Form 10-Q - Quarterly report [Sections 13 or 15(d)]
August 08 2024 - 4:15PM
Edgar (US Regulatory)
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a
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2024
OR
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-31666
First Advantage Corporation
(Exact Name of Registrant as Specified in its Charter)
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Delaware |
84-3884690 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer
Identification No.) |
1 Concourse Parkway NE, Suite 200 Atlanta, GA |
30328 |
(Address of principal executive offices) |
(Zip Code) |
(888) 314-9761
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
Common Stock, $0.001 par value per share |
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FA |
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The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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☒ |
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Accelerated filer |
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Non-accelerated filer |
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☐ |
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Smaller reporting company |
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Emerging growth company |
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☐ |
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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 August 2, 2024, the registrant had 145,407,414 shares of common stock, $0.001 par value per share, outstanding.
Table of Contents
PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
First Advantage Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
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(in thousands, except share and per share amounts) |
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June 30, 2024 |
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December 31, 2023 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
269,563 |
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$ |
213,774 |
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Restricted cash |
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86 |
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138 |
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Accounts receivable (net of allowance for doubtful accounts of $1,179 and $1,036 at June 30, 2024 and December 31, 2023, respectively) |
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130,768 |
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142,690 |
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Prepaid expenses and other current assets |
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19,707 |
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13,426 |
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Income tax receivable |
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7,101 |
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3,710 |
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Total current assets |
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427,225 |
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373,738 |
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Property and equipment, net |
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63,463 |
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79,441 |
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Goodwill |
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819,136 |
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820,654 |
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Trade names, net |
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62,571 |
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66,229 |
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Customer lists, net |
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250,397 |
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275,528 |
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Other intangible assets, net |
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2,018 |
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2,257 |
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Deferred tax asset, net |
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2,872 |
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2,786 |
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Other assets |
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8,268 |
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10,021 |
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TOTAL ASSETS |
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$ |
1,635,950 |
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$ |
1,630,654 |
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LIABILITIES AND EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
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$ |
55,486 |
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$ |
47,024 |
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Accrued compensation |
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17,422 |
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16,379 |
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Accrued liabilities |
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20,641 |
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16,162 |
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Current portion of operating lease liability |
