**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

##### **Washington, DC 20549**

##### ** **

##### ****

##### ** **

**FORM 10-Q**

 

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**x****  QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

**For the quarterly period ended March 31,2008**

 

**or**

 

**o****  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

**For the transition periodfrom              to                  **

 

**Commission File Number:  001-33613**

 

**HIRERIGHT, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                     | ** ** | **33-0465016**                     |
|----------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of |       | (IRS employer  identification no.) |
| incorporation or  organization)  |       |                               |

 

**5151 California Avenue, Irvine,CA  92617**

**www.hireright.com**

(Address of principal executive offices)

 

**(949) 428-5800**

(Telephone number, including area code)

 

**Not Applicable**

(Former name, former address and formerfiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes  x              No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large  accelerated filer o | Accelerated filer o | Non-accelerated filer o(Do not check if a  smaller reporting company) | Smaller reporting company x |
|---------------------------------|--------------------------|----------------------------------------------------------------------------|--------------------------------------------|

 

Indicated by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

Yes  o              No  x

 

Thenumber of shares of the registrant’s common stock, $0.01 par value, outstandingon May 1, 2008 was 11,461,148.

 

 

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***HIRERIGHT, INC.***

* *

**INDEX**

 
| ** **                                               | ** **                                                                                                             | ** ** | **Page** |
|----------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                     |                                                                                                                   |       |     |
| **Part I.   Financial  Information** |                                                                                                                   |       |
|                                                     |                                                                                                                   |       |     |
| Item 1.                                                  | Financial  Statements                                                                                                  |       |     |
|                                                     |                                                                                                                   |       |     |
|                                                     | Condensed, Consolidated  Balance Sheets as of March 31, 2008 and December 31, 2007  (unaudited)              |       | 1        |
|                                                     |                                                                                                                   |       |     |
|                                                     | Condensed, Consolidated  Statements of Income for the Three Months Ended March 31, 2008 and 2007  (unaudited)     |       | 2        |
|                                                     |                                                                                                                   |       |     |
|                                                     | Condensed, Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2008 and  2007 (unaudited) |       | 3        |
|                                                     |                                                                                                                   |       |     |
|                                                     | Notes to  Condensed, Consolidated Financial Statements (unaudited)                                                     |       | 4        |
|                                                     |                                                                                                                   |       |     |
| Item 2.                                                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                            |       | 9        |
|                                                     |                                                                                                                   |       |     |
| Item 3.                                                  | Quantitative  and Qualitative Disclosures about Market Risk                                                            |       | 16       |
|                                                     |                                                                                                                   |       |     |
| Item 4T.                                                 | Controls and  Procedures                                                                                               |       | 16       |
|                                                     |                                                                                                                   |       |     |
| **Part II.   Other  Information**    |                                                                                                                   |       |
|                                                     |                                                                                                                   |       |     |
| Item 1.                                                  | Legal Proceedings                                                                                                      |       | 17       |
|                                                     |                                                                                                                   |       |     |
| Item 1A.                                                 | Risk Factors                                                                                                           |       | 17       |
|                                                     |                                                                                                                   |       |     |
| Item 2.                                                  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                           |       | 17       |
|                                                     |                                                                                                                   |       |     |
| Item 3.                                                  | Defaults  Upon Senior Securities                                                                                       |       | 17       |
|                                                     |                                                                                                                   |       |     |
| Item 4.                                                  | Submission  of Matters to a Vote of Security Holders                                                                   |       | 17       |
|                                                     |                                                                                                                   |       |     |
| Item 5.                                                  | Other Information                                                                                                      |       | 17       |
|                                                     |                                                                                                                   |       |     |
| Item  6.                                                 | Exhibits                                                                                                               |       | 18       |
|                                                     |                                                                                                                   |       |     |
| Signatures                                               |                                                                                                                   |       | 19       |

 

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**HIRERIGHT, INC.**

**CONDENSED,CONSOLIDATED BALANCE SHEETS**

(Unaudited)

 
| ** **                                                                                                                                                                                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(in thousands, except share amounts)**                                                                                                                                                                                                       | ** ** | **2008**           | ** ** | **2007**              | ** ** |
|                                                                                                                                                                                                                                                               |       |               |       |                  |       |
| **ASSETS**                                                                                                                                                                                                                                                         |       |               |       |                  |       |
| CURRENT ASSETS:                                                                                                                                                                                                                                                    |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                                                          |       | $                  | 35,113     |                  | $          | 17,819 |   |
| Short-term investments                                                                                                                                                                                                                                             |       | 2,630              |       | 29,005                |       |
| Accounts receivable, net of allowance for  doubtful accounts of $149 and $153 at March 31, 2008 and  December 31, 2007, respectively, and reserve for sales allowances of  $126 and $139 at March 31, 2008 and December 31, 2007, respectively |       | 11,437             |       | 10,002                |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                          |       | 1,036              |       | 1,216                 |       |
| Deferred tax asset—current                                                                                                                                                                                                                                    |       | 1,330              |       | 1,331                 |       |
|                                                                                                                                                                                                                                                               |       |               |       |                  |       |
| Total current assets                                                                                                                                                                                                                                               |       | 51,546             |       | 59,373                |       |
|                                                                                                                                                                                                                                                               |       |               |       |                  |       |
| Property and equipment, net of accumulated  depreciation and amortization of $6,012 and $5,597 at March 31, 2008 and  December 31, 2007, respectively                                                                                                    |       | 2,034              |       | 2,003                 |       |
| Long-term investments                                                                                                                                                                                                                                              |       | 18,240             |       | 8,595                 |       |
| Other assets                                                                                                                                                                                                                                                       |       | 526                |       | 486                   |       |
| Deferred tax asset—non-current                                                                                                                                                                                                                                |       | 964                |       | 964                   |       |
|                                                                                                                                                                                                                                                               |       |               |       |                  |       |
| TOTAL                                                                                                                                                                                                                                                              |       | $                  | 73,310     |                  | $          | 71,421 |   |
|                                                                                                                                                                                                                                                               |       |               |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                      |       |               |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                               |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                                   |       | $                  | 4,523      |                  | $          | 3,428 |   |
| Accrued liabilities                                                                                                                                                                                                                                                |       | 1,235              |       | 1,228                 |       |
| Accrued payroll and benefits                                                                                                                                                                                                                                       |       | 2,558              |       | 3,790                 |       |
|                                                                                                                                                                                                                                                               |       |               |       |                  |       |
| Total current liabilities                                                                                                                                                                                                                                          |       | 8,316              |       | 8,446                 |       |
|                                                                                                                                                                                                                                                               |       |               |       |                  |       |
| OTHER LIABILITIES                                                                                                                                                                                                                                                  |       | 151                |       | 203                   |       |
|                                                                                                                                                                                                                                                               |       |               |       |                  |       |
| COMMITMENTS AND CONTINGENCIES (Note 7)                                                                                                                                                                                                                             |       |               |       |                  |       |
|                                                                                                                                                                                                                                                               |       |               |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                                                                                         |       |               |       |                  |       |
| Common stock, $0.01 par value—100,000,000  shares authorized; 11,452,924 and 11,233,597 shares issued and outstanding at  March 31, 2008 and December 31, 2007, respectively                                                                        |       | 115                |       | 112                   |       |
| Additional paid-in capital                                                                                                                                                                                                                                         |       | 68,631             |       | 68,071                |       |
| Other comprehensive gain—currency  translation                                                                                                                                                                                                                |       | 16                 |       | 11                    |       |
| Accumulated deficit                                                                                                                                                                                                                                                |       | (3,919             | )          | (5,422                | )          |
|                                                                                                                                                                                                                                                               |       |               |       |                  |       |
| Net stockholders’ equity                                                                                                                                                                                                                                      |       | 64,843             |       | 62,772                |       |
|                                                                                                                                                                                                                                                               |       |               |       |                  |       |
| TOTAL                                                                                                                                                                                                                                                              |       | $                  | 73,310     |                  | $          | 71,421 |   |

 

The accompanying notes arean integral part of these condensed, consolidated financial statements.

 

1

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**HIRERIGHT, INC.**

**CONDENSED, CONSOLIDATED STATEMENTS OF INCOME**

(Unaudited)

 
| ** **                                                         | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **March 31,**               | ** ** |
| **(in thousands, except per share data)** | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                                                               |       |                             |       |   |   |
| REVENUE:                                                           |       |                             |       |   |   |
| Service revenue                                                    |       | $                                | 15,763     |   | $ | 14,515 |   |
| Reimbursed fee revenue                                             |       | 1,563                            |       | 1,505 |   |
|                                                               |       |                             |       |   |   |
| Total revenue                                                      |       | 17,326                           |       | 16,020 |   |
|                                                               |       |                             |       |   |   |
| COST OF REVENUE:                                                   |       |                             |       |   |   |
| Cost of service revenue                                            |       | 7,369                            |       | 7,016 |   |
| Reimbursed fees paid                                               |       | 1,563                            |       | 1,505 |   |
|                                                               |       |                             |       |   |   |
| Total cost of revenue                                              |       | 8,932                            |       | 8,521 |   |
|                                                               |       |                             |       |   |   |
| GROSS PROFIT                                                       |       | 8,394                            |       | 7,499 |   |
|                                                               |       |                             |       |   |   |
| OPERATING EXPENSES:                                                |       |                             |       |   |   |
| Research and development                                           |       | 1,048                            |       | 909 |   |
| Sales and marketing                                                |       | 2,938                            |       | 2,379 |   |
| General and administrative                                         |       | 2,621                            |       | 2,287 |   |
|                                                               |       |                             |       |   |   |
| Total operating expenses                                           |       | 6,607                            |       | 5,575 |   |
|                                                               |       |                             |       |   |   |
| INCOME FROM OPERATIONS                                             |       | 1,787                            |       | 1,924 |   |
|                                                               |       |                             |       |   |   |
| OTHER INCOME (EXPENSE):                                            |       |                             |       |   |   |
| Interest income                                                    |       | 583                              |       | 92 |   |
| Interest expense                                                   |       | —                           |       | (1 | ) |
| Other income (expense)—net                                    |       | (13                              | )          | (1 | ) |
|                                                               |       |                             |       |   |   |
| Total other income —net                                       |       | 570                              |       | 90 |   |
|                                                               |       |                             |       |   |   |
| INCOME BEFORE INCOME TAXES                                         |       | 2,357                            |       | 2,014 |   |
|                                                               |       |                             |       |   |   |
| INCOME TAX PROVISION                                               |       | 854                              |       | 837 |   |
|                                                               |       |                             |       |   |   |
| NET INCOME                                                         |       | 1,503                            |       | 1,177 |   |
| Preferred stock dividends                                          |       | —                           |       | (543 | ) |
| Income allocable to preferred stockholders                         |       | —                           |       | (481 | ) |
|                                                               |       |                             |       |   |   |
| NET INCOME ALLOCABLE TO COMMON STOCKHOLDERS                        |       | $                                | 1,503      |   | $ | 153 |   |
|                                                               |       |                             |       |   |   |
| EARNINGS PER SHARE:                                                |       |                             |       |   |   |
| Basic                                                              |       | $                                | 0.13       |   | $ | 0.08 |   |
| Diluted                                                            |       | $                                | 0.12       |   | $ | 0.05 |   |
|                                                               |       |                             |       |   |   |
| WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT  SHARES:             |       |                             |       |   |   |
| Basic                                                              |       | 11,338                           |       | 1,957 |   |
| Diluted                                                            |       | 12,084                           |       | 3,036 |   |

 

Theaccompanying notes are an integral part of these condensed, consolidatedfinancial statements.

 

2

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**HIRERIGHT, INC.**

**CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

 
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(in thousands)**                                                            | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                                                               |       |                                                 |       |   |   |
| CASH PROVIDED BY OPERATING ACTIVITIES:                                             |       |                                                 |       |   |   |
| Net income                                                                         |       | $                                                    | 1,503      |   | $ | 1,177 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                                      |       | 377                                                  |       | 302 |   |
| Stock-based compensation expense                                                   |       | 133                                                  |       | 77 |   |
| Deferred income taxes                                                              |       | 1                                                    |       | 717 |   |
| Excess tax benefit from exercise of stock  options                                 |       | (59                                                  | )          | — |   |
| Changes in operating assets and  liabilities:                                      |       |                                                 |       |   |   |
| Accounts receivable, net                                                           |       | (1,435                                               | )          | (870 | ) |
| Prepaid expenses and other current assets                                          |       | 180                                                  |       | 314 |   |
| Other assets                                                                       |       | (38                                                  | )          | 75 |   |
| Accounts payable                                                                   |       | 1,121                                                |       | (622 | ) |
| Accrued liabilities                                                                |       | 66                                                   |       | 601 |   |
| Accrued payroll and benefits                                                       |       | (1,250                                               | )          | (1,152 | ) |
| Other liabilities                                                                  |       | (52                                                  | )          | 241 |   |
|                                                                               |       |                                                 |       |   |   |
| Net cash provided by operating activities                                          |       | 547                                                  |       | 860 |   |
|                                                                               |       |                                                 |       |   |   |
| CASH PROVIDED BY (USED IN) INVESTING  ACTIVITIES:                                  |       |                                                 |       |   |   |
| Purchases of investments                                                           |       | (15,000                                              | )          | (1,468 | ) |
| Sales of investments                                                               |       | 31,730                                               |       | 750 |   |
| Purchases of fixed assets                                                          |       | (425                                                 | )          | (563 | ) |
|                                                                               |       |                                                 |       |   |   |
| Net cash provided by (used in) investing  activities                               |       | 16,305                                               |       | (1,281 | ) |
|                                                                               |       |                                                 |       |   |   |
| CASH PROVIDED BY (USED IN) FINANCING  ACTIVITIES:                                  |       |                                                 |       |   |   |
| Proceeds from exercise of stock options                                            |       | 371                                                  |       | 23 |   |
| Payment of deferred offering costs                                                 |       | —                                               |       | (687 | ) |
| Excess tax benefit from exercise of stock  options                                 |       | 59                                                   |       | — |   |
|                                                                               |       |                                                 |       |   |   |
| Net cash provided by (used in) financing  activities                               |       | 430                                                  |       | (664 | ) |
|                                                                               |       |                                                 |       |   |   |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                            |       | 12                                                   |       | 1 |   |
|                                                                               |       |                                                 |       |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                          |       | 17,294                                               |       | (1,084 | ) |
|                                                                               |       |                                                 |       |   |   |
| CASH AND CASH EQUIVALENTS — Beginning of  period                              |       | 17,819                                               |       | 4,201 |   |
|                                                                               |       |                                                 |       |   |   |
| CASH AND CASH EQUIVALENTS — End of period                                     |       | $                                                    | 35,113     |   | $ | 3,117 |   |
|                                                                               |       |                                                 |       |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:                                |       |                                                 |       |   |   |
| Interest paid                                                                      |       | $                                                    | —     |   | $ | 1 |   |
|                                                                               |       |                                                 |       |   |   |
| NON-CASH FINANCING TRANSACTIONS:                                                   |       |                                                 |       |   |   |
| Vesting of stock options early exercised                                           |       | $                                                    | —     |   | $ | 35 |   |
|                                                                               |       |                                                 |       |   |   |
| Accrued purchases of fixed assets                                                  |       | $                                                    | 81         |   | $ | — |   |

 

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

 

3

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**HIRERIGHT,INC.**

**NOTES TOCONDENSED, CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited)

 

**1.****                         ****General**

 

**Business. **HireRight, Inc. (the “Company”) was incorporatedin California in 1990 and reincorporated in Delaware in July 2007. Ourshares of common stock are listed on the NASDAQ Global Market and trade underthe symbol “HIRE.”  We are a provider ofon-demand employment screening solutions. Our customers use our comprehensivescreening services in conjunction with our web-based software applications toconduct and manage their employment screening programs efficiently andeffectively, make more informed employment decisions, improve workplace safetyand mitigate risk. We offer a comprehensive set of background screeningservices including criminal, motor vehicle and other public records searches,employment, education and professional license verifications and credit checks,as well as drug and health screening services.

 

**Basis ofPresentation. **The accompanying condensed, consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles (“GAAP”) in the United States for interim financialinformation, and in accordance with the rules and regulations of theUnited States Securities and Exchange Commission (the “SEC”). Accordingly, theydo not include all of the information and notes required by GAAP in the UnitedStates for annual financial statements as permitted under applicable rules andregulations, and should be read in conjunction with our audited consolidatedfinancial statements and notes thereto for the fiscal year ended December 31,2007 included in the Company’s Annual Report on Form 10-K.

 

Thecondensed, consolidated financial statements included herein are unaudited;however, they contain all adjustments, including normal recurring adjustments,which in the opinion of management are necessary for a fair presentation. Theresults of operations for the three months ended March 31, 2008 are notnecessarily indicative of results that can be expected for the full year.

 

Thepreparation of our condensed, consolidated financial statements in accordancewith GAAP in the United States requires management to make estimates andassumptions that affect the amounts reported in our condensed, consolidatedfinancial statements and notes thereto. Actual results could differ materiallyfrom those estimates.

 

**Initial Public Offering. **The Registration Statement for the Company’s initial public offering (the “Public Offering”) was declared effective on August 7, 2007 (the “Effective Date”). The Company consummated the Public Offering on August 13, 2007 and sold 2,954,115 shares of its common stock, at a price of $15.00 per share. An additional 1,420,885 shares were sold by selling stockholders. The Company received approximately $39.4 million, net of underwriting discounts, commissions, and other offering costs. Upon the closing of the Public Offering, all of the Company’s outstanding preferred stock automatically converted into an aggregate of 6,201,142 shares of the Company’s common stock.

 

**2.****                         ****Investments**

 

The Companyaccounts for its investments in marketable securities under Statements ofFinancial Accounting Standards (“SFAS”) No. 115, *Accounting for Certain Investments in Debt and EquitySecurities* (“SFAS 115”). Investments consist of auction ratemunicipal and equity securities with interest at rates that are resetperiodically. These securities are recorded at fair value in the accompanyingbalance sheets. For the three months ended March 31, 2008 and 2007, theCompany has not recorded any realized gains or losses on marketable investmentsecurities. The Company evaluates its investments for other-than-temporarilyimpairment on a security by security basis. As of March 31, 2008, theCompany determined that none of its securities were other-than-temporarilyimpaired.  As of March 31, 2008,there was $7,000 in unrealized holding losses. The Company classifies allavailable-for-sale securities as current or non-current assets in theaccompanying balance sheets based on management’s intended holding period andliquidity considerations based on market conditions.

 

At March 31,2008, the Company held $20.9 million of securities with an auction resetfeature. The Dutch auction process that resets the applicable interest rate atpredetermined calendar intervals is intended to provide liquidity to the holderof auction rate securities by matching buyers and sellers within a marketcontext enabling the holder to gain immediate liquidity by selling suchinterests at par or rolling over their investment. If there is an 

 

4

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imbalance between buyersand sellers the risk of a failed auction exists. The Company has had 10securities fail at auction in 2008 with an aggregate par value of$17.4 million. Given the deteriorating credit markets, and the increasedincidence of failure within the auction market in 2008, there can be noassurance as to when we will be able to liquidate a particular security. In thecase of an auction failure we would not be able to access those funds until afuture auction of these investments is successful, the security is called bythe issuer or a buyer is found outside the auction process. As a result, wehave classified these auction rate securities as long-term investments, exceptfor $2.6 million of such securities which have been either sold or redeemed bythe issuer at par value subsequent to quarter end.  Furthermore, if this situation were topersist despite our intent and ability to hold such investments until thesecurity can be sold at its par value or until maturity, we may be required torecord an impairment charge at a future date.

 

We will continueto monitor and evaluate these investments, noting that there is no assurance asto when the market for this investment class will return to orderly operations.

 

**3.****            ****Fair Value of FinancialInstruments**

 

On January 1, 2008,the Company adopted the provisions of SFAS No. 157, *Fair ValueMeasurements (“SFAS 157”),* related to its financial assets andliabilities. The Company measures certain assets and liabilities at fair valueas discussed throughout the footnotes to its quarterly and annual financialstatements. Assets or liabilities that have recurring measurements are shownbelow:

** **
| ** **                     | ** ** | **Fair Value Measurements at Reporting Date Using** | ** ** |
|--------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | ** **                                                                        | ** ** | **Quoted Prices in** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | ** **                                                                        | ** ** | **Active Markets** | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                     | ** ** | ** **                                                                        | ** ** | **for Identical** | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                     | ** ** | **March 31,**                                                                | ** ** | **Assets** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **Description**                | ** ** | **2008**                                                                          | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| Assets                         |       |                                                                              |       |   |   |   |   |   |   |
| Cash and cash equivalents(1)   |       | $                                                                                 | 35,113     |   | $ | 35,113 |   | $ | — |   | $ | — |   |
|                           |       |                                                                              |       |   |   |   |   |   |   |
| Available-for-sale securities: |       |                                                                              |       |   |   |   |   |   |   |
| Short-term investments         |       | 2,630                                                                             |       | 2,630 |   | — |   | — |   |
| Long-term investments          |       | 18,240                                                                            |       | — |   | 18,240 |   | — |   |
|                           |       | 20,870                                                                            |       | 2,630 | (2) | 18,240 | (3) | — |   |
|                           |       |                                                                              |       |   |   |   |   |   |   |
| Total                          |       | $                                                                                 | 55,983     |   | $ | 37,743 |   | $ | 18,240 |   | $ | — |   |

 

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(1)          The carryingamount approximates fair value because of the short maturity of theseinstruments.

(2)          Theseinvestments consist of auction rate securities which are actively traded.Recent transaction activity has occurred within identical assets.

(3)          Theseinvestments consist ofauction rate securities which have had fewtransactions due to recent market conditions. The fair value of such securities is determined by quoted prices foridentical or similar assets in markets that are not active.

 

As discussed in Note 2above, the Company’s short-term and long-term investments consist of auctionrate municipal and equity securities with interest at rates that are resetperiodically. These securities are publicly traded and the Company determinesits fair value based on the latest available quoted market prices**. **See Note 2 foradditional discussion of the Company’s investment securities.

 

The Company alsoadopted the provisions of SFAS No. 159, *TheFair Value Option for Financial Assets and Financial Liabilities* (“SFAS 159”)as of January 1, 2008.  The adoptionof SFAS 159 did not have a material impact on the Company’s financial position,as the Company did not make any fair value elections under SFAS 159.

