What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-17 compared with 2020-11-05 · 164 added, 252 removed, 130 unchanged (76% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read together with our Annual Report on Form 10-K for the year ended December 31, 2019 and our financial statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

The following discussion and analysis should be read together with our Annual Report on Form 10-K/A for the year ended December 31, 2020 filed on May 14, 2021 and our financial statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties.

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“Risk Factors” in this Quarterly Report on Form 10-Q and those set forth in Part I, Item 1A.

“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.

“Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2020 filed on May 14, 2021.

Please also refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements.”

Recent Events Affecting Our Operating Results

In December 2019, a novel coronavirus (“ COVID-19 ”) emerged in China and has since spread throughout the world.

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, automated safety solutions, title and registration, and other data-driven solutions, to our customers, which include rental car companies (“ RACs ”) , fleet management companies (“ FMC s”), 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 modest signs of recovery during the third quarter of 2020, we expect that COVID-19 will continue to have a significant negative impact on the global economy and travel industry, including rental car companies (“ RACs ”) in future quarters.

Revenues from RACs in our Commercial Services segment have decreased significantly in fiscal 2020 as a result of reduced airline travel and widespread travel restrictions related to COVID-19.

Our RAC customers have experienced increased rental cancellations and declines in forward bookings.

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 (“ Hertz ”), 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 modest improvements in travel demand during the third quarter 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.

Although we have seen moderate signs of recovery in the past six months 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 2021 as a result of reduced airline travel and widespread travel restrictions related to COVID-19 affecting the full three months of the first quarter in 2021 compared to only impacting the month of March in 2020.

Our RAC customers have experienced reductions in volume and revenue, and many of them have reduced their rental fleet sizes in response to the decline in customer demand.

While there were moderate improvements in travel demand, 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.

During the third quarter of 2020, many schools began reopening and some travel restrictions and stay-at-home orders were cautiously lifted.

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 fourth quarter of 2020.

Reductions in vehicle traffic in jurisdictions where we operate photo enforcement programs 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 second quarter 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.

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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.

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, fleet management companies (“ FMC s”), other large fleet owners, municipalities, school districts and violation-issuing authorities.

Pending Acquisition

On January 22, 2021, we entered into a Scheme Implementation Agreement (the “ Scheme Agreement ”) with Redflex Holdings Limited, a public company limited by shares, incorporated in Australia and listed on the Australian Securities Exchange (“ Redflex ”), pursuant to which all of the holders of Redflex’s outstanding shares 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 “ Scheme ”).

On April 29, 2021, we entered into a Deed of Amendment and Consent (the “ Scheme Amendment ”) with Redflex to amend the Scheme Agreement to increase the consideration payable to Redflex shareholders in the transaction from A$0.92 in cash per share to A$0.96 in cash per share (the “ Price Increase ”), resulting in an increase in the aggregate consideration payable by us under the Scheme Agreement from A$146.1 million to A$152.5 million (or approximately US $112.9 million to US$ 117.9 million) based on the exchange rate between the Australian Dollar and U.S.

Dollar as of the date of this Quarterly Report on Form 10-Q.

Except for the Price Increase, the material terms of the Scheme Agreement remained unchanged.

On May 9, 2021, Redflex shareholders approved the Scheme, including the Price Increase.

Separately, at a hearing held on May 13, 2021, t he second Federal Court of Australia approved the Scheme, including a change approved by the Redflex shareholder vote that allows the regulatory approval from the General Authority for Competition in the Kingdom of Saudi Arabia (the “ GAC Approval ”), which is currently a condition precedent to the transaction, to become a condition subsequent that can be satisfied on or before August 13, 2021 (the “ Outside Date ”).

If the GAC Approval is not obtained on or before the Outside Date, the transaction would not close.

The aggregate consideration payable by us will be A$152.5 million, and the closing of the acquisition is projected to take place in the second or third quarter of 2021 (approximately 7 business days after receiving notification of GAC approval), subject to timely receipt of the GAC Approval.

Unsecured Senior Notes Offering and Refinancing

On March 26, 2021, VM Consolidated Inc., our wholly owned indirect subsidiary, completed a private offering (the “ Offering ”) of $350.0 million aggregate principal amount of its 5.50% Senior Notes due 2029 (the “ Senior Notes ”).

We used the net proceeds from the Offering, together with the proceeds of the term loan incurred pursuant to an amendment and restatement agreement no.

1 (the “ Restatement Agreement ”) to our First Lien Term Credit Agreement dated as of March 1, 2018, as amended (the “ Credit Agreement ”), to refinance our outstanding term loan (the “ Refinancing ”) and to pay fees and expenses in connection with the Refinancing and Offering.

We intend to use the remainder of the net proceeds, together with cash on hand, to pay (if the transaction is consummated) approximately $118.0 million of cash purchase consideration for our proposed acquisition of Redflex.