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2,984 |
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3,354 |
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Income tax payable |
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331 |
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264 |
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Deferred revenues |
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2,234 |
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1,856 |
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Total current liabilities |
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99,098 |
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85,039 |
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Long-term debt (net of deferred financing costs of $5,352 and $6,268 at June 30, 2024 and December 31, 2023, respectively) |
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559,372 |
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558,456 |
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Deferred tax liability, net |
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56,508 |
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71,274 |
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Operating lease liability, less current portion |
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4,964 |
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5,931 |
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Other liabilities |
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2,697 |
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3,221 |
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Total liabilities |
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722,639 |
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723,921 |
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COMMITMENTS AND CONTINGENCIES (Note 12) |
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EQUITY |
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Common stock - $0.001 par value; 1,000,000,000 shares authorized, 145,324,615 and 145,074,802 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively |
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145 |
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145 |
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Additional paid-in-capital |
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987,986 |
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977,290 |
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Accumulated deficit |
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(50,592 |
) |
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(49,545 |
) |
Accumulated other comprehensive loss |
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(24,228 |
) |
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(21,157 |
) |
Total equity |
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913,311 |
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906,733 |
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TOTAL LIABILITIES AND EQUITY |
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$ |
1,635,950 |
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$ |
1,630,654 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
First Advantage Corporation
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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(in thousands, except share and per share amounts) |
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2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
REVENUES |
|
$ |
184,546 |
|
|
$ |
185,315 |
|
|
$ |
353,962 |
|
|
$ |
360,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization below) |
|
|
92,348 |
|
|
|
92,997 |
|
|
|
179,540 |
|
|
|
184,058 |
|
Product and technology expense |
|
|
13,677 |
|
|
|
12,643 |
|
|
|
26,143 |
|
|
|
25,267 |
|
Selling, general, and administrative expense |
|
|
38,640 |
|
|
|
29,982 |
|
|
|
79,302 |
|
|
|
58,664 |
|
Depreciation and amortization |
|
|
29,978 |
|
|
|
32,056 |
|
|
|
59,800 |
|
|
|
63,922 |
|
Total operating expenses |
|
|
174,643 |
|
|
|
167,678 |
|
|
|
344,785 |
|
|
|
331,911 |
|
INCOME FROM OPERATIONS |
|
|
9,903 |
|
|
|
17,637 |
|
|
|
9,177 |
|
|
|
28,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSE, NET: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
7,353 |
|
|
|
3,887 |
|
|
|
10,923 |
|
|
|
12,568 |
|
Total other expense, net |
|
|
7,353 |
|
|
|
3,887 |
|
|
|
10,923 |
|
|
|
12,568 |
|
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES |
|
|
2,550 |
|
|
|
13,750 |
|
|
|
(1,746 |
) |
|
|
16,356 |
|
Provision (benefit) for income taxes |
|
|
689 |
|
|
|
3,968 |
|
|
|
(699 |
) |
|
|
4,649 |
|
NET INCOME (LOSS) |
|
$ |
1,861 |
|
|
$ |
9,782 |
|
|
$ |
(1,047 |
) |
|
$ |
11,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation (loss) income |
|
|
(1,298 |
) |
|
|
218 |
|
|
|
(3,071 |
) |
|
|
1,087 |
|
COMPREHENSIVE INCOME (LOSS) |
|
$ |
563 |
|
|
$ |
10,000 |
|
|
$ |
(4,118 |
) |
|
$ |
12,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
1,861 |
|
|
$ |
9,782 |
|
|
$ |
(1,047 |
) |
|
$ |
11,707 |
|
Basic net income (loss) per share |
|
$ |
0.01 |
|
|
$ |
0.07 |
|
|
$ |
(0.01 |
) |
|
$ |
0.08 |
|
Diluted net income (loss) per share |
|
$ |
0.01 |
|
|
$ |
0.07 |
|
|
$ |
(0.01 |
) |
|
$ |
0.08 |
|
Weighted average number of shares outstanding - basic |
|
|
143,863,667 |
|
|
|
144,112,028 |
|
|
|
143,727,612 |
|
|
|
144,982,459 |
|
