VERRA MOBILITY Corp 10-K/A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and the related notes that are included in Item 8 of Part II of this Annual Report on Form 10-K/A. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section entitled “Risk Factors.” Please also refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements.” Business Overview We believe we are a leading provider of smart mobility technology solutions and services throughout the United States, Canada and Europe. These solutions and services include toll and violations management, title and registration, automated safety solutions, and other data-driven solutions, to our customers, which include RACs, FMCs , other large fleet owners, municipalities, school districts and violation-issuing authorities. Our solutions simplify the smart mobility ecosystem by utilizing what we believe are industry-leading capabilities, information and technology expertise, and integrated hardware and software to efficiently facilitate the automated processing of tolls and violations and safety solutions for hundreds of agencies and millions of end users annually, while also making cities and roadways safer for everyone. Recent Events COVID-19’s Impact on Our Operating Results In December 2019, COVID-19 emerged and has since spread throughout the world. The World Health Organization declared COVID-19 a pandemic in March 2020, and it continues to significantly disrupt the global economy. In the United States and abroad, many federal, state and local governments have instituted travel restrictions, stay-at-home orders, social distancing orders, and border closures in order to minimize the spread of the virus. Although we began to see moderate signs of recovery towards the latter half of 2020 due to an increase in travel activity and the availability of COVID-19 vaccines, we expect that COVID-19 will continue to have a significant negative impact on the global economy and travel industry, including RACs in future quarters. Revenues from RACs in our Commercial Services segment decreased significantly in 2020 as a result of reduced airline travel and widespread travel restrictions related to COVID-19. Our RAC customers have experienced reductions in volume and revenue. Many of these RAC customers have reduced their rental fleet sizes in response to the decline in customer demand. On May 22, 2020, The Hertz Corporation, one of our key Commercial Services customers, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, as amended, in the United States Bankruptcy Court for the District of Delaware. While there were moderate improvements in travel demand towards the latter half of 2020, the full extent and duration of COVID-19’s impact on the RAC industry and the financial health of our key RAC customers cannot be predicted at this time. These trends have had, and are expected to continue to have, a significant negative effect on revenues in our Commercial Services segment. In our Government Solutions segment, school closures resulting from the COVID-19 pandemic have negatively impacted revenues from our school bus stop arm camera and school zone speed camera products. Reductions in vehicle traffic in jurisdictions where we operate photo enforcement programs, payment rates for photo enforcement tickets and temporary inactivity of school zone speed cameras have all negatively impacted service revenue in our Government Solutions segment. We cannot predict the duration or full impact of COVID-19 on our overall business and results of operations at this time, but we expect the impact to continue into the first half of 2021. As a precautionary measure in response to COVID-19, we shifted most of our workforce to remote operations in March 2020 and we have implemented changes in our physical locations to ensure social distancing. We have not experienced any significant disruptions in our operations as a result of these measures. 49 In light of the extraordinary impact of COVID-19 and related containment measures on the global economy and our business, prior trends in our business may not be applicable to our operations for the duration of the pandemic. Pending Acquisition On January 21, 2021, we entered into an agreement pursuant to which all of the holders of Redflex’s outstanding equity as of the record date will sell, and we will cause one of our subsidiaries to purchase, one hundred percent (100%) of the outstanding equity of Redflex. The aggregate consideration payable by us under the agreement will be AUD 146.1 million, and the closing of the acquisition is expected to take place in the second quarter of 2021, subject to the satisfaction or waiver of specified conditions. For additional information, see Note 21, Subsequent Event , in Item 8, Financial Statements and Supplementary Data. Segment Information We have two operating and reportable segments, Commercial Services and Government Solutions: • Our Commercial Services segment offers toll and violation management solutions and title and registration services for RACs and FMCs in North America. In Europe, we provide violations processing through EPC and consumer tolling services through Pagatelia. • Our Government Solutions segment provides complete, end-to-end red-light, speed, school bus stop arm and bus lane enforcement solutions. We implement and administer traffic safety programs and products for municipalities and local government agencies of all sizes. Segment performance is based on revenues and income from operations before depreciation, amortization, gain (loss) on disposal of assets, net, impairment of property and equipment, and stock-based compensation. The measure also excludes interest expense, net, income taxes and certain other transactions and is inclusive of other income, net. Executive Summary We operate with long-term contracts and a highly reoccurring service revenue model. We continue to execute on our strategy of growing revenues with existing customers, expanding offerings into adjacent markets through innovation or acquisition and reducing operating costs. During the periods presented, we: • Executed on the growth strategy by completing strategic acquisitions: HTA – We acquired HTA during the first quarter of 2018 which strengthened our position in tolling and related services to RAC and FMC customers. EPC – In the second quarter of 2018, we acquired EPC which provided a platform to expand our RAC and FMC solutions into Europe. Pagatelia – During the fourth quarter of 2019, we acquired Pagatelia which provides consumer tolling and parking solutions and is accelerating our European expansion. • Generated total revenue of $393.6 million in fiscal year 2020 compared to $448.7 million in fiscal year 2019. We grew product sales by $25.3 million year over year; however, due to the ongoing impact of COVID-19, our service revenue declined significantly, as discussed below. During fiscal year 2019, we grew total revenue by $78.6 million, from $370.1 million in fiscal year 2018 to $448.7 million in fiscal year 2019. Acquisitions contributed $21.6 million to the revenue growth, while expansion in existing products and customers contributed to the remaining growth. • Generated cash flows from operating activities of $46.9 million, $133.8 million, and $49.3 million for fiscal years 2020, 2019 and 2018, respectively. Our cash on hand was $120.3 million as of December 31, 2020. • Reduced our financing costs by refinancing our term loan in February 2020, which reduced the applicable margin on our interest rate by 50 basis points. Our interest expense, net was $40.9 million, $60.7 million, and $69.6 million for fiscal years 2020, 2019 and 2018, respectively. We had a $19.9 million decrease in interest expense during fiscal year 2020 compared to fiscal year 2019. 50 Factors Affecting Our Operating Results Our operating results and financial performance are influenced by the following merger and acquisitions activity during the periods discussed herein: Business Combination We were originally incorporated in Delaware on August 15, 2016 as Gores Holdings II, Inc. (“ Gores ”), a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or more target businesses. On January 19, 2017, we consummated our initial public offering, following which our shares began trading on the Nasdaq Capital Market . On June 21, 2018, Gores, First Merger Sub, Second Merger Sub, Greenlight and PE Greenlight Holdings, LLC entered into the Merger Agreement, which provided for, among other things, (i) the First Merger and (ii) immediately following the First Merger and as part of the same overall transaction as the First Merger, the Second Merger. In connection with the closing of this Business Combination on October 17, 2018, we changed our name to Verra Mobility Corporation. As a result of the Business Combination, we became the owner, directly or indirectly, of all of the equity interests of Verra Mobility Holdings, LLC (formerly Second Merger Sub) and its subsidiaries. HTA Acquisition and Refinancing On March 1, 2018, we acquired HTA for an aggregate purchase price of $603.3 million, consisting of $525.0 million in cash, $9.7 million in purchase price adjustments, a $11.3 million payment to the sellers for certain tax items, and the issuance of equity in Greenlight with a fair value of approximately $57.3 million. The receipt of the equity was treated for accounting purposes as a capital contribution from Greenlight Acquisition Corporation. We recognized $15.6 million of costs related to the transaction in fiscal year 2018. In connection with the HTA acquisition, we refinanced the 2017 Credit Facilities (defined below) and entered into the 2018 Credit Facilities (defined