability, net |
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Operating lease liability, less current portion |
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Other liabilities |
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Total liabilities |
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EQUITY |
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Common stock - $ |
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Additional paid-in-capital |
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Accumulated deficit |
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( |
) |
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( |
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Accumulated other comprehensive loss |
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( |
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( |
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Total equity |
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TOTAL LIABILITIES AND EQUITY |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
First Advantage Corporation
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income
(Unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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(in thousands, except share and per share amounts) |
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2024 |
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2023 |
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2024 |
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2023 |
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REVENUES |
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$ |
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$ |
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$ |
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$ |
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OPERATING EXPENSES: |
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Cost of services (exclusive of depreciation and amortization below) |
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Product and technology expense |
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Selling, general, and administrative expense |
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Depreciation and amortization |
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Total operating expenses |
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INCOME FROM OPERATIONS |
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OTHER EXPENSE, NET: |
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Interest expense, net |
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Total other expense, net |
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(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES |
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( |
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( |
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Provision for income taxes |
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NET (LOSS) INCOME |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Foreign currency translation income (loss) |
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( |
) |
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( |
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COMPREHENSIVE (LOSS) INCOME |
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$ |
( |
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$ |
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$ |
( |
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$ |
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NET (LOSS) INCOME |
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$ |
( |
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$ |
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$ |
( |
) |
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$ |
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Basic net (loss) income per share |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Diluted net (loss) income per share |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
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Weighted average number of shares outstanding - basic |
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Weighted average number of shares outstanding - diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
First Advantage Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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Nine Months Ended September 30, |
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(in thousands) |
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2024 |
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2023 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net (loss) income |
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$ |
( |
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$ |
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Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
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Depreciation and amortization |
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Amortization of deferred financing costs |
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Bad debt expense |
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Deferred taxes |
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( |
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( |
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Share-based compensation |
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Loss on foreign currency exchange rates |
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(Gain) loss on disposal of fixed assets and impairment of ROU assets |
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( |
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Change in fair value of interest rate swaps |
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( |
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( |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
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( |
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Prepaid expenses and other assets |
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Accounts payable |
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Accrued compensation and accrued liabilities |
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( |
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Deferred revenues |
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Operating lease liabilities |
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( |
) |
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( |
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Other liabilities |
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( |
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( |
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Income taxes receivable and payable, net |
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( |
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Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Capitalized software development costs |
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( |
) |
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( |
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Purchases of property and equipment |
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( |
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( |
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Other investing activities |
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( |
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Acquisitions of businesses, net of cash acquired |
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( |
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Net cash used in investing activities |
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( |
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( |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from issuance of common stock under share-based compensation plans |
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Net settlement of share-based compensation plan awards |
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( |
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( |
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Payments on deferred purchase agreements |
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( |
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( |
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Cash dividends paid |
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( |
) |
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( |
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Payments on finance lease obligations |
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( |
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( |
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Share repurchases |
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( |
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Net cash provided by (used in) financing activities |
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( |
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Effect of exchange rate on cash, cash equivalents, and restricted cash |
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( |
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Increase (decrease) in cash, cash equivalents, and restricted cash |
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( |
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Cash, cash equivalents, and restricted cash at beginning of period |
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Cash, cash equivalents, and restricted cash at end of period |
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$ |
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$ |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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Cash paid for income taxes, net of refunds received |
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$ |
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$ |
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Cash paid for interest |
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$ |
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$ |
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NON-CASH INVESTING AND FINANCING ACTIVITIES: |
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Property and equipment acquired on account |
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$ |
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$ |
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Non-cash property and equipment additions |
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$ |
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$ |
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Excise taxes on share repurchases incurred but not paid |
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$ |
( |
) |
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$ |
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Dividends declared but not paid |
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$ |
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$ |
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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) |
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Common Stock |
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Additional |
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Accumulated |
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Accumulated Other |
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Total Stockholders’ |
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BALANCE – December 31, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Share-based compensation |
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Forfeitures of previously declared cash dividends |
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Proceeds from issuance of common stock under share-based compensation plans |
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Common stock withheld for tax obligations on restricted stock unit and option settlement |
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( |
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( |
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( |
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Foreign currency translation |
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( |
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( |
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Net loss |
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( |
) |
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( |
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BALANCE – March 31, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Share-based compensation |
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Forfeitures of previously declared cash dividends |
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Proceeds from issuance of common stock under share-based compensation plans |
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Common stock withheld for tax obligations on restricted stock unit and option settlement |
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( |
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( |
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( |
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Foreign currency translation |
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( |
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( |
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Net income |
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BALANCE – June 30, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Share-based compensation |
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Excise tax on repurchase of common stock |
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Forfeitures of previously declared cash dividends |
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Proceeds from issuance of common stock under share-based compensation plans |
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Common stock withheld for tax obligations on restricted stock unit and option settlement |
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( |
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( |
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( |
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Foreign currency translation |
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Net loss |
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( |
) |
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( |
) |
|||
BALANCE – September 30, 2024 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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5
First Advantage Corporation
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Continued)
(Unaudited)
(in thousands) |
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Common Stock |
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Additional |
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Accumulated |
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Accumulated Other |
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Total Stockholders’ |
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|||||
BALANCE – December 31, 2022 |
|
$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Share-based compensation |
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Repurchases of common stock |
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( |
) |
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( |
) |
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( |
) |
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Proceeds from issuance of common stock under share-based compensation plans |
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Common stock withheld for tax obligations on restricted stock unit and option settlement |
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( |
) |
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( |
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Foreign currency translation |
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Net income |
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|||||
BALANCE – March 31, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Share-based compensation |
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Repurchases of common stock |
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( |
) |
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( |
) |
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( |
) |
||
Proceeds from issuance of common stock under share-based compensation plans |
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Common stock withheld for tax obligations on restricted stock unit and option settlement |
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( |
) |
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( |
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Foreign currency translation |
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Net income |
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|||||
BALANCE – June 30, 2023 |
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$ |
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$ |
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|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|||
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Repurchases of common stock |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Cash dividends declared, $ |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||
Proceeds from issuance of common stock under share-based compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Common stock withheld for tax obligations on restricted stock unit and option settlement |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
BALANCE – September 30, 2023 |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
First Advantage Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Organization, Nature of Business, and Basis of Presentation
First Advantage Corporation, a Delaware corporation, was formed on November 15, 2019. Hereafter, First Advantage Corporation and its subsidiaries will collectively be referred to as the “Company.”
The Company derives its revenues from a variety of background check and compliance services performed across all phases of the workforce lifecycle from pre-onboarding services to post-onboarding and ongoing monitoring services, covering employees, contractors, contingent workers, tenants, and drivers. We generally classify our service offerings into three categories: pre-onboarding, post-onboarding, and adjacent products.
Pre-onboarding services are comprised of an extensive array of products and solutions that customers typically utilize to enhance their evaluation process and support compliance from the time a job or other application is submitted to a successful applicant’s onboarding date. This includes searches such as criminal background checks, drug / health screenings, extended workforce screening, biometrics and identity checks, education / workforce verification, driver records and compliance, healthcare credentials, and executive screening.
Post-onboarding services are comprised of continuous monitoring and re-screening solutions, which are important tools to help keep their end customers, workforces, and other stakeholders safer, more productive, and more compliant. Our post-monitoring solutions include criminal records, healthcare sanctions, motor vehicle records, social media, and global sanctions screening continuously or at regular intervals selected by our customers.
Adjacent products include products that complement our pre-onboarding and post-onboarding products and solutions. This includes fleet / vehicle compliance, hiring tax credits and incentives, resident / tenant screening, employment eligibility, and investigative research.
Basis of Presentation —The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. The Company includes the results of operations of acquired companies prospectively from the date of acquisition.
The condensed consolidated financial statements included herein are unaudited, but in the opinion of management, such financial statements include all adjustments, consisting of normal recurring adjustments, necessary to summarize fairly the Company’s financial position, results of operations, and cash flows for the interim periods presented. The interim results reported in these condensed consolidated financial statements should not be taken as indicative of results that may be expected for future interim periods or the full year. For a more comprehensive understanding of the Company and its condensed consolidated financial statements, these interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
The Company has historically experienced seasonality with respect to certain customer industries as a result of fluctuations in hiring volumes and other economic activities. Generally, the Company’s highest revenues have historically occurred between October and November of each year, driven by many customers’ pre-holiday season hiring initiatives.
