HIRERIGHT HOLDINGS CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

You should read the following discussion of the financial condition and results
of operations together with our condensed consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited
consolidated financial statements for the fiscal year ended December 31, 2021,
as disclosed in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission ("SEC") on March 21, 2022 ("Annual Report").
The statements in the following discussion and analysis regarding expectations
about our future performance, liquidity and capital resources and any other
non-historical statements in this discussion and analysis are forward-looking
statements. These forward-looking statements are subject to numerous risks and
uncertainties, including, but not limited to, those described immediately below.

Caution Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q and related statements by the Company contain
forward-looking statements within the meaning of the federal securities laws.
You can often identify forward-looking statements by the fact that they do not
relate strictly to historical or current facts, or by their use of words such as
"anticipate," "estimate," "expect," "project," "forecast," "plan," "intend,"
"believe," "seek," "could," "targets," "potential," "may," "will," "should,"
"can have," "likely," "continue," and other terms of similar meaning in
connection with any discussion of the timing or nature of future operating or
financial performance or other events. Forward-looking statements may include,
but are not limited to, statements concerning our anticipated financial
performance, including, without limitation, revenue, profitability, net income
(loss), adjusted EBITDA, adjusted EBITDA margin, adjusted net income, earnings
per share, adjusted diluted earnings per share, and cash flow; strategic
objectives; investments in our business, including development of our technology
and introduction of new offerings; sales growth and customer relationships; our
competitive differentiation; our market share and leadership position in the
industry; market conditions, trends, and opportunities; future operational
performance; pending or threatened claims or regulatory proceedings; and factors
that could affect these and other aspects of our business.

Forward-looking statements are not guarantees. They reflect our current
expectations and projections with respect to future events and are based on
assumptions and estimates and subject to known and unknown risks, uncertainties
and other factors that may cause our actual results, performance or achievements
to be materially different from expectations or results projected or implied by
forward-looking statements.

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 COVID­19 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.

                                       28
--------------------------------------------------------------------------------



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.

Company overview

HireRight is a leading global provider of technology-driven workforce risk
management and compliance solutions. We provide comprehensive background
screening, verification, identification, monitoring, and drug and health
screening services for approximately 39,000 customers across the globe. We offer
our services via a unified global software and data platform that tightly
integrates into our customers' human capital management ("HCM") systems enabling
highly effective and efficient workflows for workforce hiring, onboarding, and
monitoring. In 2021, we screened over 29 million job applicants, employees and
contractors for our customers and processed over 110 million screens.

HireRight GIS Group Holdings LLC ("HGGH"), was formed in July 2018 in connection
with the combination of two groups of companies: the HireRight Group and the
General Information Services ("GIS") Group, each of which includes a number of
wholly-owned subsidiaries that conduct the Company's business in the United
States, as well as other countries. Since July 2018, the combined group of
companies and their subsidiaries have operated as a unified operating company
providing screening and compliance services, predominantly under the HireRight
brand.

On October 15, 2021, HGGH converted into a Delaware corporation and changed its
name to HireRight Holdings Corporation ("HireRight" or the "Company"). In
conjunction with the conversion, all of HGGH's outstanding equity interests were
converted into shares of common stock of HireRight Holdings Corporation. The
foregoing conversion and related transactions are referred to herein as the
"Corporate Conversion." The Corporate Conversion did not affect the assets and
liabilities of HGGH, which became the assets and liabilities of HireRight
Holdings Corporation.

Factors Affecting Our Results of Operations

Economic conditions

Our business is impacted by the overall economic environment and total
employment and hiring. The rapidly changing dynamics of the global workforce are
creating increased complexity and regulatory scrutiny for employers, bolstering
the importance of the solutions we deliver. We have benefited from key demand
drivers, which increase the need for more flexible, comprehensive screening and
hiring solutions in the current environment. Our customers are a diverse set of
organizations, from large-scale multinational businesses to small and medium
businesses across a broad range of industries, including transportation,
healthcare, technology, financial services, business and consumer services,
manufacturing, education, retail and not-for-profit. Hiring requirements and
regulatory considerations can vary significantly across the different types of
customers, geographies and industry sectors we serve, creating demand for the
extensive institutional knowledge we have developed from our decades of
experience.

