**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

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

##### ****

**FORM 10-Q**

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**x****      QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

** **

**For thequarterly period ended****September 30, 2007**

 

**or**

 

**o****         TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

** **

**For the transition period from                 to                 **

 

**Commission File Number: 001-33613**

 

| **HIRERIGHT,  INC.**                                    |
|---------------------------------------------------------|
| (Exact name of  registrant as specified in its charter) |

 

| **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 ofprincipal executive offices)

 

**(949) 428-5800**

(Telephone number,including area code)

 

**Not Applicable**

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

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

                Yes x               No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

Large acceleratedfiler  o                                          Acceleratedfiler  o                                      Non-acceleratedfiler  x

 

Indicated by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).                 Yes o                No x

 

The number of shares of the registrant’s common stock,$0.01 par value, outstanding on November 2, 2007 was 11,231,941.

 

 

 

 

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***HIRERIGHT, INC.***

 

**INDEX**

 

 

| **Part I.     Financial Information** |
|-----------------------------------------------------------|
|                                                      |   |
| Item 1.                                                   | Financial Statements |
|                                                      |   |
|                                                      | Condensed,  Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006  (unaudited) |
|                                                      |   |
|                                                      | Condensed,  Consolidated Statements of Operations for the Three and Nine Months Ended  September 30, 2007 and 2006 (unaudited) |
|                                                      |   |
|                                                      | Condensed,  Consolidated Statements of Cash Flows for the Nine Months Ended September 30,  2007 and 2006 (unaudited) |
|                                                      |   |
|                                                      | Notes to  Condensed, Consolidated Financial Statements (unaudited) |
|                                                      |   |
| Item 2.                                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                                      |   |
| Item 3.                                                   | Quantitative and Qualitative Disclosures about Market  Risk |
|                                                      |   |
| Item 4T.                                                  | Controls and Procedures |
|                                                      |   |
| **Part  II.   Other Information**               |
|                                                      |   |
| Item  1.                                                  | Legal  Proceedings |
|                                                      |   |
| Item  1A.                                                 | Risk  Factors |
|                                                      |   |
| Item 2.                                                   | Unregistered Sales of Equity Securities and Use of  Proceeds |
|                                                      |   |
| Item 3.                                                   | Defaults Upon Senior Securities |
|                                                      |   |
| Item 4.                                                   | Submission of Matters to a Vote of Security Holders |
|                                                      |   |
| Item  5.                                                  | Other  Information |
|                                                      |   |
| Item 6.                                                   | Exhibits |
|                                                      |   |
| Signatures                                                |   |

 

 

2

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**HIRERIGHT, INC.CONDENSED,****CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| **(in thousands, except share amounts)**                                                                                                                                                                                                                            | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                          | ** ** | ** **        | ** ** | ** **       | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                                                                                     |       |              |       |             |       |
| Cash and cash equivalents                                                                                                                                                                                                                                           |       | $                 | 10,894     |             | $          | 4,201 |   |
| Restricted cash                                                                                                                                                                                                                                                     |       | 120               |       | 120              |       |
| Short-term investments                                                                                                                                                                                                                                              |       | 40,400            |       | 4,031            |       |
| Accounts receivable, net of allowance for doubtful accounts of $217  and $131 at September 30, 2007 and December 31, 2006, respectively, and  reserve for sales allowances of $126 and $154 at September 30, 2007 and  December 31, 2006, respectively              |       | 12,229            |       | 9,628            |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                           |       | 1,069             |       | 955              |       |
| Deferred tax asset - current                                                                                                                                                                                                                                        |       | 1,435             |       | 3,518            |       |
|                                                                                                                                                                                                                                                                |       |              |       |             |       |
| Total current assets                                                                                                                                                                                                                                                |       | 66,147            |       | 22,453           |       |
|                                                                                                                                                                                                                                                                |       |              |       |             |       |
| Property and equipment, net of accumulated depreciation and  amortization of $5,173 and $4,486 at September 30, 2007 and December 31,  2006, respectively                                                                                                           |       | 2,034             |       | 1,583            |       |
| Other assets                                                                                                                                                                                                                                                        |       | 484               |       | 646              |       |
| Deferred tax asset - non-current                                                                                                                                                                                                                                    |       | 1,167             |       | 1,151            |       |
|                                                                                                                                                                                                                                                                |       |              |       |             |       |
| TOTAL                                                                                                                                                                                                                                                               |       | $                 | 69,832     |             | $          | 25,833 |   |
|                                                                                                                                                                                                                                                                |       |              |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                       | ** ** | ** **        | ** ** | ** **       | ** ** |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                |       |              |       |             |       |
| Accounts payable                                                                                                                                                                                                                                                    |       | $                 | 2,947      |             | $          | 4,480 |   |
| Accrued liabilities                                                                                                                                                                                                                                                 |       | 2,085             |       | 1,210            |       |
| Accrued payroll and benefits                                                                                                                                                                                                                                        |       | 3,179             |       | 3,731            |       |
| Capital lease liability                                                                                                                                                                                                                                             |       | 2                 |       | 4                |       |
|                                                                                                                                                                                                                                                                |       |              |       |             |       |
| Total current liabilities                                                                                                                                                                                                                                           |       | 8,213             |       | 9,425            |       |
|                                                                                                                                                                                                                                                                |       |              |       |             |       |
| Other liabilities                                                                                                                                                                                                                                                   |       | 295               |       | —           |       |
|                                                                                                                                                                                                                                                                |       |              |       |             |       |
| Total liabilities                                                                                                                                                                                                                                                   |       | 8,508             |       | 9,425            |       |
|                                                                                                                                                                                                                                                                |       |              |       |             |       |
| COMMITMENTS AND CONTINGENCIES (Note 6)                                                                                                                                                                                                                              |       |              |       |             |       |
|                                                                                                                                                                                                                                                                |       |              |       |             |       |
| Series C redeemable convertible preferred stock,  $0.01 par value—0 and 6,794,579 shares authorized, issued and outstanding (aggregate  liquidation preference of $13,000) at September 30, 2007 and December 31,  2006, respectively                          |       | —            |       | 13,000           |       |
| Series E redeemable convertible preferred stock,  $0.01 par value—0 and 17,500,000 shares authorized, 0 and 17,246,579 shares issued  and outstanding (aggregate liquidation preference of $12,180) at September  30, 2007 and December 31, 2006, respectively |       | —            |       | 12,180           |       |
|                                                                                                                                                                                                                                                                |       |              |       |             |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                                                                                          |       |              |       |             |       |
| Preferred stock, 10,000,000 shares authorized, $0.01 par value—  none issued and outstanding                                                                                                                                                                   |       | —            |       | —           |       |
| Preferred stock, 50,000,000 shares authorized:                                                                                                                                                                                                                      |       |              |       |             |       |
| Series A redeemable convertible preferred stock, $0.01 par value—none  issued and outstanding                                                                                                                                                                  |       | —            |       | —           |       |
| Series B convertible preferred stock, $0.01 par value—0 and 854,632  shares authorized, issued and outstanding (aggregate liquidation preference  of $2,000) at September 30, 2007 and December 31, 2006, respectively                                         |       | —            |       | 2,000            |       |
| Common stock, $0.01 par value—100,000,000 shares authorized; 11,231,941  and 1,956,115 shares issued and outstanding at September 30, 2007 and  December 31, 2006, respectively                                                                                |       | 112               |       | 20               |       |
| Additional paid-in capital                                                                                                                                                                                                                                          |       | 67,929            |       | 847              |       |
| Other comprehensive gain—currency translation                                                                                                                                                                                                                  |       | 18                |       | 14               |       |
| Accumulated deficit                                                                                                                                                                                                                                                 |       | (6,735            | )          | (11,653          | )          |
|                                                                                                                                                                                                                                                                |       |              |       |             |       |
| Net stockholders’ equity (deficit)                                                                                                                                                                                                                             |       | 61,324            |       | (8,772           | )          |
|                                                                                                                                                                                                                                                                |       |              |       |             |       |
| TOTAL                                                                                                                                                                                                                                                               |       | $                 | 69,832     |             | $          | 25,833 |   |
|                                                                                                                                                                                                                                                                     |            |                   |            |                  |            |  |  |  |

