10-Q

10-Q 1 d118616d10q.htm 10-Q 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-40680

MeridianLink, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware		33-0849406
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1600 Sunflower Avenue, #200, Costa Mesa, CA		92626
(Address of Principal Executive Offices)		(Zip Code)

(714) 708-6950

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange

on which registered

Common stock, par value $0.001 per share

MLNK

The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☐

		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of September 1, 2021 there were 80,440,593 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

MeridianLink, Inc.

Table of Contents


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements		3

	Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020 (unaudited)		3

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020 (unaudited)		4

	Condensed Consolidated Statements of Preferred Units and Members’ Deficit for the three and six months ended June 30, 2021 and 2020 (unaudited)		5

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 (unaudited)		7

	Notes to Condensed Consolidated Financial Statements (unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		35

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		49

Item 4.	Controls and Procedures		49

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		49

Item 1A.	Risk Factors		50

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		82

Item 3.	Defaults Upon Senior Securities		83

Item 4.	Mine Safety Disclosures		83

Item 5.	Other Information		83

Item 6.	Exhibits		84

	Signatures		85

Special Note about Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included in this Quarterly Report on Form 10-Q and those included within our prospectus dated July 27, 2021 and as filed with the SEC on July 28, 2021. These forward-looking statements are based on management’s current beliefs, based on currently available information, as to the outcome and timing of future events. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

•

our future financial performance, including our expectations regarding our revenue, annual recurring revenue, gross profit or gross margin, operating expenses, ability to generate cash flow, revenue mix and ability to achieve and maintain future profitability;

•

our ability to execute on our strategies, plans, objectives and goals;

•

our ability to compete with existing and new competitors in existing and new markets and offerings;

•

our ability to develop and protect our brand;

•

our ability to effectively manage privacy and information and data security;

•

increases in spending by financial institutions on cloud-based technology;

•

anticipated trends and growth rates in our business and in the markets in which we operate;

•

our ability to maintain and expand our customer base and our partner network;

•

our ability to sell our applications and expand internationally;

•

our ability to comply with laws and regulations;

•

our ability to anticipate market needs and successfully develop new and enhanced solutions to meet those needs;

•

the impact of the COVID-19 pandemic on our industry, business and results of operations;

•

our ability to successfully identify, acquire and integrate complementary businesses and technologies;

•

our ability to hire and retain necessary qualified employees to grow our business and expand our operations;

•

the evolution of technology affecting our applications, platform and markets;

•

economic and industry trends;

•

seasonal fluctuations in consumer borrowing trends;

•

our ability to adequately protect our intellectual property; and

•

our ability to service our debt obligations.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we, in the future, may file with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.

Explanatory Note

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to “we,” “us,” “our,” the “Company,” and similar references refer: (1) following the consummation of our conversion to a Delaware corporation on July 27, 2021 in connection with our initial public offering, to MeridianLink, Inc., and (2) prior to the completion of such conversion, to Project Angel Parent, LLC. See Note 2, “Organization and description of business — Corporate Conversion” in Quarterly Report on Form 10-Q for further information.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PROJECT ANGEL PARENT, LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except unit and per unit data)


	As of
	June 30, 2021			December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	29,236		$	37,739
Restricted cash		2,221			2,142
Accounts receivable, net of allowance for doubtful accounts		29,086			22,358
Prepaid expenses and other current assets		9,322			5,812
Related party receivable from sellers of MeridianLink		—			4,123

Total current assets		69,865			72,174
Property and equipment, net		7,105			7,600
Intangible assets, net		320,162			328,032
Deferred tax assets, net		5,121			9,484
Goodwill		565,054			542,965
Other assets		3,043			3,450

Total assets	$	970,350		$	963,705


Liabilities and Members’ Deficit
Current liabilities:
Accounts payable	$	2,400		$	2,257
Accrued liabilities		21,730			21,070
Deferred revenue		21,094			10,873
TazWorks, LLC purchase liability		—			85,646
Related party liability due to sellers of MeridianLink		—			30,000
Payable due to sellers of Teledata Communications, Inc.		2,142			—
Current portion of long-term debt, net of debt issuance costs		1,757			2,955

Total current liabilities		49,123			152,801
Long-term debt, net of debt issuance costs		613,095			516,877
Deferred rent		456			543
Other long-term liabilities		127			—

Total liabilities		662,801			670,221

Commitments and contingencies (Note 4)
Class A preferred units, no par value, unlimited units authorized, 319,859 and 319,913 units issued and outstanding as of June 30, 2021 and December 31, 2020, respectively; liquidation preference of $420,706 and $402,607 as of June 30, 2021 and December 31, 2020, respectively		319,859			319,913
Members’ Deficit
Class B common units, no par value, unlimited units authorized, 52,112,904 and 51,492,805 units issued and outstanding as of June 30, 2021 and December 31, 2020, respectively		9			—
Additional paid-in capital		3,368			3,909
Accumulated deficit		(15,687	)		(30,338	)

Total members’ deficit		(12,310	)		(26,429	)

Total liabilities, preferred units, and members’ deficit	$	970,350		$	963,705

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

PROJECT ANGEL PARENT, LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except unit and per unit data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Revenues, net	$	68,474		$	49,535		$	136,285		$	93,153
Cost of revenues:
Subscription and services		17,997			12,114			34,611			23,249
Amortization of developed technology		3,109			2,131			5,971			4,204

Total cost of revenues		21,106			14,245			40,582			27,453

Gross profit		47,368			35,290			95,703			65,700
Operating expenses:
General and administrative		16,622			13,693			34,967			27,318
Research and development		7,288			4,726			14,274			9,033
Sales and marketing		4,224			2,177			7,823			4,201

Total operating expenses		28,134			20,596			57,064			40,552

Operating income		19,234			14,694			38,639			25,148
Other (income) expense, net:
Other income		(10	)		(23	)		(30	)		(24	)
Interest expense, net		9,846			8,517			19,908			17,374

Total other expense, net		9,836			8,494			19,878			17,350

Income before provision for income taxes		9,398			6,200			18,761			7,798

Provision for income taxes		1,966			1,304			4,098			1,576

Net income	$	7,432		$	4,896		$	14,663		$	6,222


Class A preferred return		(9,232	)		(8,462	)		(18,165	)		(16,747	)

Net loss attributable to common unitholders	$	(1,800	)	$	(3,566	)	$	(3,502	)	$	(10,525	)


Weighted average units outstanding – basic and diluted		52,015,526			51,248,738			51,843,086			51,024,837
Loss per common unit – basic and diluted	$	(0.03	)	$	(0.07	)	$	(0.07	)	$	(0.21	)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

PROJECT ANGEL PARENT, LLC

CONDENSED CONSOLIDATED STATEMENTS OF PREFERRED UNITS AND MEMBERS’ DEFICIT

(unaudited)

(in thousands, except unit data)


	Class A Preferred Units						Class B Common Units												Total Members’ Deficit
	Shares			Amount			Shares			Amount			Additional paid-in capital			Accumulated deficit			Total Members’ Deficit
Balance at December 31, 2020		319,913		$	319,913			51,492,805		$	—		$	3,909		$	(30,338)		$	(26,429)
Payment of Class A units cumulative preferred return		—			—			—			—			—			(12	)		(12	)
Vesting of Class B carried equity units		—			—			575,004			38			—			—			38
Repurchase of vested units		(54	)		(54	)		(103,421	)		(38	)		(1,849	)		—			(1,887	)
Unit-based compensation expense		—			—			—			—			643			—			643
Net income		—			—			—			—			—			7,231			7,231

Balance at March 31, 2021		319,859		$	319,859			51,964,388		$	—		$	2,703		$	(23,119)		$	(20,416)

Vesting of Class B carried equity units		—			—			148,516			9			—			—			9
Unit-based compensation expense		—			—			—			—			665			—			665
Net income		—			—			—			—			—			7,432			7,432

Balance at June 30, 2021		319,859		$	319,859			52,112,904		$	9		$	3,368		$	(15,687)		$	(12,310)

PROJECT ANGEL PARENT, LLC

CONDENSED CONSOLIDATED STATEMENTS OF PREFERRED UNITS AND MEMBERS’ DEFICIT

(unaudited)

(in thousands, except unit data)


	Class A Preferred Units						Class B Common Units											Total Members’ Deficit
	Shares			Amount			Shares			Amount			Additional paid-in capital		Accumulated deficit			Total Members’ Deficit
Balance at December 31, 2019		320,820		$	320,820			50,732,795		$	1,371		$	1,791	$	(39,353)		$	(36,191)
Payment of Class A units cumulative preferred return		—			—			—			—			—		(4	)		(4	)
Vesting of Class B carried equity units		—			—			217,634			14			—		—			14
Repurchase of vested units		(30	)		(30	)		(25,954	)		(157	)		—		—			(157	)
Unit-based compensation expense		—			—			—			—			640		—			640
Net income		—			—			—			—			—		1,326			1,326

Balance at March 31, 2020		320,790		$	320,790			50,924,475		$	1,228		$	2,431	$	(38,031)		$	(34,372)

Payment of Class A units cumulative preferred return		—			—			—			—			—		(131	)		(131	)
Vesting of Class B carried equity units		—			—			579,505			39			—		—			39
Repurchase of vested units		(870	)		(870	)		(208,431	)		(1,263	)		—		—			(1,263	)
Unit-based compensation expense		—			—			—			—			673		—			673
Net income		—			—			—			—			—		4,896			4,896

Balance at June 30, 2020		319,920		$	319,920			51,295,549		$	4		$	3,104	$	(33,266)		$	(30,158)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