below), which provided for term loans with an aggregate principal amount of $1.04 billion and a revolver with an aggregate commitment of up to $75.0 million. See Note 9, Long-term Debt , in Item 8, Financial Statements and Supplementary Data. EPC Acquisition On April 6, 2018, we acquired EPC for an aggregate purchase price of $62.9 million. The purchase consideration consisted primarily of equity in Greenlight and working capital adjustments, which aggregated $2.6 million. The receipt of equity was treated for accounting purposes as a capital contribution from Greenlight Acquisition Corporation. We recognized $3.0 million of costs related to the transaction in fiscal year 2018. Pagatelia Acquisition On October 31, 2019, we completed the acquisition of all of the outstanding shares of Pagatelia, a Spanish limited liability company that provides electronic consumer tolling and parking solutions in Spain, Portugal, France and Italy. The purchase consideration for Pagatelia was $26.6 million which we paid during fiscal year 2019 . Transaction costs were not material. Primary Components of Our Operating Results Revenues Total revenue consists of service revenue generated by our Commercial Services and Government Solutions segments and product sales generated by the Government Solutions segment. Service Revenue . Our Commercial Services segment generates service revenue primarily through the management and operation of tolling programs for RACs, FMCs and other large fleet customers. These solutions are full service offerings by which we enroll plates of our customers’ vehicles with tolling authorities, process payments on the customers’ behalf and, through proprietary technology, integrate with customer data to match the toll to the driver and then bill the driver (or our customer, as applicable) for use of the service. The cost of certain tolls, violations and our customers’ share of administration fees are netted against revenue. We also generate service revenue in our Commercial Services segment through processing titles, registrations and violations for our customers. 51 Our Government Solutions segment generates service revenue through the operation and maintenance of photo enforcement systems. This revenue is generally tied to long-term contracts, and revenue is recognized either when services are performed or when citations are issued or paid, depending on the terms of the customer contract. Revenue drivers in this segment include the number of systems installed and the monthly revenue per system. Ancillary service revenue is generated in our Government Solutions segment from payment processing, pass-through fees for collection expense, and other fees. Product Sales. Product sales are generated by the sale of photo enforcement equipment to certain Government Solutions customers. A small number of customers purchase this equipment, and their buying patterns vary greatly from period to period. We recognize product sales revenue when the equipment is accepted or installed. Cost and Expenses Cost of Service Revenue. Cost of service revenue consists of collection and other professional services provided by third parties and associated with the delivery of certain ancillary services performed by both our Government Solutions and Commercial Services segments. Cost of Product Sales. Cost of product sales consists of the cost to acquire and install photo enforcement equipment purchased by Government Solutions customers. Operating Expenses . Operating expenses include payroll and payroll-related costs (including stock-based compensation), costs related to the operation of our call centers and other operational costs, including transaction processing, print, postage and communication costs. Selling, General and Administrative Expenses . Selling, general and administrative expenses include payroll and payroll-related costs (including stock-based compensation), real estate lease expense, insurance costs, professional services fees and general corporate expenses. Depreciation, Amortization and (Gain) Loss on Disposal of Assets, Net . Depreciation, amortization and (gain) loss on disposal of assets, net includes depreciation on property, plant and equipment, and amortization of definite-lived intangible assets. This line item also includes any one-time gains or losses incurred in connection with the disposal of certain assets. Impairment of Property and Equipment . Impairment of property and equipment includes impairment charges for fixed assets which were held and used in our operations. Interest Expense, Net . This includes interest expense and amortization of deferred financing costs and discounts and is net of interest income. Change in Fair Value of Private Placement Warrants . This consists of adjustments to the Private Placement Warrants liability from the remeasurement to fair value at the end of each reporting period. Tax Receivable Agreement Liability Adjustment . This consists of adjustments made to the related party TRA liability due to changes in estimates. Loss on Extinguishment of Debt. Loss on extinguishment of debt generally consists of early payment penalties, the write-off of original issue discounts and deferred financing costs associated with debt extinguishment. Other Income, Net . Other income, net primarily consists of volume rebates earned from total spend on purchasing cards and gain or loss on foreign currency transactions. 52 Results of Operations Fiscal Year 2020 Compared to Fiscal Year 2019 The following table sets forth our statements of operations data and expresses each item as a percentage of total revenue for the periods presented as well as the changes between periods. The tables and information provided in this section were derived from exact numbers and may have immaterial rounding differences. Year Ended December 31, Percentage of Revenue Increase (Decrease) 2020 vs 2019 2020 2019 2020 2019 $ % ($ in thousands) (As restated) (As restated) Service revenue $ 336,274 $ 416,723 85.4 % 92.9 % $ (80,449 ) (19.3 )% Product sales 57,319 32,014 14.6 % 7.1 % 25,305 79.0 % Total revenue 393,593 448,737 100.0 % 100.0 % (55,144 ) (12.3 )% Cost of service revenue 3,967 5,561 1.0 % 1.2 % (1,594 ) (28.7 )% Cost of product sales 29,573 13,919 7.5 % 3.1 % 15,654 112.5 % Operating expenses 115,729 125,640 29.4 % 28.0 % (9,911 ) (7.9 )% Selling, general and administrative expenses 89,664 85,493 22.8 % 19.1 % 4,171 4.9 % Depreciation, amortization and (gain) loss on disposal of assets, net 116,844 115,771 29.7 % 25.8 % 1,073 0.9 % Impairment of property and equipment — 5,898 — 1.3 % (5,898 ) (100.0 )% Total costs and expenses 355,777 352,282 90.4 % 78.5 % 3,495 1.0 % Income from operations 37,816 96,455 9.6 % 21.5 % (58,639 ) (60.8 )% Interest expense, net 40,865 60,729 10.4 % 13.5 % (19,864 ) (32.7 )% Change in fair value of private placement warrants 1,133 16,267 0.3 % 3.6 % (15,134 ) (93.0 )% Tax receivable agreement liability adjustment 6,850 (106 ) 1.7 % 0.0 % 6,956 6562.3 % Other income, net (11,885 ) (11,092 ) (3.0 )% (2.4 )% (793 ) 7.1 % Total other expenses 36,963 65,798 9.4 % 14.7 % (28,835 ) (43.8 )% Income before income tax provision 853 30,657 0.2 % 6.8 % (29,804 ) (97.2 )% Income tax provision 5,431 13,581 1.4 % 3.0 % (8,150 ) (60.0 )% Net (loss) income $ (4,578 ) $ 17,076 (1.2 )% 3.8 % $ (21,654 ) (126.8 )% Service Revenue . Service revenue decreased by $80.4 million, or 19.3%, to $336.3 million for fiscal year 2020 from $416.7 million in fiscal year 2019, representing 85.4% and 92.9% of total revenue, respectively. The following table depicts service revenue by segment: Year Ended December 31, Percentage of Revenue Increase (Decrease) 2020 vs 2019 ($ in thousands) 2020 2019 2020 2019 $ % Service revenue Commercial Services $ 180,856 $ 276,479 46.0 % 61.6 % $ (95,623 ) (34.6 )% Government Solutions 155,418 140,244 39.4 % 31.3 % 15,174 10.8 % Total service revenue $ 336,274 $ 416,723 85.4 % 92.9 % $ (80,449 ) (19.3 )% Commercial Services service revenue includes toll and violation management revenues from commercial fleet and rental car companies. Commercial Services service revenue decreased by $95.6 million, or 34.6%, from $276.5 million in fiscal year 2019 to $180.9 million in fiscal year 2020. This decrease was primarily due to the COVID-19 pandemic and related containment measures, which continue to have a significant negative impact on the RAC industry beginning in March 2020. As a result, our revenue declined 55% from the first quarter of 2020 to $27.3 million in the second quarter of 2020 which was the bulk of the decline. We have seen sequential 53 improvement in service revenue to $44.2 million and $48.2 million in the third and fourth quarters of 2020, respectively which could be attributed to typical seasonality or to signs of recovery. Although increased availability and distribution of COVID-19 vaccine s and the gradual lifting of travel restrictions could positively impact the travel industry in 2021, we anticipate that the impact from COVID-19 will result in year over year revenue declines through March 2021 and that full year 2021 service revenue may not recover to 2019 levels . Government Solutions service revenue includes revenue from red-light, speed, school bus stop arm and bus lane photo enforcement systems. Service revenue increased by $15.2 million to $155.4 million for fiscal year 2020 from 140.2 million in fiscal year 2019. Our red-light photo enforcement service revenue declined $6.7 million during fiscal year 2020 compared to fiscal year 2019. This was primarily due to a $3.5 million decline from the loss of certain Texas programs on June 1, 2019 due to a legislative change that banned most red-light