Item 2. Management’s Discussion and Analysis
Item 2. 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/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. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part II, Item IA. “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/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.”
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 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 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. We have not experienced any significant disruptions in our operations as a result of these measures.
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.
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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.; and
•
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.
See Note 6. Long-term Debt for more information on interest payments, redemption options and costs incurred for the Offering and Refinancing.
Segment Information
We have two operating and reportable segments, Commercial Services and Government Solutions:
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•
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 Euro Parking Collection plc (“ EPC ”) and consumer tolling services through Pagatelia S.L (“ Pagatelia ”).
•
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 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 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 $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
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.
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.
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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.
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.
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.
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Results of Operations
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.
Three Months Ended March 31,
Percentage of Revenue
Increase (Decrease)
2021 vs 2020
2021
2020
2021
2020
$
%
($ in thousands)
(As restated)
Service revenue
$
89,763
$
99,497
99.9
%
85.2
%
$
(9,734
)
(9.8
)%
Product sales
95
17,216
0.1
%
14.8
%
(17,121
)
(99.4
)%
Total revenue
89,858
116,713
100.0
%
100.0
%
(26,855
)
(23.0
)%
Cost of service revenue
880
1,219
1.0
%
1.0
%
(339
)
(27.8
)%
Cost of product sales
27
8,690
0.0
%
7.5
%
(8,663
)
(99.7
)%
Operating expenses
30,492
32,259
33.9
%
27.6
%
(1,767
)
(5.5
)%
Selling, general and administrative expenses
28,443
25,886
31.7
%
22.2
%
2,557
9.9
%
Depreciation, amortization and (gain) loss on disposal of assets, net
28,265
29,246
31.5
%
25.1
%
(981
)
(3.4
)%
Total costs and expenses
88,107
97,300
98.1
%
83.4
%
(9,193
)
(9.4
)%
Income from operations
1,751
19,413
1.9
%
16.6
%
(17,662
)
(91.0
)%
Interest expense, net
9,164
12,451
10.2
%
10.7
%
(3,287
)
(26.4
)%
Change in fair value of private placement warrants
2,067
(15,467
)
2.3
%
(13.3
)%
17,534
113.4
%
Loss on extinguishment of debt
5,334
—
5.9
%
—
5,334
n/a
Other income, net
(3,013
)
(2,925
)
(3.4
)%
(2.5
)%
(88
)
3.0
%
Total other expenses (income)
13,552
(5,941
)
15.0
%
(5.1
)%
19,493
328.1
%
(Loss) income before income tax (benefit) provision
(11,801
)
25,354
(13.1
)%
21.7
%
(37,155
)
(146.5
)%
Income tax (benefit) provision
(2,886
)
3,214
(3.2
)%
2.7
%
(6,100
)
(189.8
)%
Net (loss) income
$
(8,915
)
$
22,140
(9.9
)%
19.0
%
$
(31,055
)
(140.3
)%
Service Revenue. Service revenue decreased by $9.7 million, or 9.8%, to $89.8 million for the three months ended March 31, 2021 from $99.5 million for the three months ended March 31, 2020, representing 99.9% and 85.2% of total revenue, respectively. The following table presents service revenue by segment:
Three Months Ended March 31,
Percentage of Revenue
Increase (Decrease)
2021 vs 2020
($ in thousands)
2021
2020
2021
2020
$
%
Service revenue
Commercial Services
$
45,689
$
61,242
50.9
%
52.4
%
$
(15,553
)
(25.4
)%
Government Solutions
44,074
38,255
49.0
%
32.8
%
5,819
15.2
%
Total service revenue
$
89,763
$
99,497
99.9
%
85.2
%
$
(9,734
)
(9.8
)%
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
32
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 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 $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 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 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 $1.8 million, or 5.5%, from $32.3 million for the three months ended March 31, 2020 to $30.5 million for the three months ended March 31, 2021. This decrease was primarily due to decrease in employee wages, payment processing and operational equipment costs, offset by an increase in subcontractor expense. Operating expenses as a percentage of revenue increased from 27.6% to 33.9% for the three months ended March 31, 2020 and 2021, respectively. The following table presents operating expenses by segment:
Three Months Ended March 31,
Percentage of Revenue
Increase (Decrease)
2021 vs 2020
($ in thousands)
2021
2020
2021
2020
$
%
Operating expenses
Commercial Services
$
14,206
$
16,530
15.8
%
14.1
%
$
(2,324
)
(14.1
)%
Government Solutions
16,092
15,509
17.9
%
13.3
%
583
3.8
%
Total operating expenses before stock-based compensation
30,298
32,039
33.7
%
27.4
%
(1,741
)
(5.4
)%
Stock-based compensation
194
220
0.2
%
0.2
%
(26
)
(11.8
)%
Total operating expenses
$
30,492
$
32,259
33.9
%
27.6
%
$
(1,767
)
(5.5
)%
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Selling, General and Administrative Expenses. 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 $3.0 mi llion and travel and marketing related expenses year over year . Selling, general and administrative expenses as a percentage of revenue increased from 22.2 % to 3 1.7 % for the three months ended March 31, 20 20 and 202 1 , respectively. The following table presents s elling, general and administrative expenses by segment:
Three Months Ended March 31,
Percentage of Revenue
Increase (Decrease)
2021 vs 2020
($ in thousands)
2021
2020
2021
2020
$
%
Selling, general and administrative expenses
Commercial Services
$
10,792
$
13,384
12.0
%
11.5
%
$
(2,592
)
(19.4
)%
Government Solutions
10,811
9,669
12.1
%
8.3
%
1,142
11.8
%
Corporate and other
4,126
285
4.6
%
0.2
%
3,841
1347.7
%
Total selling, general and administrative expenses before stock-based compensation
25,729
23,338
28.7
%
20.0
%
2,391
10.2
%
Stock-based compensation
2,714
2,548
3.0
%
2.2
%
166
6.5
%
Total selling, general and administrative expenses
$
28,443
$
25,886
31.7
%
22.2
%
$
2,557
9.9
%
Depreciation, Amortization and (Gain) Loss on Disposal of Assets, Net. 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 $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 $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 $(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.
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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. 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 Revolver, or equity financings, all of which may not be available to us on favorable terms or at all.
We have the ability to borrow under our Revolver to meet obligations as they come due. 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 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 $26.8 million in service revenue under the Emergency Contract. NYCDOT has not made any payments against the Emergency Contract to date. There is no material reserve related to these receivables as amounts are deemed collectible based on current conditions and expectations. Please also see section entitled “ Risk Factors .”
The following table sets forth certain captions indicated on our statements of cash flows for the periods indicated:
Three Months Ended March 31,
($ in thousands)
2021
2020
Net cash provided by operating activities
$
9,013
$
14,841
Net cash used in investing activities
(3,648
)
(8,131
)
Net cash provided by (used in) financing activities
123,915
(23,084
)
Cash Flows from Operating Activities
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 $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.
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Cash Flows from Financing Activities
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)
Applicable
prepayment
percentage
> 3.70:1.00
50%
< 3.70:1.00 and > 3.20:1.00
25%
< 3.20:1.00
0%
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:
Year
Percentage
2024
102.750%
2025
101.375%
2026 and thereafter
100.000%
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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.
The Revolver
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 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 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 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 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 2020 Annual Report on Form 10-K/A filed on May 14, 2021 for our critical accounting policies, estimates and judgments.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to Note 2, Significant Accounting Policies , in Item 1, Financial Statements.
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