Stock-Based Compensation

6 Months Ended

Jun. 30, 2022

Share-based Payment Arrangement [Abstract]

Stock-Based Compensation

Stock-Based Compensation

Stock-based compensation expense is recognized in cost of revenues, corporate, technology and production systems, and selling, general, and administrative expense in the accompanying unaudited condensed consolidated statements of income and comprehensive income as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2022		2021		2022
(in thousands)
Stock-based compensation expense
Cost of revenues	$	—	$	411	$	—	$	824
Corporate technology and production systems	—		499		—		1,030
Selling, general and administrative	756		5,113		1,653		9,277
Total stock-based compensation expense	$	756	$	6,023	$	1,653	$	11,131

Prior to the IPO, all share-based awards were issued to employees under the Company’s 2015 Long-Term Equity Incentive Plan (the “2015 Plan”). Upon the adoption of the Sterling Check Corp. 2021 Omnibus Incentive Plan (the “2021 Equity Plan”) on August 4, 2021 and as of September 22, 2021, all newly granted share-based awards have been issued under the 2021 Equity Plan.

As of June 30, 2022, the Company had approximately $83.9 million of unrecognized pre-tax non-cash stock-based compensation expense related to awards granted under the 2021 Equity Plan, consisting of approximately $38.2 million related to non-qualified stock options (“NQSOs”), $44.8 million related to restricted stock, and approximately $0.9 million related to restricted stock units (“RSUs”), all of which the Company expects to recognize over a weighted average period of 3.29 years.

2015 Long-Term Equity Incentive Plan

The table below provides a summary of service-based vesting options (“SVOs”) and performance-based stock options (“PSOs”) currently outstanding under the 2015 Plan for the six months ended June 30, 2022:

	Outstanding SVOs						Outstanding PSOs
	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value		Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value
(in thousands, except shares and per share amounts)
Balances as of December 31, 2021	6,450,978	$	9.58	6.70	$	70,510	3,096,830	$	10.05	7.04	$	32,394
Exercised	(69,910)	9.57			886		(14,975)	9.68			154
Balances as of June 30, 2022 (1)	6,381,068	$	9.58	6.19	$	42,945	3,081,855	$	10.05	6.54	$	19,288

__________

(1)    All SVOs and PSOs are exercisable as of June 30, 2022.

On August 4, 2021, the Company amended each option outstanding under the 2015 Plan to (i) accelerate vesting upon an initial public offering and (ii) permit each option to be exercised following termination for any reason for the period set forth in the applicable award agreement or, if longer, an extended post-termination exercise period that would end on the date that is six months following the second anniversary of the effective date of the initial public offering, provided that if such date falls during a blackout period, the post-termination exercise period will be extended until the date that is thirty days after the commencement of the Company’s next open trading window. In connection with the option agreement amendments, the option holders agreed that any shares of common stock acquired by such individuals upon exercise of any options outstanding under the 2015 plan (the “LTIP Option Shares”) will be subject to the following transfer restrictions, in addition to any other lock-up restrictions, securities trading policies, and other limitations to which such individuals may be subject: (i) the holder will be able to transfer up to 25% of the LTIP Option Shares at any time after six months following the effectiveness of the registration statement of which the IPO Prospectus formed a part (or such earlier time as the transfer restrictions expire under the lock-up agreements described in the IPO Prospectus under “Shares Eligible for Future Sale—Lock-up Agreements”) but prior to the first anniversary of the effectiveness of the registration statement of which the IPO Prospectus formed a part; (ii) on or after the first anniversary but prior to the second anniversary of the effectiveness of the registration statement of which the IPO Prospectus formed a part, the holder will be able to transfer up to 50% of the LTIP Option Shares (reduced by any of the LTIP Option Shares sold prior to the first anniversary) and (iii) on or after the second anniversary of the effectiveness of the registration statement of which the IPO Prospectus forms a part, the holder will be able to transfer all of his or her LTIP Option Shares. The foregoing transfer restrictions will not apply to any shares of common stock held by any such individual that are not LTIP Option Shares.

