VERRA MOBILITY Corp 10-Q

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 17, 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 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 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 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. See Note 3 . Acquisition, for additional details on the Redflex acquisition. Unsecured Senior Notes Offering and Refinancing 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 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: • 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; 33 • 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 • 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. See Note 7 . 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: • 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 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 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: • 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; and • 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 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 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 and registrations for our customers. 34 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 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. Cost and Expenses Cost of Service Revenue. 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 our 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 . 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. 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. 35 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 June 30, Percentage of Revenue Increase (Decrease) 2021 vs 2020 2021 2020 2021 2020 $ % ($ in thousands) (As restated) Service revenue $ 116,426 $ 62,815 90.5 % 78.7 % $ 53,611 85.3 % Product sales 12,231 16,994 9.5 % 21.3 % (4,763 ) (28.0 )% Total revenue 128,657 79,809 100.0 % 100.0 % 48,848 61.2 % Cost of service revenue 1,332 1,013 1.0 % 1.3 % 319 31.5 % Cost of product sales 6,144 9,060 4.8 % 11.4 % (2,916 ) (32.2 )% Operating expenses 36,434 26,699 28.3 % 33.4 % 9,735 36.5 % Selling, general and administrative expenses 26,229 20,821 20.4 % 26.1 % 5,408 26.0 % Depreciation, amortization and (gain) loss on disposal of assets, net 27,012 29,166 21.0 % 36.5 % (2,154 ) (7.4 )% Total costs and expenses 97,151 86,759 75.5 % 108.7 % 10,392 12.0 % Income (loss) from operations 31,506 (6,950 ) 24.5 % (8.7 )% 38,456 553.3 % Interest expense, net 11,680 9,539 9.1 % 11.9 % 2,141 22.4 % Change in fair value of private placement warrants 8,067 8,334 6.3 % 10.4 % (267 ) (3.2 )% Tax receivable agreement liability adjustment 1,661 4,446 1.3 % 5.6 % (2,785 ) (62.6 )% Other income, net (2,798 ) (1,523 ) (2.2 )% (1.9 )% (1,275 ) 83.7 % Total other expenses 18,610 20,796 14.5 % 26.0 % (2,186 ) (10.5 )% Income (loss) before income taxes 12,896 (27,746 ) 10.0 % (34.7 )% 40,642 146.5 % Income tax provision (benefit) 8,904 (4,024 ) 6.9 % (5.0 )% 12,928 321.3 % Net income (loss) $ 3,992 $ (23,722 ) 3.1 % (29.7 )% $ 27,714 116.8 % Service Revenue. Service revenue increased by $53.6 million, or 85.3%, to $116.4 million for the three months ended June 30, 2021 from $62.8 million for the three months ended June 30, 2020, representing 90.5% and 78.7% of total revenue, respectively. The following table depicts service revenue by segment: Three Months Ended June 30, Percentage of Revenue Increase (Decrease) 2021 vs 2020 ($ in thousands) 2021 2020 2021 2020 $ % Service revenue Commercial Services $ 66,480 $ 27,272 51.7 % 34.2 % $ 39,208 143.8 % Government Solutions 49,946 35,543 38.8 % 44.5 % 14,403 40.5 % Total service revenue $ 116,426 $ 62,815 90.5 % 78.7 % $ 53,611 85.3 % 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 $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 36 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 $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 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 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 increased by $9.7 million, or 36.5%, from $26.7 million for the three months ended June 30, 2020 to $36.4 million for the three months ended June 30, 2021. The increase was primarily attributable to increase in wages expense, recurring services, and subcontractor expenses resulting from increased operations in 2021, which were lower in the 2020 period due to the impact from the COVID-19 pandemic. The increase is partially due to the inclusion of Redflex operations for the 12 days of June 2021 with no comparable amount in prior year. Operating expenses as a percentage of total revenue decreased from 33.4% to 28.3% for the three months ended June 30, 2020 and 2021, respectively. The following table presents operating expenses by segment: Three Months Ended June 30, Percentage of Revenue Increase (Decrease) 2021 vs 2020 ($ in thousands) 2021 2020 2021 2020 $ % Operating expenses Commercial Services $ 15,990 $ 10,750 12.4 % 13.5 % $ 5,240 48.7 % Government Solutions 20,196 15,655 15.7 % 19.6 % 4,541 29.0 % Total operating expenses before stock-based compensation 36,186 26,405 28.1 % 33.1 % 9,781 37.0 % Stock-based compensation 248 294 0.2 % 0.3 % (46 ) (15.6 )% Total operating expenses $ 36,434 $ 26,699 28.3 % 33.4 % $ 9,735 36.5 % 37 Selling, General and Administrative Expenses. 