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 (“FMCs”), 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
T2 Systems Acquisition
On November 1, 2021, VM Consolidated, Inc., our indirect wholly owned subsidiary (“VM Consolidated”), Project Titan Merger Sub, Inc. (“Merger Sub”), a wholly owned subsidiary of VM Consolidated, T2 Systems Parent Corporation, a Delaware corporation (“T2 Systems”), and Thoma Bravo Discover Fund, L.P., a Delaware limited partnership, solely in its capacity as representative, entered into an Agreement and Plan of Merger (the “T2 Merger Agreement”). Upon the terms and subject to the conditions set forth in the T2 Merger Agreement, Merger Sub will merge with and into T2 Systems (the “Merger”), with T2 Systems surviving the Merger as an indirect wholly owned subsidiary of the Company. At the closing of the Merger (the “Closing”), VM Consolidated will pay a purchase price of $347.0 million on a cash-free, debt-free basis, subject to certain customary purchase price adjustments. The purchase price paid by VM Consolidated in the Merger could be increased by the costs of an impending asset acquisition by T2 Systems, Inc., an indirect wholly owned subsidiary of T2 Systems, which costs include a $9.0 million purchase price and the assumption of liabilities in the form of obligations assumed under contracts assigned to T2 Systems, Inc.
The obligation of the parties to consummate the Merger is subject to the satisfaction or waiver of customary closing conditions set forth in the T2 Merger Agreement, including the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, required stockholder approval and the accuracy of the other party’s representations and warranties and the performance, in all material respects, by the other party of its obligations under the T2 Merger Agreement. The T2 Merger Agreement includes certain termination rights of both VM Consolidated and T2 Systems, including providing that either party, subject to certain exceptions and limitations, may terminate the T2 Merger Agreement if the Merger is not consummated by January 14, 2022. The Closing is expected to take place in the fourth quarter of 2021.
Share Repurchase and Retirement
On August 9, 2021, we announced that our Board of Directors authorized a share repurchase program for up to an aggregate amount of $100 million of our outstanding shares of Class A Common Stock. On August 20, 2021, we repurchased and retired 6,849,315 shares of our Class A Common Stock from the Platinum Stockholder at a price per share of $14.60, which was equal to the price at which the underwriter exercised the overallotment option for the secondary offering. We paid $100 million to fund the share repurchase using existing cash on hand. See Note 12. Related Party Transactions, for additional details on the secondary offering by the Platinum Stockholder.
34
Redflex Acquisition
On June 17, 2021, we completed the 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, 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.
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.
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 acquisition of Redflex, 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 international operations through Redflex primarily involve the sale of traffic enforcement products and related maintenance services.
Segment performance is based on revenues and income from operations before depreciation, amortization, gain (loss) on disposal of assets, net, and stock-based compensation. The measure also excludes interest expense, net, income taxes and certain other transactions and is inclusive of other income, net.
Executive Summary
We operate 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 by $87.2 million from $293.4 million for the nine months ended September 30, 2020 to $380.6 million for the nine months ended September 30, 2021. Redflex contributed $22.8 million to the revenue growth, and the remaining increase was due 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 $129.3 million and $44.4 million for the nine months ended September 30, 2021 and 2020, respectively. The increase in cash flows from operations was due largely to improved cash collections, specifically from NYCDOT, coupled with improved operating performance. Our cash on hand was $128.2 million as of September 30, 2021.
Primary Components of Our Operating Results
Revenue
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
35
are full service offerings by which we enroll the license 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.
Our Government Solutions segment generates service revenue through the operation and maintenance of photo enforcement systems. This revenue is generally tied to long-term contracts, and revenue is recognized either when services are performed or when citations are issued or paid, depending on the terms of the customer contract. Revenue drivers in this segment include the number of systems installed and the monthly revenue per system. Ancillary service revenue is generated in our Government Solutions segment from payment processing, pass-through fees for collection expense, and other fees.
Product Sales. Product sales are generated by the sale of photo enforcement equipment to certain customers in the Government Solutions segment whose buying patterns vary greatly from period to period. We recognize product sales revenue when the equipment is accepted or installed.
Costs 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 re-measurement 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 gains or losses on foreign currency transactions.