photo enforcement programs in the state. The remainder of the decline was primarily attributed to the impact from COVID-19 on variable rate clients. We also had a $4.3 million decrease in service revenue from the suspension of school bus stop arm cameras as most school buses were not operating for much of this period. These declines were mainly offset by speed program revenue, which grew approximately $25.7 million in fiscal year 2020, compared to the same period in 2019, due to an increase in the total number of camera systems installed. There was an average of 4,027 active camera systems during fiscal year 2020 compared to an average of 4,738 for fiscal year 2019. The decline in active camera systems was primarily due to 1,347 cameras that were temporarily inactive due to COVID-19, and the loss of Texas programs noted above. These declines were partially offset by the expansion of speed enforcement systems with existing customers. Service revenue for the year was negatively impacted from COVID-19 beginning in March 2020 which led to reduction in vehicle traffic as a result of stay-at-home orders and early school closures and delayed re-openings in certain jurisdictions in which we operate. We saw growth in our speed program revenue in 2020 and aniticipate continued growth in 2021 based on the full year impact of 2020 camera installations. However, we anticipate the negative impacts of COVID-19 will continue to impact our other revenue programs in future quarters. Product Sales. Product sales were $57.3 million and $32.0 million for fiscal years 2020 and 2019, respectively, which relate to revenue generated from Government Solutions customers who purchase their equipment. Product sales increased by $25.3 million which was primarily driven by sales to a single customer that is currently expanding its existing school zone speed program. A small number of customers purchase this equipment, and their buying patterns vary greatly from period to period. Without a specific notice to proceed with additional installation, we anticipate product revenue for 2021 to be in line with 2018. Cost of Service Revenue. Cost of service revenue decreased year over year, from $5.6 million for fiscal year 2019 to $4.0 million for fiscal year 2020. The decrease resulted from decreased costs of collection and other third-party professional services and associated with the delivery of certain ancillary services performed by both of our segments. Cost of Product Sales. Cost of product sales increased by $15.7 million from $13.9 million in fiscal year 2019 to $29.6 million in fiscal year 2020, and was driven by the increase in product sales volume. Operating Expenses. Operating expenses decreased by $9.9 million, or 7.9%, from $125.6 million for fiscal year 2019 to $115.7 million in fiscal year 2020. This decrease was primarily attributable to decreases of $4.6 million in employee wages due to furloughs, reduced headcount and bonus expense, and $9.1 million in transaction processing and other volume related costs, which were partially offset by increases in subcontractor expenses and operational equipment costs. Operating expenses as a percentage of total revenue increased from 28.0% to 29.4% in fiscal years 2019 and 2020, respectively. The following table presents operating expenses by segment: Year Ended December 31, Percentage of Revenue Increase (Decrease) 2020 vs 2019 ($ in thousands) 2020 2019 2020 2019 $ % Operating expenses Commercial Services $ 52,505 $ 66,916 13.3 % 14.9 % $ (14,411 ) (21.5 )% Government Solutions 62,387 57,905 15.9 % 12.9 % 4,482 7.7 % Total operating expenses before stock-based compensation 114,892 124,821 29.2 % 27.8 % (9,929 ) (8.0 )% Stock-based compensation 837 819 0.2 % 0.2 % 18 2.2 % Total operating expenses $ 115,729 $ 125,640 29.4 % 28.0 % $ (9,911 ) (7.9 )% 54 Selling, General and Administrative Expenses . Selling, general and administrative expenses increased by $4.2 million to $89.7 million for fiscal year 2020 compared to $85.5 million for fiscal year 2019. We recorded a $14.4 million credit loss expense during the year as a result of the new credit loss accounting standard, which contributed to a $6.3 million year over year increase. We also had increases to stock based compensation and consulting fees of $2.6 million and $1.5 million, respectively. These increases were partially offset by an aggregate $7.6 million of cost-cutting measures including the elimination of the bonus payout and the related expense along with reductions to marketing and non-essential travel. Selling, general and administrative expenses as a percentage of total revenue increased from 19.1% to 22.8% in fiscal years 2019 and 2020, respectively. The following table presents selling, general and administrative expenses by segment: Year Ended December 31, Percentage of Revenue Increase (Decrease) 2020 vs 2019 ($ in thousands) 2020 2019 2020 2019 $ % Selling, general and administrative expenses Commercial Services $ 40,978 $ 41,384 10.4 % 9.2 % $ (406 ) (1.0 )% Government Solutions 34,465 32,696 8.8 % 7.3 % 1,769 5.4 % Corporate and other 2,469 2,220 0.6 % 0.5 % 249 11.2 % Total selling, general and administrative expenses before stock-based compensation 77,912 76,300 19.8 % 17.0 % 1,612 2.1 % Stock-based compensation 11,752 9,193 3.0 % 2.1 % 2,559 27.8 % Total selling, general and administrative expenses $ 89,664 $ 85,493 22.8 % 19.1 % $ 4,171 4.9 % Depreciation, Amortization and (Gain) Loss on Disposal of Assets, Net. Depreciation, amortization and (gain) loss on disposal of assets, net, increased from $115.8 million in fiscal year 2019 to $116.8 million in fiscal year 2020. The increase is primarily due to the increased depreciation and amortization expense resulting from the Pagatelia acquisition included in the entire fiscal year 2020 compared to only two months in 2019. Impairment of Property and Equipment . Impairment of property and equipment for the fiscal year 2019 included a $5.9 million impairment charge as a result of legislation that banned most red-light photo enforcement programs in Texas on June 1, 2019, which was in the Government Solutions segment. Interest Expense, Net. Interest expense, net decreased by $19.9 million from $60.7 million in fiscal year 2019 to $40.9 million in fiscal year 2020. This decrease was primarily as a result of lower interest rates coupled with the refinancing of our New First Lien Term Loan (as defined and discussed below) in February 2020, which reduced the applicable margin on the interest rate by 50 basis points. See “ Liquidity and Capital Resources ” below. Change in Fair Value of Private Placement Warrants . We recorded losses of $1.1 million and $16.3 million in fiscal years 2020 and 2019, respectively, related to the changes in fair value of our Private Placement Warrants which are accounted for as liabilities on our consolidated balance sheets. The change in fair value is the result of remeasurement of the liability at the end of each reporting period. Tax Receivable Agreement Liability Adjustment . We recorded a $6.8 million charge in fiscal year 2020 and income of $0.1 million in fiscal year 2019. The adjustment in 2020 reflects the impact of an increase to the Company’s deferred tax rate arising from higher estimated state tax rates due to a change in apportionment. Other Income, Net. Other income, net was $11.9 million in fiscal year 2020 compared to $11.1 million in fiscal year 2019. The increase of $0.8 million was primarily due to a $1.4 million gain related to the HTA Settlement Agreement and another $1.4 million gain for the receipt of insurance proceeds related to this matter, both of which are further discussed in Note 17, Commitments and Contingencies , partially offset by the decreased volume in purchasing card rebates resulting from COVID-19’s impact on toll usage. 55 Income Tax Provision. Income tax provision was $ 5 . 4 million representing an effective tax rate of 636.7 % for fiscal year 2020 compared to $ 13.6 million, representing an effective tax rate of 44.3 % for fiscal year 2019. The effective tax rate change was primarily due to lower pre-tax income in 2020 , resulting in the Company’s permanent book and tax differences having a proportionately greater impact on the effective tax rate in the current year. Net (Loss) Income. We had a net loss of $4.6 million for fiscal year 2020 compared to net income of $17.1 million for 2019. The $21.7 million decrease in net income was primarily due to the decline in revenue from the impact of COVID-19 on our RAC customers, and the other statement of operations activity discussed above. Fiscal Year 2019 Compared to Fiscal Year 2018 The following table sets forth our statements of operations data and expresses each item as a percentage of total revenue for the periods presented as well as the changes between periods. The tables and information provided in this section were derived from exact numbers and may have immaterial rounding differences. Year Ended December 31, Percentage of Revenue Increase (Decrease) 2019 vs 2018 2019 2018 2019 2018 $ % ($ in thousands) (As restated) (As restated) Service revenue $ 416,723 $ 365,076 92.9 % 98.6 % $ 51,647 14.1 % Product sales 32,014 5,070 7.1 % 1.4 % 26,944 531.4 % Total revenue 448,737 370,146 100.0 % 100.0 % 78,591 21.2 % Cost of service revenue 5,561 5,788 1.2 % 1.6 % (227 ) (3.9 )% Cost of product sales 13,919 3,447 3.1 % 0.9 % 10,472 303.8 % Operating expenses 125,640 108,883 28.0 % 29.4 % 16,757 15.4 % Selling, general and administrative expenses 85,493 132,827 19.1 % 35.9 % (47,334 ) (35.6 )% Depreciation, amortization and (gain) loss on disposal of assets, net 115,771 103,353 25.8 % 27.9 % 12,418 