What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-09 compared with 2021-05-17 · 242 added, 143 removed, 151 unchanged (72% of the section changed)

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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.

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 1A “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 17, 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.

We believe we are a leading provider of smart mobility technology solutions and services to customers located throughout the world, primarily within the United States, Australia, Europe and Canada.

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, state and local government agencies (both domestic and international), 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.

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.

Redflex Acquisition

On June 17, 2021, we completed the previously announced acquisition of Redflex Holdings Limited (“ Redflex ”), a public company limited by shares, incorporated in Australia and listed on the Australian Securities Exchange.

Redflex is a provider of intelligent traffic management products and services that are sold and managed in the Asia Pacific, North America, United Kingdom, Europe, and Middle East regions.

Redflex develops, manufactures, and operates a wide range of platform-based solutions, utilizing advanced sensor and image capture technologies that enable active management of state and local motorways.

We included the financial results of Redflex in the condensed consolidated financial statements from the date of acquisition, which were not material.

Pursuant to the Scheme Implementation Agreement (the “ Agreement ”) entered into by us and Redflex on January 21, 2021, as amended by the Deed of Amendment and Consent, dated April 30, 2021, VM Consolidated, Inc., our indirect wholly owned subsidiary, purchased one hundred percent of the outstanding equity of Redflex at A$0.96 per share resulting in consideration of A$152.5 million, or approximately US$117.9 million.

Acquisition, for additional details on the Redflex acquisition.

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 ”).

On March 26, 2021, VM Consolidated Inc., our indirect wholly owned 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.

1 (the “ Restatement Agreement ”) to our First Lien Term Loan 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 Offering and Refinancing.

We used the remainder of the net proceeds, together with cash on hand, to pay approximately $118.0 million of cash purchase consideration for our 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:

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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.

amend 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.

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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 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.

Our Government Solutions segment offers photo enforcement solutions and services to its customers.

Through our recent acquisition of Redflex on June 17, 2021, we expanded our current footprint in the United States and gained access to international markets.

We provide complete, end-to-end speed, red-light, school bus stop arm and bus lane enforcement solutions within the United States and Canada.

We implement and administer traffic safety programs for municipalities, counties, school districts and law enforcement agencies.

The newly acquired international operations through Redflex primarily involve the sale of traffic enforcement products and related maintenance services.

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.

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 operate under long-term contracts and have 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.

grew total revenue $22.0 million from $196.5 million for the six months ended June 30, 2020 to $218.5 million for the six months ended June 30, 2021.

The increase was attributable to service revenue resulting from improved travel demand that positively impacted the rental car industry in our Commercial Services segment, and growth in both speed and red-light programs in our Government Solutions segment;

generated cash flows from operations of $37.5 million and $22.5 million for the six months ended June 30, 2021 and 2020, respectively.

Our cash on hand was $147.3 million as of June 30, 2021.

Primary Components of Our Operating Results

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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.

Our Commercial Services segment generates service revenue primarily through the management and operation of tolling programs and processing violations for RACs, FMCs and other large fleet customers.

These solutions are full service offerings by which we enroll plates of our customers’ vehicles and transponders with tolling authority accounts, pay tolls and violations on the customers’ behalf and, through proprietary technology, integrate with customer data to match the toll or violation 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.

We also generate service revenue in our Commercial Services segment through processing titles and registrations for our customers.

Our Government Solutions segment generates service revenue through the operation and maintenance of photo enforcement systems.

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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.

Product sales are generated by the sale of photo enforcement equipment primarily to international customers in the Government Solutions segment.

These international customers along with certain domestic 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.

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Cost of Service Revenue.

Cost of service revenue consists of collection and other professional services provided by third parties and associated with the delivery of certain ancillary services performed by both our Government Solutions and Commercial Services segments.

Cost of service revenue consists of collection and other professional services provided by third parties associated with the delivery of certain ancillary services performed by both our Government Solutions and Commercial Services segments.

Cost of Product Sales.

Cost of product sales consists of the cost to acquire and install photo enforcement equipment purchased by Government Solutions customers.

Cost of product sales consists of the cost to acquire and install photo enforcement equipment purchased by our Government Solutions customers.

Operating Expenses .

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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.

Change in fair value of private placement warrants consists of adjustments to the liability related to the 6,666,666 warrants originally issued to Gores Sponsor II, LLC in a private placement in connection with our initial public offering (the “ Private Placement Warrants ”) from the remeasurement to fair value at the end of each reporting period.