In connection with the Offering, we entered into the Restatement Agreement, which includes, among other changes, amending certain provisions of the Credit Agreement as follows:

permit and account for the repayment of the then outstanding term loan, together with all accrued and unpaid interest, and the incurrence of the new term loan on March 26, 2021 in the original principal amount of $650.0 million due March 26, 2028;

permit the issuance of the Senior Notes, which were issued on the effective date of the Restatement Agreement, and our related incurrence of indebtedness in respect of such Senior Notes and the guarantee by our subsidiary guarantor of such Senior Notes;

expressly permit the acquisition of Redflex by VM Consolidated Inc.;

amending certain provisions dealing with interest rate replacement provisions in the case where any interest rate benchmark applicable to the loans and commitment fees in the future ceases to be available.

Long-term Debt for more information on interest payments, redemption options and costs incurred for the Offering and Refinancing.

Segment Information

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In Europe, we provide violations processing through Euro Parking Collection plc (“ EPC ”) and consumer tolling services through Pagatelia S.L (“ Pagatelia ”).

Our Government Solutions segment provides complete, end-to-end red-light, speed, school bus stop arm and bus lane enforcement solutions.

Our Government Solutions segment provides complete, end-to-end speed, red-light, 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 (loss) from operations before depreciation, amortization, gain (loss) on disposal of assets, net, and stock-based compensation.

Segment performance is based on revenues and income from operations before depreciation, amortization, gain (loss) on disposal of assets, net, 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 customer contracts and a highly reoccurring service revenue model.

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:

Generated total revenue of $293.4 million and $336.3 million during the nine months ended September 30, 2020 and 2019, respectively.

We grew product sales by $23.7 million year over year;

however, due to the ongoing impact of COVID-19, our service revenue declined significantly, as discussed below.

Generated cash flows from operating activities of $44.4 million and $95.6 million for the nine months ended September 30, 2020 and 2019, respectively.

Our cash on hand was $129.2 million as of September 30, 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 for the nine months ended September 30, 2020 was $31.6 million, a $15.0 million decrease compared to $46.6 million in the same period in 2019.

Generated total revenue of $89.9 million for the three months ended March 31, 2021 compared to $116.7 million for the three months ended March 31, 2020.

Service revenue for the Government Solutions segment increased $5.8 million in 2021 compared to 2020 while the service revenue for the Commercial Services segment declined due to COVID-19, as discussed below.

Generated cash flows from operating activities of $9.0 million and $14.8 million for the three months ended March 31, 2021 and 2020, respectively.

Our cash on hand was $249.6 million as of March 31, 2021 and includes the net proceeds received in connection with the refinancing described above and will be used in part to fund the pending acquisition of Redflex.

Primary Components of Our Operating Results

Total revenue consists of service revenue generated by our Commercial Services and Government Solutions segments and product sales generated by our Government Solutions segment.

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 .

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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 .

Interest expense, net includes interest expense and amortization of deferred financing costs and discounts and is net of interest income.

Loss from Tax Receivable Agreement Adjustment .

This consists of adjustments made to the related party TRA liability due to changes in estimates.

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.

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 .

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Results of Operations

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 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.

Three Months Ended September 30,

Percentage of Revenue

Increase (Decrease)

($ in thousands)

Service revenue

Product sales

Total revenue

Cost of service revenue

Cost of product sales

Operating expenses

Selling, general and administrative expenses

Depreciation, amortization and (gain) loss on disposal of assets, net

Total costs and expenses

Income from operations

Interest expense, net

Other income, net

Total other expenses

Income before income tax provision

Income tax provision

Service Revenue.

Service revenue decreased by $27.8 million, or 25.1%, to $83.0 million for the three months ended September 30, 2020 from $110.8 million for the three months ended September 30, 2019, representing 85.6% and 86.4% of total revenue, respectively.

The following table depicts service revenue by segment:

Three Months Ended September 30,

Percentage of Revenue

Increase (Decrease)

($ in thousands)

Service revenue

Commercial Services

Government Solutions

Total service revenue

Commercial Services service revenue decreased by $33.5 million, or 43.1%, from $77.6 million for the three months ended September 30, 2019 to $44.2 million for the three months ended September 30, 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.

There was a moderate improvement to service revenue in the third quarter compared to the second quarter of 2020 which could be attributed to typical seasonality or to modest signs of recovery.

In either case we anticipate that the impact of COVID-19 will result in year over year revenue declines through March 2021.

The full extent and duration of COVID-19’s impact on our financial results is not yet known.

Government Solutions service revenue includes revenue from red-light, speed, school bus stop arm and bus lane photo enforcement systems.

Service revenue increased by $5.7 million to $38.8 million for the three months ended September 30, 2020 from $33.1 million for the three months ended September 30, 2019.

The increase is primarily due to a $7.3 million increase in speed program revenue during the three months ended September 30, 2020 compared to the same period in 2019, resulting from the increase in the total number of camera systems installed.

The increase in total installed cameras was partially offset by temporarily inactive school-zone speed cameras due to COVID-19.

Our red-light photo enforcement service revenue

declined $ 1.1 million during the three months ended September 30, 2020 compared to the same period in 2019 which was primarily attributed to the impact from COVID-19 on variable rate clients .

We also had a $ 1.2 million service revenue decline from the suspension of school bus stop arm cameras as most school buses were not operating.

Service revenue overall for the quarter was negatively impacted by reductions in vehicle traffic and delayed school re-openings, as a result of COVID-19.