Weighted average number of shares outstanding - diluted |
|
|
145,856,112 |
|
|
|
145,338,920 |
|
|
|
143,727,612 |
|
|
|
146,894,790 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
First Advantage Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(in thousands) |
|
2024 |
|
|
2023 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
Net (loss) income |
|
$ |
(1,047 |
) |
|
$ |
11,707 |
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
|
59,800 |
|
|
|
63,922 |
|
Amortization of deferred financing costs |
|
|
916 |
|
|
|
927 |
|
Bad debt (recovery) expense |
|
|
(156 |
) |
|
|
138 |
|
Deferred taxes |
|
|
(14,601 |
) |
|
|
(3,057 |
) |
Share-based compensation |
|
|
9,799 |
|
|
|
5,659 |
|
Loss on foreign currency exchange rates |
|
|
— |
|
|
|
4 |
|
(Gain) loss on disposal of fixed assets and impairment of ROU assets |
|
|
(26 |
) |
|
|
2,125 |
|
Change in fair value of interest rate swaps |
|
|
(9,177 |
) |
|
|
(1,235 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
|
11,919 |
|
|
|
4,034 |
|
Prepaid expenses and other assets |
|
|
2,245 |
|
|
|
5,335 |
|
Accounts payable |
|
|
7,565 |
|
|
|
(3,035 |
) |
Accrued compensation and accrued liabilities |
|
|
7,203 |
|
|
|
(8,847 |
) |
Deferred revenues |
|
|
373 |
|
|
|
248 |
|
Operating lease liabilities |
|
|
(467 |
) |
|
|
(460 |
) |
Other liabilities |
|
|
(626 |
) |
|
|
304 |
|
Income taxes receivable and payable, net |
|
|
(3,348 |
) |
|
|
(6,047 |
) |
Net cash provided by operating activities |
|
|
70,372 |
|
|
|
71,722 |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
Capitalized software development costs |
|
|
(12,894 |
) |
|
|
(12,434 |
) |
Purchases of property and equipment |
|
|
(970 |
) |
|
|
(688 |
) |
Other investing activities |
|
|
52 |
|
|
|
(196 |
) |
Net cash used in investing activities |
|
|
(13,812 |
) |
|
|
(13,318 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
Proceeds from issuance of common stock under share-based compensation plans |
|
|
1,197 |
|
|
|
2,104 |
|
Payments on deferred purchase agreements |
|
|
(469 |
) |
|
|
(469 |
) |
Net settlement of share-based compensation plan awards |
|
|
(311 |
) |
|
|
(211 |
) |
Cash dividends paid |
|
|
(204 |
) |
|
|
— |
|
Share repurchases |
|
|
— |
|
|
|
(52,334 |
) |
Payments on finance lease obligations |
|
|
— |
|
|
|
(74 |
) |
Net cash provided by (used in) financing activities |
|
|
213 |
|
|
|
(50,984 |
) |
Effect of exchange rate on cash, cash equivalents, and restricted cash |
|
|
(1,036 |
) |
|
|
(30 |
) |
Increase in cash, cash equivalents, and restricted cash |
|
|
55,737 |
|
|
|
7,390 |
|
Cash, cash equivalents, and restricted cash at beginning of period |
|
|
213,912 |
|
|
|
391,796 |
|
Cash, cash equivalents, and restricted cash at end of period |
|
$ |
269,649 |
|
|
$ |
399,186 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
Cash paid for income taxes, net of refunds received |
|
$ |
17,158 |
|
|
$ |
13,797 |
|
Cash paid for interest |
|
$ |
23,887 |
|
|
$ |
21,933 |
|
NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
Property and equipment acquired on account |
|
$ |
1,030 |
|
|
$ |
73 |
|
Non-cash property and equipment additions |
|
$ |
540 |
|
|
$ |
— |
|
Excise taxes on share repurchases incurred but not paid |
|
$ |
— |
|
|
$ |
522 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
First Advantage Corporation
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Common Stock |
|
|
Additional
Paid-In-Capital |
|
|
Accumulated
Deficit |
|
|
Accumulated Other
Comprehensive
Loss |
|
|
Total Stockholders’
Equity |
|
BALANCE – December 31, 2023 |
|
$ |
145 |
|
|
$ |
977,290 |
|
|
$ |
(49,545 |
) |
|
$ |
(21,157 |
) |
|
$ |
906,733 |
|
Share-based compensation |
|
|
— |
|
|
|
4,751 |
|
|
|
— |
|
|
|
— |
|
|
|
4,751 |
|
Forfeitures of previously declared cash dividends |
|
|
— |
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
Proceeds from issuance of common stock under share-based compensation plans |
|
|
0 |
|
|
|
976 |
|
|
|
— |
|
|
|
— |
|
|
|
976 |
|
Common stock withheld for tax obligations on restricted stock unit and option settlement |
|
(0) |
|
|
|
(41 |
) |
|
|
— |
|
|
|
— |
|
|
|
(41 |
) |
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,773 |
) |
|
|
(1,773 |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
(2,908 |
) |
|
|
— |
|
|
|
(2,908 |
) |
BALANCE – March 31, 2024 |
|
$ |
145 |
|
|
$ |
982,982 |
|
|
$ |
(52,453 |
) |
|
$ |
(22,930 |
) |
|
$ |
907,744 |
|
Share-based compensation |
|
|
— |
|
|
|
5,048 |
|
|
|
— |
|
|
|
— |
|
|
|
5,048 |
|
Forfeitures of previously declared cash dividends |
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
Proceeds from issuance of common stock under share-based compensation plans |
|
|
0 |
|
|
|
221 |
|
|
|
— |
|
|
|
— |
|
|
|
221 |
|
Common stock withheld for tax obligations on restricted stock unit and option settlement |
|
(0) |
|
|
|
(270 |
) |
|
|
— |
|
|
|
— |
|
|
|
(270 |
) |
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,298 |
) |
|
|
(1,298 |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
1,861 |
|
|
|
— |
|
|
|
1,861 |
|
BALANCE – June 30, 2024 |
|
$ |
145 |
|
|
$ |
987,986 |
|
|
$ |
(50,592 |
) |
|
$ |
(24,228 |
) |
|
$ |
913,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Common Stock |
|
|
Additional
Paid-In-Capital |
|
|
Accumulated
Deficit |
|
|
Accumulated Other
Comprehensive
Loss |
|
|
Total Stockholders’
Equity |
|
BALANCE – December 31, 2022 |
|
$ |
149 |
|
|
$ |
1,176,163 |
|
|
$ |
(27,363 |
) |
|
$ |
(22,331 |
) |
|
$ |
1,126,618 |
|
Share-based compensation |
|
|
— |
|
|
|
2,058 |
|
|
|
— |