12.0 % Impairment of property and equipment 5,898 — 1.3 % — 5,898 n/a Total costs and expenses 352,282 354,298 78.5 % 95.7 % (2,016 ) (0.6 )% Income from operations 96,455 15,848 21.5 % 4.3 % 80,607 508.6 % Interest expense, net 60,729 69,550 13.5 % 18.8 % (8,821 ) (12.7 )% Change in fair value of private placement warrants 16,267 (3,667 ) 3.6 % (1.0 )% 19,934 (543.6 )% Tax receivable agreement liability adjustment (106 ) — 0.0 % — (106 ) n/a Loss on extinguishment of debt — 26,486 — 7.2 % (26,486 ) (100.0 )% Other income, net (11,092 ) (8,795 ) (2.4 )% (2.4 )% (2,297 ) 26.1 % Total other expenses 65,798 83,574 14.7 % 22.6 % (17,776 ) (21.3 )% Income (loss) before income tax provision (benefit) 30,657 (67,726 ) 6.8 % (18.3 )% 98,383 145.3 % Income tax provision (benefit) 13,581 (16,241 ) 3.0 % (4.4 )% 29,822 183.6 % Net income (loss) $ 17,076 $ (51,485 ) 3.8 % (13.9 )% $ 68,561 133.2 % 56 Service Revenue . Service revenue increased by $51.6 million, or 14.1%, to $416.7 million for fiscal year 2019 from $365.1 million for fiscal year 2018, representing 92.9% and 98.6% of total revenue, respectively. The following table depicts service revenue by segment: Year Ended December 31, Percentage of Revenue Increase (Decrease) 2019 vs 2018 ($ in thousands) 2019 2018 2019 2018 $ % Service revenue Commercial Services $ 276,479 $ 222,611 61.6 % 60.1 % $ 53,868 24.2 % Government Solutions 140,244 142,465 31.3 % 38.5 % (2,221 ) (1.6 )% Total service revenue $ 416,723 $ 365,076 92.9 % 98.6 % $ 51,647 14.1 % Commercial Services service revenue includes toll and violation management revenues from commercial fleet and rental car companies. Service revenue increased by $53.9 million, or 24.2%, from $222.6 million for fiscal year 2018 to $276.5 million for fiscal year 2019. We acquired HTA, a toll and violation processor, on March 1, 2018, and EPC, a European violations processor, on April 6, 2018. These acquisitions contributed $21.6 million to service revenue growth during the period presented. The remaining service revenue was mainly due to a $28.9 million increase from improved volumes in both billable days and tolls processed across our tolling products. Government Solutions service revenue includes revenue from red-light, speed, school bus arm and bus lane photo enforcement systems. Service revenue decreased by $2.2 million, to $140.2 million for fiscal year 2019 from $142.5 million for fiscal year 2018. Our red-light photo enforcement service revenue declined $9.5 million compared to fiscal year 2018. This was primarily due to a $2.7 million decline from the loss of certain Florida programs and $4.5 million due to the loss of Texas programs on June 1, 2019 due to a legislative change that banned most red-light photo enforcement programs in the state. The loss of most of our red-light programs in Texas has negatively impacted year over year service revenue comparison for the next two quarters. The remaining decline resulted from lower price per system in variable contracts. Pricing of red-light photo enforcement programs can be impacted by timing of transaction volume in our variable contracts as well as the pricing of contract renewals. The Company exited its street light maintenance offering at the end of the first quarter of 2019, resulting in a $2.5 million decrease year over year. This street light maintenance offering was not part of our core business and did not meet our profitability criteria. These declines were offset by speed program revenue, which grew approximately $10 million due to increases in the total number of camera systems installed and higher average pricing. Our previous reporting of installed camera systems included systems connected to suspended programs or spare systems at client locations. We re-evaluated our metric during the first quarter of 2019, and only reported installed camera systems that generated revenue, as we believe this is a more meaningful presentation. There were an average of 4,738 camera systems installed during fiscal year 2019 compared to an average of 4,306 for fiscal year 2018. The increase in camera systems was primarily due to new installations of school bus arm systems and the expansion of speed enforcement systems with existing customers. This increase was partially offset by a decline in red-light photo enforcement systems primarily due to the loss of certain Florida and Texas programs noted above. Product Sales. Product sales of $32.0 million and $5.1 million for fiscal years 2019 and 2018, respectively, included revenue generated from Government Solutions customers who purchased their equipment. Product sales increased by $26.9 million primarily driven by sales to a single customer who was expanding their existing school zone speed program. Cost of Service Revenue. Cost of service revenue decreased slightly by $0.2 million, to $5.6 million for fiscal year 2019 from $5.8 million in fiscal year 2018. The decline in cost was consistent with a slight decline in ancillary revenue generated from supporting red-light programs. Cost of Product Sales. Cost of product sales increased by $10.5 million, to $13.9 million for fiscal year 2019 compared to $3.4 million in fiscal year 2018, and was consistent with the change in product sales. 57 Operating Expenses. Operating expenses were $125.6 million for fiscal year 2019, which increased $16.8 million from $108.9 million in fiscal year 2018 mainly due to the inclusion of HTA and EPC operations for the full year compared to only ten months and nine months, respectively, in 2018, but have decreased as a percentage of revenue from 29.4% to 28.0% in fiscal years 2018 and 2019, respectively. Operating expenses by segment appear in the table below: Year Ended December 31, Percentage of Revenue Increase (Decrease) 2019 vs 2018 ($ in thousands) 2019 2018 2019 2018 $ % Operating expenses Commercial Services $ 66,916 $ 51,221 14.9 % 13.8 % $ 15,695 30.6 % Government Solutions 57,905 57,525 12.9 % 15.6 % 380 0.7 % Total operating expenses before stock-based compensation 124,821 108,746 27.8 % 29.4 % 16,075 14.8 % Stock-based compensation 819 137 0.2 % — 682 497.8 % Total operating expenses $ 125,640 $ 108,883 28.0 % 29.4 % $ 16,757 15.4 % Selling, General and Administrative Expenses . Selling, general and administrative expenses were $85.5 million for fiscal year 2019. Expenses in this line item decreased by $47.3 million from $132.8 million in fiscal year 2018 primarily due to $53.2 million of transaction expenses for the Business Combination, HTA and EPC acquisitions, non-recurring expenses of $8.8 million and $5.4 million related to fees paid under a corporate advisory services agreement in fiscal year 2018 for which there were no comparable amounts in fiscal year 2019. The decrease was partially offset by the increase in stock-based compensation expense recorded in fiscal year 2019. Selling, general and administrative expenses as a percentage of total revenue decreased from 35.9% to 19.1% for fiscal years 2018 and 2019, respectively, and are presented by segment in the table below: Year Ended December 31, Percentage of Revenue Increase (Decrease) 2019 vs 2018 2019 2018 2019 2018 $ % ($ in thousands) (As restated) Selling, general and administrative expenses Commercial Services $ 41,384 $ 55,370 9.2 % 15.0 % $ (13,986 ) (25.3 )% Government Solutions 32,696 27,827 7.3 % 7.5 % 4,869 17.5 % Corporate and other 2,220 47,495 0.5 % 12.8 % (45,275 ) (95.3 )% Total selling, general and administrative expenses before stock-based compensation 76,300 130,692 17.0 % 35.3 % (54,392 ) (41.6 )% Stock-based compensation 9,193 2,135 2.1 % 0.6 % 7,058 330.6 % Total selling, general and administrative expenses $ 85,493 $ 132,827 19.1 % 35.9 % $ (47,334 ) (35.6 )% Depreciation, Amortization and (Gain) Loss on Disposal of Assets, Net. Depreciation, amortization and (gain) loss on disposal of assets, net, of $115.8 million for fiscal year 2019 included $22.8 million of depreciation and $92.8 million of amortization. The increase of $12.4 million from $103.4 million in fiscal year 2018 is primarily due to the inclusion of amortization expense resulting from the HTA and EPC acquisitions for the entire fiscal year 2019 compared to partial periods in the 2018 period. Impairment of Property and Equipment. Impairment of property and equipment for fiscal year 2019 consists of a $5.9 million impairment charge as a result of a legislation ban of most red-light photo enforcement programs in Texas on June 1, 2019, which was in the Government Solutions segment. 58 Interest Expense, Net. Interest expense, net decreased by $ 8.8 million from $ 69.5 million in fiscal year 2018 to $ 60.7 million in 2019. The average debt balances as of December 31, 2018 and 2019 were $887.8 million and $899.7 million, respectively. Although the average debt balances remained relatively consistent, interest expense was higher in the 2018 period due to the New Second Lien Term Loan, which had a higher interest rate. The decrease in interest expense in 2019 is due to the full payoff of the New Second Lien Term Loan in the fourth quarter of 2018 and increase in interest income of $1.1 million during fiscal year 2019 . See “ Liquidity and Capital Resources .” Tax Receivable Agreement Liability Adjustment . We recorded $0.1 million of income in fiscal year 2019 resulting from changes in taxable income and tax rates. Change in Fair Value of Private Placement Warrants . We recorded a $16.3 million loss in fiscal year 2019 and a $3.7 million gain in 2018 related to the changes in fair value of our Private Placement Warrants, which are accounted for as liabilities on our consolidated balance sheets. The change in fair value is the result of remeasurement of the liability at the end of each reporting period. Loss on Extinguishment of Debt. This represents the loss on extinguishment of debt related to the 2017 Credit Facilities which were replaced by the 2018 Credit facilities in conjunction with the HTA acquisition and the repayment of the New Second Lien Term Loan in October 2018 pursuant to the Business Combination. See “ Liquidity and Capital Resources .” Other Income, Net. Other income, net increased $2.3 million, from $8.8 million in fiscal year 2018 to $11.1 million for fiscal year 2019 primarily due to the increased purchasing card rebates resulting from the inclusion of HTA operations for the entire period in fiscal year 2019 compared to ten months in the 2018 period. We pay a high volume of tolls on behalf of our customers with purchasing cards which generate rebates based on volume, payment terms and rebate frequency. Income Tax Provision (Benefit). The income tax provision was $13.6 million for fiscal year 2019 compared to an income tax benefit of $(16.2) million for fiscal year 2018. The effective tax rate was 44.3% in 2019 compared to an effective tax benefit rate of (24.0)% for 2018. Our effective tax rate for 2019 was higher compared to 2018 primarily due to the impact of permanent items on pre-tax book income in 2019, which increased the effective tax rate, versus the impact of permanent items on a pre-tax book loss in 2018, which had the impact of decreasing the effective tax rate. Our effective tax rate differed from the statutory federal income tax rate in 2019 and 2018 primarily due to state taxes, the impact of permanent items such as transaction costs, change in fair value of private placement warrant liability, executive compensation, changes in uncertain tax positions, changes in the valuation allowance, lobbying expenses and meals. Net Income (Loss). We had net income of $17.1 million for fiscal year 2019, compared to a net loss of $51.5 million for 2018. The increase in net income was primarily due to expenses in the 2018 period related to an aggregate of $93.8 million of acquisition, refinancing (including loss on extinguishment of debt) and integration costs associated with the HTA and EPC acquisitions for which there were no comparable amounts in fiscal year 2019. This increase was partially offset by related amortization expense and an impairment charge, noted above. Liquidity and Capital Resources Our principal sources of liquidity are cash flow from operations and borrowings under our 2018 Credit Facilities (as defined below). We have incurred significant long-term debt as a result of acquisitions completed in prior years. We believe that our existing cash and cash equivalents, cash flows provided by operating activities and our availability to borrow under our New Revolver (as defined below) will be sufficient to meet operating cash requirements and service debt obligations for at least the next 12 months. Our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive and other factors beyond our control. In addition, our future capital expenditures and other cash requirements could be higher than currently expected due to various factors, including any expansion of our business or strategic acquisitions. Should we pursue strategic acquisitions, we may need to raise additional capital, which may be in the form of additional long-term debt, borrowings on our New Revolver, or equity financings, all of which may not be available to us on favorable terms or at all. Please also see section entitled “ Risk Factors .” 59 We have the ability to borrow under our New Revolver to meet obligations as they come due. As of December 31 , 2020, we had $ 48.8 million available for borrowing, net of letters of credit, under our New Revolver. Concentration of Credit Risk As of December 31, 2020, NYCDOT represented 58.9% of accounts receivable, net. The Company provides photo enforcement services to NYCDOT under the Legacy Contract and the Emergency Contract. At December 31, 2020, the Legacy Contract had an open receivable balance of $28.8 million, of which $20.5 million had aged beyond NYCDOT’s 45-day payment terms. As of December 31, 2020, the Company had invoiced NYCDOT for $52.6 million in product revenue and $17.4 million in service revenue under the Emergency Contract. NYCDOT has not made any payments against the Emergency Contract to date. In late January 2021, we were informed that the City of New York is investigating matters related to our past installation practices, and it is unclear whether this investigation will impact the timing of the payments. Refer to Concentration of Credit Risk within Note 2 to the consolidated financial statements for additional information on significant customers’ revenue concentration. For information on the risks and uncertainties relating to our contracts with NYCDOT and other government entities, please see the risk factors entitled “ The New York City Law Department recently advised us that the City of New York is investigating certain aspects of our installation work for our largest customer, NYCDOT ” and “ Our government contracts are subject to unique risks and uncertainties, including termination rights, delays in payment, audits and investigations, any of which could have a material adverse effect on our business ” set forth in Part I, Item 1A. “ Risk Factors. ” The following table sets forth certain captions on our statements of cash flows for the respective periods: For the Year Ended December 31, 2020 2019 2018 ($ in thousands) (As restated) Net cash provided by operating activities $ 46,909 $ 133,802 $ 49,259 Net cash used in investing activities (24,153 ) (54,973 ) (562,857 ) Net cash (used in) provided by financing activities (34,004 ) (14,520 ) 571,026 Cash Flows from Operating Activities Cash provided by operating activities decreased by $86.9 million, from $133.8 million in fiscal year 2019 to $46.9 million in fiscal year 2020. Net income year over year decreased by $21.7 million, from $17.1 million income in 2019 to a $4.6 million loss in 2020. The adjustments to net (loss) income included a $6.3 million increase in credit loss expense related to the credit loss standard, the $7.0 million increase in the tax receivable agreement liability adjustment and a $6.1 million change in deferred income taxes. These increases were partially offset by a decrease of $15.1 million from the change in fair value of our private placement warrants, and a $5.9 million impairment of property and equipment in fiscal year 2019 with no comparable amount in 2020. There was an aggregate $65.5 million decrease year over year in the changes in operating assets and liabilities, which was driven primarily by a $77.9 million increase in accounts receivables primarily due to collection delays on the accounts receivable associated with our fixed speed camera product sales to NYCDOT, combined with a decrease in accounts payable and accrued liabilities due to the payout of the 2019 bonus accrual with no accrual for fiscal year 2020 and a decrease in other accruals which was consistent with our decrease in certain revenue streams. For additional information on NYCDOT’s impact on our cash provided by operating activities, please see the risk factor entitled “ The New York City Law Department recently advised us that the City of New York is investigating certain aspects of our installation work for our largest customer, NYCDOT ” set forth in Part I, Item 1A. “ Risk Factors. ” Cash provided by operating activities increased $84.5 million from $49.3 million in fiscal year 2018 to $133.8 million in fiscal year 2019. The change in cash provided by operating activities year over year was primarily due to a net income increase of $68.6 million from a loss of $51.5 million in fiscal year 2018 to income of $17.1 million in fiscal year 2019. The growth in net income was driven by the inclusion of the results of HTA and EPC operations for the full year in 2019 versus only partial periods in the 2018 period. It is also attributable to $93.8 million of transaction (the Business Combination, HTA and EPC acquisitions), non-recurring transformation, sponsor fee expenses and loss on extinguishment of debt in fiscal year 2018 for which there were no comparable amounts in fiscal year 2019. 60 Aggregate adjustments to reconcile net income (loss) to net cash provide d by operations increased by $ 32.3 million. The increa se was primarily due to a $19.9 million increase from the change in fair value of our private placement warrants, and the inclusion of the amortization of intangibles associated with the HTA and EPC acquisitions and stock-based compensation for the full year in 2019 versus partial periods in 2018. The $ 26.5 million loss on extinguishment of debt in fiscal year 2018 for which there wa s no comparable amount in 2019 was offset by a $5.9 million impairment charge in the 2019 period for which there were no comparable amount in 2018 . The re was an aggregate $16. 