HRT

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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 September 30, 2022

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

For the transition period from ________ to ________

Delaware									82-1092072
(State or other jurisdiction of incorporation or organization)									(I.R.S. Employer Identification No.)

100 Centerview Drive, Suite 300			Nashville			Tennessee			37214
(Address of Principal Executive Offices)									(Zip Code)

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.001 per share

HRT

New York Stock Exchange

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☐ Emerging growth company ☒

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to “we,” “us,” “our,” the “Company,” and similar references refer: (1) following the consummation of our conversion to a Delaware corporation on October 15, 2021 in connection with our initial public offering, to HireRight Holdings Corporation, and (2) prior to the completion of such conversion, to HireRight GIS Group Holdings, LLC. See “Part I, Item 1. Financial Statements (Unaudited) - Note 1 — Organization, Basis of Presentation and Consolidation, and Significant Accounting Policies” in this Quarterly Report on Form 10-Q for further information.

For convenience, we often refer to the individuals about whom we prepare screening reports as “applicants” because the majority of our screening reports are ordered by our customers to assist in their evaluation of applicants for employment or engagement as contractors. However, we also prepare screening reports on our customers’ existing employees, vendor personnel, volunteers, and others, and our references to “applicants” refer to all subjects of our screening reports.

			Page
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Operations			2
Condensed Consolidated Statements of Comprehensive Income			3
Condensed Consolidated Statements of Stockholders’ Equity			4
Condensed Consolidated Statements of Cash Flows			6
Notes to Condensed Consolidated Financial Statements			7

Condensed Consolidated Balance Sheets (Unaudited)

			September 30, 2022						December 31, 2021
			(in thousands, except share and per share data)
Assets
Current assets
Cash and cash equivalents			$	146,508					$	111,032
Restricted cash			1,306						5,182
Accounts receivable, net of allowance for doubtful accounts of $5,170 and $4,284 at September 30, 2022 and December 31, 2021, respectively			165,944						142,473
Prepaid expenses and other current assets			17,067						18,583
Total current assets			330,825						277,270
Property and equipment, net			9,492						11,127
Right-of-use assets, net			8,802						—
Intangible assets, net			343,025						389,483
Goodwill			801,674						819,538
Cloud computing software, net			29,844						8,133
Deferred tax assets			63,167						—
Other non-current assets			18,811						18,211
Total assets			$	1,605,640					$	1,523,762
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable			$	11,355					$	13,688
Accrued expenses and other current liabilities			79,867						75,294
Accrued salaries and payroll			33,158						29,280
Derivative instruments, short-term			—						16,662
Debt, current portion			8,350						8,350
Total current liabilities			132,730						143,274
Debt, long-term portion			684,565						688,683
Derivative instruments, long-term			—						11,444
Tax receivable agreement liability			211,438						210,639
Deferred tax liabilities			5,760						14,765
Operating lease liabilities, long-term			11,051						—
Other non-current liabilities			2,394						9,240
Total liabilities			1,047,938						1,078,045
Commitments and contingent liabilities (Note 12)
Preferred stock, $0.001 par value, authorized 100,000,000 shares; none issued and outstanding as of September 30, 2022 and December 31, 2021			—						—
Common stock, $0.001 par value, authorized 1,000,000,000 shares; 79,482,612 and 79,392,937 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively			79						79
Additional paid-in capital			802,484						793,382
Accumulated deficit			(231,065)						(360,364)
Accumulated other comprehensive income (loss)			(13,796)						12,620
Total stockholders’ equity			557,702						445,717
Total liabilities and stockholders’ equity			$	1,605,640					$	1,523,762

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
			(in thousands, except share and per share data)
Revenues			$	210,303					$	204,981					$	631,306					$	531,522
Expenses
Cost of services (exclusive of depreciation and amortization below)			110,848						111,328						343,241						295,832
Selling, general and administrative			49,378						47,652						152,032						130,261
Depreciation and amortization			17,946						19,531						54,056						56,013
Total expenses			178,172						178,511						549,329						482,106
Operating income			32,131						26,470						81,977						49,416
Other expenses
Interest expense			8,457						18,518						20,971						54,674
Other expense, net			89						22						163						125
Total other expenses, net			8,546						18,540						21,134						54,799
Income (loss) before income taxes			23,585						7,930						60,843						(5,383)
Income tax (benefit) expense			(69,704)						649						(68,456)						2,954
Net income (loss)			$	93,289					$	7,281					$	129,299					$	(8,337)
Net income (loss) per share:
Basic			$	1.17					$	0.13					$	1.63					$	(0.15)
Diluted			$	1.17					$	0.13					$	1.63					$	(0.15)
Weighted average shares outstanding:
Basic			79,459,633						57,168,291						79,419,725						57,168,291
Diluted			79,542,715						57,199,204						79,476,574						57,168,291

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
			(in thousands)
Net income (loss)			$	93,289					$	7,281					$	129,299					$	(8,337)
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on derivatives qualified for hedge accounting:
Unrealized gain (loss) on interest rate swaps			—						(991)						7,981						973
Reclassification adjustments included in earnings (1)			(3,413)						5,018						(7,997)						14,733
Total unrealized gain (loss)			(3,413)						4,027						(16)						15,706
Currency translation adjustment, net of tax benefit (expense) of ($64) and ($16) for the three months ended September 30, 2022 and 2021, respectively, and ($210) and ($1) for the nine months ended September 30, 2022, and 2021, respectively			(12,565)						(3,595)						(26,400)						(2,333)
Other comprehensive income (loss)			(15,978)						432						(26,416)						13,373
Comprehensive income			$	77,311					$	7,713					$	102,883					$	5,036

(1)    Represents the reclassification of the effective portion of the gain on the Company's interest rate swaps into interest expense. Includes reclassification to earnings as a reduction to interest expense of unrealized gains included in accumulated other comprehensive income (loss) on the condensed consolidated balance sheet related to the interest rate swap agreements terminated on February 18, 2022. See Note 9 for additional information.

			Three Months Ended September 30, 2022
			Common Stock
			Shares						Amount						Additional Paid in Capital						Accumulated Deficit						Accumulated Other Comprehensive Income (Loss)						Total Stockholders’ Equity
			(in thousands, except share data)
Balances at June 30, 2022			79,432,321						$	79					$	800,566					$	(324,354)					$	2,182					$	478,473
Common stock issuance for vesting of restricted stock units and exercise of stock options			50,291						—						803						—						—						803
Net income			—						—						—						93,289						—						93,289
Stock-based compensation			—						—						1,115						—						—						1,115
Other comprehensive loss			—						—						—						—						(15,978)						(15,978)
Balances at September 30, 2022			79,482,612						$	79					$	802,484					$	(231,065)					$	(13,796)					$	557,702

			Three Months Ended September 30, 2021
			Class A Member Units
			Units						Amount						Additional Paid in Capital						Accumulated Deficit						Accumulated Other Comprehensive Income						Total Stockholders’ Equity
			(in thousands, except unit data)
Balances at June 30, 2021			57,168,291						$	590,711					$	17,012					$	(354,679)					$	2,818					$	255,862
Net income			—						—						—						7,281						—						7,281
Stock-based compensation			—						—						841						—						—						841
Other comprehensive income			—						—						—						—						432						432
Balances at September 30, 2021			57,168,291						$	590,711					$	17,853					$	(347,398)					$	3,250					$	264,416