 

5

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**4.****                         ****Share-Based Compensation**

 

During the three months ended March 31, 2008,stock options for the purchase of 300,500 shares of common stock at a weightedaverage exercise price of $8.16 per share were awarded, with vesting generallyover four years. For the comparable period in 2007, stock options for thepurchase of 24,889 shares of common stock at a weighted average exercise priceof $10.94 per share were awarded.

 

At March 31, 2008,there were 835,759 outstanding stock options granted under our StockOption/Stock Issuance Plan (the “2000 Plan”) and 353,546 outstanding stockoptions under the 2007 Long Term Incentive Plan (the “2007 Plan”). The 2007Plan became effective on the Effective Date of the Company’s Public Offering.All stock option awards up until the Effective Date were made under the 2000Plan.  Commencing on the Effective Date,new options and other stock awards may only be granted under the 2007 Plan. Themaximum aggregate number of shares of common stock or options to purchaseshares of the Company’s common stock that may initially be issued under the2007 Plan is 1,000,000. Outstanding options granted under both our 2000 Planand 2007 Plan expire ten years from the grant date and typically vest 25% uponcompletion of one year of service with the remaining options vesting in 36successive equal monthly installments upon completion of each additional monthof service thereafter.

 

During the three monthsended March 31, 2008, in accordance with the prospective method ofadoption of SFAS No. 123 (revised 2004), *Share-BasedPayment* (“SFAS 123(R)”), the Company recognized share-basedcompensation expense of $133,000 compared to $77,000 for the comparable 2007period. At March 31, 2008, there was approximately $2.0 million ofunrecognized compensation cost related to unvested shares that will berecognized over a weighted average period of 2.0 years.

 

A summary of significantassumptions used in determining the fair value of the options granted is asfollows:

 
| ** **              | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| ** **              | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Expected life (years)   |       | 6.25                                                 |       | 6.25 |   |
| Risk-free interest rate |       | 3.14                                                 | %          | 4.82 | % |
| Volatility              |       | 41.56                                                | %          | 41.50 | % |
| Dividend yield          |       | 0                                                    | %          | 0 | % |

 

As of March 31,2008, the total number of outstanding options vested and expected to vest(based on anticipated forfeitures) was 1,125,594, which had a weighted-averageexercise price of $5.53. The average remaining life of these options was 7.66years and the aggregate intrinsic value was $5.1 million at March 31,2008.

 

As of March 31,2008, the total number of outstanding options currently exercisable was614,035, which had a weighted-average exercise price of $3.38. The averageremaining life of these options was 6.4 years and the aggregate intrinsic valuewas $4.1 million at March 31, 2008.

 

**5.****        ****Calculation of Earnings per Common Share**

 

Basic earnings per commonshare is calculated by dividing net income allocable to common stockholders bythe weighted average number of common shares outstanding during the period.Diluted earnings per common share is calculated by dividing net incomeallocable to common stockholders by the weighted average number of commonshares outstanding after giving effect to all potentially dilutive commonshares outstanding during the period. Basic and diluted earnings per commonshare were calculated as follows:

 

6

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| ** **                                                          | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **March 31,**               | ** ** |
| **in thousands, except per share amounts** | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                                                                |       |                             |       |   |   |
| **Numerator:**                                                      |       |                             |       |   |   |
| Net income                                                          |       | $                                | 1,503      |   | $ | 1,177 |   |
| Less preferred stock dividends                                      |       | —                           |       | (543 | ) |
| Less income allocable to preferred stockholders                     |       | —                           |       | (481 | ) |
|                                                                |       |                             |       |   |   |
| Net income allocable to common stockholders                         |       | $                                | 1,503      |   | $ | 153 |   |
|                                                                |       |                             |       |   |   |
| **Denominator:**                                                    |       |                             |       |   |   |
| Weighted average common shares outstanding:                         |       |                             |       |   |   |
| Basic                                                               |       | 11,338                           |       | 1,957 |   |
| Effect of dilutive potential common shares:                         |       |                             |       |   |   |
| Weighted average unvested common shares                             |       | —                           |       | 10 |   |
| Common equivalent shares from warrants to purchase common stock     |       | 245                              |       | 359 |   |
| Common equivalent shares from options to purchase common stock      |       | 501                              |       | 710 |   |
|                                                                |       |                             |       |   |   |
| Diluted                                                             |       | 12,084                           |       | 3,036 |   |
|                                                                |       |                             |       |   |   |
| Basic earnings per common share                                     |       | $                                | 0.13       |   | $ | 0.08 |   |
|                                                                |       |                             |       |   |   |
| Diluted earnings per common share                                   |       | $                                | 0.12       |   | $ | 0.05 |   |

 

Theanti-dilutive effect of 459,583 shares from outstanding stock options have beenexcluded from the earnings per share calculations for the three months ended March 31,2008.

 

**6.****        ****Recent Accounting Pronouncements**

 

In February 2008,the FASB issued FASB Staff Position No. 157-2 (“Staff Position 157-2”),which deferred the effective date for certain portions of SFAS 157 related tononrecurring measurements of nonfinancial assets and liabilities.  That provision of SFAS 157 will beeffective for the Company’s fiscal year 2009. We are currently evaluating the effect, if any, that the adoption of Staff Position 157-2will have on our results of operations, financial position and cash flows.

 

In December 2007,the FASB issued SFAS No. 141—revised 2007, “*Business Combinations”* (“SFAS 141R”). SFAS 141Restablishes principles and requirements for how an acquirer in a businesscombination recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest; recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase; and determines what informationto disclose to enable financial statement users to evaluate the nature andfinancial effects of the business combination. SFAS 141R applies tobusiness combinations for which the acquisition date is on or after December 15,2008. Early adoption is prohibited. We are currently evaluating the effect, ifany, that the adoption of SFAS 141R will have on our results ofoperations, financial position and cash flows.

 

In December 2007,the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements—an amendment to ARB No. 51*(“SFAS 160”). SFAS 160 requires all entities to report noncontrolling(minority) interests in subsidiaries as equity in the consolidated financialstatements, but separate from the equity of the parent company. The statementfurther requires that consolidated net income be reported at amountsattributable to the parent and the noncontrolling interest, rather thanexpensing the income attributable to the minority interest holder. Thisstatement also requires that companies provide sufficient disclosures toclearly identify and distinguish between the interests of the parent companyand the interests of the noncontrolling owners, including a disclosure on theface of the consolidated statements for income attributable to thenoncontrolling interest holder. This statement is effective for fiscal yearsbeginning on or after December 15, 2008. Early adoption is prohibited. Weare currently evaluating the effect, if any, that the adoption of SFAS 160will have on our results of operations, financial position and cash flows.

 

7

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**7.****        ****Commitmentsand Contingencies**

 

The Company iscurrently involved in certain legal matters that have arisen in the normalcourse of business. Management believes that the ultimate resolution of suchactions will not have a material adverse effect on the Company’s consolidatedfinancial position and results of operations.

 

**8.****                         ****SegmentInformation**

 

The Companyprovides web-based screening services, primarily to customers locatedthroughout the United States, and provides similar services to similarcustomers across industries. Separate profitability or financial information isnot analyzed for particular individual screening services. Management,including the chief operating decision maker, evaluates the Company’sperformance based on its overall operating results for the Company, and therefore,the Company has determined that it operates under one reportable segment.

 

**9.****        ****IncomeTaxes**

 

At March 31, 2008, the Company had a federal netoperating loss carryforward of approximately $1.8 million. The federal netoperating losses will begin to expire in 2011. In general, Section 382 ofthe Internal Revenue Code includes provisions which limit the amount of netoperating loss carryforwards and other tax attributes that may be used annuallyin the event that a 50% ownership change (as defined) occurs in any three-yearperiod. During 2000, the Company experienced an ownership change for purposesof Section 382, and the annual utilization of net operating losscarryforwards and credits prior to the change will be limited accordingly. Suchlimitation is reflected in the deferred income tax benefit balances as of March 31,2008.

