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Stock-Based Compensation
 12 Months Ended
Dec. 31, 2023
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 consolidated statements of operations and comprehensive income (loss) as follows:
Year Ended
December 31,
(in thousands)202320222021
Stock-based compensation expense
Cost of revenues$1,591 $1,533 $1,512 
Corporate technology and production systems2,822 2,264 2,054 
Selling, general and administrative30,237 20,008 29,014 
Total stock-based compensation expense$34,650 $23,805 $32,580 
The total income tax benefit was $3.6 million, $2.4 million, and $0.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. The Company uses actual data to record forfeitures.
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 December 31, 2023, the Company had approximately $73.0 million of unrecognized pre-tax non-cash stock-based compensation expense related to awards granted under the 2021 Equity Plan, consisting of approximately $21.7 million related to non-qualified stock options (“NQSOs”), $50.0 million related to restricted stock, and approximately $1.3 million related to restricted stock units (“RSUs”), all of which the Company expects to recognize over a weighted average period of 2.2 years.
2015 Long-Term Equity Incentive Plan
Pursuant to the Company’s 2015 Plan, the Company granted performance-based stock options (“PSOs”) and service-based vesting stock options (“SVOs”). 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.
Stock Options
The fair value of each option award was estimated on the date of grant using the Black-Scholes option pricing model. The Company uses an income approach, including a multiple of historical EBITDA adjusted for nonrecurring transactions, for valuing its equity. This approach was selected as a reasonably appropriate method to determine the implied share price of the Company’s common stock, which represented a privately-held business interest prior to the IPO. Assumptions used in determining compensation cost for SVOs granted included the following: (i) expected holding period determined using the mid-point of the contractual term; (ii) the estimate of expected volatility based upon an analysis of the historical volatility of guideline public companies; (iii) the likelihood of additional dividends; and (iv) the risk-free interest rate determined using the Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected holding period of the award being valued.
The following table represents the weighted-average assumptions used to determine compensation costs and grant-date fair values for SVOs granted during the period presented:
Year Ended
December 31, 2021
Weighted-average assumptions used:
Expected volatility25.90 %
Risk-free interest rate0.60 %
Dividend rate0.00 %
Expected term, in years5.0
Weighted average grant date fair value$2.32 
There were no SVOs granted during the years ended December 31, 2023 and 2022. There were no PSOs granted during the years ended December 31, 2023, 2022 and 2021
The table below provides a summary of SVOs and PSOs currently outstanding under the 2015 Plan for the year ended December 31, 2023:
Outstanding SVOsOutstanding 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 at December 31, 20226,208,274 $9.59 5.00$36,513 3,081,855 $10.05 3.32$16,699 
Granted— — — — 
Forfeited / Expired— — — — 
Exercised(572,532)9.48 2,168 (44,925)9.68 148 
Balances at December 31, 2023(1)
5,635,742 $9.60 3.68$24,349 3,036,930 $10.05 2.14$11,732 
_________________________
(1)    All SVOs and PSOs are exercisable as of December 31, 2023.
The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of the Company’s common stock as of the reporting date. The intrinsic value of SVOs exercised was approximately $2.2 million, $3.0 million, and $0.1 million for the years ended December 31, 2023, 2022 and 2021, respectively. The tax benefit from SVOs exercised was approximately $0.4 million and $0.7 million for the years ended December 31, 2023 and 2022, respectively. There was no tax benefit from SVOs exercised during the year ended December 31, 2021.
The intrinsic value of PSOs exercised was approximately $0.1 million and $0.2 million for the years ended December 31, 2023 and 2022. respectively. There was no tax benefit from PSOs exercised for the years ended December 31, 2023 and 2022, respectively. There were no PSO’s exercised for the year ended December 31, 2021.
Promissory Notes
In December 2020, the Company issued 370,182 shares of common stock to employees at $9.68 per share. Consideration was made in the form of promissory notes between the employee and the Company. The promissory notes accrued interest at the mid-term applicable federal rate for November 2020 (0.39% per annum) and were partially secured by the underlying shares of common stock. The promissory notes were partial-recourse, but treated as non-recourse for accounting purposes and, as such, (i) each of these purchases of common stock with a promissory note was accounted for as if it were a stock option grant and (ii) no receivable for amounts due under the promissory notes was recorded on the Company’s consolidated balance sheets. As the shares were considered fully vested, unexercised stock options, the full amount of stock compensation expense was recognized on the grant date in the amount of $0.8 million in 2020. As the employees have the right to require the Company to purchase all of the shares at fair market value under certain events, these instruments were classified as a liability and recorded in Other liabilities on the consolidated balance sheets as of December 31, 2020. The fair value of the fully vested stock options was marked to market each reporting period.