PROJECT ANGEL PARENT, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Six Months Ended June 30,
	2021			2020
Cash flows from operating activities:
Net income	$	14,663		$	6,222
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		24,957			19,458
Provision for doubtful accounts		89			300
Amortization of debt issuance costs		1,817			349
Unit-based compensation expense		1,308			1,313
Loss on disposal of fixed assets		207			72
Loss on sublease liability		405			—
Other adjustments		(16	)		—
Deferred income taxes		3,842			1,522
Changes in operating assets and liabilities:
Accounts receivable		(2,641	)		(5,777	)
Prepaid expenses and other assets		(1,774	)		(1,030	)
Accounts payable		(39	)		972
Accrued liabilities		(3,081	)		(339	)
Deferred revenue		10,221			7,286
Deferred rent		(49	)		(31	)

Net cash provided by operating activities		49,909			30,317

Cash flows from investing activities:
Acquisitions, net of cash acquired – TazWorks, LLC		(85,421	)		—
Acquisitions, net of cash acquired – Saylent Technologies, Inc		(35,957	)		—
Capitalized software additions		(2,216	)		(1,428	)
Purchases of property and equipment		(553	)		(2,829	)

Net cash used in investing activities		(124,147	)		(4,257	)

Cash flows from financing activities:
Repurchases of Class A Units		(54	)		(900	)
Repurchases of Class B Units		(1,887	)		(1,420	)
Proceeds from long-term debt		100,000			—
Principal payments of long-term debt		(2,590	)		(2,078	)
Payments of debt issuance costs		(1,970	)		—
Payments of financing obligation due to related party		—			(40	)
Payments of Class A cumulative preferred return		(12	)		(135	)
Payments of deferred offering costs		(2,008	)		—
Holdback payment to prior shareholders		(25,665	)		—

Net cash provided by (used in) financing activities		65,814			(4,573	)

Net increase (decrease) in cash, cash equivalents and restricted cash		(8,424	)		21,487
Cash, cash equivalents, and restricted cash, beginning of period		39,881			97,770

Cash, cash equivalents, and restricted cash, end of period	$	31,457		$	119,257

Reconciliation of cash, cash equivalents, and restricted cash
Cash and cash equivalents	$	29,236		$	119,257
Restricted cash		2,221			—

Cash, cash equivalents, and restricted cash	$	31,457		$	119,257

Supplemental disclosures of cash flow information:
Cash paid for interest	$	18,078		$	17,258
Cash paid for income taxes		212			69
Non-cash investing and financing activities:
Purchases of property and equipment included in accounts payable and accrued expenses	$	56		$	146
Deferred offering costs included in accounts payable and accrued expenses		327			—
Vesting of Class B Units		47			53
Paycheck Protection Program (“PPP”) Loan forgiven, reclassified from long- and short-term debt to payable due to sellers of Teledata Communications, Inc		2,142			—
Related party receivable net against holdback payment to prior shareholders		4,335			—

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Organization and Description of Business

Project Angel Parent, LLC, (“Parent”), conducting business as MeridianLink, Inc., and its wholly-owned subsidiaries, (collectively the “Company,”) provides secure, cloud-based digital solutions that transform the ways in which traditional and emerging financial services providers engage with account holders and end users. The Company sells its solutions to financial institutions, including banks, credit unions, mortgage lenders, specialty lending providers, and consumer reporting agencies. The Company delivers its solutions to the substantial majority of its customers using a software-as-a-service (“SaaS”) model under which its customers pay subscription fees for the use of the Company’s solutions. The Company was formed as a limited liability company in Delaware in May 2018 and is a holding company that owns 100% of the outstanding member units of Project Angel Intermediate Holdings, LLC (“Intermediate”). Project Angel Holdings, LLC (“Holdings”), a Delaware limited liability company, was formed on March 15, 2018, and is a wholly-owned subsidiary of Intermediate. On May 31, 2018, Holdings acquired all the outstanding common stock of MeridianLink, Inc. (“MeridianLink”). The Company is controlled by its majority unitholder, which is represented by various investment funds of Thoma Bravo L.P. (“Thoma Bravo”). The Company is headquartered in Costa Mesa, California, and has offices in Oregon, Louisiana, and Georgia.

Under the terms of the Amended and Restated Limited Liability Company Operating Agreement (“Agreement”), dated as of May 31, 2018, of Project Angel Parent, LLC, the members are not obligated for debt, liabilities, contracts or other obligations of Project Angel Parent, LLC. Profits and losses are allocated to members as defined in the Agreement.

Corporate Conversion

Prior to July 27, 2021, the Company operated as a Delaware limited liability company under the name Project Angel Parent, LLC, which directly and indirectly held all the equity interests in its operating subsidiaries. On July 27, 2021, prior to the effectiveness of the registration statement for the Company’s initial public offering, MeridianLink, Inc., the operating company and the indirect wholly owned subsidiary of Project Angel Parent, LLC, changed its name to ML California Sub, Inc., and Project Angel Parent, LLC converted into a Delaware corporation pursuant to a statutory conversion and changed its name to MeridianLink, Inc. As a result of the corporate conversion, MeridianLink, Inc. succeeded to all property and assets, and debts and obligations of Project Angel Parent, LLC. Effective July 27, 2021, MeridianLink, Inc. is governed by its certificate of incorporation filed with the Delaware Secretary of State and its bylaws.

Upon its conversion into a corporation, the Company converted each of its outstanding Class A Units into a number of shares of common stock equal to the result of the accrued preferred return price per Class A Unit divided by the initial public offering price per share of common stock of $26.00. The preferred return price for each Class A Unit is equal to the future value of $1,000 at a 9% interest rate compounded quarterly over the time passed since the issuance of such unit. Upon the Company’s conversion into a corporation, the outstanding Class A Units converted into an aggregate of 16,607,235 shares of common stock. Additionally, all the outstanding Class B Units converted into an aggregate of 53,646,668 shares of common stock on a one-for-one basis.

The effects of the events described in the preceding two paragraphs are collectively referred to as the “Corporate Conversion.”

In connection with the Corporate Conversion, outstanding options to purchase Class B Units granted under the Project Angel Parent, LLC 2019 Equity Option Plan (“2019 Option Plan”) were converted into options to purchase shares of common stock, and outstanding units granted under the Project Angel Parent, LLC Equity Plan (“Equity Plan”) were converted into shares of common stock or restricted stock, which have been granted under the 2021 Stock Option and Incentive Plan (“2021 Plan”).

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

Initial Public Offering and Reverse Stock Split

On July 28, 2021, the Company completed its initial public offering (“IPO”) through an underwritten sale of 14.4 million shares of its common stock, of which 10.0 million shares were sold by the Company at a price to the public of $26.00 per share. The Company received net proceeds of approximately $241.5 million after deducting approximately $18.5 million in underwriting discounts, commissions, and offering-related expenses.

The IPO also included the sale of 3.2 million shares of our common stock by the selling stockholders. The Company did not receive any proceeds from the sale of common stock by the selling stockholders. Additionally, the selling stockholders granted the underwriters an option, exercisable for 30 days after the effective date of the Prospectus, to purchase up to 2.0 million additional shares of common stock. The option was exercised for 1.2 million additional shares on August 26, 2021.

In connection with the listing of the Company’s common stock on the NYSE, the Company entered into indemnification agreements with its directors and certain officers and employees that require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or services as directors, officers, or employees.

Upon the Corporate Conversion, all then-outstanding shares of the Company’s Class A Preferred Units outstanding (see Note 6) were automatically converted into an aggregate of 16,607,235 issued common shares and were reclassified into permanent equity. Following the Corporate Conversion, there were no units of Class A Preferred Units outstanding.

In advance of the IPO, on July 16, 2021, the Company effected a 1-for-2 reverse unit split of the Company’s Class B Units, whereby every two Class B Units converted into one Class B unit. All Class B unit and per unit information included in the accompanying condensed consolidated financial statements have been adjusted to reflect this reverse unit split for all periods presented.

The condensed consolidated financial statements as of June 30, 2021, including unit and per unit amounts, do not give effect to the IPO, the Corporate Conversion, or the conversion of the Class A Preferred Units into common stock and related reclassification into permanent equity, as the IPO, the Corporate Conversion, and such conversions and reclassifications into permanent equity were completed subsequent to June 30, 2021.

Novel Coronavirus (COVID-19)

In March 2020, the World Health Organization characterized the novel coronavirus (“COVID-19”) outbreak as a pandemic. The Company’s operating results depend significantly on the demand by customers. While the Company has not seen a significant negative impact on the demand for its subscription and services resulting from the COVID-19 outbreak as of the date of these financial statements, if the outbreak causes weakness in national, regional, and local economies that negatively impact the demand for services and/or increase bad debts, the Company’s business, financial condition, liquidity, results of operations and prospects could be adversely impacted in 2021 and potentially beyond. To date, the Company has experienced an increased demand in its mortgage loan products and has not experienced any significant supplier disruptions or bad debts related to customer receivables.

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief and Economic Security (CARES) Act.” The Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act did not have a material impact on the Company’s income tax provision in 2020 and 2021. To date, the Company has elected to defer employer social security payments until the fourth quarter of 2021 when they will begin to be repaid. In addition, as part of the Company’s acquisition of Teledata Communications, Inc., the Company assumed a $1.8 million liability within current portion of long-term debt, net of issuance costs and a $0.3 million liability within long-term debt, net of issuance costs, as of December 31, 2020 related to an outstanding preacquisition Paycheck Protection Program loan. As a condition of the purchase agreement, the funds were escrowed to cover the outstanding loan balance in the event that TCI did not receive full forgiveness of the loan. The loan was forgiven by the Small Business Association in June 2021. See Note 12 for subsequent events related to the Paycheck Protection Program Loan.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

Emerging Growth Company Status

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these condensed consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. The Company expects to use the extended transition period for any other new or revised accounting standards during the period in which it remains an emerging growth company.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The interim condensed consolidated financial statements of the Company have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation.

