# FIRST ADVANTAGE CORP (FA) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FIRST ADVANTAGE CORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1210677/000095017022004413/fa-20211231.htm
Accession: 0000950170-22-004413
Filing date: 2022-03-23
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/FA/
All MD&A years: /company/FA/mda/
Next year: /company/FA/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of First Advantage Corporations’ financial condition and results of operations is provided as a supplement to the consolidated financial statements for the year ended December 31, 2021, which should be read in conjunction with the discussion regarding our financial condition and results of operations for the period from February 1, 2020 through December 31, 2020 (Successor) and for the period from January 1, 2020 through January 31, 2020 (Predecessor) compared to the year ended December 31, 2019 (Predecessor) in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our prospectus dated November 10, 2021 as filed with the SEC on November 12, 2021, which is incorporated herein by reference.

The discussion contains forward-looking statements involving risks, uncertainties and assumptions that could cause our results to differ materially from expectations. See “Cautionary Notice Regarding Forward-Looking Statements.” Factors that might cause such differences include those described in Item 1A. “Risk Factors” and elsewhere in this Annual Report.

Overview

First Advantage is a leading global provider of technology solutions for screening, verifications, safety, and compliance related to human capital. We deliver innovative solutions and insights that help our customers manage risk and hire the best talent. Enabled by our core proprietary technology, our products and solutions help companies protect their brands and provide safer environments for their customers and their most important resources: employees, contractors, contingent and extended workers, drivers, tenants, and volunteers.

Our comprehensive product suite includes criminal background checks, drug / health screening, extended workforce screening, biometrics & identity, education / work verifications, resident screening, fleet / driver compliance, executive screening, data analytics, continuous monitoring, social media monitoring, and hiring tax incentives. We derive a substantial majority of our revenues from pre-onboarding screening and perform screens in over 200 countries and territories, enabling us to serve as a one-stop-shop provider to both multinational companies and growth companies. Our more than 33,000 customers are global enterprises, mid-sized companies, and small companies, and our products and solutions are used by personnel in recruiting, human resources, risk, compliance, vendor management, safety, and/or security.

Our products are sold both individually and bundled. The First Advantage platform offers flexibility for customers to specify which products to include in their screening package, such as Social Security numbers, criminal records, education and work verifications, sex offender registry, and global sanctions. Generally, our customers order a bundled background screening package or selected combination of screens related to a single individual before they onboard that individual. The type and mix of products and solutions we sell to a customer vary by customer size, their screening requirements and industry vertical. Therefore, order volumes are not comparable across both customers and periods. Pricing can also vary considerably by customer depending on the product mix in their screening packages, order volumes, screening requirements and preferences, pass-through and third-party out of pocket costs, and bundling of products.

We enter into contracts with our customers that are typically three years in length. These contracts set forth the general terms and pricing of our products and solutions but generally do not include minimum order volumes or committed order volumes. Accordingly, contracts do not provide guarantees of future revenues. Due to our contract terms and the nature of the background screening industry, we determined our contract terms for ASC 606 purposes are less than one year. Through our ongoing dialogue with our customers, we have some visibility into their expected future order volumes, although these can be difficult to accurately forecast. We typically bill our customers at the end of each month and recognize revenues as completed orders are reported or otherwise made available to our customers. Over 90% of the criminal searches performed in the United States are completed the same day they are submitted.

We have experienced consistent organic revenue growth, including in 2020 and 2021 despite the impact of COVID-19 on the overall economy. We generated revenues of $712 million for the year ended December 31, 2021, which represents 40% growth as compared to $509 million for the year ended December 31, 2020 on a pro forma basis. While our revenue growth for the first half of 2020 was impacted by COVID-19, it accelerated to 17% year-over-year in the second half of 2020, driven by the addition of a number of large new customers, upselling and cross-selling existing customers, and strong demand among Enterprise customers in the essential retail, e-commerce, and transportation and home delivery verticals that experienced significant hiring increases as a result of COVID-19. Our revenues continued to grow in 2021, driven by the improvement in the overall economy and hiring market, as well as the addition of a number of large new customers, upselling and cross-selling existing customers, and strong, broad-based demand across our existing customer base. We have experienced additional increases as a result of the U.K. screening business acquisition which closed on March 31, 2021. Approximately 84% of our revenues for the year ended December 31, 2021 (Successor) was generated in the Americas, predominantly in the U.S., while the remaining 16% was generated internationally. Other than the United States, no single country accounted for 10% or more of our total revenues for the year ended December 31, 2021 (Successor).

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Basis of Presentation

On January 31, 2020, Silver Lake acquired substantially all of the equity interests of the Company from Symphony Technology Group (“STG”) pursuant to an Agreement and Plan of Merger, dated as of November 19, 2019 (the “Silver Lake Transaction”). For the purposes of the consolidated financial data included in this Annual Report, periods on or prior to January 31, 2020 reflect the financial position, results of operations, and cash flows of the Company and its consolidated subsidiaries prior to the Silver Lake Transaction, referred to herein as the Predecessor, and periods beginning after January 31, 2020 reflect the financial position, results of operations and cash flows of the Company and its consolidated subsidiaries as a result of the Silver Lake Transaction, referred to herein as the Successor. As a result of the Silver Lake Transaction, the results of operations and financial position of the Predecessor and Successor are not directly comparable.

To facilitate comparability across periods, we have presented in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section certain financial information on a pro forma basis, giving pro forma effect to the Silver Lake Transaction as if it had occurred on January 1, 2020. Please refer to “Results of Operations” for further details.

Numerical figures included in this Annual Report have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.

We have one operating segment.

Recent Developments

Initial Public Offering

On June 25, 2021, the Company completed its IPO in which it sold 22,856,250 shares of its common stock, including 2,981,250 shares that were sold pursuant to the full exercise of the underwriters’ option to purchase additional shares, $0.001 par value per share (the “Common Stock”) at an offering price of $15.00 per share, resulting in net proceeds to us of $316.5 million, after deducting the underwriting discount of $22.3 million and offering costs of $4.0 million. Additionally, certain existing stockholders sold an aggregate of 6,468,750 shares, including 843,750 shares that were sold pursuant to the full exercise of the underwriters’ option to purchase additional shares.

November Follow-On Offering

On November 15, 2021, the Company completed a follow-on offering (“November Follow-On”) where certain existing stockholders sold an aggregate of 15,000,000 shares, plus an additional 2,250,000 shares that were sold pursuant to the full exercise of the underwriters’ option to purchase additional shares. The Company did not sell any shares of its common stock in the November Follow-on Offering and did not receive any of the proceeds from the sale of shares.

During the IPO and the November Follow-On certain of the Company’s investors realized cash returns. As a result, a portion of the performance based vesting on various awards were deemed to have vested during the year ended December 31, 2021 (Successor). This vesting resulted in the recognition of an incremental $3.9 million of share-based compensation expense for the year ended December 31, 2021 (Successor). See Note 10 to the consolidated financial statements included elsewhere in this Annual Report.

M&A

On November 30, 2021, the Company acquired 100% of the equity interest of Corporate Screening Services, LLC (“Corporate Screening”), a U.S.-based healthcare and higher education focused screening and compliance solutions provider headquartered in Cleveland, Ohio. The results of Corporate Screening, which are not material, have been included in our results of operation from the date of the acquisition.

On November 30, 2021, the Company acquired 100% of the equity interest of MultiLatin Advisors, S.A. de C.V. (“MultiLatin”), a Mexico-based background screening and verifications provider. This acquisition strategically expands the Company’s presence and screening capabilities in Latin America. The results of MultiLatin, which are not material, have been included in our results of operation from the date of the acquisition.

On January 10, 2022, the Company completed its asset acquisition of Form I-9 Compliance ("Form I-9"), a U.S.-based technology solution and consulting service provider for Form I-9 and E-Verify compliance. The transaction is effective as of January 1, 2022. The results of Form I-9 will be included in our results of operation from the effective date of the acquisition.

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Factors Affecting Operating Results

We believe that the future growth and profitability of our business depend on numerous factors, including the following:

Acquiring New Customers

We are focused on continuing to grow our customer base, particularly with respect to high-growth Enterprise customers in attractive industry verticals. In 2021, we performed approximately 93 million screens on behalf of more than 33,000 customers, including 189 Enterprise customers as of December 31, 2021, spanning the globe and all major industry verticals. Our customer acquisition strategy depends on our ability to continue to cost-effectively offer innovative and comprehensive products and solutions, execute our verticalized go-to-market strategy, and maintain our reputation and brand. New customers typically begin generating revenues within two to four months of executing a contract and ramp up order volumes over the subsequent three to five month period. We believe there is opportunity to continue to increase our domestic and international market share, grow our non-U.S. international customer base, and increase adoption and expansion of screening products and solutions.

Expanding Wallet Share with Existing Customers

Our growth in revenues depends on our ability to sell more products and solutions to existing customers. We typically grow our revenues over time with customers as their underlying screening volumes grow and as they roll out our products and solutions to new divisions or geographies, increase our wallet share in multi-provider programs, perform more extensive screens, and purchase additional products and solutions such as continuous screening, hiring tax credits, employment eligibility, and fleet solutions. Our Customer Success teams work closely with our customers to further develop their screening, compliance, and risk management programs within their organization and in doing so, frequently identify opportunities to expand their relationship with First Advantage. Our revenue growth with existing customers is also dependent upon our ability to retain customers. We have achieved an average gross retention rate of approximately 96% from 2019 through 2021.

Maintaining Performance Through Macroeconomic Environments

Our results are also impacted by our customers’ underlying business performance and hiring trends, which drive their demand for background screening and adjacent products. Our customers’ business can be affected by a variety of factors, including general economic conditions, hiring velocity and turnover, and other industry-related trends. We are also exposed to macroeconomic cyclicality, as companies typically reduce employee hiring and flexible workforces in weaker economic environments, which can impact demand for our products and solutions. Our ability to grow our business will also depend on the long-term strength, diversity, and durability of the verticals that we invest in and rely upon to drive our revenues.