Use of Estimates — The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Changes in these estimates and assumptions may have a material impact on the condensed consolidated financial statements and accompanying notes.
Significant estimates, judgments, and assumptions, include, but are not limited to, the determination of the fair value and useful lives of assets acquired and liabilities assumed through business combinations, goodwill impairment, revenue recognition, capitalized software, assumptions used for purposes of determining share-based compensation, and income tax liabilities and assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.
7
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 carrying amounts of cash and cash equivalents, receivables, and accounts payable approximate fair value due to the short-term maturities of these financial instruments (Level 1). The fair values and carrying values of the Company’s long-term debt are disclosed in Note 6, “Long-term Debt”.
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 September 30, 2024 (in thousands):
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||
Liabilities |
|
|
|
|
|
|
|
|
|
|||
Interest rate swaps |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Business Combinations— The Company records business combinations using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, identifiable assets acquired and liabilities assumed are recorded at their acquisition-date fair values. The excess of the purchase price over the estimated fair value is recorded as goodwill. Changes in the estimated fair values of net assets recorded for acquisitions prior to the finalization of more detailed analysis, but not to exceed one year from the date of acquisition, will adjust the amount of the purchase price allocable to goodwill. Measurement period adjustments are reflected in the period in which they occur.
In valuing the trade names, customer lists, and software developed for internal use, the Company utilizes variations of the income approach, which relies on historical financial and qualitative information, as well as assumptions and estimates for projected financial information. The Company considers the income approach the most appropriate valuation technique because the inherent value of these assets is their ability to generate current and future income. Projected financial information is subject to risk if estimates are incorrect. The most significant estimate relates to projected revenues and profitability. If the projected revenues and profitability used in the valuation calculations are not met, then the asset could be impaired.
Concentrations of Credit Risk — Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Cash is deposited with major financial institutions and, at times, such balances with each financial institution may be in excess of insured limits. The Company has not experienced, and does not anticipate, any losses with respect to its cash deposits. Accounts receivable represent credit granted to customers for services provided. The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on accounts receivable. The Company had
The Company has entered into interest rate derivative agreements with a counterparty bank to reduce its exposure to interest rate volatility. The Company has determined the counterparty bank to be a high credit quality institution. The Company does not enter into financial instruments for trading or speculative purposes.
8
Foreign Currency — The functional currency of all of the Company’s foreign subsidiaries is the applicable local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenues and expense accounts using average exchange rates prevailing during the fiscal year. Adjustments resulting from the translation of foreign currency financial statements are accumulated net of tax in a separate component of equity. Currency translation (loss) income included in accumulated other comprehensive loss was approximately $
Gains or losses resulting from foreign currency transactions are included in the accompanying condensed consolidated statements of operations and comprehensive (loss) income, except for those relating to intercompany transactions of a long-term investment nature, which are captured in a separate component of equity as accumulated other comprehensive loss. Currency transaction income (loss) included in the accompanying condensed consolidated statements of operations and comprehensive (loss) income was approximately $(
Recent Accounting Pronouncements — There were no accounting pronouncements issued during the nine months ended September 30, 2024 that are expected to have a material impact on the condensed consolidated financial statements.
Note 3. Acquisitions
Acquisition of Sterling Check Corp.
On February 28, 2024, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among First Advantage, Sterling Check Corp., a Delaware corporation (“Sterling”), and Starter Merger Sub, Inc., a Delaware corporation and an indirect, wholly owned subsidiary of First Advantage (“Merger Sub”).
On October 31, 2024, following the satisfaction or waiver of the applicable closing conditions, including receipt of the requisite regulatory approvals, First Advantage completed its acquisition of Sterling, pursuant to the Merger Agreement. Under the terms of the Merger Agreement, Merger Sub merged with and into Sterling, with Sterling continuing as the surviving corporation in such merger and becoming an indirect, wholly owned subsidiary of First Advantage. The Sterling stockholders received approximately $
Due to the limited amount of time since closing the transaction, the preliminary allocation of the purchase price is not yet complete. The initial purchase price allocation will be provided within our Annual Report on Form 10-K for fiscal year ended December 31, 2024, and we expect most of the purchase price will be allocated to goodwill and other identifiable intangible assets. The acquisition will be accounted for in accordance with ASC 805, Business Combinations and Sterling’s results of operations will be consolidated in the Company’s financial statements effective November 1, 2024. Acquisition-related costs through October 31, 2024 were approximately $
9
2023 Acquisition
On September 1, 2023, the Company acquired
The allocation of the purchase price is based on the fair value of assets acquired and liabilities assumed as of the acquisition date.
Consideration |
|
|
|
|
Cash purchase price |
|
$ |
|
|
Other transaction adjustments |
|
|
|
|
Total fair value of consideration transferred |
|
$ |
|
|
Current assets |
|
$ |
|
|
Property and equipment, including software developed for internal use |
|
|
|
|
Trade name |
|
|
|
|
Customer lists |
|
|
|
|
Other intangible assets |
|
|
|
|
Other assets |
|
|
|
|
Total liabilities |
|
|
( |
) |
Total identifiable net assets |
|
$ |
|
|
Goodwill |
|
$ |
|
|
Goodwill recognized is not expected to be deductible for tax purposes. Results of operations have been included in the condensed consolidated financial statements of the Company’s Americas segment since the date of acquisition. The acquisition is not material to the Company’s financial position as of September 30, 2024 or results of operations for the three and nine months ended September 30, 2024, and therefore, pro forma operating results and other disclosures for the acquisition are not presented.
Note 4. Property and Equipment, net
Property and equipment, net as of September 30, 2024 and December 31, 2023 consisted of the following (in thousands):
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Furniture and equipment |
|
$ |
|
|
$ |
|
||
Capitalized software for internal use, acquired by business combination |
|
|
|
|
|
|
||
Capitalized software for internal use, developed internally or otherwise purchased |
|
|
|
|
|
|
||
Leasehold improvements |
|
|
|
|
|
|
||
Total property and equipment |
|
|
|
|
|
|
||
Less: accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
Property and equipment, net |
|
$ |
|
|
$ |
|
||
Depreciation and amortization expense of property and equipment was approximately $
Note 5. Goodwill, Trade Names, Customer Lists and Other Intangible Assets
The changes in the carrying amount of goodwill for the nine months ended September 30, 2024 by reportable segment were as follows (in thousands):
|
|
Americas |
|
|
International |
|
|
Total |
|
|||
Balance – December 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Adjustments to initial purchase price allocations |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Foreign currency translation |
|
|
( |
) |
|
|
|
|
|
|
||
Balance – September 30, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
10
The following summarizes the gross carrying value and accumulated amortization for the Company’s trade names, customer lists, and other intangible assets as of September 30, 2024 and December 31, 2023 (in thousands):
|
|
September 30, 2024 |
||||||||||||
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Useful Life |
|||
Trade names |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|||
Customer lists |
|
|
|
|
|
( |
) |
|
|
|
|
|||
Other intangible assets |
|
|
|
|
|
( |
) |
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|
||
|
|
December 31, 2023 |
||||||||||||
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Useful Life |
|||
Trade names |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|||
Customer lists |
|
|
|
|
|
( |
) |
|
|
|
|
|||
Other intangible assets |
|
|
|
|
|
( |
) |
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|
||
Amortization expense of trade names, customer lists, and other intangible assets was approximately $
Note 6. Long-term Debt
The fair value of the Company’s long-term debt obligation approximated its book value as of September 30, 2024 and December 31, 2023 and consisted of the following (in thousands):
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
First Lien Credit Facility |
|
$ |
|
|
$ |
|
||
Less: Deferred financing costs |
|
|
( |
) |
|
|
( |
) |
Long-term debt, net |
|
$ |
|
|
$ |
|
||
First Advantage Holdings, LLC, an indirect wholly-owned subsidiary of the Company, is a party to a First Lien Credit Agreement (as amended, “Credit Agreement”), which provides for a term loan of $
In connection with the acquisition of Sterling, on October 31, 2024, the Company refinanced its existing First Lien Credit Agreement and all related Sterling debt (the “2024 First Lien Credit Agreement”). The 2024 First Lien Credit Agreement provides for a term loan of $
11
Note 7. Derivatives
To reduce exposure to variability in expected future cash outflows on variable rate debt attributable to the changes in one-month LIBOR, the Company has historically entered into interest rate derivative instruments to economically offset a portion of this risk and may do so in the future. In June 2023, the Company transitioned the reference rate for its interest rate derivative agreements from one-month LIBOR to one-month SOFR.