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
                                       29
--------------------------------------------------------------------------------

income changes. The Company has taken steps to continue to improve its profitability, including the impact of lower interest charges through the voluntary repayment of debt.

The Company's net U.S. federal and state deferred tax assets were previously
fully offset by a valuation allowance, excluding a portion of its deferred tax
liabilities for tax deductible goodwill, primarily as a result of the Company's
lack of U.S. earnings history and cumulative loss position. The Company prepares
a quarterly analysis of its deferred tax assets which considers positive and
negative evidence, including its cumulative income (loss) position, revenue
growth, continuing and improved profitability, and expectations regarding future
profitability. Although the Company believes its estimates are reasonable, the
ultimate determination of the appropriate amount of valuation allowance involves
significant judgment.

Even though there are factors creating uncertainty in the future financial
results of the business as described above, the Company determined sufficient
positive evidence existed to conclude that the U.S. deferred tax assets are more
likely than not realizable. As a result, the Company released the valuation
allowance attributed to the deferred tax assets associated with the Company's
operations in the U.S. during the three months ended September 30, 2022. In
making the determination to release the valuation allowance, the Company
considered its movement into a cumulative income position for the most recent
three-year period, the significant decrease in its interest expense from the
paydown of debt in the fourth quarter of 2021 using IPO proceeds, its seventh
consecutive quarter of operating income, forecasts of future earnings for its
U.S. operations, and other factors. The release of the valuation allowance
resulted in a non-cash deferred tax benefit of $70.2 million, which materially
decreased the Company's income tax expense during the three months ended
September 30, 2022.

Developments 2022

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.

Key elements of our operating results

Revenue

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

                                       30
--------------------------------------------------------------------------------



5% of revenues during each of the three and nine months ended September 30,
2021. Technology, healthcare, financial services, and transportation customers
represent the largest contributors to revenues. Revenues for the three and nine
months ended September 30, 2022, from these customers increased 5% and 24%,
respectively, over the prior year periods.

Expenses

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.

The income tax expense consists of WE federal, state and local income taxes based on income in multiple jurisdictions for our affiliates.

Operating results

Comparison of operating results for the three and nine months ended
September 30, 2022 and 2021

The following tables present the results of operations for the three and nine months ended September 30, 2022 and 2021.

                                       31
--------------------------------------------------------------------------------

                                                                    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

Turnover for the three months ended September 30, 2022 increased to $210.3 millionan augmentation of $5.3 million, or 2.6%, over the prior year period, primarily due to increased overload revenue. Surcharge

                                       32
--------------------------------------------------------------------------------



revenues increased due to price increases. Revenues from international and
United States regions increased by $0.3 million, or 2.1%, and by $5.0 million,
or 2.6%, respectively, during the three months ended September 30, 2022,
compared to the three months ended September 30, 2021. The strengthening of the
U.S. dollar against the British pound in the three months ended September 30,
2022, compared to the same period in 2021 had an unfavorable impact on revenue
from international regions. On a constant currency basis, United Kingdom
revenues would have been $2.0 million higher than actual revenues. Constant
currency represents current period results that have been retranslated using
exchange rates in effect in the prior comparable period.

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 (excluding depreciation and amortization)

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 expenses

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

                                       33
--------------------------------------------------------------------------------

were partially offset in each period by decreases in various other costs, including a reduction in facilities-related expenses resulting from the vacating of unused office space in 2021.

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 expense (benefits)

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.

The effective tax rate for the three and nine months ended September 30, 2022,
differs from the Federal statutory rate of 21% primarily due to the release of
federal and state valuation allowances, state taxes, and U.S. tax on foreign
operations. The effective tax rate for the three months ended September 30,
2021, differs from the Federal statutory rate of 21% primarily due to valuation
allowances, state taxes, and U.S. tax on foreign operations. The effective tax
rate for the nine months ended September 30, 2021, differs from the Federal
statutory rate of 21% primarily due to the revaluation of deferred taxes in the
United Kingdom.

