The following discussion and analysis of our financial condition and results of operations is provided as a supplement to and should be read in conjunction with our unaudited condensed consolidated financial statements and related notes for the three and nine months endedSeptember 30, 2021 . This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results described in or implied by the forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the sections titled "Risk Factors" included in the IPO Prospectus and "Cautionary Note Regarding Forward-Looking Statements" included elsewhere in this report. BASIS OF PRESENTATION As used in this report, unless the context otherwise requires, references to "Sterling," "we," "us," "our," the "Company," and similar references refer toSterling Check Corp. Numerical figures included in this 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. In addition, we round certain percentages presented in this report to the nearest whole number. As a result, figures expressed as percentages in the text may not total 100% or, when aggregated, may not be the arithmetic aggregation of the percentages that precede them. OnSeptember 10, 2021 , our board of directors authorized a stock split and we filed an amendment to our certificate of incorporation to effectuate a 1,198-for-1 split of our outstanding common stock. The stock split was effectuated such that (i) each then outstanding share of common stock was increased to 1,198; (ii) the number of shares of common stock into which then-outstanding options to purchase common stock is exercisable was proportionately increased; and (iii) the exercise price of each then-outstanding option to purchase common stock was proportionately reduced. The accompanying discussion gives retroactive effect as though the 1,198-for-1 stock split of our common stock occurred for all periods presented. Overview We are a leading global provider of technology-enabled background and identity verification services. We provide the foundation of trust and safety that our clients need to create great environments for their most essential resource-people. We offer a comprehensive hiring and risk management solution that begins with identity verification, followed by criminal background screening, credential verification, drug and health screening, processing of employee documentation required for onboarding and ongoing risk monitoring. Our services are delivered through our purpose-built, proprietary, cloud-based technology platform that empowers organizations with real-time and data-driven insights to conduct and manage their employment screening programs efficiently and effectively. Our interfaces are supported by our powerful artificial intelligence ("AI")-driven fulfillment platform, which leverages more than 3,300 automation integrations, including Application Programming Interfaces and Robotic Process Automation bots. This enables 90% ofUnited States ("U.S.") criminal searches to be automated and allows us to complete 70% ofU.S. criminal searches within the first hour and 90% within the first day. As ofSeptember 30, 2021 , 95% of our revenue is processed through platforms hosted in the cloud, which allows us to consistently maintain 99.9% platform availability while being prepared to scale into the future. Our client-centric approach underpins everything we do. We serve a diverse and global client base in a wide range of industries, such as healthcare, gig economy, financial and business services, industrials, retail, contingent, technology, media and entertainment, transportation and logistics, hospitality, education and government. Employers are facing numerous challenges, including complex and changing legal and regulatory requirements, a rise in fraudulent job applications, a growing spotlight on reputation and more complex global workforces. Successfully navigating these challenges requires an industry-specific perspective, given differing candidate profiles, economics, competitive dynamics and regulatory demands. To serve these differing needs, our sales and support delivery model is organized around industry-specific teams ("Verticals") and geographic markets ("Regions"). Experienced client success, sales, product and operations teams dedicated to individual Verticals collaborate with our clients to address their unique challenges and compliance requirements while providing industry best practice guidance. Our delivery model provides our clients with both the personal touch and consultative partnership of a small boutique firm and the global reach, scale, innovation and resources of an industry leader; all of which benefit small- and mid-sized businesses, global multinational enterprises and everyone in between. Additionally, this delivery model supports our principle of "Compliance by Design", enabling clients to maintain compliance globally. Our clients face a dynamic and rapidly evolving global labor market with increasing complexity and regulatory requirements. As a result, we believe our solutions are mission-critical to their core human resources, risk management and compliance functions. During the twelve months endedSeptember 30, 2021 , we completed over 75 million searches for over 40,000 clients, including over 50% of the Fortune 100 and over 45% of the Fortune 500. We believe the combination of our deep market expertise from our sales and support combined with the flexibility of our proprietary technology platform enable us to deliver industry-relevant, highly specialized solutions to our clients in a scalable manner, driving growth and differentiating us from our competitors. 32 -------------------------------------------------------------------------------- Table of Contents Throughout our 45-year operating history, innovation and self-disruption have been at the core of what we do every day. Our history of unique, industry-oriented market insights allows us to be at the forefront of innovation which includes multiple industry-leading solutions. For example, we pioneered criminal fulfilment technology (CourtDirect), arrest record and incarceration alert products, post-hire monitoring capabilities, AI-enhanced record review and validation process and the industry's only proprietary technology in a single-sourcedU.S. -nationwide fingerprint network. Our commitment to innovation has continued with the recent development and introduction of enhanced global language support capabilities, a cloud-based operating platform and a comprehensive identity verification solution. Enabled by our market leadership and platform investments, we have established a foundation and roadmap for future innovation which includes industry-specific products, growing our Identity-as-a-Service capabilities and further geographic expansion. Recent Developments Initial Public Offering OnSeptember 27, 2021 , we completed our initial public offering ("IPO") in which we and certain selling stockholders sold an aggregate of 16,427,750 shares of our common stock,$0.01 par value per share, consisting of 4,760,000 newly issued shares that we sold, 9,525,000 secondary shares that the selling stockholders sold and 2,142,750 shares that the selling stockholders sold pursuant to the full exercise of the underwriters' option to purchase additional shares at an offering price of$23.00 per share, resulting in net proceeds to us of$94.5 million , after deducting the underwriting discount of$6.8 million and offering expenses of$8.1 million , of which$2.0 million was unpaid as ofSeptember 30, 2021 . Impact of the COVID-19 Pandemic Since the onset of the COVID-19 pandemic, we have been focused on keeping our employees safe and maintaining our clients' uninterrupted access to our services. We have implemented a series of measures to protect the health and safety of our employees. The global impact of the outbreak has continued to evolve rapidly. Many countries reacted by instituting quarantines and restrictions on travel and limiting operations of non-essential businesses. Such actions created disruption in global supply chains, increased rates of unemployment and adversely impacted many industries. While some governmentally and institutionally mandated restrictions and limitations have been relaxed as local populations have been vaccinated or the outbreak has locally subsided, the outbreak has continued to spread globally and the COVID-19 virus has mutated into new strains. The COVID-19 pandemic could have a continued adverse impact on economic and market conditions, and the full extent of the impact and duration of the COVID-19 pandemic will depend on future developments, including, among other factors, spread of the outbreak and the success of vaccination programs, along with related travel advisories, quarantines and restrictions, the recovery times of disrupted supply chains and industries, the impact of labor market interruptions, the impact of government interventions, and uncertainty with respect to the duration of the global economic slowdown. Our financial performance in 2020 was impacted by the general economic downturn experienced as a result of the COVID-19 pandemic. In response to the COVID-19 pandemic, many of our clients froze headcount, furloughed and terminated employees, deferred hiring and partially or completely shut down their business operations and as a result, we experienced reduced demand for our products and services, particularly in industries impacted severely by the COVID-19 pandemic such as brick-and-mortar retail, entertainment, and hospitality. However, we saw increased demand for our products and services in industries such as healthcare and gig, both in theU.S. and internationally, which we believe is attributable to changing consumer behavior. Our lack of industry concentration with a highly diversified client base provided a natural hedge against industry-specific effects of the COVID-19 pandemic. Additionally, due to our increased investment in automation, we were able to fulfill searches in at least 98% ofU.S. jurisdictions throughout the COVID-19 pandemic, while certain competitors struggled to operate. Beginning in the third quarter of 2020, as shelter-in-place policies were relaxed, businesses began to reopen and general economic conditions began to improve, we experienced an increase in the demand for our products and services. This increase in demand continued through the end of 2020 with the business moving into year-over-year revenue growth for November and December. InJune 2020 , we expanded our services to include COVID-19 testing and inSeptember 2021 , we expanded our services to include vaccination tracking. We are also pursuing new opportunities in antigen testing for our clients. Our comprehensive suite of COVID-19 products has resulted in an increase in demand for our services. In 2021, we have executed on our growth playbook, supported by the broader macroeconomic recovery from the COVID-19 pandemic and increased operating leverage resulting from the cost optimization measures we implemented during the pandemic. As the COVID-19 pandemic continues, it may also have the effect of heightening many of the risks described under "Risk Factors" in our IPO Prospectus, including, but not limited to, those relating to changes in economic, political, social and market conditions; systems failures, interruptions, delays in services, cybersecurity incidents, unforeseen or catastrophic events and any resulting interruptions; our international operations; and our dependence on our senior management team and other qualified personnel. Emerging Growth Company The Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") permits us, as an "emerging growth company," to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for private companies. 33 -------------------------------------------------------------------------------- Table of Contents Recent Accounting Standards Updates Refer to Note 3, "Recent Accounting Standards Updates" of the condensed consolidated financial statements included elsewhere in this report for information about recent accounting pronouncements. Components of our Results of Operations The following discussion summarizes the key components of our consolidated statements of operations. We have one operating and reporting segment. Revenues We generate revenue by providing background and identity verification services to our clients. We have an attractive business model underpinned by stable and highly recurring transactional revenues, significant operating leverage and low capital requirements that contribute to strong cash flow generation. We recognize revenue under theFinancial Accounting Standards Board's Accounting Standards Codification Topic No. 606, "Revenue from Contracts with Customers" ("ASC 606"). Under ASC 606, we recognize revenue when control of the promised goods or services is transferred to clients, generally at a point in time, in an amount that reflects the consideration that we are entitled to for those goods or services. A majority of ourU.S. enterprise client contracts are exclusive to Sterling or require Sterling to be used as the primary provider. Additionally, they are typically multi-year agreements with automatic renewal terms, no termination for convenience clauses and set pricing with Sterling's right to increase prices upon notice. The strength of our contracts combined with our high levels of client retention results in a high degree of revenue visibility. Our revenue drivers are acquiring new clients (which we measure by new client growth, calculated as discussed in the following paragraph), retaining existing clients (which we measure by gross retention rate, calculated as discussed in the following paragraph), and growing our existing client relationships through upselling, cross-selling, and organic and inorganic growth in our client's operations that lead to an increase in hiring (which we measure by base growth, calculated as discussed in the following paragraph). New client growth for the relevant period is calculated as revenues from clients that are in the first twelve months of billing with Sterling divided by total revenues from the prior period, expressed as a percentage. Base growth is defined as growth in revenues in the current period, from clients that have been billing with us for longer than twelve calendar months divided by total revenues from the prior period, expressed as a percentage. Gross retention rate is a percentage, the numerator of which is prior period revenues less the revenue impact from accounts considered lost and the denominator is prior period revenues. The revenue impact is calculated as revenue decline of lost accounts in the relevant period from the prior period for the months after they were considered lost. Therefore, the attrition impact of clients lost in the current year may be partially captured in both the current and following period's retention rates depending on what point during the period they are lost. Our gross retention rate does not factor in revenue impact, whether growth or decline, attributable to existing clients, inclusive of cross-sell and up-sell of products, or the incremental revenue impact of new clients. In addition to organic growth through the drivers mentioned above, we may from time to time consider acquisitions that drive growth in our business. In those instances, inorganic growth will refer to the revenue from acquisitions for the twelve months following an acquisition. Any incremental revenue generation thereafter will be considered organic growth. Our revenues come from the following services which are sold as a bundle or individually, with revenue recognized at the time of delivery of background screening reports.