Developing New Products to Expand Our Revenue Opportunity with Existing Customers

We plan to continue to diversify our product suite beyond pre-onboarding screening by growing our post-onboarding screening and adjacent risk and compliance products. For example, we are currently investing in post-onboarding monitoring solutions, re-screening programs, and employment eligibility. We see opportunities to develop risk management solutions that align with our capabilities, such as franchise screening programs, DOT compliance, and Right to Work checks.

Profitably Managing our Growth

Our ability to grow profitably depends on our ability to manage our cost structure. Our costs are affected by third-party costs including government fees and data vendors, as these third-parties have discretion to adjust pricing, although these third-party fees are typically invoiced to our customers as direct pass-through costs.

Our historical margin expansion has been largely driven by increased automation and deployment of RPA technologies in the background screening process, which has increased our speed, efficiency, quality, and operating leverage. Additionally, we have gained operating leverage from efficiencies and control in managing general and administrative costs. In order to grow profitably, we make strategic investments that generate incremental revenues and enable us to deliver our products and solutions and support our customers in a cost-effective manner. Our ability to innovate and drive future reductions of operating costs through automation and digitization does require upfront investment.

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COVID-19

The Company continues to closely monitor how COVID-19 is affecting its employees, customers, and business operations. In our continued response to the COVID-19 pandemic, we implemented operational changes to ensure the safety of our workforce and to ensure that we continue to serve our customers. In the markets in which we operate, we have generally seen improving macroeconomic conditions since the second half of 2020 and saw steady improvements in our results of operations in 2021. In the United States, we saw strong and improving macroeconomic conditions throughout 2021, including strong gross domestic product (“GDP”) growth and falling unemployment rates. We saw similar improvements in our international markets, although in certain of these markets there remains higher ongoing concerns about the impact of COVID-19. These overall economic improvements are evident in our 2021 results, as revenues grew 39.9% compared to the twelve months ended December 31, 2020, on a pro forma basis. Further discussion regarding the impact of the pandemic to our operations for the year ended December 31, 2021 (Successor), for the period from February 1, 2020 through December 31, 2020 (Successor), and for the period from January 1, 2020 through January 31, 2020 (Predecessor) is provided within this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Given the ongoing uncertainty and unpredictable nature of the pandemic, including the impact of virus variants and the effectiveness of vaccines against those variants, COVID-19 may have a material and adverse impact on various aspects of our business in the future, including our results of operations. The Company will continue to closely monitor the associated impacts and take appropriate actions in an effort to mitigate the COVID-19 pandemic’s negative effects on the Company’s operations and financial results.

For additional information, see Part I, Item 1A, “Risk Factors—Risks Related to Our Business— The impact of COVID-19 and related risks have affected and may continue to materially affect our business, results of operations, financial position, and/or liquidity.”

Recently Issued Accounting Standards

See Note 2 to the audited consolidated financial statements included elsewhere in this Annual Report for disclosure of the impact that recent accounting pronouncements may have on the consolidated financial statements.

Components of our Results of Operations

Revenues

The Company derives revenues from a variety of background screening and adjacent products that cover phases from pre-onboarding screening to post-onboarding screening after the employees, contractors, contingent and extended workers, drivers, tenants, and volunteers have been onboarded. We generally classify our products and solutions into three major categories: pre-onboarding, post-onboarding, and adjacent products, each of which is enabled by our technology, proprietary databases, and data analytics capabilities. Pre-onboarding products, which comprise the substantial majority of our revenues, span an extensive array of products that customers typically utilize to enhance their applicant evaluation process and ensure compliance with their workforce onboarding criteria from the time an application is submitted to an applicant’s successful onboarding. Post-onboarding products are comprised of continuous monitoring, re-screening, and other solutions to help our customers keep their end customers, workforces, and other stakeholders safer, productive, and compliant. Adjacent products include products that complement our pre-onboarding and post-onboarding solutions such as fleet / vehicle compliance, tax credits and incentives, resident / tenant screening, employment eligibility, and investigative screening.

Our suite of products is available individually or through bundled solutions that can be configured and tailored according to our customers’ needs. We typically bill our customers at the end of each month and recognize revenues after completed orders are reported or otherwise made available to our customers, with a substantial majority of our customers’ orders completed the same day they are submitted. We recognize revenues for other products over time as the customer simultaneously receives and consumes the benefits of the products and solutions delivered.

44

Operating Expenses

We incur the following expenses related to our cost of revenues and operating expenses:

•
Cost of Services: Consists of amounts paid to third parties for access to government records, other third-party data and services, and our internal processing fulfillment and customer care functions. In addition, cost of services include expenses from our drug screening lab and collection site network as well as our court runner network. Third-party cost of services are largely variable in nature and are typically invoiced to our customers as direct pass-through costs. Cost of services also includes our salaries and benefits expense for personnel involved in the processing and fulfilment of our screening products and solutions, as well as our customer care organization and robotics process automation implementation team. Other costs included in cost of services include an allocation of certain overhead costs for our revenue-generating products and solutions, primarily consisting of certain facility costs and administrative services allocated by headcount or another related metric. We do not allocate depreciation and amortization to cost of services.

•
Product and Technology Expense: Consists of salaries and benefits of personnel involved in the maintenance of our technology and its integrations and APIs, product marketing, management of our network and infrastructure capabilities, and maintenance of our information security and business continuity functions. A portion of the personnel costs are related to the development of new products and features that are primarily developed through agile methodologies. These costs are partially capitalized, and therefore, are partially reflected as amortization expense within the depreciation and amortization cost line item. Product and technology expense also includes third-party costs related to our cloud computing services, software licensing and maintenance, telecommunications, and other data processing functions. We do not allocate depreciation and amortization to product and technology expense.

•
Selling, General, and Administrative Expense: Consists of sales, customer success, marketing, and general and administrative expenses. Sales, customer success, and marketing consists primarily of employee compensation such as salaries, bonuses, sales commissions, stock-based compensation, and other employee benefits for our verticalized Sales and Customer Success teams. General and administrative expenses include travel expenses and various corporate functions including finance, human resources, legal, and other administrative roles, in addition to certain professional service fees and expenses incurred in connection with our IPO and now as a public company. We expect our selling, general, and administrative expenses to increase in the short-term, primarily as a result of additional public company related reporting and compliance costs. Over the long-term, we expect our selling, general, and administrative expenses to decrease as a percentage of revenues as we leverage our past investments. We do not allocate depreciation and amortization to selling, general, and administrative expenses.

•
Depreciation and Amortization: Property and equipment consisting mainly of capitalized software costs, furniture, hardware, and leasehold improvements are depreciated or amortized and reflected as operating expenses. We also amortize the capitalized costs of finite-life intangible assets acquired in connection with the Silver Lake Transaction and other business combinations. The comparability of our operating expenses over time is affected by the increased depreciation and amortization recorded as a result of applying purchase accounting at the time of the Silver Lake Transaction.

We have a flexible cost structure that allows our business to adjust quickly to the impacts of macroeconomic events and scale to meet the needs of large new customers. Operating expenses are influenced by the amount of revenue and mix of customers that contribute to our revenues for any given period. As revenues grow, we would generally expect cost of services to grow in a similar fashion, albeit influenced by the effects of automation, productivity, and other efficiency initiatives as well as customer and product mix shifts. We regularly review expenses and investments in the context of revenue growth and any shifts we see in cost of services in order to align with our overall financial objectives. While we expect operating expenses to increase in absolute dollars to support our continued growth, we believe that operating expenses will decline gradually as a percentage of total revenues in the future as our business grows and our operating efficiency continues to improve.

45

Other Expense (Income)

Our other expense (income) consists of the following:

•
Interest Expense: Relates primarily to our debt service costs and, to a lesser extent, the interest-related expenses of our interest rate swaps and the interest on our capital lease obligations. Additionally, interest expense includes the amortization of deferred financing costs.

•
Interest Income: We earn interest income on our cash and cash equivalent balances held in interest-bearing accounts. We also earn interest income on our short-term investments which are fixed-time deposits having a maturity date within twelve months.

•
Loss on Extinguishment of Debt: Reflects losses on the extinguishment of certain debt.

•
Transaction Expenses, Change in Control: Includes transaction expenses related to the change of control resulting from the Silver Lake Transaction as well as transaction costs related to other business combinations completed as part of our historic business combinations.

Provision for Income Taxes

Provision for income taxes consists of domestic and foreign corporate income taxes related to earnings from our sale of services, with statutory tax rates that differ by jurisdiction. Our effective tax rate may be affected by many other factors including changes in tax laws, regulations or rates, new interpretations of existing laws or regulations, shifts in the allocation of income earned throughout the world, and changes in overall levels of income before tax. For example, there are several proposals to change the current tax law, including changes in GILTI. If any or all of these (or similar) proposals are ultimately enacted into law, in whole or in part, they could increase our effective tax rate.

Results of Operations

The comparability of our operating results for the year ended December 31, 2021 compared to the year ended December 31, 2020 was impacted by our accounting for the Silver Lake Transaction. The period from January 1, 2020 through January 31, 2020 relate to the Predecessor and the period from February 1, 2020 through December 31, 2020 relate to the Successor. To facilitate comparability of the year ended December 31, 2021 to the year ended December 31, 2020, below we present the combination of consolidated results from January 1, 2020 to December 31, 2020, comprising the Successor consolidated results from February 1, 2020 to December 31, 2020, the Predecessor consolidated results for the period from January 1, 2020 to January 31, 2020, and certain pro forma adjustments that give effect to the Silver Lake Transaction and the related refinancing as if it had occurred on January 1, 2020 (pro forma results for the twelve months ended December 31, 2020). The pro forma information below has been prepared on a basis consistent with Article 11 of Regulation S-X, but does not constitute Article 11 pro forma information because it only presents the pro forma year ended December 31, 2020, reflecting the Silver Lake Transaction and the related refinancing as if they had occurred as of January 1, 2020. The information contained below should be read in conjunction with our accompanying historical consolidated financial statements and the related notes.