Tax Receivable Agreement Liability Adjustment .

Tax receivable agreement liability adjustment consists of adjustments made to our Tax Receivable Agreement (the “ TRA ”) with PE Greenlight Holdings, LLC and Greenlight Holding II Corporation due to changes in estimates.

Loss on Extinguishment of Debt.

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Other income, net primarily consists of volume rebates earned from total spend on purchasing cards and gain or loss on foreign currency transactions.

Results of Operations

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

R esults of Operations

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 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,

Three Months Ended June 30,

Percentage of Revenue

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Total costs and expenses

Income from operations

Income (loss) from operations

Interest expense, net

Change in fair value of private placement warrants

Loss on extinguishment of debt

Tax receivable agreement liability adjustment

Other income, net

Total other expenses (income)

(Loss) income before income tax (benefit) provision

Income tax (benefit) provision

Net (loss) income

Total other expenses

Income (loss) before income taxes

Income tax provision (benefit)

Net income (loss)

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,

Service revenue increased by $53.6 million, or 85.3%, to $116.4 million for the three months ended June 30, 2021 from $62.8 million for the three months ended June 30, 2020, representing 90.5% and 78.7% of total revenue, respectively.

The following table depicts service revenue by segment:

Three Months Ended June 30,

Percentage of Revenue

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Total service revenue

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.

Commercial Services service revenue increased by $39.2 million, or 143.8%, from $27.3 million for the three months ended June 30, 2020 to $66.5 million for the three months ended June 30, 2021.

This increase was primarily due to the increased travel demand in the RAC industry that impacted volume in the three months ended June 30, 2021 compared to the prior year which was negatively impacted by the COVID-19 pandemic.

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 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.

Service revenue increased by $14.4 million to $49.9 million for the three months ended June 30, 2021 from $35.5 million in the same period in 2020.

Our speed program revenue grew approximately $9.4 million during the three months ended June 30, 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.

In addition, revenue from red-light programs increased by $3.

5 million which was mainly attributable to the inclusion of Redflex operations for twelve days in June 2021 with no comparable amounts in the prior year , and general increase in travel and related vehicle traffic in 2021 compared to prior year which was negatively impacted by the COVID-19 pandemic .

We maintained an average of 5,966 active camera systems during the three months ended June 30, 2021 compared to an average of 3,293 for the three months ended June 30, 2020, excluding Redflex cameras for each respective period.

The increase in active camera systems was primarily due to the expansion of speed enforcement systems with existing customers and the restart of cameras that were temporarily inactive due to COVID-19.

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.

Product sales were $12.2 million and $17.0 million for the three months ended June 30, 2021 and 2020, respectively.

Product sales decreased $4.8 million due to the timing of installations for a single customer that is expanding its school zone speed program.

Product sales revenue is generated from international customers and certain domestic customers in the Government Solutions segment who purchase their equipment and their buying patterns vary greatly from year to year.

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 service revenue increased slightly from $1.0 million for the three months ended June 30, 2020 to $1.3 million for the three months ended June 30, 2021.

The increase resulted from increased costs from third-party professional services associated with the delivery of certain ancillary services.

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.

Cost of product sales decreased by $2.9 million from $9.1 million in the three months ended June 30, 2020 to $6.1 million in the three months ended June 30, 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.

Operating expenses increased by $9.7 million, or 36.5%, from $26.7 million for the three months ended June 30, 2020 to $36.4 million for the three months ended June 30, 2021.

The increase was primarily attributable to increase in wages expense, recurring services, and subcontractor expenses resulting from increased operations in 2021, which were lower in the 2020 period due to the impact from the COVID-19 pandemic.

The increase is partially due to the inclusion of Redflex operations for the 12 days of June 2021 with no comparable amount in prior year.

Operating expenses as a percentage of total revenue decreased from 33.4% to 28.3% for the three months ended June 30, 2020 and 2021, respectively.

The following table presents operating expenses by segment:

Three Months Ended March 31,

Three Months Ended June 30,

Percentage of Revenue

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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,

Selling, general and administrative expenses increased to $26.2 million for the three months ended June 30, 2021 compared to $20.8 million for the same period in 2020.