36
Results of Operations
Three Months Ended September 30, 2021 Compared to Three Months Ended September 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 September 30,
|
|
|
|
|
|
|
|
|
|
|
Percentage of Revenue
|
|
|
Increase (Decrease)
2021 vs 2020
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
$
|
|
|
%
|
|
|
($ in thousands)
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
141,811
|
|
|
$
|
82,980
|
|
|
|
87.5
|
%
|
|
|
85.6
|
%
|
|
$
|
58,831
|
|
|
|
70.9
|
%
|
|
Product sales
|
|
|
20,284
|
|
|
|
13,928
|
|
|
|
12.5
|
%
|
|
|
14.4
|
%
|
|
|
6,356
|
|
|
|
45.6
|
%
|
|
Total revenue
|
|
|
162,095
|
|
|
|
96,908
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
65,187
|
|
|
|
67.3
|
%
|
|
Cost of service revenue
|
|
|
1,412
|
|
|
|
907
|
|
|
|
0.9
|
%
|
|
|
0.9
|
%
|
|
|
505
|
|
|
|
55.7
|
%
|
|
Cost of product sales
|
|
|
9,391
|
|
|
|
7,088
|
|
|
|
5.8
|
%
|
|
|
7.3
|
%
|
|
|
2,303
|
|
|
|
32.5
|
%
|
|
Operating expenses
|
|
|
48,309
|
|
|
|
26,544
|
|
|
|
29.8
|
%
|
|
|
27.4
|
%
|
|
|
21,765
|
|
|
|
82.0
|
%
|
|
Selling, general and administrative expenses
|
|
|
31,580
|
|
|
|
17,511
|
|
|
|
19.5
|
%
|
|
|
18.1
|
%
|
|
|
14,069
|
|
|
|
80.3
|
%
|
|
Depreciation, amortization and (gain) loss on disposal of assets, net
|
|
|
29,529
|
|
|
|
29,590
|
|
|
|
18.2
|
%
|
|
|
30.5
|
%
|
|
|
(61
|
)
|
|
|
(0.2
|
)%
|
|
Total costs and expenses
|
|
|
120,221
|
|
|
|
81,640
|
|
|
|
74.2
|
%
|
|
|
84.2
|
%
|
|
|
38,581
|
|
|
|
47.3
|
%
|
|
Income from operations
|
|
|
41,874
|
|
|
|
15,268
|
|
|
|
25.8
|
%
|
|
|
15.8
|
%
|
|
|
26,606
|
|
|
|
174.3
|
%
|
|
Interest expense, net
|
|
|
11,637
|
|
|
|
9,578
|
|
|
|
7.2
|
%
|
|
|
9.9
|
%
|
|
|
2,059
|
|
|
|
21.5
|
%
|
|
Change in fair value of private placement warrants
|
|
|
(5,067
|
)
|
|
|
(4,400
|
)
|
|
|
(3.1
|
)%
|
|
|
(4.5
|
)%
|
|
|
(667
|
)
|
|
|
15.2
|
%
|
|
Other income, net
|
|
|
(3,494
|
)
|
|
|
(4,982
|
)
|
|
|
(2.2
|
)%
|
|
|
(5.1
|
)%
|
|
|
1,488
|
|
|
|
(29.9
|
)%
|
|
Total other expenses
|
|
|
3,076
|
|
|
|
196
|
|
|
|
1.9
|
%
|
|
|
0.3
|
%
|
|
|
2,880
|
|
|
|
1469.4
|
%
|
|
Income before income taxes
|
|
|
38,798
|
|
|
|
15,072
|
|
|
|
23.9
|
%
|
|
|
15.5
|
%
|
|
|
23,726
|
|
|
|
157.4
|
%
|
|
Income tax provision
|
|
|
11,492
|
|
|
|
3,986
|
|
|
|
7.1
|
%
|
|
|
4.1
|
%
|
|
|
7,506
|
|
|
|
188.3
|
%
|
|
Net income
|
|
$
|
27,306
|
|
|
$
|
11,086
|
|
|
|
16.8
|
%
|
|
|
11.4
|
%
|
|
$
|
16,220
|
|
|
|
146.3
|
%
|
Service Revenue. Service revenue increased by $58.8 million, or 70.9%, to $141.8 million for the three months ended September 30, 2021 from $83.0 million for the three months ended September 30, 2020, representing 87.5% and 85.6% of total revenue, respectively. The following table depicts service revenue by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
Percentage of Revenue
|
|
|
Increase (Decrease)
2021 vs 2020
|
|
|
($ in thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
$
|
|
|
%
|
|
|
Service revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Services
|
|
$
|
77,257
|
|
|
$
|
44,153
|
|
|
|
47.7
|
%
|
|
|
45.5
|
%
|
|
$
|
33,104
|
|
|
|
75.0
|
%
|
|
Government Solutions
|
|
|
64,554
|
|
|
|
38,827
|
|
|
|
39.8
|
%
|
|
|
40.1
|
%
|
|
|
25,727
|
|
|
|
66.3
|
%
|
|
Total service revenue
|
|
$
|
141,811
|
|
|
$
|
82,980
|
|
|
|
87.5
|
%
|
|
|
85.6
|
%
|
|
$
|
58,831
|
|
|
|
70.9
|
%
|