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 $3.9 million reduction to the credit loss expense resulting from changes in loss rate estimates based on improved economic conditions. Selling, general and administrative expenses as a percentage of total revenue decreased from 26.1% to 20.4% for the three months ended June 30, 2020 and 2021, respectively. The following table presents selling, general and administrative expenses by segment: Three Months Ended June 30, Percentage of Revenue Increase (Decrease) 2021 vs 2020 ($ in thousands) 2021 2020 2021 2020 $ % Selling, general and administrative expenses Commercial Services $ 9,479 $ 10,191 7.4 % 12.8 % $ (712 ) (7.0 )% Government Solutions 10,119 7,150 7.8 % 9.0 % 2,969 41.5 % Corporate and other 3,306 503 2.6 % 0.6 % 2,803 557.3 % Total selling, general and administrative expenses before stock-based compensation 22,904 17,844 17.8 % 22.4 % 5,060 28.4 % Stock-based compensation 3,325 2,977 2.6 % 3.7 % 348 11.7 % Total selling, general and administrative expenses $ 26,229 $ 20,821 20.4 % 26.1 % $ 5,408 26.0 % Depreciation, Amortization and (Gain) Loss on Disposal of Assets, Net. 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 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 $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. 38 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) 2021 vs 2020 2021 2020 2021 2020 $ % ($ in thousands) (As restated) Service revenue $ 206,189 $ 162,312 94.4 % 82.6 % $ 43,877 27.0 % Product sales 12,326 34,210 5.6 % 17.4 % (21,884 ) (64.0 )% Total revenue 218,515 196,522 100.0 % 100.0 % 21,993 11.2 % Cost of service revenue 2,212 2,232 1.0 % 1.1 % (20 ) (0.9 )% Cost of product sales 6,171 17,750 2.8 % 9.1 % (11,579 ) (65.2 )% Operating expenses 66,926 58,958 30.6 % 30.0 % 7,968 13.5 % Selling, general and administrative expenses 54,672 46,707 25.1 % 23.8 % 7,965 17.1 % Depreciation, amortization and (gain) loss on disposal of assets, net 55,277 58,412 25.3 % 29.7 % (3,135 ) (5.4 )% Total costs and expenses 185,258 184,059 84.8 % 93.7 % 1,199 0.7 % Income from operations 33,257 12,463 15.2 % 6.3 % 20,794 166.8 % Interest expense, net 20,844 21,990 9.6 % 11.2 % (1,146 ) (5.2 )% Change in fair value of private placement warrants 10,134 (7,133 ) 4.6 % (3.6 )% 17,267 242.1 % Tax receivable agreement liability adjustment 1,661 4,446 0.8 % 2.2 % (2,785 ) (62.6 )% Loss on extinguishment of debt 5,334 — 2.4 % — 5,334 n/a Other income, net (5,811 ) (4,448 ) (2.7 )% (2.3 )% (1,363 ) 30.6 % Total other expenses 32,162 14,855 14.7 % 7.5 % 17,307 116.5 % Income (loss) before income taxes 1,095 (2,392 ) 0.5 % (1.2 )% 3,487 145.8 % Income tax provision (benefit) 6,018 (810 ) 2.8 % (0.4 )% 6,828 843.0 % Net loss $ (4,923 ) $ (1,582 ) (2.3 )% (0.8 )% $ (3,341 ) 211.2 % 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 $162.3 million for the six months ended June 30, 2020, representing 94.4% and 82.6% of total revenue, respectively. The following table depicts service revenue by segment: Six Months Ended June 30, Percentage of Revenue Increase (Decrease) 2021 vs 2020 ($ in thousands) 2021 2020 2021 2020 $ % Service revenue Commercial Services $ 112,169 $ 88,514 51.4 % 45.0 % $ 23,655 26.7 % Government Solutions 94,020 73,798 43.0 % 37.6 % 20,222 27.4 % Total service revenue $ 206,189 $ 162,312 94.4 % 82.6 % $ 43,877 27.0 % 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 39 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. 