The increase is primarily due to $3.3 million of transaction costs incurred related to the Reflex acquisition, increased wages expense due to the reinstatement of employee bonus accrual in 2021, and the inclusion of Redflex operations for the 12 days of June 2021 with no comparable amounts in prior year.

These increases were partially offset by a $3.9 million reduction to the credit loss expense resulting from changes in loss rate estimates based on improved economic conditions.

Selling, general and administrative expenses as a percentage of total revenue decreased from 26.1% to 20.4% for the three months ended June 30, 2020 and 2021, respectively.

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

Three Months Ended June 30,

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, 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.

Depreciation, amortization and (gain) loss on disposal of assets, net, decreased from $29.2 million for the three months ended June 30, 2020 to $27.0 million for the same period in 2021.

The decrease was mainly due to certain trademark intangibles being fully amortized for the three months ended June 30, 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.

Interest expense, net increased by $2.2 million from $9.5 million for the three months ended June 30, 2020 to $11.7 million for the same period in 2021.

This increase is primarily due to the increased borrowings as part of the debt restructuring in March 2021 in conjunction with the fixed rate on the Senior Notes which is approximately 200 basis points higher than the 2021 Term Loan interest rate during the three months ended June 30, 2021.

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.

We recorded a loss of $8.1 million and $8.3 million for the three months ended June 30, 2021 and 2020, respectively, 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.

Tax Receivable Agreement Liability Adjustment .

We recorded $1.7 million and $4.4 million in charges for the three months ended June 30, 2021 and 2020, respectively.

The TRA liability adjustment in 2021 is arising from higher estimated state tax rates due to changes in statutory rates, whereas in 2020 it is arising from higher estimated state tax rates due to a change in apportionment.

Other Income, Net.

We pay a high volume of tolls on behalf of our customers with purchasing cards which generate rebates based on volume, payment terms and rebate frequency.

Other income, net was $2.8 million for the three months ended June 30, 2021, compared to $1.5 million for the three months ended June 30, 2020.

The increase is attributable to increased tolling activity due to travel demand that positively affected the RAC industry during the three months ended June 30, 2021.

Income Tax Provision (Benefit).

Income tax provision was $8.9 million representing an effective tax rate of 69.0% for the three months ended June 30, 2021 compared to a tax benefit of $4.0 million, representing an effective tax benefit of 14.5% for the same period in 2020.

The primary driver of the effective tax rate variance is from the Company’s permanent differences related to the mark-to-market adjustment on the private placement warrants.

Net Income (Loss).

We had net income of $4.0 million for the three months ended June 30, 2021, as compared to a net loss of $23.7 million for the three months ended June 30, 2020.

The $27.7 million increase in net income was primarily due to increase in revenues resulting from improved travel demand experienced by our RAC customers, and the other statement of operations activity discussed above.

Si x Months Ended June 30, 202 1 Compared to Six Months Ended June 30, 20 20

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.

Six Months Ended June 30,

Percentage of Revenue

Increase (Decrease)

($ in thousands)

(As restated)

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

Change in fair value of private placement warrants

Tax receivable agreement liability adjustment

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.

Liquidit y and Capital Resources

Total other expenses

Income (loss) before income taxes

Income tax provision (benefit)

Service Revenue.

Service revenue increased by $43.9 million, or 27.0%, to $206.2 million for the six months ended June 30, 2021 from $162.3 million for the six months ended June 30, 2020, representing 94.4% and 82.6% of total revenue, respectively.

The following table depicts service revenue by segment:

Six Months Ended June 30,

Percentage of Revenue

Increase (Decrease)

($ in thousands)

Service revenue

Commercial Services

Government Solutions

Total service revenue

Commercial Services service revenue increased by $23.7 million, or 26.7%, from $88.5 million for the six months ended June 30, 2020 to $112.2 million for the six months ended June 30, 2021.

This increase was primarily due to the increased travel demand in the RAC industry that impacted volume in the six months ended June 30, 2021 compared to prior year which was negatively impacted by the COVID-19 pandemic.

The consecutive revenue growth was approximately $20.7 million in the second quarter of 2021 compared to the first quarter of 2021.

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

Service revenue increased by $20.2 million to $94.0 million for the six months ended June 30, 2021 from $73.8 million in the same period in 2020.

Our speed program revenue grew approximately $15.9 million during the six months ended June 30, 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.