As of September 30, 2024, the Company had the following outstanding derivatives that were not designated as a hedge in qualifying hedging relationships:
Product |
|
Effective Date |
|
Maturity Date |
|
Notional |
|
Rate |
Interest rate swap(a) |
|
|
|
$ |
|
|||
Interest rate swap |
|
|
|
$ |
|
|||
Interest rate swap |
|
|
|
$ |
|
|||
Interest rate swap |
|
|
|
$ |
|
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 |
|
Balance Sheet Location |
|
As of |
|
|
As of |
|
||
Interest rate collars |
|
Prepaid expenses and other current assets |
|
$ |
|
|
$ |
|
||
Interest rate swaps |
|
Accrued liabilities |
|
$ |
|
|
$ |
|
||
The following is a summary of location and amount of gains recorded related to the derivative instruments (in thousands):
|
|
|
|
Gain (Loss) |
|
|||||||||||||
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
Derivatives not designated |
|
Income Statement Location |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Interest rate collars |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Interest rate swaps |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
||||
Note 8. Income Taxes
The Company’s income tax expense and balance sheet accounts reflect the results of the Company and its subsidiaries.
In accordance with ASC 740-270, Interim Reporting, at the end of each interim period, the Company is required to determine the best estimate of its annual effective tax rate and then apply that rate in providing for income taxes on an interim period. However, in certain circumstances where the Company is unable to make a reliable estimate of the annual effective tax rate, ASC 740-270 allows the actual effective tax rate for the interim period to be used. As of September 30, 2024, the Company calculated its effective rate and applied that rate to the results for the three and nine months ended September 30, 2024. The Company used this approach because it was unable to reasonably estimate its annual effective rate due to the variability of the rate as a result of small changes in forecasted income and fluctuations in annual pre-tax income and loss between quarters.
The effective income tax rate for the three and nine months ended September 30, 2024 was (
The effective income tax rate for the three and nine months ended September 30, 2023 was
12
Note 9. Revenues
Substantially all of the Company’s revenues are recognized at a point in time when the orders are completed and the completed reports are reported, or otherwise made available. For revenues delivered over time, the output method is utilized to measure the value to the customer based on the transfer to date of the services promised, with no rights of return once consumed. In these cases, revenues on transactional contracts with a defined price but an undefined quantity is recognized utilizing the right to invoice expedient resulting in revenues being recognized when the service is provided and becomes billable. Additionally, under this practical expedient, the Company is not required to estimate the transaction price.
The Company considers negotiated and anticipated incentives and estimated adjustments, including historical collections experience, when recording revenues.
The Company’s contracts with customers generally include standard commercial payment terms acceptable in each region, and do not include any financing components. The Company does not have any significant obligations for refunds, warranties, or similar obligations. The Company records revenues net of sales taxes.
Contract balances are generated when the revenues recognized in a given period varies from billing. A contract asset is created when the Company performs a service for a customer and recognizes more revenues than what has been billed. The contract asset balance was $
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 $
For additional disclosures about the disaggregation of our revenues, see Note 15, “Reportable Segments.”
Note 10. Share-based Compensation
Share-based compensation expense is recognized in cost of services, product and technology expense, and selling, general, and administrative expense, in the accompanying condensed consolidated statements of operations and comprehensive (loss) income as follows (in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of services |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Product and technology expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general, and administrative expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total share-based compensation expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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”). In connection with the IPO, the Company adopted the 2021 Omnibus Incentive Plan (as amended by the First Amendment, dated as of May 10, 2023, the “2021 Equity Plan”).
In May 2023, the Company’s Board of Directors approved a modification of the vesting terms of outstanding unvested and unearned performance-based options, restricted stock units, and restricted stock (collectively, “Performance Awards”) previously issued under its equity plans. The modification, effective May 10, 2023, allowed for unvested and unearned Performance Awards outstanding as of the date of the modification, to vest based on time on the fourth, fifth, and sixth anniversaries of the relevant vesting commencement date, as set forth in each grant agreement (the “Vesting Commencement Date”), while preserving the eligibility to vest upon the Company’s investors receiving a targeted money-on-money return, subject to continued service.
In connection with the Company’s declaration of a one-time special dividend in August 2023, the exercise price of outstanding stock option awards and stock purchases under the Company’s employee stock purchase plan (“ESPP”) was reduced by $
13
In August 2024 and September 2024, the Company modified the equity award agreements for its Chief Financial Officer and President, Americas, respectively, as part of each executive’s retirement agreement. The modifications allowed for accelerated vesting of certain unvested equity awards that would have otherwise been forfeited at retirement and modified certain provisions of the outstanding stock option agreements. As a result of the modifications, the related awards were revalued, resulting in an incremental $
2020 Equity Plan
Awards issued under the 2020 Equity Plan consist of options and profit interests.
A summary of the stock option activity for the nine months ended September 30, 2024 is as follows:
|
|
|
|
Options |
|
|
Weighted Average |
|
|
Weighted Average Remaining Contractual Term |
|
Aggregate Intrinsic Value |
||
December 31, 2023 |
|
Grants outstanding |
|
|
|
|
$ |
|
|
|
|
|
||
|
|
Grants exercised |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|
Grants cancelled/forfeited |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
September 30, 2024 |
|
Grants outstanding |
|
|
|
|
$ |
|
|
|
$ |
|||
September 30, 2024 |
|
Grants vested |
|
|
|
|
$ |
|
|
|
$ |
|||
September 30, 2024 |
|
Grants unvested |
|
|
|
|
$ |
|
|
|
|
|
||
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
Stock Options
A summary of the stock option activity for the nine months ended September 30, 2024 is as follows:
|
|
|
|
Options |
|
|
Weighted Average |
|
|
Weighted Average Remaining Contractual Term |
|
Aggregate Intrinsic Value |
||
December 31, 2023 |
|
Grants outstanding |
|
|
|
|
$ |
|
|
|
|
|
||
|
|
Grants issued |
|
|
|
|
$ |
|
|
|
|
|
||
|
|
Grants exercised |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|
Grants cancelled/forfeited |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
September 30, 2024 |
|
Grants outstanding |
|
|
|
|
$ |
|
|
|
$ |
|||
September 30, 2024 |
|
Grants vested |
|
|
|
|
$ |
|
|
|
$ |
|||
September 30, 2024 |
|
Grants unvested |
|
|
|
|
$ |
|
|
|
|
|
||
The fair value for stock options granted for the nine months ended September 30, 2024 was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
Options |
|
|
Expected stock price volatility |
|
|
% |
|
Risk-free interest rate |
|
|
% |
|
Expected term (in years) |
|
|
|
|
Fair-value of the underlying unit |
|
$ |
|
|
14
Restricted Stock Units
A summary of the restricted stock units (“RSU”) activity for the nine months ended September 30, 2024 is as follows:
|
|
|
|
Shares |
|
|
Weighted Average |
|
||
December 31, 2023 |
|
Nonvested RSUs |
|
|
|
|
$ |
|
||
|
|
Granted |
|
|
|
|
$ |
|
||
|
|
Vested |
|
|
( |
) |
|
$ |
|
|
|
|
Forfeited |
|
|
( |
) |
|
$ |
|
|
September 30, 2024 |
|
Nonvested RSUs |
|
|
|
|
$ |
|
||
Restricted Stock
A summary of the restricted stock activity for the nine months ended September 30, 2024 is as follows:
|
|
|
|
Shares |
|
|
Weighted Average |
|
||
December 31, 2023 |
|
Nonvested restricted stock |
|
|
|
|
$ |
|
||
|
|
Vested |
|
|
( |
) |
|
$ |
|
|
September 30, 2024 |
|
Nonvested restricted stock |
|
|
|
|
$ |
|
||
As of September 30, 2024, the Company had approximately $
2021 Employee Stock Purchase Plan
The Company adopted the ESPP, which allows eligible employees to voluntarily make after-tax contributions of up to
Note 11. Equity
Preferred Stock
As of September 30, 2024 and December 31, 2023,
Share Repurchase Program
The Company did not repurchase any shares of common stock during the nine months ended September 30, 2024. As of September 30, 2024, the remaining authorized value of shares available to be repurchased under the Repurchase Program was approximately $
15
Note 12. Commitments and Contingencies
There have been no material changes to the Company’s contractual obligations as compared to December 31, 2023.