			Nine Months Ended September 30, 2022
			Common Stock
			Shares						Amount						Additional Paid in Capital						Accumulated Deficit						Accumulated Other Comprehensive Income (Loss)						Total Stockholders’ Equity
			(in thousands, except share data)
Balances at December 31, 2021			79,392,937						$	79					$	793,382					$	(360,364)					$	12,620					$	445,717
Common stock issuance for vesting of restricted stock units and exercise of stock options			89,675						—						803						—						—						803
Net income			—						—						—						129,299						—						129,299
Stock-based compensation			—						—						8,299						—						—						8,299
Other comprehensive loss			—						—						—						—						(26,416)						(26,416)
Balances at September 30, 2022			79,482,612						$	79					$	802,484					$	(231,065)					$	(13,796)					$	557,702

			Nine Months Ended September 30, 2021
			Class A Member Units
			Units						Amount						Additional Paid in Capital						Accumulated Deficit						Accumulated Other Comprehensive Income (Loss)						Total Stockholders’ Equity
			(in thousands, except unit data)
Balances at December 31, 2020			57,168,291						$	590,711					$	15,360					$	(339,061)					$	(10,123)					$	256,887
Net loss			—						—						—						(8,337)						—						(8,337)
Stock-based compensation			—						—						2,493						—						—						2,493
Other comprehensive income			—						—						—						—						13,373						13,373
Balances at September 30, 2021			57,168,291						$	590,711					$	17,853					$	(347,398)					$	3,250					$	264,416

			Nine Months Ended September 30,
			2022						2021
			(in thousands)
Cash flows from operating activities
Net income (loss)			$	129,299					$	(8,337)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			54,056						56,013
Deferred income taxes			(70,954)						1,933
Amortization of debt issuance costs			2,549						3,139
Amortization of contract assets			3,312						2,782
Amortization of right-of-use assets			2,094						—
Amortization of unrealized gains on terminated interest rate swap agreements			(9,676)						—
Amortization of cloud computing software costs			1,446						—
Stock-based compensation			8,587						2,493
Increase in tax receivable agreement liability			800						—
Other non-cash charges, net			524						(541)
Changes in operating assets and liabilities:
Accounts receivable			(24,521)						(44,715)
Prepaid expenses and other current assets			1,516						(2,327)
Cloud computing software			(23,158)						—
Other non-current assets			(3,934)						(4,157)
Accounts payable			(5,212)						(13,736)
Accrued expenses and other current liabilities			5,498						19,676
Accrued salaries and payroll			3,631						6,194
Operating lease liabilities, net			(4,125)						—
Other non-current liabilities			(805)						626
Net cash provided by operating activities			70,927						19,043
Cash flows from investing activities
Purchases of property and equipment			(3,973)						(5,092)
Capitalized software development			(9,149)						(4,891)
Net cash used in investing activities			(13,122)						(9,983)
Cash flows from financing activities
Repayments of debt			(6,263)						(6,263)
Borrowings on line of credit			—						30,000
Repayments on line of credit			—						(30,000)
Payments for termination of interest rate swap agreements			(18,445)						—
Payment of issuance costs - revolving credit facility			(342)						—
Other financing			—						(1,240)
Net cash used in financing activities			(25,050)						(7,503)
Net increase in cash, cash equivalents and restricted cash			32,755						1,557
Effect of exchange rates			(1,155)						(978)
Cash, cash equivalents and restricted cash
Beginning of period			116,214						24,059
End of period			$	147,814					$	24,638
Cash paid for
Interest			$	27,890					$	51,355
Income taxes paid			2,718						787
Supplemental schedule of non-cash activities
Unpaid deferred offering costs			$	—					$	2,975
Unpaid property and equipment and capitalized software purchases			1,102						468

The Company’s significant accounting policies are discussed in “Note 1 — Organization, Basis of Presentation and Consolidation, and Significant Accounting Policies” of the notes to the audited consolidated financial statements for the year ended December 31, 2021, included in the Annual Report. Except as noted below and in Note 2 — Recently Issued Accounting Pronouncements regarding leases, there have been no significant changes to these policies which have had a material impact on the Company’s unaudited condensed consolidated financial statements during the nine months ended September 30, 2022.

For cloud computing arrangements that are a service contract, the Company capitalizes certain implementation costs incurred, including employee costs and third-party costs, during the application development stage, and expenses costs as incurred during the preliminary project and post-implementation stages. Capitalized implementation costs are expensed on a straight-line basis over the estimated useful life. Capitalized amounts related to such arrangements are recorded within prepaid expenses and other current assets and within cloud computing software in the condensed consolidated balance sheets and amortized to selling, general and administrative expenses in the condensed consolidated statement of operations.

Preparation of the Company’s unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates, judgments, and assumptions that affect the amounts reported and disclosed in the financial statements. The Company believes that the estimates, judgments, and assumptions used to determine certain amounts that affect the financial statements are reasonable based upon information available at the time they are made. The Company uses such estimates, judgments, and assumptions when accounting for items and matters such as, but not limited to, the allowance for doubtful accounts, customer rebates, impairment assessments and charges, recoverability of long-lived assets, deferred tax assets, lease accounting, uncertain tax positions, income tax expense, liabilities under the TRA, derivative instruments, fair value of debt, stock-based compensation expense, useful lives assigned to long-lived assets, and the stand-alone selling price of performance obligations for revenue recognition purposes. Results and outcomes could differ materially from these estimates, judgments, and assumptions due to risks and uncertainties.

The change in goodwill during the nine months ended September 30, 2022 was driven by foreign currency translation, as the U.S. dollar strengthened against the British pound and other currencies.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“Topic 842”) to increase transparency and comparability among organizations related to their leasing arrangements. The update requires lessees to recognize most leases, with the exception of short-term leases if a policy election is made, on their balance sheets as a right-of-use (“ROU”) asset representing the right to use an underlying asset and a lease liability representing the obligation to make lease payments over the lease term, measured on a discounted basis, while recognizing lease expense on their income statements in a manner similar to current GAAP. The guidance also requires an entity to disclose key quantitative and qualitative information about its leasing arrangements.

The Company leases office facilities under operating lease agreements. All of the Company’s leases are operating leases. The Company adopted Topic 842 on January 1, 2022 using the modified retrospective transition approach. Under this transition provision, results for the reporting period beginning on January 1, 2022 are presented under Topic 842 while prior period amounts continue to be reported and disclosed in accordance with the Company’s historical accounting treatment under ASC Topic 840, Leases.

The Company elected the “package of practical expedients” permitted under the transition guidance, which among other things, does not require reassessment of whether contracts entered into prior to adoption are or contain leases, and allows carryforward of the historical lease classification for existing leases. The Company did not elect the “hindsight” practical expedient, and therefore measured the ROU asset and lease liability using the remaining portion of the lease term at adoption on January 1, 2022.