In addition, revenue from red-light programs increased by $3.8 million which was mainly attributable to the inclusion of Redflex operations for twelve days in June 2021 with no comparable amounts in the prior year, and general increase in travel and related vehicle traffic in 2021 compared to prior year which was negatively impacted by the COVID-19 pandemic.

We maintained an average of 5,352 active camera systems during the six months ended June 30, 2021 compared to an average of 4,147 for the six months ended June 30, 2020, excluding Redflex cameras for each respective period.

The increase in active camera systems was primarily due to the expansion of speed enforcement systems with existing customers which was partially offset by 525 cameras that were temporarily inactive due to COVID-19.

Product Sales.

Product sales were $12.3 million and $34.2 million for the six months ended June 30, 2021 and 2020, respectively.

Product sales decreased $21.9 million due to the timing of installations at a single customer that is expanding its school zone speed program.

Cost of Service Revenue.

Cost of service revenue remained constant at $2.2 million for both six month periods ended June 30, 2021 and 2020.

Cost of service revenue relates to 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 by $11.6 million from $17.8 million in the six months ended June 30, 2020 to $6.2 million in the six months ended June 30, 2021, which was consistent with the decrease in product sales.

Operating Expenses.

Operating expenses increased by $8.0 million, or 13.5%, from $58.9 million for the six months ended June 30, 2020 to $66.9 million for the six months ended June 30, 2021.

The increases in costs were partially offset by a decrease in operational equipment costs.

Operating expenses as a percentage of revenue increased slightly from 30% to 30.6% for the six months ended June 30, 2020 and 2021, respectively.

The following table presents operating expenses by segment:

Six Months Ended June 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 increased by $8.0 million to $54.7 million for the six months ended June 30, 2021 compared to $46.7 million for the same period in 2020.

The increase is primarily due to $7.4 million in transaction costs incurred related to the Reflex acquisition, increased wages expense due to the reinstatement of employee bonus accrual in 2021, increased professional expenses and the inclusion of Redflex operations for the 12 days of June 2021 with no comparable amounts in prior year.

These increases were partially offset by a $6.9 million reduction to the credit loss expense resulting from changes in loss rate estimates based on improved economic conditions.

Selling, general and administrative expenses as a percentage of revenue increased from 23.8% to 25.1% for the six months ended June 30, 2020 and 2021, respectively.

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

Six Months Ended June 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, decreased from $58.4 million for the six months ended June 30, 2020 to $55.3 million for the same period in 2021.

The decrease was mainly due to certain trademark intangibles being fully amortized for four months out of the six months period ended June 30, 2021.

Interest Expense, Net.

Interest expense, net decreased by approximately $1.2 million from $22.0 million for the six months ended June 30, 2020 to $20.8 million for the same period in 2021.

The decrease is primarily due to lower interest rates in 2021 compared to the same period in 2020.

See “ Liquidity and Capital Resources ” below.

Tax Receivable Agreement Liability Adjustment .

We recorded $1.7 million and $4.4 million in charges for the six months ended June 30, 2021 and 2020, respectively.

Other Income, Net.

We pay a high volume of tolls on behalf of our customers with purchasing cards which generate rebates based on volume, payment terms and rebate frequency.

Other income, net was $5.8 million for the six months ended June 30, 2021, compared to $4.4 million for the six months ended June 30, 2020.

The increase is attributable to increased tolling activity due to travel demand that positively affected the RAC industry during the six months ended June 30, 2021.

Income Tax Provision (Benefit).

Income tax provision was $6.0 million representing an effective tax rate of 549.6% for the six months ended June 30, 2021 compared to a tax benefit of $0.8 million, representing an effective tax benefit rate of 33.9% for the same period in 2020.

The primary driver of the effective tax rate variance is from the Company’s permanent differences related to the mark-to-market adjustment on the private placement warrants.

We had a net loss of $ 4.9 million for the six months ended June 30, 2021, as compared to a net loss of $1.6 million for the six months ended June 30, 2020.

The increase in net loss was mainly due to other expenses incurred related to the change in the fair value of Private Placement Warrants and loss on extinguishment of debt, and the other statements of operations activity discussed above.

Liquidity 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 have incurred significant long-term debt as a result of acquisitions completed in prior years as well as the Redflex 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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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.

As of June 30, 2021, we had $57.0 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.

As of June 30, 2021, the City of New York Department of Transportation (“ NYCDOT ”) represented 59% of total 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.