Commercial Services service revenue increased by $33.1 million, or 75.0%, from $44.2 million for the three months ended September 30, 2020 to $77.3 million for the three months ended September 30, 2021. This increase was primarily due to the increased travel demand in the RAC industry that impacted volume in the three months ended September 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 was $64.6 million and $38.8 million for the three months ended September 30, 2021 and 2020, respectively, and it increased by $25.7 million with Redflex contributing $15.9 million during the three months ended September 30, 2021. Our speed program revenue grew approximately $13.6 million during the three months ended September 30, 2021 compared to the same period in 2020 due to the inclusion of Redflex operations for the three months ended September 30, 2021 with no comparable amounts in the prior year and an increase in the total number of camera systems installed. This trend is expected to continue into future quarters. In addition, revenue from red-light programs increased by $6.3 million which was mainly attributable to the inclusion of Redflex operations for the three months ended September 30, 2021
37
with no comparable amounts in the prior year, and a 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 8,946 active camera systems during the three months ended September 30, 2021 compared to an average of 3,730 for the three months ended September 30, 2020. The increase in active camera systems was primarily due to the inclusion of Redflex camera systems with no comparable amounts in the prior year, 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 $20.3 million and $13.9 million for the three months ended September 30, 2021 and 2020, respectively. Product sales increased $6.4 million due to the inclusion of Redflex camera systems with no comparable amounts in the prior year and 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 from $0.9 million for the three months ended September 30, 2020 to $1.4 million for the three months ended September 30, 2021. The $0.5 million 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 increased by $2.3 million from $7.1 million in the three months ended September 30, 2020 to $9.4 million in the three months ended September 30, 2021, which was consistent with the increase in product sales.
Operating Expenses. Operating expenses increased by $21.8 million, or 82%, from $26.5 million for the three months ended September 30, 2020 to $48.3 million for the three months ended September 30, 2021. The increase was primarily attributable to increase in wages expense, recurring services, and subcontractor expenses resulting from increased operations in 2021, which were lower in the 2020 period due to the impact from the COVID-19 pandemic. The increase was also driven by the inclusion of Redflex operations for the three months ended September 30, 2021 with no comparable amounts in the prior year. Operating expenses as a percentage of total revenue increased from 27.4% to 29.8% for the three months ended September 30, 2020 and 2021, respectively. The following table presents operating expenses by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
Percentage of Revenue
|
|
|
Increase (Decrease)
2021 vs 2020
|
|
|
($ in thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
$
|
|
|
%
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Services
|
|
$
|
17,471
|
|
|
$
|
11,796
|
|
|
|
10.8
|
%
|
|
|
12.2
|
%
|
|
$
|
5,675
|
|
|
|
48.1
|
%
|
|
Government Solutions
|
|
|
30,659
|
|
|
|
14,565
|
|
|
|
18.9
|
%
|
|
|
15.0
|
%
|
|
|
16,094
|
|
|
|
110.5
|
%
|
|
Total operating expenses before stock-based compensation
|
|
|
48,130
|
|
|
|
26,361
|
|
|
|
29.7
|
%
|
|
|
27.2
|
%
|
|
|
21,769
|
|
|
|
82.6
|
%
|
|
Stock-based compensation
|
|
|
179
|
|
|
|
183
|
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
(4
|
)
|
|
|
(2.2
|
)%
|
|
Total operating expenses
|
|
$
|
48,309
|
|
|
$
|
26,544
|
|
|
|
29.8
|
%
|
|
|
27.4
|
%
|
|
$
|
21,765
|
|
|
|
82.0
|
%
|
38