Although there were signs of modest recovery in the third quarter compared to the second quarter of 2020, we anticipate the negative impacts of COVID-19 to continue into future quarters.

There were an average of 3,730 active camera systems during the three months ended September 30, 2020 compared to an average of 4,759 for the three months ended September 30, 2019.

The decline in active camera systems was primarily due to 1,814 cameras that were temporarily inactive due to COVID-19, which was partially offset by the expansion of speed enforcement systems with existing customers.

Product Sales.

Product sales relate to revenue generated from Government Solutions customers who purchase their equipment.

Product sales were $13.9 million for the three months ended September 30, 2020 compared to $17.5 million for the same period in 2019.

The $3.6 million decrease was driven by a lower average sales price on sales to a large customer.

Cost of Service Revenue.

Cost of service revenue decreased from $1.4 million for the three months ended September 30, 2019 to $0.9 million for the three months ended September 30, 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 decreased slightly from $7.2 million in the three months ended September 30, 2019 to $7.1 million in the same period in 2020.

The reduction in cost for product sales was due to an approximate 4% decline in unit cost per product.

Operating Expenses.

Operating expenses decreased by $6.4 million, or 19.5%, from $33.0 million for the three months ended September 30, 2019 to $26.5 million for the three months ended September 30, 2020.

The decrease was primarily attributable to $2.4 million of lower employee expense due to reduced headcount and bonus expenses, and $3.6 million of transaction processing and related costs in our Commercial Services segment which is consistent with the lower volumes.

Operating expenses as a percentage of total revenue increased from 25.7% to 27.4% for the three months ended September 30, 2019 and 2020, respectively.

The following table presents operating expenses by segment:

Three Months Ended September 30,

Percentage of Revenue

Increase (Decrease)

($ in thousands)

Operating expenses

Commercial Services

Government Solutions

Total operating expenses before stock-based compensation

Stock-based compensation

Total operating expenses

Selling, General and Administrative Expenses.

Selling, general and administrative expenses decreased to $ 1 7.5 million for the three months ended September 30, 2020 compared to $ 21.3 million for the same period in 2019.

The decrease is mainly due to a $2.7 million reduction in credit loss expense resulting from an adjustment to the reserve for receivables that are no longer subject to risk of nonpayment primarily from one of our Commercial Services customers.

The decrease is also attributable to an aggregate cutback of $2.4 million in costs as a result of eliminating the bonus accrual, marketing and non-essential travel in 2020.

These decreases are partially offset by a $0.8 million increase in consulting fees and $ 0.6 millio n increase in stock-based compensation .

Selling, general and administrative expenses as a percentage of total revenue incr eased from 16.6 % to 1 8.1 % for the three months ended September 30 , 2019 and 2020, respectively.

The following table presents selling, general and administrative expenses by segment:

Three Months Ended September 30,

Percentage of Revenue

Increase (Decrease)

($ in thousands)

Selling, general and administrative expenses

Commercial Services

Government Solutions

Corporate and other

Total selling, general and administrative expenses before stock-based compensation

Stock-based compensation

Total selling, general and administrative expenses

Depreciation, Amortization and (Gain) Loss on Disposal of Assets, Net.

Depreciation, amortization and (gain) loss on disposal of assets, net, increased slightly from $28.7 million for the three months ended September 30, 2019 to $29.6 million for the same period in 2020.

The increase is primarily due to the increased depreciation and amortization expense resulting from the Pagatelia acquisition included in the three months ended September 30, 2020 with no comparable amount in the prior year.

Interest Expense, Net.

Interest expense, net decreased by $5.4 million from $14.9 million for the three months ended September 30, 2019 to $9.6 million for the same period in 2020.

This decrease is primarily as a result of lower interest rates coupled with the refinancing of our 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 .”

Other Income, Net.

Other income, net was $5.0 million for the three months ended September 30, 2020 compared to $2.7 million for the three months ended September 30, 2019.

The increase of $2.3 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 15, Commitments and Contingencies , partially offset by the decreased volume in purchasing card rebates resulting from COVID-19’s impact on toll usage.

Income Tax Provision.

Income tax provision was $4.0 million representing an effective tax rate of 37.4% for the three months ended September 30, 2020 compared to $6.7 million, representing an effective tax rate of 27.4 % for the same period in 2019.

The effective tax rate change was primarily due to lower pre-tax income in the current period, resulting in the Company’s permanent book and tax differences having a proportionately greater impact on the effective tax rate in the current period.

We had net income of $6.7 million for the three months ended September 30, 2020, compared to $17.8 million for the three months ended September 30, 2019.

The $11.1 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.

N ine Months Ended September 30, 2020 Compared to N ine Months Ended September 30, 2019

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

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.

Nine Months Ended September 30,

Three Months Ended March 31,

Percentage of Revenue

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($ in thousands)

(As restated)

Service revenue

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Depreciation, amortization and (gain) loss on disposal of assets, net

Impairment of property and equipment

Total costs and expenses

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Interest expense, net

Loss from tax receivable agreement adjustment

Change in fair value of private placement warrants

Loss on extinguishment of debt

Other income, net

Total other expenses

Income before income tax provision

Income tax provision

Total other expenses (income)

(Loss) income before income tax (benefit) provision

Income tax (benefit) provision

Net (loss) income

Service Revenue.