Non-GAAP Financial Measures

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 and Adjusted EBITDA margin

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

                                       34
--------------------------------------------------------------------------------



measures that management and external users of our financial statements, such as
industry analysts, investors, lenders and rating agencies, may use to assess
our:

• Operating performance relative to other publicly traded companies, regardless of capital structure or historical cost base;

•Ability to generate cash flow;

•Ability to contract and service debt and finance capital expenditures; and

•Viability of acquisitions and other capital expenditure projects and returns on investment from 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                              Nine Months Ended
                                                              September 30,                                   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%



(1)During the three months ended September 30, 2022, the Company determined
sufficient positive evidence existed to reverse the Company's valuation
allowance attributable to the deferred tax assets associated with the Company's
operations in the U.S. This reversal resulted in a non-cash deferred tax benefit
of $70.2 million, which materially decreased the Company's income tax expense
during the three and nine months ended September 30, 2022.

(2) Merger integration expenses consist primarily of information technology (“IT”) related costs, including personnel expenses, professional and service fees associated with customer integration and GIS operations, which began in July 2018 and was substantially completed at the end of 2020.

(3) Technology investments represent discovery phase costs associated with various platform and runtime technology initiatives aimed at achieving greater operational efficiency.

(4)Amortization of cloud computing software costs consists of expense recognized
in selling, general and administrative expenses for capitalized implementation
costs for cloud computing IT systems incurred in connection with our platform
and

                                       35
--------------------------------------------------------------------------------

execution technology initiatives that aim to increase operational efficiency. This charge is not included in the amortization above.

(5)Other items include (i) costs of $0.4 million and $1.7 million associated
with the implementation of a company-wide enterprise resource planning ("ERP")
system during the three and nine months ended September 30, 2022, respectively,
(ii) $1.0 million and $1.6 million of severance costs during the three and nine
months ended September 30, 2022, respectively, and (iii) $0.4 million related to
professional services fees not related to core operations for the three and nine
months ended September 30, 2022, and (iv) $0.2 million related to loss on
disposal of assets and exit costs associated with one of our short-term leased
facilities during the nine months ended September 30, 2022. These costs were
partially offset by a reduction in previously accrued legal settlement expense
of $0.6 million during the nine months ended September 30, 2022 due to a more
favorable outcome than originally anticipated in a claim outside the ordinary
course of business. Other items for the three and nine months ended
September 30, 2021 include (i) $1.1 million and $4.3 million, respectively,
related to the preparation of the Company's initial public offering during 2021,
(ii) $1.5 million related to loss on disposal of assets and exit costs
associated with one of our short-term leased facilities during the three and
nine months ended September 30, 2021, and (iii) costs of $0.3 million and $0.8
million associated with the implementation of an ERP system during the three and
nine months ended September 30, 2021.

(6) Net earnings (loss) margin represents net earnings (loss) divided by revenues for the period.

Adjusted net earnings and adjusted diluted earnings per share

In addition to Adjusted EBITDA, management believes that Adjusted Net Income is
a strong indicator of our overall operating performance and is useful to our
management and investors as a measure of comparative operating performance from
period to period. We define Adjusted Net Income as net income (loss) adjusted
for amortization of acquired intangible assets, 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, to which we apply an adjusted effective tax rate. See the footnotes
to the table below for a description of certain of these adjustments. We define
Adjusted Diluted Earnings Per Share as Adjusted Net Income divided by the
adjusted weighted average number of shares outstanding (diluted) for the
applicable period. We believe Adjusted Diluted Earnings Per Share is useful to
investors and analysts because it enables them to better evaluate per share
operating performance across reporting periods and to compare our performance to
that of our peer companies.

                                       36
--------------------------------------------------------------------------------



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

                                                     Three Months Ended                    Nine Months Ended
                                                       September 30,                         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
Income (loss) before income taxes                  23,585             7,930             60,843            (5,383)
Amortization of acquired intangible assets         15,353            16,226             46,335            47,518
Interest expense swap adjustments (2)              (3,413)                -             (9,676)                -
Interest expense discounts (3)                        790             1,057              2,549             3,139
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 (4)                         -               193                205             1,174
Technology investments (5)                            559             1,690                559             1,690
Amortization of cloud computing software
costs (6)                                             980                 -              1,446                 -
Other items (7)                                     1,943             2,895              3,501             6,659
Adjusted income before income taxes                40,299            30,856            113,554            57,415
Adjusted income taxes (8)                         (71,216)              662            (70,951)            2,533
Adjusted Net Income                              $111,515            $30,194           $184,505           $54,882