 

As of March 31, 2008, the Company had no materialunrecognized tax benefits and no adjustments to liabilities or operations wererequired. The Company recognizes interest and penalties related to uncertaintax positions in income tax expense. There was no expense related to interestand penalties for the three months ended March 31, 2008.

 

Tax years 2004 through 2007 and 2003 through 2007 aresubject to examination by the federal and state taxing authorities,respectively. There are no income tax examinations currently in process.

 

8

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

 

**Overview**

 

We are a leading providerof on-demand employment screening solutions. Our customers use ourcomprehensive screening services in conjunction with our web-based softwareapplications to conduct and manage their employment screening programsefficiently and effectively, make more informed employment decisions, improveworkplace safety and mitigate risk. We offer a comprehensive set of backgroundscreening services including criminal, motor vehicle and other public recordssearches, employment, education and professional license verifications andcredit checks, as well as drug and health screening services.

 

Our screening solutionsare flexible and scalable, and therefore able to meet the demands of customersacross a range of sizes and industries, with hiring operations dispersedthroughout the United States and internationally. We serve a diverse customerbase in a variety of industries, such as business services, technology,healthcare, manufacturing, telecommunications and financial services. As of March 31,2008, we had 2,384 customers, which included 67 of the Fortune 500 companies.Our sales are derived from a combination of direct sales efforts as well asthrough our established network of strategic alliances with many of the leadingrecruiting software application providers and human resource outsourcing, orHRO, providers.

 

**CautionaryStatement Regarding Forward Looking Statements**

 

Certain statements contained in this Quarterly Reporton Form 10-Q, which are not purely historical, are “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, Section 27A of the Securities Act of 1933 and Section 21E ofthe Securities Exchange Act of 1934, including but not limited to statementsregarding our expectations, hopes, beliefs, intentions, estimates or strategiesregarding the future, such as our future operating performance and financialresults, as well as those set forth in Part II, Item 1 “Legal Proceedings”below.  Actual results could differmaterially from those projected in any forward-looking statements as a resultof a number of factors, including those detailed below in this “Management’sDiscussion and Analysis” section and elsewhere herein and in our Annual Reporton Form 10-K for the period ended December 31, 2007.  Any forward-looking statements are made as ofthe date hereof, and the Company assumes no obligation to update theforward-looking statements, or to update the reasons why actual results coulddiffer materially from those projected in the forward-looking statements.  For a discussion of risks and uncertaintiesthat should be considered and which could materially adversely affect theCompany and which could cause our actual results to differ materially fromthose anticipated in our forward-looking statements, please see “Risk Factors” belowand in Part I, Item 1A of our Annual Report on Form 10-K for theperiod ended December 31, 2007.

 

The following discussion ofour financial condition and results of operations should be read together withthe consolidated financial statements and related notes for the year ended December 31, 2007included in the Company’s Annual Report on Form10-K.

 

9

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**Results of Operations**

 

The following table sets forth selected statements ofincome data for the periods indicated, expressed as a percent of total revenue:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **March 31,**               | ** ** |
| ** **                      | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| REVENUE:                        |       |                             |       |   |   |
| Service revenue                 |       | 91.0                             | %          | 90.6 | % |
| Reimbursed fee revenue          |       | 9.0                              | %          | 9.4 | % |
|                            |       |                             |       |   |   |
| Total revenue                   |       | 100.0                            | %          | 100.0 | % |
|                            |       |                             |       |   |   |
| COST OF REVENUE:                |       |                             |       |   |   |
| Cost of service revenue         |       | 42.5                             | %          | 43.8 | % |
| Reimbursed fees paid            |       | 9.0                              | %          | 9.4 | % |
|                            |       |                             |       |   |   |
| Total cost of revenue           |       | 51.5                             | %          | 53.2 | % |
|                            |       |                             |       |   |   |
| GROSS PROFIT                    |       | 48.5                             | %          | 46.8 | % |
|                            |       |                             |       |   |   |
| OPERATING EXPENSES:             |       |                             |       |   |   |
| Research and development        |       | 6.0                              | %          | 5.7 | % |
| Sales and marketing             |       | 17.0                             | %          | 14.9 | % |
| General and administrative      |       | 15.1                             | %          | 14.3 | % |
|                            |       |                             |       |   |   |
| Total operating expenses        |       | 38.1                             | %          | 34.9 | % |
|                            |       |                             |       |   |   |
| INCOME FROM OPERATIONS          |       | 10.4                             | %          | 11.9 | % |
|                            |       |                             |       |   |   |
| OTHER INCOME (EXPENSE):         |       |                             |       |   |   |
| Interest income                 |       | 3.4                              | %          | 0.6 | % |
| Interest expense                |       | (0.0                             | )%         | (0.0 | )% |
| Other income (expense)—net |       | (0.1                             | )%         | (0.0 | )% |
|                            |       |                             |       |   |   |
| Total other income—net     |       | 3.3                              | %          | 0.6 | % |
|                            |       |                             |       |   |   |
| INCOME BEFORE INCOME TAXES      |       | 13.7                             | %          | 12.5 | % |
|                            |       |                             |       |   |   |
| INCOME TAX PROVISION            |       | 4.9                              | %          | 5.2 | % |
|                            |       |                             |       |   |   |
| NET INCOME                      |       | 8.8                              | %          | 7.3 | % |

 

10

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**Three months ended March 31,2008 and 2007**

 

***Service revenue***

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | ** **                 | ** ** | ** ** | ** ** |
|---------------------------------|------------|----------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                      | ** ** | **March 31**                | ** ** | **2008 vs 2007** | ** ** |
| **$ in thousands**    | ** ** | **2008**                         | ** ** | **2007**                   | ** ** | **Change** | ** ** | **%Change** | ** ** |
|                            |       |                             |       |                       |       |       |       |   |   |
| Service revenue                 |       | $                                | 15,763     |                       | $          | 14,515     |       | $ | 1,248 |   | 8.6 | % |
| *As a percent of total revenue* |       | 91.0                             | %          | 90.6                       | %          | 0.4        | ppts       |   |   |
|                                 |            |                                  |            |                            |            |            |            |  |  |  |  |  |

 

Service revenue for the three months ended March 31,2008 increased $1.2 million, or 8.6%, compared to the corresponding prior yearperiod. This increase was primarily due to a $1.8 million increase in servicerevenue generated from net new customers in the three months ended March 31,2008, compared to the 2007 period, offset by a decrease in service revenuederived from existing customers of $0.6 million. We define revenue derived fromnet new customers to mean revenue derived during the period from customers whohad not used our services during the 13 months immediately preceding the end ofthat period, net of revenue derived during the period from customers who hadbeen billed for services in the prior period and were billed for less than 10%of that prior period amount in the period being analyzed. The increase inservice revenue from new customers was due to customers that have started usingour services in the second quarter of 2007 or later from whom we had notgenerated revenue during the period prior to March 31, 2007. As of March 31,2008, we had 2,384 customers, compared to 1,566 customers as of March 31,2007. The decrease in service revenue from existing customers compared to theprior year was primarily the result ofa slowdown in the number of background screens ordered by these customers inthe current quarter, which we believe is due in most part to less hiring andless movement by employees to new positions due to the current macro-economicuncertainties.  This slowdown of existingcustomer revenue reduced our overall service revenue growth rate. We are unableto currently predict if this existing customer growth slowdown will continueinto the future and, if so, for how long.