4 million decrease in the change in operating assets and liabilities which was primarily driven by an increase in prepaid expenses and the change in accrued liabilities offset by the change in accounts receivables . Cash Flows from Investing Activities Cash used in investing activities was $24.2 million in fiscal year 2020 which was mainly related to purchases of installation and service parts and property and equipment. Cash used in investing activities was $55.0 million and $562.9 million for fiscal years 2019 and 2018, respectively. The change in cash used in investing activities year over year was primarily due to acquisitions. Cash paid for the Pagatelia acquisition in fiscal year 2019 was $26.6 million, net of $1.1 million of cash acquired. Cash consideration for the HTA acquisition was $531.7 million net of $3.0 million of cash acquired, and for EPC it was $2.6 million, net of $9.0 million of cash acquired. Cash Flows from Financing Activities Cash used in financing activities was $34.0 million and $14.5 million for fiscal years 2020 and 2019, respectively. The cash used in 2020 increased primarily as a result of a $19.7 million mandatory prepayment of excess cash flows made pursuant to the terms of the New First Lien Term Loan (as defined below), and costs associated with refinancing the New First Lien Term Loan in February 2020. Cash provided by financing activities was $571.0 million for fiscal year 2018 and was due to our entering into the 2018 Credit Facilities to fund the HTA acquisition and to repay the outstanding balance on the 2017 Credit Facilities, which totaled approximately $450.5 million, as well as the repayment of the New Second Lien Term Loan in full and the $70.0 million increase to the New First Lien Term Loan in conjunction with the Business Combination. Additionally, cash received in connection with the Business Combination was $803.3 million. Cash payments made in connection with the issuance of the 2018 Credit Facilities, the repayment of the 2017 Credit Facilities and the Business Combination were $29.5 million, $8.2 million and $27.3 million, respectively. Additionally, there was a $779.2 million distribution to the selling shareholders in the Business Combination that was partially offset by a $169.3 million capital contribution from Greenlight. Debt In connection with the an acquisition, VM Consolidated, Inc., our wholly-owned subsidiary, entered into a First Lien Term Loan Credit Agreement (the “ New First Lien Term Loan ”), a Second Lien Term Loan Credit Agreement (the “ New Second Lien Term Loan ” and together with the New First Lien Term Loan, the “ New Term Loans ”) and a Revolving Credit Agreement (the “ New Revolver ,” and together with the New Term Loans, the “ 2018 Credit Facilities ”) with a syndicate of lenders. The 2018 Credit Facilities initially provided for committed senior secured financing of $1.115 billion, consisting of an aggregate principal amount of $1.04 billion under the New Term Loans and an aggregate revolving commitment of up to $75 million available for loans and letters of credit under the New Revolver (subject to borrowing eligibility requirements as described below). In July 2018, we amended the New First Lien Term Loan to expand the aggregate principal loan amount from $840 million to $910 million. The additional $70 million, along with funds contributed by Platinum Equity, LLC, were used to repay the $200 million New Second Lien Term Loan in full contemporaneously with the closing of the Business Combination on October 17, 2018 . The New First Lien Term Loan represents the only debt outstanding under the 2018 Credit Facilities as of December 31, 2020. 61 The 2018 Credit Facilities replaced the previous First Lien Term Loan Credit Agreement (the “ Old First Lien ”), the Second Lien Term Loan Credit Agreement (the “ Old Second Lien ” and together with the Old First Lien, the “ Old Term Loans ” ), which were repaid concurrent with the closing on the 2018 Credit Facilities, and a preexisting Revolving Credit Agreement (the “ Old Revolver ”, collectively with the Old Term Loans, the “ 2017 Credit Facilities ”) which was undrawn at close . The outstanding balances at the date of close on the Old Term Loans, which were repaid in full with proceeds from the 2018 Credit Facilities were $323 million and $125 million, respectively. The New First Lien Term Loan is repayable at 1.0% per annum of the amount initially borrowed, paid in quarterly installments. The New First Lien Term Loan matures on February 28, 2025. We refinanced the entire outstanding amount under the New First Lien Term Loan on February 20, 2020, which reduced the previous applicable margin by 50 basis points. The New First Lien Term Loan now bears interest based, at our option, on either (1) LIBOR plus an applicable margin of 3.25% per annum, or (2) an alternate base rate plus an applicable margin of 2.25% per annum. As of December 31 , 2020, the interest rate on the New First Lien Term Loan was 3.4 %. In addition, the New First Lien Term Loan requires mandatory prepayments equal to the product of the excess cash flows of the Company (as defined in the loan agreement) and the applicable prepayment percentages (calculated as of the last day of the fiscal year, beginning with the year ending December 31, 2019), as set forth in the following table: Consolidated first lien net leverage ratio (as defined by the New First Lien Term Loan agreement) Applicable prepayment percentage > 3.70:1.00 50% < 3.70:1.00 and > 3.20:1.00 25% < 3.20:1.00 0% We made a $19.7 million mandatory prepayment of excess cash flow during the first quarter of fiscal year 2020, which was classified as current portion of long-term debt in the consolidated balance sheet at December 31, 2019. We did not have a mandatory prepayment of excess cash flow for the fiscal year ended December 31, 2020. The New Revolver matures on February 28, 2023. The terms of the New Revolver were not affected by the refinancing of the New First Lien Term Loan discussed above. Borrowing eligibility under the New Revolver is subject to a monthly borrowing base calculation based on (i) certain percentages of eligible accounts receivable and inventory, less (ii) certain reserve items, including outstanding letters of credit and other reserves. We may at any time, on not more than five occasions, request an increase to the New Revolver of up to an aggregate amount of $50 million. The New Revolver bears interest on either (1) LIBOR plus an applicable margin, or (2) an alternate base rate, plus an applicable margin. The margin percentage applied to (1) LIBOR is either 1.25%, 1.50%, or 1.75%, or (2) the base rate is either 0.25%, 0.50%, or 0.75%, depending on our average availability to borrow under the commitment. At December 31 , 2020, we had no outstanding borrowings on the New Revolver and our availability to borrow was $48.8 million, net of $6.3 million of outstanding letters of credit. Interest on the unused portion of the New Revolver is payable quarterly at 0.375% and we are also required to pay participation and fronting fees at 1.38% on $6.3 million of outstanding letters of credit as of December 31, 2020. All borrowings and other extensions of credits under the 2018 Credit Facilities are subject to the satisfaction of customary conditions and restrictive covenants including absence of defaults and accuracy in material respects of representations and warranties. At December 31, 2020, we were compliant with the 2018 Credit Facilities covenants. Substantially all of our assets are pledged as collateral to secure the Company’s indebtedness under the 2018 Credit Facilities. We recorded interest expense, including amortization of deferred financing costs and discounts, of $40.9 million, $60.7 million and $69.6 million for fiscal years 2020, 2019 and 2018 respectively. 62 In connection with the refinancing of the New First Lien Term Loan in February 2020, which we determined was to be accounted for as a modification, we incurred $0.8 million of lender fees which were capitalized as deferred financing costs and amortized over the remaining life of the New First Lien Term Loan, and $0.2 million of legal fees that were expensed as selling, general and administrative expenses on the consolidated statement of operations in the fiscal year ended December 31, 2020 . We recognized a charge of $10.2 million in fiscal year 2018 consisting of a $3.8 million prepayment penalty on the Old Term Loan balances, a $2.0 million write-off of preexisting deferred financing costs and $4.4 million of lender and third-party costs associated with the issuance of the 2018 Credit Facilities. We also recorded a loss on extinguishment of the New Second Lien Term Loan of $16.3 million in fiscal year 2018 consisting of a $4.0 million prepayment penalty, a $3.4 million write-off of pre-existing deferred financing costs and $8.9 million of lender and third-party costs associated with the issuance of the loan . Commitments and Contingencies We have issued various letters of credit under contractual arrangements with certain of our vendors and customers. Outstanding letters of credit under these arrangements totaled $6.3 million and $0.1 million at December 31, 2020 and 2019, respectively. The letters of credit are not released until all services have been provided or the contract has been canceled. The following table summarizes our contractual commitments at December 31, 2020: Payments due by period ($ in thousands) Total 1 year 2 - 3 years 4 - 5 years Thereafter Long-term debt, including current maturities (1) $ 865,642 $ 9,104 $ 18,208 $ 838,330 $ — Interest on long-term debt (2) 121,585 29,693 58,445 33,447 — Operating lease payments 43,485 4,737 6,735 5,990 26,023 Purchase obligations 6,302 6,302 — — — (1) Amounts for 2021, 2022-2023, and 2024-2025 represent quarterly installment payments with respect to the New First Lien Term Loan. (2) This reflects the interest rate for the New First Lien Term Loan in effect at December 31, 2020. Off-Balance Sheet Arrangements We do not have any material off-balance sheet financing arrangements nor do we have any interest in entities referred to as variable interest entities as of December 31, 2020. Critical Accounting Policies The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that its estimates and assumptions are reasonable in the circumstances; however, actual results could differ materially from those estimates. Our significant accounting policies are described in Note 2, Significant Accounting Policies, in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K/A. We believe that the critical accounting policies listed below involve our more significant judgments, assumptions, and estimates and, therefore, could have the greatest potential impact on the financial statements. 