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $31.6 million for the three months ended September 30, 2021 compared to $17.5 million for the same period in 2020. The increase is primarily due to increased wages expense, information technology and communications expense due to the inclusion of Redflex operations for the three months ended September 30, 2021 with no comparable amounts in the prior year. In addition, we had increases of $2.9 million related to the credit loss expense compared to the prior year, $2.7 million of transaction costs incurred during the quarter and an increase due to the reinstatement of employee bonus accrual in 2021. Selling, general and administrative expenses as a percentage of total revenue increased from 18.1% to 19.5% for the three months ended September 30, 2020 and 2021, respectively. The following table presents selling, general and administrative expenses by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
Percentage of Revenue
|
|
|
Increase (Decrease)
2021 vs 2020
|
|
|
($ in thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
$
|
|
|
%
|
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Services
|
|
$
|
10,615
|
|
|
$
|
5,920
|
|
|
|
6.5
|
%
|
|
|
6.1
|
%
|
|
$
|
4,695
|
|
|
|
79.3
|
%
|
|
Government Solutions
|
|
|
14,763
|
|
|
|
8,107
|
|
|
|
9.1
|
%
|
|
|
8.4
|
%
|
|
|
6,656
|
|
|
|
82.1
|
%
|
|
Corporate and other
|
|
|
2,678
|
|
|
|
514
|
|
|
|
1.7
|
%
|
|
|
0.5
|
%
|
|
|
2,164
|
|
|
|
421.0
|
%
|
|
Total selling, general and administrative expenses before stock-based compensation
|
|
|
28,056
|
|
|
|
14,541
|
|
|
|
17.3
|
%
|
|
|
15.0
|
%
|
|
|
13,515
|
|
|
|
92.9
|
%
|
|
Stock-based compensation
|
|
|
3,524
|
|
|
|
2,970
|
|
|
|
2.2
|
%
|
|
|
3.1
|
%
|
|
|
554
|
|
|
|
18.7
|
%
|
|
Total selling, general and administrative expenses
|
|
$
|
31,580
|
|
|
$
|
17,511
|
|
|
|
19.5
|
%
|
|
|
18.1
|
%
|
|
$
|
14,069
|
|
|
|
80.3
|
%
|
Depreciation, Amortization and (Gain) Loss on Disposal of Assets, Net. Depreciation, amortization and (gain) loss on disposal of assets, net, remained consistent year over year at $29.5 million and $29.6 million for the three months ended September 30, 2021 and 2020, respectively. This was mainly due to increased depreciation and amortization expense resulting from the Redflex acquisition included in the three months ended September 30, 2021 with no comparable amount in the prior year, partially offset by a decrease due to certain trademark intangibles being fully amortized for the three months ended September 30, 2021.
Interest Expense, Net. Interest expense, net increased by $2.0 million from $9.6 million for the three months ended September 30, 2020 to $11.6 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 being approximately 200 basis points higher than the rate paid for the 2021 Term Loan during the three months ended September 30, 2021. See “Liquidity and Capital Resources.”
Change in Fair Value of Private Placement Warrants. We recorded a gain of $5.1 million and $4.4 million for the three months ended September 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 re-measurement of the liability at the end of each reporting period.
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 $3.5 million for the three months ended September 30, 2021, compared to $5.0 million for the three months ended September 30, 2020. The decrease of $1.5 million is primarily driven by a total of $2.8 million in gains recorded in the three months ended September 30, 2020 from a settlement agreement and related insurance proceeds, which was offset by an increase in the 2021 period due to increased tolling activity as a result of COVID-19 recovery in the travel industry.
Income Tax Provision. Income tax provision was $11.5 million representing an effective tax rate of 29.6% for the three months ended September 30, 2021 compared to a tax provision of $4.0 million, representing an effective tax rate of 26.4% 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. We had net income of $27.3 million for the three months ended September 30, 2021, as compared to a net income of $11.1 million for the three months ended September 30, 2020. The $16.2 million increase in net income was primarily due to increases in both service revenue and product sales, and the other statement of operations activity discussed above.
39
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
Percentage of Revenue
|
|
|
Increase (Decrease)
2021 vs 2020
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
$
|
|
|
%
|
|
|
($ in thousands)
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
348,000
|
|
|
$
|
245,292
|
|
|
|
91.4
|
%
|
|
|
83.6
|
%
|
|
$
|
102,708
|
|
|
|
41.9
|
%
|
|
Product sales
|
|
|
32,610
|
|
|
|
48,138
|
|
|
|
8.6
|
%
|
|
|
16.4
|
%
|
|
|
(15,528
|
)
|
|
|
(32.3
|
)%
|
|
Total revenue
|
|
|
380,610
|
|
|
|
293,430
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
87,180
|
|
|
|
29.7
|
%
|
|
Cost of service revenue
|
|
|
3,624
|
|
|
|
3,139
|
|
|
|
1.0
|
%
|
|
|
1.1
|
%
|
|
|
485
|
|
|
|
15.5
|
%
|
|
Cost of product sales
|
|
|
15,562
|
|
|
|
24,838
|
|
|
|
4.1
|
%
|
|
|
8.4
|
%
|
|
|
(9,276
|
)
|
|
|
(37.3
|
)%
|
|
Operating expenses
|
|
|
115,235
|
|
|
|
85,502
|
|
|
|
30.3
|
%
|
|
|
29.1
|
%
|
|
|
29,733
|
|
|
|
34.8
|
%
|
|
Selling, general and administrative expenses
|
|
|
86,252
|
|
|
|
64,218
|
|
|
|
22.6
|
%
|
|
|
21.9
|
%
|
|
|
22,034
|
|
|
|
34.3
|
%
|
|
Depreciation, amortization and (gain) loss on disposal of assets, net
|
|
|
84,806
|
|
|
|
88,002
|
|
|
|
22.3
|
%
|
|
|
30.0
|
%
|
|
|
(3,196
|
)
|
|
|
(3.6
|
)%
|
|
Total costs and expenses
|
|
|
305,479
|
|
|
|
265,699
|
|
|
|
80.3
|
%
|
|
|
90.5
|
%
|
|
|
39,780
|
|
|
|
15.0
|
%
|
|
Income from operations
|
|
|
75,131
|
|
|
|
27,731
|
|
|
|
19.7
|
%
|
|
|
9.5
|
%
|
|
|
47,400
|
|
|
|
170.9
|
%
|
|
Interest expense, net
|
|
|
32,481
|
|
|
|
31,568
|
|
|
|
8.5
|
%
|
|
|
10.8
|
%
|
|
|
913
|
|
|
|
2.9
|
%
|
|
Change in fair value of private placement warrants
|
|
|
5,067
|
|
|
|
(11,533
|
)
|
|
|
1.3
|
%
|
|
|
(3.9
|
)%
|
|
|
16,600
|
|
|
|
143.9
|
%
|
|
Tax receivable agreement liability adjustment
|
|
|
1,661
|
|
|
|
4,446
|
|
|
|
0.4
|
%
|
|
|
1.5
|
%
|
|
|
(2,785
|
)
|
|
|
(62.6
|
)%
|
|
Loss on extinguishment of debt
|
|
|
5,334
|
|
|
|
—
|
|
|
|
1.4
|
%
|
|
|
—
|
|
|
|
5,334
|
|
|
n/a
|
|
|
Other income, net
|
|
|
(9,305
|
)
|
|
|
(9,430
|
)
|
|
|
(2.4
|
)%
|
|
|
(3.2
|
)%
|
|
|
125
|
|
|
|
(1.3
|
)%
|
|
Total other expenses
|
|
|
35,238
|
|
|
|
15,051
|
|
|
|
9.2
|
%
|
|
|
5.2
|
%
|
|
|
20,187
|
|
|
|
134.1
|
%
|
|
Income before income taxes
|
|
|
39,893
|
|
|
|
12,680
|
|
|
|
10.5
|
%
|
|
|
4.3
|
%
|
|
|
27,213
|
|
|
|
214.6
|
%
|
|
Income tax provision
|
|
|
17,510
|
|
|
|
3,176
|
|
|
|
4.6
|
%
|
|
|
1.1
|
%
|
|
|
14,334
|
|
|
|
451.3
|
%
|
|
Net income
|
|
$
|
22,383
|
|
|
$
|
9,504
|
|
|
|
5.9
|
%
|
|
|
3.2
|
%
|
|
$
|
12,879
|
|
|
|
135.5
|
%
|
Service Revenue. Service revenue increased by $102.7 million, or 41.9%, to $348.0 million for the nine months ended September 30, 2021 from $245.3 million for the nine months ended September 30, 2020, representing 91.4% and 83.6% of total revenue, respectively. The following table depicts service revenue by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
Percentage of Revenue
|
|
|
Increase (Decrease)
2021 vs 2020
|
|
|
($ in thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
$
|
|
|
%
|
|
|
Service revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Services
|
|
$
|
189,426
|
|
|
$
|
132,667
|
|
|
|
49.8
|
%
|
|
|
45.2
|
%
|
|
$
|
56,759
|
|
|
|
42.8
|
%
|
|
Government Solutions
|
|
|
158,574
|
|
|
|
112,625
|
|
|
|
41.6
|
%
|
|
|
38.4
|
%
|
|
|
45,949
|
|
|
|
40.8
|
%
|
|
Total service revenue
|
|
$
|
348,000
|
|
|
$
|
245,292
|
|
|
|
91.4
|
%
|
|
|
83.6
|
%
|
|
$
|
102,708
|
|
|
|
41.9
|
%
|
Commercial Services service revenue increased by $56.8 million, or 42.8%, from $132.7 million for the nine months ended September 30, 2020 to $189.4 million for the nine months ended September 30, 2021. This increase was primarily due to the increased travel demand in the RAC industry that impacted volume in the nine months ended September 30, 2021 compared to the prior year which was negatively impacted by the COVID-19 pandemic. In addition, the consecutive revenue growth was approximately $10.8 million in the third quarter of 2021 compared to the second quarter of 2021 partially due to seasonality in the RAC industry from leisure travel in the summer months.