 

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

 

3

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** **

**HIRERIGHT, INC.CONDENSED,****CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| **(in thousands, except per share data)**             | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| REVENUE:                                              |       |                   |       |                  |       |   |   |   |   |
| Service revenue                                       |       | $                      | 16,016     |                  | $          | 13,955 |   | $ | 47,337 |   | $ | 39,621 |   |
| Reimbursed fee revenue                                |       | 1,633                  |       | 1,375                 |       | 4,908 |   | 4,291 |   |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| Total revenue                                         |       | 17,649                 |       | 15,330                |       | 52,245 |   | 43,912 |   |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| COST OF REVENUE:                                      |       |                   |       |                  |       |   |   |   |   |
| Cost of service revenue                               |       | 7,273                  |       | 6,929                 |       | 21,653 |   | 19,597 |   |
| Reimbursed fees paid                                  |       | 1,633                  |       | 1,375                 |       | 4,908 |   | 4,291 |   |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| Total cost of revenue                                 |       | 8,906                  |       | 8,304                 |       | 26,561 |   | 23,888 |   |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| GROSS PROFIT                                          |       | 8,743                  |       | 7,026                 |       | 25,684 |   | 20,024 |   |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| OPERATING EXPENSES:                                   |       |                   |       |                  |       |   |   |   |   |
| Research and development                              |       | 982                    |       | 925                   |       | 2,914 |   | 2,714 |   |
| Sales and marketing                                   |       | 2,572                  |       | 2,141                 |       | 7,657 |   | 6,135 |   |
| General and administrative                            |       | 2,559                  |       | 2,445                 |       | 7,432 |   | 5,778 |   |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| Total operating expenses                              |       | 6,113                  |       | 5,511                 |       | 18,003 |   | 14,627 |   |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| INCOME FROM OPERATIONS                                |       | 2,630                  |       | 1,515                 |       | 7,681 |   | 5,397 |   |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| OTHER INCOME (EXPENSE):                               |       |                   |       |                  |       |   |   |   |   |
| Interest income                                       |       | 413                    |       | 49                    |       | 625 |   | 83 |   |
| Interest expense                                      |       | —                 |       | (2                    | )          | 1 |   | (40 | ) |
| Other income (expense)—net                       |       | (12                    | )          | (4                    | )          | (19 | ) | (19 | ) |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| Total other income —net                          |       | 401                    |       | 43                    |       | 607 |   | 24 |   |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES                            |       | 3,031                  |       | 1,558                 |       | 8,288 |   | 5,421 |   |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| INCOME TAX PROVISION (BENEFIT)                        |       | 1,189                  |       | (4,993                | )          | 3,369 |   | (4,887 | ) |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| NET INCOME                                            |       | 1,842                  |       | 6,551                 |       | 4,919 |   | 10,308 |   |
| Preferred stock dividends                             |       | —                 |       | (543                  | )          | — |   | (1,630 | ) |
| Income allocable to preferred stockholders            |       | —                 |       | (4,623                | )          | — |   | (6,678 | ) |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| NET INCOME ALLOCABLE TO COMMON STOCKHOLDERS           |       | $                      | 1,842      |                  | $          | 1,385 |   | $ | 4,919 |   | $ | 2,000 |   |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| EARNINGS PER SHARE:                                   |       |                   |       |                  |       |   |   |   |   |
| Basic                                                 |       | $                      | 0.27       |                  | $          | 0.75 |   | $ | 1.37 |   | $ | 1.12 |   |
| Diluted                                               |       | $                      | 0.17       |                  | $          | 0.48 |   | $ | 0.50 |   | $ | 0.69 |   |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES: |       |                   |       |                  |       |   |   |   |   |
| Basic                                                 |       | 6,812                  |       | 1,845                 |       | 3,599 |   | 1,782 |   |
| Diluted                                               |       | 10,812                 |       | 2,862                 |       | 9,763 |   | 2,907 |   |
|                                                       |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

4

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**HireRight,Inc.CONDENSED, CONSOLIDATED StatementS of Cash flows****(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                                                                 | ** ** | **2007**                             | ** ** | **2006** | ** ** |
|                                                                               |       |                                 |       |   |   |
| CASH PROVIDED BY OPERATING ACTIVITIES:                                             |       |                                 |       |   |   |
| Net income                                                                         |       | $                                    | 4,919      |   | $ | 10,308 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                 |       |   |   |
| Depreciation and amortization                                                      |       | 945                                  |       | 834 |   |
| Stock-based compensation expense                                                   |       | 272                                  |       | 187 |   |
| Deferred income taxes                                                              |       | 2,067                                |       | (5,051 | ) |
| Changes in operating assets and liabilities:                                       |       |                                 |       |   |   |
| Accounts receivable, net                                                           |       | (2,601                               | )          | (2,679 | ) |
| Prepaid expenses and other current assets                                          |       | (115                                 | )          | (353 | ) |
| Other assets                                                                       |       | 116                                  |       | (354 | ) |
| Accounts payable                                                                   |       | (1,607                               | )          | 1,974 |   |
| Accrued liabilities                                                                |       | 826                                  |       | (544 | ) |
| Accrued payroll and benefits                                                       |       | (571                                 | )          | 941 |   |
| Other liabilities                                                                  |       | 295                                  |       | — |   |
|                                                                               |       |                                 |       |   |   |
| Net cash provided by operating activities                                          |       | 4,546                                |       | 5,263 |   |
|                                                                               |       |                                 |       |   |   |
| CASH USED IN INVESTING ACTIVITIES:                                                 |       |                                 |       |   |   |
| Purchases of short-term investments                                                |       | (44,869                              | )          | (2,500 | ) |
| Sales of short-term investments                                                    |       | 8,500                                |       | 500 |   |
| Purchases of fixed assets                                                          |       | (1,315                               | )          | (802 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash used in investing activities                                              |       | (37,684                              | )          | (2,802 | ) |
|                                                                               |       |                                 |       |   |   |
| CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:                                   |       |                                 |       |   |   |
| Payments on notes payable                                                          |       | —                               |       | (1,124 | ) |
| Payments on capital leases                                                         |       | (2                                   | )          | (43 | ) |
| Proceeds from exercise of stock options and warrants                               |       | 407                                  |       | 145 |   |
| Proceeds from initial public offering                                              |       | 39,420                               |       | — |   |
|                                                                               |       |                                 |       |   |   |
| Net cash provided by (used in) financing activities                                |       | 39,825                               |       | (1,022 | ) |
|                                                                               |       |                                 |       |   |   |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                            |       | 6                                    |       | 9 |   |
|                                                                               |       |                                 |       |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                          |       | 6,693                                |       | 1,448 |   |
|                                                                               |       |                                 |       |   |   |
| CASH AND CASH EQUIVALENTS — Beginning of period                               |       | 4,201                                |       | 1,739 |   |
|                                                                               |       |                                 |       |   |   |
| CASH AND CASH EQUIVALENTS — End of period                                     |       | $                                    | 10,894     |   | $ | 3,187 |   |
|                                                                               |       |                                 |       |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                 |       |                                 |       |   |   |
| Interest paid                                                                      |       | $                                    | —     |   | $ | 88 |   |
|                                                                               |       |                                 |       |   |   |
| Income taxes paid                                                                  |       | $                                    | 1,350      |   | $ | 152 |   |
|                                                                               |       |                                 |       |   |   |
| NON-CASH FINANCING TRANSACTIONS:                                                   |       |                                 |       |   |   |
| Vesting of stock options early exercised                                           |       | $                                    | 48         |   | $ | — |   |
|                                                                               |       |                                 |       |   |   |
| Purchases of fixed assets                                                          |       | $                                    | 75         |   | $ | — |   |
|                                                                               |       |                                 |       |   |   |
| Accretion of Series E preferred stock                                              |       | $                                    | —     |   | $ | 64 |   |

 

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

 

5

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**HIRERIGHT, INC.**

**NOTES TO CONDENSED, CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited)

 

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

 

**Business. **HireRight, Inc. (the “Company”) wasincorporated in California in 1990 and reincorporated in Delaware in July 2007.Our shares of common stock are listed on the NASDAQ Global Market and tradeunder the symbol “HIRE.”  We are aprovider of 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.