2021 Omnibus Incentive Plan

On August 4, 2021, the Company’s Board of Directors adopted, and on August 13, 2021 the Company’s stockholders approved, the 2021 Equity Plan. Equity awards under the 2021 Equity Plan are intended to retain and motivate our officers and employees, consultants and non-employee directors and to promote the success of the Company’s business by providing such participating individuals with a proprietary interest in the performance of the Company. The 2021 Equity Plan will terminate on the tenth anniversary thereof, unless earlier terminated by the Board of Directors. Under the 2021 Equity Plan, the following types of awards can be granted to an eligible individual (as defined by the plan and to the extent permitted by applicable law): incentive stock options (“ISOs”) and NQSOs; stock appreciation rights (“SARs”); restricted stock; RSUs; performance awards; cash-based awards and other share-based awards. Upon its adoption, the 2021 Equity Plan provided that up to 9,433,000 shares may be issued pursuant to awards granted under the 2021 Equity Plan (the “Share Limit”); provided, that, the Share Limit shall be automatically increased on the first day of each calendar year

commencing on January 1, 2022 and ending on January 1, 2030 in an amount equal to the lesser of (x) 5% of the total number of shares outstanding on the last day of the immediately preceding calendar year, and (y) such number of shares as determined by the Board of Directors, and no more than 9,433,000 shares may be issued upon the exercise of ISOs. As of June 30, 2022, 7,306,956 shares were available for issuance pursuant to future granted awards under the 2021 Equity Plan.

Stock Options

Options issued under the 2021 Equity Plan generally vest over four years, subject to continued employment with the Company through the applicable vesting date. Options issued under the 2021 Equity Plan generally expire ten years after the grant date.

The table below provides a summary of stock option activity under the 2021 Equity Plan for the six months ended June 30, 2022:

		Weighted Average Exercise Price		Weighted Average Contractual Term (in years)	Aggregate Intrinsic Value		Weighted Average Fair Value (per share)
	Number of Shares
	(in thousands, except share and per share amounts)
Outstanding at December 31, 2021	3,918,454	$	23.00	9.65	$	—
Granted	622,919	22.35					$	10.43
Forfeited / Cancelled	(36,635)	23.00
Outstanding at June 30, 2022	4,504,738	$	22.91	9.31	$	—

Restricted Stock

Restricted stock issued under the 2021 Equity Plan generally vest over four years, subject to continued employment with the Company through the applicable vesting date. Holders of restricted stock are entitled to all rights of a common stockholder of the Company and are subject to restrictions on transfer.

The table below provides a summary of restricted stock activity under the 2021 Equity Plan for the six months ended June 30, 2022:

		Weighted Average Fair Value (per share)
	Number of Shares
Unvested at December 31, 2021	1,779,716	$	23.01
Granted	800,473	21.45
Forfeited / Cancelled	(224,990)	22.96
Unvested at June 30, 2022	2,355,199	$	22.48

Restricted Stock Units

Restricted stock units issued under the 2021 Equity Plan generally vest over four years, subject to continued employment with the Company through the applicable vesting date. Upon vesting, employees will receive shares of common stock in settlement of the units. The table below provides a summary of restricted stock unit activity under the 2021 Equity Plan for the six months ended June 30, 2022:

	Number of Shares	Weighted Average Fair Value (per share)
Unvested at December 31, 2021	41,933	$	23.00
Granted	7,786	22.35
Forfeited / Cancelled	(3,263)	23.00
Unvested at June 30, 2022	46,456	$	22.89

Employee Stock Purchase Plan

There were no stock employee purchase offerings under the 2021 Employee Stock Purchase Plan (the “ESPP”) during the three and six months ended June 30, 2022 and, accordingly, no eligible employees were enrolled in the ESPP during the three and six months ended June 30, 2022.