• Identity Verification-Leveraging innovative technologies in
fingerprinting, facial recognition and ID validation to verify that candidates are who they say they are.
• Background Checks-County, state and federal criminal checks fulfilled
through proprietary automation technology enabling global criminal
screening capabilities in over 240 countries and territories. Other
services include credit checks, civil checks, motor vehicle registration
confirmation and social media checks.
• Credential Verification-Thorough employment and education verification
services and licensing certification backed by a powerful fulfillment
engine. • Drug and Health Screening-Comprehensive, accurate and fast drug and health screening services through a network of over 15,000U.S. Department of Transportation-compliant collection sites. 34
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• Onboarding-Custom forms including
I-9 and eVerify employment eligibility, tax withholding forms and Equal Employment Opportunity disclosure forms, with built-in compliance and dynamic validation.
• Post-hire Monitoring-Continuous screening allowing for greater mobility
and safety for remote, onsite and contingent jobs and also ensuring
prompt risk warnings on any changes to an employee's profile.
Operating Expenses Our cost structure is flexible and provides us with operational leverage to be able to effectively adapt to changing client needs and broader economic events. Additionally, in 2020, we implemented strategic structural changes in our business to improve operating leverage and accelerate modernizing our technological infrastructure including leveraging robotics process automation. We moved to a virtual-first strategy and closed or reduced the size of eight offices globally and began reducing our data center footprint as we executed moving our revenue to the cloud and streamlined our sales and operations organization for greater operational efficiency. In any given period, operating expenses are driven by the amount of revenue, mix of clients and products, and impact of automation, productivity and procurement initiatives. 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 scale continues to improve. Operating expenses include the following costs: Cost of Revenues Cost of revenues includes costs related to delivery of services and includes third-party vendor costs associated with acquisition of data and to a lesser extent, costs related to our onshore and offshore fulfillment teams, associated stock-based compensation expense and cost of facilities. 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 vendor costs, as these third parties have discretion to adjust pricing. Third-party data costs include amounts paid to third parties for access to government records, other third-party data and services, as well as costs related to our court runner network. Third-party costs of services are largely variable in nature. Where applicable, these are typically invoiced to our clients as direct pass-through costs. Additional vendor costs are third-party costs for robotics process automation related to fulfillment related to hosting our fulfillment platforms in the cloud. Cost of services also includes salaries and benefits expense for personnel involved in the processing and fulfilment of our screening products and solutions, as well as our client care organization, and facilities costs for our onshore and offshore fulfillment centers. We do not allocate depreciation and amortization to cost of revenues. Corporate Technology and Production Systems Included in this line item are costs related to maintaining our corporate information technology infrastructure and non-capitalizable costs to develop and maintain our production systems. Corporate information technology expenses consist of personnel costs supporting internal operations such as information technology support and the maintenance of our information security and business continuity functions. Also included are third-party costs including cloud computing costs that support our corporate internal systems, software licensing and maintenance, telecommunications and other technology infrastructure costs. Production systems costs consist of non-capitalizable personnel costs including contractor costs incurred for the development of platform and product initiatives, and production support and maintenance. Platform and product initiatives facilitate the development of our technology platform and the launch of new screening products. Production support and maintenance includes costs to support and maintain the technology underlying our existing screening products, and to enhance the ease of use for our cloud applications. Certain personnel costs related to new products and features are capitalized and amortization of these capitalized costs is included in the depreciation and amortization line item. 35 -------------------------------------------------------------------------------- Table of Contents Included within corporate technology and production systems are non-capitalizable production system and corporate information technology expenses related to Project Ignite, a three-phase strategic investment initiative. Phase one of Project Ignite modernized client and candidate experiences and is complete. Phase two of Project Ignite focused on decommissioning our on-premises data centers and migrating our production systems and corporate information technological infrastructure to a managed service provider in the cloud. As ofJune 30, 2021 , we completed phase two related to the migration of our production and fulfillment systems to the cloud, and as a result, 95% of our revenue is processed through platforms hosted in the cloud. The remaining expense to complete phase two is the decommissioning of our on-premises data centers for our internal corporate technology infrastructure and migration to the cloud. This final component will be completed byJune 30, 2022 . Phase three of Project Ignite is decommissioning of platforms purchased over the prior ten years and the migration of the clients to one global platform. This third and final phase, which we expect to complete in 2022, will unify our clients onto a single global platform. The future costs related to completing these initiatives will be included in our corporate technology and production systems expense. Selling, General and Administrative Selling expenses consist of personnel costs, travel expenses and other expenses for our client success, sales and marketing teams. Additionally, selling expenses include the cost of marketing and promotional events, corporate communications and other brand-building activities. General and administrative expenses consist of personnel and related expenses for human resources, legal and compliance, finance, global shared services and executives. Additional costs include professional fees, stock-based compensation, insurance premiums and other corporate expenses. Depreciation and Amortization Definite-lived intangible assets consist of intangibles acquired through acquisition and the costs of developing internal-use software. They are amortized using a straight-line basis over their estimated useful lives except for client lists to which we apply an accelerated method of amortization. The costs of developing internal-use software are capitalized during the application development stage. Amortization commences when the software is placed into service and is computed using the straight-line method over the useful life of the underlying software of three years. Depreciation of our property and equipment is computed on the straight-line basis over the estimated useful life of the assets, generally three to five years or, for leasehold improvements, the shorter of seven years or the term of the lease. Impairment of Long-Lived Assets Long-lived assets, such as property, equipment and capitalized internal use software subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, such as (i) a significant adverse change in the extent or manner in which it is being used or in its physical condition, (ii) a significant adverse change in legal factors or in business climate that could affect its value, or (iii) a current-period operation or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with its use. An asset is considered impaired if the carrying amount exceeds the undiscounted future net cash flows the asset is expected to generate. An impairment charge is recognized for the amount by which the carrying amount of the assets exceeds its fair value. The adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated or amortized over the remaining useful life of that asset. Assets held for sale are reported at the lower of the carrying amount or fair value, less selling costs. Interest Expense, Net Interest expense consists of interest and the amortization discount on the First Lien Term Loan (as defined under "Liquidity and Capital Resources-Credit Facility.") (Gain) Loss on Interest Rate Swaps (Gain) loss on interest rate swaps consists of realized and unrealized gains and losses on our interest rate swaps, which we enter into to reduce our exposure to variability in expected future cash flows on the First Lien Term Loan, which bears interest at a variable rate. Unrealized gains and losses result from changes in the fair value of the swaps and realized gains and losses reflect the amounts payable or receivable between the fixed rate on the swap and LIBOR. Our interest rate swaps expire inJune 2022 and do not qualify for hedge accounting treatment. 36 -------------------------------------------------------------------------------- Table of Contents Income Tax Provision (Benefit) Income tax provision (benefit) consists of domestic and foreign corporate income taxes related to earnings from our sale of services, with statutory tax rates that differ by jurisdiction. We expect the income earned by our international entities to grow over time as a percentage of total income, which may impact our effective income tax rate. However, our effective tax rate will 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. The computation of the provision for or benefit from income taxes for interim periods is determined by applying the estimated annual effective tax rate to year-to-date loss before income taxes and adjusting for discrete tax items recorded in the period, if any. Results of Operations Three Months EndedSeptember 30, 2020 compared to the Three Months EndedSeptember 30, 2021 The following table sets forth certain historical consolidated financial performance for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2021 . Three Months Increase/ Ended September 30, (Decrease) 2020 2021 $ % (dollars in thousands, except per share amounts) Revenues$ 117,602 $ 169,557 $ 51,955 44.2 % Cost of revenues (exclusive of depreciation and amortization below) 55,112 82,638 27,526 49.9 % Corporate technology and production systems 10,842 12,084 1,241 11.5 % Selling, general and administrative 25,391 84,983 59,592 234.7 % Depreciation and amortization 22,863 20,346 (2,517 ) (11.0 )% Impairments of long-lived assets 621 15 (606 ) (97.6 )% Total operating expenses 114,829 200,066 85,237 74.2 % Operating income (loss) 2,773 (30,509 ) (33,282 ) (1200.2 )% Interest expense, net 7,817 7,668 (148 ) (1.9 )% (Gain) loss on interest rate swaps (49 ) 112 161 (327.5 )% Other income (336 ) (400 ) (64 ) 19.0 % Total other expense, net 7,432 7,380 (52 ) (0.7 )% Loss before income taxes (4,659 ) (37,889 ) (33,230 ) 713.2 % Income tax provision (benefit) 5,727 (12,633 ) (18,360 ) (320.6 )% Net loss$ (10,386 ) $ (25,256 ) $ (14,870 ) 143.2 % Net loss margin (8.8 )% (14.9 )% (6.1 )% Net loss per share$ (0.12 ) $ (0.28 ) $ (0.16 ) 140.2 % 37