46

Comparison of Results of Operations for the Year Ended December 31, 2021 (Successor) compared to the Period from February 1, 2020 through December 31, 2020 (Successor) and the Period from January 1, 2020 through January 31, 2020 (Predecessor)

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[[/GREPCENT_TABLE]]

(a)
Refer to Note 2(a) in the Notes to the Unaudited Supplemental Pro Forma Financial Information Presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations

(b)
Refer to Note 2(c) in the Notes to the Unaudited Supplemental Pro Forma Financial Information Presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations

(c)
Refer to Note 2(d) in the Notes to the Unaudited Supplemental Pro Forma Financial Information Presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations

(d)
Refer to Note 2(b) in the Notes to the Unaudited Supplemental Pro Forma Financial Information Presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations

(e)
Refer to Note 2(e) in the Notes to the Unaudited Supplemental Pro Forma Financial Information Presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Revenues

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[[/GREPCENT_TABLE]]

Revenues were $712.3 million for the year ended December 31, 2021 (Successor), compared to $472.4 million for the period from February 1, 2020 through December 31, 2020 (Successor) and $36.8 million for the period from January 1, 2020 through January 31, 2020 (Predecessor). On a pro forma basis, revenues were $509.2 million for the twelve months ended December 31, 2020. Revenue for the year ended December 31, 2021 (Successor) increased by $203.1 million, or 39.9%, compared to the twelve months ended December 31, 2020, on a pro forma basis.

The increase in revenues was primarily driven by:

•
a net increase of $139.4 million in existing customer revenues, primarily driven by a strong, broad-based recovery in demand as compared to 2020 which was negatively impacted by the COVID-19 pandemic, increased revenue growth in key verticals and geographies, and on-going strength in upsell and cross-sell. These existing customer increases were offset by the impact of lost accounts,

•
increased revenues of $39.1 million attributable to new customers, and

•
revenues of $24.6 million attributable to our acquisitions, which were all within the first year of acquisition in 2021.

The Company experienced high demand among customers in the essential retail, e-commerce, transportation and home delivery, technology, and business / financial services and flexible workforce / staffing verticals during 2021. Pricing was relatively stable across all periods.

48

Cost of Services

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[[/GREPCENT_TABLE]]

Cost of services was $352.2 million for the year ended December 31, 2021 (Successor), compared to $240.3 million for the period from February 1, 2020 through December 31, 2020 (Successor) and $20.3 million for the period from January 1, 2020 through January 31, 2020 (Predecessor). On a pro forma basis, cost of services was $260.6 million for the twelve months ended December 31, 2020. Cost of services for the year ended December 31, 2021 (Successor) increased by $91.6 million, or 35.2%, compared to the twelve months ended December 31, 2020, on a pro forma basis.

The increase in cost of services was primarily due to:

•
an increase in variable third-party data expenses of $77.8 million as a direct result of increased revenues and 2021 acquisitions in total having a larger mix of third-party data expenses,

•
an $11.9 million increase in personnel related expenses in our operations and customer care functions as a result of additional operational support headcount to process and fulfill the Company’s order volume growth. This increase is further impacted by the COVID-19 related personnel and benefit expense reduction actions taken in 2020 that did not continue into 2021,

•
foreign currency exchange losses of $0.5 million due to the impact of foreign exchange rate volatility, and

•
a number of cost of services related operating expense increases attributable to insurance, software licenses, and other expenses related to the increased revenue volumes experienced in 2021.

The increase in cost of services was partially offset by:

•
a number of other operating expense decreases including a decrease in travel-related expenses due to COVID-19 related restrictions.

Cost of services as a percentage of revenues was 49.4% for the year ended December 31, 2021 (Successor), compared to 50.9% for the period from February 1, 2020 through December 31, 2020 (Successor) and 55.1% for the period from January 1, 2020 through January 31, 2020 (Predecessor). On a pro forma basis, cost of services as a percentage of revenues was 51.2% for the twelve months ended December 31, 2020. The Company was able to continue to improve cost of services leverage in 2021 as a result of operating efficiencies, the increased use of automation and RPA tools, and proprietary data assets which helped control or reduce personnel and third-party data expenses. These leverage improvements were slightly offset by the impact of the Company’s 2021 acquisitions, which, in total, had a larger mix of third-party data expenses.

49

Product and Technology Expense

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[["","","Successor","","","","Predecessor"],["","","Year Ended December 31,","","","Period from February 1, 2020 through December 31,","","","","Period from January 1, 2020 through January 31,","","","Pro Forma Adjustments for the Year Ended December 31,","","","Pro Forma Twelve Months Ended December 31,"],["(in thousands)","","2021","","","2020","","","","2020","","","2020","","","2020"],["Product and technology expense","","$","45,507","","","$","32,201","","","","$","3,189","","","$","\u2014","","","$","35,390"]]
[[/GREPCENT_TABLE]]

Product and technology expense was $45.5 million for the year ended December 31, 2021 (Successor), compared to $32.2 million for the period from February 1, 2020 through December 31, 2020 (Successor) and $3.2 million for the period from January 1, 2020 through January 31, 2020 (Predecessor). On a pro forma basis, product and technology expense was $35.4 million for the twelve months ended December 31, 2020. Product and technology expense for the year ended December 31, 2021 (Successor) increased by $10.1 million, or 28.6%, compared to the twelve months ended December 31, 2020, on a pro forma basis.

The increase in product and technology expense was primarily due to:

•
a $7.3 million increase in personnel-related and professional service fee expenses as a result of additional investments made to enhance our products, solutions, and technology, and

•
a $4.4 million increase in software licensing related expenses.

The increase in product and technology was partially offset by:

•
a $2.5 million decrease in third-party fees related to a one-time product and technology organization restructuring that took place in 2020 and did not continue into 2021.

50

Selling, General, and Administrative Expense

[[GREPCENT_TABLE]]
[["","","Successor","","","","Predecessor"],["","","Year Ended December 31,","","","Period from February 1, 2020 through December 31,","","","","Period from January 1, 2020 through January 31,","","","Pro Forma Adjustments for the Year Ended December 31,","","","Pro Forma Twelve Months Ended December 31,"],["(in thousands)","","2021","","","2020","","","","2020","","","2020","","","2020"],["Selling, general, and administrative expense","","$","107,980","","","$","66,864","","","","$","11,235","","","$","\u2014","","","$","78,099"]]
[[/GREPCENT_TABLE]]

Selling, general, and administrative expense was $108.0 million for the year ended December 31, 2021(Successor), compared to $66.9 million for the period from February 1, 2020 through December 31, 2020 (Successor) and $11.2 million for the period from January 1, 2020 through January 31, 2020 (Predecessor). On a pro forma basis, selling, general, and administrative expense was $78.1 million for the twelve months ended December 31, 2020. Selling, general, and administrative expense for the year ended December 31, 2021 (Successor) increased by $29.9 million or 38.3%, compared to the twelve months ended December 31, 2020, on a pro forma basis.

Selling, general, and administrative expense increased primarily due to:

•
a $7.8 million increase in professional service fees incurred related to the Company’s IPO, related readiness expenses, the November Follow-On, and insurance expenses incurred related to the Company becoming and operating as a publicly traded company,

•
a $7.3 million increase in personnel related expenses primarily due to additional investments made in the Company’s Sales and Customer Success functions, additional headcount related to operating as a public company, and COVID-19 related personnel and benefit expense reduction actions taken in 2020 that did not continue into 2021,

•
a $5.9 million increase in commissions and bonus related expenses due to the Company’s improved operating results in 2021, as well as a transaction bonus program related to one of the Company’s 2021 acquisitions,

•
a $3.5 million increase in share-based compensation expenses as a result of performance related vesting related to the Company’s IPO, the November Follow-On, and incremental awards granted in the fourth quarter of 2021, offset by accelerated vesting related to the Silver Lake Transaction that did not reoccur in 2021,

•
a $2.0 million increase in legal expenses (see Note 12 to the audited consolidated financial statements included elsewhere in this Annual Report), and

•
a number of other corporate expenses that increased primarily as a result of the Company now being a publicly traded company, additional 2021 marketing and software licensing expenses, and COVID-19 related expense reductions in 2020 that did not continue into 2021.

The increase in selling, general, and administrative expense was partially offset by:

•
decreases in bad debt and travel expenses.

51

Depreciation and Amortization

[[GREPCENT_TABLE]]
[["","","Successor","","","","Predecessor"],["","","Year Ended December 31,","","","Period from February 1, 2020 through December 31,","","","","Period from January 1, 2020 through January 31,","","","Pro Forma Adjustments for the Year Ended December 31,","","","Pro Forma Twelve Months Ended December 31,"],["(in thousands)","","2021","","","2020","","","","2020","","","2020","","","2020"],["Depreciation and amortization","","$","142,815","","","$","135,057","","","","$","2,105","","","$","6,124","","","$","143,286"]]
[[/GREPCENT_TABLE]]

Depreciation and amortization was $142.8 million for the year ended December 31, 2021 (Successor), compared to $135.1 million for the period from February 1, 2020 through December 31, 2020 (Successor) and $2.1 million for the period from January 1, 2020 through January 31, 2020 (Predecessor). On a pro forma basis, depreciation and amortization was $143.3 million for the twelve months ended December 31, 2020. Depreciation and amortization for the year ended December 31, 2021 (Successor) decreased by $0.5 million, or 0.3%, compared the twelve months ended December 31, 2020, on a pro forma basis. This decrease was primarily due to the impact of the step up in fair value of property and equipment and intangible assets as a result of the application of purchase accounting related to the Silver Lake Transaction, of which the intangible asset amortization is accelerated based on the relative projected discounted cash flows. This decrease was partially offset by increases in depreciation related to assets placed in service during the year ended December 31, 2021 (Successor).

Interest Expense

[[GREPCENT_TABLE]]
[["","","Successor","","","","Predecessor"],["","","Year Ended December 31,","","","Period from February 1, 2020 through December 31,","","","","Period from January 1, 2020 through January 31,","","","Pro Forma Adjustments for the Year Ended December 31,","","","Pro Forma Twelve Months Ended December 31,"],["(in thousands)","","2021","","","2020","","","","2020","","","2020","","","2020"],["Interest expense","","$","25,122","","","$","47,914","","","","$","4,514","","","$","(741",")","","$","51,687"]]
[[/GREPCENT_TABLE]]

Interest expense was $25.1 million for the year ended December 31, 2021 (Successor), compared to $47.9 million for the period from February 1, 2020 through December 31, 2020 (Successor) and $4.5 million for the period from January 1, 2020 through January 31, 2020 (Predecessor). On a pro forma basis, interest expense was $51.7 million for the twelve months ended December 31, 2020. Interest expense for the year ended December 31, 2021 (Successor) decreased by $26.6 million, or 51.4%, compared to the twelve months ended December 31, 2020, on a pro forma basis.