The Company made an accounting policy election not to recognize ROU assets and lease liabilities for leases with a term of twelve months or less. For all other leases, the Company recognizes ROU assets and lease liabilities based on the present value of lease payments over the lease term at the commencement date of the lease (or January 1, 2022 for existing leases upon the adoption of Topic 842). Lease payments may include fixed rent escalation clauses or payments that depend on an index (such as the consumer price index). Subsequent changes to an index and any other periodic market-rate adjustments to base rent are recorded in variable lease expense in the period incurred. The ROU assets also include any initial direct costs incurred and lease payments made at or before the commencement date and are reduced by any lease incentives.

The Company has made an accounting policy election to account for lease and non-lease components in its contracts as a single lease component. The non-lease components typically represent additional services transferred to the Company, such as common area maintenance for real estate, which are variable in nature and recorded in variable lease expense in the period incurred.

The Company uses its incremental borrowing rate which is the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term and amount in a similar economic environment to determine the present value of lease payments as the Company’s leases do not have a readily determinable implicit discount rate. Judgment is applied in assessing factors such as Company specific credit risk, lease term, nature and quality of the underlying collateral, currency, and economic environment in determining the incremental borrowing rate to apply to each lease.

Upon adoption, the Company recorded ROU assets and operating lease liabilities of $9.9 million and $18.9 million, respectively, related to the Company’s operating leases. The adoption of the new lease standard did not materially impact the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2022, or the condensed consolidated statements of cash flows for the nine months ended September 30, 2022.

In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.” The ASU requires additional disclosures for transactions with a government accounted for by applying a grant or contribution accounting model by analogy, including: (i) information about the nature of the transactions and related accounting policy used to account for the transactions; (ii) the line items on the balance sheet and income statement affected by these transactions including amounts applicable to each line; and (iii) significant terms and conditions of the transactions, including commitments and contingencies. The Company adopted this ASU effective January 1, 2022. The adoption of this ASU did not have a material impact on the condensed consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which aims to improve the accounting for acquired revenue contracts with customers in a business combination. The ASU requires an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The new guidance is effective for the Company for annual periods beginning after December 15, 2023 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this standard on the condensed consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848),” which provides temporary, optional practical expedients and exceptions to enable a smoother transition to the new reference rates which will replace the London Interbank Offered Rate (“LIBOR”) and other reference rates expected to be discontinued. In January 2021, the FASB issued ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope,” which expanded the scope of Topic 848 to include derivative instruments impacted by the discounting transition. This collective guidance is effective at any time after March 12, 2020 but no later than December 31, 2022. The Company does not expect the adoption of this guidance to have a material impact on the condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” which delayed the effective date for this guidance until the fiscal year beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted. The Company expects there to be no material impact on the condensed consolidated financial statements from the adoption of this ASU.

			September 30, 2022						December 31, 2021
			(in thousands)
Prepaid software licenses, maintenance, and insurance			$	10,433					$	11,668
Other prepaid expenses and current assets			6,634						6,915
Total prepaid expenses and other current assets			$	17,067					$	18,583

The components of other non-current assets were as follows:

			September 30, 2022						December 31, 2021
			(in thousands)
Contract implementation costs			$	17,680					$	17,242
Other non-current assets			1,131						969
Total other non-current assets			$	18,811					$	18,211

See Note 14 — Revenues for further discussion on contract implementation costs and related amortization included in cost of services in the Company’s condensed consolidated statements of operations.

4. Right-of-Use Assets and Lease Liabilities

The Company determines if an arrangement is or contains a lease at inception, which is the date on which the terms of the contract are agreed, and if the arrangement creates enforceable rights and obligations. Under Topic 842, a contract is or contains a lease when (i) explicitly or implicitly identified assets have been deployed in the contract and (ii) the customer obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract. See Note 2 — Recently Issued Accounting Pronouncements for more information on the Company’s accounting policies for leases.

The Company leases office facilities under operating lease agreements that have initial terms ranging from 1 to 12 years. Some leases include one or more options to extend the term of the lease, generally at the Company’s sole discretion, with renewal terms that can extend the lease term up to 5 years. In addition, certain leases give the Company, the lessor, or both parties the right to terminate. Options to extend a lease are included in the lease term when it is reasonably certain that the Company will exercise the option. Options to terminate a lease are excluded from the lease term when it is reasonably certain that the Company will not exercise the option. The Company’s leases generally do not contain any material restrictive covenants or residual value guarantees.

The Company’s operating leases were as follows:

			September 30, 2022
			(in thousands)
Right-of-use assets, net			$	8,802
Current operating lease liabilities (1)			$	5,207
Operating lease liabilities, long-term			11,051
Total operating lease liabilities			$	16,258

(1) Current lease liabilities are recorded in other current liabilities on the Company’s condensed consolidated balance sheets.

The components of lease cost are recorded in selling, general, and administrative expenses for the three and nine months ended September 30, 2022 and were as follows:

			Three Months Ended September 30, 2022						Nine Months Ended September 30, 2022
			(in thousands)
Operating lease cost			$	981					$	2,764
Short-term lease cost			137						470
Variable lease cost			12						36
Total lease cost			$	1,130					$	3,270

Operating lease cost is recognized on a straight-line basis over the lease term.

Supplemental cash flow information related to leases was as follows:

			Nine Months Ended September 30, 2022
			(in thousands)
Cash paid for amounts included in measurement of operating lease liabilities			$	4,193
ROU assets obtained in exchange for operating lease liabilities			$	10,896

The weighted-average remaining lease term and weighted-average discount rate for the Company’s operating leases were as follows:

			September 30, 2022
Weighted-average remaining lease term (in years)			4.22
Weighted-average discount rate			4.6		%

Maturities of the Company’s operating lease liabilities were as follows:

			September 30, 2022
			(in thousands)
2022 (excluding the nine months ended September 30, 2022)			$	1,499
2023			5,958
2024			3,636
2025			2,166
2026			1,357
Thereafter			3,392
Total lease payments			18,008
Less amount representing interest			(1,750)
Total present value of lease liabilities			$	16,258

The Company periodically identifies opportunities for cost savings through office consolidations or by exit from certain underutilized facilities. Cease-use costs represent lease obligation charges and executory costs for exited facilities. The Company accounts for cease-use costs pursuant to guidance under ASC 420, Costs Related to Exit or Disposal Activities. Charges related to these cease-use costs are estimated based on the discounted future cash flows of rent expense and executory costs that the Company is obligated to pay under the lease agreements, partially offset by projected sublease income, which is calculated based on certain sublease assumptions.

As a result of the exit from certain facilities, the Company recorded a cease-use liability in 2021. The cease-use liability of $9.0 million was reclassified and treated as a reduction to the beginning ROU asset recorded upon adoption of ASC 842, Leases, on January 1, 2022. Cease-use costs were $0.2 million during the nine months ended September 30, 2022, and are included as a component of selling, general and administrative expenses in the condensed consolidated statements of operations. No cease-use costs were incurred during the three months ended September 30, 2022. Cease-use costs were $1.5 million during the three and nine months ended September 30, 2021.