-------------------------------------------------------------------------------- Table of Contents Revenues Revenues increased by 44.2%, or$52.0 million , from$117.6 million for the three months endedSeptember 30, 2020 to$169.6 million for the three months endedSeptember 30, 2021 . Of the growth, 43.2% was organic constant currency revenue growth and 1.0% was due to the impact of fluctuations in foreign exchange currency rates. Year over year revenue growth was driven primarily by$13.5 million of new customer revenue and$38.5 million of base growth, net of attrition. Pricing was relatively stable across the periods and not meaningful to the change in revenues. In ourU.S. business, we saw double-digit revenue growth in all our industry verticals, with particularly exceptional results in our healthcare and financial and business services verticals, as we executed our growth playbook and theU.S. economy continued its recovery from the impact of the COVID-19 pandemic. Our international business also grew, as our international gig business continued its growth trajectory, primarily driven by our large market share of theUnited Kingdom food delivery industry, as well as robust growth in theAsia Pacific ("APAC") andCanada . Cost of Revenues Cost of revenues increased by 49.9%, or$27.5 million , from$55.1 million for the three months endedSeptember 30, 2020 to$82.6 million for the three months endedSeptember 30, 2021 . The increase in costs was primarily due to servicing increased volume. The remaining increase was due to stock-based compensation expense resulting from the accelerated vesting of outstanding options upon completion of the IPO. Cost of revenues as a percentage of revenue was 46.9% for the three months endedSeptember 30, 2020 and 48.7% for the three months endedSeptember 30, 2021 . Corporate Technology and Production Systems Expense Corporate technology and production systems expense increased by 11.5%, or$1.2 million , from$10.8 million for the three months endedSeptember 30, 2020 to$12.1 million for the three months endedSeptember 30, 2021 , primarily due to$1.5 million of stock-based compensation expense associated with the accelerated vesting of options upon completion of the IPO. Included in corporate technology and production systems expense are costs related to maintaining our corporate information technology infrastructure and non-capitalizable costs to develop and maintain our production systems. Costs related to maintaining our corporate information technology infrastructure increased by$1.4 million from$4.7 million for the three months endedSeptember 30, 2020 to$6.1 million for the three months endedSeptember 30, 2021 , primarily driven by stock-based compensation expense resulting from the accelerated vesting of options upon completion of the IPO. Costs to develop platform and product initiatives decreased by$0.2 million from$4.1 million for the three months endedSeptember 30, 2020 to$3.9 million for the three months endedSeptember 30, 2021 . Costs related to maintaining our production systems remained relatively flat at$2.0 million for the three months endedSeptember 30, 2020 to$2.1 million for the three months endedSeptember 30, 2021 . These expenses also include non-capitalizable costs related to Project Ignite. We incurred$0.8 million related to phase one,$1.1 million related to phase two and$1.3 million related to phase three in the three months endedSeptember 30, 2020 , and nothing related to phase one,$1.4 million related to phase two and$1.7 million related to phase three in the three months endedSeptember 30, 2021 . For more information about Project Ignite, including information related to the anticipated completion and treatment of noncapitalizable expenses in future periods, please see "-Components of our Results of Operations-Operating Expenses-Corporate Technology and Production Systems." Selling, General and Administrative Selling, general and administrative expenses increased by 234.7%, or$59.6 million , from$25.4 million for the three months endedSeptember 30, 2020 to$85.0 million for the three months endedSeptember 30, 2021 . The year-over-year increase was primarily driven by costs related to the IPO of$30.5 million and an increase in stock-based compensation expense of$22.6 million due to the accelerated vesting of outstanding options and the forgiveness of promissory notes exchanged for common stock in connection with the IPO. For the three months endedSeptember 30, 2021 , IPO related costs of$30.5 million included$16.8 million of contractual compensation payments to former executives (of which,$15.6 million was funded by certain stockholders),$7.5 million associated with the final settlement of fees in connection with the Fourth Amended and Restated Management Services Agreement, and$6.2 million of professional fees and other related expenses. The remaining increase was primarily due to normalized bonus related expenses driven by an increase in the annual bonus pool accrual over the prior year's pool which was reduced due to the impact of the COVID-19 pandemic. 38
-------------------------------------------------------------------------------- Table of Contents Depreciation and Amortization Depreciation and amortization expense decreased by 11.0%, or$2.5 million , from$22.9 million for the three months endedSeptember 30, 2020 to$20.3 million for the three months endedSeptember 30, 2021 , primarily due to$2.0 million of lower intangible asset amortization, as new intangible assets were added at a lower rate compared to those which became fully depreciated in the interim period. Fixed asset depreciation decreased by approximately$0.5 million , primarily due to reduced fixed asset additions to offset fully depreciated assets. Impairments of Long-Lived Assets Impairments of long-lived assets decreased by$0.6 million for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2021 , primarily due to the write-off of fixed assets in exited offices and capitalized software costs during the three months endedSeptember 30, 2020 . Interest Expense, Net Interest expense decreased by 1.9%, or$0.1 million , from$7.8 million for the three months endedSeptember 30, 2020 to$7.7 million for the three months endedSeptember 30, 2021 due to the reduction in the interest rate on our First Lien Term Loan resulting from a reduction in LIBOR as well as a lower principal balance due to a mandatory principal prepayment during the second quarter of 2021. Amortization of the debt discount and deferred issuance costs was$0.6 million for each of the three months endedSeptember 30, 2020 and 2021. (Gain) Loss on Interest Rate Swaps (Gain) loss on interest rate swaps decreased by$0.2 million from a gain of less than$0.1 million for the three months endedSeptember 30, 2020 to a loss of$0.1 million for the three months endedSeptember 30, 2021 due to a realized loss of$2.2 million offset by a mark to market ("MTM") gain of$2.1 million . Income Tax Provision (Benefit) Income tax provision (benefit) decreased by 320.6%, or$18.4 million , from a provision of$5.7 million for the three months endedSeptember 30, 2020 to a benefit of$12.6 million for the three months endedSeptember 30, 2021 , primarily due to permanent differences and the increase in the net loss for the period resulting from the additional expenses incurred with the IPO. Loss before income taxes increased from a loss of$4.7 million for the three months endedSeptember 30, 2020 to a loss of$37.9 million for the three months endedSeptember 30, 2021 . Net Loss, Net Loss per Share and Net Loss Margin Net loss increased from a loss of$10.4 million , or a loss per share of$0.12 , for the three months endedSeptember 30, 2020 to a net loss of$25.3 million , or a loss per share of$0.28 , for the three months endedSeptember 30, 2021 . Net loss margin increased from (8.8)% for the three months endedSeptember 30, 2020 to (14.9)% for the three months endedSeptember 30, 2021 . The increase in both net loss and net loss margin resulted primarily from incremental expenses in connection with our IPO, partially offset by increased revenue. 39 -------------------------------------------------------------------------------- Table of Contents Nine Months EndedSeptember 30, 2020 compared to the Nine Months EndedSeptember 30, 2021 The following table sets forth certain historical consolidated financial performance for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2021 . Nine Months Increase/ Ended September 30, (Decrease) 2020 2021 $ % (dollars in thousands, except per share amounts) Revenues$ 325,550 $ 468,255 $ 142,705 43.8 % Cost of revenues (exclusive of depreciation and amortization below) 153,458 225,798 72,340 47.1 % Corporate technology and production systems 32,922 32,435 (488 ) (1.5 )% Selling, general and administrative 86,848 153,194 66,346 76.4 % Depreciation and amortization 68,441 61,193 (7,247 ) (10.6 )% Impairments of long-lived assets 680 2,940 2,260 332.4 % Total operating expenses 342,349 475,560 133,211 38.9 % Operating income (loss) (16,799 ) (7,305 ) 9,494 (56.5 )% Interest expense, net 25,110 22,841 (2,269 ) (9.0 )% (Gain) loss on interest rate swaps 9,604 199 (9,405 ) (97.9 )% Other income (998 ) (1,034 ) (36 ) 3.6 % Total other expense, net 33,716 22,006 (11,710 ) (34.7 )% Loss before income taxes (50,515 ) (29,311 ) 21,204 (42.0 )% Income tax provision (benefit) 718 (8,080 ) (8,798 ) (1225.6 )% Net loss$ (51,233 ) $ (21,231 ) $ 30,002 (58.6 )% Net loss margin (15.7 )% (4.5 )% 11.2 % Net loss per share$ (0.58 ) $ (0.24 ) $ 0.34 (58.9 )% 40
-------------------------------------------------------------------------------- Table of Contents Revenues Revenues increased by 43.8%, or$142.7 million , from$325.6 million for the nine months endedSeptember 30, 2020 to$468.3 million for the nine months endedSeptember 30, 2021 . Of the growth, 41.6% was organic constant currency revenue growth and 2.2% was due to the impact of fluctuations in foreign exchange currency rates. Year over year was driven by$43.3 million of new customer revenue and$99.4 million of base growth, net of attrition. Our gross retention rate for the nine months endedSeptember 30, 2020 was 95% compared to 96% for the nine months endedSeptember 30, 2021 . Pricing was relatively stable across the periods and not meaningful to the change in revenues. In ourU.S. business, we saw double-digit revenue growth in all our industry verticals, with particularly exceptional results in our healthcare and financial and business services verticals, as we executed our growth playbook and theU.S. economy continued its recovery from the impact of the COVID-19 pandemic. Our international business also grew, as our international gig business continued its growth trajectory, primarily driven by our large market share of theUnited Kingdom food delivery industry, as well as robust growth in APAC andCanada . Cost of Revenues Cost of revenues increased by 47.1%, or$72.3 million , from$153.5 million for the nine months endedSeptember 30, 2020 to$225.8 million for the nine months endedSeptember 30, 2021 . The increase in costs was primarily due to servicing increased volume. The remaining increase was due to stock-based compensation expense resulting from the accelerated vesting of outstanding options upon completion of the IPO. Cost of revenues as a percentage of revenue was 47.1% for the nine months endedSeptember 30, 2020 and 48.2% for the nine months endedSeptember 30, 2021 . Corporate Technology and Production Systems Expense Corporate technology and production systems expense decreased by 1.5%, or$0.5 million , from$32.9 million for the nine months endedSeptember 30, 2020 to$32.4 million for the nine months endedSeptember 30, 2021 , primarily due to lower headcount compared to the same period of the prior year partially offset by higher bonus expense due to normalized bonus related expenses driven by an increase in the annual bonus pool accrual over the prior year's pool which was reduced due to the impact of the COVID-19 pandemic and stock-based compensation expense associated with the accelerated vesting of options upon completion of the IPO. Costs related to maintaining our corporate information technology infrastructure increased by$0.7 million from$14.9 million for the nine months endedSeptember 30, 2020 to$15.6 million for the nine months endedSeptember 30, 2021 . Costs to develop platform and product initiatives decreased by$0.9 million from$12.2 million for the nine months endedSeptember 30, 2020 to$11.3 million for the nine months endedSeptember 30, 2021 . Costs related to maintaining our production systems decreased by$0.3 million from$5.9 million for the nine months endedSeptember 30, 2020 to$5.6 million for the nine months endedSeptember 30, 2021 . These expenses also include non-capitalizable costs related to Project Ignite. We incurred$2.3 million related to phase one,$3.0 million related to phase two and$3.6 million related to phase three in the nine months endedSeptember 30, 2020 , and$0.9 million related to phase one,$4.6 million related to phase two and$4.5 million related to phase three in the nine months endedSeptember 30, 2021 . Selling, General and Administrative Selling, general and administrative expenses increased by 76.4%, or$66.3 million , from$86.8 million for the nine months endedSeptember 30, 2020 to$153.2 million for the nine months endedSeptember 30, 2021 . The year-over-year increase was primarily driven by costs related to the IPO of$35.9 million and an increase in stock-based compensation expense of$23.0 million due to the accelerated vesting of outstanding options and the forgiveness of promissory notes exchanged for common stock in connection with the IPO. For the nine months endedSeptember 30, 2021 , IPO related expenses of$35.9 million included$16.8 million of contractual compensation payments to former executives (of which,$15.6 million was funded by certain stockholders),$7.5 million associated with the final settlement of fees in connection with the Fourth Amended and Restated Management Services Agreement, and$11.6 million of professional fees and other related expenses. The remaining increase was primarily due to normalized bonus related expenses driven by an increase in the annual bonus pool accrual over the prior year's pool which was reduced due to the impact of the COVID-19 pandemic partially offset by savings related to reduced rent due to our virtual-first strategy and other operating savings. 41 -------------------------------------------------------------------------------- Table of Contents Depreciation and Amortization Depreciation and amortization expense decreased by 10.6%, or$7.2 million , from$68.4 million for the nine months endedSeptember 30, 2020 to$61.2 million for the nine months endedSeptember 30, 2021 , primarily due to$5.2 million lower intangible asset amortization, as new intangible assets were added at a lower rate compared to those which became fully depreciated in the interim period. Fixed asset depreciation decreased by approximately$2.0 million , primarily as a result of fixed asset impairments associated with exited office locations. Impairments of Long-Lived Assets Impairments of long-lived assets increased by$2.3 million from$0.7 million for the nine months endedSeptember 30, 2020 to$2.9 million for the nine months endedSeptember 30, 2021 , primarily due to the write-off of fixed assets in our exited office inBellevue, Washington . Interest Expense, Net Interest expense decreased by 9.0%, or$2.3 million , from$25.1 million for the nine months endedSeptember 30, 2020 to$22.8 million for the nine months endedSeptember 30, 2021 due to the reduction in the interest rate on our First Lien Term Loan resulting from a reduction in LIBOR as well as a lower principal balance due to a mandatory principal payment during the second quarter of 2021. Amortization of the loan discount was$1.8 million and$1.7 million for the nine months endedSeptember 30, 2020 and 2021, respectively. Loss on Interest Rate Swaps Loss on interest rate swaps decreased by$9.4 million from$9.6 million for the nine months endedSeptember 30, 2020 to$0.2 million for the nine months endedSeptember 30, 2021 . The reduction in LIBOR during the nine months endedJune 30, 2020 resulted in a MTM loss recorded in that period. As LIBOR was relatively stable for the nine months endedSeptember 30, 2021 , the MTM loss and resulting expense was significantly lower than the prior year period. Income Tax Provision (Benefit) Income tax provision decreased from an expense of$0.7 million for the nine months endedSeptember 30, 2020 to a benefit of$8.1 million for the nine months endedSeptember 30, 2021 . Loss before income taxes decreased from a loss of$50.5 million for the nine months endedSeptember 30, 2020 to a loss of$29.3 million for the nine months endedSeptember 30, 2021 , driven primarily by increased revenue partially offset by expenses related to the IPO, including additional stock-based compensation expense. The increase in income tax benefit notwithstanding the decrease in Loss before income taxes is due to the jurisdictional mix of earnings with losses in theU.S. and income in the foreign jurisdictions. Net Loss, Net Loss per Share and Net Loss Margin Net loss decreased from a loss of$51.2 million , or a loss per share of$0.58 , for the nine months endedSeptember 30, 2020 to a loss of$21.2 million , or a loss per share of$0.24 , for the nine months endedSeptember 30, 2021 . Net loss margin improved from (15.7)% for the nine months endedSeptember 30, 2020 to (4.5)% for the nine months endedSeptember 30, 2021 . The decrease in both net loss and net loss margin resulted from improved operating leverage, as revenues increased by 43.8% while operating expenses grew by only 38.9% for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2021 , notwithstanding IPO related expenses in 2021. Non-GAAP Financial Measures This report contains "non-GAAP financial measures," which are financial measures that are not calculated and presented in accordance with US GAAP. Specifically, we make use of the non-GAAP financial measures "organic constant currency revenue growth", "Adjusted EBITDA," "Adjusted EBITDA Margin," "Adjusted Net Income," "Adjusted Earnings Per Share" and "Adjusted Free Cash Flow" to assess the performance of our business. 42 -------------------------------------------------------------------------------- Table of Contents Organic constant currency revenue growth is calculated by adjusting for any merger and acquisition ("M&A") activity that contributed revenue in the current period, which was not present in the prior period, and converting the current period revenue at foreign currency exchange rates consistent with the prior period. There was no impact of M&A activity on our revenue in the three and nine months endedSeptember 30, 2021 or in the three and nine months endedSeptember 30, 2020 . We present organic constant currency revenue growth because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance; however, it has limitations as an analytical tool, and you should not consider such a measure either in isolation or as a substitute for analyzing our results as reported under US GAAP. In particular, organic constant currency revenue growth does not reflect M&A activity or the impact of foreign currency exchange rate fluctuations. Adjusted EBITDA is defined as net loss adjusted for provision for income taxes, interest expense, depreciation and amortization, stock-based compensation, costs related to M&A activity, optimization and restructuring, technology transformation costs, foreign currency (gains) and losses and other costs affecting comparability. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenue for the applicable period. We present Adjusted EBITDA and Adjusted EBITDA Margin because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management and our board of directors use Adjusted EBITDA to evaluate the factors and trends affecting our business to assess our financial performance and in preparing and approving our annual budget and believe it is helpful in highlighting trends in our core operating performance. Further, our executive incentive compensation is based in part on components of Adjusted EBITDA. Adjusted EBITDA and Adjusted EBITDA Margin have limitations as analytical tools and should not be considered in isolation or as substitutes for our results as reported under US GAAP. Adjusted EBITDA excludes items that can have a significant effect on our profit or loss and should, therefore, be considered only in conjunction with net income (loss) for the period. Our management uses Adjusted EBITDA to supplement US GAAP results to evaluate the factors and trends affecting the business to assess our financial performance and in preparing and approving our annual budget and believe it is helpful in highlighting trends in our core operating performance. Because not all companies use identical calculations, these measures may not be comparable to other similarly titled measures of other companies. Adjusted Net Income is a non-GAAP profitability measure. Adjusted Net Income is defined as net income adjusted for amortization of acquired intangible assets, stock-based compensation, costs related to M&A, optimization and restructuring, technology transformation costs, and certain other costs affecting comparability, adjusted for the applicable tax rate. Adjusted Earnings Per Share is defined as Adjusted Net Income divided by diluted weighted average shares for the applicable period. We present Adjusted Net Income and Adjusted Earnings Per Share because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding certain material non-cash items and unusual items that we do not expect to continue at the same level in the future. Our management believes that the inclusion of supplementary adjustments to net income (loss) applied in presenting Adjusted Net Income provide additional information to investors about certain material non-cash items and about items that we do not expect to continue at the same level in the future. Adjusted Net Income and Adjusted Earnings Per Share have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under US GAAP. Adjusted Free Cash Flow is defined asNet Cash provided by (used in) Operating Activities minus purchases of property and equipment and purchases of intangible assets and capitalized software. For the nine months endedSeptember 30, 2021 , we have adjusted Adjusted Free Cash Flow for one-time, non-operating cash charges related to the IPO. We present Adjusted Free Cash Flow because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding certain material non-recurring, non-operating cash items that we do not expect to continue at the same level in the future. Adjusted Free Cash Flow has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported under US GAAP. Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA increased by 68.7%, or$20.9 million , from$30.4 million for the three months endedSeptember 30, 2020 to$51.3 million for the three months endedSeptember 30, 2021 . Adjusted EBITDA Margin increased by 440 basis points year-over-year from 25.9% for the three months endedSeptember 30, 2020 to 30.3% for the three months endedSeptember 30, 2021 . This improvement was due to increased revenue and improved operating leverage. Adjusted EBITDA increased by 87.9%, or$63.2 million , from$71.9 million for the nine months endedSeptember 30, 2020 to$135.1 million for the nine months endedSeptember 30, 2021 . Adjusted EBITDA Margin increased by 680 basis points from 22.1% for the nine months endedSeptember 30, 2020 to 28.9% in the corresponding period in 2021. This improvement was due to increased revenue and improved operating leverage. 43 -------------------------------------------------------------------------------- Table of Contents The following table reconciles revenue growth, the most directly comparable GAAP measure, to organic constant currency revenue growth for the three and nine months endedSeptember 30, 2020 and 2021. Three Months Ended Nine Months Ended September 30, September 30, 2021 2021 Reported revenue growth 44.2 % 43.8 % Impact from M&A activity(1) 0.0 % 0.0 % Impact from foreign currency exchange(2) 1.0 % 2.2 % Organic constant currency revenue growth 43.2 % 41.6 %
(1) Impact to revenue growth in the current period from acquisitions and
dispositions that have occurred over the past twelve months.
(2) Impact to revenue growth in the current period from fluctuations in foreign
currency exchange rates.
The following table reconciles net income (loss), the most directly comparable GAAP measure, to Adjusted EBITDA for the three and nine months endedSeptember 30, 2020 and 2021. Three Months Ended Nine Months Ended September 30, September 30, 2020 2021 2020 2021 (dollars in thousands) Net loss$ (10,386 ) $ (25,256 ) $ (51,233 ) $ (21,231 ) Income tax provision (benefit) 5,727 (12,633 ) 718 (8,080 ) Interest expense, net 7,817 7,668 25,110 22,841 Depreciation and amortization 22,863 20,346 68,441 61,193 Stock-based compensation 570 25,582 1,756 27,236 Transaction expenses(1) 539 31,513 1,624 38,771 Restructuring(2) 1,060 634 7,070 4,243 Technology Transformation(3) 2,581 3,137 8,048 9,138 Settlements impacting comparability(4) 120 - 260 - (Gain) loss on interest rate swaps(5) (49 ) 112 9,604 199 Other(6) (439 ) 196 535 826 Adjusted EBITDA$ 30,403 $ 51,300 $ 71,933 $ 135,136 Adjusted EBITDA Margin 25.9 % 30.3 % 22.1 % 28.9 %
(1) Consists of transaction expenses related to mergers and acquisitions,
associated earn-outs, investor management fees in connection with the Fourth
Amended and Restated Management Services Agreement and costs related to
preparation of the IPO. For the three months ended
costs consisted primarily of
the three months ended
related expenses of
compensation payments to former executives (of which,
funded by certain stockholders),
management fees, and
expenses. The period also included
earn-out
and performance-based incentive payments associated with an acquisition in
2018 and
Fourth Amended and Restated Management Services Agreement, associated with
the terms prior to the final settlement. For the nine months ended
management fees. For the nine months ended
consisted primarily of IPO related expenses of
which,
investor management fees, including the final settlement of fees in
connection with the Fourth Amended and Restated Management Services
Agreement, and
period also included
earn-out
and performance-based incentive payments associated with an acquisition in
2018 and
Fourth Amended and Restated Management Services Agreement, associated with
the terms prior to the final settlement.
(2) Consists of restructuring-related costs, including executive recruiting and
severance charges, and lease termination costs and disposal of fixed assets
related to our real estate consolidation efforts. During 2019 and 2020, we
executed an extensive restructuring program, significantly strengthening our
management team and creating a client-facing industry-specific Vertical
organization. This program was completed by the end of 2020 and the final
costs related to this program were incurred through the first quarter of
2021. Beginning in 2020, we began executing a virtual-first strategy, closing
offices and reducing office space globally. We expect this real estate
consolidation effort to be completed by the end of 2021. For the three months
ended
restructuring-related executive recruiting and severance charges, and
months ended
our real estate consolidation program. For the nine months ended
restructuring-related executive recruiting and severance charges, including
the elimination of the vice-chairman position, and approximately
of expenses related to our real estate consolidation program. For the nine
months ended
related to the real estate consolidation program, due largely to the
write-off
on disposal of fixed assets for our exited facility in
44
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Table of Contents (3) Includes costs related to technology modernization efforts. We believe that
these costs are discrete and non-recurring in nature, as they relate to a one-time restructuring and decommissioning of our on-premise
production systems and corporate technological infrastructure and the move to
a managed service provider, decommissioning redundant fulfillment systems and
modernizing internal functional systems. As such, they are not normal,
recurring operating expenses and are not reflective of ongoing trends in the
cost of doing business. The significant majority of these are related to the
last two phases of Project Ignite, with the remainder related to an
investment made to modernize internal functional systems in preparation for
our public company infrastructure. For the three months ended
2020, investment related to Project Ignite was
investment made to modernize internal functional systems was
For the three months ended
Ignite was
investment related to Project Ignite was
investment made to modernize internal functional systems was
For the nine months ended
Ignite was
(4) Consists of
non-recurring
settlements impacting comparability. For the three months ended
2020, the cost of
with the
ended
2019 settlement with the
(5) Consists of (gain) loss on interest rate swaps. See "-Part I. Item 3.