The accompanying interim condensed consolidated balances sheets as of June 30, 2021 and December 31, 2020, and the interim condensed consolidated statements of operations, and statements of preferred units and members’ deficit for the three and six months ended June 30, 2021 and 2020, and the related disclosures are unaudited.

In the Company’s opinion, the interim unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation. Certain information and disclosures normally included in the notes to the annual consolidated financial statements prepared in accordance with GAAP have been omitted from these interim unaudited condensed consolidated financial statements pursuant to the rules and regulations of the SEC. Accordingly, these interim unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes for the fiscal year ended December 31, 2020 included within the Company’s prospectus dated July 27, 2021 (“Prospectus”) and as filed with the Securities and Exchange Commission (“SEC”) on July 28, 2021 pursuant to Rule 424(b) under the Securities Act of 1933, as amended (“Securities Act”). The results of operations for the six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 or for any other period.

There have been no changes to the Company’s significant accounting policies described in the Company’s Prospectus that have had a material impact on its condensed consolidated financial statements and related notes.

Operating and Reportable Segment

As of June 30, 2021, the Company has operated and managed its business and financial information on a consolidated basis for the purposes of evaluating financial performance and the allocation of resources. Accordingly, the Company’s management determined that it operates in one operating and reportable segment that is focused exclusively on providing cloud-based digital solutions in the United States. In reaching this conclusion, management considers the definition of the chief operating decision maker (“CODM”), how the business is defined by the CODM, the nature of the information provided to the CODM and how that information is used to make operating decisions, allocate resources, and assess performance. The Company’s CODM is the chief executive officer. The results of operations provided to and analyzed by the CODM are at the consolidated level and accordingly, key resource decisions and assessment of performance are performed at the consolidated level. The Company assesses its determination of operating segments at least annually.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

The following table disaggregates the Company’s net revenues by solution type (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Lending Software Solutions	$	45,243	$	32,799	$	88,377	$	63,338
Data Verification Software Solutions		23,231		16,736		47,908		29,815

Total	$	68,474	$	49,535	$	136,285	$	93,153

Lending Software Solutions accounted for 66% of total revenues for both the three months ended June 30, 2021 and 2020. Lending Software Solutions accounted for 65% and 68% of total revenues for the six months ended June 30, 2021 and 2020, respectively. Data Verification Software Solutions accounted for 34% of total revenues for both the three months ended June 30, 2021 and 2020. Data Verification Software Solutions accounted for 35% and 32% of total revenues for the six months ended June 30, 2021 and 2020, respectively.

Business Combinations

The Company accounts for business combinations in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations.” The results of businesses acquired in a business combination are included in the Company’s condensed consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business generally being recorded at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill. Transaction costs associated with business combinations are expensed as incurred and are included in acquisition related costs in the condensed consolidated statements of operations. The Company performs valuations of assets acquired and liabilities assumed and allocates the purchase price to its respective assets and liabilities. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, and selection of comparable companies. The Company engages the assistance of valuation specialists in concluding on fair value measurements in connection with management’s determination of the fair values of assets acquired and liabilities assumed in a business combination. During the measurement period, if new information is obtained about facts and circumstances that existed as of the acquisition date, changes in the estimated fair values of the net assets recorded may change the amount of the purchase price allocable to goodwill. During the measurement period, which expires one year from the acquisition date, changes to any purchase price allocations that are material to the Company’s consolidated financial results will be adjusted prospectively.

Use of Estimates

The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses. Significant items subject to such estimates include revenue recognition including determining the nature and timing of satisfaction of performance obligations, variable consideration, standalone selling price, and other revenue items requiring significant judgment; unit-based compensation; the fair value of acquired intangibles; the capitalization of software development costs; the useful lives of property and equipment and long-lived intangible assets; impairment of goodwill and long-lived assets; and income taxes. In accordance with GAAP, management bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Management regularly evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ significantly from those estimates.

Accounting policies and estimates that most significantly impact the presented amounts within these financial statements are further described below:

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents. As of June 30, 2021 and December 31, 2020, cash consisted of checking deposit accounts and demand deposit accounts. There were no cash equivalents held as of June 30, 2021 or December 31, 2020.

Restricted Cash

Restricted cash included cash held in escrow to pay-off Teledata Communications, Inc.’s (“TCI”) outstanding Paycheck Protection Program (“PPP”) Loan in the event the loan was not forgiven by the Small Business Administration (“SBA”), as a part of the acquisition of TCI (see Note 11). The Company received notice in June 2021 that the entirety of the loan was forgiven by the SBA, and the Company subsequently released the cash held in escrow to the sellers of TCI in August 2021. See Note 12 for subsequent events related to the Paycheck Protection Program Loan. As of June 30, 2021, $2.1 million held in escrow was included within restricted cash and the corresponding liability was included within payable due to sellers of TCI on the Company’s condensed consolidated balance sheets. As of December 31, 2020, prior to receiving forgiveness from the SBA, the corresponding liability was included within long-term and short-term debt on the Company’s condensed consolidated balance sheets.

As of June 30, 2021, restricted cash included $0.1 million related to a standby letter of credit from the acquisition of Saylent Technologies, Inc. This standby letter of credit was for the security deposit of the Saylent office lease.

Any cash that is legally or contractually restricted from immediate use is classified as restricted cash.

Fair Value of Financial Instruments

The Company accounts for certain of its financial assets at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

•

Level 1 – Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.

•

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents approximate fair value due to their high liquidity in actively quoted trading markets and their short maturities. The Company’s accounts receivable, related party receivable due from sellers of MeridianLink, accounts payable, accrued liabilities, related party liability due to sellers of MeridianLink, payable due to sellers of TCI, and deferred revenue approximate fair value due to their short maturities. The carrying value of the Company’s long-term debt is considered to approximate the fair value of such debt as of June 30, 2021 and December 31, 2020, based upon the interest rates that the Company believes it can currently obtain for similar debt. Certain trademark intangible assets were recorded at fair value as of December 31, 2020 in connection with the Company’s impairment testing. The inputs used to measure the fair value of these assets are primarily unobservable inputs and, as such, considered Level 3 fair value measurements. There were no assets or liabilities measured at fair value on a recurring or non-recurring basis at June 30, 2021.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents, and accounts receivable. Cash and cash equivalents are invested in short-term and highly liquid investment-grade obligations, which are held in safekeeping by large and creditworthy financial institutions. Deposits in these financial institutions may exceed federally insured limits.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable includes billed and unbilled receivables, net of allowance for doubtful accounts. Trade accounts receivable are recorded at invoiced amounts and do not bear interest. The expectation of collectability is based on a review of credit profiles of customers, contractual terms and conditions, current economic trends, and historical payment experience. The Company regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice and the collection history of each customer to determine the appropriate amount of allowance for doubtful accounts. Allowance for doubtful accounts totaled $0.4 million and $0.6 million, and is classified as accounts receivable, net of allowance for doubtful accounts on the condensed consolidated balance sheets as of June 30, 2021 and December 31, 2020, respectively. Accounts receivable deemed uncollectible are charged against the allowance for doubtful accounts when identified. Bad debt expense is included in general and administrative expenses on the accompanying condensed consolidated statements of operations.

Property and Equipment

The Company records property and equipment at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:


Asset Category		Life (years)
Computer equipment and software		3 – 5 years
Office equipment and furniture		3 – 7 years
Buildings		25 years
Leasehold improvements		Shorter of the lease term and the estimated useful lives of the assets

Expenditures for maintenance and repairs are charged to expense as incurred, and major renewals and betterments are capitalized. Gains or losses on disposal of property and equipment are recognized in the period when the assets are sold or disposed of and the related cost and accumulated depreciation is removed from the accounts.

Goodwill

The Company evaluates and tests the recoverability of goodwill for impairment at least annually, on October 1, or more frequently if circumstances indicate that goodwill may not be recoverable. The Company performs the impairment testing by first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of its reporting unit is less than its carrying amount. The Company has one reporting unit. If, after assessing the totality of events or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company tests for impairment by comparing the estimated fair value of the reporting unit with its carrying amount. The Company estimates the fair value of the reporting unit using a “step one” analysis using a fair-value-based approach based on the market capitalization or a discounted cash flow analysis of projected future results to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Any excess of the carrying amount of the reporting unit’s goodwill over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down. In assessing the qualitative factors, the Company considers the impact of certain key factors including macroeconomic conditions, industry and market considerations, management turnover, changes in regulation, litigation matters, changes in enterprise value, and overall financial performance. No goodwill impairment was recorded during the three and six months ended June 30, 2021 and 2020.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

Research and Development and Capitalized Software

For development costs related to internal use software, such as the Company’s subscription offerings, the Company follows guidance of ASC 350-40, “Internal Use Software.” ASC 350-40 sets forth the guidance for costs incurred for computer software developed or obtained for internal use and requires companies to capitalize qualifying computer software development costs, which are incurred during the application development stage. Once the application development stage is reached, internal and external costs are capitalized until the software is substantially complete and ready for its intended use. These capitalized costs are to be amortized on a straight-line basis over the expected useful life of the software of three years. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. For the three months ended June 30, 2021 and 2020, the Company capitalized $1.4 million and $0.7 million, respectively, related to internally developed software costs. For the six months ended June 30, 2021 and 2020, the Company capitalized $2.2 million and $1.4 million, respectively, related to internally developed software costs. Such capitalized costs related to developed technology are included within the intangible assets balance in the condensed consolidated balance sheets.