 

**Basis of Presentation. **The accompanying condensed, consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples (“GAAP”) in the United States for interim financial information, andin accordance with the rules and regulations of the United States Securitiesand Exchange Commission (the “SEC”). Accordingly, they do not include all ofthe information and notes required by GAAP in the United States for annualfinancial statements as permitted under applicable rules and regulations, andshould be read in conjunction with our audited consolidated financialstatements and notes thereto for the fiscal year ended December 31, 2006included in the Company’s Registration Statement on Form S-1, as amended (“FormS-1”), filed with the SEC and declared effective on August 7, 2007.

 

The condensed, consolidated financial statementsincluded herein are unaudited; however, they contain all adjustments, includingnormal recurring adjustments, which in the opinion of management are necessaryfor a fair presentation. The results of operations for the three and nine monthsended September 30, 2007 are not necessarily indicative of results that can beexpected for the full year.

 

The preparation of our condensed, consolidatedfinancial statements in accordance with GAAP in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin our condensed, consolidated financial statements and notes thereto. Actualresults could differ materially from those estimates.

 

**Reincorporation and Reverse Stock Split. **On July 18, 2007, the Company reincorporated in Delaware and in connection therewith effected a 1-for-4.5 reverse stock split of the Company’s common stock. All share and per share amounts relating to common stock and stock options included in the accompanying condensed, consolidated financial statements and notes thereto have been restated to reflect the reverse stock split.

 

**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.

 

6

 

**Adoption of Incentive Plan. **On the Effective Date, the HireRight, Inc. 2007Long-Term Incentive Plan (the “2007 Plan”) became effective. The aggregatenumber of shares of common stock that may initially be issued under allstock-based awards under the 2007 Plan is 1,000,000 shares. In addition, thenumber of shares of common stock reserved under the 2007 Plan willautomatically be increased on the first day of January in each calendar year,beginning on January 1, 2009 and ending on January 1, 2013, in an amount equalto the lesser of 2.5% of the shares outstanding on such date or a lesser numberof shares as determined by the compensation committee of the Company’s board ofdirectors. Any employee, officer, consultant, advisor or director providingservices to the Company or any of its affiliates, who is selected by thecommittee, is eligible to receive awards under the 2007 Plan. With theeffectiveness of the 2007 Plan, no further option grants will be made under the2000 Stock Option/Stock Issuance Plan (the “2000 Plan”). However, alloutstanding options under the 2000 Plan will continue to be administered underthe terms and conditions of the 2000 Plan.

 

**Adoption of Employee Stock Purchase Plan. **On the Effective Date, the HireRight, Inc. EmployeeStock Purchase Plan (the “ESPP” or the “Purchase Plan”) became effective. TheESPP is designed to permit our employees and our participating subsidiaries’eligible employees to purchase shares of our common stock through periodicafter-tax payroll deductions and is intended to qualify as a “stock purchaseplan” within the meaning of Section 423 of the Internal Revenue Code.  225,000 shares of our common stock arereserved for issuance under our ESPP. The Purchase Plan will be implemented bya series of consecutive six-month purchase periods. The initial purchase periodwill begin on the date established by the compensation committee and willterminate on the last business day of the next following six-month period.Eligible employees who elect to participate in the ESPP will be able to directthe Company to make payroll deductions of up to 15% of their regularcompensation for each pay period during a purchase period, for the purchase ofshares of common stock. The applicable purchase price for each purchase periodwill be equal to the price established by the committee prior to the firstbusiness day of that purchase period, which price may, at the discretion of thecompensation committee, be a price which is not fixed or determinable as of thefirst business day of that purchase period. In no event, however, will thepurchase price for any purchase period be less than the lesser of 85% of thefair market value of the Company’s common stock on the first business day orthe last business day of that purchase period. As of September 30, 2007, nopurchase period had been initiated and no participant contributions had beenreceived by the Company.

 

**2.****                         ****Short-Term Investments**

 

The Company’s short-term investments primarily consistof various auction rate securities. The Company accounts for its investments inmarketable securities under Statement of Financial Accounting Standard (“SFAS”)No. 115, *Certain Investments in Debt and Equity Securities*.The company has classified these investments as available for sale and recordsthese investments at fair value.

 

**3.****                         ****Share-Based Compensation**

 

During the three and nine months ended September 30,2007, stock options for the purchase of 73,492 and 141,308 shares of commonstock, respectively, at a weighted average exercise price of $14.99 and $14.41per share, respectively, were awarded, with vesting generally over four years.For the comparable periods in 2006, stock options for the purchase of 180,230 and407,015 shares of common stock, respectively, at a weighted average exerciseprice of $6.93 and $5.22 per share, respectively, were awarded.

 

At September 30, 2007,there were 1,041,503 outstanding stock options granted under the 2000 Plan and73,492 outstanding stock options under the 2007 Plan. The Company now maintainstwo plans, the 2000 Plan and the 2007 Plan, which became effective on theEffective Date of the Company’s initial public offering. All stock optionawards up until the Effective Date were made under the 2000 Plan.  Commencing on the Effective Date, new optionsand other stock awards may only be granted under the 2007 Plan. The maximumaggregate number of shares of common stock or options to purchase shares of theCompany’s common stock that may initially be issued under the 2007 Plan is1,000,000. Outstanding options granted under both our 2000 Plan and 2007 Planexpire ten years from the grant date and typically vest 25% upon completion ofone

 

7

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year of service with theremaining options vesting in 36 successive equal monthly installments uponcompletion of each additional month of service thereafter.

 

During the three and ninemonths ended September 30, 2007, in accordance with the prospective method ofadoption of SFAS No. 123 (revised 2004), “*Share-Based Payment*,”the Company recognized share-based compensation expense of $119,000 and$272,000, respectively, compared to $154,000 and $187,000, respectively, forthe comparable 2006 periods. At September 30, 2007, there was $1.4 million ofunrecognized compensation cost related to unvested shares that will berecognized over a weighted average period of 2.0 years.

 

Asummary of significant assumptions used in determining the fair value of theoptions granted is as follows:

 

| ** **              | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------|------------|-------------------------------------|------------|
| ** **              | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| Expected life (years)   |       | 6.25                                |       | 6.25 |   |
| Risk-free interest rate |       | 4.69                                | %          | 4.92 | % |
| Volatility              |       | 41.5                                | %          | 41.5 | % |
| Dividend yield          |       | 0                                   | %          | 0 | % |
| Forfeiture rate         |       | 9.25                                | %          | 9.25 | % |

 

As of September 30, 2007,the total number of outstanding options vested and expected to vest (based onanticipated forfeitures) was 1,079,473, which had a weighted-average exerciseprice of $4.47. The average remaining life of these options was 7.1 years andthe aggregate intrinsic value was $6.4 million at September 30, 2007.

 

As of September 30, 2007,the total number of outstanding options currently exercisable was 661,623,which had a weighted-average exercise price of $2.47. The average remaininglife of these options was 6.2 years and the aggregate intrinsic value was $5.2million at September 30, 2007.