Quantitative and Qualitative Disclosures about Market Risk-Interest Rate
Risk" for additional information on interest rate swaps.
(6) Consists of costs related to a local government mandate in
on foreign currency transactions, impairment of capitalized software and
other costs outside of the ordinary course of business.
The following table summarizes these costs for the three and nine months endedSeptember 30, 2020 and 2021. Three Months Ended Nine Months Ended September 30, September 30, 2020 2021 2020 2021 (in thousands) Other Government mandate $ - $ -$ 1,291 $ - (Gain) Loss on foreign currency transactions (439 ) 196 (120 ) 1,316 Impairment of capitalized software - - 73 30 Duplicate fulfillment charges - - (709 ) (521 ) Total$ (439 ) $ 196 $ 535 $ 825 The following table presents the calculation of Net Loss Margin and Adjusted EBITDA Margin for the three and nine months endedSeptember 30, 2020 and 2021. Three Months Ended Nine Months Ended September 30, September 30, 2020 2021 2020 2021 (dollars in thousands) Net loss$ (10,386 ) $ (25,256 ) $ (51,233 ) $ (21,231 ) Adjusted EBITDA 30,403 51,300 71,933 135,136 Revenues 117,602 169,557 325,550 468,255 Net loss margin (8.8 )% (14.9 )% (15.7 )% (4.5 )% Adjusted EBITDA margin 25.9 % 30.3 % 22.1 % 28.9 % Adjusted Net Income and Adjusted Earnings Per Share Adjusted Net Income increased by 187%, or$20.6 million , from$11.0 million for the three months endedSeptember 30, 2020 to$31.6 million for the three months endedSeptember 30, 2021 . The increase was primarily driven by an increase in revenues and improved operating leverage. 45 -------------------------------------------------------------------------------- Table of Contents Adjusted Net Income increased by 298%, or$52.1 million , from$17.5 million for the nine months endedSeptember 30, 2020 to$69.6 million for the nine months endedSeptember 30, 2021 . The increase was primarily driven by an increase in revenues and improved operating leverage. Adjusted Earnings Per Share-basic increased by 184%, or$0.23 per share from$0.12 per share for the three months endedSeptember 30, 2020 to$0.35 per share for the three months endedSeptember 30, 2021 . Adjusted Earnings Per Share-diluted increased by 168%, or$0.21 per share from$0.12 per share for the three months endedSeptember 30, 2020 to$0.33 per share for the three months endedSeptember 30, 2021 . The increase in Earnings Per Share-basic and Earnings Per Share-diluted was primarily due to the increase in Adjusted Net Income. Adjusted Earnings Per Share-basic increased by 295%, or$0.58 per share, from$0.20 per share for the nine months endedSeptember 30, 2020 to$0.78 per share for the nine months endedSeptember 30, 2021 , and Adjusted Earnings Per Share-diluted increased by 270%, or$0.54 per share, from$0.20 per share for the nine months endedSeptember 30, 2020 to$0.74 per share for the nine months endedSeptember 30, 2021 , primarily due to the increase in adjusted net income. The following tables reconcile operating income (loss), or net income (loss), the most directly comparable GAAP measures, to Adjusted Net Income and Adjusted Earnings Per Share for the three and nine months endedSeptember 30, 2020 and 2021. Three Months Ended Nine Months Ended September 30, September 30, 2020 2021 2020 2021 (in thousands, except per share amounts) Net (loss) income$ (10,386 ) $ (25,256 ) $ (51,233 ) $ (21,231 ) Income tax (benefit) expense 5,727 (12,633 ) 718 (8,080 ) (Loss) income before income taxes (4,659 ) (37,889 ) (50,515 ) (29,311 ) Amortization of acquired intangible assets 15,119 12,962 45,289 39,232 Stock-based compensation 570 25,582 1,756 27,236 Transaction expenses(1) 539 31,513 1,624 38,771 Restructuring(2) 1,060 634 7,070 4,194 Technology Transformation(3) 2,581 3,137 8,048 9,138 Settlements impacting comparability(4) 120 - 260 - (Gain) loss on interest rate swaps(5) (49 ) 112 9,604 199 Other(6) (439 ) 196 535 826
Adjusted Net Income before income tax effect 14,842 36,248
23,671 90,333 Income tax effect(7) 3,859 4,672 6,154 20,686 Adjusted Net Income 10,983 31,575 17,517 69,646 Net Loss per share-diluted (0.12 ) (0.28 ) (0.58 ) (0.24 ) Adjusted Earnings Per Share-basic 0.12 0.35 0.20 0.78 Adjusted Earnings Per Share-diluted 0.12 0.33 0.20 0.74
(1) Consists of transaction expenses related to mergers and acquisitions,
associated earn-outs, investor management fees, and costs related to
preparation of the IPO.
(2) Consists of restructuring-related costs, including executive recruiting and
severance charges, and lease termination costs and disposal of fixed assets
related to our real estate consolidation efforts. During 2019 and 2020, we
executed an extensive restructuring program, significantly strengthening our
management team and creating a client-facing industry-specific Vertical
organization. This program was completed by the end of 2020 and the final
costs related to this program were incurred through the first quarter of
2021. Beginning in 2020, we began executing a virtual-first strategy, closing
offices and reducing office space globally. We expect this real estate
consolidation effort to be completed by the end of 2021.
(3) Includes costs related to technology modernization efforts. We believe that
these costs are discrete and non-recurring in nature, as they relate to a one-time restructuring and decommissioning of our on-premise
production systems and corporate technological infrastructure and the move to
a managed service provider, decommissioning redundant fulfillment systems and
modernizing internal functional systems. As such, they are not normal,
recurring operating expenses and are not reflective of ongoing trends in the
cost of doing business. The significant majority of these are related to the
last two phases of Project Ignite, with the remainder related to an
investment made to modernize internal functional systems in preparation for
our public company infrastructure. 46
-------------------------------------------------------------------------------- Table of Contents (4) Consists of
non-recurring
settlements impacting comparability.
(5) Consists of (gain) loss on interest rate swaps. See "-Quantitative and
Qualitative Disclosures about Market Risk-Interest Rate Risk" for additional
information on interest rate swaps.
(6) Consists of costs related to a local government mandate in
on foreign currency transactions, impairment of capitalized software and
other costs outside of the ordinary course of business.
The following table summarizes these costs for the three and nine months endedSeptember 30, 2021 . Three Months Ended Nine Months Ended September 30, September 30, 2020 2021 2020 2021 (in thousands) Other Government mandate $ - $ -$ 1,291 $ - (Gain) Loss on foreign currency transactions (439 ) 196 (120 ) 1,316 Impairment of capitalized software - - 73 30 Duplicate fulfillment charges - - (709 ) (521 ) Total$ (439 ) $ 196 $ 535 $ 825
(7) Effective tax rates of 26%, 13%, and 23% have been used to compute Adjusted
Net Income for the 2020 periods, the three months ended
and the nine months ended
to reduce future income subject to income taxes. 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.
The following table reconciles net loss per share, the most directly comparable GAAP measure, to Adjusted Earnings Per Share for the three months endedSeptember 30, 2020 and 2021 and for the nine months endedSeptember 30, 2020 and 2021. 47
--------------------------------------------------------------------------------
Table of Contents Three Months Ended Nine Months Ended September 30, September 30, 2020 2021 2020 2021 (in thousands, except share and per share amounts) Net income (loss)$ (10,386 ) $ (25,256 ) $ (51,233 ) $ (21,231 ) Less: Undistributed amounts allocated to participating securities - - - - Undistributed (losses) earnings allocated to stockholders$ (10,386 ) $ (25,256 )
Weighted average number of shares outstanding - basic 88,332,134 89,431,022 88,325,838 88,956,388 Weighted average number of shares outstanding - diluted 88,332,134 89,431,022 88,325,838 88,956,388 Net income (loss) per share - basic$ (0.12 ) $ (0.28 ) $ (0.58 ) $ (0.24 ) Net income (loss) per share - diluted (0.12 ) (0.28 ) (0.58 ) (0.24 ) Adjusted Net Income$ 10,983 $ 31,575 $ 17,517 $ 69,646 Less: Undistributed amounts allocated to participating securities - - - - Undistributed (losses) earnings allocated to stockholders$ 10,983 $ 31,575 $ 17,517 $ 69,646 Weighted average number of shares outstanding - basic 88,332,134 89,431,022 88,325,838 88,956,388 Weighted average number of shares outstanding - diluted 88,410,918 95,008, 310 88,377,154 93,532,785 Adjusted earnings per share - basic$ 0.12 $ 0.35 $ 0.20 $ 0.78 Adjusted earnings per share - diluted 0.12 0.33 0.20 0.74
The following table presents the calculation of Adjusted Diluted Earnings Per Share for the periods presented.