At June 30, 2021, the Legacy Contract had an open receivable balance of $30.8 million, of which $22.3 million had aged beyond NYCDOT’s 45-day payment terms.

As of June 30, 2021, the Company has invoiced NYCDOT for $64.4 million in product revenue and $36.7 million in service revenue under the Emergency Contract, and the Emergency Contract had an open receivable balance of $96.3 million, of which $79.5 million had aged beyond NYCDOT’s 45-day payment terms .

The total outstanding receivables balance has increased approximately $6 million in the second quarter of 2021 compared to the first quarter due to additional invoices under both contracts.

The Company collected $28.1 million during the second quarter of 2021 related to both contracts.

There is no material reserve related to open 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,

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

Six Months Ended June 30,

($ in thousands)

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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 provided by operating activities increased by $14.9 million, from $22.5 million for the six months ended June 30, 2020 to $37.5 million for the six months ended June 30, 2021.

Net loss year over year increased by $3.3 million, from $1.6 million in 2020 to $4.9 million in 2021.

We had increases to adjustments to net loss resulting from changes in the fair value of private placement warrants and the $5.3 million loss on extinguishment of debt, which were offset partially by the change in the TRA liability adjustment and the decrease in the credit loss expense.

The major changes in operating assets and liabilities were driven by an increase in accounts payable and accrued liabilities, which was partially offset by a decrease in unbilled receivables and prepaid assets compared to the prior year.

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.

Cash used in investing activities was $115.1 million and $14.3 million for the six months ended June 30, 2021 and 2020, respectively.

The cash used in 2021 was primarily related to the acquisition of Redflex on June 17, 2021 by VM Consolidated, Inc.

of one hundred percent of the outstanding equity of Redflex at A$0.96 per share for total consideration of A$152.5 million, or approximately US$117.9 million.

The cash used in 2020 was related to purchases of installation and service parts and property and equipment.

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.

Cash provided by (used in) financing activities was $107.0 million and $(25.5) million for the six months ended June 30, 2021 and 2020, respectively.

We had aggregate borrowings of $996.8 million during 2021 consisting of the 2021 Term Loan and Senior Notes (defined below) and repayments of $881.3 million on outstanding debt related to the 2018 and 2021 Term Loans, and debt related to Redflex subsequent to the acquisition.

The 2018 Term Loan has been fully repaid in March 2021.

The aggregate borrowings net of the repayments were used in part to fund the close of the Redflex acquisition discussed above.

The cash used in financing activities in 2020 was mainly 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.

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.

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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%.

It 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 June 30, 2021, the interest rate on the 2021 Term Loan was 3.4%.

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:

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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:

On or after April 15, 2024, we 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

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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.

Accordingly, we recognized a loss on extinguishment of debt of $5.3 million on the 2018 Term Loan during the six months ended June 30, 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.

During fiscal year 2020, Redflex received a loan from the U.S.

Small Business Administration (“ SBA ”) as part of the Paycheck Protection Program (“ PPP Loan ”) to offset certain employment and other allowable costs incurred as a result of the COVID-19 pandemic.

At June 30, 2021, the loan amount outstanding was $2.9 million and is payable within a year, and is included in the current portion of long-term debt.

In early 2021, Redflex applied for forgiveness of this loan and awaits approval from the SBA.

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.

The terms of the Revolver were not affected by other debt instruments 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.

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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.

At June 30 , 2021, we had no outstanding borrowings on the Revolver and our availability to borrow was $57.0 million, net of $6.2 million of outstanding letters of credit.

All borrowings and other extensions of credits under the 2021 Term Loan, the 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 June 30 , 2021, we were compliant with all debt covenants.

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

Interest Expense

We recorded interest expense, including amortization of deferred financing costs and discounts, of $11.7 million and $9.5 million for the three months ended June 30 , 2021 and 2020, respectively, and $20.8 million and $22.0 million for the six months ended June 30 , 2021 and 2020, respectively.

Off-Balance Sheet Arrangements

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

We do not have any material off-balance sheet financing arrangements as of June 30 , 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.

Significant items subject to such estimates and assumptions include the fair values assigned to net assets acquired (including identifiable intangible assets) in business combinations, the carrying amounts of inventory, 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;

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Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, refer to Note 2, Significant Accounting Policies , in Item 1, Financial Statements.

For a discussion of recent accounting pronouncements, refer to Note 2, Significant Accounting Policies , in Part I, Item 1, Financial Statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis