hrt-20220630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2022


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

For the transition period from ________ to ________

Commission file number 001-40982

HireRight Holdings Corporation

(Exact name of registrant as specified in its charter)


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


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

(615) 320-9800

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.001 per share

HRT

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No

The registrant had outstanding 79,432,321 shares of common stock as of July 28, 2022.

EXPLANATORY NOTE

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

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)


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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

Item 6. Exhibits

Signatures

Part I - FINANCIAL INFORMATION

Item 1. Financial Statements

HireRight Holdings Corporation

Condensed Consolidated Balance Sheets (Unaudited)


	June 30, 2022		December 31, 2021
	(in thousands, except share and per share data)
Assets
Current assets
Cash and cash equivalents	$	118,440	$	111,032
Restricted cash	1,101		5,182
Accounts receivable, net of allowance for doubtful accounts of $5,277 and $4,284 at June 30, 2022 and December 31, 2021, respectively	176,371		142,473
Prepaid expenses and other current assets	16,660		18,583
Total current assets	312,572		277,270
Property and equipment, net	10,399		11,127
Right-of-use assets, net	9,794		—
Intangible assets, net	358,913		389,483
Goodwill	810,040		819,538
Cloud computing software, net	24,142		8,133
Other non-current assets	18,829		18,211
Total assets	$	1,544,689	$	1,523,762
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	7,117	$	13,688
Accrued expenses and other current liabilities	97,519		75,294
Accrued salaries and payroll	27,476		29,280
Derivative instruments, short-term	—		16,662
Debt, current portion	8,350		8,350
Total current liabilities	140,462		143,274
Debt, long-term portion	685,931		688,683
Derivative instruments, long-term	—		11,444
Tax receivable agreement liability	210,639		210,639
Deferred taxes	14,415		14,765
Operating lease liabilities, long-term	12,572		—
Other non-current liabilities	2,197		9,240
Total liabilities	1,066,216		1,078,045
Commitments and contingent liabilities (Note 12)
Preferred stock, $0.001 par value, authorized 100,000,000 shares; none issued and outstanding as of June 30, 2022 and December 31, 2021	—		—
Common stock, $0.001 par value, authorized 1,000,000,000 shares; 79,432,321 and 79,392,937 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively	79		79
Additional paid-in capital	800,566		793,382
Accumulated deficit	(324,354)		(360,364)
Accumulated other comprehensive income	2,182		12,620
Total stockholders’ equity	478,473		445,717
Total liabilities and stockholders’ equity	$	1,544,689	$	1,523,762

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

HireRight Holdings Corporation

Condensed Consolidated Statements of Operations (Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(in thousands, except share and per share data)
Revenues	$	222,292	$	176,984	$	421,003	$	326,541

Expenses
Cost of services (exclusive of depreciation and amortization below)	119,990		98,317		232,393		184,504
Selling, general and administrative	54,387		43,215		102,654		82,609
Depreciation and amortization	18,049		18,239		36,110		36,482
Total expenses	192,426		159,771		371,157		303,595
Operating income	29,866		17,213		49,846		22,946

Other expenses
Interest expense	4,957		18,207		12,514		36,156
Other expense, net	33		912		74		103
Total other expenses, net	4,990		19,119		12,588		36,259
Income (loss) before income taxes	24,876		(1,906)		37,258		(13,313)
Income tax expense	430		1,733		1,248		2,305
Net income (loss)	$	24,446	$	(3,639)	$	36,010	$	(15,618)

Net income (loss) per share:
Basic	$	0.31	$	(0.06)	$	0.45	$	(0.27)
Diluted	$	0.31	$	(0.06)	$	0.45	$	(0.27)
Weighted average shares outstanding:
Basic	79,405,872		57,168,291		79,399,440		57,168,291
Diluted	79,478,094		57,168,291		79,443,173		57,168,291

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

HireRight Holdings Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(in thousands)
Net income (loss)	$	24,446	$	(3,639)	$	36,010	$	(15,618)

Other comprehensive income (loss), net of tax
Unrealized gain (loss) on derivatives qualified for hedge accounting:
Unrealized gain (loss) on interest rate swaps	—		(609)		7,981		1,964
Reclassification adjustments included in earnings (1)	(4,082)		4,904		(4,584)		9,715
Total unrealized gain (loss)	(4,082)		4,295		3,397		11,679
Currency translation adjustment, net of tax benefit (expense) of ($83) and $3 for the three months ended June 30, 2022 and 2021, respectively, and ($146) and $15 for the six months ended June 30, 2022, and 2021, respectively	(10,042)		1,283		(13,835)		1,262

