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First Advantage(FA) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and changes in stockholders' equity, along with detailed notes explaining accounting policies, acquisitions, debt, and segment performance for the periods ended June 30, 2025 Condensed Consolidated Balance Sheets This section details the company's financial position, including assets, liabilities, and equity as of June 30, 2025 | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (vs. Dec 31, 2024) | | :----------------------------- | :----------------------------- | :------------------------------- | :------------------------ | | Total Assets | $3,871,212 | $3,922,893 | $(51,681) | | Total Liabilities | $2,572,049 | $2,615,854 | $(43,805) | | Total Equity | $1,299,163 | $1,307,039 | $(7,876) | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) This section presents the company's financial performance, including revenues, expenses, and net income (loss) for the periods | Metric (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | Change (YoY) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | Change (YoY) | | :-------------------- | :--------------------------- | :--------------------------- | :----------- | :--------------------------- | :--------------------------- | :----------- | | Revenues | $390,633 | $184,546 | +111.7% | $745,221 | $353,962 | +110.5% | | Total Operating Expenses | $352,896 | $174,643 | +102.1% | $699,867 | $344,785 | +102.9% | | Income from Operations | $37,737 | $9,903 | +281.0% | $45,354 | $9,177 | +394.2% | | Interest Expense, net | $44,785 | $7,353 | +509.1% | $91,365 | $10,923 | +736.4% | | Net Income (Loss) | $308 | $1,861 | -83.4% | $(40,886) | $(1,047) | -3899.6% | | Basic EPS | $0.00 | $0.01 | -100.0% | $(0.24) | $(0.01) | -2300.0% | | Diluted EPS | $0.00 | $0.01 | -100.0% | $(0.24) | $(0.01) | -2300.0% | Condensed Consolidated Statements of Cash Flows This section details cash flows from operating, investing, and financing activities for the six months | Cash Flow Activity (in thousands) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | Change (YoY) | | :-------------------------------- | :--------------------------- | :--------------------------- | :----------- | | Net cash provided by operating activities | $56,816 | $70,372 | $(13,556) | | Net cash used in investing activities | $(23,816) | $(13,812) | $(10,004) | | Net cash (used in) provided by financing activities | $(21,107) | $213 | $(21,320) | | Increase in cash, cash equivalents, and restricted cash | $14,862 | $55,737 | $(40,875) | | Cash, cash equivalents, and restricted cash at end of period | $184,345 | $269,649 | $(85,304) | Condensed Consolidated Statements of Changes in Stockholders' Equity This section outlines changes in common stock, paid-in capital, accumulated deficit, and comprehensive loss | Equity Component (in thousands) | December 31, 2024 | June 30, 2025 | Change | | :------------------------------ | :---------------- | :------------ | :----- | | Common Stock | $173 | $174 | +$1 | | Additional Paid-In-Capital | $1,504,007 | $1,517,179 | +$13,172 | | Accumulated Deficit | $(159,808) | $(200,694) | $(40,886) | | Accumulated Other Comprehensive Loss | $(37,333) | $(17,496) | +$19,837 | | Total Stockholders' Equity | $1,307,039 | $1,299,163 | $(7,876) | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements Note 1. Organization, Nature of Business, and Basis of Presentation This note describes the company's business, services, and basis for financial statement presentation - The Company provides background check and compliance services across the workforce lifecycle, categorized into pre-onboarding, post-onboarding, and adjacent products19202122 - The Company experiences seasonality, with highest revenues typically in October-November due to pre-holiday hiring and increased hiring in Q2 due to the end of the school year and increased commercial activity25 Note 2. Summary of Significant Accounting Policies This note outlines key accounting principles and methods, including fair value and revenue recognition Fair Value Hierarchy | Fair Value Hierarchy | Description | | :------------------- | :---------- | | Level 1 | Quoted prices for identical instruments in active markets | | Level 2 | Quoted prices for similar instruments in active markets, or model-derived valuations with observable inputs | | Level 3 | Significant unobservable inputs to the valuation model | - The Company did not have any customers representing 10% or more of consolidated revenues in Q2 2025, but had one customer representing approximately 11% in Q2 2024 in its First Advantage Americas segment35 Note 3. Acquisitions This note details the Sterling Check Corp. acquisition, including consideration and adjustments - First Advantage acquired Sterling Check Corp. on October 31, 2024, for approximately $2.2 billion, financed by cash, new debt, and common stock40 - Measurement period adjustments for the Sterling acquisition resulted in a $6.4 million increase to goodwill, finalized as of June 30, 202542 Consideration Transferred | Consideration Transferred (in thousands) | Amount | | :--------------------------------------- | :----- | | Cash consideration | $1,152,163 | | Fair value of First Advantage common stock issued | $490,098 | | Repayment of Sterling's outstanding debt | $535,046 | | Total fair value of consideration transferred | $2,197,699 | Note 4. Property and Equipment, net This note details property and equipment, including net carrying value and depreciation Total Property and Equipment, net | Metric (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :-------------------- | :------------ | :---------------- | :----- | | Total property and equipment, net | $275,635 | $307,539 | $(31,904) | - Depreciation and amortization expense for property and equipment increased by approximately $12.0 million (76.4%) for the three months ended June 30, 2025, and by $24.0 million (76.7%) for the six months ended June 30, 2025, compared to the same periods in 202447 Note 5. Goodwill and Other Intangible Assets This note presents goodwill by segment and net carrying value of other intangible assets Goodwill by Segment | Goodwill by Segment (in thousands) | December 31, 2024 | June 30, 2025 | Change | | :--------------------------------- | :---------------- | :------------ | :----- | | First Advantage Americas | $703,294 | $703,340 | +$46 | | First Advantage International | $114,341 | $117,664 | +$3,323 | | Sterling | $1,306,893 | $1,322,355 | +$15,462 | | Total Goodwill | $2,124,528 | $2,143,359 | +$18,831 | Intangible Assets | Intangible Assets (in thousands) | June 30, 2025 Net Carrying Value | December 31, 2024 Net Carrying Value | Change | | :------------------------------- | :------------------------------- | :----------------------------------- | :----- | | Trade names | $109,294 | $118,475 | $(9,181) | | Customer lists | $814,497 | $867,695 | $(53,198) | | Other intangible assets | $1,536 | $1,778 | $(242) | | Total Intangible Assets, net | $925,327 | $987,948 | $(62,621) | Note 6. Debt This note details debt obligations, including the Amended First Lien Credit Facility and repayments Debt | Debt (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :------------------ | :------------ | :---------------- | :----- | | Amended First Lien Credit Facility | $2,164,538 | $2,185,000 | $(20,462) | | Long-term debt, net | $2,104,285 | $2,121,289 | $(17,004) | - The Company made a voluntary principal repayment of $15.0 million on its Amended First Lien Credit Facility in May 2025, resulting in a $0.3 million loss on extinguishment of debt52 Note 7. Derivatives This note provides information on the fair value of interest rate swaps and their impact on interest expense Derivative Fair Value | Derivative (in thousands) | June 30, 2025 Fair Value | December 31, 2024 Fair Value | Change | | :------------------------ | :----------------------- | :--------------------------- | :----- | | Interest rate swaps (asset) | $0 | $3,110 | $(3,110) | | Interest rate swaps (liability) | $5,720 | $247 | +$5,473 | - Interest expense, net, included a loss of $2.483 million from interest rate swaps for the three months ended June 30, 2025, compared to a gain of $2.132 million in the prior year; for the six months, it was a loss of $6.419 million compared to a gain of $8.226 million54 Note 8. Income Taxes This note presents effective income tax rates and the (benefit) provision for income taxes Income Tax Metrics | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Effective Income Tax Rate | 104.2% | 27.0% | 11.6% | 40.0% | | (Benefit) Provision for Income Taxes (in thousands) | $(7,610) | $689 | $(5,379) | $(699) | - The effective tax rates for 2025 were primarily impacted by the jurisdictional mix of earnings, significant acquisition-related depreciation and amortization affecting U.S. net loss, and income taxes in foreign jurisdictions56 Note 9. Revenues This note describes revenue recognition policies and provides details on contract assets and liabilities - Substantially all revenues are recognized at a point in time when orders are completed and reports are made available to customers58 Contract Balance | Contract Balance (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :------------------------------ | :------------ | :---------------- | :----- | | Contract asset | $11,600 | $5,900 | +$5,700 | | Contract liability (deferred revenues) | $4,800 | $4,300 | +$500 | Note 10. Share-based Compensation This note outlines share-based compensation expense and unrecognized compensation expense Share-based Compensation Expense | Share-based Compensation Expense (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | Change (YoY) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | Change (YoY) | | :---------------------------------------------- | :--------------------------- | :--------------------------- | :----------- | :--------------------------- | :--------------------------- | :----------- | | Total share-based compensation expense | $5,742 | $5,048 | +13.8% | $13,709 | $9,799 | +39.9% | - As of June 30, 2025, the Company had approximately $32.7 million of unrecognized pre-tax non-cash compensation expense, expected to be recognized over a weighted average period of 1.3 years64 Note 11. Equity This note provides information on the company's equity structure, including preferred stock status - No Preferred Stock was issued or outstanding as of June 30, 2025, or December 31, 202475 Note 12. Commitments and Contingencies This note discloses commitments and contingencies, including liabilities for probable legal proceedings - The Company has recorded a liability of $10.0 million as of June 30, 2025, for probable and estimable losses related to legal proceedings, a decrease from $11.6 million at December 31, 202478 Note 13. Related Party Transactions This note reports on the absence of material related party transactions - No material related party transactions occurred for the six months ended June 30, 202580 Note 14. Net Income (Loss) Per Share This note presents basic and diluted net income (loss) per share Net Income (Loss) Per Share | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Basic