Service revenue decreased by $66.6 million, or 21.4%, to $245.3 million for the nine months ended September 30, 2020 from $311.9 million for the nine months ended September 30, 2019, representing 83.6% and 92.7% of total revenue, respectively.

The following table depicts service revenue by segment:

Nine Months Ended September 30,

Service revenue decreased by $9.7 million, or 9.8%, to $89.8 million for the three months ended March 31, 2021 from $99.5 million for the three months ended March 31, 2020, representing 99.9% and 85.2% of total revenue, respectively.

The following table presents service revenue by segment:

Three Months Ended March 31,

Percentage of Revenue

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Total service revenue

Commercial Services service revenue decreased by $75.6 million, or 36.3%, from $208.3 million for the nine months ended September 30, 2019 to $132.7 million for the nine months ended September 30, 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.

There was a moderate improvement to service revenue in the third quarter compared to the second quarter of 2020 which could be attributed to typical seasonality or to modest signs of recovery.

In either case we anticipate that the impact of COVID-19 will result in year over year revenue declines through March 2021.

The full extent and duration of COVID-19’s impact on our financial results is not yet known.

Government Solutions service revenue includes revenue from red-light, speed, school bus stop arm and bus lane photo enforcement systems.

Service revenue increased by $9.1 million to $112.6 million for the nine months ended September 30, 2020 from $103.6 million for the nine months ended September 30, 2019.

Our red-light photo enforcement service revenue declined $6.5 million during the nine months ended September 30, 2020 compared to the same period in 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 $ 2.7 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 offset by speed program revenue, which grew approximately $ 18.0 million in the nine months ended September 30 , 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 4,008 active camera systems during the nine months ended September 30, 2020 compared to an average of 4,666 for the nine months ended September 30, 2019.

The decline in active camera systems was primarily due to 1,245 cameras that are temporarily inactive due to COVID-19, and the loss of Texas programs noted above.

Commercial Services service revenue decreased by $15.6 million, or 25.4%, from $61.2 million for the three months ended March 31, 2020 to $45.7 million for the three months ended March 31, 2021.

This decrease was primarily due to the COVID-19 pandemic and related containment measures affecting the full three months of the first quarter in 2021 compared to only impacting the month of March in 2020.

Although increased availability and distribution of COVID-19 vaccines and the gradual lifting of travel restrictions could positively impact the travel industry in 2021, we anticipate full year 2021 service revenue may not recover to pre-COVID levels.

Government Solutions service revenue includes revenue from speed, red-light, school bus stop arm and bus lane photo enforcement systems.

Service revenue increased by $5.8 million to $44.1 million for the three months ended March, 31 2021

from $38.3 million in the same period in 2020.

Our speed program revenue grew approximately $ 6.6 million during the three months ended March 31, 2021 compared to the same period in 2020, due to an increase in the total number of camera systems installed in 2020 that had a full year impact in 2021, and this trend should continue into future quarters .

Th is increase w as partially offset by a $1.4 million decrease in service revenue from the suspension of school bus stop arm cameras as many school buses were not operating for much of this period.

There was an average of 4,738 active camera systems during the three months ended March 31, 2021 compared to an average of 5,002 for the three months ended March 31, 2020.

The decline in active camera systems was primarily due to 1,036 cameras that were temporarily inactive due to COVID-19.

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.

Although there were signs of modest recovery in the third quarter compared to the second quarter of 2020, we anticipate the negative impacts of COVID-19 to continue in future quarters.

Service revenue for the quarter was negatively impacted by COVID-19 which led to reduction in vehicle traffic as a result of stay-at-home orders and early school closures and delayed school re-openings in certain jurisdictions in which we operate.

We saw growth in our speed program revenue which we expect will continue for the remainder of 2021.

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 $48.1 million and $24.4 million for the nine months ended September 30, 2020 and 2019, respectively, which relate to revenue generated from Government Solutions customers who purchase their equipment.

Product sales increased by $23.7 million which was primarily driven by sales to a single customer that is currently expanding its existing school zone speed program.

Product sales were $0.1 million and $17.2 million for the first quarter of 2021 and 2020, respectively.

Product sales revenue is generated from certain Government Solutions customers who purchase their equipment, whose buying patterns vary greatly from year to year.

Product sales in 2020 were primarily driven by sales to a single customer that was expanding its school zone speed program.

Cost of Service Revenue.

Cost of service revenue decreased year over year, from $4.4 million for the nine months ended September 30, 2019 to $3.1 million for the nine months ended September 30, 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 service revenue decreased from $1.2 million for the three months ended March 31, 2020 to $0.9 million for the three months ended March 31, 2021.

The decrease resulted from decreased costs of collection and other third-party professional services associated with the delivery of certain ancillary services performed by both of our segments.

Cost of Product Sales.

Cost of product sales increased by $14.4 million from $10.4 million in the nine months ended September 30, 2019 to $24.8 million in the same period in 2020, and was consistent with the increase in product sales.

Cost of product sales decreased from $8.7 million in the quarter ended March 31, 2020 to $0.1 million in the same period in 2021, which was consistent with the decrease in product sales.

Operating Expenses.