The Company is involved in litigation from time to time in the ordinary course of business. At times, the Company, given the nature of its background screening business, could become subject to lawsuits, or potential class action lawsuits, in multiple jurisdictions, related to claims brought primarily by consumers or individuals who were the subject of its screening services.
For all pending matters, the Company believes it has meritorious defenses and intends to defend vigorously or otherwise seek indemnification from other parties as appropriate. However, the Company has recorded a liability of $
The Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.
Note 13. Related Party Transactions
The Company had
Note 14. Net (Loss) Income Per Share
Basic weighted-average shares outstanding excludes nonvested restricted stock. Diluted weighted average shares outstanding is similar to basic weighted-average shares outstanding, except that the weighted-average number of shares is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common share had been issued, including the dilutive impact of nonvested restricted stock. The potentially dilutive securities outstanding during the three and nine months ended September 30, 2024, had an anti-dilutive effect and were therefore not included in the calculation of diluted net (loss) income per share.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Basic net (loss) income per share |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Diluted net (loss) income per share |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net (loss) income (in thousands) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of shares outstanding - basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Add stock options to purchase shares and restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of shares outstanding - diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
For the three months ended September 30, 2024 and 2023,
16
Note 15. Reportable Segments
We have
We define Adjusted EBITDA as net (loss) 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 9, “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 industry verticals in the United States, Canada, and Latin America.
International. The International segment provides services similar to our Americas segment in regions outside of the Americas. We primarily deliver our solutions across multiple industry verticals in the Europe, India, and Asia Pacific.
A reconciliation of Segment Adjusted EBITDA to net (loss) income for the three and nine months ended September 30, 2024 and 2023 is as follows (in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
International |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Adjustments to reconcile to net (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Transaction and acquisition-related charges(a) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Integration, restructuring, and other charges(b) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net (loss) income |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
17
Geographic Information
The Company categorizes revenues by geographic region in which the revenues and invoicing are recorded. Other than the United States,
The following summarizes revenues by geographical region (in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
International |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Eliminations |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The following table sets forth net long-lived assets by geographic area (in thousands):
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Long-lived assets, net |
|
|
|
|
|
|
||
United States, country of domicile |
|
$ |
|
|
$ |
|
||
All other countries |
|
|
|
|
|
|
||
Total long-lived assets, net |
|
$ |
|
|
$ |
|
||
Note 16. Subsequent Events
In connection with the refinancing of the First Lien Credit Facility as part of the acquisition of Sterling, the Company will record the related accounting in the fourth quarter of 2024. Additionally, in connection with the acquisition of Sterling, the Company entered into separation agreements with certain Sterling executives. The Company will incur incremental compensation expense related to separation payments and accelerated vesting of certain equity awards in the fourth quarter of 2024.
On November 4, 2024, the Company entered into an interest rate swap agreement with a notional amount of $
18
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 and nine months ended September 30, 2024, and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2023, 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, 2023. All discussions and information in this Quarterly Report on Form 10-Q regarding our business and financial results relate solely to our operations prior to the acquisition of Sterling, unless otherwise indicated.
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: the failure to realize the expected benefits of our acquisition of Sterling, 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; 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, data security, and artificial intelligence; 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, 2023, 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.
19
Glossary of Selected Terminology
The following terms are used in this Form 10-Q, unless otherwise noted or indicated by the context:
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.
Overview
First Advantage is a leading global provider of employment background screening, identity, and verification solutions. Enabled by its proprietary technology, First Advantage delivers innovative services and insights that help customers mitigate risk and hire the best talent: 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 more than 30,000 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, and pass-through and third-party out of pocket costs.
20
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. 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. Approximately 90% of our criminal searches performed in the United States in 2023 were completed the same day they were submitted.
We generated revenues of $199.1 million for the three months ended September 30, 2024, as compared to $200.4 million for the three months ended September 30, 2023 and generated revenues of $553.1 million for the nine months ended September 30, 2024, as compared to $561.2 million for the nine months ended September 30, 2023. Approximately 87% of our revenues for the nine months ended September 30, 2024 was generated in the Americas, predominantly in the United States, while the remaining 13% was generated internationally. Other than the United States, no single country accounted for 10% or more of our total revenues for the three and nine months ended September 30, 2024. Please refer to “Results of Operations” for further details.
Segments
We manage our business and report our financial results in two reportable segments, Americas and International:
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 U.S. holiday season and lowest in December and at the beginning of the new year, following the U.S. holiday hiring season. Certain customers across various industries also historically increase 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. 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
Acquisition of Sterling Check Corp.
On February 28, 2024, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among First Advantage, Sterling Check Corp., a Delaware corporation (“Sterling”), and Starter Merger Sub, Inc., a Delaware corporation and an indirect, wholly owned subsidiary of First Advantage (“Merger Sub”).
On October 31, 2024, following the satisfaction or waiver of the applicable closing conditions, including receipt of the requisite regulatory approvals, First Advantage completed its acquisition of Sterling, pursuant to the Merger Agreement. Under the terms of the Merger Agreement, Merger Sub, merged with and into Sterling, with Sterling continuing as the surviving corporation in such merger and becoming an indirect, wholly owned subsidiary of First Advantage. The Sterling stockholders received approximately $1,224.6 million in cash and 27.15 million shares of First Advantage common stock with a fair value of $507.7 million. We believe the transaction extends First Advantage’s high-quality and cost-effective background screening, identity, and verification technology solutions for the benefit of both companies' customers across industry verticals and geographies. The cash-and-stock transaction values Sterling at approximately $2.2 billion and was financed through cash on hand and the issuance of new debt and common stock. See Note 6, “Long-term Debt,” to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information.
21
Current Economic Conditions
Macroeconomic factors, including inflation, interest rates, consumer spending, variability in hiring activity and job openings, and global economic and geopolitical developments, have negatively impacted significant portions of the global economy, and created volatility in the financial markets.
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, revenue 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 conditions, we are confident in the overall long-term 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, 2023.
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 help 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.
22
Operating Expenses
We incur the following expenses related to our cost of revenues and operating expenses:
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 identify in the business in order to align with our overall financial objectives. While we expect operating expenses to increase in absolute dollars to support our continued growth, we believe that, in the long term, operating expenses as a percentage of total revenues will decline gradually 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 interest expense, net. Interest expense, net relates primarily to our debt service costs, the interest-related unrealized gains and losses of our interest rate derivative instruments 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.
23
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.
In accordance with ASC 740-270, Interim Reporting, at the end of each interim period, the Company is required to determine the best estimate of its annual effective tax rate and then apply that rate in providing for income taxes on an interim period. However, in certain circumstances where the Company is unable to make a reliable estimate of the annual effective tax rate, ASC 740-270 allows the actual effective tax rate for the interim period to be used. As of September 30, 2024, the Company calculated its effective rate and applied that rate to the results for the three and nine months ended September 30, 2024. The Company used this approach because it was unable to reasonably estimate its annual effective rate due to the variability of the rate as a result of small changes in forecasted income and fluctuations in annual pre-tax income and loss between quarters.