                                       37
--------------------------------------------------------------------------------

The following table shows the calculation of adjusted diluted earnings per share for the periods presented:

                                                         Three Months Ended                            Nine Months Ended
                                                           September 30,                                 September 30,
                                                     2022                    2021                  2022                   2021

Diluted net income (loss) per share           $      1.17               $      0.13          $      1.63             $     (0.15)
Income tax (benefit) expense (1)                    (0.88)                     0.01                (0.86)                   0.05
Amortization of acquired intangible assets           0.19                      0.29                 0.58                    0.83
Interest expense swap adjustments (2)               (0.04)                        -                (0.12)                      -
Interest expense discounts (3)                       0.01                      0.02                 0.03                    0.06
Stock-based compensation                             0.02                      0.01                 0.11                    0.04
Realized and unrealized loss on foreign
exchange                                            (0.01)                        -                (0.01)                      -
Merger integration expenses (4)                         -                         -                    -                    0.02
Technology investments (5)                           0.01                      0.03                 0.01                    0.03
Amortization of cloud computing software
costs (6)                                            0.01                         -                 0.02                       -
Other items (7)                                      0.02                      0.05                 0.04                    0.12
Adjusted income taxes (8)                            0.90                     (0.01)                0.89                   (0.04)
Adjusted Diluted Earnings Per Share           $      1.40               $      0.53          $      2.32             $      0.96

Weighted average number of shares outstanding
- diluted                                              79,542,715           57,199,204              79,476,574           57,168,291




(1)During the three months ended September 30, 2022, the Company determined
sufficient positive evidence existed to reverse the Company's valuation
allowance attributable to the deferred tax assets associated with the Company's
operations in the U.S. This reversal resulted in a non-cash deferred tax benefit
of $70.2 million, which materially decreased the Company's income tax expense
during the three and nine months ended September 30, 2022.

(2) Interest expense swap adjustments consist of the amortization of unrealized gains on terminated interest rate swap contracts, which will be recognized in December 2023 as a reduction in interest charges.

(3) Interest expense discounts include the amortization of the initial issue discount and debt issue costs.

(4) Merger integration expenses consist primarily of information technology (“IT”) related costs, including personnel expenses, professional and service fees associated with customer integration and to GIS operations, which began in July 2018 and was substantially completed at the end of 2020.

(5) Technology investments represent discovery phase costs associated with various platform and runtime technology initiatives aimed at achieving greater operational efficiency.

(6)Amortization of cloud computing software costs consists of expense recognized
in selling, general and administrative expenses for capitalized implementation
costs for cloud computing IT systems incurred in connection with our platform
and fulfillment technology initiatives that are intended to achieve greater
operational efficiencies. This expense is not included in depreciation and
amortization above.

(7)Other items include (i) costs of $0.4 million and $1.7 million associated
with the implementation of a company-wide enterprise resource planning ("ERP")
system during the three and nine months ended September 30, 2022, respectively,
(ii) $1.0 million and $1.6 million of severance costs during the three and nine
months ended September 30, 2022, respectively, and (iii) $0.4 million related to
professional services fees not related to core operations for the three and nine
months ended September 30, 2022, and (iv) $0.2 million related to loss on
disposal of assets and exit costs associated with one of our short-term leased
facilities during the nine months ended September 30, 2022. These costs

                                       38
--------------------------------------------------------------------------------



were partially offset by a reduction in previously accrued legal settlement
expense of $0.6 million during the nine months ended September 30, 2022 due to a
more favorable outcome than originally anticipated in a claim outside the
ordinary course of business. Other items for the three and nine months ended
September 30, 2021 include (i) $1.1 million and $4.3 million, respectively,
related to the preparation of the Company's initial public offering during 2021,
(ii) $1.5 million related to loss on disposal of assets and exit costs
associated with one of our short-term leased facilities during the three and
nine months ended September 30, 2021, and (iii) costs of $0.3 million and $0.8
million associated with the implementation of an ERP system during the three and
nine months ended September 30, 2021.