Deferred Offering Costs

Costs directly related to the Company’s IPO are deferred for expense recognition and instead capitalized and recorded on the accompanying condensed consolidated balance sheets. These costs consist of legal fees, accounting fees, and other applicable professional services incurred incrementally as a result of the IPO. These deferred offering costs were reclassified to additional paid-in capital upon the closing of the IPO in July 2021. As of June 30, 2021 and December 31, 2020, $2.8 million and $1.0 million, respectively, of deferred offering costs were reported on the accompanying condensed consolidated balance sheets within prepaid expenses and other current assets. See Note 12 for subsequent events related to the IPO.

Impairment of Long-Lived Assets

Identifiable intangible assets with finite lives, such as developed technology, customers relationships, trademarks, and non-agreements, are amortized over their estimated useful lives on either a straight-line or accelerated basis, depending on the nature of the intangible asset.

The Company evaluates the carrying value of long-lived assets, including intangible assets with finite lives and property and equipment, whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. The impairment to be recognized is measured as the amount by which the carrying amount exceeds the fair value of the assets.

No impairment of long-lived assets was recorded during the three and six months ended June 30, 2021 and 2020.

Cumulative Preferred Return

As of June 30, 2021 and prior to the Corporate Conversion, Class A preferred unitholders were entitled to a cumulative preferred return, as disclosed further in Note 6. At each reporting period-end, the Company evaluated whether the Class A Units were considered currently redeemable or probable of becoming redeemable in accordance with ASC 480-10, “Distinguishing Liabilities from Equity,” based on the facts and circumstances of the deemed liquidation events that would give rise to the redemption of the units. In accordance with the prescribed accounting literature, the Company does not record the cumulative preferred return in the condensed consolidated financial statements until the Company determines that such units are probable of becoming redeemable.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

Revenue Recognition

Revenue-generating activities are directly related to the sale, implementation, and support of the Company’s solutions. The Company derives the majority of its revenues from subscription fees for the use of its solutions hosted in either the Company’s data centers or cloud-based hosting services, volume-based fees, as well as revenues for customer support and professional implementation services related to the Company’s solutions.

Under ASC 606, “Revenue from Contracts with Customers,” revenue is recognized upon the transfer of control of a promised service to a customer in an amount that reflects the consideration the Company expects to receive in exchange for those services, net of sales taxes. The Company applies the following five-step revenue recognition model in accounting for its revenue arrangements:

•

Identification of the contract, or contracts, with a customer;

•

Identification of the performance obligations in the contract;

•

Determination of the transaction price;

•

Allocation of the transaction price to the performance obligations in the contract; and

•

Recognition of revenue when or as the Company satisfies the performance obligations.

Subscription Fee Revenues

The Company’s software solutions are generally available for use as hosted application arrangements under subscription fee agreements. The Company’s software solutions consist of an obligation for the Company to provide continuous access to a technology solution that it hosts and routine customer support, both of which the Company accounts for as a stand-ready performance obligation. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customer. Amounts that have been invoiced are recorded in accounts receivable and deferred revenues or revenues, depending on whether the revenue recognition criteria have been met. Additional fees for monthly usage above the levels included in the standard subscription fee are recognized as revenue in the month when the usage amounts are determined and reported.

The Company has a limited number of legacy customers that host and manage its solutions on-premises under term license and maintenance agreements. This type of arrangement is no longer sold and represents an immaterial amount of the Company’s subscription fee revenues. However, there is no planned sunset or end of life for these on-premises solutions.

Professional Services Revenues

The Company offers implementation, consulting and training services for the Company’s software solutions and SaaS offerings. Revenues from services are recognized in the period the services are performed, provided that collection of the related receivable is probable.

Other Revenues

The Company enters into referral and marketing agreements with various third parties, in which revenues for the Company are primarily generated from transactions initiated by the third parties’ customers. The Company may introduce its customers to a referral partner or offer additional services available from the referral partner via an integration with the Company’s software solutions. Revenues are recognized in the period the services are performed, provided that collection of the related receivable is probable.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

The following table disaggregates the Company’s net revenues by major source (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Subscription fees	$	60,427	$	44,000	$	120,743	$	82,771
Professional services		5,615		3,651		11,106		7,400
Other		2,432		1,884		4,436		2,982

Total revenues, net	$	68,474	$	49,535	$	136,285	$	93,153

Significant Judgments

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of accounting in the new revenue standard. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Judgments include whether the series guidance under ASC 606 applicable to the Company’s subscription services and whether implementation and training services represent distinct performance obligations. The Company has contracts with customers that often include multiple performance obligations, usually including multiple subscription and implementation services. For these contracts, the Company accounts for distinct individual performance obligations separately by allocating the contract’s total transaction price to each performance obligation in an amount based on the relative standalone selling price (“SSP”) of each distinct good or service in the contract.

In determining whether SaaS services are distinct, we considered whether the series guidance applies to the Company’s subscription services. The Company considered various factors including that substantially all the Company’s SaaS arrangements involve the transfer of a service to the customer, which represents a performance obligation that is satisfied over time because the customer simultaneously receives and consumes the benefits of the services provided. Customer support services, forms maintenance, and subscription services are considered a series of distinct services that are accounted for as a single performance obligation as the nature of the services are substantially the same and have the same pattern of transfer (i.e., distinct days of service). For these contracts, the Company allocates the ratable portion of the consideration to each period based on the services provided in such period.

In determining whether implementation services are distinct from subscription services, the Company considered that there is not a significant level of integration between implementation and subscription services. Further, implementation services in our contracts provide benefit to the customer with other readily available resources and the implementation services generally are not interdependent with the SaaS subscription services. Therefore, implementation services are generally accounted for as a separate performance obligation, as they represent distinct services that provide benefit to the customer apart from SaaS services.

Consulting and training services are generally considered a separate performance obligation as they are considered distinct services that provide a benefit to the customer on their own.

The determination of SSP for each distinct performance obligation requires judgment. Performance obligations are generally sold at standard prices and subscriptions are generally coterminous. Therefore, it is rare that any reallocation of transaction consideration is required. The Company‘s best evidence of SSP is the observable price at which products and services are sold separately to customers in similar circumstances or to similar customers in a single transaction, which is generally the stated contract price.

The Company believes that it is the passage of time that corresponds to the satisfaction of its subscription, implementation, and professional services performance obligations, so the appropriate measurement of progress is a time-based input method based on estimated or projected hours to complete the professional services.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

The Company evaluates whether it is the principal (i.e., reports revenues on a gross basis) or agent (i.e., reports revenues on a net basis) with respect to the vendor reseller agreements pursuant to which the Company resells certain third-party solutions along with the Company’s solutions. Generally, the Company reports revenues from these types of contracts on a gross basis, meaning the amounts billed to customers are recorded as revenues and expenses incurred are recorded as cost of revenues. Where the Company is the principal, it first obtains control of the inputs to the specific service and directs their use to create the combined output. The Company’s control is evidenced by its involvement in the integration of the partners’ services with the Company’s solutions before the partners’ services are transferred to the Company’s customers and is further supported by the Company being primarily responsible to the customers and having a level of discretion in establishing pricing. In cases where the Company does not obtain control prior to the transfer of services, and acts as an agent, revenue is reported on a net basis, with costs being recorded as a reduction to revenues.

The Company has concluded that its subscription fees related to monthly usage above the levels included in the standard subscription fee relates specifically to the transfer of the service to the customer in that month and is consistent with the allocation objective of ASC 606 when considering all the performance obligations and payment terms in the contract. Therefore, the Company recognizes additional usage revenues in the month when the usage amounts are determined and reported. This allocation reflects the amount the Company expects to receive for the services for the given period.

Contract Balances

The timing of customer billing and payment relative to the start of the service period varies from contract to contract; however, the Company bills many of its customers in advance of the provision of services under its contracts, resulting in contract liabilities consisting of deferred revenue. Deferred revenue represents billings under noncancelable contracts before the related product or service is transferred to the customer.

The payment terms and conditions vary by contract; however, the Company’s terms generally require payment within 30 days from the invoice date. In instances where the timing of revenue recognition differs from the timing of payment, the Company elected to apply the practical expedient in accordance with ASC 606 to not adjust contract consideration for the effects of a significant financing component. The Company expects, at contract inception, that the period between when promised goods and services are transferred to the customer and when the customer pays for those goods and services will be one year or less. As such, the Company determined its contracts do not generally contain a significant financing component.

Deferred Revenue

The deferred revenue balance consists of subscription and implementation fees which have been invoiced upfront and are recognized as revenue only when the revenue recognition criteria are met. The Company’s subscription contracts are typically invoiced to its customers annually, and revenue is recognized ratably over the service term. Implementation and service-based fees are most commonly invoiced 50% upfront and 50% upon completion. The Company believes that it is the passage of time that corresponds to the satisfaction of its subscription implementation and professional services performance obligations, so the appropriate measurement of progress is a time-based input method based on estimated or projected hours to complete the professional services. Accordingly, the Company’s deferred revenue balance does not include revenues for future years of multi-year noncancelable contracts that have not yet been billed and is considered current since the deferred balance will all be recognized within 12 months.

The changes in the Company’s deferred revenue as of June 30, 2021 and 2020 were as follows (in thousands):


	Six Months Ended June 30,
	2021			2020
Deferred revenue, beginning balance	$	10,873		$	7,841
Billing of transaction consideration		146,506			100,440
Revenue recognized		(136,285	)		(93,153	)

Deferred revenue, ending balance	$	21,094		$	15,128

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

Assets Recognized from Costs to Obtain a Contract with a Customer

The Company capitalizes sales commissions related to its customer agreements because the commission charges are so closely related to the revenues from the noncancelable customer agreements that they should be recorded as an asset and charged to expense over the expected period of customer benefit. The Company capitalizes commissions and bonuses for those involved in the sale of our SaaS offerings, including direct employees and indirect supervisors, as these are incremental to the sale. The Company begins amortizing deferred costs for a particular customer agreement once the revenue recognition criteria are met and amortizes those deferred costs over the expected period of customer benefit, which the Company estimates to be three years. The Company determined the period of benefit by considering factors such as historically high renewal rates with similar customers and contracts, initial contract length, an expectation that there will still be a demand for the product at the end of its term, and the significant costs to switch to a competitor’s product, all of which are governed by the estimated useful life of the technology. Current costs are included in prepaid expenses and other current assets, and non-current costs are included in other assets on the accompanying condensed consolidated balance sheets. There was no impairment of assets related to deferred commissions during the three and six months ended June 30, 2021 and 2020.

The Company applies a practical expedient to expense costs to obtain a contract with a customer, as incurred, when the amortization period would have been one year or less.

The following table represents the changes in contract cost assets (in thousands):


	Six Months Ended June 30,
	2021			2020
Beginning balance	$	3,207		$	1,635
Additions		1,940			814
Amortization		(594	)		(297	)

Ending balance	$	4,553		$	2,152

Contract cost assets, current	$	1,796		$	825
Contract cost assets, noncurrent		2,757			1,327

Total deferred contract cost assets	$	4,553		$	2,152

Cost of Revenues

Cost of revenues consists primarily of salaries and other personnel-related costs, including employee benefits, bonuses, and unit-based compensation, for employees providing services to our customers. This includes the costs of our implementation, customer support, data center, and customer training personnel. Cost of revenues also includes the direct costs from third-party services included in our solutions, an allocation of general overhead costs, and the amortization of developed technology. We allocate general overhead expenses to all departments based on the number of employees in each department, which we consider to be a fair and representative means of allocation.

Marketing Costs

Marketing costs are expensed as incurred. Advertising and tradeshow expenses were $0.3 million and $0.1 million for the three months ended June 30, 2021 and 2020, respectively, and $0.4 million for both the six months ended June 30, 2021 and 2020. Advertising and tradeshow expenses are included in sales and marketing expenses in the accompanying condensed consolidated statements of operations.

Deferred Financing Fees

Deferred financing fees represent fees and other direct incremental costs incurred in connection with the Company’s debt. Deferred financing fees are netted against the Company’s debt. These amounts are amortized into interest expense over the estimated life of the debt using the effective interest method.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

In accordance with ASC 470-50, Debt—Modifications and Extinguishments, the Company will perform an analysis on a creditor-by-creditor basis when its debt is modified to determine if the debt instruments were substantially different. In the event of extinguishment, capitalized deferred financing costs are expensed. In the event of debt modification, lender related fees are capitalized, and third-party costs are expensed.

Unit-Based Compensation

The Company accounts for unit-based compensation by estimating the fair value of unit-based payment awards at the grant date. The Company estimates the fair value of its unit options using the Black-Scholes option-pricing model, and the portion that is ultimately expected to vest is recognized as compensation expense over the requisite service period.

Calculating unit-based compensation expense requires the input of highly subjective assumptions, including the expected term of the unit-based awards, fair value of its units, and unit price volatility. The Company utilized an independent valuation specialist to assist with the Company’s determination of the fair value per unit. The methods used to determine the fair value per unit included discounted cash flow analysis, comparable public company analysis, and comparable acquisition analysis. Starting in the third quarter of 2020, the probability-weighted expected return method was used and considered multiple exit scenarios, including a near term IPO. The estimate of the expected term of options granted was determined by utilizing a weighted average approach, considering the use of the “simplified method” (where the expected term is presumed to be equal to the vesting period plus the midpoint of the remaining contractual term) and an expected liquidation event occurrence. The Company utilizes this method, as it does not have the historical experience to calculate the term. Since the Company was a privately-held entity with no historical data on volatility of its units until its IPO went effective in July 2021, the expected volatility is based on the volatility of similar entities (referred to as guideline companies). In evaluating similarity, the Company considered factors such as industry, stage of life cycle, size, and financial leverage. The assumptions used in calculating the fair value of unit-based awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, unit-based compensation expense could be materially different in the future. The risk-free rate for periods within the contractual life of the option is based on U.S. Treasury yield for a term consistent with the expected life of the unit option in effect at the time of grant. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future.

The Company accounts for forfeitures when they occur. The Company has elected to recognize unit-based compensation expense for service-based awards on a straight-line basis over the service vesting period. The Company recognizes compensation expense for awards subject to performance conditions using the graded attribution method. See Note 12 for subsequent events related to the unit-based compensation.

Net Loss Per Common Unit

As of June 30, 2021 and prior to the Corporate Conversion, basic net loss per common unit was computed by dividing the net loss attributable to the then-existing Class B common unitholders by the weighted average number of Class B common units (“common units”) outstanding during the period, without the consideration for potential dilutive common units. For the purpose of calculating basic net loss per common unit for the three and six months ended June 30, 2021 and 2020, the Company adjusted net income or loss for cumulative dividends on the then-existing Class A preferred units (“preferred units”). Net loss attributable to common unitholders was computed by deducting the dividends accumulated for the period on cumulative preferred units from net income. If there was a net loss, the amount of the loss is increased by those preferred dividends.

Diluted net loss per common unit was computed by dividing the net loss by the weighted-average number of common unit equivalents outstanding for the period determined using the treasury-stock method and if-converted method, as applicable. Due to a net loss after adjusting for the cumulative dividends on preferred units in the periods presented, all otherwise potentially dilutive securities were antidilutive. Accordingly, basic net loss per common unit equals diluted net loss per common unit for all periods presented in the accompanying condensed consolidated financial statements.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. A goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The standard is effective for the Company for interim and annual reporting periods beginning after December 15, 2022; early adoption is permitted. The Company has elected to early adopt this standard effective January 1, 2021, and the adoption did not have a material impact on its condensed consolidated financial statements and disclosures.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statement of operations. The new standard provides for a modified retrospective approach which requires recognition at the beginning of the earliest comparative period presented of leases that exist at that date, as well as adjusting equity at the beginning of the earliest comparative period presented as if the new standard had always been applied. In July 2018, the FASB issued ASU 2018-11, which provides an additional transition method. Under the additional transition method, an entity initially applies the new leases guidance at the adoption date (rather than at the beginning of the earliest period presented). Therefore, an entity which elects the additional transition method would apply Topic 840 in the comparative periods and recognize the effects of applying Topic 842 as a cumulative adjustment to retained earnings as of the adoption date. If an entity elects the new transition method, it is required to provide the Topic 840 disclosures for all prior periods presented that remain under the legacy lease guidance. For the Company, the new standard is effective for fiscal years beginning after December 15, 2021, and interim periods beginning the following year. Early adoption is permitted. The Company is evaluating the potential impact of this guidance on the Company’s condensed consolidated financial statements and disclosures.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. For the Company, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and must be adopted as a cumulative effect adjustment to retained earnings; early adoption is permitted. The Company is in the early stages of evaluating the effect of this guidance on its condensed consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles, Goodwill and Other (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract,” which requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance in ASC 350-40. For the Company, the amendments are effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption is permitted, including adoption in any interim period. The Company is evaluating the potential impact of this guidance on the Company’s condensed consolidated financial statements and disclosures.

In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes” (Topic 740). The amendments in the updated guidance simplify the accounting for income taxes by removing certain exceptions and improving consistent application of other areas of the topic by clarifying the guidance. For the Company, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted. The Company is currently evaluating the timing of and impact of this guidance on the Company’s condensed consolidated financial statements.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform” (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential accounting burden associated with transitioning away from reference rates, such as the London Inter-Bank Offered Rate (LIBOR), which regulators in the United Kingdom have announced will be phased out by the end of 2021. The expedients and exceptions provided by ASU 2020-04 are for the application of U.S. GAAP to contracts, hedging relationships and other transactions affected by the rate reform, and will not be available after December 31, 2022, other than for certain hedging relationships entered into before December 31, 2022. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time (generally through December 31, 2022, as noted above). The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements and related disclosures.

Note 3 – Balance Sheet Components

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):


	As of June 30, 2021		As of December 31, 2020
Prepaid expenses	$	4,585	$	2,938
Capitalized contract costs – current		1,796		1,256
Deferred offering costs		2,767		995
Prepaid income taxes		—		196
Others		174		427

Total prepaid expenses and other current assets	$	9,322	$	5,812

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):


	As of June 30, 2021			As of December 31, 2020
Computer equipment and software	$	7,685		$	7,317
Leasehold improvements		3,292			2,953
Office equipment and furniture		1,426			1,683
Construction in progress		—			3

Total		12,403			11,956
Less: Accumulated depreciation and amortization		(5,298	)		(4,356	)

Property and equipment, net	$	7,105		$	7,600

Depreciation expense amounted to $0.6 million for both the three months ended June 30, 2021 and 2020, respectively, and $1.2 million for both the six months ended June 30, 2021 and 2020, respectively. The Company disposed of office furniture that resulted in a loss of $0.1 million and $0.0 million during the three months ended June 30, 2021 and 2020, respectively, and $0.2 million and $0.1 million during the six months ended June 30, 2021 and 2020, respectively. The losses are included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

Intangible Assets, Net

Intangible assets, net consisted of the following (in thousands):


	As of June 30, 2021
	Gross Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	328,600	$	(82,987	)	$	245,613
Developed technology		74,800		(24,155	)		50,645
Trademarks		24,175		(6,139	)		18,036
Non-competition agreements		600		(75	)		525
Capitalized software		8,102		(2,759	)		5,343

	$	436,277	$	(116,115	)	$	320,162


	As of December 31, 2020
	Gross Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	322,800	$	(66,750	)	$	256,050
Developed technology		69,000		(19,275	)		49,725
Trademarks		22,675		(4,637	)		18,038
Capitalized software		5,887		(1,668	)		4,219

	$	420,362	$	(92,330	)	$	328,032

The estimated useful lives and weighted average amortization periods for intangible assets at June 30, 2021 and December 31, 2020 were as follows:


	Weighted-Average Amortization Period
Customer relationships		10 years
Developed technology		5-10 years
Trademarks		10 years
Non-competition agreements		2 years
Capitalized software		3 years

Amortization expense related to intangible assets was $12.0 million for the three months ended June 30, 2021, of which $3.1 million and $8.9 million, were included in cost of sales and general and administrative expense, respectively, on the accompanying condensed consolidated statements of operations. Amortization expense related to intangible assets was $9.2 million for the three months ended June 30, 2020, of which $2.1 million and $7.1 million, were included in cost of sales and general and administrative expense, respectively, on the accompanying condensed consolidated statements of operations.

Amortization expense related to intangible assets was $23.8 million for the six months ended June 30, 2021, of which $6.0 million and $17.8 million, were included in cost of sales and general and administrative expense, respectively, on the accompanying condensed consolidated statements of operations. Amortization expense related to intangible assets was $18.3 million for the six months ended June 30, 2020, of which $4.2 million and $14.1 million, were included in cost of sales and general and administrative expense, respectively, on the accompanying condensed consolidated statements of operations.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

The estimated future amortization of intangible assets as of June 30, 2021 was as follows (in thousands):


Years ending December 31, 2021 (remaining six months)	$	24,188
2022		48,039
2023		46,075
2024		44,344
2025		40,337
Thereafter		117,179

Total amortization expense	$	320,162

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):


	As of
	June 30, 2021		December 31, 2020
Accrued bonuses	$	3,872	$	5,423
Accrued payroll and payroll-related expenses		7,845		7,305
Sales tax liability from acquisitions		2,939		2,739
Accrued costs of revenues		3,740		1,988
Accrued operating costs		1,419		1,609
Other accrued expenses		1,915		2,006

	$	21,730	$	21,070

Note 4 – Commitments and Contingencies

Legal Matters

The Company is, and from time to time may be, involved in litigation relating to claims arising out of the Company’s operations in the normal course of business. Management is not currently aware of any legal proceedings or claims against it that could have a material adverse effect on the financial position, results of operations, or cash flows of the Company. However, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities.

Operating Lease Commitments

The Company leases office space under various operating lease agreements that expire through December 2026. The Company recognizes the related rent expense on a straight-line basis over the term of each lease. Free rent and rental increases are recognized on a straight-line basis over the term of each lease.

One of the leases is with a related party with a term date of December 2022. The monthly payments during both the three months ended June 30, 2021 and 2020 were $0.1 million, and the monthly payments during both the six months ended June 30, 2021 and 2020 were both $0.1 million. The monthly payments are subject to annual increases.

During February 2021, the Company ceased using one of its leased office spaces and entered into a sublease agreement for a portion of the vacated space. The remaining portion of the vacated space remains available for sublease in future periods. The Company estimates the fair value of the lease termination obligation as of the cease-use date considering the future contractual lease obligations, net of any estimated sub-lease recoveries. Future cash flows are discounted using the Company’s credit adjusted risk free rate. Sublease rental income assumptions were based on actual sublease agreements entered into and data available from rental activity in the local markets. There is uncertainty in the estimates of future lease costs and sublease recoveries. Actual costs and sublease recoveries could vary from the estimated amounts and result in additional charges, and such amounts could be material.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

As of June 30, 2021, the Company’s future lease obligations totaled approximately $0.8 million, which were reduced for estimates for sublease rental income of $0.5 million, resulting in a net lease termination liability balance of $0.3 million. The Company also recorded a loss on contract termination of $0.4 million and a loss on disposal of assets of $0.1 million during the six months ended June 30, 2021. Both losses were included in general and administrative expenses on the condensed consolidated statements of operations for the six months ended June 30, 2021. In connection with the lease termination liability, the Company removed approximately $0.1 million of deferred rent on the original lease.

Changes to accrued lease termination liability were as follows (in thousands):


	As of June 30, 2021
Accrued termination costs, January 1, 2021	$	—
Additions to lease termination liability		454
Lease amounts paid, net of sublease income		(125	)

Accrued termination costs, June 30, 2021		329
Less current portion (included in accrued liabilities)		(202	)

Accrued termination costs, non-current portion (included in other long-term liabilities)	$	127

Future minimum lease payments under these noncancelable operating leases, and expected sublease receipts, as of June 30, 2021 were as follows (in thousands):


	Related Party		Third Party		Sublease Receipts			Total
Years Ending December 31, 2021 (remaining six months)	$	421	$	538	$	(156	)	$	803
2022		875		1,076		(295	)		1,656
2023		—		1,099		—			1,099
2024		—		897		—			897
2025		—		319		—			319
Thereafter		—		243		—			243

Total future minimum lease payments	$	1,296	$	4,172	$	(451	)	$	5,017

Rent expense has been recorded in the condensed consolidated statements of operations for the three and six months ended June 30, 2021 and 2020 as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Cost of revenues	$	217	$	189	$	452	$	379
General and administrative		54		51		112		104
Research and development		139		117		292		237
Sales and marketing		65		43		130		80

Total rent expense	$	475	$	400	$	986	$	800

See Note 9, Related Party Transactions.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

Note 5 – Long-Term Debt

Long-term debt was comprised of the following (in thousands):


	As of June 30, 2021			As of December 31, 2020
First lien	$	503,665		$	406,255
Second lien		125,000			125,000
Paycheck Protection Program loan		—			2,142

Total principal payments due		628,665			533,397
Debt issuance costs		(13,813	)		(13,565	)

Total debt, net	$	614,852		$	519,832

Less: Current portion of long-term debt
First lien	$	5,179		$	4,156
Paycheck Protection Program loan		—			1,785
Debt issuance costs		(3,422	)		(2,986	)

Total current portion of long-term debt, net		1,757			2,955

Non-current portion of long-term debt, net	$	613,095		$	516,877

On May 31, 2018, Holdings, Intermediate and MeridianLink (collectively, the “Borrowers”) entered into a First Lien Credit Agreement (“First Lien”) and a Second Lien Credit Agreement (“Second Lien”).

The First Lien consists of a $315.0 million term loan, itself consisting of a $245.0 million initial term loan and a delayed draw term loan of $70.0 million, as well as a $35.0 million revolving credit facility. Under the First Lien term loan, the Borrowers borrowed $245.0 million on May 31, 2018 and $70.0 million on June 7, 2018. The First Lien term loan requires quarterly principal payments equal to 0.25% of the original principal, with the remainder due at maturity. The First Lien term loan bears interest at a rate per annum equal to LIBOR plus 4.0% (which was 4.75% at both June 30, 2021 and December 31, 2020), and matures on May 31, 2025. The revolving credit facility includes a $5.0 million sublimit for the issuance of letters of credit. The First Lien revolving credit facility bears interest at a rate per annum equal to LIBOR plus 3.5% and matures on May 31, 2023. As of June 30, 2021 and December 30, 2020, there were no borrowings on the First Lien revolving credit facility, which bore interest at a rate of 4.25% as of June 30, 2021 and December 31, 2020. The First Lien revolving credit facility also requires a quarterly commitment fee based on the Borrower’s consolidated first lien net leverage ratio. As of June 30, 2021 and December 31, 2020, the applicable rate was 0.375%, which was applied against the $35 million unused revolving credit facility balance.

The Second Lien consists of a term loan of $125.0 million, itself consisting of a $95.0 million initial term loan and a delayed draw term loan of $30.0 million. The Borrowers borrowed $95.0 million on May 31, 2018 and $30.0 million on June 7, 2018. The Second Lien term loan requires interest only payments, bears interest at a rate per annum equal to LIBOR plus 8.0% (which was 9.0% at both June 30, 2021 and December 31, 2020), and matures on May 29, 2026.

The First and Second Liens are secured by substantially all assets of the Borrowers. Under the First Lien and Second Lien, the Borrowers are subject to various financial covenants, as well as customary affirmative and negative covenants, as discussed below.

In connection with First Lien and Second Lien term loans, the Borrowers incurred $16.2 million in issuance costs. Expenses associated with the issuance of the term loans are presented in the consolidated balance sheets as a direct deduction from the carrying amount of the debt and are amortized to interest expense over the life of the term loan using the effective interest method. In connection with the First Lien revolving credit facility, the Borrowers incurred $1.0 million in issuance costs. Expenses associated with the issuance of the revolving credit facility are presented in the accompanying condensed consolidated balance sheets in prepaid expenses and other current assets, and other assets, and are amortized to interest expense over the life of the revolving credit facility using the straight-line method.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

On October 7, 2019, the Borrowers amended the First Lien credit agreement and borrowed an additional $60.0 million (“2019 Incremental Term”) to make a seller holdback payment, and to pay fees and expenses incurred in connection with the 2019 Incremental Term debt.

In connection with the 2019 Incremental Term debt, the Borrowers incurred $1.1 million in expenses, of which $1.0 million and $0.1 million related to lender fees and third-party fees, respectively.

On January 12, 2021, the Borrowers amended the First Lien credit agreement and borrowed an additional $100.0 million (“2021 Incremental Term”) primarily to fund the TazWorks acquisition. Debt issuance costs associated with the borrowing were approximately $2.0 million. The First Lien term continues to bear interest at a rate per annum equal to LIBOR plus 4.0% and matures on May 31, 2025.