Other comprehensive income (loss)	(14,124)		5,578		(10,438)		12,941
Comprehensive income (loss)	$	10,322	$	1,939	$	25,572	$	(2,677)

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

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

HireRight Holdings Corporation

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)


	Three Months Ended June 30, 2022
	Common Stock
	Shares	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
	(in thousands, except share data)
Balances at March 31, 2022	79,392,937	$	79	$	796,176	$	(348,800)	$	16,306	$	463,761
Issuance of common stock upon vesting of restricted stock units	39,384	—		—		—		—		—
Net income	—	—		—		24,446		—		24,446
Stock-based compensation	—	—		4,390		—		—		4,390
Other comprehensive loss	—	—		—		—		(14,124)		(14,124)
Balances at June 30, 2022	79,432,321	$	79	$	800,566	$	(324,354)	$	2,182	$	478,473


	Three Months Ended June 30, 2021
	Class A Member Units
	Units	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	(in thousands, except unit data)
Balances at March 31, 2021	57,168,291	$	590,711	$	16,183	$	(351,040)	$	(2,760)	$	253,094
Net loss	—	—		—		(3,639)		—		(3,639)
Stock-based compensation	—	—		829		—		—		829
Other comprehensive income	—	—		—		—		5,578		5,578
Balances at June 30, 2021	57,168,291	$	590,711	$	17,012	$	(354,679)	$	2,818	$	255,862

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

HireRight Holdings Corporation

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)


	Six Months Ended June 30, 2022
	Common Stock
	Shares	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
	(in thousands, except share data)
Balances at December 31, 2021	79,392,937	$	79	$	793,382	$	(360,364)	$	12,620	$	445,717
Issuance of common stock upon vesting of restricted stock units	39,384	—		—		—		—		—
Net income	—	—		—		36,010		—		36,010
Stock-based compensation	—	—		7,184		—		—		7,184
Other comprehensive loss	—	—		—		—		(10,438)		(10,438)
Balances at June 30, 2022	79,432,321	$	79	$	800,566	$	(324,354)	$	2,182	$	478,473


	Six Months Ended June 30, 2021
	Class A Member Units
	Units	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	(in thousands, except unit data)
Balances at December 31, 2020	57,168,291	$	590,711	$	15,360	$	(339,061)	$	(10,123)	$	256,887
Net loss	—	—		—		(15,618)		—		(15,618)
Stock-based compensation	—	—		1,652		—		—		1,652
Other comprehensive income	—	—		—		—		12,941		12,941
Balances at June 30, 2021	57,168,291	$	590,711	$	17,012	$	(354,679)	$	2,818	$	255,862

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

HireRight Holdings Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Six Months Ended June 30,
	2022		2021
	(in thousands)
Cash flows from operating activities
Net income (loss)	$	36,010	$	(15,618)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	36,110		36,482
Deferred income taxes	243		1,765
Amortization of debt issuance costs	1,759		2,082
Amortization of contract assets	2,166		1,809
Amortization of right-of-use assets	1,355		—
Amortization of unrealized gains on terminated interest rate swap agreements	(6,263)		—
Amortization of cloud computing software costs	466		—
Stock-based compensation	7,305		1,652
Other non-cash charges, net	1,473		633
Changes in operating assets and liabilities:
Accounts receivable	(34,969)		(24,035)
Prepaid expenses and other current assets	1,924		(644)
Cloud computing software	(16,475)		—
Other non-current assets	(2,732)		(3,162)
Accounts payable	(10,154)		(11,839)
Accrued expenses and other current liabilities	23,158		10,765
Accrued salaries and payroll	(2,136)		(391)
Operating lease liabilities, net	(2,604)		—
Other non-current liabilities	(770)		154
Net cash provided by (used in) operating activities	35,866		(347)
Cash flows from investing activities
Purchases of property and equipment	(2,763)		(3,753)
Capitalized software development	(5,417)		(3,005)

Net cash used in investing activities	(8,180)		(6,758)
Cash flows from financing activities
Repayments of debt	(4,175)		(4,175)
Borrowings on line of credit	—		20,000
Repayments on line of credit	—		(20,000)