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 and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(in thousands, except percentages) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Revenues |
|
$ |
199,119 |
|
|
$ |
200,364 |
|
|
$ |
553,081 |
|
|
$ |
561,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of services (exclusive of depreciation and amortization below) |
|
|
100,879 |
|
|
|
101,410 |
|
|
|
280,419 |
|
|
|
285,468 |
|
Product and technology expense |
|
|
12,909 |
|
|
|
13,107 |
|
|
|
39,052 |
|
|
|
38,374 |
|
Selling, general, and administrative expense |
|
|
46,050 |
|
|
|
30,217 |
|
|
|
125,352 |
|
|
|
88,881 |
|
Depreciation and amortization |
|
|
30,168 |
|
|
|
32,419 |
|
|
|
89,968 |
|
|
|
96,341 |
|
Total operating expenses |
|
|
190,006 |
|
|
|
177,153 |
|
|
|
534,791 |
|
|
|
509,064 |
|
Income from operations |
|
|
9,113 |
|
|
|
23,211 |
|
|
|
18,290 |
|
|
|
52,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other Expense, Net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
17,191 |
|
|
|
7,557 |
|
|
|
28,114 |
|
|
|
20,125 |
|
Total other expense, net |
|
|
17,191 |
|
|
|
7,557 |
|
|
|
28,114 |
|
|
|
20,125 |
|
(Loss) income before provision for income taxes |
|
|
(8,078 |
) |
|
|
15,654 |
|
|
|
(9,824 |
) |
|
|
32,010 |
|
Provision for income taxes |
|
|
782 |
|
|
|
4,881 |
|
|
|
83 |
|
|
|
9,530 |
|
Net (loss) income |
|
$ |
(8,860 |
) |
|
$ |
10,773 |
|
|
$ |
(9,907 |
) |
|
$ |
22,480 |
|
Net (loss) income margin |
|
|
(4.4 |
)% |
|
|
5.4 |
% |
|
|
(1.8 |
)% |
|
|
4.0 |
% |
24
Revenues
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Americas |
|
$ |
174,905 |
|
|
$ |
176,046 |
|
|
$ |
486,410 |
|
|
$ |
490,784 |
|
International |
|
|
26,624 |
|
|
$ |
25,805 |
|
|
|
72,834 |
|
|
$ |
74,766 |
|
Eliminations |
|
|
(2,410 |
) |
|
$ |
(1,487 |
) |
|
|
(6,163 |
) |
|
$ |
(4,351 |
) |
Total revenues |
|
$ |
199,119 |
|
|
$ |
200,364 |
|
|
$ |
553,081 |
|
|
$ |
561,199 |
|
Revenues were $199.1 million for the three months ended September 30, 2024, compared to $200.4 million for the three months ended September 30, 2023. Revenues for the three months ended September 30, 2024 decreased by $1.2 million, or 0.6%, compared to the three months ended September 30, 2023.
The decrease in revenues was primarily due to a net decrease of $9.3 million, or 4.7%, in existing customer revenues, primarily driven by the impact of macroeconomic factors affecting the hiring industry, particularly in our Americas segment, which have resulted in reduced demand from our customers and the impact of lost accounts. These consolidated decreases were partially offset by ongoing strength in upselling and cross-selling incremental services to existing customers, contributing $14.7 million, or 7.3%, of additional revenues.
The decrease in existing customer revenues was further offset by:
Revenues were $553.1 million for the nine months ended September 30, 2024, compared to $561.2 million for the nine months ended September 30, 2023. Revenues for the nine months ended September 30, 2024 decreased by $8.1 million, or 1.4%, compared to the nine months ended September 30, 2023.
The decrease in revenues was primarily due to a net decrease of $39.0 million, or 7.0%, in existing customer revenues, primarily driven by the impact of macroeconomic factors affecting the hiring industry which have resulted in reduced demand from our customers and the impact of lost accounts. These consolidated decreases were partially offset by ongoing strength in upselling and cross-selling to existing customers, contributing $31.0 million, or 5.5%, of additional revenues, and increased revenues from certain existing customers that were impacted by macroeconomic conditions, to a lesser extent, as compared to other existing customers.
The decrease in existing customer revenues was further offset by:
Pricing remained relatively stable across all periods.
Cost of Services
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(in thousands, except percentages) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Cost of services |
|
|
100,879 |
|
|
|
101,410 |
|
|
|
280,419 |
|
|
|
285,468 |
|
Revenues |
|
$ |
199,119 |
|
|
$ |
200,364 |
|
|
$ |
553,081 |
|
|
$ |
561,199 |
|
Cost of services as a % of revenue |
|
|
50.7 |
% |
|
|
50.6 |
% |
|
|
50.7 |
% |
|
|
50.9 |
% |
Cost of services was $100.9 million for the three months ended September 30, 2024, compared to $101.4 million for the three months ended September 30, 2023. Cost of services for the three months ended September 30, 2024 decreased by $0.5 million, or 0.5%, compared to the three months ended September 30, 2023. The decrease in cost of services was primarily due to a decrease in variable third-party data expenses as a result of decreased revenue volumes and increased automation.
25
Cost of services as a percentage of revenues was 50.7% for the three months ended September 30, 2024, compared to 50.6% for the three months ended September 30, 2023. The cost of services percentage of revenues for the third quarter of 2024 was impacted by a variation in customer ordering mix.
Cost of services was $280.4 million for the nine months ended September 30, 2024, compared to $285.5 million for the nine months ended September 30, 2023. Cost of services for the nine months ended September 30, 2024 decreased by $5.0 million, or 1.8%, compared to the nine months ended September 30, 2023.
The decrease in cost of services was primarily due to:
Cost of services as a percentage of revenues was 50.7% for the nine months ended September 30, 2024, compared to 50.9% for the nine months ended September 30, 2023. The cost of services percentage of revenues for the nine months ended September 30, 2024 was impacted by cost savings from the Company’s continued implementation of automation and other process and facilities efficiencies. These decreases were partially offset by slight increases in certain third-party data costs.
Product and Technology Expense
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Product and technology expense |
|
$ |
12,909 |
|
|
$ |
13,107 |
|
|
$ |
39,052 |
|
|
$ |
38,374 |
|
Product and technology expense was $12.9 million for the three months ended September 30, 2024, compared to $13.1 million for the three months ended September 30, 2023. Product and technology expense for the three months ended September 30, 2024 decreased by $0.2 million, or 1.5%, compared to the three months ended September 30, 2023.
Product and technology expense decreased primarily due to:
These decreases were partially offset by a $0.3 million increase in personnel expenses as a result of increased share-based compensation expense and additional investments made to enhance our product, solutions, and technology platform.
Product and technology expense was $39.1 million for the nine months ended September 30, 2024, compared to $38.4 million for the nine months ended September 30, 2023. Product and technology expense for the nine months ended September 30, 2024 increased by $0.7 million, or 1.8%, compared to the nine months ended September 30, 2023.
Product and technology expense increased primarily due to a $2.4 million increase in personnel expenses as a result of increased share-based compensation expense and additional investments made to enhance our product, solutions, and technology platform. The increase was partially offset by a $1.7 million decrease in software license fees.
Selling, General, and Administrative Expense
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Selling, general, and administrative expense |
|
$ |
46,050 |
|
|
$ |
30,217 |
|
|
$ |
125,352 |
|
|
$ |
88,881 |
|
Selling, general, and administrative expense was $46.1 million for the three months ended September 30, 2024, compared to $30.2 million for the three months ended September 30, 2023. Selling, general, and administrative expense for the three months ended September 30, 2024 increased by $15.8 million, or 52.4%, compared to the three months ended September 30, 2023.
Selling, general, and administrative expense increased primarily due to:
26
The increase in selling, general, and administrative expense was partially offset by:
Selling, general, and administrative expense was $125.4 million for the nine months ended September 30, 2024, compared to $88.9 million for the nine months ended September 30, 2023. Selling, general, and administrative expense for the nine months ended September 30, 2024 increased by $36.5 million, or 41.0%, compared to the nine months ended September 30, 2023.
Selling, general, and administrative expense increased primarily due to:
The increase in selling, general, and administrative expense was partially offset by:
Depreciation and Amortization
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Depreciation and amortization |
|
$ |
30,168 |
|
|
$ |
32,419 |
|
|
$ |
89,968 |
|
|
$ |
96,341 |
|
Depreciation and amortization was $30.2 million for the three months ended September 30, 2024, compared to $32.4 million for the three months ended September 30, 2023. Depreciation and amortization for the three months ended September 30, 2024 decreased by $2.3 million, or 6.9%, compared to the three months ended September 30, 2023. This decrease was partially offset by increases in depreciation related to assets placed in service during the three months ended September 30, 2024.