This decrease was primarily due to the impact of the Company’s February 2021 refinancing of the Successor First Lien Credit Facility (as defined below) and early repayment of the Successor Second Lien Credit Facility (as defined below), resulting in interest rate savings due to lower principal and more favorable interest rate margins. This decrease was partially offset by a one-time increase in interest expense associated with the repayment of $200.0 million of the Successor First Lien Credit Facility, in conjunction with the Company’s IPO, resulting in accelerated amortization of the related deferred financing costs.

Interest Income

[[GREPCENT_TABLE]]
[["","","Successor","","","","Predecessor"],["","","Year Ended December 31,","","","Period from February 1, 2020 through December 31,","","","","Period from January 1, 2020 through January 31,","","","Pro Forma Adjustments for the Year Ended December 31,","","","Pro Forma Twelve Months Ended December 31,"],["(in thousands)","","2021","","","2020","","","","2020","","","2020","","","2020"],["Interest income","","$","(150",")","","$","(530",")","","","$","(25",")","","$","\u2014","","","$","(555",")"]]
[[/GREPCENT_TABLE]]

Interest income was $0.2 million for the year ended December 31, 2021 (Successor), compared to $0.5 million for the period from February 1, 2020 through December 31, 2020 (Successor) and $0.0 million for the period from January 1, 2020 through January 31, 2020 (Predecessor). On a pro forma basis, interest income was $0.6 million for the twelve months ended December 31, 2020. Interest income for the year ended December 31, 2021 (Successor) decreased by $0.4 million, or 73.0%, compared to the twelve months ended December 31, 2020, on a pro forma basis.

Interest income decreases were primarily due to general decreases in interest rates.

52

Loss on Extinguishment of Debt

[[GREPCENT_TABLE]]
[["","","Successor","","","","Predecessor"],["","","Year Ended December 31,","","","Period from February 1, 2020 through December 31,","","","","Period from January 1, 2020 through January 31,","","","Pro Forma Adjustments for the Year Ended December 31,","","","Pro Forma Twelve Months Ended December 31,"],["(in thousands)","","2021","","","2020","","","","2020","","","2020","","","2020"],["Loss on extinguishment of debt","","$","13,938","","","$","\u2014","","","","$","10,533","","","$","(10,533",")","","$","\u2014"]]
[[/GREPCENT_TABLE]]

Loss on extinguishment of debt for the year ended December 31, 2021 (Successor) relates to expenses stemming from the write-off of debt issuance costs associated with the February 2021 refinancing of the Successor First Lien Credit Facility and early repayment of the Successor Second Lien Credit Facility.

Loss on extinguishment of debt for the period from January 1, 2020 through January 31, 2020 (Predecessor), relates to expenses stemming from the write-off of debt issuance costs as a result of prepayment of the Company’s outstanding debt obligations in connection with the Silver Lake Transaction.

Transaction Expenses, Change in Control

[[GREPCENT_TABLE]]
[["","","Successor","","","","Predecessor"],["","","Year Ended December 31,","","","Period from February 1, 2020 through December 31,","","","","Period from January 1, 2020 through January 31,","","","Pro Forma Adjustments for the Year Ended December 31,","","","Pro Forma Twelve Months Ended December 31,"],["(in thousands)","","2021","","","2020","","","","2020","","","2020","","","2020"],["Transaction expenses, change in control","","$","\u2014","","","$","9,423","","","","$","22,370","","","$","(22,370",")","","$","9,423"]]
[[/GREPCENT_TABLE]]

Transaction expenses, change in control relate solely to costs relating to the Silver Lake Transaction that are recorded on our books and are therefore only included in our results of operations for the period from February 1, 2020 through December 31, 2020 (Successor) and for the period from January 1, 2020 through January 31, 2020 (Predecessor).

53

Provision for Income Taxes

[[GREPCENT_TABLE]]
[["","","Successor","","","","Predecessor"],["","","Year Ended December 31,","","","Period from February 1, 2020 through December 31,","","","","Period from January 1, 2020 through January 31,","","","Pro Forma Adjustments for the Year Ended December 31,","","","Pro Forma Twelve Months Ended December 31,"],["(in thousands)","","2021","","","2020","","","","2020","","","2020","","","2020"],["Provision (benefit) for income taxes","","$","8,862","","","$","(11,355",")","","","$","(871",")","","$","7,073","","","$","(5,153",")"]]
[[/GREPCENT_TABLE]]

Our provision (benefit) for income taxes was $8.9 million for the year ended December 31, 2021 (Successor), compared to $(11.4) million for the period from February 1, 2020 through December 31, 2020 (Successor) and $(0.9) million for the period from January 1, 2020 through January 31, 2020 (Predecessor). On a pro forma basis, our (benefit) for income taxes was $(5.2) million for the twelve months ended December 31, 2020. Our provision for income taxes for the year ended December 31, 2021 (Successor) increased by $14.0 million, or 272.0%, compared to the twelve months ended December 31, 2020, on a pro forma basis.

The increase in our provision for income taxes was primarily due to the pre-tax income in 2021, the tax impact of high GILTI inclusion, and nondeductible executive share-based compensation expense incurred during the year ended December 31, 2021 (Successor).

Net Income (Loss) and Net Income (Loss) Margin

[[GREPCENT_TABLE]]
[["","","Successor","","","","Predecessor"],["","","Year Ended December 31,","","","Period from February 1, 2020 through December 31,","","","","Period from January 1, 2020 through January 31,","","","Pro Forma Adjustments for the Year Ended December 31,","","","Pro Forma Twelve Months Ended December 31,"],["(in thousands)","","2021","","","2020","","","","2020","","","2020","","","2020"],["Net income (loss)","","$","16,051","","","$","(47,492",")","","","$","(36,530",")","","$","20,447","","","$","(63,575",")"],["Net income (loss) margin","","","2.3","%","","","(10.1",")%","","","","(99.3",")%","","","\u2014","","","","(12.5",")%"]]
[[/GREPCENT_TABLE]]

Net income was $16.1 million for the year ended December 31, 2021 (Successor), compared to a net (loss) of $(47.5) million for the period from February 1, 2020 through December 31, 2020 (Successor) and $(36.5) million for the period from January 1, 2020 through January 31, 2020 (Predecessor). On a pro forma basis, net (loss) was $(63.6) million for the twelve months ended December 31, 2020. Net income for the year ended December 31, 2021 (Successor) increased by $79.6 million, or 125.2%, compared to the twelve months ended December 31, 2020, on a pro forma basis, due to the factors described above.

Net income (loss) margin was 2.3% for the year ended December 31, 2021 (Successor), compared to (10.1)% for the period from February 1, 2020 through December 31, 2020 (Successor) and (99.3)% for the period from January 1, 2020 through January 31, 2020 (Predecessor). Net (loss) margin for the twelve months ended December 31, 2020, on a pro forma basis, was (12.5)%.

The improvement in our net income (loss) margin is attributable to our ability to leverage operating efficiencies to control our overall expenses while increasing revenue and our reduction in interest expense as a result of the February 2021 refinancing.

54

Key Operating and Financial Metrics

In addition to our results determined in accordance with GAAP, we believe certain measures are useful in evaluating our operating performance. Management believes these non-GAAP measures are useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate, and capital investments. Management uses Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, and Adjusted Diluted Earnings Per Share to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation, and to compare our performance against that of other peer companies using similar measures. Management supplements GAAP results with non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone.

The presentations of these measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because not all companies use identical calculations, the presentations of these measures may not be comparable to other similarly titled measures of other companies and can differ significantly from company to company. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP.

Adjusted EBITDA and Adjusted EBITDA Margin

Management believes that Adjusted EBITDA is a strong indicator of our overall operating performance and is useful to management and investors as a measure of comparative operating performance from period to period. We define Adjusted EBITDA as net income before interest, taxes, depreciation, and amortization, and as further adjusted for loss on extinguishment of debt, share-based compensation, transaction and acquisition-related charges, integration and restructuring charges, and other non-cash charges. We exclude the impact of share-based compensation because it is a non-cash expense and we believe that excluding this item provides meaningful supplemental information regarding performance and ongoing cash generation potential. We exclude loss on extinguishment of debt, transaction and acquisition related charges, integration and restructuring charges, and other charges because such expenses are episodic in nature and have no direct correlation to the cost of operating our business on an ongoing basis.

Adjusted EBITDA was $226.3 million for the year ended December 31, 2021 (Successor) and represented an Adjusted EBITDA Margin of 32%. Adjusted EBITDA was $139.8 million and $7.0 million for the period from February 1, 2020 through December 31, 2020 (Successor) and for the period January 1, 2020 through January 31, 2020 (Predecessor), respectively. This represented an Adjusted EBITDA Margin of 30% and 19% for the period from February 1, 2020 through December 31, 2020 (Successor) and for the period January 1, 2020 through January 31, 2020 (Predecessor), respectively. On a pro forma basis, Adjusted EBITDA was $146.8 million for the twelve months ended December 31, 2020 and represented an Adjusted EBITDA Margin of 29%. Adjusted EBITDA for the year ended December 31, 2021 (Successor) increased by $79.5 million, or 54.2%, compared to the twelve months ended December 31, 2020, on a pro forma basis.

Growth in Adjusted EBITDA was driven primarily from revenue growth attributed to new and existing customers and margin expansion attributed to increased automation, cost efficiencies, and operating leverage.