						Cease-use Liability
						(in thousands)
Balance at December 31, 2021						$	11,588
Cease-use costs						160
Reclassified as a reduction to the beginning ROU asset upon adoption of ASC 842						(9,001)
Accretion of liability						(146)
Payments						(874)
Foreign currency translation						(390)
Balance at September 30, 2022						$	1,337

			September 30, 2022						December 31, 2021
			(in thousands)
Accrued data costs			$	39,017					$	34,632
Litigation settlements (Note 13)			607						3,310
Other (1)			40,243						37,352
Total accrued expenses and other current liabilities			$	79,867					$	75,294

			September 30, 2022						December 31, 2021
			(in thousands)
Wages, benefits and taxes			$	18,258					$	12,017
Accrued bonus			14,900						17,263
Total accrued salaries and payroll			$	33,158					$	29,280

			September 30, 2022						December 31, 2021
			(in thousands)
Amended First Lien Term Loan Facility			$	701,600					$	707,863
Amended Revolving Credit Facility			—						—
Total debt			701,600						707,863
Less: Original issue discount			(1,598)						(1,993)
Less: Unamortized debt issuance costs			(7,087)						(8,837)
Less: Current portion of long-term debt			(8,350)						(8,350)
Long-term debt, less current portion			$	684,565					$	688,683

•a first lien senior secured term loan facility, in an aggregate principal amount of $835.0 million, maturing on July 12, 2025 (“First Lien Term Loan Facility”);

•a first lien senior secured revolving credit facility, in an aggregate principal amount of up to $100.0 million, including a $40.0 million letter of credit sub-facility, maturing on July 12, 2023 (“Revolving Credit Facility” and, together with the First Lien Term Loan Facility, the “First Lien Facilities”).

On June 3, 2022, the Company entered into an amendment to the First Lien Term Loan Facility (“Amended First Lien Term Loan Facility”) with the lenders party thereto and Bank of America, N.A. as administrative agent. The Amended First Lien Term Loan Facility amends the Company’s First Lien Facilities, by and among the Company, the lending institutions from time to time party thereto and Bank of America, N.A. as administrative agent, collateral agent and a letter of credit issuer (as amended through the Amended First Lien Term Loan Facility, the “Amended First Lien Facilities”).

Under the Amended First Lien Facilities, (i) the aggregate commitments under the Company’s Revolving Credit Facility were increased from $100.0 million to $145.0 million; (ii) the maturity date of the Revolving Credit Facility was extended from July 12, 2023 to June 3, 2027 or, if earlier, 91 days prior to the maturity of the Company’s term loans under the Amended First Lien Facilities, as may be extended or refinanced; and (iii) the interest rate benchmark applicable to the Revolving Credit Facility was converted from LIBOR to term Secured Overnight Financing Rate (“SOFR”). The Revolving Credit Facility as amended is herein after referred to as the “Amended Revolving Credit Facility.” The Company’s existing term loans under the Amended First Lien Facilities remained in effect. Upon the effectiveness of the Amended First Lien Term Loan Facilities, the Company did not have any outstanding principal balance on the Revolving Credit Facility. The Amended First Lien Term Loan Facilities did not modify the financial covenants, negative covenants, mandatory prepayment events or security provisions or arrangements under the Amended First Lien Facilities.

The Amended First Lien Term Loan Facility was accounted for as a modification for certain lenders and an extinguishment for other lenders and debt issuance costs and lender fees were accounted for in proportion to whether the related borrowing commitment was considered modified or extinguished. Accordingly, newly incurred and existing deferred debt issuance costs of $0.4 million and $0.4 million, respectively, will be amortized to interest expense over the new remaining term of the Amended Revolving Credit Facility. Additionally, the Company wrote off unamortized debt issuance costs of $0.1 million related to the modification of the Revolving Credit Facility, which is recorded in interest expense in the condensed consolidated statements of operations.

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
			(in thousands)
Debt discount amortization			$	133					$	146					$	395					$	431
Debt issuance costs amortization			588						658						1,750						1,955
Total debt discount and issuance cost amortization			$	721					$	804					$	2,145					$	2,386

The weighted average interest rate on outstanding borrowings as of September 30, 2022 and December 31, 2021 was 4.8% and 4.5%, respectively.

Level 1			Quoted prices in active markets for identical assets and liabilities;
Level 2			Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in inactive markets, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data; or
Level 3			Amounts derived from valuation models in which unobservable inputs reflect the reporting entity’s own assumptions about the assumptions of market participants that would be used in pricing the asset or liability, such as discounted cash flow models or valuations.

The Company’s derivative instruments, all of which the Company terminated during the quarter ended March 31, 2022, consisted of interest rate swap contracts which were Level 2 of the fair value hierarchy and reported in the condensed consolidated balance sheet as of December 31, 2021 as derivative liabilities current and derivative liabilities long-term. See Note 9 — Derivative Instruments for more information.

The fair value of the Company’s Amended First Lien Term Loan Facility is calculated based upon market price quotes obtained for the Company’s debt agreements (Level 2 fair value inputs). The fair value of the Amended Revolving Credit Facility approximates carrying value, based upon the short-term duration of the interest rate periods currently available to the Company. The estimated fair values were as follows:

			September 30, 2022												December 31, 2021
			Carrying Value						Fair Value						Carrying Value						Fair Value
			(in thousands)
Amended First Lien Term Loan Facility			$	700,002					$	684,693					$	705,870					$	704,550
Amended Revolving Credit Facility			—						—						—						—
Total			$	700,002					$	684,693					$	705,870					$	704,550

The Company entered into interest rate swap agreements with a total notional amount of $700 million with an effective date of December 31, 2018 (“Interest Rate Swap Agreements”). The Interest Rate Swap Agreements were designed to provide predictability against changes in the interest rates on the Company’s debt, as the Interest Rate Swap Agreements converted a portion of the variable interest rate on the Company’s debt to a fixed rate. The Interest Rate Swap Agreements were originally scheduled to expire on December 31, 2023.

On September 26, 2019, the Company modified the terms of the Interest Rate Swap Agreements with the then existing counterparties to change the LIBOR reference period to one month. The notional amount and maturities of the Interest Rate Swap Agreements remained unchanged. The Company elected hedge accounting treatment at that time. To ensure the effectiveness of the Interest Rate Swap Agreements, the Company elected the one-month LIBOR rate option for its variable rate interest payments on term balances equal to or in excess of the applicable notional amount of the Interest Rate Swap Agreements as of each reset date. The reset dates and other critical terms on the term loans perfectly matched with the interest rate cap reset dates and other critical terms through February 18, 2022, the date the Interest Rate Swap Agreements were terminated, and during the three and nine months ended September 30, 2021. At September 30, 2022 and December 31, 2021, the effective portion of the Interest Rate Swap Agreements was included on the condensed consolidated balance sheets in accumulated other comprehensive income (loss).

For derivative instruments that qualify for hedge accounting treatment, the fair value is recognized on the Company’s condensed consolidated balance sheets as derivative assets or liabilities with offsetting changes in fair value, to the extent effective, recognized in accumulated other comprehensive income (loss) until reclassified into earnings when the related transaction occurs. The portion of a cash flow hedge that does not offset the change in the fair value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. Prior to termination discussed below, the Interest Rate Swap Agreements were determined to be effective hedging agreements.