 

8

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**4.         Calculation of Earnings per CommonShare**

 

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:

 
| ** **                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| **in thousands, except per share amounts**                      | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                            |       |                   |       |                  |       |   |   |   |   |
| **Numerator:**                                                  | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                      |       | $                      | 1,842      |                  | $          | 6,551 |   | $ | 4,919 |   | $ | 10,308 |   |
| Less preferred stock dividends                                  |       | —                 |       | (543                  | )          | — |   | (1,630 | ) |
| Less income allocable to preferred stockholders                 |       | —                 |       | (4,623                | )          | — |   | (6,678 | ) |
|                                                            |       |                   |       |                  |       |   |   |   |   |
| Net income allocable to common stockholders                     |       | $                      | 1,842      |                  | $          | 1,385 |   | $ | 4,919 |   | $ | 2,000 |   |
|                                                            |       |                   |       |                  |       |   |   |   |   |
| **Denominator:**                                                | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average common shares outstanding:                     |       |                   |       |                  |       |   |   |   |   |
| Basic                                                           |       | 6,812                  |       | 1,845                 |       | 3,599 |   | 1,782 |   |
| Effect of dilutive potential common shares:                     |       |                   |       |                  |       |   |   |   |   |
| Weighted average unvested common shares                         |       | —                 |       | 48                    |       | 5 |   | 75 |   |
| Common equivalent shares from warrants to purchase common stock |       | 338                    |       | 269                   |       | 352 |   | 474 |   |
| Common equivalent shares from options to purchase common stock  |       | 696                    |       | 700                   |       | 696 |   | 576 |   |
| Common equivalent shares from convertible preferred stock       |       | 2,966                  |       | —                |       | 5,111 |   | — |   |
|                                                            |       |                   |       |                  |       |   |   |   |   |
| Diluted                                                         |       | 10,812                 |       | 2,862                 |       | 9,763 |   | 2,907 |   |
|                                                            |       |                   |       |                  |       |   |   |   |   |
| Basic earnings per common share                                 |       | $                      | 0.27       |                  | $          | 0.75 |   | $ | 1.37 |   | $ | 1.12 |   |
|                                                            |       |                   |       |                  |       |   |   |   |   |
| Diluted earnings per common share                               |       | $                      | 0.17       |                  | $          | 0.48 |   | $ | 0.50 |   | $ | 0.69 |   |
|                                                                 |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |

 

The anti-dilutive effect of 141,308 shares fromoutstanding stock options have been excluded from the earnings per share calculationsfor the three months and nine months ended September 30, 2007, respectively.

 

**5.         Recent Accounting Pronouncements**

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109* (“FIN 48”), effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109 by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. The Company adopted FIN 48 as of January 1, 2007. The impact of the Company’s reassessment of its tax positions in accordance with FIN 48 did not have a material effect on its consolidated financial position, results of operations or cash flows.

 

9

 

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS 157”),which defines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements. SFAS 157 applies to otheraccounting**pronouncements thatrequire or permit fair value measurements. The new guidance is effective for**financial statements issued for fiscalyears beginning after November 15, 2007, and for interim periods**within those fiscal years. The Company iscurrently evaluating the impact, if any, that SFAS 157 will have on itsconsolidated financial position, results of operations and cash flows.

 

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities**- Including an amendmentof FASB Statement No. 115* (“SFAS 159”). SFAS 159 permits entities tochoose, at specified election dates, to measure eligible items at fair value(the “Fair Value Option”). A business entity shall report unrealized gains andlosses on items for which the Fair Value Option has been elected in earnings ateach subsequent reporting period. SFAS 159 is effective for years beginningafter November 15, 2007. The Company is currently evaluating the effect, ifany, of the adoption of SFAS 159 will have on its consolidated financialposition, results of operations and cash flows.

 

**6.         Commitmentsand Contingencies**

 

The Company is currently involved in certain legalmatters that have arisen in the normal course of business. Management believesthat the ultimate resolution of such actions will not have a material adverseeffect on the Company’s consolidated financial position and results ofoperations.

 

**7.****                         ****SegmentInformation**

 

The Company provides web-based screening services,primarily to customers located throughout the United States, and providessimilar services to similar customers across industries. Separate profitabilityor financial information is not analyzed for particular individual screeningservices. Management, including the chief operating decision maker, evaluatesthe Company’s performance based on its overall operating results for theCompany, and therefore, the Company has determined that it operates under onereportable segment.

 

**8.        ****IncomeTaxes**

 

At September 30, 2007, the Company had a federal netoperating loss carryforward of approximately $1.6 million. The federal netoperating losses will begin to expire in 2011. In general, Section 382 of theInternal 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 loss carryforwardsand credits prior to the change will be limited accordingly. Such limitation isreflected in the deferred income tax benefit balances as of September 30, 2007.

 

The Company adopted the provisions of FIN 48 onJanuary 1, 2007. At the adoption date and as of September 30, 2007, the Companyhad no material unrecognized tax benefits and no adjustments to liabilities oroperations were required. The Company recognizes interest and penalties relatedto uncertain tax positions in income tax expense. There was no expense relatedto interest and penalties for the three and nine months ended September 30,2007.

 

Tax years 2003 through 2006 and 2002 through 2006 aresubject to examination by the federal and state taxing authorities,respectively. There are no income tax examinations currently in process.

 

10

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**Item 2.            Management’sDiscussion and Analysis ofFinancial 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 ofSeptember 30, 2007, we had 1,891 customers, which included 63 of the Fortune500 companies. Our sales are derived from a combination of direct sales effortsas well as through our established network of strategic alliances with many ofthe leading recruiting software application providers and human resourceoutsourcing, or HRO, providers.

 

**Cautionary Statement Regarding Forward Looking Statements**

Certainstatements contained in this Quarterly Report on Form 10-Q, which are notpurely historical, are “forward-looking statements” within the meaning of thePrivate Securities Litigation Reform Act of 1995, Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934, includingbut not limited to statements regarding our expectations, hopes, beliefs,intentions, estimates or strategies regarding the future, such as those setforth in Part II, Item1 “Legal Proceedings” below.  Actualresults could differ materially from those projected in any forward-lookingstatements as a result of a number of factors, including those detailed belowin this “Management’s Discussion and Analysis” section and elsewhere herein andin our Quarterly Report on Form 10-Q for the period ended June 30, 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”in Part II, Item 1A of our Quarterly Report on Form 10-Q for the period endedJune 30, 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, 2006 andthree months ended March 31, 2007 included in the Company’s Form S-1, and our QuarterlyReport on Form 10-Q for the period ended June 30, 2007.

 

**Significant Events and Developments**

 

***Reincorporation and Reverse Stock Split.***** **On July 18, 2007, we reincorporated in Delaware and in connection therewith effected a 1-for-4.5 reverse stock split of our common stock. All share and per share amounts relating to common stock and stock options included in the accompanying condensed, consolidated financial statements and notes thereto have been restated to reflect the reverse stock split.

 

***Initial Public Offering.***** **The registration statement for our initial public offering (the “Public Offering”) was declared effective on August 7, 2007 (the “Effective Date”). We consummated the Public Offering on August 13, 2007 and sold 2,954,115 shares of our common stock, at a price of $15.00 per share.  An additional 1,420,885 shares were sold by selling stockholders.  We 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 our common stock.

 

***Adoption of Incentive Plan.***** **On theEffective Date, the HireRight, Inc. 2007 Long-Term Incentive Plan (the “2007Plan”) became effective. The aggregate number of shares of common stock thatmay initially be issued under

 

 

 

11

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all stock-basedawards under the 2007 Plan is 1,000,000 shares. In addition, the number ofshares of common stock reserved under the 2007 Plan will automatically beincreased on the first day of January in each calendar year, beginning onJanuary 1, 2009 and ending on January 1, 2013, in an amount equal to the lesserof 2.5% of the shares outstanding on such date or a lesser number of shares asdetermined by the compensation committee of the Company’s board of directors.Any employee, officer, consultant, advisor or director providing services tothe Company or any of its affiliates, who is selected by the committee, iseligible to receive awards under the 2007 Plan. With the effectiveness of the2007 Plan, no further option grants will be made under the 2000 StockOption/Stock Issuance Plan (the “2000 Plan”). However, all outstanding optionsunder the 2000 Plan will continue to be administered under the terms andconditions of the 2000 Plan.