Payments for termination of interest rate swap agreements	(18,445)		—
Payment of issuance costs - revolving credit facility	(342)		—
Net cash used in financing activities	(22,962)		(4,175)
Net increase (decrease) in cash, cash equivalents and restricted cash	4,724		(11,280)
Effect of exchange rates	(1,397)		(727)
Cash, cash equivalents and restricted cash
Beginning of period	116,214		24,059
End of period	$	119,541	$	12,052
Cash paid for
Interest	$	16,945	$	33,928
Income taxes paid	1,529		10


Supplemental schedule of non-cash investing and financing activities
Unpaid property and equipment and capitalized software purchases	$	1,939	$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization, Basis of Presentation and Consolidation, and Significant Accounting Policies

Organization

Description of Business

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

Corporate Conversion and Stock Split

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

On October 18, 2021, HireRight Holdings Corporation effected a one-for-15.969236 reverse stock split (“Stock Split”). All shares of the Company’s common stock, stock-based instruments, and per-share data included in the condensed consolidated financial statements give retroactive effect to the Stock Split.

Initial Public Offering

On November 2, 2021, the Company completed its initial public offering (“IPO”), in which the Company issued 22,222,222 shares of its common stock. The shares began trading on the New York Stock Exchange on October 29, 2021 under the symbol “HRT.” The shares were sold at an IPO price of $19.00 per share for net proceeds of $393.5 million, after deducting underwriting discounts and commissions of $23.2 million and other offering costs payable by the Company of $5.5 million. On November 30, 2021, the Company issued an additional 2,424 shares pursuant to the partial exercise of the underwriters’ option to purchase additional shares for net proceeds of an immaterial amount.

Income Tax Receivable Agreement

In connection with the Company’s IPO, the Company entered into an income tax receivable agreement (“TRA”), which provides for the payment by the Company over a period of approximately 12 years to pre-IPO equityholders or their permitted transferees of 85% of the benefits, if any, that the Company and its subsidiaries realize, or are deemed to realize (calculated using certain assumptions) in U.S. federal, state, and local income tax savings as a result of the utilization (or deemed utilization) of certain existing tax attributes. As of June 30, 2022 and December 31, 2021, the Company recorded a total liability of $210.6 million in connection with the projected obligations under the TRA on its condensed consolidated balance sheets.

Basis of Presentation and Principles of Consolidation

The unaudited condensed consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiaries. The unaudited condensed consolidated financial statements are presented in accordance with generally accepted accounting principles in the United States of America ("GAAP") and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting.

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 21, 2022 (“Annual Report”). The December 31, 2021 condensed consolidated balance sheet data included herein was derived from audited financial statements but does not include all disclosures required by GAAP.

In the opinion of management, all adjustments, consisting of normal recurring items, necessary for the fair statement of the condensed consolidated financial statements have been included. All intercompany balances and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Note 1 of the notes to the audited consolidated financial statements for the year ended December 31, 2021, included in the Annual Report. Certain reclassifications have been made to prior year presentation to conform to current year presentation.

Significant Accounting Policies

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

Implementation Costs Incurred in Cloud Computing Arrangements

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

Use of Estimates

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

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

2. Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements Adopted

Accounting Pronouncements Adopted in 2022

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

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

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

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

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

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

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

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Recently Issued Accounting Pronouncements Not Yet Adopted

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

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

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” which delayed the effective date for this guidance until the fiscal year beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2016-13 on the condensed consolidated financial statements.

3. Prepaid Expenses and Other Current Assets, and Other Non-Current Assets

The components of prepaid expenses and other current assets were as follows:


	June 30, 2022		December 31, 2021
	(in thousands)
Prepaid software licenses, maintenance, and insurance	$	10,291	$	11,668
Other prepaid expenses and current assets	6,369		6,915
Total prepaid expenses and other current assets	$	16,660	$	18,583

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

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


	June 30, 2022		December 31, 2021
	(in thousands)
Contract implementation costs	$	17,673	$	17,242
Other non-current assets	1,156		969
Total other non-current assets	$	18,829	$	18,211

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

4. Right-of-Use Assets and Lease Liabilities

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

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

The Company’s operating leases were as follows:


	June 30, 2022
	(in thousands)
Right-of-use assets, net	$	9,794

Current operating lease liabilities (1)	$	5,358
Operating lease liabilities, long-term	12,572
Total operating lease liabilities	$	17,930

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

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

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)