55

The following table presents a reconciliation of Adjusted EBITDA for the periods presented. For a discussion of pro forma adjustments, see “Notes to the Unaudited Supplemental Pro Forma Financial Information Presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

[[GREPCENT_TABLE]]
[["","","Successor","","","","Predecessor"],["","","Year Ended December 31,","","","Period from February 1, 2020 through December 31,","","","","Period from January 1, 2020 through January 31,","","","Pro Forma Adjustments for the Year Ended December 31,","","","Pro Forma Twelve Months Ended December 31,"],["(in thousands)","","2021","","","2020","","","","2020","","","2020","","","2020"],["Net income (loss)","","$","16,051","","","$","(47,492",")","","","$","(36,530",")","","$","20,447","","","$","(63,575",")"],["Interest expense, net","","","24,972","","","","47,384","","","","","4,489","","","","(741",")","","","51,132"],["Provision (benefit) for income taxes","","","8,862","","","","(11,355",")","","","","(871",")","","","7,073","","","","(5,153",")"],["Depreciation and amortization","","","142,815","","","","135,057","","","","","2,105","","","","6,124","","","","143,286"],["Loss on extinguishment of debt","","","13,938","","","","\u2014","","","","","10,533","","","","(10,533",")","","","\u2014"],["Share-based compensation","","","9,530","","","","1,876","","","","","3,976","","","","\u2014","","","","5,852"],["Transaction and acquisition-related charges (a)","","","9,314","","","","10,146","","","","","22,840","","","","(22,370",")","","","10,616"],["Integration and restructuring charges(b)","","","584","","","","3,413","","","","","327","","","","\u2014","","","","3,740"],["Other(c)","","","228","","","","747","","","","","153","","","","\u2014","","","","900"],["Adjusted EBITDA","","$","226,294","","","$","139,776","","","","$","7,022","","","$","\u2014","","","$","146,798"]]
[[/GREPCENT_TABLE]]

(a)
Represents charges incurred related to acquisitions and similar transactions, primarily consisting of change in control-related costs, professional service fees, and other third-party costs. Additionally, the year ended December 31, 2021 (Successor) includes incremental professional service fees incurred related to the initial public offering, the November Follow-On, and a transaction bonus program related to one of the Company’s 2021 acquisitions.

(b)
Represents charges from organizational restructuring and integration activities outside of the ordinary course of business.

(c)
Represents non-cash and other charges primarily related to legal exposures inherited from legacy acquisitions, foreign currency (gains) losses, and (gains) losses on the sale of assets.

We define Adjusted EBITDA Margin as Adjusted EBITDA divided by total revenues. The following table presents the calculation of Adjusted EBITDA Margin for the periods presented.

[[GREPCENT_TABLE]]
[["","","Successor","","","","Predecessor"],["","","Year Ended December 31,","","","Period from February 1, 2020 through December 31,","","","","Period from January 1, 2020 through January 31,","","","Pro Forma Adjustments for the Year Ended December 31,","","","Pro Forma Twelve Months Ended December 31,"],["(in thousands)","","2021","","","2020","","","","2020","","","2020","","","2020"],["Adjusted EBITDA","","$","226,294","","","$","139,776","","","","$","7,022","","","$","\u2014","","","$","146,798"],["Revenues","","","712,295","","","","472,369","","","","","36,785","","","","\u2014","","","","509,154"],["Adjusted EBITDA Margin","","","32","%","","","30","%","","","","19","%","","","\u2014","","","","29","%"]]
[[/GREPCENT_TABLE]]

56

Adjusted Net Income and Adjusted Diluted Earnings Per Share

Similar to Adjusted EBITDA, management believes that Adjusted Net Income and Adjusted Diluted Earnings Per Share are strong indicators of our overall operating performance and are useful to our management and investors as measures of comparative operating performance from period to period. We define Adjusted Net Income for a particular period as net income before taxes adjusted for debt-related costs, acquisition-related depreciation and amortization, share-based compensation, transaction and acquisition related charges, integration and restructuring charges, and other non-cash charges, to which we then apply the related effective tax rate. We define Adjusted Diluted Earnings Per Share as Adjusted Net Income divided by adjusted weighted average number of shares outstanding—diluted.

Adjusted Net Income was $142.4 million for the year ended December 31, 2021 (Successor), compared to $63.9 million for the period from February 1, 2020 through December 31, 2020 (Successor) and $1.4 million for the period from January 1, 2020 through January 31, 2020 (Predecessor). On a pro forma basis, Adjusted Net Income was $65.6 million for the twelve months ended December 31, 2020. Adjusted Net Income for the year ended December 31, 2021 (Successor) increased by $76.8 million, or 117.0%, compared to the twelve months ended December 31, 2020, on a pro forma basis.

Adjusted Diluted Earnings Per Share was $1.01 for the year ended December 31, 2021 (Successor), compared to $0.49 for the period from February 1, 2020 through December 31, 2020 (Successor) and $0.01 for the period from January 1, 2020 through January 31, 2020 (Predecessor). On a pro forma basis, Adjusted Diluted Earnings Per Share was $0.50 for the twelve months ended December 31, 2020. Adjusted Diluted Earnings Per Share for the year ended December 31, 2021 (Successor) increased by $0.51, or 102.0%, compared to the twelve months ended December 31, 2020, on a pro forma basis.

This growth was driven primarily by the same factors contributing to Adjusted EBITDA growth, though Adjusted Net Income and Adjusted Diluted Earnings Per Share are also impacted by changes in acquisition-related depreciation and amortization and changes in our capital structure that are captured in interest expense. The purchase accounting from the Silver Lake Transaction and our debt refinancing at the beginning of 2020 and 2021 impacts the comparability of Adjusted Net Income and Adjusted Diluted Earnings Per Share across historical periods.

The following tables present a reconciliation of Adjusted Net Income for the periods presented. For a discussion of pro forma adjustments, see “Notes to the Unaudited Supplemental Pro Forma Financial Information Presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

[[GREPCENT_TABLE]]
[["","","Successor","","","","Predecessor"],["","","Year Ended December 31,","","","Period from February 1, 2020 through December 31,","","","","Period from January 1, 2020 through January 31,","","","Pro Forma Adjustments for the Year Ended December 31,","","","Pro Forma Twelve Months Ended December 31,"],["(in thousands)","","2021","","","2020","","","","2020","","","2020","","","2020"],["Net income (loss)","","$","16,051","","","$","(47,492",")","","","$","(36,530",")","","$","20,447","","","$","(63,575",")"],["Provision (benefit) for income taxes","","","8,862","","","","(11,355",")","","","","(871",")","","","7,073","","","","(5,153",")"],["Income (loss) before provision for income taxes","","","24,913","","","","(58,847",")","","","","(37,401",")","","","27,520","","","","(68,728",")"],["Debt-related costs(a)","","","20,143","","","","3,242","","","","","11,102","","","","(10,801",")","","","3,543"],["Acquisition-related depreciation and amortization(b)","","","126,865","","","","125,419","","","","","848","","","","6,124","","","","132,391"],["Share-based compensation","","","9,530","","","","1,876","","","","","3,976","","","","\u2014","","","","5,852"],["Transaction and acquisition-related charges(c)","","","9,314","","","","10,146","","","","","22,840","","","","(22,370",")","","","10,616"],["Integration and restructuring charges(d)","","","584","","","","3,413","","","","","327","","","","\u2014","","","","3,740"],["Other(e)","","","228","","","","747","","","","","153","","","","\u2014","","","","900"],["Adjusted Net Income before income tax effect","","","191,577","","","","85,996","","","","","1,845","","","","473","","","","88,314"],["Less: Income tax effect(f)","","","49,178","","","","22,101","","","","","474","","","","122","","","","22,697"],["Adjusted Net Income","","$","142,399","","","$","63,895","","","","$","1,371","","","$","351","","","$","65,617"]]
[[/GREPCENT_TABLE]]

57

The following table presents the calculation of Adjusted Diluted Earnings Per Share for the periods presented. For a discussion of pro forma adjustments, see “Notes to the Unaudited Supplemental Pro Forma Financial Information Presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Prior to the IPO, the equity awards under the Successor Plan were issued by the Company’s Parent. As a result, these awards are not considered equity awards issued by the Company, and therefore not included in the calculation of adjusted weighted average number of shares outstanding—diluted.

[[GREPCENT_TABLE]]
[["","","Successor","","","","Predecessor"],["","","Year Ended December 31,","","","Period from February 1, 2020 through December 31,","","","","Period from January 1, 2020 through January 31,","","","Pro Forma Adjustments for the Year Ended December 31,","","","Pro Forma Twelve Months Ended December 31,"],["(in thousands)","","2021","","","2020","","","","2020","","","2020","","","2020"],["Diluted net income (loss) per share (GAAP)","","$","0.11","","","$","(0.37",")","","","$","(0.24",")","","$","0.16","","","$","(0.49",")"],["Adjusted Net Income adjustments per share"],["Income taxes","","","0.06","","","","(0.09",")","","","","(0.01",")","","","0.05","","","","(0.04",")"],["Debt-related costs(a)","","","0.14","","","","0.02","","","","","0.07","","","","(0.08",")","","","0.03"],["Acquisition-related depreciation and amortization(b)","","","0.90","","","","0.96","","","","","0.01","","","","0.05","","","","1.02"],["Share-based compensation","","","0.07","","","","0.01","","","","","0.03","","","","\u2014","","","","0.05"],["Transaction and acquisition related charges(c)","","","0.07","","","","0.08","","","","","0.15","","","","(0.17",")","","","0.08"],["Integration and restructuring charges(d)","","","0.00","","","","0.03","","","","","0.00","","","","\u2014","","","","0.03"],["Other(e)","","","0.00","","","","0.01","","","","","0.00","","","","\u2014","","","","0.01"],["Adjusted income tax effect(f)","","","(0.35",")","","","(0.17",")","","","","(0.00",")","","","(0.00",")","","","(0.17",")"],["Adjusted Diluted Earnings Per Share (Non-GAAP)","","$","1.01","","","$","0.49","","","","$","0.01","","","$","0.00","","","$","0.50"],["Weighted average number of shares outstanding used in computation of Adjusted Diluted Earnings Per Share:"],["Weighted average number of shares outstanding\u2014diluted (GAAP)","","","141,687,384","","","","130,000,000","","","","","149,686,460","","","","130,000,000","","","","130,000,000"],["Options and restricted stock not included in weighted average number of shares outstanding\u2014diluted (GAAP) (using treasury stock method)","","","\u2014","","","","\u2014","","","","","\u2014","","","","\u2014","","","","\u2014"],["Adjusted weighted average number of shares outstanding\u2014diluted (Non-GAAP)","","","141,687,384","","","","130,000,000","","","","","149,686,460","","","","130,000,000","","","","130,000,000"]]
[[/GREPCENT_TABLE]]

(a)
Represents the loss on extinguishment of debt and non-cash interest expense related to the amortization of debt issuance costs for the financing for the Silver Lake Transaction.