Operating expenses decreased by $8.6 million, or 9.1%, from $94.1 million for the nine months ended September 30, 2019 to $85.5 million for the nine months ended September 30, 2020.

This decrease was primarily attributable to decreases of $3.4 million in employee wages due to furloughs, reduced headcount and bonus expense, and $7.5 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 29.1% for the nine months ended September 30, 2019 and 2020, respectively.

Operating expenses decreased by $1.8 million, or 5.5%, from $32.3 million for the three months ended March 31, 2020 to $30.5 million for the three months ended March 31, 2021.

This decrease was primarily due to decrease in employee wages, payment processing and operational equipment costs, offset by an increase in subcontractor expense.

Operating expenses as a percentage of revenue increased from 27.6% to 33.9% for the three months ended March 31, 2020 and 2021, respectively.

The following table presents operating expenses by segment:

Nine Months Ended September 30,

Three Months Ended March 31,

Percentage of Revenue

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Selling, General and Administrative Expenses.

Selling , general and administrative expenses increased by $ 1.5 million to $ 6 4.2 million for the nine months ended September 30, 2020 compared to $ 62.7 million for the same period in 2019.

We recorded a $ 10.6 million credit loss expense during the year as a result of the new CECL accounting standard, discussed further in the notes to the condensed consolidated financial statements.

This contributed $ 5.3 million to the increase year over year , in addition to a $ 1.7 million increase in stock-based compensation and $1.1 million increase in consulting fees .

These increases were partially offset by an aggregate $ 5.9 million decrease in costs related to the bonus expense as a result of eliminating the bonus accrual, marketing and non-essential travel.

Selling, general and administrative expenses as a percentag e of total revenue increased from 18.6 % to 21.9 % for the nine months ended September 30 , 2019 and 2020, respectively.

The following table presents selling, general and administrative expenses by segment:

Nine Months Ended September 30,

Selling, general and administrative expenses increased by $ 2.

6 million to $2 8.4 million for the three months ended March 31, 202 1 compared to $2 5.9 million for the same period in 20 20 .

This increase was primarily due to $4.1 million of transaction expenses incurred in 2021 mainly related to the p ending acquisition of Redflex , $1.

7 million increase in professional services expenses, and expense incurred for the reinstatement of employee bonus accrual in 2021.

The increases were offset by a decrease in credit loss expense of $3.0 mi llion and travel and marketing related expenses year over year .

Selling, general and administrative expenses as a percentage of revenue increased from 22.2 % to 3 1.7 % for the three months ended March 31, 20 20 and 202 1 , respectively.

The following table presents s elling, general and administrative expenses by segment:

Three Months Ended March 31,

Percentage of Revenue

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Depreciation, Amortization and (Gain) Loss on Disposal of Assets, Net.

Depreciation, amortization and (gain) loss on disposal of assets, net, increased from $86.5 million for the nine months ended September 30, 2019 to $88.0 million for the same period in 2020.

The increase is primarily due to the increased depreciation and amortization expense resulting from the Pagatelia acquisition included in the nine months ended September 30, 2020 with no comparable amount in the prior year.

Impairment of Property and Equipment .

Impairment of property and equipment for the nine months ended September 30, 2019 includes 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.

Depreciation, amortization and (gain) loss on disposal of assets, net, decreased slightly from $29.2 million for the three months ended March 31, 2020 to $28.3 million for the same period in 2021.

The decrease was mainly due to certain trademark intangibles being fully amortized mid-first quarter of 2021.

Interest Expense, Net.

Interest expense, net decreased by $15.1 million from $46.6 million for the nine months ended September 30, 2019 to $31.6 million for the same period in 2020.

See “ Liquidity and Capital Resources ” below.

Loss from Tax Receivable Agreement Adjustment .

We recorded a $4.4 million charge to loss from tax receivable agreement adjustment for the nine months ended September 30, 2020.

The adjustment 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.

Interest expense, net decreased by $3.3 million from $12.5 million for the three months ended March 31, 2020 to $9.2 million for the same period in 2021.

This decrease is primarily as a result of lower interest rates coupled with the refinancing of our 2018 Term Loan (as defined below) in February 2020, which reduced the applicable margin on the interest rate by 50 basis points.

See “— Liquidity and Capital Resources .”

Change in Fair Value of Private Placement Warrants .

We recorded a loss of $2.1 million for the three months ended March 31, 2021 and a gain of $15.5 million in the same period in 2020, related to the changes in fair value of our Private Placement Warrants which are accounted for as liabilities on our condensed 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 .

Loss on extinguishment of debt was $5.3 million during the three months ended March 31, 2021 consisting of a $4.0 million write-off of pre-existing deferred financing costs and $1.3 million of lender and third-party costs associated with the issuance of the new 2021 Term Loan discussed below.

Other Income, Net.

Other income, net was $9.4 million for the nine months ended September 30, 2020 compared to $8.3 million for the nine months ended September 30, 2019.

The increase of $1.2 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 15, Commitments and Contingencies , partially offset by the decreased volume in purchasing card rebates resulting from COVID-19’s impact on toll usage.

Income Tax Provision.

Income tax provision was $3.2 million representing an effective tax rate of 276.9% for the nine months ended September 30, 2020 compared to $9.8 million, representing an effective tax rate of 28.8% for the same period in 2019.

The effective tax rate change was primarily due to lower pre-tax income in the current year, resulting in the Company’s permanent book and tax differences having a proportionately greater impact on the effective tax rate in the current year.

Other income, net was $3.0 million for the three months ended March 31, 2021, compared to $2.9 million for the three months ended March 31, 2020.

Income Tax (Benefit) Provision.

Our income tax provision decreased from a tax liability of $3.2 million, representing an effective tax rate of 12.7% for the three months ended March 31, 2020, to a tax benefit of $(2.9) million, representing an effective tax benefit rate of 24.5% for the same period in 2021.

The effective tax rate change was primarily due to the Company’s permanent differences related to mark-to-market adjustments on the private placement warrants, which had a lesser impact on the effective tax rate.

Net (Loss) Income.

We had a net loss of $( 2.

0 ) million for the nine months ended September 30 , 2020, a s compared to net income of $24.2 million for the nine months ended September 30 , 2019.

The $ 2 6.2 million decrease in net (loss) 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.

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 had a net loss of $(8.9) million for the three months ended March 31, 2021, as compared to $22.1 million of income for the three months ended March 31, 2020.

The $31.1 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.

Liquidit y and Capital Resources

Our principal sources of liquidity are cash flow from operations and available borrowings under our 2021 Term Loan, Unsecured Senior Notes and the Revolver (all of which are defined below).

We have incurred significant long-term debt as a result of acquisitions completed in prior years as well as a pending strategic acquisition in the current year.

We believe that our existing cash and cash equivalents, cash flows provided by operating activities and our availability to borrow under our Revolver (as defined below) will be sufficient to meet operating cash requirements and service debt obligations for at least the next 12 months.

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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 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 .”

We have the ability to borrow under our Revolver to meet obligations as they come due.

As of September 30, 2020, we had $44.0 million available for borrowing, net of letters of credit, under our Revolver.

As of March 31, 2021, we had $49.4 million available for borrowing, net of letters of credit, under our Revolver.

Concentration of Credit Risk

As of September 30, 2020, the City of New York Department of Transportation (“ NYCDOT ”) represented 50.1% of accounts receivable, net.

The Company provides photo enforcement services to NYCDOT under two primary agreements, (i) a legacy contract relating to photo enforcement cameras that were installed prior to fiscal 2020 (the “ Legacy Contract ”), and (ii) an emergency contract for the purchase, installation, maintenance and operation of the expanded speed camera program beginning in 2020 (the “ Emergency Contract ”).

At September 30, 2020, the Legacy Contract had an open receivable balance of $16.6 million, of which $8.0 million had aged beyond NYCDOT’s 45-day payment terms.

As of September 30, 2020, the Company had invoiced NYCDOT for $43.6 million in product revenue and $9.5 million in service revenue under the Emergency Contract.

As of March 31, 2021, the City of New York Department of Transportation (“ NYCDOT ”) represented 63% of accounts receivable, net.

The Company provides photo enforcement services to NYCDOT under two primary agreements, (i) a legacy contract relating to photo enforcement cameras that were installed prior to fiscal year 2020 (the “ Legacy Contract ”), and (ii) an emergency contract for the purchase, installation, maintenance and operation of the expanded speed camera program beginning in 2020 (the “ Emergency Contract ”).

At March 31, 2021, the Legacy Contract had an open receivable balance of $41.3 million, of which $33.1 million had aged beyond NYCDOT’s 45-day payment terms.

As of March 31, 2021, the Company had invoiced NYCDOT for $52.6 million in product revenue and $26.8 million in service revenue under the Emergency Contract.

NYCDOT has not made any payments against the Emergency Contract to date.

The Company is working to clear administrative hurdles that will allow NYCDOT to proceed with payment.

See Note 4, Accounts Receivables, Net for additional information on the concentration of credit risk.

For additional information on the risks and uncertainties relating to our government contracts, please see the risk factor entitled “ Our government contracts are subject to unique risks and uncertainties, including termination rights, audits and investigations, any of which could have a material adverse effect on our business ” set forth in Part I, Item 1A.

“ Risk Factors ” in our Annual Report on Form 10-K for the year ended December 31, 2019.

The following table sets forth certain captions on our statements of cash flows for the respective periods:

Nine Months Ended September 30,

There is no material reserve related to these receivables as amounts are deemed collectible based on current conditions and expectations.

Please also see section entitled “ Risk Factors .”

The following table sets forth certain captions indicated on our statements of cash flows for the periods indicated:

Three Months Ended March 31,

($ in thousands)

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Net cash used in investing activities

Net cash used in financing activities

Net cash provided by (used in) financing activities

Cash Flows from Operating Activities

Cash provided by operating activities decreased by $51.2 million, from $95.6 million for the nine months ended September 30, 2019 to $44.4 million for the nine months ended September 30, 2020.

Net income year over year decreased by $26.2 million, from $24.2 million in 2019 to a net loss of $(2.0) million in 2020.

The aggregate adjustments to net (loss) income increased $9.4 million mainly due to a $5.3 million increase in credit loss expense related to the CECL accounting standard, a $5.5 million change in deferred income taxes and the $4.4 million loss from tax receivable agreement adjustment.