	Three Months Ended June 30, 2022		Six Months Ended June 30, 2022
	(in thousands)
Operating lease cost	$	884	$	1,783
Short-term lease cost	165		333
Variable lease cost	12		24
Total lease cost	$	1,061	$	2,140

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

Supplemental cash flow information related to leases was as follows:


	Six Months Ended June 30, 2022
	(in thousands)
Cash paid for amounts included in measurement of operating lease liabilities	$	2,697
ROU assets obtained in exchange for operating lease liabilities	$	11,150

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


	June 30, 2022
Weighted-average remaining lease term (in years)	4.34
Weighted-average discount rate	4.6	%

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


	June 30, 2022
	(in thousands)
2022 (excluding the six months ended June 30, 2022)	$	2,999
2023	6,091
2024	3,758
2025	2,274
2026	1,388
Thereafter	3,392
Total lease payments	19,902
Less amount representing interest	(1,972)
Total present value of lease liabilities	$	17,930

Cease-use Liabilities

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

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Cease-use costs are included in other non-current liabilities and accrued expenses and other current liabilities on the condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021. The following table summarizes the activity for the liability for cease-use costs for the periods presented:


	Cease-use Liability
	(in thousands)
Balance at December 31, 2021	$	11,588
Cease-use costs	160
Reclassified as a reduction to the beginning ROU asset upon adoption of ASC 842	(9,001)
Accretion of liability	(101)
Payments	(653)
Foreign currency translation	(214)
Balance at June 30, 2022	$	1,779

5. Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities were as follows:


	June 30, 2022		December 31, 2021
	(in thousands)
Accrued data costs	$	51,586	$	34,632
Litigation settlements (Note 13)	586		3,310
Other (1)	45,347		37,352
Total accrued expenses and other current liabilities	$	97,519	$	75,294

________________

(1)During the six months ended June 30, 2022, the Company paid $3.9 million, which was previously held in escrow as of December 31, 2021, as unsecured creditors’ funds pursuant to plans of liquidation and restructurings of predecessor entities.

6. Accrued Salaries and Payroll

The components of accrued salaries and payroll were as follows:


	June 30, 2022		December 31, 2021
	(in thousands)
Wages, benefits and taxes	$	16,605	$	12,017
Accrued bonus	10,871		17,263
Total accrued salaries and payroll	$	27,476	$	29,280

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

7. Debt

The components of debt were as follows:


	June 30, 2022		December 31, 2021
	(in thousands)
Amended First Lien Term Loan Facility	$	703,688	$	707,863
Amended Revolving Credit Facility	—		—
Total debt	703,688		707,863
Less: Original issue discount	(1,731)		(1,993)
Less: Unamortized debt issuance costs	(7,676)		(8,837)
Less: Current portion of long-term debt	(8,350)		(8,350)
Long-term debt, less current portion	$	685,931	$	688,683

On July 12, 2018, the Company entered into the following credit arrangements:

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

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

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

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

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

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Amended First Lien Facilities

The Company is required to make scheduled quarterly payments equal to 0.25% of the aggregate initial outstanding principal amount of the Amended First Lien Term Loan Facility, or approximately $2.1 million per quarter, with the remaining balance payable at maturity. The Company may make voluntary prepayments on the Amended First Lien Term Loan Facility at any time prior to maturity at par.

The Company is required to make prepayments on the Amended First Lien Term Loan Facility with the net cash proceeds of certain asset sales, debt incurrences, casualty events and sale-leaseback transactions, subject to certain specified limitations, thresholds and reinvestment rights. Additionally, the Company is required to make annual prepayments on the outstanding Amended First Lien Term Loan Facility with a percentage (subject to leverage-based reductions) of the Company’s excess cash flow, as defined therein, if the excess cash flow exceeds a certain specified threshold. For the three and six months ended June 30, 2022 and 2021, the Company was not required to make a prepayment under the Amended First Lien Term Loan Facility based on the Company’s excess cash flow.

The Amended First Lien Term Loan Facility has an interest rate calculated as, at the Company’s option, either (a) LIBOR determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs (“LIBOR Reference Rate”) with a floor of 0.00% or (b) a base rate determined by reference to the highest of (i) the federal funds effective rate plus 0.50% per annum, (ii) the rate the Administrative Agent announces from time to time as its prime lending rate in New York City, and (iii) one-month adjusted LIBOR plus 1.00% per annum (“ABR”), in each case, plus the applicable margin of 3.75% for LIBOR loans and 2.75% for ABR loans, and is payable on each interest payment date, at least quarterly, in arrears. The applicable margin for borrowings under the Revolving Credit Facility is 3.00% for SOFR loans and 2.00% for ABR loans, in each case, subject to adjustment pursuant to a leverage-based pricing grid. As of June 30, 2022, the Amended First Lien Term Loan Facility accrued interest at one-month LIBOR plus 3.75%, and the Amended Revolving Credit Facility accrued interest at one-month SOFR plus 2.50% based upon the current pricing grid.