(b)
Represents the depreciation and amortization expense related to intangible assets and developed technology assets recorded due to the application of ASC 805, Business Combinations.

(c)
Represents charges incurred related to acquisitions and similar transactions, primarily consisting of change in control-related costs, professional service fees, and other third-party costs. Additionally, the year ended December 31, 2021 (Successor) includes incremental professional service fees incurred related to the initial public offering, the November Follow-On, and a transaction bonus program related to one of the Company’s 2021 acquisitions.

(d)
Represents charges from organizational restructuring and integration activities outside of the ordinary course of business.

(e)
Represents non-cash and other charges primarily related to legal exposures inherited from legacy acquisitions, foreign currency (gains) losses, and (gains) losses on the sale of assets.

(f)
Effective tax rates of approximately 25.7% and 25.7% have been used to compute Adjusted Net Income and Adjusted Diluted Earnings Per Share for the 2020 periods and year ended December 31, 2021, respectively. As of December 31, 2021, we had net operating loss carryforwards of approximately $120.1 million, $147.5 million, and $25.1 million for federal, state, and foreign income tax purposes, respectively, available to reduce future income subject to income taxes. As a result, the amount of actual cash taxes we pay for federal, state and foreign income taxes differs significantly from the effective income tax rate computed in accordance with GAAP and from the normalized rate shown above.

58

Liquidity and Capital Resources

Liquidity

The Company’s primary liquidity requirements are for working capital, continued investments in software development and other capital expenditures, and other strategic investments. Income taxes are currently not a significant use of funds but after the benefits of our net operating loss carryforwards are fully recognized, could become a material use of funds, depending on our future profitability, and future tax rates. The Company’s liquidity needs are met primarily through cash flows from operations, as well as funds available under our revolving credit facility and proceeds from our term loan borrowings. Our cash flows from operations include cash received from customers, less cash costs to provide services to our customers, which includes general and administrative costs and interest payments.

As of December 31, 2021, we had $292.6 million in cash and cash equivalents and $100.0 million available under our revolving credit facility. As of December 31, 2021, we had $564.7 million of total debt outstanding. We believe our cash on hand, together with amounts available under our revolving credit facility, and cash provided by (used in) operating activities are and will continue to be adequate to meet our operational and business needs in the next twelve months. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds. In the event that we need access to additional cash, we may not be able to access the credit markets on commercially acceptable terms or at all. Our ability to fund future operating expenses and capital expenditures and our ability to meet future debt service obligations or refinance our indebtedness will depend on our future operating performance, which will be affected by general economic, financial, and other factors that may be beyond our control, including those described under “Risk Factors.”

We may from time to time repurchase shares of our common stock in the open market at prevailing market prices (including through a Rule 10b5-1 plan), in privately negotiated transactions, a combination thereof or through other transactions. The actual timing, number, manner and value of any shares repurchased will depend on several factors, including the market price of our stock, general market and economic conditions, our liquidity requirements, applicable legal requirements and other business considerations.

Long-Term Debt

On January 31, 2020, our previously outstanding indebtedness was repaid in full as part of the Silver Lake Transaction. As part of the Silver Lake Transaction, a new financing structure was established consisting of a new First Lien Credit Agreement (“Successor First Lien Agreement”) and a new Second Lien Credit Agreement (“Successor Second Lien Agreement”) (collectively, the “Successor Credit Agreements”). The Successor First Lien Agreement provided financing in the form of a $670.0 million term loan due January 31, 2027 (“Successor First Lien Credit Facility”) and a $75.0 million new revolving credit facility due January 31, 2025 (“Successor Revolver”). The Successor Second Lien Agreement provided financing in the form of a $145.0 million term loan due January 31, 2028 (“Successor Second Lien Credit Facility”).

On February 1, 2021, we amended the Successor First Lien Agreement to fund $100.0 million of additional first lien term loans and reduce the applicable margins by 0.25%. The refinancing resulted in a loss on extinguishment of debt of $5.1 million, composed of the write-off of $4.5 million of unamortized deferred financing costs and $0.6 million of accrued interest and miscellaneous fees. In addition, we fully repaid the outstanding Successor Second Lien Agreement and recorded a loss on extinguishment of debt of $8.9 million, composed of the write-off of $7.3 million of unamortized deferred financing costs plus a $1.5 million prepayment premium, and $0.1 million of accrued interest and other miscellaneous fees.

In connection with the IPO, the Company entered into an amendment to increase the borrowing capacity under the Successor Revolver from $75.0 million to $100.0 million and extend the maturity date from January 31, 2025 to July 31, 2026.

Borrowings under the Successor First Lien Agreement bear interest at a rate per annum equal to an applicable margin plus, at our option, either (a) a base rate or (b) LIBOR, which is subject to a floor of 0.00% per annum. The applicable margins under the Successor First Lien Agreement are subject to stepdowns based on our first lien net leverage ratio. In connection with the closing of the IPO, each applicable margin was reduced further by 0.25%. In addition, the borrower, First Advantage Holdings, LLC, which is an indirect wholly-owned subsidiary of the Company, is required to pay a commitment fee on any unutilized commitments under the revolving credit facility. The commitment fee rate ranges between 0.25% and 0.50% per annum based on our first lien net leverage ratio. The borrower is also required to pay customary letter of credit fees.

The Successor First Lien Credit Facility amortizes in equal quarterly installments in aggregate annual amounts equal to 1.00% of the principal amount. The Successor Revolver has no amortization. The Successor First Lien Credit Facility requires the borrower to prepay outstanding term loans, subject to certain exceptions, with certain proceeds from non-ordinary course asset sales, issuance of debt not permitted by the credit agreement to be incurred and annual excess cash flows. In addition, any voluntary prepayment of term loans in connection with certain repricing transactions on or prior to August 1, 2021 were subject to a 1.00% prepayment premium. Otherwise, the borrower may voluntarily repay outstanding loans without premium or penalty, other than customary “breakage” costs.

59

In connection with the closing of the IPO, on June 30, 2021 the Company repaid $200.0 million of the Successor First Lien Credit Facility outstanding, of which $44.3 million was applied to all of the remaining quarterly amortizing principal payments due under the Successor First Lien Agreement. The remaining $564.7 million term loan is scheduled to mature on January 31, 2027. As a result of the prepayment, the Company recorded additional interest expense of $3.7 million associated with the accelerated amortization of the related deferred financing costs.

The Successor First Lien Agreement is unconditionally guaranteed by Fastball Parent, Inc., a wholly-owned subsidiary of the Company and the direct parent of the borrower, and material wholly owned domestic restricted subsidiaries of Fastball Parent, Inc. The Successor First Lien Agreement and the guarantees of such obligations, are secured, subject to permitted liens and other exceptions, by (1) a first priority security interest in certain tangible and intangible assets of the borrower and the guarantors and (2) a first-priority pledge of 100% of the capital stock of the borrower and of each wholly-owned material restricted subsidiary of the borrower and the guarantors (which pledge, in the case of any non-U.S. subsidiary of a U.S. subsidiary, does not include more than 65% of the voting stock of such non-U.S. subsidiary).

The credit agreement contains customary affirmative covenants, negative covenants and events of default (including upon a change of control). The credit agreement also includes a “springing” first lien net leverage ratio test, applicable only to the revolving credit facility, that requires such ratio to be no greater than 7.75:1.00 on the last day of any fiscal quarter if more than 35.0% of the revolving credit facility is utilized on such date.

Cash Flow Analysis

Comparison of Cash Flows for the Year Ended December 31, 2021 (Successor) compared to the Period from February 1, 2020 through December 31, 2020 (Successor) and for the Period from January 1, 2020 through January 31, 2020 (Predecessor)

The following table is a summary of our cash flow activity for the periods presented:

[[GREPCENT_TABLE]]
[["","","Successor","","","","Predecessor"],["(in thousands)","","Year Ended December 31, 2021","","","Period from February 1, 2020 through December 31, 2020","","","","Period from January 1, 2020 through January 31, 2020"],["Net cash provided by (used in) operating activities","","$","148,677","","","$","72,851","","","","$","(19,216",")"],["Net cash used in investing activities","","","(72,427",")","","","(15,569",")","","","","(2,043",")"],["Net cash provided by (used in) financing activities","","","63,848","","","","46,404","","","","","(11,122",")"]]
[[/GREPCENT_TABLE]]

Cash Flows from Operating Activities

For the year ended December 31, 2021 (Successor), for the period from February 1, 2020 through December 31, 2020 (Successor), and for the period from January 1, 2020 through January 31, 2020 (Predecessor), net cash provided by (used in) operating activities was $148.7 million, $72.9 million, and $(19.2) million, respectively. The cash flows from operating activities for the period from February 1, 2020 through December 31, 2020 (Successor) and for the period from January 1, 2020 through January 31, 2020 (Predecessor) are impacted by $9.4 million and $22.4 million of transaction expenses from the Silver Lake Transaction, respectively. Cash flows from operating activities was also positively impacted by increased profitability related to the Company’s revenue growth from existing customers, new customer go-lives, and the 2021 acquisitions. This was offset in part by the use of cash for working capital primarily due to the high level of revenue growth acceleration that remained in receivables at December 31, 2021, consistent with normal payment terms offered to our customers.

Cash Flows from Investing Activities

For the year ended December 31, 2021 (Successor), for the period from February 1, 2020 through December 31, 2020 (Successor), and the period from January 1, 2020 through January 31, 2020 (Predecessor), net cash used in investing activities was $(72.4) million, $(15.6) million, and $(2.0) million, respectively. The cash flows used in investing activities for the year ended December 31, 2021 (Successor) included an aggregate of $48.9 million in purchase price for the three 2021 acquisitions. The remaining use of investing cash flows are driven primarily by capitalized software development costs and purchases of property and equipment, which increased in 2021 as we continued to make incremental investments in our technology and operations.