Effective February 18, 2022, the Company terminated the Interest Rate Swap Agreements. In connection with the termination of the Interest Rate Swap Agreements, the Company made a payment of $18.4 million to the swap counterparties. Following these terminations, $21.5 million of unrealized gains related to the terminated Interest Rate Swap Agreements included in accumulated other comprehensive income (loss) will be reclassified to earnings as reductions to interest expense through December 31, 2023.

The Company reclassified interest expense related to hedges of these transactions into earnings as follows:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
			(in thousands)
Reclassification of the effective portion of the gain on the Interest Rate Swap Agreements into interest expense			$	—					$	5,018					$	1,679					$	14,733
Reclassification of unrealized gains related to terminated Interest Rate Swap Agreements into interest expense			(3,413)						—						(9,676)						—
Total reclassification adjustments included in earnings			$	(3,413)					$	5,018					$	(7,997)					$	14,733

The fair value of the Interest Rate Swap Agreements was as follows:

			December 31, 2021
			Markets for Identical Assets (Level 1)						Observable Inputs (Level 2)						Unobservable Inputs (Level 3)						Total
			(in thousands)
Derivative instruments, current			$	—					$	16,662					$	—					$	16,662
Derivative instruments, long-term			—						11,444						—						11,444
Total liabilities measured at fair value			$	—					$	28,106					$	—					$	28,106

There were no amounts excluded from the measurement of hedge effectiveness at February 18, 2022, the date of termination, and December 31, 2021. See Note 10 — Accumulated Other Comprehensive Income (Loss) for further information.

Accumulated other comprehensive income (loss) consists primarily of unrealized changes in fair value of derivative instruments that qualified for hedge accounting prior to termination and cumulative foreign currency translation adjustments.

The components of accumulated other comprehensive income (loss) as of September 30, 2022 and December 31, 2021 were as follows:

			Derivative Instruments						Currency Translation Adjustment						Total
			(in thousands)
Balance at December 31, 2021			$	11,823					$	797					$	12,620
Other comprehensive income (loss)			(16)						(26,400)						(26,416)
Balance at September 30, 2022			$	11,807					$	(25,603)					$	(13,796)

			Three Months Ended September 30,																								Nine Months Ended September 30,
			2022												2021												2022												2021
			(in thousands, except percent)
Revenues
United States			$	194,081					92.3		%				$	189,097					92.3		%				$	582,817					92.3		%				$	491,490					92.5		%
International			16,222						7.7		%				15,884						7.7		%				48,489						7.7		%				40,032						7.5		%
Total revenues			$	210,303					100.0		%				$	204,981					100.0		%				$	631,306					100.0		%				$	531,522					100.0		%

			September 30, 2022						December 31, 2021
			(in thousands)
Long-lived assets:
United States			$	12,047					$	7,154
International			6,247						3,973
Total long-lived assets			$	18,294					$	11,127

In the ordinary course of business, the Company enters into agreements with customers, providers of services and data that the Company uses in its business operations, and other third parties pursuant to which the Company agrees to indemnify and defend them and their affiliates for losses resulting from claims of intellectual property infringement, damages to property or persons, business losses, and other costs and liabilities. Generally, these indemnity and defense obligations relate to claims and losses that result from the Company’s acts or omissions, including actual or alleged process errors, inclusion of erroneous or impermissible information, or omission of includable information in background screening reports that the Company prepares. In addition, under some circumstances, the Company agrees to indemnify and defend contract counterparties against losses resulting from their own business operations, obligations, and acts or omissions, or the business operations, obligations, and acts or omissions of third parties. For example, its business interposes the Company between suppliers of information that the Company includes in its background screening reports and customers that use those reports; the Company generally agrees to indemnify and defend its customers against claims and losses that result from erroneous information provided by its suppliers, and also to indemnify and defend its suppliers against claims and losses that result from misuse of their information by its customers.

The Company’s agreements with customers, suppliers, and other third parties typically include provisions limiting its liability to the counterparty, and the counterparty’s liability to the Company. However, these limits often do not apply to indemnity obligations. The Company’s rights to recover from one party for its acts or omissions may be capped below its obligation to another party for those same acts or omissions, and its obligation to provide indemnity and defense for its own acts or omissions in any particular situation may be uncapped.

The Company has entered into indemnification agreements with the members of its board of directors and executive officers that require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service. In addition, customers of the Company may seek indemnity for negligent hiring claims that result from the Company’s alleged failure to identify or report adverse background information about an individual.

In addition to claims related to privacy and background checks, the Company is also subject to other claims and proceedings arising in the ordinary course of its business, including without limitation claims for indemnity by customers and vendors, employment-related claims, and claims for alleged taxes owed, infringement of intellectual property rights, and breach of contract.

The Company accrues for contingent liabilities if it is probable that a liability has been incurred and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote.

Although the Company and its subsidiaries are subject to various claims and proceedings from time to time in the ordinary course of business, the Company and its subsidiaries are not party to any pending legal proceedings that the Company believes to be material.

On November 6, 2020, the Company entered into a settlement agreement related to 24 lawsuits that had been filed in 2009 and 2010 against HireRight Solutions, Inc. (“Old HireRight”), which is the predecessor to the Company’s subsidiary HireRight, LLC, by approximately 1,400 individuals alleging violation of the California Investigative Consumer Reporting Agencies Act by Old HireRight and one of its customers (“Customer”) related to background reports that Old HireRight prepared for the Customer about those individuals.

Pursuant to the settlement agreement the Company paid $11.2 million on November 15, 2021, and the remaining balance of $0.3 million on March 31, 2022. No amounts related to the settlement agreement are accrued at September 30, 2022.

Disaggregated revenues were as follows:

						Three Months Ended September 30,												Nine Months Ended September 30,
						2022						2021						2022						2021
						(in thousands)
Revenues
Service revenues						$	151,256					$	152,332					$	451,184					$	395,624
Surcharge revenues						59,047						52,649						180,122						135,898
Total revenues						$	210,303					$	204,981					$	631,306					$	531,522

Contract implementation costs represent incremental set up costs to fulfill contracts with customers, including, for example, salaries and wages incurred to onboard customers onto the Company’s platform to enable the customers to request and access completed background screening reports. Contract implementation costs and the related amortization are recorded in other non-current assets on the Company’s condensed consolidated balance sheets and in cost of services (exclusive of depreciation and amortization) in the Company’s condensed consolidated statements of operations, respectively. Amortization of contract implementation costs included in cost of services (exclusive of depreciation and amortization) was $1.1 million and $3.3 million for the three and nine months ended September 30, 2022, respectively, and $1.0 million and $2.8 million for the three and nine months ended September 30, 2021, respectively. See Note 3 — Prepaid Expenses and Other Current Assets, and Other Non-Current Assets for contract implementation costs included in the Company’s condensed consolidated balance sheets.