Unlike the Amended Revolving Credit Facility, the interest rates for the Amended First Lien Term Loan Facility are calculated using LIBOR, which is scheduled to become unavailable in June 2023. The credit agreement underlying the Amended First Lien Term Loan Facility contemplates that, if the administrative agent determines that LIBOR is unavailable or is replaced by a new benchmark interest rate to replace LIBOR for syndicated loans, then, the administrative agent and the Borrower may amend the Amended First Lien Term Loan Facility to replace LIBOR with an alternate benchmark rate (“LIBOR Successor Rate”) unless lenders holding more than 50% in value of the loans or commitments under the credit agreement do not accept such amendment. If no LIBOR Successor Rate has been determined, the obligation of lenders to make or maintain LIBOR loans will be suspended (to the extent of the affected LIBOR rate loans or interest periods), and the LIBOR component will no longer be utilized in determining an alternative benchmark rate. Under such circumstances, the Borrower can revoke any pending request for a new borrowing, conversion to, or continuation of LIBOR loans or such loans will be deemed to be ABR loans of the same amount. The Borrower also has the ability to convert all or a portion equal to at least $2.5 million of LIBOR loans to ABR loans under the credit agreement.

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

As of June 30, 2022, the Company had $143.7 million in available borrowing under the Amended Revolving Credit Facility, after utilizing $1.3 million for letters of credit. The Company is required to pay a quarterly fee of 0.50% on unutilized commitments under the Amended Revolving Credit Facility, subject to adjustment pursuant to a leverage-based pricing grid. As of June 30, 2022 and December 31, 2021, the quarterly fee on unutilized commitments under the Amended Revolving Credit Facility was 0.38% and 0.50%, respectively.

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Debt Covenants

The Amended First Lien Facilities contain certain covenants and restrictions that limit the Company’s ability to, among other things: (a) incur additional debt or issue certain preferred equity interests; (b) create or permit the existence of certain liens; (c) make certain loans or investments (including acquisitions); (d) pay dividends on or make distributions in respect of the capital stock or make other restricted payments; (e) consolidate, merge, sell, or otherwise dispose of all or substantially all of the Company’s assets; (f) sell assets; (g) enter into certain transactions with affiliates; (h) enter into sale-leaseback transactions; (i) restrict dividends from the Company’s subsidiaries or restrict liens; (j) change the Company’s fiscal year; and (k) modify the terms of certain debt agreements. In addition, the Amended First Lien Facilities also provide for customary events of default. The Company was in compliance with the covenants under the Amended First Lien Facilities for the three and six months ended June 30, 2022.

The Company is also subject to a springing financial maintenance covenant under the Amended Revolving Credit Facility, which requires the Company to not exceed a specified first lien leverage ratio at the end of each fiscal quarter if the outstanding loans and letters of credit under the Amended Revolving Credit Facility, subject to certain exceptions, exceed 35% of the total commitments under the Amended Revolving Credit Facility at the end of such fiscal quarter. The Company was not subject to this covenant as of June 30, 2022 and December 31, 2021, as outstanding loans and letters of credit under the Amended Revolving Credit Facility did not exceed 35% of the total commitments under the facility.

Other

Amortization of debt discount and debt issuance costs related to the Amended First Lien Term Loan Facility are included in interest expense in the condensed consolidated statements of operations and were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(in thousands)
Debt discount amortization	$	132	$	143	$	262	$	285
Debt issuance costs amortization	584		651		1,162		1,297
Total debt discount and issuance cost amortization	$	716	$	794	$	1,424	$	1,582

In addition, interest expense includes the amortization of debt issuance costs for the Amended Revolving Credit Facility of $0.2 million and $0.1 million, for the three months ended June 30, 2022 and 2021, respectively, and $0.3 million and $0.2 million, for the six months ended June 30, 2022 and 2021, respectively,. Unamortized debt issuance costs for the Amended Revolving Credit Facility are recorded in other non-current assets on the Company’s condensed consolidated balance sheets. Interest expense for the three and six months ended June 30, 2021 includes $4.1 million and $8.2 million, respectively, related to a second lien senior secured term loan facility which was repaid on November 3, 2021 using proceeds from the IPO.