Government Solutions service revenue includes revenue from speed, red-light, school bus stop arm and bus lane photo enforcement systems. Service revenue was $158.6 million and $112.6 million for the nine months ended September 30, 2021 and 2020, respectively, and it increased by $45.9 million with Redflex contributing $19.0 million during the nine months ended September 30, 2021. Our speed program revenue grew approximately $29.6 million during the nine months ended September 30, 2021 compared to the same period in 2020 due to the inclusion of Redflex operations for approximately one hundred days in the 2021 period with no comparable amounts in the prior year and an increase in the total number of camera systems installed. This trend is expected to continue into future quarters. In addition, revenue from red-light programs increased by $10.2 million
40
which was mainly attributable to the inclusion of Redflex operations for approximately one hundred days in the 2021 period with no comparable amounts in the prior year and the 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 6,550 active camera systems during the nine months ended September 30, 2021 compared to an average of 4,008 for the nine months ended September 30, 2020. The increase in active camera systems was primarily due to the inclusion of Redflex camera systems with no comparable amounts in the prior year, 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 $32.6 million and $48.1 million for the nine months ended September 30, 2021 and 2020, respectively. Product sales decreased $15.5 million mainly due to the timing of installations at a single customer that is expanding its school zone speed program, offset by an increase due to the inclusion of Redflex product sales for approximately one hundred days in the 2021 period with no comparable amounts in the prior year. 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 from $3.1 million for the nine months ended September 30, 2020 to $3.6 million for the nine months ended September 30, 2021. The $0.5 million 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 $9.3 million from $24.8 million in the nine months ended September 30, 2020 to $15.6 million in the nine months ended September 30, 2021, which was consistent with the decrease in product sales.
Operating Expenses. Operating expenses increased by $29.7 million, or 34.8%, from $85.5 million for the nine months ended September 30, 2020 to $115.2 million for the nine months ended September 30, 2021. The increase was primarily attributable to increase in wages expense, recurring services, and subcontractor expenses resulting from increased operations in 2021, which were lower in the 2020 year due to the impact from the COVID-19 pandemic. The increase was also driven by the inclusion of Redflex operations for approximately one hundred days in 2021 with no comparable amounts in the prior year. Operating expenses as a percentage of total revenue increased from 29.1% to 30.3% for the nine months ended September 30, 2020 and 2021, respectively. The following table presents operating expenses by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
Percentage of Revenue
|
|
|
Increase (Decrease)
2021 vs 2020
|
|
|
($ in thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
$
|
|
|
%
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Services
|
|
$
|
47,667
|
|
|
$
|
39,076
|
|
|
|
12.5
|
%
|
|
|
13.3
|
%
|
|
$
|
8,591
|
|
|
|
22.0
|
%
|
|
Government Solutions
|
|
|
66,947
|
|
|
|
45,729
|
|
|
|
17.6
|
%
|
|
|
15.6
|
%
|
|
|
21,218
|
|
|
|
46.4
|
%
|
|
Total operating expenses before stock-based compensation
|
|
|
114,614
|
|
|
|
84,805
|
|
|
|
30.1
|
%
|
|
|
28.9
|
%
|
|
|
29,809
|
|
|
|
35.2
|
%
|
|
Stock-based compensation
|
|
|
621
|
|
|
|
697
|
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
|
|
(76
|
)
|
|
|
(10.9
|
)%
|
|
Total operating expenses
|
|
$
|
115,235
|
|
|
$
|
85,502
|
|
|
|
30.3
|
%
|
|
|
29.1
|
%
|
|
$
|
29,733
|
|
|
|
34.8
|
%
|
41
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $22.0 million to $86.3 million for the nine months ended September 30, 2021 compared to $64.2 million for the same period in 2020. The increase is primarily due to $10.1 million in transaction costs incurred related to the Reflex acquisition and other deal costs, increased wages expense due to the reinstatement of employee bonus accrual in 2021, and increased wages, information technology and other related professional expenses from the inclusion of Redflex operations for approximately one hundred days in 2021 with no comparable amounts in prior year. These increases were partially offset by a $3.9 million reduction to the credit loss expense resulting from changes in loss rate estimates based on improved economic conditions. Selling, general and administrative expenses as a percentage of revenue increased from 21.9% to 22.6% for the nine months ended September 30, 2020 and 2021, respectively. The following table presents selling, general and administrative expenses by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