 

***Adoption of Employee StockPurchase Plan.***** **On the Effective Date, the HireRight, Inc. EmployeeStock Purchase Plan (the “ESPP” or the “Purchase Plan”) became effective. TheESPP is designed to permit our employees and our participating subsidiaries’eligible employees to purchase shares of our common stock through periodicafter-tax payroll deductions and is intended to qualify as a “stock purchaseplan” within the meaning of Section 423 of the Internal Revenue Code.  225,000 shares of our common stock arereserved for issuance under our ESPP. The Purchase Plan will be implemented bya series of consecutive six-month purchase periods. The initial purchase periodwill begin on the date established by the compensation committee and willterminate on the last business day of the next following six-month period.Eligible employees who elect to participate in the ESPP will be able to directthe Company to make payroll deductions of up to 15% of their regular compensationfor each pay period during a purchase period, for the purchase of shares ofcommon stock. The applicable purchase price for each purchase period will beequal to the price established by the committee prior to the first business dayof that purchase period, which price may, at the discretion of the compensationcommittee, be a price which is not fixed or determinable as of the firstbusiness day of that purchase period. In no event, however, will the purchaseprice for any purchase period be less than the lesser of 85% of the fair marketvalue of the Company’s common stock on the first business day or the lastbusiness day of that purchase period. As of September 30, 2007, no purchaseperiod had been initiated and no participant contributions had been received bythe Company.

 

 

 

12

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**Resultsof Operations**

 

The following table sets forth selected statements ofoperations data for the periods indicated, expressed as a percent of totalrevenue:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                      | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| REVENUE:                        |       |                   |       |                  |       |   |   |   |   |
| Service revenue                 |       | 90.7                   | %          | 91.0                  | %          | 90.6 | % | 90.2 | % |
| Reimbursed fee revenue          |       | 9.3                    | %          | 9.0                   | %          | 9.4 | % | 9.8 | % |
|                            |       |                   |       |                  |       |   |   |   |   |
| Total revenue                   |       | 100.0                  | %          | 100.0                 | %          | 100.0 | % | 100.0 | % |
|                            |       |                   |       |                  |       |   |   |   |   |
| COST OF REVENUE:                |       |                   |       |                  |       |   |   |   |   |
| Cost of service revenue         |       | 41.2                   | %          | 45.2                  | %          | 41.4 | % | 44.6 | % |
| Reimbursed fees paid            |       | 9.3                    | %          | 9.0                   | %          | 9.4 | % | 9.8 | % |
|                            |       |                   |       |                  |       |   |   |   |   |
| Total cost of revenue           |       | 50.5                   | %          | 54.2                  | %          | 50.8 | % | 54.4 | % |
|                            |       |                   |       |                  |       |   |   |   |   |
| GROSS PROFIT                    |       | 49.5                   | %          | 45.8                  | %          | 49.2 | % | 45.6 | % |
|                            |       |                   |       |                  |       |   |   |   |   |
| OPERATING EXPENSES:             |       |                   |       |                  |       |   |   |   |   |
| Research and development        |       | 5.6                    | %          | 6.0                   | %          | 5.6 | % | 6.2 | % |
| Sales and marketing             |       | 14.6                   | %          | 14.0                  | %          | 14.7 | % | 14.0 | % |
| General and administrative      |       | 14.5                   | %          | 15.9                  | %          | 14.2 | % | 13.2 | % |
|                            |       |                   |       |                  |       |   |   |   |   |
| Total operating expenses        |       | 34.7                   | %          | 35.9                  | %          | 34.5 | % | 33.4 | % |
|                            |       |                   |       |                  |       |   |   |   |   |
| INCOME FROM OPERATIONS          |       | 14.8                   | %          | 9.9                   | %          | 14.7 | % | 12.2 | % |
|                            |       |                   |       |                  |       |   |   |   |   |
| OTHER INCOME (EXPENSE):         |       |                   |       |                  |       |   |   |   |   |
| Interest income                 |       | 2.3                    | %          | 0.3                   | %          | 1.2 | % | 0.2 | % |
| Interest expense                |       | 0.0                    | %          | 0.0                   | %          | 0.0 | % | (0.1 | )% |
| Other income (expense)—net |       | (0.1                   | )%         | 0.0                   | %          | 0.0 | % | 0.0 | % |
|                            |       |                   |       |                  |       |   |   |   |   |
| Total other income—net     |       | 2.2                    | %          | 0.3                   | %          | 1.2 | % | 0.1 | % |
|                            |       |                   |       |                  |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES      |       | 17.0                   | %          | 10.2                  | %          | 15.9 | % | 12.3 | % |
|                            |       |                   |       |                  |       |   |   |   |   |
| INCOME TAX PROVISION            |       | 6.7                    | %          | (32.6                 | )%         | 6.4 | % | (11.1 | )% |
|                            |       |                   |       |                  |       |   |   |   |   |
| NET INCOME                      |       | 10.3                   | %          | 42.8                  | %          | 9.5 | % | 23.4 | % |

 

 

 

13

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**Three months and nine months ended****September****30,2007 and 2006**

 

***Service revenue***

| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| **$ in thousands**         | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service revenue                 |       | $                      | 16,016     |                  | $          | 13,955 |   | $ | 47,337 |   | $ | 39,621 |   |
| *As a percent of total revenue* |       | 90.7                   | %          | 91.0                  | %          | 90.6 | % | 90.2 | % |
|                                 |            |                        |            |                       |            |  |  |  |  |  |  |  |  |

 

Service revenue for the three months ended September30, 2007 increased $2.1 million, or 14.8%, compared to the corresponding prioryear period. This increase was primarily due to a $1.9 million increase inservice revenue generated from net new customers in the three months endedSeptember 30, 2007, compared to the 2006 period, and an increase in servicerevenue derived from existing customers of $0.2 million. We define revenuederived from net new customers to mean revenue derived during the period fromcustomers who had not used our services during the 13 months immediatelypreceding the end of that period, net of revenue derived during the period fromcustomers who had been billed for services in the prior period and were billedfor less than 10% of that prior period amount in the period being analyzed. Theincrease in service revenue from new customers was due to customers thatstarted using our services in the fourth quarter of 2006 and generated yearover year increases in revenue in 2007 as they further integrated theirscreening operations with us, and the addition of new customers for the ninemonths ended September 30, 2007, from whom we had not generated revenue duringthe period prior to September 30, 2006. As of September 30, 2007, we had 1,891customers, compared to 1,367 customers as of September 30, 2006. The moremodest increase of $0.2 million in service revenue from existing customerscompared to the first two quarters of the year was primarily the result of a slowdown in the growth of the number ofbackground screens ordered by these customers in the current quarter.  This slowdown in growth of existing revenuereduced our overall service revenue growth rate in the third quarter ascompared to the second quarter of this year. We are unable to currently predictif this existing customer growth slowdown will continue into the future and, ifso, for how long.

 

Service revenue for the nine months ended September30, 2007 increased $7.7 million, or 19.5%, compared to the corresponding prioryear period. For the nine months ended September 30, 2007, service revenuegenerated from net new customers and existing customers increased $5.6 millionand $2.1 million, respectively, compared to the corresponding 2006 period. Theincrease in service revenue from new customers was due to customers thatstarted using our services in the fourth quarter of 2006 and thereforegenerated year over year increases in revenue in 2007 as they furtherintegrated their screening operations with us, and the addition of newcustomers for the nine months ended September 30, 2007, from whom we had not generatedrevenue during the nine months ended September 30, 2006. The increase inservice revenue from existing customers was largely due to the sale of additional services to existing customers, furtherrollout of our screening services to other divisions by enterprise customers,and overall growth in hiring in the first half of 2007, tempered by a slowdownin growth in the third quarter of 2007.