(8)The tax effect of each adjustment is determined based on the tax laws and
valuation allowance status of the jurisdiction to which the adjustment relates.
An adjusted effective income tax rate has been determined for each period
presented by applying the statutory income tax rate, net of applicable
adjustments for valuation allowances, which was used to compute Adjusted Net
Income for the periods presented. Due to the existence of a U.S. tax valuation
allowance, the tax impact of the pre-tax adjustments for the three and nine
months ended September 30, 2021 is immaterial. During the three months ended
September 30, 2022, the Company determined sufficient positive evidence existed
to reverse the Company's valuation allowance attributable to the deferred tax
assets associated with the Company's operations in the U.S. This reversal
resulted in a non-cash deferred tax benefit of $70.2 million, which materially
decreased the Company's income tax expense during the three and nine months
ended September 30, 2022. As a result of the reversal of the valuation
allowance, the U.S. tax provision for the remainder of the year is expected to
be immaterial.


Cash and capital resources

General

Our primary sources of liquidity and capital resources are cash generated from
our operating activities, cash on hand, and borrowings under our long-term debt
arrangements. Income taxes have historically not been a significant use of funds
but after the benefits of our net operating loss ("NOL") carryforwards are fully
recognized, could become a material use of funds, depending on our future
profitability and future tax rate. Additionally, as a result of the income tax
receivable agreement ("TRA") we entered into in connection with the IPO, we will
be required to pay certain pre-IPO equityholders or their transferees 85% of the
benefits, if any, that the Company and its subsidiaries realize, or are deemed
to realize in income tax savings due to our utilization of the NOLs and other
tax attributes, for which the Company recognized an estimated total liability of
$211.4 million as of September 30, 2022. Based on our current taxable income
estimates, we expect to repay the majority of this obligation by the end of
2030. These payments will result in cash outflows of amounts we would otherwise
have retained in the form of tax savings from the application of the NOLs and
other tax attributes.

Cash and cash equivalents not allocated to September 30, 2022 has been
$146.5 million. From September 30, 2022cash held in foreign jurisdictions was approximately $17.1 million and is mainly related to international operations.

Restricted cash of $1.3 million as of September 30, 2022 consists primarily of
$1.1 million held in escrow for the benefit of former investors in a subsidiary
of the Company pursuant to the terms of its divestiture of a former affiliate in
April 2018.

Debt

The Company currently has two long-term debt agreements:

•The Amended First Lien Term Loan Facility, a first lien senior secured term
loan facility, bearing interest payable monthly at a LIBOR variable rate (3.12%
at September 30, 2022) + 3.75%, maturing on July 12, 2025. Total principal
outstanding on our debt was $701.6 million as of September 30, 2022 and $707.9
million as of December 31, 2021.

• The Amended Revolving Credit Facility, a first lien senior secured revolving credit facility in an aggregate principal amount of up to $145.0 millionincluding an $40.0 million letter of credit sub-facility, bearing

                                       39
--------------------------------------------------------------------------------



interest monthly at a SOFR variable rate (2.47% at September 30, 2022) + 2.5%
(subject to adjustment pursuant to a leverage-based pricing grid) and maturing
on June 3, 2027 or, if earlier, 91 days prior to the maturity of the Company's
term loans under the Amended First Lien Term Loan Facility. The Company had
$143.7 million in available borrowing capacity under the Amended Revolving
Credit Facility, after utilizing $1.3 million for letters of credit as of
September 30, 2022.

The Amended First Lien Term Loan Facility includes a financial maintenance
covenant for the benefit of the revolving lenders thereunder, which requires us
to maintain a maximum first lien leverage ratio as of the last day of any fiscal
quarter on which greater than 35% of the revolving commitments are drawn
(excluding for this purpose up to $15.0 million of undrawn letters of credit).
The Company was in compliance with the covenants under the Amended First Lien
Facilities for the three and nine months ended September 30, 2022.

The Company's obligations under the Amended First Lien Facilities are
guaranteed, jointly and severally, on a senior secured first-priority basis, by
substantially all of the Company's domestic wholly-owned material subsidiaries,
as defined in the agreement, and are secured by first-priority security
interests in substantially all of the assets of the Company and its domestic
wholly-owned material subsidiaries, subject to certain permitted liens and
exceptions. Collateral includes all outstanding equity interests in whatever
form of the borrower and each restricted subsidiary that is owned by any credit
party.