Depreciation and amortization was $90.0 million for the nine months ended September 30, 2024, compared to $96.3 million for the nine months ended September 30, 2023. Depreciation and amortization for the nine months ended September 30, 2024 decreased by $6.4 million, or 6.6%, compared to the nine months ended September 30, 2023. This decrease was partially offset by increases in depreciation related to assets placed in service during the nine months ended September 30, 2024.
Interest Expense, Net
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Interest expense, net |
|
$ |
17,191 |
|
|
$ |
7,557 |
|
|
$ |
28,114 |
|
|
$ |
20,125 |
|
Interest expense, net was $17.2 million for the three months ended September 30, 2024, compared to $7.6 million for the three months ended September 30, 2023. Interest expense, net for the three months ended September 30, 2024 increased by $9.6 million or 127.5%, compared to the three months ended September 30, 2023.
The increase in interest expense, net was primarily attributable to a $8.2 million unrealized loss on the Company’s interest rate swaps recorded in 2024 as a result of volatility in the interest rate environment. Interest expense, net for the three months ended September 30, 2024 was further impacted by lower interest income earned on cash held within interest bearing accounts as a result of lower cash on hand due to the Company’s one time, special dividend paid in August 2023.
27
Interest expense, net was $28.1 million for the nine months ended September 30, 2024, compared to $20.1 million for the nine months ended September 30, 2023. Interest expense for the nine months ended September 30, 2024 increased by $8.0 million or 39.7% compared to the nine months ended September 30, 2023.
The increase in interest expense, net was primarily attributable to higher interest expense on the First Lien Credit Facility as a result of increasing interest rates and lower interest income earned on cash held within interest bearing accounts as a result of lower cash on hand. Interest expense, net for the nine months ended September 30, 2024 was further impacted by $1.0 million of unrealized loss on the Company’s interest rate swaps recorded in 2024 as a result of volatility in the interest rate environment.
Provision for Income Taxes
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Provision for income taxes |
|
$ |
782 |
|
|
$ |
4,881 |
|
|
$ |
83 |
|
|
$ |
9,530 |
|
Our provision for income taxes was $0.8 million for the three months ended September 30, 2024, compared to $4.9 million for the three months ended September 30, 2023. Our provision for income taxes for the three months ended September 30, 2024 decreased by $4.1 million, compared to the three months ended September 30, 2023.
The decrease in our provision for income taxes was primarily due to the decrease of income before income taxes during the three months ended September 30, 2024, as compared to the three months ended September 30, 2023.
Our provision for income taxes was $0.1 million for the nine months ended September 30, 2024, compared to $9.5 million for the nine months ended September 30, 2023. Our provision for income taxes for the nine months ended September 30, 2024 decreased by $9.4 million, compared to the nine months ended September 30, 2023.
The decrease in our provision for income taxes was primarily due to the decrease of income before income taxes during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023.
Net (Loss) Income and Net (Loss) Income Margin
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(in thousands, except percentages) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net (loss) income |
|
$ |
(8,860 |
) |
|
$ |
10,773 |
|
|
$ |
(9,907 |
) |
|
$ |
22,480 |
|
Net (loss) income margin |
|
|
(4.4 |
)% |
|
|
5.4 |
% |
|
|
(1.8 |
)% |
|
|
4.0 |
% |
Net (loss) income was $(8.9) million for the three months ended September 30, 2024, compared to $10.8 million for the three months ended September 30, 2023. Net (loss) income for the three months ended September 30, 2024 decreased by $19.6 million compared to the three months ended September 30, 2023.
Net (loss) income margin was (4.4)% for the three months ended September 30, 2024, compared to 5.4% for the three months ended September 30, 2024, as increases in selling, general, and administrative expenses, as a result of the Company’s acquisition of Sterling and reduced demand from customers more impacted by macroeconomic events, contributed to lower profitability.
Net (loss) income was $(9.9) million for the nine months ended September 30, 2024, compared to $22.5 million for the nine months ended September 30, 2023. Net (loss) income for the nine months ended September 30, 2024 decreased by $32.4 million compared to the nine months ended September 30, 2023.
Net (loss) income margin was (1.8)% for the nine months ended September 30, 2024 compared to 4.0% for the nine months ended September 30, 2023, as increases in selling, general, and administrative expenses, as a result of the Company’s acquisition of Sterling and reduced demand from customers more impacted by macroeconomic events, contributed to lower profitability, particularly as the Company cycled over the growth experienced in 2023 due to the post-pandemic recovery.
28
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 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 (loss) 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 $64.0 million for the three months ended September 30, 2024 and represented an Adjusted EBITDA Margin of 32.2%. Adjusted EBITDA was $64.8 million for the three months ended September 30, 2023 and represented an Adjusted EBITDA Margin of 32.3%. Adjusted EBITDA for the three months ended September 30, 2024 decreased by $0.7 million, or 1.1%, compared to the three months ended September 30, 2023.
Adjusted EBITDA was $166.4 million for the nine months ended September 30, 2024 and represented an Adjusted EBITDA Margin of 30.1%. Adjusted EBITDA was $169.3 million for the nine months ended September 30, 2023 and represented an Adjusted EBITDA Margin of 30.2%. Adjusted EBITDA for the nine months ended September 30, 2024 decreased by $3.0 million, or 1.7%, compared to the nine months ended September 30, 2023.
Adjusted EBITDA declined during the nine months ended September 30, 2024, as macroeconomic events impacted our revenues attributed to existing customers. 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.
29
The following table presents a reconciliation of Adjusted EBITDA for the periods presented.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net (loss) income |
|
$ |
(8,860 |
) |
|
$ |
10,773 |
|
|
$ |
(9,907 |
) |
|
$ |
22,480 |
|
Interest expense, net |
|
|
17,191 |
|
|
|
7,557 |
|
|
|
28,114 |
|
|
|
20,125 |
|
Provision for income taxes |
|
|
782 |
|
|
|
4,881 |
|
|
|
83 |
|
|
|
9,530 |
|
Depreciation and amortization |
|
|
30,168 |
|
|
|
32,419 |
|
|
|
89,968 |
|
|
|
96,341 |
|
Share-based compensation(a) |
|
|
9,504 |
|
|
|
4,790 |
|
|
|
19,303 |
|
|
|
10,449 |
|
Transaction and acquisition-related charges(b) |
|
|
13,218 |
|
|
|
1,571 |
|
|
|
35,083 |
|
|
|
3,832 |
|
Integration, restructuring, and other charges(c) |
|
|
2,043 |
|
|
|
2,800 |
|
|
|
3,721 |
|
|
|
6,565 |
|
Adjusted EBITDA |
|
$ |
64,046 |
|
|
$ |
64,791 |
|
|
$ |
166,365 |
|
|
$ |
169,322 |
|
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 September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(in thousands, except percentages) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Adjusted EBITDA |
|
$ |
64,046 |
|
|
$ |
64,791 |
|
|
$ |
166,365 |
|
|
$ |
169,322 |
|
Revenues |
|
|
199,119 |
|
|
|
200,364 |
|
|
|
553,081 |
|
|
|
561,199 |
|
Adjusted EBITDA Margin |
|
|
32.2 |
% |
|
|
32.3 |
% |
|
|
30.1 |
% |
|
|
30.2 |
% |
The following table presents a calculation of Adjusted EBITDA by segment for the periods presented. See Note 15, “Reportable Segments” to the condensed consolidated financial statements for a reconciliation of Adjusted EBITDA for the periods presented by segment.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(in thousands, except percentages) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Adjusted EBITDA(1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Americas |
|
$ |
58,637 |
|
|
$ |
60,188 |
|
|
$ |
153,900 |
|
|
$ |
157,168 |
|
International |
|
|
5,409 |
|
|
|
4,603 |
|
|
|
12,465 |
|
|
|
12,154 |
|
Adjusted EBITDA |
|
$ |
64,046 |
|
|
$ |
64,791 |
|
|
$ |
166,365 |
|
|
$ |
169,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Americas |
|
$ |
174,905 |
|
|
$ |
176,046 |
|
|
$ |
486,410 |
|
|
$ |
490,784 |
|
International |
|
|
26,624 |
|
|
|
25,805 |
|
|
|
72,834 |
|
|
|
74,766 |
|
Less: intersegment eliminations |
|
|
(2,410 |
) |
|
|
(1,487 |
) |
|
|
(6,163 |
) |
|
|
(4,351 |
) |
Total revenues |
|
$ |
199,119 |
|
|
$ |
200,364 |
|
|
$ |
553,081 |
|
|
$ |
561,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjusted EBITDA Margin |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Americas |
|
|
33.5 |
% |
|
|
34.2 |
% |
|
|
31.6 |
% |
|
|
32.0 |
% |
International |
|
|
20.3 |
% |
|
|
17.8 |
% |
|
|
17.1 |
% |
|
|
16.3 |
% |
Adjusted EBITDA Margin |
|
|
32.2 |
% |
|
|
32.3 |
% |
|
|
30.1 |
% |
|
|
30.2 |
% |
30
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 (loss) 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 $38.0 million for the three months ended September 30, 2024, compared to $40.0 million for the three months ended September 30, 2023. Adjusted Net Income for the three months ended September 30, 2024 decreased by $2.0 million, or 5.1% compared to the three months ended September 30, 2023.