60

Cash Flows from Financing Activities

For the year ended December 31, 2021 (Successor), for the period from February 1, 2020 through December 31, 2020 (Successor), and the period from January 1, 2020 through January 31, 2020 (Predecessor), net cash provided by (used in) financing activities was $63.8 million, $46.4 million, and $(11.1) million, respectively. Net cash provided by financing activities for the year ended December 31, 2021 (Successor) was primarily driven by the Company’s completion of its IPO on June 25, 2021. Cash inflows related to the IPO were $320.6 million, partially offset by the use of proceeds which consisted of a $200.0 million repayment of the Company’s Successor First Lien Credit Facility and $4.0 million of offering costs.

Net cash provided by financing activities for the year ended December 31, 2021 (Successor) was incrementally driven by the Company’s February 2021 debt refinancing which consisted of a refinancing of the Successor First Lien Credit Facility and the full repayment of the Successor Second Lien Credit Facility. Cash outflows related to this refinancing were $308.5 million, partially offset by cash inflows of $261.4 million. As part of the refinancing, the Company paid $1.3 million related to new debt issuance costs. The remaining outflows primarily consisted of principal payments due under the Successor First Lien Credit Facility, payments on capital lease obligations, a deferred purchase of a software platform, and share-based compensation activity.

Net cash provided by financing activities for the period from February 1, 2020 through December 31, 2020 (Successor) was driven by a $50.0 million investment in the Company’s equity by Workday, Inc. and $9.4 million of capital contributions related to the transaction expenses from the Silver Lake Transaction. In March 2020, we made a $25.0 million precautionary draw on our revolving credit facility in light of the COVID-19 pandemic, which we fully repaid in June 2020. These inflows were primarily offset by debt issuance costs paid, principal payments on the Successor First Lien Credit Facility, and distributions to Predecessor’s members and optionholders in connection with the Silver Lake Transaction.

Net cash used in financing activities for the period from January 1, 2020 through January 31, 2020 (Predecessor) were driven by a $34.0 million repayment of our previous credit facility in place at the time of the Silver Lake Transaction and distributions of $18.0 million to Predecessor’s members and optionholders in connection with the Silver Lake Transaction. These were partially offset by additional capital contributions of $41.1 million related to payment and settlement of existing options issued by Predecessor and transaction expenses from the Silver Lake Transaction.

61

Notes to the Unaudited Supplemental Pro Forma Financial Information Presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations

Note 1. Basis of Presentation & Description of the Transactions

The unaudited pro forma consolidated statement of operations for the year ended December 31, 2020 gives effect to the Silver Lake Transaction and the Silver Lake Transaction Refinancing as if they had occurred on January 1, 2020. The unaudited pro forma consolidated statement of operations for the year ended December 31, 2021 does not give effect to either the Silver Lake Transaction or the Silver Lake Transaction Refinancing as if they had occurred on January 1, 2020 because these events are already reflected for the full period presented in the historical statement of operations of the Company.

The Silver Lake Transaction and Silver Lake Transaction Refinancing

On January 31, 2020, Silver Lake acquired substantially all of the Company’s equity interests for approximately $1,576.0 million. A portion of the consideration was derived from members of the management team contributing an allocation of their Silver Lake Transaction proceeds. The Silver Lake Transaction was accounted for under the acquisition method in accordance with ASC 805, Business Combinations.

The allocation of the purchase price is based on the fair value of assets acquired and liabilities assumed as of the acquisition date, less transaction expenses funded by transaction proceeds. The following table summarizes the consideration paid and the amounts recognized for the assets acquired and liabilities assumed (in thousands):

[[GREPCENT_TABLE]]
[["Consideration"],["Cash, net of cash acquired","","$","1,556,810"],["Rollover management equity interests","","","19,148"],["Total fair value of consideration transferred","","$","1,575,958"],["Current assets","","$","145,277"],["Property and equipment, including software developed for internal use","","","236,775"],["Trade name","","","95,000"],["Customer lists","","","500,000"],["Deferred tax asset","","","106,327"],["Other assets","","","1,429"],["Current liabilities","","","(71,496",")"],["Deferred tax liability","","","(198,535",")"],["Other liabilities","","","(6,616",")"],["Total identifiable net assets","","$","808,161"],["Goodwill","","$","767,797"]]
[[/GREPCENT_TABLE]]

In connection with the Silver Lake Transaction, on January 31, 2020, the existing credit facilities of the Predecessor were repaid in full with the proceeds of a new First Lien Credit Agreement (“Successor First Lien Agreement”) and a new Second Lien Credit Agreement (“Successor Second Lien Agreement”) (collectively, the “Successor Credit Agreements”). The Successor First Lien Agreement provided financing in the form of a $670.0 million term loan due January 31, 2027, carrying an interest rate of 3.25% to 3.50%, based on the first lien leverage ratio, plus LIBOR (“Successor First Lien Credit Facility”) and a $75.0 million new revolving facility due January 31, 2025 (“Successor Revolver”). The Successor First Lien Credit Facility required mandatory quarterly repayments of 0.25% of the original loan balance commencing September 30, 2020. The Successor Second Lien Agreement provided financing in the form of a $145.0 million term loan due January 31, 2028, carrying an interest rate of 8.50% plus LIBOR (“Successor Second Lien Credit Facility”).

In February 2021, the Company refinanced the Successor First Lien Credit Facility and fully repaid the outstanding balance on the Successor Second Lien Credit Facility (the “2021 Debt Refinancing”). The effects of the 2021 Debt Refinancing are fully reflected in the historical statement of operations of the Company for the year ended December 31, 2021. Because the Company does not consider the effects of the 2021 Debt Refinancing to be material, no pro forma adjustments have been made to the unaudited pro forma statement of operations for the year ended December 31, 2020 to reflect the 2021 Debt Refinancing as if it had occurred on January 1, 2020.

62

Note 2. Notes to Unaudited Pro Forma Consolidated Statements of Operations

The following adjustments were made related to the unaudited pro forma consolidated statement of operations for the year ended December 31, 2020:

Silver Lake Transaction Accounting Adjustments

a)
Reflects the incremental amortization expense related to certain definite-lived intangible assets, reflected in the purchase price allocation at the date of the Silver Lake Transaction, as if those certain definite-lived intangible assets were put into place on January 1, 2020. The following table shows the pro forma adjustment to estimated amortization expense for the year ended December 31, 2020:

[[GREPCENT_TABLE]]
[["Description (in thousands)","","Estimated Fair Value at Acquisition","","","Estimated Useful Life","","","Year Ended December 31, 2020"],["Capitalized software for internal use","","$","220,000","","","","5","","","$","57,081"],["Trade name","","$","95,000","","","","20","","","","8,171"],["Customer lists","","$","500,000","","","","14","","","","70,807"],["Pro forma amortization expense","","","","","","","","","136,059"],["Less: historical amortization expense recorded","","","","","","","","","(129,935",")"],["Pro forma adjustment for amortization expense","","","","","","","","$","6,124"]]
[[/GREPCENT_TABLE]]

b)
Reflects the adjustment to remove Predecessor transaction expenses related to the Silver Lake Transaction which would have been incurred and recorded during the year ended December 31, 2019 if the Silver Lake Transaction had occurred on January 1, 2020.

Silver Lake Transaction Refinancing Accounting Adjustments

c)
Reflects the adjustment to interest expense resulting from (i) the elimination of interest expense related to the debt financing in place during the Predecessor period, and (ii) the incremental interest expense and amortization of deferred financing costs associated with the Successor First Lien Credit Agreement and Successor Second Lien Credit Agreement to give effect to the Silver Lake Transaction Refinancing as if it had occurred on January 1, 2020, calculated as follows:

[[GREPCENT_TABLE]]
[["Description (in thousands)","","Year Ended December 31, 2020"],["Interest Expense on Successor First Lien Agreement","","$","29,835"],["Interest Expense on Successor Second Lien Agreement","","","13,713"],["Amortization of deferred financing costs","","","3,543"],["Pro forma interest expense","","","47,091"],["Less: historical interest expense recorded","","","(47,832",")"],["Pro forma adjustment for interest expense","","$","(741",")"]]
[[/GREPCENT_TABLE]]

No adjustment has been made to the unaudited pro forma statement of operations for the year ended December 31, 2020 to reflect changes in interest expense as a result of the 2021 Debt Refinancing because the Company does not consider the 2021 Debt Refinancing to be material.

d)
Reflects an adjustment to the historical loss on extinguishment of Predecessor debt for the unaudited pro forma consolidated statements of operations for the year ended December 31, 2020 as if the Silver Lake Transaction Refinancing had been consummated on January 1, 2020.

Silver Lake Transactions Accounting Adjustments

e)
Reflects the adjustment to the provision for income taxes attributable to the tax impacts of the preceding Silver Lake Transaction and Refinancing Accounting Adjustments, assuming an effective tax rate of approximately 25.7%.

63

Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of December 31, 2021 that require us to make future cash payments:

[[GREPCENT_TABLE]]
[["(in thousands)","","2022","","","2023","","","2024","","","2025","","","2026","","","Thereafter","","","Total"],["Debt Principal (1)","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","564,724","","","$","564,724"],["Interest Payments (1)","","","17,502","","","","17,469","","","","16,575","","","","16,342","","","","16,342","","","","1,388","","","","85,618"],["Operating Leases","","","7,303","","","","6,110","","","","5,354","","","","2,124","","","","1,653","","","","459","","","","23,003"],["Capital Leases (2)","","","914","","","","106","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","1,020"],["Purchase Obligation(3)","","","938","","","","938","","","","938","","","","\u2014","","","","\u2014","","","","\u2014","","","","2,814"],["Total contractual cash obligations(4)","","$","26,657","","","$","24,623","","","$","22,867","","","$","18,466","","","$","17,995","","","$","566,571","","","$","677,179"]]
[[/GREPCENT_TABLE]]

(1)
Debt principal consists of short-term and long-term debt obligations, and excludes debt discounts and deferred financing costs. The estimated interest payments are based on rates on individual debt and our interest rate collar agreements outstanding at December 31, 2021. Actual interest rates on our variable rate debt and interest rate collars and the actual amount of our variable indebtedness could vary from the amounts used to compute the amounts shown here.