|
|
|
— |
|
|
|
2,058 |
|
Repurchases of common stock |
|
|
(2 |
) |
|
|
— |
|
|
|
(25,515 |
) |
|
|
— |
|
|
|
(25,517 |
) |
Proceeds from issuance of common stock under share-based compensation plans |
|
|
0 |
|
|
|
1,399 |
|
|
|
— |
|
|
|
— |
|
|
|
1,399 |
|
Common stock withheld for tax obligations on restricted stock unit and option settlement |
|
|
0 |
|
|
|
(25 |
) |
|
|
— |
|
|
|
— |
|
|
|
(25 |
) |
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
869 |
|
|
|
869 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
1,925 |
|
|
|
— |
|
|
|
1,925 |
|
BALANCE – March 31, 2023 |
|
$ |
147 |
|
|
$ |
1,179,595 |
|
|
$ |
(50,953 |
) |
|
$ |
(21,462 |
) |
|
$ |
1,107,327 |
|
Share-based compensation |
|
|
— |
|
|
|
3,601 |
|
|
|
— |
|
|
|
— |
|
|
|
3,601 |
|
Repurchases of common stock |
|
|
(2 |
) |
|
|
— |
|
|
|
(27,337 |
) |
|
|
— |
|
|
|
(27,339 |
) |
Proceeds from issuance of common stock under share-based compensation plans |
|
|
0 |
|
|
|
705 |
|
|
|
— |
|
|
|
— |
|
|
|
705 |
|
Common stock withheld for tax obligations on restricted stock unit and option settlement |
|
|
0 |
|
|
|
(186 |
) |
|
|
— |
|
|
|
— |
|
|
|
(186 |
) |
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
218 |
|
|
|
218 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
9,782 |
|
|
|
— |
|
|
|
9,782 |
|
BALANCE – June 30, 2023 |
|
$ |
145 |
|
|
$ |
1,183,715 |
|
|
$ |
(68,508 |
) |
|
$ |
(21,244 |
) |
|
$ |
1,094,108 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
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.
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.
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 June 30, 2024 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets |
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
— |
|
|
$ |
4,602 |
|
|
$ |
— |
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Other intangible assets are subject to nonrecurring fair value measurement as the result of business acquisitions. The fair values of these assets were estimated using the present value of expected future cash flows through unobservable inputs (Level 3).
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 one customer which represented approximately 11% of its consolidated revenues during the three and six months ended June 30, 2024. The Company had one customer which represented approximately 11% and 10% of its consolidated revenues during the three and six months ended June 30, 2023, respectively. Additionally, the Company did not have any customers which represented 10% or more of its consolidated accounts receivable, net for any period presented.
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.
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 $(1.3) million and $0.2 million for the three months ended June 30, 2024 and 2023, respectively. Currency translation (loss) income included in accumulated other comprehensive loss was approximately $(3.1) million and $1.1 million for the six months ended June 30, 2024 and 2023, respectively.
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 income (loss) was approximately $0.6 million and $0.2 million for the three months ended June 30, 2024 and 2023, respectively. Currency transaction income (loss) included in the accompanying condensed consolidated statements of operations and comprehensive income was approximately $0.6 million and $(0.3) million for the six months ended June 30, 2024 and 2023, respectively.
Recent Accounting Pronouncements — There were no accounting pronouncements issued during the six months ended June 30, 2024 that are expected to have a material impact on the condensed consolidated financial statements.
Note 3. Acquisitions
Pending 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”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will be 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 cash-and-stock transaction (the “Acquisition”) valued Sterling at approximately $2.2 billion as of the date of the Merger Agreement.
The Acquisition is subject to satisfaction or waiver of customary closing conditions, including, among others, adoption of the Merger Agreement by Sterling stockholders (which approval has been obtained), the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (the “HSR Act”) and the effectiveness of a registration statement on Form S-4 filed by First Advantage in connection with the Acquisition (which registration statement was declared effective on June 11, 2024).
On May 28, 2024, First Advantage and Sterling each received a request for additional information and documentary materials (a “Second Request”) from the U.S. Department of Justice (the “DOJ”) in connection with the DOJ’s review of the proposed transaction contemplated by the Merger Agreement. The Second Request was issued under the notification requirements of the HSR Act. The effect of the Second Request is to extend the waiting period imposed under the HSR Act until 30 days after First Advantage and Sterling have substantially complied with the Second Request, unless that period is extended voluntarily by the parties or terminated sooner by the DOJ. The parties have been working cooperatively with the DOJ to bring its review of the proposed transaction to a close as expeditiously as possible and will continue to do so. The proposed transaction remains subject to the expiration or termination of the waiting period applicable to the proposed transaction under the HSR Act and the satisfaction or waiver of the other closing conditions contained in the Merger Agreement.