Percentage of Revenue
|
|
|
Increase (Decrease)
2021 vs 2020
|
|
|
($ in thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
$
|
|
|
%
|
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Services
|
|
$
|
30,886
|
|
|
$
|
29,495
|
|
|
|
8.1
|
%
|
|
|
10.1
|
%
|
|
$
|
1,391
|
|
|
|
4.7
|
%
|
|
Government Solutions
|
|
|
35,693
|
|
|
|
24,926
|
|
|
|
9.4
|
%
|
|
|
8.5
|
%
|
|
|
10,767
|
|
|
|
43.2
|
%
|
|
Corporate and other
|
|
|
10,110
|
|
|
|
1,302
|
|
|
|
2.6
|
%
|
|
|
0.4
|
%
|
|
|
8,808
|
|
|
|
676.5
|
%
|
|
Total selling, general and administrative expenses before stock-based compensation
|
|
|
76,689
|
|
|
|
55,723
|
|
|
|
20.1
|
%
|
|
|
19.0
|
%
|
|
|
20,966
|
|
|
|
37.6
|
%
|
|
Stock-based compensation
|
|
|
9,563
|
|
|
|
8,495
|
|
|
|
2.5
|
%
|
|
|
2.9
|
%
|
|
|
1,068
|
|
|
|
12.6
|
%
|
|
Total selling, general and administrative expenses
|
|
$
|
86,252
|
|
|
$
|
64,218
|
|
|
|
22.6
|
%
|
|
|
21.9
|
%
|
|
$
|
22,034
|
|
|
|
34.3
|
%
|
Depreciation, Amortization and (Gain) Loss on Disposal of Assets, Net. Depreciation, amortization and (gain) loss on disposal of assets, net, decreased from $88.0 million for the nine months ended September 30, 2020 to $84.8 million for the same period in 2021. The decrease was mainly due to certain trademark intangibles being fully amortized for seven months out of the nine months period ended September 30, 2021, offset by increased depreciation and amortization expense resulting from the Redflex acquisition in 2021 with no comparable amounts in the prior year.
Interest Expense, Net. Interest expense, net increased by $0.9 million from $31.6 million for the nine months ended September 30, 2020 to $32.5 million for the same period in 2021. This increase is primarily due to increased borrowings as part of the debt restructuring in March 2021, partially offset by lower interest rates in 2021 on our variable-rate debt 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 nine months ended September 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.
Loss on Extinguishment of Debt. Loss on extinguishment of debt was $5.3 million during the nine months ended September 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 discussed below.
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 $9.3 million for the nine months ended September 30, 2021, compared to $9.4 million for the nine months ended September 30, 2020. The slight decrease is primarily driven by a total of $2.8 million in gains recorded in the nine months ended September 30, 2020 from a settlement agreement and related insurance proceeds, which was offset by an increase in the 2021 period due to increased tolling activity as a result of COVID-19 recovery in the travel industry.
Income Tax Provision. Income tax provision was $17.5 million representing an effective tax rate of 43.9% for the nine months ended September 30, 2021 compared to a tax provision of $3.2 million, representing an effective tax rate of 25% for the same period in 2020. For the nine months ended September 30, 2020, the impact of discrete items was favorable and had a larger impact on the tax rate due to the pretax income being lower. For the nine months ended September 30, 2021, the pretax income was higher and the discrete items unfavorably affected the tax rate, in addition to the impact of the Company’s permanent differences related to the mark-to-market adjustment on the private placement warrants.
Net Income. We had net income of $22.4 million for the nine months ended September 30, 2021, as compared to a net income of $9.5 million for the nine months ended September 30, 2020. The increase in net income of $12.9 million was
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mainly due to increase in service revenue in both of our segments, and the other statements of operations activity discussed above.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flows from operations and available borrowings under our 2021 Term Loan and the Revolver (both of which are defined below).
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 September 30, 2021, we had $62.2 million available for borrowing, net of letters of credit, under our Revolver.