Three Months Ended Nine Months Ended September 30, September 30, 2020 2021 2020 2021 Net income (loss) per share - diluted$ (0.12 ) $ (0.28 ) $ (0.58 ) $ (0.24 ) Adjusted Net Income adjustments per share Income tax (benefit) expense 0.06 (0.12 ) 0.01 (0.08 ) Amortization of acquired intangible assets 0.17 0.14 0.51 0.42 Stock-based compensation 0.01 0.27 0.02 0.29 Transaction expenses(1) 0.01 0.33 0.02 0.41 Restructuring(2) 0.01 0.01 0.08 0.05 Technology Transformation(3) 0.03 0.03 0.09 0.10 Settlements impacting comparability(4) - - - - Loss/Gain on interest Swap(5) - - 0.11 - Other(6) - - 0.01 0.01 Income tax effect(7) (0.04 ) (0.05 ) (0.07 ) (0.22 ) Adjusted earnings per share - diluted$ 0.12 $ 0.33
Weighted average number of shares outstanding used in computation of Adjusted Diluted Earnings Per Share: Weighted average number of shares outstanding - diluted (GAAP) 88,332,134 89,431,022 88,325,838 88,956,388 Options not included in weighted average number of shares outstanding - diluted (GAAP) (using treasury stock method) 78,784 5,577,288 51,316 4,576,397 Weighted average number of shares outstanding - diluted (non-GAAP) (using treasury stock method) 88,410,918 95,008,310 88,377,154 93,532,785
(1) Consists of transaction expenses related to mergers and acquisitions,
associated earn-outs, investor management fees, and costs related to
preparation of the IPO.
(2) Consists of restructuring-related costs, including executive recruiting and
severance charges, and lease termination costs and disposal of fixed assets
related to our real estate consolidation efforts. During 2019 and 2020, we
executed an extensive restructuring program, significantly strengthening our
management team and creating a client-facing industry-specific Vertical
organization. This program was completed by the end of 2020 and the final
costs related to this program were incurred through the first quarter of
2021. Beginning in 2020, we began executing a virtual-first strategy, closing
offices and reducing office space globally. We expect this real estate
consolidation effort to be completed by the end of 2021.
(3) Includes costs related to technology modernization efforts. We believe that
these costs are discrete and non-recurring in nature, as they relate to a
one-time restructuring and decommissioning of our on-premise production
systems and corporate technological infrastructure and the move to a managed
service provider, decommissioning redundant fulfillment systems and
modernizing internal functional systems. As such, they are not normal,
recurring operating expenses and are not reflective of ongoing trends in the
cost of doing business. The significant majority of these are related to the
last two phases of Project Ignite, with the remainder related to an
investment made to modernize internal functional systems in preparation for
our public company infrastructure.
(4) Consists of non-recurring settlements impacting comparability.
(5) Consists of (gain) loss on interest rate swaps. See "-Quantitative and
Qualitative Disclosures about Market Risk-Interest Rate Risk" for additional
information on interest rate swaps.
(6) Consists of costs related to a local government mandate in
on foreign currency transactions, impairment of capitalized software and
other costs outside of the ordinary course of business.
The following table summarizes these costs for the three and nine months endedSeptember 30, 2021 . Three Months Ended Nine Months Ended September 30, September 30, 2020 2021 2020 2021 (in thousands) Other Government mandate $ - $ -$ 1,291 $ - (Gain) Loss on foreign currency transactions (439 ) 196 (120 ) 1,316 Impairment of capitalized software - - 73 30 Duplicate fulfillment charges - - (709 ) (521 ) Total$ (439 ) $ 196 $ 535 $ 825
(7) Effective tax rates of 26%, 13%, and 23% have been used to compute Adjusted
Net Income for the 2020 periods, the three months ended
and the nine months ended
31, 2020, we had net operating loss carryforwards of approximately
million for federal, state, and foreign income tax purposes available to
reduce future income subject to income taxes. 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.
Liquidity and Capital Resources Overview Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs to meet operating expenses, debt service, acquisitions, capital expenditures, other commitments and contractual obligations. We consider liquidity in terms of cash flows from operations and their sufficiency to fund our operating and investing activities. 48 -------------------------------------------------------------------------------- Table of Contents Our primary cash needs are for day-to-day operations, working capital requirements, capital expenditures for ongoing development of our technological offering and other mandatory payments such as taxes, and debt principal and interest obligations. Our liquidity needs are met primarily through cash flows from operations, which include cash received from customers less cash costs related to our operations. Our capital expenditures can vary depending on the timing of the development of new products and services and technological enhancement-related investments. Capital expenditures for the nine months endedSeptember 30, 2020 and 2021 were approximately$13.1 million and$14.6 million , respectively, primarily related to capitalizable software development. We believe that our projected cash position and cash flows from operations will be sufficient to fund our liquidity requirements for at least the next twelve months. However, our future liquidity requirements could be higher than we currently expect as a result of various factors. For example, any future investments, acquisitions, joint ventures or other similar transactions may require additional capital. In addition, our ability to continue to meet our future liquidity requirements will depend on, among other things, our ability to achieve anticipated levels of revenues and cash flows from operations and our ability to manage costs and working capital successfully, all of which are subject to general economic, financial, competitive and other factors beyond our control. In the event we require any additional capital, it will take the form of equity or debt financing, or both, and there can be no assurance that we will be able to raise any such financing on terms acceptable to us or at all. As ofSeptember 30, 2021 , we had cash and cash equivalents of approximately$192.4 million . OnNovember 1, 2021 , the Company utilized the net proceeds from the IPO and cash on hand to repay$100.0 million of outstanding borrowings under the First Lien Term Loan. As ofDecember 31, 2020 , we had cash and cash equivalents of$66.6 million . This amount includes$6.7 million accrued at year-end 2020 for our 2020 excess cash flow payment paid to lenders under the Credit Agreement (as defined below) inApril 2021 . All cash and cash equivalents are held with independent financial institutions with a minimum credit rating of A as defined by the three main credit rating agencies. As ofSeptember 30, 2021 , all cash and cash equivalents were held in accounts with banks such that the funds are immediately available or in fixed term deposits with a maximum maturity of three months. Credit Facility InJune 2015 , our subsidiarySterling Midco Holdings, Inc. (predecessor toSterling Infosystems, Inc. ) entered into a first lien credit agreement as borrower (as most recently amended by the Sixth Amendment thereto datedAugust 11, 2021 , the "Credit Agreement") withKeyBank National Association , as administrative agent (the "Administrative Agent"), certain guarantors party thereto and various lenders, includingGoldman Sachs Lending Partners LLC , as lenders. The Credit Agreement provides for aggregate principal borrowings of$795.0 million (subject to the increase described below), comprising a$655.0 million original principal amount of term loan (the "First Lien Term Loan") which matures inJune 2024 and a$140.0 million revolving credit facility (the "Revolver"), which matures the earlier of (a)August 11, 2026 or(b)December 31, 2023 unless, on or prior toDecember 31, 2023 , the First Lien Term Loan has been (i) refinanced with the proceeds of indebtedness with a final maturity date that is no earlier thanFebruary 11, 2027 or (ii) amended, modified or waived, such that the final maturity date of the First Lien Term Loan is no earlier thanFebruary 11, 2027 . Amounts outstanding under the First Lien Term Loan bear interest under either of the following two rates, elected in advance quarterly by the borrower for periods of either one month, two months, three months or six months: (1) an applicable rate of 2.5% plus a base rate (equal to the greater of (a) the prime rate (b) the federal funds rate plus 1 / 2 of 1% or (c) the one-month LIBOR plus 1%, subject to a 2% floor); or (2) an applicable rate of 3.5% plus one-month LIBOR which is subject to a 1% floor. Interest on LIBOR borrowings is payable on the last business day of the interest period selected except in the case of a six-month election, in which case it is payable on the last day of the third and sixth month. The interest rate in effect for the First Lien Term Loan as ofSeptember 30, 2021 was 4.5%. The First Lien Term Loan requires$1.6 million repayment of principal on the last business day of each March, June, September and December. Under the Credit Agreement, we must also make a mandatory prepayment of principal in the amount of 50% of the excess cash, as defined in the Credit Agreement, generated in any given year, if our Net Leverage Ratio (as defined in the Credit Agreement) is greater than or equal to 2.95:1.00. In 2020, the mandatory prepayment was$6.7 million and was paid inApril 2021 . OnNovember 1, 2021 , the Company utilized the net proceeds from the IPO and cash on hand to repay$100.0 million of outstanding borrowings under the First Lien Term Loan. All remaining outstanding principal is due at maturity inJune 2024 . We have been in compliance with all covenants under the Credit Agreement since origination. 