2023 Acquisition
On September 1, 2023, the Company acquired 100% of the equity interest of a digital identity and biometrics solutions company headquartered in New York, for $41.0 million. The acquired company operates under the trade name Infinite ID. The acquisition expands the Company’s network and portfolio of identity solutions in the United States. The acquired company was determined to constitute a business and the Company was deemed to be the acquirer under ASC 805. The Company recorded a preliminary allocation of the purchase price to assets acquired and liabilities assumed based on their estimated fair values as of September 1, 2023. The allocation was finalized as of June 30, 2024 with an immaterial adjustment recorded related to the valuation of deferred taxes.
The allocation of the purchase price is based on the fair value of assets acquired and liabilities assumed as of the acquisition date. The following table summarizes the consideration paid and the amounts recognized for the assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
Consideration |
|
|
|
Cash purchase price |
|
$ |
41,000 |
|
Other transaction adjustments |
|
|
97 |
|
Total fair value of consideration transferred |
|
$ |
41,097 |
|
Current assets |
|
$ |
1,335 |
|
Property and equipment, including software developed for internal use |
|
|
5,959 |
|
Trade name |
|
|
2,300 |
|
Customer lists |
|
|
3,800 |
|
Other intangible assets |
|
|
2,400 |
|
Other assets |
|
|
236 |
|
Total liabilities |
|
|
(1,084 |
) |
Total identifiable net assets |
|
$ |
14,946 |
|
Goodwill |
|
$ |
26,151 |
|
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 June 30, 2024 or results of operations for the three and six months ended June 30, 2024, and therefore, pro forma operating results and other disclosures for the acquisition is not presented.
Note 4. Property and Equipment, net
Property and equipment, net as of June 30, 2024 and December 31, 2023 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
Furniture and equipment |
|
$ |
27,381 |
|
|
$ |
26,576 |
|
Capitalized software for internal use, acquired by business combination |
|
|
232,367 |
|
|
|
232,505 |
|
Capitalized software for internal use, developed internally or otherwise purchased |
|
|
100,516 |
|
|
|
86,704 |
|
Leasehold improvements |
|
|
2,807 |
|
|
|
2,275 |
|
Total property and equipment |
|
|
363,071 |
|
|
|
348,060 |
|
Less: accumulated depreciation and amortization |
|
|
(299,608 |
) |
|
|
(268,619 |
) |
Property and equipment, net |
|
$ |
63,463 |
|
|
$ |
79,441 |
|
Depreciation and amortization expense of property and equipment was approximately $15.7 million and $16.6 million for the three months ended June 30, 2024 and 2023, respectively. Depreciation and amortization expense of property and equipment was approximately $31.3 million and $33.1 million for the six months ended June 30, 2024 and 2023, respectively.
Note 5. Goodwill, Trade Names, Customer Lists and Other Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30, 2024 by reportable segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
|
International |
|
|
Total |
|
Balance – December 31, 2023 |
|
$ |
703,797 |
|
|
$ |
116,857 |
|
|
$ |
820,654 |
|
Adjustments to initial purchase price allocations |
|
|
(368 |
) |
|
|
— |
|
|
|
(368 |
) |
Foreign currency translation |
|
|
(55 |
) |
|
|
(1,095 |
) |
|
|
(1,150 |
) |
Balance – June 30, 2024 |
|
$ |
703,374 |
|
|
$ |
115,762 |
|
|
$ |
819,136 |
|
The following summarizes the gross carrying value and accumulated amortization for the Company’s trade names, customer lists, and other intangible assets as of June 30, 2024 and December 31, 2023 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2024 |
|
|
Gross
Carrying Value |
|
|
Accumulated
Amortization |
|
|
Net
Carrying Value |
|
|
Useful Life
(in years) |
Trade names |
|
$ |
96,182 |
|
|
$ |
(33,611 |
) |
|
$ |
62,571 |
|
|
20 years |
Customer lists |
|
|
519,343 |
|
|
|
(268,946 |
) |
|
|
250,397 |
|
|
13-14 years |
Other intangible assets |
|
|
2,400 |
|
|
|
(382 |
) |
|
|
2,018 |
|
|
5 years |
Total |
|
$ |
617,925 |
|
|
$ |
(302,939 |
) |
|
$ |
314,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2023 |
|
|
Gross
Carrying Value |
|
|
Accumulated
Amortization |
|
|
Net
Carrying Value |
|
|
Useful Life
(in years) |
Trade names |
|
$ |
96,321 |
|
|
$ |
(30,092 |
) |
|
$ |
66,229 |
|
|
20 years |
Customer lists |
|
|
520,105 |
|
|
|
(244,577 |
) |
|
|
275,528 |
|
|
13-14 years |
Other intangible assets |
|
|
2,400 |
|
|
|
(143 |
) |
|
|
2,257 |
|
|
5 years |
Total |
|
$ |
618,826 |
|
|
$ |
(274,812 |
) |
|
$ |
344,014 |
|
|
|
Amortization expense of trade names, customer lists, and other intangible assets was approximately $14.3 million and $15.4 million for the three months ended June 30, 2024 and 2023, respectively. Amortization expense of trade names, customer lists, and other intangible assets was approximately $28.5 million and $30.8 million for the six months ended June 30, 2024 and 2023, respectively. Trade names and customer lists are amortized on an accelerated basis based upon their estimated useful life. Other intangible assets are amortized on a straight-line or accelerated basis over their expected useful life of five years.