63 Revenue Recognition Commercial Services . The Commercial Services segment offers toll and violation management solutions for the commercial fleet and rental car industries. We have determined our performance obligation is a distinct stand-ready obligation as there is an unspecified quantity of services provided that does not diminish, and the customer is being charged only when it uses our services, such as toll payment, title and registration, etc. Payment terms for contracts with commercial fleet and rental car companies vary, but are usually billed as services are performed. Government Solutions. The Government Solutions segment principally generates revenue by providing complete, end-to-end red-light, speed, school bus stop arm, and bus lane enforcement solutions. Products, when sold, are typically sold together with the services in a bundle. The average initial term of a contract is 3 to 5 years. Payment terms for contracts with government agencies vary depending on whether the consideration is fixed or variable. Payment terms for contracts with fixed consideration are usually based on equal installments over the duration of the contract. Payment terms for contracts with variable consideration are usually billed and collected as citations are issued or paid. For bundled packages, we account for individual products and services separately if they are distinct – i.e., if a product or service is separately identifiable from other items in the bundle and if a customer can benefit from it as a stand-alone item. The consideration is allocated between separate products and services in a bundle based on their stand-alone selling prices (“ SSP ”). We estimate the SSP of our services based upon observable evidence, market conditions and other relevant inputs. • Product sales (sale of camera and installation) – we recognize revenue when the installation process is completed and the camera is ready to perform the services as expected by the customer. Generally, this occurs at site acceptance or first citation. We recognize revenue for the sale of the camera and installation services at a point in time. • Service revenue – we have determined our performance obligation is to provide a complete end-to-end safety and enforcement solution. Promises include providing a system to capture images, processing images taken by the camera, forwarding eligible images to the local police department and processing payments on behalf of the municipality. We determined certain of the promises to our customers are capable of being distinct as they are capable of providing some measure of benefit to the customer either on their own or together with other resources that are readily available to the customer. However, we have determined the promises to our customers do not meet the criterion of being distinct within the context of our contracts. We would not be able to fulfill our promises individually as our customers could not obtain the intended benefit from the contract without us fulfilling all promises. Accordingly, we concluded that each contract represents one service offering and is a single performance obligation to our customer. Further, we account for all the services as a single continuous service. We applied the series guidance for those services as we stand ready to deliver those services over the contract period. We recognize revenue from services over time, as they are performed. Remaining Performance Obligations As of December 31, 2020, we had approximately $0.2 million of remaining performance obligations in the Government Solutions segment, which includes amounts that will be invoiced and recognized in future periods. The remaining performance obligations are limited only to arrangements that meet the definition of a contract as of December 31, 2020. As these amounts relate to the initial deferral of revenue under a contract, we expect to recognize these amounts over a two-month period at the end of the contract. Significant Judgments Under the new revenue standard, significant judgments are required in order to identify contracts with customers and estimate transaction prices. Additional judgments are required for identifying the performance obligations and determining whether the services provided are able to be distinct, determining the transaction price as it relates to the different variable consideration structures identified in our contracts, the estimation of the SSP and the allocation of the transaction price by relative SSPs. Assumptions regarding timing of when control transfers to the customer also requires significant judgment in order to recognize revenue. 64 Allowance for Credit Loss In accordance with the current expected credit losses standard discussed in Note 2 to our consolidated financial statements, we review historical loss rates, customer payment trends and collection rates on customer balances. Estimated loss rates are developed as of the balance sheet date using historical credit loss experience and adjusted for future expectations using probability-weighted assumptions about potential outcomes. Receivables are written off against the allowance for credit loss when it is probable that amounts will not be collected based on terms of the customer contracts, and subsequent recoveries reverse the previous write-off and apply to the receivable in the period recovered. The Company periodically evaluates the adequacy of its allowance for expected credit losses by comparing its actual historical write-offs to its previously recorded estimates, and adjusts appropriately. This includes evaluation by portfolio segment the changes in expectations based on the newest information available on customer payment trends and risk characteristics, and adjusting the probability-weighting either upward or downward that is most representative of the expected credit losses. Acquisitions We apply the asset acquisition method to account for business acquisitions. We allocate the fair value of the purchase price consideration to assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the fair value of the identifiable assets and liabilities is recorded as goodwill. The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment and includes the use of independent valuation specialists to assist us in estimating fair values of acquired tangible and intangible assets. Fair values of acquired assets and their respective useful lives are based on, among other factors, estimates of expected cash flows, customer turnover, discount rates and royalty cost savings. Although we believe that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from estimates. Differences between estimates and actual results may result in adjustment to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to fair values of assets and liabilities made after the end of the measurement period are recognized within our consolidated statements of operations as a current period gain or loss. Impairment of Long-Lived Assets We assess goodwill for impairment annually on October 1, or more frequently if events or circumstances indicate that the carrying amounts may not be fully recoverable. We first consider the option to assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value is less than the carrying amount, we then perform a one-step quantitative impairment test by comparing the reporting unit’s fair value with its carrying value in accordance with ASU 2017-04, which we adopted as of January 1, 2020. Refer to Note 2, Significant Accounting Policies for more information on our adoption of ASU 2017-04. Pursuant to ASU 2017-04, an impairment loss is recognized for the amount by which the reporting units’ carrying value exceeds its fair value, up to the total amount of goodwill allocated to the reporting unit. No impairment is recognized if the fair value of the reporting unit exceeds its carrying value. The process of evaluating goodwill requires significant judgment including the identification of reporting units and the determination of the fair value of each reporting unit. If necessary, we determine fair values of our reporting units based on an income approach or more specifically, a discounted cash flow method (“ DCF Method ”). The DCF Method is based on projected future cash flows and terminal value estimates discounted to their present values. Terminal value represents a present value an investor would pay on the valuation date for the rights to the cash flows of the business for the years subsequent to the discrete cash flow projection period. We consider the DCF Method to be the most appropriate valuation technique since it is based on our long-term financial projections. In addition to determining the fair value of our reporting units based on the DCF method, we also compare the aggregate values of our net corporate assets and the reporting unit fair values to our overall market capitalization and use certain market-based valuation techniques to assess the reasonableness of the reporting unit fair values determined in accordance with the DCF Method. The key inputs used in the DCF Method include revenue growth rates, gross margin percentage, selling, general and administrative expense percentage and discount rates that are at or above our weighted-average cost of capital. We apply discount rates that are commensurate with the risks and uncertainties inherent in the respective reporting units and our internally developed projections of future cash flows. 