In connection with the 2021 Incremental Term debt, the Borrowers incurred $2.2 million in expenses, of which approximately $2.0 million and $0.2 million related to lender fees and third-party fees, respectively.

Total amortization of financing costs was $0.7 million and $0.4 million for the three months ended June 30, 2021 and 2020, respectively and was $1.8 million and $0.3 million for the six months ended June 30, 2021 and 2020, respectively. Total interest expense was $9.1 million and $8.0 million for the three months ended June 30, 2021 and 2020, respectively, and was $18.1 million and $17.0 million for the six months ended June 30, 2021 and 2020, respectively.

The First Lien and Second Lien also contain customary affirmative and negative covenants including, among other requirements, negative covenants that restrict the Borrowers’ ability to dispose of assets, create liens, incur indebtedness, pay dividends, make acquisitions, make investments, or make distributions to the Company or the Company’s ultimate unitholders. Parent (as a standalone legal entity) is not a party to the First Lien or Second Lien and the business operations of the Company are almost entirely conducted by Parent’s wholly-owned subsidiaries.

Further, under the First Lien, if the amount outstanding under the revolving credit facility is greater than 30% of the revolving credit commitments at each quarter end, the First Lien contains a financial covenant that requires testing of maximum consolidated First Lien net leverage ratio (the ratio of the aggregate indebtedness under the First Lien as of such date minus the aggregate amount of unrestricted cash and cash equivalents, to consolidated EBITDA for the period of the four fiscal quarters most recently ended). If required to test, the Borrowers must maintain a maximum Consolidated First Lien Net Leverage Ratio of 7.00 to 1.00.

The Borrowers were in compliance with all covenants of the First Lien and Second Lien as of June 30, 2021.

See Note 2 for discussion related to the PPP loan.

Future principal payments of long-term debt as of June 30, 2021 were as follows (in thousands):


Years ending December 31, 2021 (remaining six months)	$	2,589
2022		5,179
2023		5,179
2024		5,179
2025		485,539
2026		125,000

Total	$	628,665

See Note 12 for subsequent events related to prepayment of debt.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

Note 6 – Preferred Units and Members’ Deficit

As of June 30, 2021 and prior to the Corporate Conversion, the Company operated subject to the terms and conditions of the amended and restated Project Angel Parent, LLC, Limited Liability Company Agreement (“the Members’ Agreement”) dated May 31, 2018. The membership interests were represented by two classes: Class A preferred units (“Class A Units”) and Class B common units (“Class B Units”). Under the Members’ Agreement, there was an unlimited number of Class A Units and Class B Units that could be issued. The Company’s board of managers had the sole authority and right to manage the business and affairs of the Company and to make all decisions and take all actions for the Company, except for certain exceptions defined within the Members’ Agreement.

Class A Units

Voting Rights—Class A Units did not have voting, approval, or consent rights under the Members’ Agreement.

Conversion Rights—Class A Units did not have any conversion rights into common units.

Preferred Return—The Class A preferred unitholders were entitled to a cumulative preferred return at a rate of 9% per annum (“Preferred Return”), compounding on a quarterly basis, on Unpaid Return (“Unpaid Return” means an amount equal to the excess of the aggregate Class A Preferred Return accrued on such Class A Units for all prior periods, over the aggregate amount of prior distributions made by the Company related to such Preferred Return) plus Unreturned Capital (“Unreturned Capital” means aggregate contributions made in exchange for Class A Units reduced by distributions made by the Company) to such unitholders for all prior quarterly periods.

Liquidation Preference—The Class A preferred unitholders were entitled to liquidation preference over Class B Units. The distribution would first be made to the Class A Unpaid Return on such unitholder’s outstanding Class A preferred units until the Class A Unpaid Return was zero, and then to the Class A Unreturned Capital (at $1,000 per unit) with respect to such unitholder’s Class A preferred units held until the Class A Unreturned Capital was zero. Any remaining amounts would be distributed pro rata among holders of Class B Units based on the outstanding Class B Units held at the time of such distribution. Therefore, all Class A unitholders had first priority with regard to any distributions made by the Company to its unitholders, whether the result of a liquidation event (such as a sale or dissolution of the Company) or the result of a distribution elected by the board of managers of the Company. The liquidation preference provisions related to the Class A Units were considered contingent redemption provisions and the deemed liquidation events were not solely within the control of the Company, such as a sale or change in control of the Company. Accordingly, the Company has presented the Class A Units within the mezzanine portion of the accompanying consolidated balance sheet. However, the Class A Units were not considered currently redeemable because redemption is contingent on the sale of the Company (or similar change of control event), whereas the identification of a market participant willing to purchase the Company for consideration in an amount sufficient to distribute the redemption amount to the holders of the Class A Units was not considered probable. As a result, the Company has not recorded the Preferred Return on the Class A Units within the accompanying condensed consolidated statements of preferred units and members’ deficit.

Repurchase Rights—In accordance with the terms and conditions of certain investor unit agreements, co-invest unit agreements, or other incentive unit agreements entered into between the Company and its unitholders, the Class A Units were subject to repurchase at the election of the Company, Thoma Bravo, or another related party upon the unitholder’s termination or in connection with a sale of the Company. The repurchase price for each Class A Unit was the fair market value of such unit as of the date of repurchase; provided, however, that if the unitholder was terminated for cause, the repurchase price would be the lesser of the unitholder’s original cost for such unit and the fair market value of such unit.

Class B Units

As of and June 30, 2021 and December 31, 2020, there were and 52,112,904 and 51,492,805 units, respectively of Class B Units issued and outstanding. Class B Units did not have voting, approval, or consent rights under the Members’ Agreement. No distribution would be made on Class B Units, unless and until the distributions were made to holders of Class A Units and any remaining amounts to be distributed pro rata among holders of Class B Units based on the Class

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

B Units held as of the time of such distribution. Certain Class B Units, including Carried Equity Units (as defined below) were subject to repurchase by the Company, Thoma Bravo, or another related party upon the unitholder’s termination. Refer to Note 7 for further information regarding the Company’s repurchase rights on the Class B Units, including the nature and classification of certain Class B Units on the condensed consolidated balance sheets. See Note 12 for subsequent events related to the Class B Units.

Note 7 – Unit-Based Compensation

On October 23, 2018, the Company’s board of managers approved the adoption of the Project Angel Parent, LLC Equity Plan (the “2018 Plan”). The 2018 Plan provides incentives to employees, consultants, directors, managers or advisers of the Company and its subsidiaries through the sale or grant of the Company’s Class A Units, Class B Units, and/or other equity-based awards. Under the 2018 Plan, 4,868 Class A Units and 738,796 Class B Units have been issued under co-invest agreements (“Co-Invest Units”), which remain outstanding as of June 30, 2021 and December 31, 2020. No additional Co-Invest Units will be granted in subsequent years.

In addition, under the 2018 Plan, in 2019, the Company issued 746,744 of Class B carried units at a price of $0.06 per unit, to employees, directors, and officers of the Company (the “Carried Equity Units”). No additional units were granted during the periods ended June 30, 2021 and 2020. The Carried Equity Units are subject to vesting based on (1) the participant’s continued service to the Company over a period of approximately one to four years and/or (2) the Company achieving annual EBITDA targets. As the Carried Equity Units are unvested on the date of issuance, the cash received by the Company from the participant’s purchase of the Carried Equity Units is included in accrued expenses on the accompanying condensed consolidated balance sheets and such liability is reduced over time as vesting occurs. The number of units vested during the three months ended June 30, 2021 and 2020 was 148,515 and 579,505, respectively. The number of units vested during the six months ended June 30, 2021 and 2020 was 723,520 and 797,139, respectively. The liability balance as of June 30, 2021 and December 31, 2020 related to the unvested Carried Equity Units was and $0.1 million and $0.2 million, respectively. As of and June 30, 2021 and December 31, 2020, the unvested Carried Equity Units amount to 1,533,882 and 2,700,948 units, respectively. None of the Carried Equity Units were cancelled or forfeited during the three and six months ended June 30, 2021 and 2020. The Carried Equity Units are also subject to repurchase by the Company or Thoma Bravo upon the participant’s termination. Unvested Carried Equity Units are subject to repurchase at the lower of the participant’s original cost for such unit or the fair market value of such unit. Vested Carried Equity Units are subject to repurchase at the fair market value of such unit; provided, however, that if the participant is terminated for cause, the repurchase price for each vested unit shall be the lesser of the participant’s original cost for such unit and the fair market value of such unit.

The Company recognized approximately $0.1 million in unit-based compensation expense during both the three months ended June 30, 2021 and 2020, and $0.3 million in unit-based compensation expense during both the six months ended June 30, 2021 and 2020 for Carried Equity Units related to the excess of fair value per unit on date of issuance over the $0.06 per unit purchase price paid by the participants, which has been recognized as additional compensation expense attributable to the participants.

On May 6, 2019, the Company established the 2019 Equity Option Plan (the “2019 Plan”). The 2019 Plan provides for grants of certain unit options to employees, which allow option holders to purchase Class B Units in the Company. For time-based service options granted, the options vest over a period of three to four years. The performance-based options vest upon achieving annual EBITDA targets or upon a change of control as defined in the 2019 Plan documents. An option holder must be an employee of the Company at the date of these vesting conditions.