49 -------------------------------------------------------------------------------- Table of Contents Pursuant to the Sixth Amendment to the Credit Agreement, the$85.0 million Revolver automatically increased an additional$55.0 million to$140.0 million upon the consummation of the IPO onSeptember 23, 2021 . Amounts outstanding under the Revolver bear interest at a tiered floating interest rate based on the net leverage ratio of the borrower. The rate may be chosen periodically in advance of each interest period at the election of the borrower, as follows: (1) an applicable rate of 2.5% plus the greater of (a) the prime rate (b) the federal funds rate plus 1 / 2 of 1% (c) the one-month LIBOR plus 1% or (d) a 2% floor or (2) an applicable rate of 3.5% plus one-month LIBOR. In addition, there is a quarterly fee of 0.50% or 0.375% on the unused portion of the commitments based on the first lien net leverage ratio. Unused and therefore available borrowings under the Revolver, net of letters of credit, were$84.0 million and$139.3 million as ofDecember 31, 2020 andSeptember 30, 2021 , respectively. The Revolver matures on the earlier ofAugust 11, 2026 orDecember 31, 2023 unless, on or prior toDecember 31, 2023 , the First Lien Term Loan has been refinanced with a final maturity date that is no earlier thanFebruary 11, 2027 or amended, modified or waived, such that the final maturity date of the First Lien Term Loan is no earlier thanFebruary 11, 2027 . We can use available funding capacity under the Revolver to satisfy letters of credit related to leased office space and other obligations, subject to a sublimit equal to the lesser of$20.0 million or aggregate amounts available for borrowing under the Revolver. The issuance of letters of credit reduce the available capacity under the Revolver. We had outstanding letters of credit totaling$1.0 million as ofDecember 31, 2020 and$0.7 million as ofSeptember 30, 2021 and additional availability for letters of credit of$19.0 million and$19.3 million , respectively. The Credit Agreement contains covenants that, among other things restrict our ability to: incur certain additional indebtedness; transfer money between our various subsidiaries; pay dividends on, repurchase or make distributions with respect to our subsidiaries' capital stock or make other restricted payments; issue stock of subsidiaries; make certain investments, loans or advances; transfer and sell certain assets; create or permit liens on assets; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; enter into certain transactions with our affiliates; and amend certain documents. The Credit Agreement also contains financial covenants that require us to maintain a total specified leverage ratio of less than 6.75:1.00 for so long as we have borrowed at least 35% or more of the total availability under the Revolver. Compliance with the financial covenants may be waived by lenders holding a majority of the Revolver. We were in compliance with all financial covenants under the Credit Agreement as ofSeptember 30, 2021 . Obligations under the Credit Agreement are collateralized by a first lien on substantially all the assets and outstanding capital stock of the Company subject to exceptions. The Credit Agreement also contains various events of default, including, without limitation, the failure to pay interest or principal when the same is due, cross default and cross acceleration provisions, the failure of representations and warranties contained in the agreements to be true and certain insolvency events. If an event of default occurs and is continuing, the principal amounts outstanding under the Credit Agreement, together with all accrued and unpaid interest and other amounts owed thereunder, may be declared immediately due and payable by the lenders. Cash Flows The following table presents a summary of our consolidated cash flows from operating, investing and financing activities for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2021 . Nine Months Ended September 30, 2020 2021 (in thousands) Net cash provided by operating activities$ 25,853 $
38,926
Net cash used in investing activities (12,849 ) (14,599 ) Net cash (used in) provided by financing activities (3,651 ) 102,300 Increase in cash and cash equivalents 9,353
126,627
Effect of exchange rate changes on cash (2,194 )
(863 ) Cash and cash equivalents at beginning of the period 50,299 66,633
Cash and cash equivalents at end of the period
50 -------------------------------------------------------------------------------- Table of Contents Operating Activities Net cash provided by operating activities for the nine months endedSeptember 30, 2020 and 2021 was$25.9 million and$38.9 million , respectively. The increase year-over-year was driven primarily by the reduction in net loss resulting from increased revenue. Net cash provided by operating activities for the nine months endedSeptember 30, 2020 reflects the adjustment to net loss for non-cash charges totaling$76.3 million , primarily driven by$68.4 million in depreciation and amortization, a$7.4 million change in fair value of derivatives,$1.8 million of stock-based compensation,$1.8 million of debt discount amortization and$1.1 million of other charges, partially offset by$4.1 million in deferred income taxes. Changes in operating assets and liabilities provided an additional$0.7 million of operating cash flow primarily due to an$8.0 million increase in other liabilities and a$2.8 million decrease in prepaid expenses, partially offset by an$8.0 million decrease in accrued expenses and a$2.4 million decrease in other assets. Net cash provided by operating activities for the nine months endedSeptember 30, 2021 reflects the adjustment to net income for non-cash charges totaling$73.1 million primarily driven by$61.2 million of depreciation and amortization,$27.2 million of stock-based compensation, driven by the accelerated vesting of options due to the IPO,$2.9 million of impairments of long-lived assets,$1.7 million of amortization of debt discount and$0.9 million of other charges, partially offset by$13.3 million of deferred income taxes, a$5.0 million change in the fair value of derivatives, a$1.3 million credit to deferred rent and$1.2 million excess payment on contingent consideration related an acquisition made in 2018. Changes in operating assets and liabilities for the nine months endedSeptember 30, 2021 decreased cash flow from operating activities by$13.1 million . An increase in accounts receivable of$40.4 million , due to increased revenue, and an increase in prepaid expenses of$1.4 million were largely offset by a$12.1 increase in accounts payable and a$15.6 million increase in accrued expenses. Investing Activities Net cash used in investing activities for the nine months endedSeptember 30, 2020 and 2021 was$12.8 million and$14.6 million , respectively. Net cash used in investing activities for the nine months endedSeptember 30, 2020 consisted of a$11.3 million investment in capitalized software and$1.8 million in purchases of computer hardware and other property, plant and equipment, partially offset by$0.2 million in proceeds from disposal of property, plant and equipment. Net cash used in investing activities for the nine months endedSeptember 30, 2021 consisted of a$12.0 million investment in capitalized software and$2.6 million in purchases of computer hardware and other property, plant and equipment. Financing Activities Net cash used in financing activities for the nine months endedSeptember 30, 2020 was$3.7 million . Net cash provided by financing activities for the nine months endedSeptember 30, 2021 was$102.3 million . The increase year-over-year is primarily due to proceeds from the issuance of common stock in connection with the IPO inSeptember 2021 . Net cash used in financing activities for the nine months endedSeptember 30, 2020 was comprised of$4.8 million in principal payments on our long-term debt offset by$1.2 million of proceeds received from the issuance of common stock. Net cash provided by financing activities for the nine months endedSeptember 30, 2021 was comprised of$102.6 million of proceeds from the issuance of common stock in our IPO, net of underwriting discounts and commissions,$2.5 million of proceeds from the issuance of common stock and a$15.6 million received from certain stockholders related to a one-time payment to a former executive as a result of the IPO. The one-time payment is reflected in cash flows from operating activities. Net cash provided by financing activities for the nine months endedSeptember 30, 2021 was partially offset by$6.1 million of IPO issuance costs,$11.5 million in principal payments on our long-term debt, including the$6.7 million mandatory payment on excess cash as required by our Credit Agreement and$0.7 million in payment of earn-out contingent consideration related to an acquisition in 2018. Adjusted Free Cash Flow For the nine months endedSeptember 30, 2021 , the Company generated$58.3 million of Adjusted Free Cash Flow, adjusted for one-time, cash, non-operating expenses related to the IPO, compared to$12.8 million in the previous period. The following table reconciles net cash flow provided by operating activities, the most directly comparable GAAP measure, to Adjusted Free Cash Flow for the nine months endedSeptember 30, 2020 and 2021. Nine Months Ended September 30, (in thousands) 2020 2021 Net Cash provided by Operating Activities$ 25,853 $ 38,926 Total IPO adjustments (1) - 34,003
Purchases of intangible assets and capitalized software (11,250 ) (11,987 ) Purchases of property and equipment
(1,835 ) (2,619 ) Adjusted Free Cash Flow$ 12,768 $ 58,323
(1) Includes one-time, cash, non-operating charges related to the IPO. Costs
included are
executives, of which,
million final settlement of investor management fees in connection with the
Fourth Amended and Restated Management Services Agreement, and
related primarily to professional fees and other expenses.
Critical Accounting Policies and Estimates The preparation of our consolidated financial statements in accordance with US GAAP requires us to use estimates and make judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our IPO Prospectus for a description of our critical accounting estimates and Note 2 to our 2020 consolidated financial statements in our IPO Prospectus for our significant accounting policies. There were no changes to our critical accounting estimates in the nine months endedSeptember 30, 2021 . See Note 3 to our unaudited condensed consolidated financial statements in this Quarterly Report for a discussion of new accounting guidance adopted during the first nine months of 2021. 51
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