65 During the first half of fiscal 2020, our market capitalization declined significantly compared to December 31, 2019. Over the same period, the equity value of our key Commercial Services customers, our peer group companies and the overall U.S. stock market also declined significantly amid market volatility. These declines were driven by the uncertainty surrounding the outbreak of COVID-19 and other macroeconomic events. Based on these factors, we concluded that a triggering event occurred and, accordingly, interim quantitative impairment tests were performed as of March 31, 2020 and as of June 30, 2020. In connection with these tests, we concluded the fair values of the Government Solutions and Commercial Services reporting units exceeded their respective carrying values and that an adjustment to goodwill was not required. The fair values of our reporting units as of March 31, 2020 and June 30, 2020 were determined in accordance with the DCF Method described above using our most currently available financial forecasts assuming a long-term growth rate of 2% and a discount rate of 12%. To understand the sensitivity that a change in discount rate could have on our reporting units’ fair values, the Company also applied discount rates ranging from 1 1 % to 14% and concluded the fair values of the both reporting units exceeded their respective carrying values in each instance. In addition, we completed our annual goodwill impairment test as of October 1, 2020 for our two reporting units. In doing so, we conducted a qualitative assessment and concluded no adjustment to goodwill was necessary because our most current long-term financial forecasts continued to meet or exceed the forecasted results used in connection with the interim quantitative impairment tests performed at March 31 and June 30, 2020. In addition, there were no indicators of impairment based on the qualitative analysis performed as of the fiscal years ended December 31, 2019 and 2018. The current economic conditions due to COVID-19 are still evolving and any significant adverse changes in future periods to our internal forecasts or the external market conditions, if any, could reasonably be expected to negatively affect our key assumptions and may result in a future goodwill impairment charge, which could be material. We review our long-lived assets other than goodwill, for impairment whenever events or circumstances indicate that the carrying amount of an asset or asset group may not be fully recoverable. We assess recoverability by comparing the estimated undiscounted future cash flows expected to be generated by the asset or asset group with its carrying value. If the carrying value of the asset or asset group exceeds the estimated undiscounted future cash flows, an impairment loss is recognized for the difference between the estimated fair value and the carrying value. Our estimates of cash flows are subjective judgments based on past experiences adjusted for trends and future expectation, and can be significantly impacted by changes in our business or economic conditions. The determination of asset group fair value is also subject to significant judgment and utilizes valuation techniques including discounting estimated future cash flows and market-based analyses. If our estimates or underlying assumptions change in the future, our operating results may be materially impacted. The state of Texas passed legislation as of June 1, 2019 to ban red-light photo enforcement programs across the state, with certain carve-outs for some existing programs. We considered this a triggering event for potential impairment and evaluated the recoverability of property and equipment used in the operations of red-light photo enforcement programs in Texas. As a result, we recognized an impairment charge in the Government Solutions segment of $5.9 million for the year ended December 31, 2019, which is included in impairment of property and equipment in the consolidated statements of operations. We did not have impairment losses on long-lived assets for the years ended December 31, 2020 or December 31, 2018. Income Taxes We account for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between the tax basis of assets or liabilities and their carrying amounts in the financial statements. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years, while deferred tax liabilities generally represent items that generate a future tax liability for items where deductions have been accelerated for tax purposes. We provide a valuation allowance for deferred tax assets if it is more likely than not that some portion or all of the tax assets will not be realized . We calculate the valuation allowance in accordance with the authoritative guidance relating to income taxes, which requires an assessment of both positive and negative evidence regarding the realizability of these deferred tax assets when measuring the need for a valuation allowance. Significant judgment is required in determining any valuation allowance against deferred tax assets. The realization of deferred tax assets can be affected by, among other things, the nature, frequency, and severity of current and cumulative losses, forecasts of future profitability, the length of statutory carryforward periods, our experience with utilizing operating losses and tax credit carryforwards by jurisdiction and tax planning alternatives and strategies that may be available. 66 Our effective tax rate is based on income, statutory tax rates, differences in the deductibility of certain expenses and inclusion of certain income items between financial statement and tax return purposes, and tax planning opportunities available to us in the various jurisdictions in which we operate. Under GAAP, if we determine that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. Tax code and regulations require certain items to be included in the tax return at different times than when those items are required to be recorded in the consolidated financial statements. As a result, our effective tax rate reflected in our consolidated financial statements is different from that reported in our tax returns. Some of these differences are permanent, such as meals and entertainment expenses that are not fully deductible on our tax returns, and some are temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. We recognize benefits on uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. Tax Receivable Agreement At the closing of the Business Combination, we entered into the Tax Receivable Agreement (“ TRA ”) with the Platinum Stockholder and Greenlight as the stockholder representative. The TRA generally provides for the payment by the post-closing company to the Platinum Stockholder of 50% of the net cash savings, if any, in U.S. federal, state and local income tax that the post-closing company actually realizes (or is deemed to realize in certain circumstances) in periods after the closing of the Business Combination as a result of the increase in the tax basis of the intangible assets which resulted from our acquisition of HTA prior to the Business Combination. We generally will retain the benefit of the remaining 50% of these cash savings. We estimated the potential maximum benefit to be paid will be approximately $70 million , and recorded an initial liability and corresponding charge to equity at the closing of the Business Combination. Subsequently, we made adjustments to this amount. We recorded a $6.8 million expense in fiscal year 2020 and $0.1 million of income in fiscal year 2019 to tax receivable agreement liability adjustment in the consolidated statements of operations. The adjustment in 2020 reflects the impact of an increase to the Company’s deferred tax rate arising from higher estimated state tax rates due to a change in apportionment. At December 31, 2020, the TRA liability was approximately $72.7 million of which $4.8 million was the current portion and $67.9 million was the non-current portion both of which are included in the respective payable to related party pursuant to tax receivable agreement line items on the consolidated balance sheets. The remaining tax life of these intangible assets is approximately 14 years. The ultimate timing of payments of the TRA liability is uncertain due to the realization of the benefits from the HTA intangibles involving uncertainties in the amount and timing of our future taxable income. We expect to fund future payments through cash flow from operations. Private Placement Warrant Liabilities We account for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance under FASB ASC 480, Distinguishing Liabilities from Equity (“ ASC 480 ”) and ASC 815, Derivatives and Hedging (“ ASC 815 ”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to our own common shares, among other conditions for equity classification. 67 For warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. Our Public Warrants meet the criteria for equity classification and accordingly, are reported as component of shareholders’ equity while our Private Placement Warrants do not meet the criteria for equity classification and are instead classified as a liability. The fair value of the Private Placement Warrants is estimated at period-end using a Black-Scholes option pricing model. Recent Accounting Pronouncements For a discussion of recent accounting pronouncements, refer to Note 2, Significant Accounting Policies , in Item 8, Financial Statements and Supplementary Data.