(2)
Capital leases reflect the principal amount of capital lease obligations, including related interest.

(3)
Purchase obligations reflects a deferred purchase in 2021 of a web-based software platform for $3.8 million to be paid over four years. We had no other material purchase obligations as of December 31, 2021. In February 2021, we entered into a one-year contract with a third-party service provider which contains a minimum volume commitment, which was renewed for 2022. The Company expects to exceed the stipulated minimum volume of purchases in the ordinary course of business.

(4)
Total contractual cash obligations in the table above exclude income taxes as we are unable to make a reasonably reliable estimate of the timing for the remaining payments in future years. As of December 31, 2021, we had unrecognized tax benefits of $1.4 million, including $0.6 million of accrued interest. Accrued penalties related to the unrecognized tax benefits were not material. Payments or receipts from tax authorities are not expected to have a significant impact on liquidity in the next year. See Note 8 to the audited consolidated financial statements included elsewhere in this Annual Report for further information.

The table above does not include the liability of $7.9 million relating to legal proceedings in which the Company believes a loss is both probable and estimable, including $5.5 million relating to two separate class actions subject to a settlement agreement which was approved by the court in December 2021. See Note 13 of the audited consolidated financial statements included elsewhere in this Annual Report.

As of December 31, 2021, the Company had no standby letters of credit or other contingently available credit outstanding.

Recent Accounting Pronouncements

See Note 2 to the audited consolidated financial statements included in Part II, Item 8 of this Annual Report for a full description of recent accounting pronouncements.

Critical Accounting Policies and Estimates

Our audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report are prepared in accordance with GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

We believe that the accounting policies described below involve a significant degree of judgment and complexity. Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. For further information, see Note 2 to the audited consolidated financial statements included elsewhere in this Annual Report.

64

Revenue Recognition

The Company’s primary source of revenues is derived from pre-onboarding background screening and related products provided to our customers on a transactional basis, in which a background screening package or selection of products is ordered by a customer related to a single applicant. Substantially all of the Company’s customers are large, medium, or small businesses. The Company satisfies its performance obligations and recognizes revenues for its products as the orders are completed and the completed results or reports are transmitted, or otherwise made available. The Company’s remaining products, substantially consisting of post-onboarding monitoring, tax consulting, fleet management, and driver qualification services, are delivered over time as the customer receives and consumes the benefits of the products and solutions delivered. To measure the Company’s performance over time, the output method is utilized to measure the value to the customer based on the transfer to date of the services promised, with no rights of return once consumed. In these cases, revenues on transactional contracts with a defined price but an undefined quantity is recognized utilizing the right to invoice expedient resulting in revenues being recognized when the service is provided and becomes billable. Additionally, under this practical expedient, the Company is not required to estimate the transaction price. The Company records third-party pass- through fees incurred as part of screening related products on a gross revenue basis, with the related expense recorded as a third-party records expense, as the Company has control over the transaction and is therefore considered to be acting as a principal. The Company records motor vehicle registration and other tax payments paid on behalf of the Company’s fleet management customers on a net revenue basis as the Company does not have control over the transaction and therefore is considered to be acting as an agent of the customer.

Business Combinations

We record business combinations using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, identifiable assets acquired and liabilities assumed are recorded at their acquisition-date fair values. The excess of the purchase price over the estimated fair value is recorded as goodwill. Measurement period adjustments from changes in the estimated fair values of net assets recorded for acquisitions before the completion of a final detailed analysis are recorded in the period in which they occur.

Share-Based Compensation

We have granted our employees and directors share-based incentive awards. These awards are in the form of options and profits interests for Predecessor and options, profits interests, restricted stock units, and stock appreciation rights for Successor. We measure share-based compensation expense for all share-based awards granted based on the estimated fair value of those awards on their grant date expensed over the period during which an employee is required to provide service in exchange for the award (the vesting period) or meet certain performance obligations.

Immediately prior to the consummation of the IPO, all share-based awards that were previously issued by a parent of the Company were exchanged into awards issued directly by the Company, based on the terms of the grant agreements. This exchange used an exchange formula that preserved the fair market value of each award. Each exchanged award is subject to the same vesting conditions, and all other material terms remained the same. As a result, the Company did not recognize these exchanges as modifications under ASC 718 and therefore did not incur significant share-based compensation expense related to the IPO.

Substantially all of the Company’s share-based awards issued prior to the IPO contain a performance-based vesting component that is triggered upon certain realization events, including Silver Lake’s sale of its interests in the Company or distribution of its interests in the Company to its partners.

65

Pre-IPO Valuation of Equity

We granted employees share-based compensation awards at exercise prices equal to the fair value of the underlying equity at the time of grant, as determined by our board of directors on a contemporaneous basis. To determine the fair value of our equity, our board of directors considered many factors, including:

•
our current and historical operating performance;

•
our expected future operating performance;

•
our financial condition at the grant date;

•
the liquidation rights and preferences of our equity;

•
any recent privately negotiated sales of our securities to independent third parties;

•
input from management;

•
the amount of debt on our balance sheet;

•
the business risks inherent in our business and industry generally; and

•
the market performance of comparable public companies.

We engaged an independent valuation firm to perform certain valuation consulting services to provide an estimate of fair market value of our equity on an annual basis. The valuations were prepared using a weighted combination of income approach and market approach valuation methodologies. To derive a business enterprise value, our valuation methodologies utilize a discounted cash flow method using our forecasted operating results and a market comparable method and market transaction method based on comparable companies and market observations. Adjustments for the amount of debt and cash on our balance sheet and the liquidity preference of our equity and outstanding share awards were made to determine the valuation of our equity on a per share basis. Our board of directors used the fair value per share to grant awards during the subsequent period.

The analysis performed by the independent valuation firm is based upon data and assumptions provided to it by us and received from third-party sources, which the independent valuation firm relied upon as being accurate without independent verification. The results of the analyses performed by the independent valuation firm are among the factors our board of directors took into consideration in making its determination with respect to fair value of our equity, but are not determinative. Our board of directors is solely and ultimately responsible for determining the fair value of our equity in good faith.

The dates of our valuation reports, which were prepared on a periodic basis, were not contemporaneous with the grant dates of our share-based compensation awards. Therefore, we considered the amount of time between the valuation report date and the grant date to determine whether to use the latest valuation report for the purposes of determining the fair value of our common stock for financial reporting purposes. We assessed the fair value of such equity-based awards used for financial reporting purposes after considering the fair value reflected in the most recent valuation report and various updated assumptions based on facts and circumstances on the date of grant. The additional factors considered when determining any changes in fair value between the most recent valuation report and the grant dates included, when available, the prices paid in recent transactions involving our securities, as well as our operating and financial performance, changes in volatility and other key valuation assumptions, current industry conditions, and the market performance of comparable publicly traded companies. There were significant judgments and estimates inherent in these valuations, which included assumptions regarding our future operating performance and the time to complete an initial public offering or other liquidity event.

Long-Lived Assets

We review long-lived assets held and used by us—including property and equipment primarily consisting of capitalized internal use software, and definite-lived intangible assets—for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset or asset group may not be fully recoverable. If an impairment is determined to exist, we calculate any related impairment loss based on the difference between the fair value and carrying values of the respective assets or asset groups.

Internal use software development costs are capitalized during the application development stage of initial development or during development of new features and enhancements. The Company amortizes these costs using the straight-line method over the estimated useful life of the software, generally three years. Software costs not meeting the criteria for capitalization are expensed as incurred.

66

Goodwill

We assess goodwill for impairment annually or more frequently if events or changes in business circumstances indicate that it is more likely than not that the carrying value of a reporting unit exceeds its fair value. In performing these assessments, management relies on various factors, including operating results, business plans, economic projections, anticipated future cash flows and other market data. There are inherent uncertainties related to these factors and judgment is required in applying them to the goodwill impairment test. Our annual goodwill impairment test is performed on the last day of the year. We perform additional tests throughout the year when required.

For quantitative goodwill impairment tests, the fair value for each reporting unit is determined using a discounted cash flow method. Key assumptions for computing fair value include discount rate, long term growth rate, foreign currency exchange rate, and cash flow projections for each reporting unit. No goodwill impairment was recognized for 2021. See Note 2 to the audited consolidated financial statements included elsewhere in this Annual Report for more information on our goodwill impairment testing.

Income Taxes

In determining taxable income for our consolidated financial statements, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses.

In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage our underlying businesses.

ASC 740 requires a valuation allowance to reduce the deferred income tax assets recorded if, based on the weight of the evidence, it is more likely than not, that some or all of the deferred income tax assets will not be realized. The Company evaluates all of the positive and negative evidence annually to determine the need for a valuation allowance. After consideration of all of the evidence, the Company has determined that a valuation allowance of $2.4 million and $4.6 million is necessary at December 31, 2021 and 2020 (Successor), respectively.

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. We record the effect of a tax rate or law change on our deferred tax assets and liabilities in the period of enactment. Future tax rate or law changes could have a material effect on our results of operations, financial condition, or cash flows.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in the United States and elsewhere. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on estimates of whether, and the extent to which, additional taxes will be due in accordance with the authoritative guidance regarding the accounting for uncertain tax positions. These tax liabilities are reflected net of related tax loss carryforwards. We adjust these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. The Company classifies interest and penalties associated with its unrecognized tax benefits as a component of income tax expense (see Note 8 to the audited consolidated financial statements included elsewhere in this Annual Report).

Jumpstart Our Business Startups Act of 2012

Under the JOBS Act, an “emerging growth company” can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an “emerging growth company” to delay the adoption of new or revised accounting standards that have different transition dates for public and private companies until those standards would otherwise apply to private companies. We meet the definition of an “emerging growth company” and have elected to use this extended transition period. As a result of this election, our timeline to comply with these standards will in many cases be delayed as compared to other public companies that are not eligible to take advantage of this election or have not made this election. Therefore, our consolidated financial statements may not be comparable to those of companies that comply with the public company effective dates for these standards.

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