 

***Reimbursed feerevenue***

 

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | ** **                 | ** ** | ** ** | ** ** |
|---------------------------------|------------|----------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                      | ** ** | **March 31**                | ** ** | **2008 vs 2007** | ** ** |
| **$ in thousands**    | ** ** | **2008**                         | ** ** | **2007**                   | ** ** | **Change** | ** ** | **%Change** | ** ** |
|                            |       |                             |       |                       |       |       |       |   |   |
| Reimbursed fee revenue          |       | $                                | 1,563      |                       | $          | 1,505      |       | $ | 58 |   | 3.9 | % |
| *As a percent of total revenue* |       | 9.0                              | %          | 9.4                        | %          | (0.4       | )ppts      |   |   |
|                                 |            |                                  |            |                            |            |            |            |  |  |  |  |  |

 

Reimbursed fee revenue for the three months ended March 31,2008 increased $0.1 million, or 3.9%, compared to the corresponding prior yearperiod.  This increase was a result of anincrease in the number of screening transactions, which grew approximately13.2% in the three months ended March 31, 2008 compared to the threemonths ended March 31, 2007.

 

***Cost of revenue***

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | ** **                 | ** ** | ** ** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                        | ** ** | **March 31**                | ** ** | **2008 vs 2007** | ** ** |
| **$ in thousands**      | ** ** | **2008**                         | ** ** | **2007**                   | ** ** | **Change** | ** ** | **%Change** | ** ** |
|                              |       |                             |       |                       |       |       |       |   |   |
| Cost of revenue                   |       | $                                | 7,369      |                       | $          | 7,016      |       | $ | 353 |   | 5.0 | % |
| *As a percent of service revenue* |       | 46.7                             | %          | 48.3                       | %          | (1.6       | )ppts      |   |   |
|                              |       |                             |       |                       |       |       |       |   |   |
| Gross profit                      |       | $                                | 8,394      |                       | $          | 7,499      |       | $ | 895 |   | 11.9 | % |
| *As a percent of service revenue* |       | 53.3                             | %          | 51.7                       | %          | 1.6        | ppts       |   |   |

 

11

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Cost of revenue for the three months ended March 31,2008 increased $0.4 million, or 5.0%, compared to the three months ended March 31,2007.  The increase was primarily due toan increase in vendor costs and salaries and wages. Overall, cost of servicerevenue as a percent of service revenue declined 1.6 percentage points for thethree months ended March 31, 2008 compared to the corresponding prior yearperiod. This decline was largely due to improved fixed cost leverage withrespect to our facilities and overhead costs, as well as the implementation ofcertain automation projects.

 

***Research anddevelopment expense***

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | ** **                 | ** ** | ** ** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                        | ** ** | **March 31**                | ** ** | **2008 vs 2007** | ** ** |
| **$ in thousands**      | ** ** | **2008**                         | ** ** | **2007**                   | ** ** | **Change** | ** ** | **%Change** | ** ** |
|                              |       |                             |       |                       |       |       |       |   |   |
| Research and development expense  |       | $                                | 1,048      |                       | $          | 909        |       | $ | 139 |   | 15.3 | % |
| *As a percent of service revenue* |       | 6.6                              | %          | 6.3                        | %          | 0.3        | ppts       |   |   |
|                                   |            |                                  |            |                            |            |            |            |  |  |  |  |  |

 

Research and development expense for the three monthsended March 31, 2008 increased $0.1 million, or 15.3%, compared to thethree months ended March 31, 2007. The increase was the result of higher salaries and related benefits forexisting employees, partially offset by development costs capitalized in the2008 period. Research and development expense as a percent of service revenueincreased by 0.3 percentage points for the three months ended March 31,2008 compared to the corresponding prior year period. This increase as apercentage of service revenue primarily resulted from an increase in thecurrent period in amortization from capitalized software and a decrease incapitalized labor.

 

***Sales andmarketing expense***

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | ** **                 | ** ** | ** ** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                        | ** ** | **March 31**                | ** ** | **2008 vs 2007** | ** ** |
| **$ in thousands**      | ** ** | **2008**                         | ** ** | **2007**                   | ** ** | **Change** | ** ** | **%Change** | ** ** |
|                              |       |                             |       |                       |       |       |       |   |   |
| Sales and marketing expense       |       | $                                | 2,938      |                       | $          | 2,379      |       | $ | 559 |   | 23.5 | % |
| *As a percent of service revenue* |       | 18.6                             | %          | 16.4                       | %          | 2.2        | ppts       |   |   |
|                                   |            |                                  |            |                            |            |            |            |  |  |  |  |  |

 

Sales and marketing expense for the three months endedMarch 31, 2008 increased $0.6 million, or 23.5%, compared to thecorresponding prior year period. Approximately $0.4 million of the increase was due to higher salariesand related benefits resulting from 15 additional full-time equivalent employeesduring the three months ended March 31, 2008 compared to the 2007 period.The remaining increase in sales and marketing expense was attributable tohigher travel and marketing expenses. We anticipate that sales and marketingexpense will continue to increase as a percentage of service revenue throughthe end of 2008 as we plan to continue to invest in our sales and marketingcapabilities.

 

***General andadministrative expense***

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | ** **                 | ** ** | ** ** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                        | ** ** | **March 31**                | ** ** | **2008 vs 2007** | ** ** |
| **$ in thousands**      | ** ** | **2008**                         | ** ** | **2007**                   | ** ** | **Change** | ** ** | **%Change** | ** ** |
|                              |       |                             |       |                       |       |       |       |   |   |
| General and adminstrative expense |       | $                                | 2,621      |                       | $          | 2,287      |       | $ | 334 |   | 14.6 | % |
| *As a percent of service revenue* |       | 16.6                             | %          | 15.8                       | %          | 0.8        | ppts       |   |   |
|                                   |            |                                  |            |                            |            |            |            |  |  |  |  |  |

 

General and administrative expense for the threemonths ended March 31, 2008 increased $0.3 million, or 14.6%, compared tothe three months ended March 31, 2007. This was due to a $0.1 million increase in salaries and related benefitsfor existing employees, plus expenses related to 6 additional full-timeequivalent employees during the three months ended March 31, 2008 comparedto the 2007 period.  The remainingincrease in general and

 

12

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administrative expenses was due to a $0.2 millionincrease in consulting costs. As a percent of service revenue, general andadministrative expense increased 0.8 percentage points for the three monthsended March 31, 2008, compared to the corresponding prior year period.

 

***Interest income***

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | ** **                 | ** ** | ** ** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                        | ** ** | **March 31**                | ** ** | **2008 vs 2007** | ** ** |
| **$ in thousands**      | ** ** | **2008**                         | ** ** | **2007**                   | ** ** | **Change** | ** ** | **%Change** | ** ** |
|                              |       |                             |       |                       |       |       |       |   |   |
| Interest income                   |       | $                                | 583        |                       | $          | 92         |       | $ | 491 |   | 533.7 | % |
| *As a percent of service revenue* |       | 3.7                              | %          | 0.6                        | %          | 3.1        | ppts       |   |   |
|                                   |            |                                  |            |                            |            |            |            |  |  |  |  |  |

 

Interest income increased $0.5 million to $0.6 millionfor the three months ended March 31, 2008 as compared to $0.1 million inthe three months ended March 31, 2007. The increase is a result of earnings on the proceeds from our initialpublic offering held in investments.

 

***Income taxes***

 

The effective taxrate for the three months ended March 31, 2008 was approximately 36.2%compared to approximately 41.5% for the same period in 2007. The decrease inthe effective tax rate during the three months ended March 31, 2008compared to the 2007 period was a result of tax-exempt interest incomegenerated from investment in tax-exempt securities during the current period.

