HireRight Holdings Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Stock-Based Compensation

Stock-Based Compensation

12 Months Ended

Dec. 31, 2022

Share-Based Payment Arrangement [Abstract]

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. The Omnibus Incentive Plan has a term of 10 years. Pursuant to the Omnibus Incentive Plan, the Company initially reserved an aggregate of 7.9 million shares of the Company’s common stock for issuance pursuant to awards to be granted thereunder, subject to an annual increase equal to the lesser of (a) 4% of the aggregate number of shares of common stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as is determined by the Company’s board of directors. If any award granted under the Omnibus Incentive Plan expires, terminates, or is canceled or forfeited without being settled, vested (in the case of restricted stock) or exercised, shares of the Company’s common stock subject to such award will again be made available for future grants. At December 31, 2022, the total number of shares authorized for issuance under the Omnibus Incentive Plan was 11.1 million shares and 5.5 million shares remain available for issuance.

Equity Plan Awards and Modification of Certain Equity Plan Awards

The exercise price per option award for each option award issued under the Equity Plan is equal to the fair market value of a Unit at the date of grant, as determined by the compensation committee pursuant to the Equity Plan. The outstanding Unit options terminate ten years after grant, or earlier as a result of termination of service.

None of the outstanding Unit options were vested at the time of grant. 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 on their investments in the Company (“Performance-Vesting Options”). On March 19, 2022, the compensation committee of the Company’s Board of Directors approved a modification of outstanding Performance-Vesting Options to vest based solely on continued service rather than MOIC attainment. Under the modified vesting terms, the amended Performance-Vesting Options vest quarterly starting March 31, 2022 and ending December 31, 2024 based solely on continued service. The outstanding stock options terminate 10 years after grant, or earlier as a result of termination of service. None of the outstanding stock options were vested at the time of grant.

The weighted average per share fair value of the Time-Vesting Options and Performance-Vesting Options was calculated using the Monte Carlo simulation. The volatility assumption used in the Monte Carlo simulation was based on an assessment of the historical and implied volatilities of guideline companies. These historical volatilities were based on daily observations of historical share prices, and implied volatilities were based on the share prices implied by forward-looking option prices. The expected term represented the time from the valuation date to an exit event and was estimated as 5 years. The risk-free rate was based on the yield curve of the US Treasury STRIPS with a 5-year maturity. The dividend yield was zero for the years ended December 31, 2021, and 2020.

Omnibus Incentive Plan Awards

The calculated value of each option award issued under the Omnibus Incentive Plan is estimated at the date of grant using the Black-Scholes option valuation model that utilizes the assumptions included in the table below. The Company recognizes stock-based expenses related to stock option awards on a straight-line basis over the requisite service period of the awards, which is generally the vesting term of four years. For stock options issued under the Omnibus Incentive Plan, the Company estimates the expected term using the simplified method as specified under Staff Accounting Bulletin Topic 14, which utilizes the midpoint between the stock options’ vesting date and the end of the contractual term. The Company does not plan to pay cash dividends in the foreseeable future; therefore, the Company used an expected dividend yield of zero. The risk-free interest rate is based on U.S. Treasury rates in effect at the time of grant with maturities equal to the grant’s expected term. The expected volatility is based on historical volatility of peer companies for a period consistent with the expected term. The fair value of common stock is based on the grant-date closing price of the Company’s common stock.

Stock-Based Compensation Expense

Total stock-based compensation expense recognized in the consolidated statements of operations was as follows:


	December 31,
	2022		2021		2020
	(in thousands)
Selling, general and administrative	$	10,739	$	4,528	$	3,218
Cost of services (exclusive of depreciation and amortization)	735		—		—
Total stock-based compensation expense	$	11,474	$	4,528	$	3,218

Stock Options under the Equity Plan

At December 31, 2022, outstanding stock options issued pursuant to the Equity Plan had vested with respect to 2,180,758 underlying shares and had no intrinsic value. The total fair value of the stock options that vested during the year ended December 31, 2022 was $4.3 million.

At December 31, 2021, outstanding Time-Vesting Options had vested with respect to 1,326,620 underlying shares and had an intrinsic value of $0.1 million, and no Performance-Vesting Options had vested. The total fair value of the stock options that vested during the year ended December 31, 2021 was $3.3 million.

At December 31, 2020, outstanding Time-Vesting Options had vested with respect to 923,038 underlying shares and had an intrinsic value of $1.9 million, and no Performance-Vesting Options had vested. The total fair value of the stock options that vested during the year ended December 31, 2019 was $3.2 million.