Income tax expense and effective tax rates were as follows:

						Three Months Ended September 30,												Nine Months Ended September 30,
						2022						2021						2022						2021
						(in thousands, except effective tax rate)
Income (loss) before income taxes						$	23,585					$	7,930					$	60,843					$	(5,383)
Income tax (benefit) expense						(69,704)						649						(68,456)						2,954
Effective tax rate						(295.5)		%				8.2		%				(112.5)		%				54.9		%

In general, with certain exceptions, ASC 740-270, Income Taxes, requires the use of an estimated annual effective tax rate to compute the tax provision during an interim period. For the three and nine months ended September 30, 2022, the Company has net income before income taxes and used an estimated annual effective tax rate to compute the income tax provision. However, due to operating losses for the nine months ended September 30, 2021, the Company determined that it was unable to reliably estimate its annual effective tax rate. As such, for the three and nine months ended September 30, 2021, the Company used a discrete method, which reflected the actual tax attributable to year-to-date earnings and losses for the period.

The Company recorded income tax benefit of $69.7 million and income tax expense of $0.6 million for the three months ended September 30, 2022 and 2021, respectively. The effective tax rate for the three months ended September 30, 2022 was negative 295.5% compared to 8.2% for the three months ended September 30, 2021. The effective tax rate for the three months ended September 30, 2022, differs from the Federal statutory rate of 21%

Equity Incentive Plans

On October 22, 2018, the Company implemented the HireRight GIS Group Holdings LLC Equity Incentive Plan (“Equity Plan”) providing for the issuance of up to 4,573,463 of its Class A Units (“Units”) pursuant to awards made under the Equity Plan to members of the board of managers, officers and employees as determined by the Company’s compensation committee. Following the adoption of the Omnibus Incentive Plan (as defined below), the Company did not grant further awards under the Equity Plan. However, any outstanding awards granted under the Equity Plan remain subject to the Equity Plan and applicable award agreement. In connection with the Corporate Conversion, each option to purchase units of HireRight GIS Group Holdings LLC was converted into an option to purchase shares of common stock of HireRight Holdings Corporation.

On October 18, 2021, the Company’s stockholders adopted the Company’s 2021 Omnibus Incentive Plan (“Omnibus Incentive Plan”), which became effective on October 28, 2021. The Omnibus Incentive Plan provides for the grant of awards of non-qualified stock options, incentive (qualified) stock options, stock appreciation rights,

Modification of Certain Pre-IPO Equity Awards

The stock option awards issued prior to the Company’s IPO pursuant to the Equity Plan had vesting schedules based either upon continued service (“Time-Vesting Options”), or upon attainment of specified levels of cash-on-cash return to the Company’s pre-IPO investors as a multiple of invested capital (“MOIC”) on their investments in the Company (“Performance-Vesting Options”). On March 19, 2022, the compensation committee of the Company’s Board of Directors approved a modification of outstanding Performance-Vesting Options to vest based solely on continued service rather than MOIC attainment. Under the modified vesting terms, the amended Performance-Vesting Options vest quarterly starting March 31, 2022 and ending December 31, 2024 based solely on continued service.

Stock-based compensation expense recognized in the condensed consolidated statements of operations was as follows:

						Three Months Ended September 30,												Nine Months Ended September 30,
						2022						2021						2022						2021
						(in thousands)
Selling, general and administrative						$	1,089					$	841					$	8,083					$	2,493
Cost of services (exclusive of depreciation and amortization)						193						—						504						—
Total stock-based compensation expense						$	1,282					$	841					$	8,587					$	2,493

Equity Plan Awards (Pre-IPO)

For stock options issued under the Equity Plan that were outstanding and unvested as of September 30, 2022, the Company expects to recognize future compensation expense of $6.0 million over a weighted average remaining vesting period of 2.19 years.

Omnibus Incentive Plan Awards

During the three months ended September 30, 2022, the Company determined that it is no longer probable that the target performance conditions will be achieved for certain awards granted under the Omnibus Incentive Plan during the three months ended March 31, 2022. Accordingly, the Company reversed $1.8 million of previously recognized stock-based compensation expense and no stock-based compensation expense was recognized in the current period for these awards.

The Company granted 1,167,199 options during the nine months ended September 30, 2022 under the Omnibus Incentive Plan, with a weighted-average grant date fair value of $5.14 calculated using the Black-Scholes option valuation model. For options under the Omnibus Incentive Plan outstanding and unvested as of September 30, 2022, the Company expects to recognize future compensation expense of $14.2 million over a weighted average remaining vesting period of 2.70 years.

The Company granted 1,134,464 RSUs with a weighted-average grant date fair value of $15.30 per share during the nine months ended September 30, 2022 under the Omnibus Incentive Plan. For RSUs outstanding and unvested

as of September 30, 2022, the Company expects to recognize future compensation expense of $11.5 million over a weighted average remaining vesting period of 2.99 years.

On June 1, 2022, the Company approved a grant of a total of 422,143 RSUs with a grant-date fair value of $14.45 per unit. A portion of these RSUs may vest upon the achievement of a series of goal-based performance milestones, and the balance of these RSUs may vest based upon achievement of all aggregated milestones by a final target date, followed by subsequent continued service for a specified period of time. The fair value of these awards, until vested, is included in accrued expenses and other current liabilities and other non-current liabilities in the condensed consolidated balance sheets. The Company measures stock-based compensation cost for liability classified awards based on the fair value of the award at each quarterly reporting date and recognizes the expense over the vesting period. The expected stock-based compensation expense of these June 1, 2022 approved RSUs is $6.1 million, which is expected to be recognized over the period from grant date through April 2024.

For the three and nine months ended September 30, 2022, compensation expense associated with these awards totaled $0.3 million and $0.4 million, respectively.

Employee Stock Purchase Plan

The first offering period for the Company’s Employee Stock Purchase Plan (“ESPP”) began on May 20, 2022 and will continue for six months until the purchase date on November 19, 2022. Thereafter, offerings will begin on November 20 and May 20 and will end on the following May 19 and November 19, respectively. Such shares will be purchased at an amount equal to 85% of the fair market value of a share on (i) the purchase date or (ii) the offering date, whichever amount is lower; provided, that the purchase price will in no event be less than the par value of a share.

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
			(in thousands, except share and per share data)
Numerator:
Net income (loss)			$	93,289					$	7,281					$	129,299					$	(8,337)
Denominator:
Weighted average shares outstanding - basic			79,459,633						57,168,291						79,419,725						57,168,291
Effect of dilutive options			83,082						30,913						56,849						—
Weighted average shares outstanding - diluted			79,542,715						57,199,204						79,476,574						57,168,291
Net income (loss) per share:
Basic			$	1.17					$	0.13					$	1.63					$	(0.15)
Diluted			$	1.17					$	0.13					$	1.63					$	(0.15)