net income (loss) per share | $0.00 | $0.01 | $(0.24) | $(0.01) | | Diluted net income (loss) per share | $0.00 | $0.01 | $(0.24) | $(0.01) | - Potentially dilutive securities were anti-dilutive and excluded from diluted EPS calculations for both three and six months ended June 30, 2025 and 2024, due to the net loss82 Note 15. Reportable Segments This note provides financial information by reportable segment, including Adjusted EBITDA and revenues - The Company operates in three reportable segments: First Advantage Americas, First Advantage International, and Sterling (acquired October 31, 2024)87110 Segment Adjusted EBITDA | Segment Adjusted EBITDA (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | First Advantage Americas | $51,260 | $51,594 | $91,567 | $95,263 | | First Advantage International | $4,340 | $4,167 | $7,706 | $7,056 | | Sterling | $58,346 | $0 | $106,785 | $0 | | Total Segment Adjusted EBITDA | $113,946 | $55,761 | $206,058 | $102,319 | Revenues by Geographic Region | Revenues by Geographic Region (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | United States | $334,907 | $158,871 | $638,696 | $305,077 | | All other countries | $55,726 | $25,675 | $106,525 | $48,885 | | Total revenues | $390,633 | $184,546 | $745,221 | $353,962 | Note 16. Subsequent Events This note discloses significant events after the reporting period, including credit amendments and repayments - On July 30, 2025, the Company amended its 2024 First Lien Credit Agreement to reduce interest rates on its Amended First Lien Credit Facility and Amended Revolver by 0.50%93 - On August 1, 2025, the Company made a voluntary principal repayment of $25.0 million on its Amended First Lien Credit Facility using available cash94 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition, results of operations, and cash flows, highlighting the impact of the Sterling acquisition, macroeconomic conditions, and key financial metrics for the three and six months ended June 30, 2025 Overview This section provides an overview of the company's global HR technology business and the Sterling acquisition impact - First Advantage is a global HR technology provider offering employment background screening, digital identity solutions, and verification services, powered by proprietary technology and AI101 - The acquisition of Sterling Check Corp. on October 31, 2024, significantly enhanced the Company's capabilities and expanded its service offerings globally103 - The Company serves over 80,000 customers globally across various industries, with a substantial majority of revenues derived from pre-onboarding screening104 Recent Developments This section discusses macroeconomic impacts on hiring trends and new tax legislation - Current macroeconomic conditions, including elevated interest rates, persistent inflation, and geopolitical tensions, continue to impact the global economy and customer hiring trends, potentially affecting demand for the Company's services111112113 - The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, includes permanent extension of certain Tax Cuts and Jobs Act provisions and restoration of favorable tax treatment for business provisions, with the Company currently assessing its impact114 Components of our Results of Operations This section explains revenue drivers and flexible cost structure, anticipating long-term expense decline - Revenues are primarily derived from pre-onboarding, post-onboarding, and adjacent products, with pre-onboarding services comprising the substantial majority117 - The Company maintains a flexible cost structure, expecting operating expenses as a percentage of total revenues to decline gradually in the long term due to growth, operating efficiency, and automation initiatives119 Results of Operations This section analyzes financial performance, including revenue growth, costs, and net income (loss) Results of Operations Summary | Metric (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | Change (YoY) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | Change (YoY) | | :-------------------- | :--------------------------- | :--------------------------- | :----------- | :--------------------------- | :--------------------------- | :----------- | | Revenues | $390,633 | $184,546 | +111.7% | $745,221 | $353,962 | +110.5% | | Cost of services | $207,841 | $92,348 | +125.1% | $400,406 | $179,540 | +123.0% | | Product and technology expense | $25,676 | $13,677 | +87.7% | $52,831 | $26,143 | +102.1% | | Selling, general, and administrative expense | $57,473 | $38,640 | +48.7% | $123,058 | $79,302 | +55.2% | | Depreciation and amortization | $61,906 | $29,978 | +106.5% | $123,572 | $59,800 | +106.6% | | Interest expense, net | $44,785 | $7,353 | +509.1% | $91,365 | $10,923 | +736.4% | | Net income (loss) | $308 | $1,861 | -83.4% | $(40,886) | $(1,047) | -3899.6% | - Revenue growth was primarily driven by $203.7 million (Q2) and $391.3 million (6M) attributable to the Sterling Acquisition, along with new customer revenues, partially offset by a net decrease from existing customers due to macroeconomic pressures127128134 - Cost of services as a percentage of revenues increased due to Sterling's higher relative cost of services and variations in customer ordering mix131133 Key Operating and Financial Metrics This section presents key non-GAAP financial measures including Adjusted EBITDA and Adjusted Net Income Key Operating and Financial Metrics | Metric (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | Change (YoY) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | Change (YoY) | | :-------------------- | :--------------------------- | :--------------------------- | :----------- | :--------------------------- | :--------------------------- | :----------- | | Adjusted EBITDA | $113,946 | $55,761 | +104.3% | $206,058 | $102,319 | +101.4% | | Adjusted EBITDA Margin | 29.2% | 30.2% | -1.0 pp | 27.7% | 28.9% | -1.2 pp | | Adjusted Net Income | $46,965 | $30,753 | +52.7% | $77,451 | $55,539 | +39.5% | | Adjusted Diluted EPS | $0.27 | $0.21 | +28.6% | $0.44 | $0.38 | +15.8% | - Adjusted EBITDA and Adjusted Net Income increased significantly due to the Sterling Acquisition, though Adjusted EBITDA Margin slightly decreased160161170172 Liquidity and Capital Resources This section discusses liquidity sources, including cash, operating cash flows, and recent debt refinancing - The Company's primary liquidity sources are cash on hand ($184.3 million as of June 30, 2025), cash flows from operations, and a $250.0 million revolving credit facility183184 - In connection with the Sterling Acquisition, the Company refinanced its debt, resulting in a $2.185 billion term loan and a $250.0 million revolving credit facility187 - Post-period, the Company amended its credit agreement to reduce interest rates by 0.50% and made a voluntary principal repayment of $25.0 million on August 1, 202518894 Contractual Obligations and Commitments This section confirms no significant changes to contractual obligations and commitments during the reporting period - No significant changes to contractual obligations and commitments occurred during the three and six months ended June 30, 2025197 Recently Issued Accounting Standards This section states that no new accounting pronouncements are expected to materially impact the financial statements - No accounting pronouncements issued during the six months ended June 30, 2025, are expected to have a material impact on the condensed consolidated financial statements39198 Critical Accounting Policies and Estimates This section confirms no significant changes to critical accounting policies and estimates during the reporting period - No significant changes to critical accounting policies and estimates occurred during the six months ended June 30, 2025199 Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes in the Company's market risks as of June 30, 2025, compared to the disclosures in its 2024 Annual Report - No material changes in market risks occurred as of June 30, 2025, compared to the 2024 Annual Report200 Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2025. No material changes in internal control over financial reporting occurred during the quarter, with ongoing integration of Sterling's operations - Disclosure controls and procedures were evaluated as effective at a reasonable assurance level as of June 30, 2025201202 - No material changes in internal control over financial reporting occurred, and the Company is integrating Sterling's operations, control processes, and information systems203 PART II. OTHER INFORMATION This section provides additional information on legal proceedings, risk factors, and executive compensation Item 1. Legal Proceedings This section incorporates by reference the information on legal proceedings from Note 12, Commitments and Contingencies, in Part I of this report - Information on legal proceedings is incorporated by reference from Note 12, Commitments and Contingencies206 Item 1A. Risk Factors This section states that there have been no material changes in the Company's risk factors compared to the disclosure in its 2024 Annual Report - No material changes in risk factors occurred compared to the 2024 Annual Report207 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports that there were no unregistered sales of equity securities and no use of proceeds to disclose for the period - No unregistered sales of equity securities and use of proceeds208 Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities208 Item 4. Mine Safety Disclosures This section indicates that the disclosure requirements for mine safety are not applicable to the Company - Mine Safety Disclosures are not applicable208 Item 5. Other Information This section provides details on Rule 10b5-1 trading arrangements and updates to the employment agreements for key executives, Steven Marks (CFO) and Douglas Nairne (Global COO), including changes to their base salaries, annual performance bonus targets, and post-termination benefits - Director James L. Clark adopted a Rule 10b5-1 trading arrangement on June 12, 2025, for the sale of up to 4,416 shares of common stock209 - Steven Marks, CFO, received a base salary increase to $450,000 and an annual performance bonus target increase to 50% of base salary, effective November 8, 2024211 - Douglas Nairne, Global COO, received a base salary increase to $500,000 and an annual performance bonus target increase to 60% of base salary, effective November 1, 2024212 Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including merger agreements, corporate governance documents, executive compensation arrangements, and certifications - Key exhibits include the Agreement and Plan of Merger for Sterling Check Corp., amended corporate documents, and employment agreements for Steven Marks and Douglas Nairne215 Signatures This section contains the official certifications by the company's CEO and CFO, confirming report accuracy Signatures This section contains the signatures of the Company's Chief Executive Officer and Chief Financial Officer, certifying the filing of the report on August 7, 2025 - The report was signed by Scott Staples (CEO) and Steven Marks (EVP & CFO) on August 7, 2025220