Concentration of Credit Risk
As of September 30, 2021, the City of New York Department of Transportation (“NYCDOT”) represented 46.3% 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 September 30, 2021, the Legacy Contract had an open receivable balance of $16.1 million, of which $7.6 million had aged beyond NYCDOT’s 45-day payment terms. As of September 30, 2021, the Company has invoiced NYCDOT for $80.9 million in product revenue and $48.8 million in service revenue under the Emergency Contract, and the Emergency Contract had an open receivable balance of $64.8 million, of which $41.6 million had aged beyond NYCDOT’s 45-day payment terms. The total outstanding receivables balance decreased $46.2 million at September 30, 2021 compared to the outstanding balance at June 30, 2021 as the Company collected $87.5 million during the third quarter of 2021 related to both contracts. There is no material reserve related to open receivables as amounts are deemed collectible based on current conditions and expectations. Please also see section entitled “Risk Factors.”
The following table sets forth certain captions indicated on our statements of cash flows for the respective periods:
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Nine Months Ended September 30,
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($ in thousands)
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2021
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|
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2020
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|
|
Net cash provided by operating activities
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|
$
|
129,284
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|
|
$
|
44,350
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|
|
Net cash used in investing activities
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|
|
(122,412
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)
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|
|
(18,250
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)
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|
Net cash provided by (used in) financing activities
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|
|
5,335
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|
|
|
(27,949
|
)
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Cash Flows from Operating Activities
Cash provided by operating activities increased by $84.9 million, from $44.4 million for the nine months ended September 30, 2020 to $129.3 million for the nine months ended September 30, 2021. Net income year over year increased by $12.9 million, from $9.5 million in 2020 to $22.4 million in 2021. Adjustments to reconcile net income to cash provided by operating activities increased $9.1 million in 2021 compared to the 2020 nine-month period and consisted primarily of a $16.6 million change in the fair value of private placement warrants and the $5.3 million loss on extinguishment of debt, which were offset partially by the decreases in depreciation and amortization, tax receivable agreement liability adjustment and the credit loss expense. The major changes in operating assets and liabilities were driven by a significant reduction in the accounts receivable balance from payments received by NYCDOT during the second and third quarters of fiscal year 2021, and an increase in accrued liabilities resulting from an increase in accrued interest and income taxes payable as of the period end. Total payments received from NYCDOT during the three and nine months ended September 30, 2021 totaled $115.7 million and
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$87.5 million, respectively. The increase in accrued interest is attributable to the timing of our interest payments on the $350 million of Senior Notes that were issued in March 2021.
Cash Flows from Investing Activities
Cash used in investing activities was $122.4 million and $18.3 million for the nine months ended September 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 $5.3 million and $(27.9) million for the nine months ended September 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 $882.9 million on outstanding debt related to the 2018 and 2021 Term Loans, and debt assumed as part of the Redflex acquisition that was subsequently paid. The 2018 Term Loan has been fully repaid in March 2021. The aggregate borrowings net of the repayments along with existing cash on hand were used to fund the close of the Redflex acquisition in June 2021 and the share repurchase and retirement for $100 million in August 2021 (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 in the quarter ended March 31, 2020 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 September 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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Consolidated first lien net leverage ratio (as defined by the 2021 Term Loan agreement)
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Applicable
prepayment
percentage
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> 3.70:1.00
|
|
50%
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|
< 3.70:1.00 and > 3.20:1.00
|
|
25%
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|
< 3.20:1.00
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|
0%
|
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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, 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:
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Year
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Percentage
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2024
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|
102.750%
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|
2025
|
|
101.375%
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2026 and thereafter
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100.000%
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In addition, we may redeem up to 40% of the Senior Notes before April 15, 2024, with the net cash proceeds from certain equity offerings.
We evaluated the refinancing transactions on a lender by lender basis and accounted for the portion of the transaction that did not meet the accounting criteria for debt extinguishment as a debt modification. Accordingly, we recognized a loss on extinguishment of debt of $5.3 million on the 2018 Term Loan during the nine months ended September 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 September 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”) with a 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 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 September 30, 2021, we had no outstanding borrowings on the Revolver and our availability to borrow was $62.2 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 September 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 September 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 $11.6 million and $9.6 million for the three months ended September 30, 2021 and 2020, respectively, and $32.5 million and $31.6 million for the nine months ended September 30, 2021 and 2020, respectively.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet financing arrangements as of September 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
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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.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to Note 2, Significant Accounting Policies, in Part I, Item 1, Financial Statements.