These increases were offset by a $5.9 million impairment of property and equipment in the prior year with no comparable amount in the current year.

There was an aggregate $ 34.5 million decrease in the changes in operating assets and liabilities, which was driven primarily by an increase in accounts receivables 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 2020 and a combination of other factors, the largest of which include a drop in subcontractor accruals, and a decrease in the balance of credit cards payable due to a drop in replenishments required by tolling authorities .

Cash provided by operating activities decreased by $5.8 million, from $14.8 million for the three months ended March 31, 2020 to $9.0 million for the three months ended March 31, 2021.

First quarter net income decreased year over year by $31.1 million, from $22.1 million of net income in 2020 to net loss of $(8.9) million in 2021.

Adjustments to reconcile net (loss) income to net cash provided by operations increased $20.4 million mainly due to the $17.5 million change in fair value of private placement warrants year over year, and a $5.3 million loss on extinguishment of debt in 2021 with no comparable amount in the prior year, which are partially offset by a decrease in credit loss expense year over year.

The aggregate changes in operating assets and liabilities decreased cash provided by operating activities by $8.8 million year over year driven primarily by an increase in accounts payable and accrued liabilities at the end of the period, which are offset by an increase in accounts receivables and unbilled receivables.

Cash Flows from Investing Activities

Cash used in investing activities was $18.3 million and $17.5 million for the nine months ended September 30, 2020 and 2019, respectively, which was related to purchases of installation and service parts and property and equipment.

Cash used in investing activities was $3.6 million and $8.1 million for the three months ended March 31, 2021 and 2020, respectively, which was related to purchases of installation and service parts and property and equipment.

Cash Flows from Financing Activities

Cash used in financing activities was $27.9 million and $7.1 million for the nine months ended September 30, 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 we made pursuant to the terms of the First Lien Term Loan (as defined below), and costs associated with refinancing the First Lien Term Loan in February 2020.

In connection with an acquisition in 2018, VM Consolidated, Inc., a wholly-owned subsidiary, entered into a First Lien Term Loan Credit Agreement (the “ First Lien Term Loan ”), a Second Lien Term Loan Credit Agreement (the “ Second Lien Term Loan ,” and together with the First Lien Term Loan, the “ Term Loans ”) and a Revolving Credit Facility Agreement (the “ Revolver ,” and together with the 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 Term Loans and an aggregate revolving commitment of up to $75 million available for loans and letters of credit under the Revolver (subject to borrowing eligibility requirements as described below).

In July 2018, we amended the 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 Second Lien Term Loan in full contemporaneously with the closing of the Business Combination (see Note 1, Description of Business ) on October 17, 2018 .

The First Lien Term Loan is repayable at 1.0% per annum of the amount initially borrowed, paid in quarterly installments.

The First Lien Term Loan matures on February 28, 2025.

We refinanced the entire outstanding amount under the First Lien Term Loan on February 20, 2020, which reduced the previous applicable margin by 50 basis points.

The 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 September 30 , 2020, the interest rate on the First Lien Term Loan was 3.4 %.

In addition, the 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 First Lien Term Loan agreement)

Cash provided by (used in) financing activities was $123.9 million and $(23.1) million for the three months ended March 31, 2021 and 2020, respectively.

We had aggregate borrowings of $996.8 million during the first quarter of 2021 consisting of the 2021 Term Loan and Senior Notes (defined below) and we concurrently repaid $865.6 million outstanding debt on the 2018 Term Loan (defined below).

The aggregate borrowings net of the repayments, which totaled $131.2 million, were held as cash and cash equivalents at March 31, 2021 and will be used in part to fund the close of the pending Redflex acquisition.

We also had payments related to debt issuance costs and debt extinguishment costs during the period.

The cash used in financing activities in 2020 was due to a $19.7 million mandatory prepayment of excess cash flows we made pursuant to the terms of the 2018 Term Loan, and costs associated with refinancing it in February 2020.

Long-term Debt

2021 Term Loan and Senior Notes

In March 2021, VM Consolidated, Inc., our wholly owned subsidiary, entered into an Amendment and Restatement Agreement No.

1 to the First Lien Term Loan Credit Agreement (the “ 2021 Term Loan ”) with a syndicate of lenders.

The 2021 Term Loan has an aggregate borrowing of $650 million, maturing on March 26, 2028, and an accordion feature providing for an additional $250 million of term loans, subject to satisfaction of certain requirements.

In connection with the 2021 Term Loan, we had an offering discount cost of $3.3 million and $0.7 million of deferred financing costs, both of which were capitalized and are amortized over the remaining life of the 2021 Term Loan.

In addition, in March 2021, VM Consolidated, Inc.

issued an aggregate principal amount of $350.0 million in Senior Unsecured Notes (the “ Senior Notes ”), due on April 15, 2029.

In connection with the issuance of the Senior Notes, we incurred $5.7 million in lender and third-party costs, which were capitalized as deferred financing costs and are being amortized over the remaining life of the Senior Notes.

The net proceeds from both the 2021 Term Loan and the Senior Notes were used to repay in full all outstanding debt which was represented by the existing First Lien Term Loan Credit Agreement (as amended, the “ 2018 Term Loan ”) with a balance of $865.6 million.