As of June 30, 2021 and December 31, 2020, the maximum aggregate number of Class B Units that could be sold or granted to participants under both the 2018 Plan and the 2019 Plan amounted to 9,450,667.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

A summary of unit option activity under the 2019 Plan is as follows:


	Number of Options		Weighted Average Exercise Price
Outstanding – January 1, 2021		3,169,696	$	6.30
Granted		37,500		18.26

Outstanding – June 30, 2021		3,207,196	$	6.44


	Number of Options		Weighted Average Exercise Price
Outstanding – January 1, 2020		2,757,696	$	6.06
Granted		127,500		6.06

Outstanding – June 30, 2020		2,885,196	$	6.06

The Company recognized approximately $0.5 million in unit-based compensation expense related to time-based and performance-based unit options for both the three months ended June 30, 2021 and 2020. The Company recognized approximately $1.0 million in unit-based compensation expense related to time-based and performance-based unit options for both the six months ended June 30, 2021 and 2020. During the six months ended June 30, 2021 and 2020, performance-based options were probable of vesting and therefore were included as part of unit-based compensation expense. All options have a 10-year contractual life.

Unit-based compensation for unit-based awards granted to participants has been recorded in the condensed consolidated statements of operations for the three and six months ended June 30, 2021 and 2020 as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Cost of revenues	$	93	$	28	$	165	$	55
General and administrative		353		485		706		958
Research and development		82		88		164		159
Sales and marketing		137		72		273		141

Total unit-based compensation expense	$	665	$	673	$	1,308	$	1,313

See Note 12 for subsequent events related to unit-based compensation.

Note 8 – Income Taxes

In accordance with applicable accounting guidance, the income tax expense for the six months ended June 30, 2021 is based on the estimated annual effective tax rate for fiscal year 2021. The estimated effective tax rate may be subject to adjustment in subsequent quarterly periods as the forecasts of pretax income and other items impacting forecasted income tax expense change.

The Company’s provision for income taxes reflected an effective tax rate of approximately 20.9% and 21.0% for the three months ended June 30, 2021 and 2020, respectively, and approximately 21.8% and 20.2% for the six months ended June 30, 2021 and 2020, respectively. The Company’s effective tax rate differs from the U.S. federal statutory rate primarily due to R&D credits, state taxes, and expected permanent differences.

The Company assesses whether a valuation allowance should be recorded against its deferred tax assets based on the consideration of all available evidence, using a “more likely than not” realization standard. The four sources of taxable income that must be considered in determining whether deferred tax assets will be realized are: (l) future reversals of existing taxable temporary differences (i.e., offset of gross deferred tax assets against gross deferred tax liabilities); (2) taxable income in prior carryback years, if carryback is permitted under the applicable tax law; (3) tax planning strategies; and (4) future taxable income exclusive of reversing temporary differences and carryforwards.

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

Note 9 – Related Party Transactions

The Company has leased one property from a related party. Rental expense for this property totaled $0.1 million and $0.2 million for the three months ended June 30, 2021 and 2020, respectively, and was $0.2 million and $0.4 million for the six months ended June 30, 2021 and 2020, respectively.

The Company entered into a sale-leaseback transaction with a related party on April 29, 2019 for one of its office properties, in which the Company was involved in the construction of significant changes to the existing building and was considered the continued owner of the building for accounting purposes. Under the terms of the lease and based on certain prohibited forms of continuing involvement in the leased assets, the lease did not qualify for sale-leaseback accounting and was accounted for as a financing obligation. The lease was terminated in October 2020.

On May 31, 2018, the Company entered into an Advisory Services Agreement with Thoma Bravo, a private equity firm, that owns the majority of the Company through private equity funds managed by the firm. During the three months ended June 30, 2021 and 2020, the Company recorded $0.5 million and $0.6 million, in general and administrative expenses on the accompanying condensed consolidated statements of operations for management and advisory fees. During the six months ended June 30, 2021 and 2020, the Company recorded $1.0 million and $1.1 million, in general and administrative expenses on the accompanying condensed consolidated statements of operations for management and advisory fees. As of June 30, 2021, the Company has an accounts payable balance of $0.5 million due to Thoma Bravo on the accompanying condensed consolidated balance sheets. As of December 31, 2020, the Company had a balance of $0.5 million, for amounts paid to Thoma Bravo included within prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets. The Advisory Services Agreement was terminated upon completion of the IPO.

In June 2021, the Company signed an agreement with the sellers of MeridianLink which finalized the terms for payment of the remaining $30 million holdback liability outstanding as of December 31, 2020 reflected as a related party liability on the condensed consolidated balance sheets. During June 2021, the Company released $25.7 million to the sellers representing the funds remaining in the holdback amount, net of the claims against the holdback which had been recorded as a related party receivable due from the sellers.

Note 10 – Net Loss Per Common Unit

The following table presents the calculation of basic and diluted net loss per common unit (in thousands, except units and per unit data):


	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Basic and diluted net loss per unit
Numerator:
Net loss attributable to common unitholders	$	(1,800	)	$	(3,566	)	$	(3,502	)	$	(10,525	)
Denominator:
Weighted-average number of common units—basic and dilutive		52,015,526			51,248,738			51,843,086			51,024,837
Net loss per unit:
Basic and dilutive	$	(0.03	)	$	(0.07	)	$	(0.07	)	$	(0.21	)

PROJECT ANGEL PARENT, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)

The following outstanding potentially dilutive securities were excluded from the calculation of diluted net loss per common unit attributable to common unitholders because their impact would have been anti-dilutive for the periods presented:


	As of June 30,
	2021		2020
Class B options outstanding, unexercised		3,207,196		2,885,196
Class B carried equity units unvested		1,533,882		3,058,596

Total		4,741,078		5,943,792

Note 11 – Business Combinations

Teledata Communications, Inc. and TazWorks, LLC

During the quarter ended June 30, 2021, the Company settled its remaining obligation for the acquisition of TazWorks, LLC (“TazWorks”). The Company’s final remaining provisional purchase price allocation amount related to the final working capital adjustment, which amounted to approximately $0.2 million being received by the Company from the sellers of TazWorks, was settled in April 2021 and resulted in a corresponding adjustment to prepaid expenses and other current assets.

The pro forma consolidated statement of operations data presented below for the period ended June 30, 2020, gives effect to the 2020 acquisitions of Teledata Communications , Inc., (“TCI”) and TazWorks which were acquired in November 2020 and December 2020, respectively, as if they had occurred on January 1, 2019. These amounts have been calculated after adjusting the operating results of TCI and TazWorks for the following primary items: (1) additional intangible amortization from the transaction, (2) additional interest expense on borrowings, (3) removal of historical interest expense of the acquired entities, (4) acquisition-related expenses incurred, (5) adjustments to certain employee stock-based compensation, (6) adjustments to deferred revenue that would have occurred assuming the fair value adjustments had been applied since January 1, 2019, and (7) the related tax effects of the above adjustments. For the three months ended June 30, 2020, pro forma revenue was $59.2 million and pro forma earnings reflect net income of $4.5 million. For the six months ended June 30, 2020, pro forma revenue was $112.9 million and pro forma earnings reflect net income of $4.8 million.

The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisitions taken place as of January 1, 2019 or the results of our future operations. Furthermore, the pro forma results do not give effect to all cost savings or incremental costs that may occur as a result of the integration and consolidation of the completed acquisitions.

Saylent Technologies, Inc.

On April 1, 2021, the Company acquired all the outstanding stock of Saylent Technologies, Inc. (“Saylent”) for cash consideration of $38.5 million, subject to adjustment as defined in the purchase agreement. In connection with the acquisition, the Company incurred $0.8 million in acquisition related costs. Such costs have been included in general and administrative expenses in the accompanying condensed consolidated statements of operations. The acquisition was funded by the Company’s available cash. Saylent is based out of Boston, MA. Saylent is a data analytics and marketing solution that offers insights to financial institutions that help drive account and credit and debit card usage. The acquisition was accounted for using the acquisition method of accounting whereby the acquired assets and liabilities of Saylent were recorded at their respective fair values, including an amount for goodwill. Results of operations of Saylent have been included in the operations of the Company beginning with the closing date of the acquisition. The acquisition was deemed immaterial to the Company’s operating results as a whole.

The table below summarizes the preliminary allocation of the purchase price of Saylent based on the estimated fair value of the assets acquired and the liabilities assumed (in thousands). The Company’s remaining provisional purchase price allocations at June 30, 2021 related to the final working capital adjustment and income tax effects.


Assets acquired:
Cash and cash equivalents	$	2,451
Restricted cash		104
Accounts receivable, net		4,174
Prepaid expenses and other current assets		121
Property and equipment, net		371
Goodwill		22,042
Intangible assets		13,700

Total assets acquired		42,963

Liabilities assumed:
Accounts payable		210
Accrued compensation and benefits		2,191
Accrued expenses		754
Deferred tax liability		521
Notes payable (PPP Loan)		775

Total liabilities assumed		4,451

Fair value of assets acquired and liabilities assumed	$	38,512

The goodwill recognized is attributable to increased customer base and expanded service capabilities. The Saylent acquisition is treated as a stock purchase for income tax purposes; therefore, of the goodwill recorded, none is considered deductible for income tax purposes. A rollforward of the Company’s goodwill balance at December 31, 2021 to June 30, 2021 is as follows:


	Total
Balance, December 31, 2020	$	542,965
Saylent Technologies, Inc Acquisition		22,042
Adjustments to TazWorks acquisition date fair value made in 2021		47

Balance, June 30, 2021	$	565,054

The fair value of the separately identifiable finite-lived intangible assets acquired and estimated useful lives are as follows (in thousands, except years):


	Estimated Fair Values		Weighted Average Amortization Life (years)
Customer Relationships	$	5,800		15.0
Trademarks		1,500		6.3
Non-compete		600		2.0
Developed technology		5,800		8.7