The following inputs and assumptions were used to value the stock options under the Equity Plan as of the grant dates for the years indicated:


	Year Ended December 31,
	2021		2020
Dividend yield	NA		NA
Expected term	5 Years		5 Years
Risk-free interest rate	0.5	%	2.1	%
Expected volatility	43.3	%	42.5	%

The following is a summary of stock option activity under the Equity Plan:


	Number of Options	Weighted Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Stock options
Options outstanding at December 31, 2021	3,760,319	$	16.32
Options granted	—	—
Options exercised	(50,291)	15.97
Options cancelled/forfeited	(81,510)	16.10
Options outstanding at December 31, 2022	3,628,518	$	16.33	6.01	$	—
Options vested and exercisable at December 31, 2022	2,180,758	$	16.24	5.87	$	—
Options vested and expected to vest	3,628,518	$	16.33	6.01	$	—

For stock options issued under the Equity Plan that were outstanding and unvested as of December 31, 2022, the Company expects to recognize future compensation expense of $5.2 million, over a weighted average remaining vesting period of 2.0 years. The number of outstanding stock options issued under the Equity Plan that were unvested as of December 31, 2022 was 1,447,760 at a weighted average grant date fair value per share of $3.68.

Stock Options under the Omnibus Incentive Plan

The following inputs and assumptions were used to value the stock options under the Omnibus Plan as of the grant dates for the years indicated:


	Year Ended December 31,
	2022	2021
Dividend yield	—	—
Expected term	5.5 - 6.11 Years	6.11 Years
Risk-free interest rate	1.74% - 4.35%	1.30	%
Expected volatility	28.67% - 30.83%	28.79	%

A summary of the Company’s stock option activity under the Omnibus Incentive Plan is as follows:


	Number of Options	Weighted Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Stock options
Options outstanding at December 31, 2021	1,889,313	$	19.00
Options granted	1,197,596	15.40
Options exercised	—	—
Options cancelled/forfeited	(45,836)	19.00
Options outstanding at December 31, 2022	3,041,073	$	17.58	9.15	$	129,187
Options vested and exercisable at December 31, 2022	461,236	$	19.00	8.81	$	—
Options vested and expected to vest	3,041,073	$	17.58	9.15	$	129,187

For options under the Omnibus Incentive Plan outstanding and unvested as of December 31, 2022, the Company expects to recognize future compensation expense of $13.6 million over a weighted average remaining vesting period of 2.4 years. The number of outstanding stock options issued under the Omnibus Incentive Plan that were unvested as of December 31, 2022 was 2,579,837 at a weighted average grant date fair value per share of $5.49. The total fair value of the options that vested during the year ended December 31, 2022 was $2.8 million.

Restricted Stock Units

Pursuant to the Omnibus Incentive Plan, the Company has granted RSUs. The Company accounts for RSUs granted to employees at fair value on the date of grant, which is measured at the closing price of our common stock on the New York Stock Exchange on the date of grant, and recognized as compensation expense in the statements of operations over the requisite service period. Outstanding RSUs generally vest over a period of one or four years from the date of grant. No RSUs were granted prior to the IPO.

A summary of RSU activity under the Omnibus Incentive Plan is as follows:


	Number of Shares	Weighted Average Grant Date Fair Value
Unvested as of December 31, 2021	710,735	$	18.97
Granted	1,974,670	12.03
Vested	(192,978)	18.83
Cancelled/forfeited	(78,896)	16.13
Unvested as of December 31, 2022	2,413,531	$	13.40

For RSUs outstanding and unvested as of December 31, 2022, the Company expects to recognize future compensation expense of approximately $15.1 million over a weighted average remaining vesting period of 2.8 years. The total fair value of RSUs that vested during the year ended December 31, 2022 was $5.4 million. The weighted average grant date fair value of the RSUs granted during the year ended December 31, 2021 is $18.97.

Employee Stock Purchase Plan

Offering periods under the Company’s Employee Stock Purchase Plan (the “ESPP”) begin on November 20 and May 20 of each year and end on the following May 19 and November 19, respectively. The first offering period began on May 20, 2022 and continued for six months until the purchase date on November 19, 2022. On each purchase date, accumulated participant contributions are applied to purchase shares at an amount equal to 85% of the fair market value of a share on (i) the purchase date or (ii) the offering date, whichever amount is lower; provided, that the purchase price will in no event be less than the par value of a share. The Company initially reserved 1.6

million shares of common stock for future issuance under the ESPP, subject to an annual increase on the first day of each calendar year, beginning on January 1, 2022 and ending on and including January 1, 2031. The annual increase is equal to the least of (i) 1% of the aggregate number of shares of common stock outstanding on the final day of the immediately preceding calendar year, (ii) 1.6 million shares of common stock, and (iii) such smaller number of shares as determined by the board of directors. At December 31, 2022, the total number of shares authorized for issuance under the ESPP was 2.4 million shares and 2.3 million shares remain available for issuance.

The Company recognized $0.3 million of stock-based compensation expense related to the ESPP during the year ended December 31, 2022. As of December 31, 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 0.4 years.