 

***Reimbursed feerevenue***

| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| **$ in thousands**         | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Reimbursed fee revenue          |       | $                      | 1,633      |                  | $          | 1,375 |   | $ | 4,908 |   | $ | 4,291 |   |
| *As a percent of total revenue* |       | 9.3                    | %          | 9.0                   | %          | 9.4 | % | 9.8 | % |
|                                 |            |                        |            |                       |            |  |  |  |  |  |  |  |  |

 

Reimbursed fee revenue for the three months endedSeptember 30, 2007 increased $0.3 million, or 18.8%, compared to thecorresponding prior year period.  Thisincrease was a result of an increase in the number of screening transactions,which grew approximately 16.9% in the three months ended September 30, 2007compared to the three months ended September 30, 2006.

 

Reimbursed fee revenue for the nine months endedSeptember 30, 2007 increased $0.6 million, or 14.4%, respectively, compared tothe corresponding prior year period.  Inthe nine months ended September 30, 2007, the number of screening transactionsgrew approximately 19.3% compared to the corresponding 2006 period.

 

 

 

14

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Reimbursed fee revenue as a percent of total revenue decreased 0.4percentage points for the nine months ended September 30, 2007 compared to ninemonths ended September 30, 2006 because a higher percentage of the servicessold did not have associated reimbursed costs.

 

***Cost of revenue***

| ** **                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| **$ in thousands**           | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cost of revenue                   |       | $                      | 7,273      |                  | $          | 6,929 |   | $ | 21,653 |   | $ | 19,597 |   |
| *As a percent of service revenue* |       | 45.4                   | %          | 49.7                  | %          | 45.7 | % | 49.5 | % |
|                              |       |                   |       |                  |       |   |   |   |   |
| Gross profit                      |       | $                      | 8,743      |                  | $          | 7,026 |   | $ | 25,684 |   | $ | 20,024 |   |
| *As a percent of service revenue* |       | 54.6                   | %          | 50.3                  | %          | 54.3 | % | 50.5 | % |

 

Cost of revenue for the three months ended September30, 2007 increased $0.3 million, or 5.0%, compared to the three months endedSeptember 30, 2006 and consisted primarily of administrative and facilityrelated costs. Overall, cost of service revenue as a percent of service revenuedeclined 4.3 percentage points for the three months ended September 30, 2007compared to the corresponding prior year period. This decline was largely dueto improved fixed cost leverage with respect to our facilities and overheadcosts, as well as the implementation of certain automation projects.

 

Cost of revenue in the nine months ended September 30,2007 increased $2.1 million, or 10.5%, compared to the corresponding 2006period.  A higher volume of screeningtransactions from both new and existing customers resulted in increases invendor costs of $0.1 million for criminal records searches, $0.9 million insalaries and wages for screening support functions and $1.1 million inadministrative and facility related costs. As a result of improved leveragewith our facilities and overhead costs and a benefit from automation projects,cost of service revenue as a percent of service revenue declined 3.8 percentagepoints for the nine months ended September 30, 2007 compared to thecorresponding prior year period.

 

***Research anddevelopment expense***

| ** **                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| **$ in thousands**           | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Research and development expense  |       | $                      | 982        |                  | $          | 925 |   | $ | 2,914 |   | $ | 2,714 |   |
| *As a percent of service revenue* |       | 6.1                    | %          | 6.6                   | %          | 6.2 | % | 6.8 | % |
|                                   |            |                        |            |                       |            |  |  |  |  |  |  |  |  |

 

Research and development expense for the three monthsended September 30, 2007 increased $0.1 million, or 6.2%, compared to the threemonths ended September 30, 2006.  Theincrease was the result of higher salaries, bonuses and related benefits forexisting employees, partially offset by development costs capitalized in the2007 period. Research and development expense as a percent of service revenuedeclined by 0.5 percentage points for the three months ended September 30, 2007compared to the corresponding prior year period. This decrease as a percentageof service revenue primarily resulted from spreading our research anddevelopment expense over an expanded revenue base, as research and developmentexpense increased at a lower rate than our service revenue.

 

Research and development expense for the nine monthsended September 30, 2007 increased $0.2 million, or 7.4%, compared to the ninemonths ended September 30, 2006.  Theincrease was due to higher salaries, bonuses and related benefits for existingemployees, partially offset by the capitalization of certain development costsof $0.3 million in the nine months ended September 30, 2007. Research anddevelopment expense as a percent of service revenue declined by 0.6 percentagepoints for the nine months ended September 30, 2007 compared to thecorresponding 2006 period. This decrease as a percentage of service revenueprimarily resulted from spreading our research and development expense over anexpanded revenue base, as research and development expense increased at a lowerrate than our service revenue.

 

 

 

15

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***Sales andmarketing expense***

| ** **                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| **$ in thousands**           | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Sales and marketing expense       |       | $                      | 2,572      |                  | $          | 2,141 |   | $ | 7,657 |   | $ | 6,135 |   |
| *As a percent of service revenue* |       | 16.1                   | %          | 15.3                  | %          | 16.2 | % | 15.5 | % |
|                                   |            |                        |            |                       |            |  |  |  |  |  |  |  |  |

 

Sales and marketing expense for the three months endedSeptember 30, 2007 increased $0.4 million, or 20.1%, compared to thecorresponding prior year period. Approximately $0.3 million of the increase was due to higher salaries,bonuses and related benefits resulting from 11 additional full-time equivalentemployees during the three months ended September 30, 2007 compared to the 2006period. The remaining increase in sales and marketing expense was attributableto higher travel and marketing expenses and facility related costs. Weanticipate that sales and marketing expense will continue to increase as apercentage of service revenue through the end of 2007 as we plan to continue toinvest in our sales and marketing capabilities.

 

Sales and marketing expense for the nine months endedSeptember 30, 2007 increased $1.5 million, or 24.8%, compared to thecorresponding prior year period.  Theincrease was primarily due to higher salaries, bonuses and related benefits of$0.9 million resulting from 11 additional full-time equivalent employees duringthe nine months ended September 30, 2007 compared to the corresponding 2006period. The remaining increase in sales and marketing expense was attributableto higher travel and marketing expenses and facility related costs of $0.1million, $0.1 million and $0.3 million, respectively, and other administrativecosts.

 

***General andadministrative expense***

| ** **                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| **$ in thousands**           | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| General and adminstrative expense |       | $2,559                 |       | $2,445                |       | $7,432 |   | $5,778 |   |
| *As a percent of service revenue* |       | 16.0                   | %          | 17.5                  | %          | 15.7 | % | 14.6 | % |

 

General and administrative expense for the threemonths ended September 30, 2007 increased $0.1 million, or 4.7%, compared tothe three months ended September 30, 2006. This was due to a $0.6 million increase in consulting and facilityrelated costs offset by a $0.3 million decrease in administration, $0.1 milliondecrease in legal and $0.1 million decrease in telecommunication costs duringthe three months ended September 30, 2007 compared to the 2006 period. As apercent of service revenue, general and administrative expense decreased 1.5percentage points for the three months ended September 30, 2007, compared tothe corresponding prior year period. The improvement in general andadministrative expenses as a percentage of service revenue was primarily theresult of on-going efforts to control variable costs, primarily labor, travel,telecommunication and certain compensation related costs.

 

General and administrative expense for the nine monthsended September 30, 2007 increased $1.7 million, or 28.6%, compared to the ninemonths ended September 30, 2006.  Thiswas due to a $0.3 million increase in salaries, bonuses and related benefitsfor existing employees and 10 additional full-time equivalent employees duringthe nine months ended September 30, 2007 compared to the 2006 period. Otherincreases in general and administrative expense compared to the 2006 periodwere $0.5 million of facility related costs, $0.1 million in legal expense,$0.7 million in consulting expense and other various expenses. We anticipatethat general and administrative expense will continue to increase through theend of 2007 and thereafter as a result of the additional costs and compliancerequirements related to operating as a public company. General andadministrative expense as a percent of service revenue increased 1.1 percentagepoints for the nine months ended September 30, 2007, compared to thecorresponding prior year period.