 

**Liquidity and Capital Resources**

 

***OperatingActivities*****Our principal uses of cash in operating activities arefor operating expenses and working capital. Cash flows from operations aresignificantly influenced by the amount of cash invested in personnel andinfrastructure to support the anticipated future growth in our business, theincreasing number of customers using our services and the amount and timing ofpayments by these customers.

 

For the three months ended March 31, 2008, cashgenerated by operating activities of $0.5 million resulted primarily from netincome, including adjustments for depreciation and amortization and non-cashdeferred taxes, partially offset by an increase in operating assets andliabilities primarily as a result of the growth in revenues.  Cash provided by operating activities of $0.9million for the three months ended March 31, 2007 was primarilyattributable to net income, including adjustments for depreciation and amortizationand non-cash deferred taxes, partially offset by an increase in operatingassets and liabilities.

 

***InvestingActivities*** Net cash provided by investing activitiesfor the three months ended March 31, 2008 was $16.3 million and wascomprised of net investment securities sales of $16.7 million, less purchasesof fixed assets of $0.4 million. The use of cash for investing activities inthe three months ended March 31, 2007 was $1.3 million and represented netinvestment securities purchases and purchases of fixed assets of $0.7 millionand $0.6 million, respectively. See also Note 2 (Investments) above foradditional disclosures about investments.

 

***FinancingActivities*** Net cash provided by financing activitiesfor the three months ended March 31, 2008 was $0.4 million, due to theexercise of stock options. The use of cash for financing activities in thethree months ended March 31, 2007 of $0.7 million was primarily used inpreparation for our initial public offering in August 2007.

 

We currently believe that our existing cash position,cash flows provided by operating activities and existing credit facilities willbe sufficient to fund our working capital requirements and planned investmentsfor at least the next twelve months.  Wecurrently have no material debt.  TheCompany plans to use the net proceeds from our initial public offeringprimarily for working capital and other general corporate purposes, includingthe expansion of our sales and marketing activities, development of new serviceofferings and expansion of our international operations. In addition, we mayuse a portion of the net proceeds for acquisitions of, or investments in,businesses,

 

13

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productsor technologies that enhance or add new services or additional functionality,further solidify our market position or allow us to offer complementaryproducts, services or technologies. In the event an acquisitionplan is adopted which requires funds exceeding the availability describedabove, an alternate source of funds to accomplish the acquisition would have tobe developed.  Following the Company’sreincorporation into Delaware and our initial public offering, which wascompleted on August 13, 2007, the Company had 100,000,000 shares of commonstock authorized, of which 11,452,924 shares were outstanding at March 31,2008, and 10,000,000 shares of preferred stock authorized, of which none wereoutstanding. The board of directors is authorized to issue up to an aggregateof 10,000,000 shares of preferred stock in one or more series without furthervote or action by the stockholders.  TheCompany could issue additional shares of common or preferred stock or enterinto new or revised borrowing arrangements to raise funds.

 

**Critical Accounting Policies andEstimates**

 

Theforegoing discussion and analysis of the Company’s financial condition andresults of operations are based upon the consolidated financial statements ofthe Company, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of our financialstatements requires us to make estimates and assumptions that affect thereported amounts of assets, liabilities, revenues, costs and expenses, as wellas the disclosure of contingent assets and liabilities and other relateddisclosures. We base our estimates on historical experience and on variousother assumptions that we believe to be reasonable under the circumstances, theresults of which form the basis for making judgments about carrying values ofour assets and liabilities that are not readily apparent from other sources. Inmany instances, we could have reasonably used different accounting estimates.Actual results could differ from those estimates. We include any revisions to ourestimates in our results for the period in which the actual amounts becomeknown.

 

We believe the criticalaccounting policies described below affect the more significant judgments andestimates used in the preparation of our consolidated financial statements.Accordingly, the following are the policies that we believe are the mostcritical to aid in fully understanding and evaluating our historicalconsolidated financial condition and results of operations:

 

***Allowance for Doubtful Accounts.*** We maintain an allowance for doubtful accounts for estimated lossesresulting from the inability of certain of our customers to pay us. Thisprovision is based on our historical experience and for specific customersthat, in our opinion, are likely to default on our receivables from them. Inorder to identify these customers, we perform ongoing reviews of all customersthat have breached their payment terms, as well as those that have filed forbankruptcy or for whom information has become available indicating a significantrisk of non-recoverability. We continue to monitor and evaluate our customersover time. Historically, the allowance for doubtful accounts has beensufficient to cover our uncollectible receivables. To the extent that ourfuture collections differ from our assumptions based on historical experience,the amount of our bad debt and allowance recorded may be different. Although noindividual customer accounted for more than 6% of our total revenue thus far in2008, if our historical collection experience changes unexpectedly or if one ormore of our largest customers fails to pay the amounts owed to us, ourallowance for doubtful accounts would likely be inadequate.

 

***Accounting for Income Taxes.*** We record income tax expense in accordance with SFAS No. 109, *Accounting for Income Taxes* (“SFAS 109”),which requires that we recognize deferred tax assets and liabilities fortemporary differences in the bases of assets and liabilities for tax andfinancial reporting purposes. We record a valuation allowance related todeferred tax assets when it is more likely than not that some portion or all ofthe deferred tax asset will not be realized. We eliminated our valuationallowance in 2006 because we were profitable in 2006 and expected to beprofitable in future years. The preparation of financial projections involvessignificant subjectivity due to the inherent uncertainty involved in estimatingfuture performance. If we fail to perform as projected, we may need to record avaluation allowance in the future.

 

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***Accounting for Stock-Based Compensation.*** Effective January 1, 2006, we adopted SFAS 123(R), whichrequires that all stock-based compensation to employees, including grants ofemployee stock options, be expensed in our financial statements based on theirrespective grant date fair values. Under SFAS 123(R), we estimate the fairvalue of each stock-based payment award using the Black-Scholes option pricingmodel. The determination of the fair value of stock-based payment awards usingthe Black-Scholes model is affected by our stock price and a number ofassumptions, including expected volatility, expected life, risk-free interestrate and expected dividends. We do not have a history of market prices of ourcommon stock as we were not a public company until our recent initial publicoffering, and as such, we estimate volatility in accordance with StaffAccounting Bulletin No. 107 (“SAB 107”) using historical volatilitiesof other publicly traded companies in our industry. The expected life of theawards is based on the simplified method as defined in SAB 107. Therisk-free interest rate assumption is based on observed interest ratesappropriate for the terms of our awards. The dividend yield assumption is basedon our history and expectation of not paying any dividends. Forfeitures areestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates. We recognized stock-basedcompensation expense in our consolidated financial statements based on awardsthat are ultimately expected to vest. A summary of significant assumptions usedin determining the fair value of the options is as follows:

 
| ** **              | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| ** **              | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Expected life (years)   |       | 6.25                                                 |       | 6.25 |   |
| Risk-free interest rate |       | 3.14                                                 | %          | 4.82 | % |
| Volatility              |       | 41.56                                                | %          | 41.5 | % |
| Dividend yield          |       | 0                                                    | %          | 0 | % |

 

If factors change and weemploy different assumptions, stock-based compensation expense may differsignificantly from what we have recorded in the past. If there are anymodifications or cancellations of the underlying unvested securities, we may berequired to accelerate, increase or cancel any remaining unearned stock-basedcompensation expense. Future stock-based compensation expense and unearnedstock-based compensation will increase to the extent that we grant additionalequity awards to employees or we assume unvested equity awards in connectionwith acquisitions.