Note 6. Long-term Debt
The fair value of the Company’s long-term debt obligation approximated its book value as of June 30, 2024 and December 31, 2023 and consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
First Lien Credit Facility |
|
$ |
564,724 |
|
|
$ |
564,724 |
|
Less: Deferred financing costs |
|
|
(5,352 |
) |
|
|
(6,268 |
) |
Long-term debt, net |
|
$ |
559,372 |
|
|
$ |
558,456 |
|
The Company is a party to a First Lien Credit Agreement (as amended, “Credit Agreement”), which provides for a term loan of $766.6 million due January 31, 2027, carrying an interest rate of 2.75% to 3.00%, based on the first lien ratio, plus LIBOR (“First Lien Credit Facility”) and a $100.0 million revolving credit facility due July 31, 2026 (“Revolver”). Pursuant to an amendment in June 2023, the reference rate under the Credit Agreement was transitioned from LIBOR (the London Interbank Offer Rate) 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 Credit Agreement is collateralized by substantially all assets and capital stock owned by direct and indirect domestic subsidiaries and are governed by certain restrictive covenants including limitations on indebtedness, liens, and other corporate actions such as investments and acquisitions. In the event the Company’s outstanding indebtedness under the Revolver exceeds 35% of the aggregate principal amount of the revolving commitments then in effect, it is required to maintain a consolidated first lien leverage ratio no greater than 7.75 to 1.00. As of June 30, 2024, there were no outstanding borrowings under the Revolver and $564.7 million outstanding under the First Lien Credit Facility. As the Company had no outstanding amounts under the Revolver, it was not subject to the consolidated first lien leverage ratio covenant. The Company was compliant with all other covenants under the agreement as of June 30, 2024.
In connection with the execution of the Merger Agreement, on February 28, 2024, First Advantage Holdings, LLC, a subsidiary of the Company (the “Borrower”), entered into a commitment letter with certain financial institutions that committed to provide, subject to the terms and conditions of the commitment letter, an incremental term loan in an aggregate principal amount of up to $1.820 billion and incremental revolving commitments in an aggregate principal amount of $150 million, in each case, under the Credit Agreement. Such financial institutions also agreed to extend the maturity date of the Revolver from July 31, 2026 to the date that is the fifth anniversary of the closing date of the Acquisition.
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 June 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) |
|
June 30, 2023 |
|
February 28, 2026 |
|
$100.0 million |
|
4.32% |
Interest rate swap |
|
December 29, 2023 |
|
December 31, 2026 |
|
$150.0 million |
|
3.86% |
Interest rate swap |
|
March 1, 2024 |
|
December 31, 2026 |
|
$150.0 million |
|
3.76% |
(a) In conjunction with the June 2023 transition of the reference rate from LIBOR to SOFR, the fixed rate was reduced from 4.36% to 4.32%.
Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements; however, the Company has not elected to apply hedge accounting for these instruments.
The following is a summary of location and fair value of the financial positions recorded related to the derivative instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
Derivatives not designated
as hedging instruments |
|
Balance Sheet Location |
|
As of
June 30, 2024 |
|
|
As of
December 31, 2023 |
|
Interest rate collars |
|
Prepaid expenses and other current assets |
|
$ |
— |
|
|
$ |
1,986 |