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 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 $66.9 million for the six months ended June 30, 2021. The increase was primarily attributable to increase in wages expense, recurring services, and subcontractor expenses resulting from increased operations in 2021, which were lower in the 2020 year due to the impact from the COVID-19 pandemic. The increases in costs were partially offset by a decrease in operational equipment costs. Operating expenses as a percentage of revenue increased slightly from 30% to 30.6% for the six months ended June 30, 2020 and 2021, respectively. The following table presents operating expenses by segment: Six Months Ended June 30, Percentage of Revenue Increase (Decrease) 2021 vs 2020 ($ in thousands) 2021 2020 2021 2020 $ % Operating expenses Commercial Services $ 30,196 $ 27,280 13.8 % 13.9 % $ 2,916 10.7 % Government Solutions 36,288 31,164 16.6 % 15.8 % 5,124 16.4 % Total operating expenses before stock-based compensation 66,484 58,444 30.4 % 29.7 % 8,040 13.8 % Stock-based compensation 442 514 0.2 % 0.3 % (72 ) (14.0 )% Total operating expenses $ 66,926 $ 58,958 30.6 % 30.0 % $ 7,968 13.5 % 40 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 $6.9 million reduction to the credit loss expense resulting from changes in loss rate estimates based on improved economic conditions. Selling, general and administrative expenses as a percentage of revenue increased from 23.8% to 25.1% for the six months ended June 30, 2020 and 2021, respectively. The following table presents selling, general and administrative expenses by segment: Six Months Ended June 30, Percentage of Revenue Increase (Decrease) 2021 vs 2020 ($ in thousands) 2021 2020 2021 2020 $ % Selling, general and administrative expenses Commercial Services $ 20,271 $ 23,575 9.3 % 12.0 % $ (3,304 ) (14.0 )% Government Solutions 20,930 16,819 9.6 % 8.6 % 4,111 24.4 % Corporate and other 7,432 788 3.4 % 0.4 % 6,644 843.1 % Total selling, general and administrative expenses before stock-based compensation 48,633 41,182 22.3 % 21.0 % 7,451 18.1 % Stock-based compensation 6,039 5,525 2.8 % 2.8 % 514 9.3 % Total selling, general and administrative expenses $ 54,672 $ 46,707 25.1 % 23.8 % $ 7,965 17.1 % 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. 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 $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. Net Loss. 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). 41 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. 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 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 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 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 $28.1 million during the second quarter of 2021 related to both contracts. There is no material reserve related to open receivables as amounts are deemed collectible based on current conditions and expectations. Please also see section entitled “ Risk Factors .” The following table sets forth certain captions indicated on our statements of cash flows for the respective periods: Six Months Ended June 30, ($ in thousands) 2021 2020 Net cash provided by operating activities $ 37,478 $ 22,543 Net cash used in investing activities (115,102 ) (14,252 ) Net cash provided by (used in) financing activities 107,030 (25,501 ) Cash Flows from Operating Activities 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 $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. 42 Cash Flows from Financing Activities 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. 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 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. 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 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: 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, 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: Year Percentage 2024 102.750% 2025 101.375% 2026 and thereafter 100.000% 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. 43 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 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. PPP 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. 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 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. 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 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. 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 June 30 , 2021. 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 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 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 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; however, actual results could differ materially from those estimates. Refer to our 2020 Annual Report on Form 10-K/A filed on May 17, 2021 for our critical accounting policies, estimates and judgments. 44 Recent Accounting Pronouncements For a discussion of recent accounting pronouncements, refer to Note 2, Significant Accounting Policies , in Part I, Item 1, Financial Statements.