The weighted average interest rate on outstanding borrowings as of June 30, 2022 and December 31, 2021 was 4.2% and 4.5%, respectively.

8. Fair Value Measurements

The accounting standard for fair value measurements defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and requires disclosures about fair value measurements. The standard is applicable whenever assets and liabilities are measured at fair value.

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:


Level 1			Quoted prices in active markets for identical assets and liabilities;

Level 2			Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in inactive markets, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data; or

Level 3			Amounts derived from valuation models in which unobservable inputs reflect the reporting entity’s own assumptions about the assumptions of market participants that would be used in pricing the asset or liability, such as discounted cash flow models or valuations.

Recurring Fair Value Measurements

The carrying amounts of the Company’s cash, cash equivalents, and restricted cash approximate their fair value due to the short-term maturity of these instruments.

The Company’s outstanding debt instruments are recorded at their carrying values in the condensed consolidated balance sheets, which may differ from their respective fair values. The estimated fair value of the Company’s debt, which is Level 2 of the fair value hierarchy, is based on quoted prices for similar instruments in active markets or identical instruments in markets that are not active.

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

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


	June 30, 2022				December 31, 2021
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Amended First Lien Term Loan Facility	$	701,957	$	675,203	$	705,870	$	704,550
Amended Revolving Credit Facility	—		—		—		—
Total	$	701,957	$	675,203	$	705,870	$	704,550

9. Derivative Instruments

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

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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

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

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(in thousands)
Reclassification of the effective portion of the gain on the Interest Rate Swap Agreements into interest expense	$	—	$	4,904	$	1,679	$	9,715
Reclassification of unrealized gains related to terminated Interest Rate Swap Agreements into interest expense	(4,082)		—		(6,263)		—
Total reclassification adjustments included in earnings	$	(4,082)	$	4,904	$	(4,584)	$	9,715

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


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

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

The results of derivative activities are recorded in cash flows from operating activities on the condensed consolidated statements of cash flows.

10. Accumulated Other Comprehensive Income (Loss)

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

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


	Derivative Instruments		Currency Translation Adjustment		Total
	(in thousands)
Balance at December 31, 2021	$	11,823	$	797	$	12,620
Other comprehensive income (loss)	3,397		(13,835)		(10,438)
Balance at June 30, 2022	$	15,220	$	(13,038)	$	2,182

The Company terminated the Interest Rate Swap Agreements effective February 18, 2022. As of June 30, 2022, $11.2 million of the remaining accumulated other comprehensive income related to hedge accounting is expected to be reclassified into earnings over the next 12 months.

11. Segments and Geographic Information

The Company operates in one reportable segment.

Revenues are attributed to each geographic region based on the location of the HireRight entity that has contracted for the services that result in the revenues. The following table summarizes the Company’s revenues by region:


	Three Months Ended June 30,								Six Months Ended June 30,
	2022				2021				2022				2021
	(in thousands, except percent)
Revenues
United States	$	205,359	92.4	%	$	163,520	92.4	%	$	388,736	92.3	%	$	302,393	92.6	%
International	16,933		7.6	%	13,464		7.6	%	32,267		7.7	%	24,148		7.4	%
Total revenues	$	222,292	100.0	%	$	176,984	100.0	%	$	421,003	100.0	%	$	326,541	100.0	%

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table summarizes the Company’s long-lived assets, which consist of property and equipment, net, and operating lease ROU assets, net, by geographic region:


	June 30, 2022		December 31, 2021
	(in thousands)
Long-lived assets:
United States	$	13,184	$	7,154
International	7,009		3,973
Total long-lived assets	$	20,193	$	11,127

12. Commitments and Contingent Liabilities

Indemnification

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

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

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

As of December 31, 2021, the Company included $1.4 million in accrued expenses and other current liabilities in the condensed consolidated balance sheets as a result of the Company agreeing to indemnify a customer from a negligent hiring claim. While the Company did not believe it had legal responsibility, the Company chose to indemnify the customer against the negligent hiring claim in the interests of customer relations and to limit risk. On January 11, 2022, the Company paid the $1.4 million to the customer. The Company is not aware of any other pending demands to provide indemnity or defense under such agreements that would reasonably be expected to have a material adverse effect on its condensed consolidated financial statements.

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

13. Legal Proceedings

The Company is subject to claims, investigations, audits, and enforcement proceedings by private plaintiffs, third parties the Company does business with, and governmental and regulatory authorities charged with overseeing the enforcement of laws and regulations that govern the Company’s business. In the U.S., most of these matters arise under the federal Fair Credit Reporting Act and various state and local laws focused on privacy and the conduct and content of background reports. These claims are typically brought by individuals alleging process errors, inclusion of erroneous or impermissible information, or failure to include appropriate information in background reports prepared about them by the Company. Proceedings related to the Company’s U.S. operations may also be brought under the same laws by the Consumer Financial Protection Bureau or Federal Trade Commission, or by state authorities. Claims or proceedings may also arise under the European Union (“E.U.”) and U.K. General Data Protection Regulations and other laws around the world addressing privacy and the use of background information such as criminal and credit histories, and may be brought by individuals about whom the Company has prepared background reports or by the Data Protection Authorities of E.U. member states and other governmental authorities. In addition, customers of the Company may seek indemnity for negligent hiring claims that result from the Company’s alleged failure to identify or report adverse background information about an individual.

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

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

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

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

Based upon the foregoing, the Company accrued $12.1 million pursuant to the settlement agreement and potential separate individual settlements with plaintiffs who did not subscribe to the settlement agreement. On November 15, 2021, the Company paid $11.2 million of the legal settlement accrual, and on March 31, 2022, paid the remaining balance of $0.3 million related to the settlement agreement. No amounts related to the settlement agreement are accrued at June 30, 2022.

While Old HireRight’s insurer has denied coverage, the Company believes it has valid claims against the carrier and intends to pursue them. Any insurance recovery would defray the cost of the settlement to HireRight LLC, but at this time the Company is not able to assess the likelihood or amount of any potential insurance recovery.

14. Revenues

Revenues consist of service revenue and surcharge revenue. Service revenue consists of fees charged to customers for services provided by the Company. Surcharge revenue consists of fees charged to customers for obtaining data from federal, state and local jurisdictions, and certain commercial data providers required to fulfill the Company’s performance obligations. These fees are generally charged to the Company’s customers at cost. Revenue

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

is recognized when the Company satisfies its obligation to complete the service and delivers the screening report to the customer.

Disaggregated revenues were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(in thousands)
Revenues
Service revenues	$	158,425	$	131,724	$	299,928	$	243,292
Surcharge revenues	63,867		45,260		121,075		83,249
Total revenues	$	222,292	$	176,984	$	421,003	$	326,541

Contract Implementation Costs

Contract implementation costs represent incremental set up costs to fulfill contracts with customers, including, for example, salaries and wages incurred to onboard customers onto the Company’s platform to enable the customers to request and access completed background screening reports. Contract implementation costs and the related amortization are recorded in other non-current assets on the Company’s condensed consolidated balance sheets and in cost of services (exclusive of depreciation and amortization) in the Company’s condensed consolidated statements of operations, respectively. Amortization of contract implementation costs included in cost of services (exclusive of depreciation and amortization) was $1.1 million and $2.2 million for the three and six months ended June 30, 2022, respectively, and $0.9 million and $1.8 million for the three and six months ended June 30, 2021, respectively. See Note 3 — Prepaid Expenses and Other Current Assets, and Other Non-Current Assets for contract implementation costs included in the Company’s condensed consolidated balance sheets.

15. Income Taxes

Income tax expense and effective tax rates were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
	(in thousands, except effective tax rate)
Income (loss) before income taxes	$	24,876		$	(1,906)		$	37,258		$	(13,313)
Income tax expense	430			1,733			1,248			2,305
Effective tax rate	1.7		%	90.9		%	3.3		%	17.3		%

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

Income tax expense for the three months ended June 30, 2022 and 2021 was $0.4 million and $1.7 million, respectively. The effective tax rate for the three months ended June 30, 2022 was 1.7% compared to 90.9% for the

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Income tax expense for the six months ended June 30, 2022 and 2021 was $1.2 million and $2.3 million, respectively. The effective tax rate for the six months ended June 30, 2022 was 3.3% compared to 17.3% for the six months ended June 30, 2021. The effective tax rate for the six months ended June 30, 2022 differs from the Federal statutory rate of 21% primarily due to valuation allowances, state taxes, and U.S. tax on foreign operations. The effective tax rate for the six months ended June 30, 2021 differs from the Federal statutory rate of 21% primarily due to the revaluation of deferred taxes in the United Kingdom, valuation allowances and state taxes.