 

 

 

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***Income Taxes***

 

The effective tax ratefor the three and nine months ended September 30, 2007 was approximately 39.2%and 40.6%, respectively.  The slightdecrease in the effective tax rate during the three months ended September 30,2007, compared to the nine months ended September 30, 2007, was a result oftax-exempt interest income generated from certain investment in tax-exemptsecurities during the third quarter. Prior to the third quarter of 2006, we hadestablished a full valuation allowance against our deferred tax assets, as wehad not concluded that it was more likely than not that we would be able torealize substantially all of our net deferred tax assets. Subsequently in thethird quarter of 2006, we concluded that it was more likely than not that wewould be able to realize substantially all of our net deferred taxes as aresult of being profitable in 2006 and expecting to remain profitable in 2007.As a result, all of the valuation allowance applied to net deferred tax assetswas reversed in September 2006.

 

**Liquidityand 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 nine months ended September 30, 2007, cashgenerated by operating activities of $4.5 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 $5.3million for the nine months ended September 30, 2006 was primarily attributableto net income of $10.3 million, offset by a reduction for a non-cash change indeferred taxes of $5.0 million.

 

***InvestingActivities*** Net cash used in investing activities forthe nine months ended September 30, 2007 was $37.7 million and was comprised ofnet short-term investment securities purchases of $36.4 million using excesscash balances and proceeds from the Company’s initial public offering, capitalexpenditures of $1.0 million and $0.3 million in capitalized software costs.The use of cash in the nine months ended September 30, 2006 was $2.8 millionand represented net short-term investment securities purchases and capitalexpenditures of $2.0 million and $0.8 million, respectively.

 

***FinancingActivities*** Net cash provided by financing activitiesfor the nine months ended September 30, 2007 was $39.8 million, primarily fromthe net proceeds of the Company’s initial public offering. On August 13, 2007,the Company completed the initial public offering of its common stock. Theestimated net proceeds to the Company were approximately $39.4 million, net ofunderwriting discounts, commissions, and other offering costs. The net proceedsfrom the offering are currently held predominantly in various interest-bearingmoney market accounts and marketable securities. The use of cash in the ninemonths ended September 30, 2006 of $1.0 million was primarily for repayments onnotes payable.

 

Wecurrently believe that our existing cash position, cash flows provided byoperating activities and existing credit facilities will be sufficient to fundour working capital requirements and planned investments for at least the nexttwelve months.  We currently have nomaterial debt.  The Company plans to usethe net proceeds from our initial public offering primarily for working capitaland other general corporate purposes, including the expansion of our sales andmarketing activities, development of new service offerings and expansion of ourinternational operations. In addition, we may use a portion of the net proceedsfor acquisitions of, or investments in, businesses, products or technologiesthat enhance or add new services or additional functionality, further solidifyour market position or allow us to offer complementary products, services ortechnologies. In the event an acquisition plan is adopted whichrequires funds exceeding the availability described above, an alternate sourceof funds to accomplish the acquisition would have to be developed.  Following the Company’s reincorporation intoDelaware and our initial public offering, which was completed on August 13,2007, the Company had 100,000,000 shares of common stock authorized, of which11,231,941 shares were outstanding at September 30, 2007, and 10,000,000 sharesof preferred stock authorized, of which none were outstanding. The board ofdirectors is authorized to issue up to an aggregate of 10,000,000 shares ofpreferred stock in one or more series without further vote or action by thestockholders.  The

 

 

 

17

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Company could issue additional shares of common or preferred stock orenter into new or revised borrowing arrangements to raise funds.

 

**Critical Accounting Policies and Estimates**

 

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 toour estimates 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 asignificant risk of non-recoverability. We continue to monitor and evaluate ourcustomers over 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. If ourhistorical collection experience changes unexpectedly or if one or more of ourlargest customers fails to pay the amounts owed to us, our allowance fordoubtful accounts would likely be inadequate.

 

***Accounting for Income Taxes.*** We record income tax expense in accordance with Statement of FinancialAccounting Standard (“SFAS”) No. 109, *Accounting for IncomeTaxes* (“SFAS 109”), which requires that we recognize deferred taxassets and liabilities for temporary differences in the bases of assets andliabilities for tax and financial reporting purposes. We record a valuationallowance related to deferred tax assets when it is more likely than not thatsome portion or all of the deferred tax asset will not be realized. We eliminatedour valuation allowance in 2006 because we were profitable in 2006 and expectto be profitable in future years. The preparation of financial projectionsinvolves significant subjectivity due to the inherent uncertainty involved inestimating future performance. If we fail to perform as projected, we may needto record a valuation allowance in the future.

 

***Accounting for Stock-Based Compensation.*** Effective January 1, 2006, we adopted SFAS No. 123 (revised 2004), *Share-Based Payment*(“SFAS 123R”), which requires that allstock-based compensation to employees, including grants of employee stockoptions, be expensed in our financial statements based on their respectivegrant date fair values. Under SFAS 123R, we estimate the fair value of eachstock-based payment award using the Black-Scholes option pricing model. Thedetermination of the fair value of stock-based payment awards using theBlack-Scholes model is affected by our stock price and a number of assumptions,including expected volatility, expected life, risk-free interest rate andexpected dividends. We do not have a history of market prices of our commonstock as we were not a public company until our recent initial public offering,and as such, we estimate volatility in accordance with Staff AccountingBulletin No. 107 (“SAB 107”) using historical volatilities of other publiclytraded companies in our industry. The expected life of the awards is based onthe simplified method as defined in SAB 107. The risk-free interest rateassumption is based on observed interest rates appropriate for the terms of ourawards. The dividend yield assumption is based on our history and expectationof not paying any dividends. Forfeitures are estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose

 

 

 

18

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estimates. We recognizedstock-based compensation expense in our consolidated financial statements basedon awards that are ultimately expected to vest. A summary of significantassumptions used in determining the fair value of the options is as follows:

 

| ** **              | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------|------------|-------------------------------------|------------|
| ** **              | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| Expected life (years)   |       | 6.25                                |       | 6.25 |   |
| Risk-free interest rate |       | 4.69                                | %          | 4.92 | % |
| Volatility              |       | 41.5                                | %          | 41.5 | % |
| Dividend yield          |       | 0                                   | %          | 0 | % |
| Forfeiture rate         |       | 9.25                                | %          | 9.25 | % |

 

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.

 

**Recent Accounting Pronouncements**

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109* (“FIN 48”), effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS 109 by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. The Company adopted FIN 48 as of January 1, 2007. The impact of the Company’s reassessment of its tax positions in accordance with FIN 48 did not have a material effect on its consolidated financial position, results of operations or cash flows.

 

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS 157”),which defines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements. SFAS 157 applies to otheraccounting**pronouncements thatrequire or permit fair value measurements. The new guidance is effective for**financial statements issued for fiscalyears beginning after November 15, 2007, and for interim periods**within those fiscal years. The Company iscurrently evaluating the impact, if any, that SFAS 157 will have on itsconsolidated financial position, results of operations and cash flows.

 

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities* - *Including an amendment ofFASB Statement No. 115* (“SFAS 159”). SFAS 159 permits entities tochoose, at specified election dates, to measure eligible items at fair value(the “Fair Value Option”). A business entity shall report unrealized gains andlosses on items for which the Fair Value Option has been elected in earnings ateach subsequent reporting period. SFAS 159 is effective for years beginningafter November 15, 2007. The Company is currently evaluating the effect, ifany, of the adoption of SFAS 159 will have on its consolidated financialposition, results of operations and cash flows.

 

**Item3.        Quantitative and Qualitative Disclosures about MarketRisk**

 

There are no materialchanges to the disclosure set forth in the “Quantitative and QualitativeDisclosures about Market Risk” section of Management’sDiscussion and Analysis of Financial Condition and Results of Operations** **contained inthe Company’s Form S-1 (File No. 333-140613).