Operating Commitments

As of September 30, 2022, the Company had purchase obligations to various
parties of approximately $28.9 million in the aggregate, primarily to purchase
data and other screening services in the ordinary course of business. These
purchase obligations have varying expiration terms through 2023, and
approximately $25.8 million of the total is expected to be paid within one year.
Our obligations as of September 30, 2022, have increased from $21.7 million as
of December 31, 2021, due to the extension of a service agreement with one of
the Company's current vendors.

In addition to our regular capital expenditures, we expect to invest
approximately $45 to $50 million in a capital expenditure program, expected to
extend through the end of fiscal year 2023 to continue to enhance our operating
systems and technologies to improve operational efficiency. We expect that cash
flow from operations and current cash balances, together with available
borrowings under the Amended Revolving Credit Facility, will be sufficient to
meet operating requirements as well as the obligations under the TRA through the
next twelve months. Although we believe we have adequate sources of liquidity
over the long term, cash available from operations could be affected by any
general economic downturn or any decline or adverse changes in our business such
as a loss of customers, market and or competitive pressures, unanticipated
liabilities, or other significant changes in business environment. Additional
future financing may be necessary to fund our operations, and there can be no
assurance that, if needed, we will be able to secure additional debt or equity
financing on terms acceptable to us or at all.

Cash flow analysis

Comparison of cash flows for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

The following table presents a summary of our condensed consolidated cash flows for the nine months ended September 30, 2022 and 2021:

                                       40
--------------------------------------------------------------------------------

                                                                  Nine Months Ended September 30,
                                                                      2022                2021
                                                                           (in thousands)
Net cash provided by operating activities                         $   70,927          $  19,043
Net cash used in investing activities                                (13,122)            (9,983)
Net cash used in financing activities                                (25,050)            (7,503)

Net increase in cash, cash equivalents and restricted cash $32,755 $1,557


Operating Activities

Cash provided by operating activities reflects net income (loss) adjusted for
certain non-cash items and changes in operating assets and liabilities. Cash
provided by operating activities was $70.9 million for the nine months ended
September 30, 2022 compared to cash provided by operating activities of $19.0
million for the nine months ended September 30, 2021. The increase in cash
provided by operating activities was due primarily to higher net income for the
current period compared to the prior year period, partly offset by the tax
benefit from the release of the valuation allowance and higher use of cash for
working capital which includes our expenditures related to our cloud computing
platform modernization and automation efforts.

Investing activities

Cash used in investing activities was approximately $13.1 million during the
nine months ended September 30, 2022, compared to approximately $10.0 million
during the nine months ended September 30, 2021. The increase was due primarily
to increases in capitalized software development costs under our program to
enhance operational efficiencies compared to the prior period, partly offset by
a decrease of purchases of property and equipment.

Fundraising activities

Cash used in financing activities was approximately $25.1 million for the nine
months ended September 30, 2022 compared to cash used in financing activities of
approximately $7.5 million during the nine months ended September 30, 2021. The
increase was due primarily to the $18.4 million payment related to the
termination of the Interest Rate Swap Agreements, as defined below. Mandatory
repayments on our debt facilities were $6.3 million in in each of the nine
months ended September 30, 2022 and 2021.

Interest rate swaps

Effective December 31, 2018, the Company had entered into interest rate swap
agreements with a total notional amount of $700.0 million ("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 Agreement 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

                                       41
--------------------------------------------------------------------------------

The agreements were included in the condensed consolidated balance sheets in accumulated other comprehensive income.

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.

Off-balance sheet arrangements

From September 30, 2022we had no off-balance sheet arrangements within the meaning of Section 303(a)(4)(ii) of Regulation SK.

Recently issued accounting pronouncements

See Note 2 – Recently issued accounting pronouncements for more information on recently adopted accounting pronouncements and those not yet adopted.

© Edgar Online, source Previews

About Vicki Davis

Check Also

Uncertain year for Korean banks amid looming debt crisis, CEO terms end

FSC Chairman Kim Joo-hyun (center) poses for a photo with the heads of the country’s …