Adjusted Diluted Earnings Per Share was $0.26 for the three months ended September 30, 2024, compared to $0.28 for the three months ended September 30, 2023. Adjusted Diluted Earnings Per Share for the three months ended September 30, 2024 decreased by $0.02, or 7.1% compared to the three months ended September 30, 2023.
Adjusted Net Income was $93.5 million for the nine months ended September 30, 2024, compared to $103.2 million for the nine months ended September 30, 2023. Adjusted Net Income for the nine months ended September 30, 2024 decreased by $9.7 million, or 9.4%, compared to the nine months ended September 30, 2023.
Adjusted Diluted Earnings Per Share was $0.64 for the nine months ended September 30, 2024, compared to $0.71 for the nine months ended September 30, 2023. Adjusted Diluted Earnings Per Share for the nine months ended September 30, 2024 decreased by $0.07, or 9.9% compared to the nine months ended September 30, 2023.
Adjusted Net Income and Adjusted Diluted Earnings Per Share declined during the nine months ended September 30, 2024 as reduced demand from customers more impacted by macroeconomic 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. Adjusted Diluted Earnings Per Share is further impacted by shares repurchased under the Company’s Repurchase Program.
The following table presents a reconciliation of Adjusted Net Income for the periods presented.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net (loss) income |
|
$ |
(8,860 |
) |
|
$ |
10,773 |
|
|
$ |
(9,907 |
) |
|
$ |
22,480 |
|
Provision for income taxes |
|
|
782 |
|
|
|
4,881 |
|
|
|
83 |
|
|
|
9,530 |
|
(Loss) income before provision for income taxes |
|
|
(8,078 |
) |
|
|
15,654 |
|
|
|
(9,824 |
) |
|
|
32,010 |
|
Debt-related charges(a) |
|
|
10,057 |
|
|
|
2,532 |
|
|
|
6,781 |
|
|
|
7,033 |
|
Acquisition-related depreciation and amortization(b) |
|
|
22,646 |
|
|
|
25,660 |
|
|
|
67,887 |
|
|
|
76,615 |
|
Share-based compensation(c) |
|
|
9,504 |
|
|
|
4,790 |
|
|
|
19,303 |
|
|
|
10,449 |
|
Transaction and acquisition-related charges(d) |
|
|
13,218 |
|
|
|
1,571 |
|
|
|
35,083 |
|
|
|
3,832 |
|
Integration, restructuring, and other charges(e) |
|
|
2,043 |
|
|
|
2,800 |
|
|
|
3,721 |
|
|
|
6,565 |
|
Adjusted Net Income before income tax effect |
|
|
49,390 |
|
|
|
53,007 |
|
|
|
122,951 |
|
|
|
136,504 |
|
Less: Adjusted income taxes(f) |
|
|
11,400 |
|
|
|
12,972 |
|
|
|
29,422 |
|
|
|
33,279 |
|
Adjusted Net Income |
|
$ |
37,990 |
|
|
$ |
40,035 |
|
|
$ |
93,529 |
|
|
$ |
103,225 |
|
31
The following table presents the calculation of Adjusted Diluted Earnings Per Share for the periods presented.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Diluted net (loss) income per share (GAAP) |
|
$ |
(0.06 |
) |
|
$ |
0.07 |
|
|
$ |
(0.07 |
) |
|
$ |
0.15 |
|
Adjusted Net Income adjustments per share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Provision for income taxes |
|
|
0.01 |
|
|
|
0.03 |
|
|
|
0.00 |
|
|
|
0.07 |
|
Debt-related charges(a) |
|
|
0.07 |
|
|
|
0.02 |
|
|
|
0.05 |
|
|
|
0.05 |
|
Acquisition-related depreciation and amortization(b) |
|
|
0.15 |
|
|
|
0.18 |
|
|
|
0.46 |
|
|
|
0.52 |
|
Share-based compensation(c) |
|
|
0.06 |
|
|
|
0.03 |
|
|
|
0.13 |
|
|
|
0.07 |
|
Transaction and acquisition-related charges(d) |
|
|
0.09 |
|
|
|
0.01 |
|
|
|
0.24 |
|
|
|
0.03 |
|
Integration, restructuring, and other charges(e) |
|
|
0.01 |
|
|
|
0.02 |
|
|
|
0.03 |
|
|
|
0.04 |
|
Adjusted income taxes(f) |
|
|
(0.08 |
) |
|
|
(0.09 |
) |
|
|
(0.20 |
) |
|
|
(0.23 |
) |
Adjusted Diluted Earnings Per Share (Non-GAAP) |
|
$ |
0.26 |
|
|
$ |
0.28 |
|
|
$ |
0.64 |
|
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of shares outstanding used in computation of Adjusted Diluted Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of shares outstanding—diluted (GAAP) |
|
|
144,096,312 |
|
|
|
144,733,357 |
|
|
|
143,851,357 |
|
|
|
146,392,996 |
|
Options and restricted stock not included in weighted average number of shares outstanding—diluted (GAAP) (using treasury stock method) |
|
|
2,492,320 |
|
|
|
— |
|
|
|
2,318,217 |
|
|
|
— |
|
Adjusted weighted average number of shares outstanding—diluted (Non-GAAP) |
|
|
146,588,632 |
|
|
|
144,733,357 |
|
|
|
146,169,574 |
|
|
|
146,392,996 |
|
32
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, including the Acquisition. In 2023, the Company fully utilized its remaining U.S. Federal income tax net operating loss carryforwards. As a result, income taxes are and will be 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, including incremental term loan borrowings incurred to fund the Acquisition pursuant to commitment letters entered into with certain financial institutions. 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 September 30, 2024, we had $307.4 million in cash and cash equivalents and $100.0 million available under our revolving credit facility. As of September 30, 2024, we had $564.7 million of total debt outstanding. As a result of the refinancing related to the acquisition of Sterling, the Company will have $2.185 billion of total debt outstanding and $250.0 million available under our revolving credit facility. The debt balance outstanding requires 1% annual prepayments, to be made quarterly. Additionally, the Company used approximately $230 million of its cash and cash equivalents to fund the acquisition of Sterling and related expenses and expects cash and cash equivalents from Sterling after close to be approximately $55 million, resulting in a consolidated cash and cash equivalents balance after close of more than $125 million.
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, 2023.
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. On September 14, 2023, the Company announced that its Board of Directors approved a one-year extension of its share repurchase authorization, extending the previously authorized $200.0 million program through December 31, 2024. Through November 8, 2024, the Company repurchased approximately $119.5 million of shares under the Repurchase Program. In connection with the execution of the Merger Agreement, the Company suspended purchases under its Repurchase Program.
Dividends
On August 8, 2023, the Company’s Board of Directors declared a one-time special cash dividend of $1.50 per share to stockholders of record at the close of business on August 21, 2023. Since August 31, 2023 through September 30, 2024, the Company has paid an aggregate cash dividend of $218.0 million with cash from the balance sheet.