We may use the remaining proceeds for general corporate purposes which may include, without limitation, financing the consideration for and fees, costs and expenses related to the pending acquisition of Redflex, which is discussed above.

The 2021 Term Loan is repayable at 1.0% per annum of the amount initially borrowed, paid in quarterly installments.

It bears interest based, at the Company’s 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 March 31, 2021, the interest rate on the 2021 Term Loan was 3.45%.

In addition, the 2021 Term Loan requires mandatory prepayments equal to the product of the excess cash flows of the Company (as defined in the 2021 Term Loan agreement) and the applicable prepayment percentages (calculated as of the last day of the fiscal year, beginning with the year ending December 31, 2022), as set forth in the following table:

Consolidated first lien net leverage ratio (as defined by the 2021 Term Loan agreement)

< 3.70:1.00 and > 3.20:1.00

We made a $19.7 million mandatory prepayment of excess cash flow during the first quarter of fiscal 2020, which was classified as current portion of long-term debt in the condensed consolidated balance sheet at December 31, 2019.

Interest on the Senior Notes is fixed at 5.50% per annum and is payable on April 15 and October 15 of each year (beginning on October 15, 2021).

On or after April 15, 2024, the Company may redeem all or a portion of the Senior Notes at the redemption prices set forth below in percentages by year, plus accrued and unpaid interest:

2026 and thereafter

In addition, we may redeem up to 40% of the Senior Notes before April 15, 2024, with the net cash proceeds from certain equity offerings.

We evaluated the refinancing transactions on a lender by lender basis and accounted for the portion of the transaction that did not meet the accounting criteria for debt extinguishment as a debt modification.

Accordingly, we recognized a loss on extinguishment of debt of $5.3 million on the 2018 Term Loan during the three months ended March 31, 2021 consisting of a $4.0 million write-off of pre-existing deferred financing costs and $1.3 million of lender and third-party costs associated with the issuance of the new 2021 Term Loan.

We have a Revolving Credit Agreement (the “ Revolver ”) which we entered into in fiscal year 2018 in connection with an acquisition, with a revolving commitment of up to $75 million available for loans and letters of credit.

The Revolver matures on February 28, 2023.

The terms of the Revolver were not affected by the refinancing of the First Lien Term Loan discussed above.

The terms of the Revolver were not affected by the new debt instruments entered into in March 2021 discussed above.

Borrowing eligibility under the 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.

The 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 September 30 , 2020, we had no outstanding borrowings on the Revolver and availability to borrow under the Revolver was $ 44.0 million , net of $ 6.3 million of outstanding letters of credit.

Interest on the unused portion of the 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 September 30 , 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 September 30 , 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 $9.6 million and $14.9 million for the three months ended September 30 , 2020 and 2019, respectively, and $31.6 million and $46.6 million for the nine months ended September 30, 2020 and 2019, respectively.

In connection with the refinancing of the 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 First Lien Term Loan, and $0.2 million of legal fees that were expensed as selling, general and administrative expenses on the condensed consolidated statement of operations.

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 March 31, 2021, we had no outstanding borrowings on the Revolver and availability to borrow was $49.4 million, net of $6.2 million of outstanding letters of credit.

Interest on the unused portion of the Revolver is payable quarterly at 0.375% and we are also required to pay participation and fronting fees at 1.38% on $6.2 million of outstanding letters of credit as of March 31, 2021.

All borrowings and other extensions of credits under the 2021 Term Loan, Senior Notes and the Revolver 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 March 31, 2021, the Company was compliant with all debt covenants.

Substantially all of the Company’s assets are pledged as collateral to secure the Company’s indebtedness under the 2021 Term Loan.

We recorded interest expense, including amortization of deferred financing costs and discounts, of $9.2 million and $12.5 million for the three months ended March 31, 2021 and 2020, respectively.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as of September 30 , 2020.

We do not have any material off-balance sheet financing arrangements as of March 31, 2021.

Critical Accounting Policies, Estimates and Judgments

The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States (“ GAAP ”) requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes.

Significant items subject to such estimates and assumptions include the fair values assigned to net assets acquired (including identifiable intangibles) in business combinations, the carrying amounts of long-lived assets, goodwill and installation and service parts, the allowance for credit loss, valuation allowances on deferred tax assets, asset retirement obligations, contingent consideration and the recognition and measurement of loss contingencies.

The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes.

Significant items subject to such estimates and assumptions include the fair values assigned to net assets acquired (including identifiable intangibles) in business combinations, the carrying amounts of long-lived assets, goodwill, the allowance for credit loss, fair value of private placement warrant liabilities, valuation allowances on deferred tax assets, asset retirement obligations, contingent consideration and the recognition and measurement of loss contingencies.

Management believes that its estimates and assumptions are reasonable in the circumstances;

however, actual results could differ materially from those estimates.

Refer to our 2019 Annual Report on Form 10-K for our critical accounting policies, estimates and judgments.

Refer to our 2020 Annual Report on Form 10-K/A filed on May 14, 2021 for our critical accounting policies, estimates and judgments.

Recent Accounting Pronouncements

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Item 2. Management’s Discussion and Analysis