 

**RecentAccounting Pronouncements**

 

In February 2008,the FASB issued FASB Staff Position No. 157-2 (“Staff Position 157-2”),which deferred the effective date for certain portions of SFAS No. 157, *Fair Value Measurements (“SFAS 157”)*related to nonrecurringmeasurements of nonfinancial assets and liabilities.  That provision of SFAS 157 will be effectivefor the Company’s fiscal year 2009.  Weare currently evaluating the effect, if any, that the adoption of Staff Position 157-2will have on our results of operations, financial position and cash flows.

 

In December 2007,the FASB issued SFAS No. 141—revised 2007, “*Business Combinations”* (“SFAS 141R”). SFAS 141Restablishes principles and requirements for how an acquirer in a businesscombination recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest; recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase; and determines what informationto disclose to enable financial statement users to evaluate the nature andfinancial effects of the business combination. SFAS 141R applies tobusiness combinations for which the acquisition date is on or after December 15,2008. Early adoption is prohibited. We are currently evaluating the effect, ifany, that the adoption of SFAS 141R will have on our results ofoperations, financial position and cash flows.

 

In December 2007,the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements—an amendment to ARB No. 51*(“SFAS 160”). SFAS 160 requires all entities to report noncontrolling(minority) interests in subsidiaries as equity in the consolidated financialstatements, but separate from the equity of the parent company. The statementfurther requires that consolidated net income be reported at amountsattributable to the parent and the noncontrolling interest, rather thanexpensing the income attributable to the minority interest holder. Thisstatement also requires that companies provide sufficient disclosures toclearly identify and distinguish between the interests of the parent companyand the interests of the noncontrolling owners, including a disclosure on

 

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the face of theconsolidated statements for income attributable to the noncontrolling interestholder. This statement is effective for fiscal years beginning on or after December 15,2008. Early adoption is prohibited. We are currently evaluating the effect, ifany, that the adoption of SFAS 160 will have on our results of operations,financial position and cash flows.

 

**Item 3.****       ****Quantitative and QualitativeDisclosures about Market Risk**

 

Thereare no material changes to the disclosure set forth in the “Quantitativeand Qualitative Disclosures about Market Risk” section of Management’sDiscussion and Analysis of Financial Condition and Results of Operations** **contained inthe Company’s Annual Report Form 10-K for the period ended December 31,2007.

 

**Item 4T.**     Controls and Procedures

** **

The Company’sChief Executive Officer and Chief Financial Officer, with the participation ofthe Company’s management, carried out an evaluation of the effectiveness of theCompany’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)).Based upon that evaluation, the Chief Executive Officer and the Chief FinancialOfficer concluded that, as of the end of the period covered by this report, theCompany’s disclosure controls and procedures are effective at the “reasonableassurance” level in identifying material information relating to the Company(including its consolidated subsidiaries) required to be included in thisreport.

 

Disclosurecontrols and procedures, no matter how well designed and implemented, canprovide only reasonable assurance of achieving an entity’s disclosure objectives.The likelihood of achieving such objectives is affected by limitations inherentin disclosure controls and procedures. These include the fact that humanjudgment in decision-making can be faulty and that breakdowns in internalcontrol can occur because of human failures such as simple errors or mistakesor intentional circumvention of the established process.

 

There were nochanges in the Company’s internal controls over financial reporting, identifiedby the Chief Executive Officer or the Chief Financial Officer that occurredduring the period covered by this report that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

We are notrequired to comply with all of the rules and regulations of the Securitiesand Exchange Commission, particularly the requirement that we include in ourannual report on Form 10-K a report of management and accompanying auditor’sreport on the Company’s internal control over financial reporting (“404reporting”). Compliance by the Company with the 404 reporting rules andregulations will be required in our annual report on Form 10-K for thefiscal year ending December 31, 2008, unless the rules andregulations governing 404 reporting are revised.

 

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***PART II.  OTHER INFORMATION***

* *

**Item 1.****       ****LegalProceedings**

 

We encounterlawsuits from time to time in the ordinary course of business and, at March 31,2008, we were parties to several civil lawsuits. The Company does not expectthat the resolution of these lawsuits will have a material adverse impact onfuture results of operations or financial position. Certain lawsuits filedagainst the Company from time to time contain claims not covered by insurance,or seek damages in excess of policy limits, and such claims could be filed inthe future. The Company may file intellectual property infringement and/orother types of lawsuits in the future which may result in materially increasedcosts and other adverse consequences. Any costs and/or losses that we maysuffer from such lawsuits, and the effect such litigation may have upon thereputation and marketability of our products and services, could have amaterial adverse impact on the future results of operations, financialcondition and/or prospects of the Company.

 

**Item 1A.****    ****Risk Factors**

 

Exceptfor modifications to the risk factor set forth below, there have been nomaterial changes to the risk factors disclosed in Part I, Item 1A in ourAnnual Report on Form 10-K for the period ended December 31, 2007.

 

***Our investments in marketable securities are subject torisks which may cause losses.***

 

We invest our cashbalances in high-quality issuers and limit the amount of credit exposure to anyone issuer other than the United States government and its agencies. As of March 31,2008 our investments in marketable securities consist primarily of auction ratesecurities. Our auction rate securities are investment grade quality as of March 31,2008. We believe that these investments still approximate their par value,however, such risks, including the systemic failure of future auctions forauction rate securities, may result in a loss of liquidity, substantialimpairment to our investments, realization of substantial future losses, or acomplete loss of the investment in the long-term which may have a materialadverse effect on our business, results of operations, liquidity, and financialcondition. See Note 2 of our Notes to Consolidated Financial Statementsfor additional information about our investments in marketable securities.

 

**Item 2.****       ****UnregisteredSales of Equity Securities and Use of Proceeds**

 

Not applicable

 

**Item 3.****       ****Defaults Upon Senior Securities**

 

Not applicable

 

**Item 4.****       ****Submission of Matters to a Vote ofSecurity Holders**

 

No matters weresubmitted to a vote of our security holders, through solicitation of proxies orotherwise, during the first quarter of 2008.

 

**Item 5.****       ****OtherInformation**

 

Not applicable

 

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**Item 6.****       ****Exhibits**

** **
| **Exhibit** | ** ** | **Description** |
|-------------|------------|-----------------|
| ** **  | ** ** | ** **      |
| 3.1         |       |            | Certificate  of Incorporation of HireRight, Inc. (1) |
|        |       |            |   |
| 3.2         |       |            | Bylaws  of HireRight, Inc. (1) |
|        |       |            |   |
| 4.1         |       |            | Specimen  common stock certificate(1) |
|        |       |            |   |
| 31.1        | *          |            | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
|        |       |            |   |
| 31.2        | *          |            | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
|        |       |            |   |
| 32.1        | *          |            | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |
|        |       |            |   |
| 32.2        | *          |            | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |

 

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|   | *   |   | New  exhibit filed with this report.                                                                                                                          |
|--------|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (1) |   | Filed  as an exhibit to the Registrant’s Registration Statement on Form S-1  Registration No. 333-140613 and incorporated herein by reference. |

 

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***SIGNATURES***

* *

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 

 
|     |             | HIRERIGHT, INC.                        |
|----------|------------------|----------------------------------------|
|     |             |                                   |
|     |             |                                   |
| Date:    | May 7, 2008 | /s/  ERIC J.  BODEN          |
|     |             | Eric J. Boden                          |
|     |             | President and Chief  Executive Officer |
| * * |             | *(duly authorized officer)*            |
|     |             |                                   |
|     |             |                                   |
| Date:    | May 7, 2008 | /s/  JEFFREY  A. WAHBA       |
|     |             | Jeffrey A. Wahba                       |
|     |             | Chief Financial Officer                |
| * * |             | *(principal financial officer)*        |

 

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