Realization of the Company’s deferred tax assets is dependent upon future earnings, if any. The timing and amount of future earnings are uncertain. Because of the Company’s lack of U.S. earnings history, the Company’s net U.S. deferred tax assets have been fully offset by a valuation allowance, excluding a portion of its deferred tax liabilities for tax deductible goodwill. As of June 30, 2022, the Company intends to continue maintaining a valuation allowance on its deferred tax assets until there is sufficient positive evidence to support the reversal of all or some portion of the valuation allowance. A reduction in the valuation allowance would result in a material decrease to income tax expense in the period the release is recorded. Although the exact timing and reversal amount are unknown at this time, the Company may conclude that a significant portion of the valuation allowance be released contingent upon the earnings level it achieves in 2022 as well as its projected income levels in future periods.

16. Stock-Based Compensation

Equity Incentive Plans

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

On October 18, 2021, the Company’s stockholders adopted the Company’s 2021 Omnibus Incentive Plan (“Omnibus Incentive Plan”), which became effective on October 28, 2021. The Omnibus Incentive Plan provides for the grant of awards of non-qualified stock options, incentive (qualified) stock options, stock appreciation rights, restricted stock awards, restricted stock units (“RSU”), other stock-based awards, other cash-based awards or any combination of the foregoing to eligible employees, consultants, directors, and officers. At June 30, 2022, 6,360,173 shares were available for issuance under the Omnibus Incentive Plan.

Equity Plan Awards (Pre-IPO)

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

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Performance-Vesting Options vest quarterly starting March 31, 2022 and ending December 31, 2024 based solely on continued service.

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(in thousands)
Selling, general and administrative	$	4,367	$	829	$	6,994	$	1,652
Cost of services (exclusive of depreciation and amortization)	144		—		311		—
Total stock-based compensation expense	$	4,511	$	829	$	7,305	$	1,652

Stock Options

For Time-Vesting Options and Performance-Vesting Options outstanding and unvested as of June 30, 2022, the Company expects to recognize future compensation expense of $6.8 million over a weighted average remaining vesting period of 2.40 years.

The Company granted 1,015,303 options during the six months ended June 30, 2022 under the Omnibus Incentive Plan, with a weighted-average grant date fair value of $5.06 calculated using the Black-Scholes option valuation model. For options under the Omnibus Incentive Plan outstanding and unvested as of June 30, 2022, the Company expects to recognize future compensation expense of $13.6 million over a weighted average remaining vesting period of 2.98 years.

Restricted Stock Units

The Company granted 813,287 RSUs with a weighted-average grant date fair value of $15.47 per share during the six months ended June 30, 2022 under the Omnibus Incentive Plan. For RSUs outstanding and unvested as of June 30, 2022, the Company expects to recognize future compensation expense of $21.6 million over a weighted average remaining vesting period of 2.55 years.

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

For the three and six months ended June 30, 2022, compensation expense associated with these awards totaled $0.1 million.

Employee Stock Purchase Plan

The first offering period for the Company’s Employee Stock Purchase Plan (“ESPP”) began on May 20, 2022 and will continue for six months until the purchase date on November 18, 2022. Thereafter, offerings will begin on November 20 and May 20 and will end on the following May 19 and November 19, respectively. Such shares may be purchased at an amount equal to 85% of the fair market value of a share on (i) the purchase date or (ii) the

HireRight Holdings Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

offering date, whichever amount is lower; provided, that the purchase price will in no event be less than the par value of a share.

The Company recognized $0.1 million of stock-based compensation expense related to the ESPP during the three and six months ended June 30, 2022. As of June 30, 2022, total unrecognized compensation expense related to the ESPP was $0.2 million, which will be recognized on a straight-line basis over a weighted-average remaining period of 0.39 years.

17. Earnings Per Share

Basic net income (loss) per share (“EPS”) is computed by dividing net income (loss) by the weighted-average number of outstanding shares during the period.

The weighted average outstanding shares may include potentially dilutive options. Diluted net income (loss) per share includes the effects of potentially dilutive awards. For the three and six months ended June 30, 2022, there were 7,266,364, and 6,883,842 potentially dilutive awards, respectively, which were excluded from the calculations of diluted EPS because including them would have had an anti-dilutive effect. For the three and six months ended June 30, 2021, there were