33
Long-Term Debt
In February 2020, a new financing structure was established, which included a new First Lien Credit Agreement (as amended, the “Credit Agreement”). The Credit 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 its 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. Pursuant to an amendment in June 2023, the reference rate under the Credit Agreement was transitioned from LIBOR to SOFR (the Secured Overnight Financing Rate as administered by the Federal Reserve Bank of New York), with the addition of an applicable margin. The 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.
In connection with the acquisition of Sterling, on October 31, 2024, First Advantage Holdings, LLC, a subsidiary of the Company (the “Borrower”), refinanced its existing First Lien Credit Agreement and all related Sterling debt. See Note 6, “Long-term Debt,” to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information.
34
Cash Flow Analysis
Comparison of Cash Flows for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023
The following table is a summary of our cash flow activity for the periods presented:
|
|
Nine Months Ended September 30, |
|
|||||
(in thousands) |
|
2024 |
|
|
2023 |
|
||
Net cash provided by operating activities |
|
$ |
113,862 |
|
|
$ |
106,080 |
|
Net cash used in investing activities |
|
|
(21,716 |
) |
|
|
(61,932 |
) |
Net cash provided by (used in) financing activities |
|
|
1,155 |
|
|
|
(270,565 |
) |
Cash Flows from Operating Activities
Net cash provided by operating activities was $113.9 million for the nine months ended September 30, 2024, compared to $106.1 million for the nine months ended September 30, 2023. Net cash provided by operating activities for the nine months ended September 30, 2024 increased by $7.8 million compared to the nine months ended September 30, 2023. Cash flows from operating activities for the nine months ended September 30, 2024 were impacted by the timing of payments of professional service and legal fees related to the Company’s acquisition of Sterling and the continuation of more modest hiring activity from our customers resulting from the current hiring environment. 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 $21.7 million for the nine months ended September 30, 2024, compared to $61.9 million for the nine months ended September 30, 2023. Net cash used in investing activities for the nine months ended September 30, 2024 decreased by $40.2 million compared to the nine months ended September 30, 2023. The decrease in cash flows used in investing activities was primarily due to the $41.1 million Infinite ID acquisition, net of cash acquired and other transaction adjustments, during the nine months ended September 30, 2023, slightly offset by increased spend on software development.
Cash Flows from Financing Activities
Net cash provided by (used in) financing activities was $1.2 million for the nine months ended September 30, 2024, compared to $(270.6) million for the nine months ended September 30, 2023. Net cash provided by financing activities for the nine months ended September 30, 2024 was driven by cash net inflows related to share-based compensation activity. These inflows were offset by cash outflows related to payments on the deferred purchase of a software platform and dividends paid on vested RSUs as a result of the Company’s August 2023 one-time special dividend. Net cash used in financing activities for nine months ended September 30, 2023 were impacted by the Company’s one-time special cash dividend of $1.50 per share to stockholders of record at the close of business on August 21, 2023 and shares repurchased under the Company’s Repurchase Program. An aggregate cash dividend of $217.7 million was paid on August 31, 2023. During the nine months ended September 30, 2023, the Company repurchased 4,140,519 shares for a total cost of $55.9 million. These outflows were offset partially by cash inflows related to share-based compensation activity.
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.
Critical Accounting Policies and Estimates
During the three and nine months ended September 30, 2024, there have been no significant changes to our critical accounting policies and estimates compared with those disclosed in Part II, Item 7, “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, 2023.
35
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of September 30, 2024, no material change had occurred in our market risks, compared with the disclosure in our Annual Report on Form 10-K for the year ended December 31, 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 (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
36
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
Information in response to this Item is included in “Part I — Item 1. — Note 12 — 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 September 30, 2024, no material changes had occurred in our risk factors, compared with the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following information relates to the Company’s purchase of its common stock during each month within the third quarter of 2024:
Period |
|
Total Number of Shares Purchased |
|
|
Average Price |
|
|
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) |
|
||||
July 1, 2024 through July 31, 2024 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
80,478,639 |
|
August 1, 2024 through August 31, 2024 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
80,478,639 |
|
September 1, 2024 through September 30, 2024 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
80,478,639 |
|
Total |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
80,478,639 |
|
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. In connection with the execution of the Merger Agreement, the Company suspended purchases under its Repurchase Program.
37
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not applicable
Item 5. Other Information.
During the three months ended September 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended)
|
|
|
|
|
|
Trading Arrangement |
|
|
|
|
||
Director/Officer Name |
|
Title |
|
Date of Adoption/Termination |
|
Rule 10b5-1(1) |
|
Non-Rule 10b5-1 |
|
Scheduled Expiration Date of Rule 10b5-1 Trading Plan(2) |
|
Aggregate Number of Securities to Be Purchased or Sold |
|
|
|
|
X |
|
|
|
|
Sale of up to |
|||
|
|
|
|
X |
|
|
|
|
Sale of up to |
|||
|
|
|
|
X |
|
|
|
|
Sale of up to |
|||
Appointment of Global Chief Operating Officer
On November 11, 2024, the Company’s Board of Directors promoted Douglas Nairne to the role of Global Chief Operating Officer (principal operating officer), effective as of November 11, 2024. As Global Chief Operating Officer, Mr. Nairne will oversee all of the Company’s global operations, customer care, and customer onboarding teams.
Mr. Nairne, 58, previously served as the Company’s Chief Operations Officer – International since joining the Company in October 2021, and was responsible for First Advantage’s operations in the Asia-Pacific (APAC), India and Europe, Middle East, and Africa (EMEA) regions. Prior to joining the Company, Mr. Nairne served as the Chairman and Chief Executive Officer of Dataflow Group, a background screening company for employers recruiting high-risk, internationally mobile professionals from July 2011 to July 2018 and served in an advisory position from July 2018 to September 2021. Mr. Nairne’s past experience includes positions as an officer in the Canadian Army, a journalist for the South China Morning Post, and Chief Operating Officer of IntegraScreen. Mr. Nairne holds a B. A. from the University of Manitoba, a master’s in journalism from Hong Kong University, and a master’s in business administration from the Hong Kong University of Science and Technology and Northwestern University’s Kellogg School of Management.
In connection with the promotion of Mr. Nairne: (i) his annual base salary will increase to $500,000.00 (to be converted into HKD at the applicable exchange rate), (ii) he will be eligible to receive a discretionary annual cash bonus of up to 60% of his annual base salary, and (iii) he will receive a one-time cash bonus of $100,000.00 in connection with the Company’s acquisition of Sterling Check Corp. Additionally, on November 14, 2024, Mr. Nairne will receive a grant of equity awards, pursuant to the First Advantage 2021 Omnibus Incentive Plan (as amended) and the Company’s current forms of equity awards (substantially in the forms filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as Exhibit 10.9 (Form of Restricted Stock Unit Award Grant Notice and Agreement) and Exhibit 10.5 (Form of Standard Option Award Grant Notice and Agreement)), having a fair value equal to $1,000,000.00, comprised of 50% stock options and 50% restricted stock units, with each grant vesting annually in four equal installments from November 1, 2024. The exact number of stock options and restricted stock units subject to the awards will be determined on November 14, 2024, based on the prior twenty day average closing price of the Company’s common stock in the case of the restricted stock units 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 November 14, 2024.
Mr. Nairne was not appointed pursuant to any arrangement or understanding with any other person, has no family relationships with any director or executive officer of the Company, and there are no transactions involving Mr. Nairne that would be required to be reported under Item 404(a) of Regulation S-K.
38
Item 6. Exhibits.
Exhibit Number |
|
Description |
2.1 |
|
|
2.2 |
|
|
3.1 |
|
|
3.2 |
|
|
10.1 |
|
|
10.2 |
|
|
10.3 |
|
|
10.4 |
|
|
31.1 |
|
|
31.2 |
|
|
32.1 |
|
|
32.2 |
|
|
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 With Embedded Linkbase Documents. |
104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document). |
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.
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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.
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FIRST ADVANTAGE CORPORATION |
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Date: November 12, 2024 |
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By: |
/s/ Scott Staples |
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Scott Staples |
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Chief Executive Officer (principal executive officer) |
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Date: November 12, 2024 |
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By: |
/s/ Steven Marks |
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Steven Marks |
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Executive Vice President & Chief Financial Officer (principal financial officer and principal accounting officer) |
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