Share-Based Compensation

9 Months Ended

Sep. 30, 2023

Share-Based Payment Arrangement [Abstract]

Note 10. Share-based Compensation

Share-based compensation expense is recognized in cost of services, product and technology expense, and selling, general, and administrative expense, in the accompanying condensed consolidated statements of operations and comprehensive income as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Share-based compensation expense
Cost of services	$	330	$	292	$	918	$	842
Product and technology expense		640		402		1,665		918
Selling, general, and administrative expense		3,820		1,328		7,866		4,064
Total share-based compensation expense	$	4,790	$	2,022	$	10,449	$	5,824

Prior to the IPO, all share-based awards were issued by Fastball Holdco, L.P., the Company’s previous parent company, under individual grant agreements and the partnership agreement of such parent company (collectively the “2020 Equity Plan”). In connection with the IPO, the Company adopted the 2021 Omnibus Incentive Plan (as amended by the First Amendment, dated as of May 10, 2023, the “2021 Equity Plan”).

In May 2023, the Company’s Board of Directors approved a modification of the vesting terms of outstanding unvested and unearned performance-based options, restricted stock units, and restricted stock (collectively, “Performance Awards”) previously issued under its equity plans. The modification, effective May 10, 2023, allowed for unvested and unearned Performance Awards outstanding as of the date of the modification, to vest based on time on the fourth, fifth, and sixth anniversaries of the relevant vesting commencement date, as set forth in each grant agreement (the “Vesting Commencement Date”), while preserving the eligibility to vest upon the Company’s investors receiving a targeted money-on-money return, subject to continued service. As of the modification date, unrecognized pre-tax non-cash compensation expense related to the Performance Awards, after accounting for the modification, was $28.8 million. The Company expects to recognize pre-tax non-cash compensation expense related to the modification of Performance Awards prospectively from the date of modification, on a straight-line basis, over a weighted average period of 1.9 years.

The fair value of the modified restricted stock units and restricted stock was estimated using the closing stock price on the date of modification. The fair value of the modified stock options was estimated on the date of modification using the Black-Scholes option-pricing model with the following weighted average assumptions:


	Options
Expected stock price volatility		37.43	%
Risk-free interest rate		3.40	%
Expected term (in years)		4.67
Fair-value of the underlying unit	$	12.61

In connection with the Company’s declared dividend in August 2023, the exercise price of outstanding stock option awards and stock purchases under the Company’s employee stock purchase plan (“ESPP”) was reduced by $1.50, in accordance with the non-discretionary anti-dilution provisions of the equity and stock purchase plans. Historical exercise prices noted in the below tables have not been adjusted.

2020 Equity Plan

Awards issued under the 2020 Equity Plan consist of options. No awards were issued under the plan during the nine months ended September 30, 2023.

A summary of the stock option activity for the nine months ended September 30, 2023 is as follows:


		Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
December 31, 2022	Grants outstanding		2,843,342		$	6.66
	Grants exercised		(357,772	)	$	6.13
	Grants cancelled/forfeited		(533,715	)	$	6.68
September 30, 2023	Grants outstanding		1,951,855		$	5.15	6.4 Years	$16.9 million
September 30, 2023	Grants vested		539,767		$	5.12	6.2 Years	$4.7 million
September 30, 2023	Grants unvested		1,412,088		$	5.16

2021 Equity Plan

The 2021 Equity Plan is intended to provide a means through which to attract and retain key personnel and to provide a means whereby our directors, officers, employees, consultants, and advisors can acquire and maintain an equity interest in us, or be paid incentive compensation, including incentive compensation measured by reference to the value of our common stock, thereby strengthening their commitment to our welfare and aligning their interests with those of our stockholders. The 2021 Equity Plan provides for the grant of awards of stock options, stock appreciation rights, restricted shares, restricted stock units, and other equity-based or cash-based awards as determined by the Company’s Compensation Committee. The 2021 Equity Plan initially had a total of 17,525,000 shares of common stock reserved. The number of reserved shares automatically increases on the first day of each calendar year commencing on January 1, 2022 and ending on January 1, 2030, in an amount equal to the lesser of (x) 2.5% of the total number of shares of common stock outstanding on the last day of the immediately preceding calendar year and (y) a number of shares as determined by the Board of Directors. As of September 30, 2023, 16,873,494 shares were available for issuance under the 2021 Equity Plan.

Stock Options

A summary of the stock option activity for the nine months ended September 30, 2023 is as follows:


		Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
December 31, 2022	Grants outstanding		4,311,662		$	15.24
	Grants issued		384,994		$	11.96
	Grants cancelled/forfeited		(87,038	)	$	15.54
September 30, 2023	Grants outstanding		4,609,618		$	13.57	8.0 Years	$2.1 million
September 30, 2023	Grants vested		1,548,685		$	13.64	7.9 Years	$0.5 million
September 30, 2023	Grants unvested		3,060,933		$	13.53

The fair value for stock options granted for the nine months ended September 30, 2023 was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:


	Options
Expected stock price volatility		35.48	%
Risk-free interest rate		3.64	%
Expected term (in years)		6.25
Fair-value of the underlying unit	$	11.96

Restricted Stock Units

A summary of the restricted stock units (“RSU”) activity for the nine months ended September 30, 2023 is as follows:


		Shares			Weighted Average Grant Date Fair Value
December 31, 2022	Nonvested RSUs		472,332		$	16.00
	Granted		152,346		$	13.31
	Vested		(113,441	)	$	14.76
	Forfeited		(27,208	)	$	16.00
September 30, 2023	Nonvested RSUs		484,029		$	15.45

Restricted Stock

A summary of the restricted stock activity for the nine months ended September 30, 2023 is as follows:


		Shares			Weighted Average Grant Date Fair Value
December 31, 2022	Nonvested restricted stock		2,281,300		$	3.85
	Vested		(326,670	)	$	3.85
September 30, 2023	Nonvested restricted stock		1,954,630		$	8.50

As of September 30, 2023, the Company had approximately $41.1 million of unrecognized pre-tax non-cash compensation expense, comprised of approximately $15.7 million related to restricted stock, $6.2 million related to RSUs, and approximately $19.2 million related to stock options, which the Company expects to recognize over a weighted average period of 1.4 years.

2021 Employee Stock Purchase Plan

The Company adopted the First Advantage Corporation 2021 Employee Stock Purchase Plan (“ESPP”) that allows eligible employees to voluntarily make after-tax contributions of up to 15% of such employee’s cash compensation to acquire Company stock during designated offering periods. During each offering period, there is one six-month purchase period. During the holding period, ESPP purchased shares are not eligible for sale or broker transfer. The Company recorded an associated expense of approximately $0.2 million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively. The Company recorded an associated expense of approximately $0.7 million and $0.3 million for the nine months ended September 30, 2023 and 2022, respectively.