 

 

 

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** **

**Item 4T.     Controls and Procedures**

 

The Company’s Chief Executive Officer and ChiefFinancial Officer with the participation of the Company’s management, carriedout an evaluation of the effectiveness of the Company’s disclosure controls andprocedures (as defined in Exchange Act Rule 13a-15(e)). Based upon thatevaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that, as of the end of the period covered by this report, the Company’sdisclosure controls and procedures are effective at the “reasonable assurance”level in identifying material information relating to the Company (includingits consolidated subsidiaries) required to be included in this report.

 

Disclosure controls and procedures, no matter how welldesigned and implemented, can provide only reasonable assurance of achieving anentity’s disclosure objectives. The likelihood of achieving such objectives isaffected by limitations inherent in disclosure controls and procedures. Theseinclude the fact that human judgment in decision-making can be faulty and thatbreakdowns in internal control can occur because of human failures such assimple errors or mistakes or intentional circumvention of the establishedprocess.

 

There were no changes in the Company’s internalcontrols over financial reporting, identified by the Chief Executive Officer orthe Chief Financial Officer that occurred during the period covered by thisreport that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

We are not required tocomply with all of the rules and regulations of the Securities and ExchangeCommission, particularly the requirement that we include in our Annual Reporton Form 10-K a report of management and accompanying auditor’s report on theCompany’s internal control over financial reporting (“404 reporting”).  Compliance by the Company with the 404reporting rules and regulations will be required in our Annual Report on Form10-K for the fiscal year ending December 31, 2008, unless the rules andregulations governing 404 reporting are revised.

 

 

***PART II.  OTHER INFORMATION***

** **

** **

**Item 1.        Legal Proceedings**

 

We are currently involved in certain legalmatters.  While management presentlybelieves that the ultimate outcome of these proceedings, individually and inthe aggregate, will not materially harm the Company’s financial position, cashflows, or overall trends in results of operations, litigation is subject toinherent uncertainties, and unfavorable rulings could occur. An unfavorableruling could include money damages or, in cases for which injunctive relief issought, an injunction prohibiting us from selling one or more services. Were anunfavorable ruling to occur, our business or results of operations could bematerially harmed.

 

**Item1A.     Risk Factors**

 

For detailed informationregarding risk factors that could affect us, please refer to Part II, Item 1Ain our Quarterly Report on Form 10-Q for the period ended June 30, 2007.  There have not been any material changes inthe risk factors disclosed in our Quarterly Report on Form 10-Q for the periodended June 30, 2007.

 

**Item 2.        Unregistered Salesof Equity Securities and Use of Proceeds**

 

From the period between July 1, 2007 and the filing ofour Form S-8 on August 24, 2007, employees exercised options for 8,342 sharesof unregistered common stock.

 

On August 13, 2007 the Company issued 76,417 shares ofcommon stock for proceeds of approximately $243,000, pursuant to the netexercise of a warrant previously issued and sold to Hewitt Associates LLC.

 

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The sale of the above securities was deemed to beexempt from registration under the Securities Act of 1933, as amended (the “Act”),in reliance upon Section 4(2) of the Act or Rule 701 promulgated under Section3(b) of the Act.

 

Completion of the Company’s initial public offering:

 

On August 13, 2007, the Company completed the initialpublic offering of its common stock. The managing underwriters in the offeringwere Credit Suisse Securities (USA) LLC, Robert W. Baird & Co.Incorporated, CIBC World Markets Corp., Piper Jaffray & Co. and WilliamBlair & Company, L.L.C.. The shares of the common stock sold in theoffering were registered under the Act on a Registration Statement on Form S-1(No. 333-140613). The Securities and Exchange Commission declared theRegistration Statement effective on August 7, 2007.

 

The offering commenced on August 8, 2007 andterminated on August 13, 2007 after all of the 4,375,000 shares of common stockregistered under the Registration Statement were sold, including 2,954,115shares offered by the Company and 1,420,885 shares offered by sellingstockholders. The initial public offering price was $15.00 per share for anaggregate initial public offering of $65.6 million.

 

A total of $4.6 million were paid in underwritingdiscounts and commissions, of which $3.1 million were paid by us and $1.5million were paid by the selling stockholders. In addition, other offeringexpenses of approximately $1.8 million were incurred in connection with theoffering. None of the amounts shown was paid directly or indirectly to anydirector, officer, general partner of the Company or their associates, personsowning 10 percent or more of any class of equity securities of the Company oran affiliate of the Company.

 

After deducting the underwriting discounts andcommissions and the offering expenses, the estimated net proceeds to theCompany from the offering were approximately $39.4 million. The net proceedswere predominately held in various interest-bearing money market accounts andmarketable securities at September 30, 2007.

 

**Item 3.        Defaults Upon Senior Securities**

 

Not applicable

 

**Item4.        Submission of Matters to a Voteof Security Holders**

 

During July 2007, prior to the Company’s initialpublic offering, our stockholders holding a majority of shares outstandingadopted resolutions by written consent authorizing the approval of the Company’sreincorporation in Delaware and in connection therewith effected a 1-for-4.5reverse stock split of the Company’s outstanding capital stock and approved theadoption of our amended and restated certificate of incorporation and ouramended and restated bylaws. In addition, our stockholders approved theadoption of the HireRight, Inc. 2007 Long-Term Incentive Plan and theHireRight, Inc. Employee Stock Purchase Plan. Stockholders holding 7,657,640 shares (on an as-if converted into commonstock basis), or approximately 93 percent of the shares outstanding at thattime, consented to all of the foregoing.

 

**Item 5.        Other Information**

 

Notapplicable

 

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**Item6.        Exhibits**

** **
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                                                                                                   |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                        |
| 3.1         |       | Certificate  of Incorporation of HireRight, Inc. (1)                                                                                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                              |
| 3.2         |       | Bylaws  of HireRight, Inc. (1)                                                                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                              |
| 10.1+       |       | HireRight, Inc.  2007 Long-Term Incentive Plan(1)                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                              |
| 10.2+       |       | HireRight, Inc.  Employee Stock Purchase Plan(1)                                                                                                                                                                                                                                             |
|        |       |                                                                                                                                                                                                                                                                                              |
| 10.3+       |       | Deferred  Compensation Plan for Directors of HireRight, Inc. (1)                                                                                                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                              |
| 10.4        |       | Form  of Indemnification Agreement for directors and executive officers(1)                                                                                                                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                              |
| 10.5+       |       | Form  of Stock Option Agreement for directors for use with the 2007 Long-Term  Incentive Plan(1)                                                                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                              |
| 10.6+       |       | Form  of Stock Option Agreement for certain officers (with change-in-control  double trigger) for use with the 2007 Long-Term Incentive Plan(1)                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                              |
| 10.7+       |       | Change  in Control Agreement by and between HireRight, Inc. and Jeffrey A. Wahba(1)                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                              |
| 10.8+       |       | Form  of Change in Control Agreement by and between HireRight, Inc. and each of the  following officers: Lisa A. Gallagher, Stefano Malnati,  Alexander F. Munro, David M. Nachman, Barbara M. Nieto,  Robert J. Pickell, Glen E. Schrank and Trygve M. Thoresen(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                                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                              |
|             |
| *           |       | New  exhibit filed with this report.                                                                                                                                                                                                                                                              |
| +           |       | Indicates  management contract or compensatory plan.                                                                                                                                                                                                                                              |
| (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 the requirements of the Securities Exchange Act of 1934, asamended, the registrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.

 

 
|        | HIRERIGHT, INC.  |
|-------------|------------------|
|        |             |
|        |             |
|  Date: | November 8, 2007 | /s/   Eric J.  Boden |
|        |             | Eric J. Boden |
|        |             | President and Chief Executive Officer |
| * *    |             | *(duly authorized officer)* |

 

 
| Date:    | November 8, 2007 | /s/   Jeffrey  A. Wahba |
|----------|------------------|-----------------------------------|
|     |             | Jeffrey A. Wahba                  |
|     |             | Chief Financial Officer           |
| * * |             | *(principal financial officer)*   |

 

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