Factors that could affect the outcome of the forward-looking statements include, among other things, our vulnerability to adverse economic conditions, including without limitation inflation and recession, which could increase our costs and suppress labor market activity and our revenue; the aggressive competition we face; our heavy reliance on information management systems, vendors, and information sources that may not perform as we expect; the significant risk of liability we face in the services we perform; the fact that data security, data privacy and data protection laws, emerging restrictions on background reporting due to alleged discriminatory impacts and adverse social consequences, and other evolving regulations and cross-border data transfer restrictions may increase our costs, limit the use or value of our services and adversely affect our business; our ability to maintain our professional reputation and brand name; the impacts, direct and indirect, of the COVID‐19 pandemic on our business, our personnel and vendors, and the overall economy; social, political, regulatory and legal risks in markets where we operate; the impact of foreign currency exchange rate fluctuations; unfavorable tax law changes and tax authority rulings; any impairment of our goodwill, other intangible assets and other long-lived assets; our ability to execute and integrate future acquisitions; our ability to access additional credit or other sources of financing; and the increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted cyber-related attacks that could pose a risk to our systems, networks, solutions, services and data. For more information on the business risks we face and factors that could affect the outcome of forward-looking statements, refer to our Annual Report on Form 10-K filed with the SEC on March 21, 2022, in particular the sections of that document entitled "Risk Factors," "Forward-Looking Statements," and "Management's Discussion and Analysis of Financial Condition and Results of Operations,” and other filings we make from time to time with the SEC. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Investors should read this Quarterly Report on Form 10-Q and the documents that we reference in this report and have filed or will file with the SEC completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

While we have benefited from the changing dynamics of the labor market as well as a strong hiring environment, there continues to be uncertainty around the near term macroeconomic environment. This uncertainty stems from high inflation, volatile energy prices, rising interest rates, geopolitical concerns, supply chain disruptions and labor shortages. Each of these drivers has its own adverse impact and the outlook for our business remains uncertain. Inflation puts pressure on our suppliers, resulting in increased data costs, and also increases our employment and other expenses. A sustained recession will have an adverse impact on the global hiring market and therefore the demand for our services. Slowing demand for our services will adversely affect our future results. Additionally rising interest rates will lead directly to higher interest expense. See “Item 3. Quantitative and Qualitative Disclosures about Market Risk — Inflation Risk” for additional information on the impact of inflation on our business. Although the majority of our cost of services are variable in nature and will move in tandem with revenue increases or decreases, there can be no assurance that we can reduce our cost of services in proportion to

On June 3, 2022, the Company entered into an amendment to its First Lien Term Loan Facility, as defined below under “Liquidity and Capital Resources”, (“Amended First Lien Term Loan Facility”) with the lenders party thereto and Bank of America, N.A. as administrative agent. The Amended First Lien Term Loan Facility amended the Company’s revolving credit facility (“Amended Revolving Credit Facility”) to increase the aggregate commitments under the facility from $100.0 million to $145.0 million and extend the maturity date from July 12, 2023 to the earlier of June 3, 2027 or 91 days prior to the maturity of the First Lien Term Loan Facility. The interest rate benchmark applicable to the Amended Revolving Credit Facility was converted from the London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”).

Effective February 18, 2022, the Company terminated the Interest Rate Swap Agreements, as defined below, prior to their stated termination dates. In connection with the termination of the Interest Rate Swap Agreements, the Company made a payment of $18.4 million to the swap counterparties. Following these terminations, $21.5 million of unrealized gains related to the terminated Interest Rate Swap Agreements included in accumulated other comprehensive income (loss) on the condensed consolidated balance sheet will be reclassified to earnings as reductions to interest expense through December 31, 2023. See “Liquidity and Capital Resources — Interest Rate Swaps” below for additional information.

The Company generates revenues from background screening and compliance services delivered in online reports. Our customers place orders for our services and reports either individually or through batch ordering. Each report is accounted for as a single order which is then typically consolidated and billed to our customers on a monthly basis. Approximately 28% of revenues for each of the three and nine months ended September 30, 2022 and 32% and 29% of revenues for the three and nine months ended September 30, 2021, respectively, were generated from the Company’s top 50 customers, which consist of large U.S. and multinational companies across diversified industries such as transportation, healthcare, technology, financial services, business and consumer services, manufacturing, education, retail and not-for-profit. None of the Company’s customers individually accounted for greater than 3% of revenues during each of the three and nine months ended September 30, 2022, and

Cost of services (excluding depreciation and amortization) consists of data acquisition costs, medical laboratory and collection fees, personnel-related costs for operations, customer service and customer onboarding functions, as well as other direct costs incurred to fulfill our services. Approximately 80% of cost of services is variable in nature.

Selling, general and administrative expenses consist of personnel-related costs for sales, technology, administrative and corporate management functions in addition to costs for third-party technology, professional and consulting services, advertising and facilities expenses. Selling, general and administrative expenses also include amortization of capitalized cloud computing software costs.

Depreciation and amortization expenses consist of depreciation of property and equipment, as well as amortization of purchased and developed software and other intangible assets, principally resulting from the acquisition of GIS in 2018.

Other expenses consist of interest expense relating to our credit facilities and interest rate swap agreements, gains and losses on asset disposal, foreign exchange gains and losses, as well as other expenses. The majority of our receivables and payables are denominated in U.S. dollars, but we also earn revenue, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar, including the Euro, the British pound, the Polish zloty, the Australian dollar, the Canadian dollar, the Singapore dollar, the Mexican peso, the Japanese yen, and the Indian rupee, among others. Therefore, increases or decreases in the value of the U.S. dollar against other currencies could result in realized and unrealized gains and losses in foreign exchange. However, to the extent we earn revenue in currencies other than the U.S. dollar, we generally pay a corresponding amount of expenses in such currency and therefore the cumulative impact of these foreign exchange fluctuations is not generally deemed material to our financial performance.

Income tax expense consists of international, U.S. federal, state and local income taxes based on income in multiple jurisdictions for our subsidiaries.

			Three Months Ended September 30,
			2022												2021
			(in thousands, except percent of revenues)
Revenues			$	210,303					100.0		%				$	204,981					100.0		%
Expenses
Cost of services (exclusive of depreciation and amortization below)			110,848						52.7		%				111,328						54.3		%
Selling, general and administrative			49,378						23.5		%				47,652						23.2		%
Depreciation and amortization			17,946						8.5		%				19,531						9.5		%
Total expenses			178,172						84.7		%				178,511						87.1		%
Operating income			32,131						15.3		%				26,470						12.9		%
Other expenses
Interest expense			8,457						4.0		%				18,518						9.0		%
Other expense, net			89						—		%				22						—		%
Total other expenses, net			8,546						4.1		%				18,540						9.0		%
Income before income taxes			23,585						11.2		%				7,930						3.9		%
Income tax (benefit) expense			(69,704)						(33.1)		%				649						0.3		%
Net income			$	93,289					44.4		%				$	7,281					3.6		%

			Nine Months Ended September 30,
			2022												2021
			(in thousands, except percent of revenues)
Revenues			$	631,306					100.0		%				$	531,522					100.0		%
Expenses
Cost of services (exclusive of depreciation and amortization below)			343,241						54.4		%				295,832						55.7		%
Selling, general and administrative			152,032						24.1		%				130,261						24.5		%
Depreciation and amortization			54,056						8.6		%				56,013						10.5		%
Total expenses			549,329						87.0		%				482,106						90.7		%
Operating income			81,977						13.0		%				49,416						9.3		%
Other expenses
Interest expense			20,971						3.3		%				54,674						10.3		%
Other expense, net			163						—		%				125						—		%
Total other expenses, net			21,134						3.3		%				54,799						10.3		%
Income (loss) before income taxes			60,843						9.6		%				(5,383)						(1.0)		%
Income tax (benefit) expense			(68,456)						(10.8)		%				2,954						0.6		%
Net income (loss)			$	129,299					20.5		%				$	(8,337)					(1.6)		%

Revenues for the three months ended September 30, 2022 increased to $210.3 million, an increase of $5.3 million, or 2.6%, from the prior-year period, primarily driven by increases in surcharge revenues. Surcharge

Revenues for the nine months ended September 30, 2022 increased to $631.3 million, an increase of $99.8 million, or 18.8%, from prior-year period, primarily driven by higher order volume and higher average order values associated with existing customers and sales to new customers. Revenues from international and United States regions increased by $8.5 million, or 21.1%, and by $91.3 million, or 18.6%, respectively, during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. For the same reasons noted in the preceding paragraph, on a constant currency basis, United Kingdom revenues would have been $3.5 million higher than actual revenues for the nine months ended September 30, 2022.