The promissory notes were forgivable upon (i) a change in control or (ii) the first public filing of a registration statement with the SEC in connection with an initial public offering. On August 4, 2021, the Company approved the forgiveness and cancelation of the outstanding indebtedness of each promissory note holder prior to the IPO. Loan Forgiveness Agreements were executed and concurrently, the Company agreed to accelerate payment of a portion of each holder’s target bonus opportunity for calendar year 2021 to assist the holder in satisfying the withholding tax obligations with respect to the forgiveness of the promissory notes upon consummation of the IPO. On August 16, 2021, pursuant to the terms of the promissory notes, the principal amount on each loan, together with all accrued and unpaid interest, were forgiven. On August 17, 2021, the forgiveness of the promissory notes by the Company was treated as an option modification, resulting in the recognition of stock compensation expense of $7.7 million which reflected the incremental fair value of the award on the date of forgiveness. As of September 30, 2021, the issuance of common stock pursuant to the forgiveness of the promissory notes became classified as Stockholders’ Equity on the consolidated balance sheets.
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 the Company’s 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 December 31, 2023, 9,357,470 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 on various schedules over one to four-year periods on the anniversary of the grant date, 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 fair value for Options granted under the 2021 Equity Plan was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for periods presented:
Year Ended
December 31,
202320222021
Weighted-average assumptions used:
Expected volatility51.98 %45.03 %44.54 %
Risk-free interest rate4.18 %1.80 %1.07 %
Dividend rate0.00 %0.00 %0.00 %
Expected term, in years6.236.506.38
Weighted average grant date fair value$7.02 $10.43 $10.25 
The table below provides a summary of stock option activity under the 2021 Equity Plan for the year ended December 31, 2023:
Number of SharesWeighted Average Exercise PriceWeighted Average Contractual Term (in years)Aggregate Intrinsic Value
(in thousands, except shares and per share amounts)
Outstanding at December 31, 20224,387,501 $22.91 8.81$— 
Granted947,021 12.79 
Forfeited / Expired(776,323)20.95 
Exercised — — 
Outstanding at December 31, 20234,558,199 $21.14 8.06$904 
Exercisable at December 31, 20231,698,943 $22.98 7.76$— 
There were no stock options exercised under the 2021 Equity Plan for the years ended December 31, 2023, 2022 and 2021.
Restricted Stock
Restricted stock issued under the 2021 Equity Plan in connection with the Company’s IPO vests 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date, subject to continued employment with the Company through the applicable vesting date. Other restricted stock grants issued under the 2021 Equity Plan vest on various schedules over one to four-year periods on the anniversary of the grant date, subject to the 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 year ended December 31, 2023:
Number of SharesWeighted Average Fair Value
(per share)
Unvested at December 31, 20223,421,920 $20.32 
Granted2,266,296 12.48 
Forfeited / Cancelled(712,342)15.87 
Vested(1,179,671)20.57 
Unvested at December 31, 20233,796,203 $16.40 
The weighted-average grant-date fair value of restricted stock granted during the years ended December 31, 2023, 2022 and 2021 was $12.48, $18.60, and $23.01, respectively.
The total grant date fair value of restricted stock vested during the years ended December 31, 2023, 2022 and 2021 was $24.3 million, $0.1 million, and $0.1 million, respectively.
Restricted Stock Units
Restricted stock units issued under the 2021 Equity Plan in connection with the Company’s IPO vest 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date, subject to continued employment with the Company through the applicable vesting date. Additional grants of RSUs vest on various schedules over a one to four-year period on the anniversary of the grant date, subject to the 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 year ended December 31, 2023:
Number of SharesWeighted Average Fair Value
(per share)
Unvested at December 31, 202251,249 $21.18 
Granted93,026 14.36 
Forfeited / Cancelled(3,351)18.09 
Vested(20,369)21.55 
Unvested at December 31, 2023120,555 $15.82 
The weighted-average grant-date fair value of restricted stock granted during the years ended December 31, 2023, 2022 and 2021 was $14.36, $18.49, and $23.00, respectively.
The total grant date fair value of restricted stock vested during the year ended December 31, 2023 was $0.4 million. There were no restricted stock units that vested during the years ended December 31, 2022 and 2021.
Employee Stock Purchase Plan
The 2021 Employee Stock Purchase Plan (the “ESPP”) was launched on July 1, 2023. The ESPP allows eligible employees to voluntarily make after-tax contributions of up to 15% of such employee’s cash compensation for the purchase of the Company’s stock. Consecutive offering periods of six months in duration have been established, with the first one commencing on July 1, 2023. During each offering period, such contributions will be accumulated and applied to purchase shares at the end of the offering period. The purchase price for shares purchased in the initial offering period will be, and for subsequent offering periods will not be less than, 85% of the lesser of the closing price of the shares on the first day of the offering period or the last day of the offering period.
The ESPP authorizes the issuance of a total of 1,886,000 shares, which number shall be automatically increased on the first day of each calendar year following the calendar year in which the effective date of the ESPP falls in an amount equal to the lesser of (a) 1% of the total number of shares outstanding on the last day of the immediately preceding calendar year and (b) a lower number of shares as determined by the board of directors. As of December 31, 2023, 3,810,649 shares were available for issuance under the ESPP. Notwithstanding the foregoing, the maximum number of shares that may be issued or transferred under the ESPP shall not exceed an aggregate of 11,319,000 shares.
During the year ended December 31, 2023, the amount the Company recorded for stock-based compensation expense associated with the ESPP was $0.2 million.