Cost of services for the three months ended September 30, 2022 decreased to $110.8 million, a decrease of $0.5 million, or 0.4%, from the prior-year period, primarily due to lower average labor costs per background screen partially offset by increased data supplier costs and increased fringe benefit programs to keep up with market conditions. Cost of services as a percent of revenues decreased to 52.7% for the three months ended September 30, 2022, compared to 54.3% for the three months ended September 30, 2021, primarily driven by lower average labor costs per background screen as a result of process improvements associated with our ongoing technology initiatives as well as an increase in the use of offshore labor.

Cost of services for the nine months ended September 30, 2022 increased to $343.2 million, an increase of $47.4 million, or 16.0%, from the prior-year period, primarily due to higher volumes and increased incentive compensation and fringe benefit programs to keep up with market conditions. For the same reasons noted in the preceding paragraph, cost of services as a percent of revenues decreased to 54.4% for the nine months ended September 30, 2022, compared to 55.7% for the nine months ended September 30, 2021.

Selling, General and Administrative

Selling, general and administrative expenses (“SG&A”) for the three months ended September 30, 2022 increased $1.7 million to $49.4 million primarily due to increases in personnel costs of $3.4 million and increases in professional service fees of $1.3 million, partially offset by a decrease in facility related expenses of $2.7 million. Of the $3.4 million increase in personnel costs, $3.2 million was related to increased salary expenses, incentive compensation and fringe benefit programs. SG&A as a percent of revenues for the three months ended September 30, 2022 increased to 23.5% from 23.2% for the three months ended September 30, 2021.

SG&A expenses for the nine months ended September 30, 2022 increased $21.8 million to $152.0 million primarily due to increases in personnel costs of $19.1 million, investments in technology of $3.3 million, and the addition of public company costs of $3.2 million. Of the $19.1 million increase in personnel costs, $5.6 million was related to stock-based compensation and $13.5 million was related to increased salary expenses, incentive compensation and fringe benefit programs. The increases were partially offset by a decrease in facility related expenses of $4.9 million. SG&A as a percent of revenues for the nine months ended September 30, 2022 decreased slightly to 24.1% from 24.5% for the nine months ended September 30, 2021.

The increases in personnel costs in both periods were attributable to responses to increases in market compensation rates, the increased use of stock-based compensation following our initial public offering in November 2021, and staffing to support growth. Our initial public offering also drove the addition of public company costs including incremental audit, accounting and legal fees as well as premiums for increased insurance coverage, which were not present in the 2021 periods but which will continue. The increases in SG&A expenses

Interest Expense

Interest expense decreased by $10.1 million to $8.5 million for the three months ended September 30, 2022, and by $33.7 million to $21.0 million for the nine months ended September 30, 2022. The decreases in both periods were primarily due to a reduction in outstanding indebtedness under our credit facilities as a result of voluntary principal prepayments using IPO proceeds during the fourth quarter of 2021, and scheduled principal repayments. Interest expense for the three and nine months ended September 30, 2021 includes $4.2 million and $12.4 million, respectively, related to a second lien senior secured term loan facility which was repaid on November 3, 2021. Additionally, reclassifications from accumulated other comprehensive income (loss) on the condensed consolidated balance sheet of unrealized gains related to the terminated Interest Rate Swap Agreements, reduced interest expense by $3.4 million and $9.7 million during the three and nine months ended September 30, 2022, respectively. The decreases for the three and nine months ended September 30, 2022 were partially offset by increased interest expense of $3.7 million and $4.9 million, respectively, associated with rising interest rates during those periods.

Income Tax (Benefit) Expense

The effective tax rate for the three months ended September 30, 2022, was negative 295.5% compared to 8.2% for the three months ended September 30, 2021. The effective tax rate for the nine months ended September 30, 2022, was negative 112.5% compared to 54.9% for the nine months ended September 30, 2021. The effective tax rate for the three and nine month periods ended September 30, 2022, compared to the prior year periods, changed primarily due to the release of the federal and state valuation allowances in 2022 and revaluation of deferred taxes in the United Kingdom in 2021.

We believe that the presentation of our non-GAAP financial measures provides information useful to investors in assessing our financial condition and results of operations. These measures should not be considered an alternative to net income (loss) or any other measure of financial performance or liquidity presented in accordance with accounting principles generally accepted in the United States (“GAAP”). These measures have important limitations as analytical tools because they exclude some but not all items that affect the most directly comparable GAAP measures. Additionally, because they may be defined differently by other companies in our industry, our definitions may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

Adjusted EBITDA represents, as applicable for the period, net income (loss) before interest expense, income taxes, depreciation and amortization expense, stock-based compensation, realized and unrealized gain (loss) on foreign exchange, merger integration expenses, amortization of cloud computing software costs, legal settlement costs deemed by management to be outside the normal course of business, and other items management believes are not representative of the Company’s core operations. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenues for the period. Adjusted EBITDA and Adjusted EBITDA margin are supplemental financial

•Operating performance as compared to other publicly traded companies without regard to capital structure or historical cost basis;

•Ability to generate cash flow;

•Ability to incur and service debt and fund capital expenditures; and

•Viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

The following table reconciles our non-GAAP financial measure of Adjusted EBITDA to net income (loss), our most directly comparable financial measures calculated and presented in accordance with GAAP, for the periods presented.

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
			(in thousands)
Net income (loss)			$93,289						$7,281						$129,299						$(8,337)
Income tax (benefit) expense (1)			(69,704)						649						(68,456)						2,954
Interest expense			8,457						18,518						20,971						54,674
Depreciation and amortization			17,946						19,531						54,056						56,013
EBITDA			49,988						45,979						135,870						105,304
Stock-based compensation			1,282						841						8,587						2,493
Realized and unrealized (gain) loss on foreign exchange			(780)						24						(795)						125
Merger integration expenses (2)			—						193						205						1,174
Technology investments (3)			559						1,690						559						1,690
Amortization of cloud computing software costs (4)			980						—						1,446						—
Other items (5)			1,943						2,895						3,501						6,659
Adjusted EBITDA			$53,972						$51,622						$149,373						$117,445
Net income (loss) margin (6)			44%						4%						20%						2%
Adjusted EBITDA margin			26%						25%						24%						22%