# VERRA MOBILITY Corp (VRRM) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from VERRA MOBILITY Corp's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1682745/000095017023005603/vrrm-20221231.htm
Accession: 0000950170-23-005603
Filing date: 2023-03-01
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/VRRM/
All MD&A years: /company/VRRM/mda/
Previous year: /company/VRRM/mda/fy2021/ (FY 2021)
Next year: /company/VRRM/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and the related notes that are included in Item 8 of Part II of this Annual Report.

Business Overview

We are a leading provider of smart mobility technology solutions throughout the United States, Australia, Europe and Canada. We make transportation safer, smarter and more connected through our integrated, data-driven solutions, including toll and violations management, title and registration services, automated safety and traffic enforcement and commercial parking management. We bring together vehicles, hardware, software, data, and people to solve transportation challenges for customers around the world, including fleet owners such as RACs and FMCs, governments, universities, parking operators, healthcare facilities, transportation hubs and other violation-issuing authorities.

Executive Summary

We operate under long-term contracts and a highly reoccurring service revenue model. We continue to execute our strategy to grow revenue organically and expand offerings into adjacent markets through innovation or acquisition. During the periods presented, we:

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Increased total revenue by $191.0 million, or 35%, from $550.6 million in fiscal year 2021 to $741.6 million in fiscal year 2022. Redflex and T2 Systems contributed $113.9 million to revenue growth, and the remaining increase was mainly due to service revenue resulting from increased travel volume and tolling activity in 2022 in the Commercial Services segment and expansion of speed programs in the Government Solutions segment; and

•
Generated cash flows from operating activities of $218.3 million, $193.2 million, and $46.9 million for fiscal years 2022, 2021 and 2020, respectively. Our cash on hand was $105.2 million as of December 31, 2022.

•
Authorized two share repurchase programs, together totaling $225.0 million, during fiscal year 2022. We used existing cash on hand of $125.0 million to repurchase shares under the first repurchase program and have not yet repurchased shares under the second repurchase program.

•
Entered into an interest rate swap agreement to hedge our exposure to interest rate fluctuations associated with the LIBOR portion of the variable interest rate on our 2021 Term Loan.

Significant Events Impacting Our Business

Share Repurchase and Retirement

On May 7, 2022, our Board of Directors authorized a share repurchase program for up to an aggregate amount of $125.0 million of our outstanding Class A Common Stock over the next 12 months from time to time in open market, ASR or privately negotiated transactions, each as permitted under applicable rules and regulations, any of which may use pre-arranged trading plans that are designed to meet the requirements of Rule 10b5-1 of the Exchange Act.

On May 12, 2022, we paid $50.0 million for an ASR, and received an initial delivery of 2,739,726 shares of our Class A Common Stock in accordance with an ASR agreement with a third-party financial institution. The final settlement occurred on August 3, 2022, at which time, we received 445,086 additional shares calculated using a volume-weighted average price over the term of the ASR agreement. In addition, we paid $6.9 million and repurchased 445,791 shares of our Class A Common Stock through open market transactions during the year ended December 31, 2022. Our Board of Directors authorized a second ASR during the third quarter of 2022 for the remaining availability under the share repurchase program. On August 19, 2022, we paid $68.1 million for this second ASR and received an initial delivery of 3,300,000 shares of our Class A Common Stock in accordance with an ASR agreement with a third-party financial institution. The final settlement occurred on November 4, 2022, at which time, we received 943,361 additional shares calculated using a volume-weighted average price over the term of the ASR agreement. We used

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existing cash on hand and paid a total of $125.0 million for shares repurchases and $0.1 million for direct costs during the year ended December 31, 2022.

In November 2022, our Board of Directors authorized a new share repurchase program for up to an aggregate amount of $100.0 million of our outstanding shares of Class A Common Stock over an 18-month period in open market, ASR or privately negotiated transactions, each as permitted under applicable rules and regulations, any of which may use pre-arranged trading plans that are designed to meet the requirements of Rule 10b5-1 of the Exchange Act. The Company has not yet repurchased shares under this repurchase program.

Interest Rate Swap Agreement

In December 2022, we entered into a cancellable interest rate swap agreement to hedge our exposure to interest rate fluctuations associated with the LIBOR portion of the variable interest rate on our 2021 Term Loan. Under the interest rate swap agreement, we pay a fixed rate and the counterparty pays a variable interest rate which is net settled. The notional amount on the interest rate swap is $675 million. We have the option to terminate the interest rate swap agreement starting in December 2023, and monthly thereafter until December 2025, in the event interest rates decrease. Any changes in the fair value of the derivative instrument (including accrued interest) are recorded in the consolidated statements of operations within the gain on interest rate swap line item, and we recorded a $1.0 million gain for the year ended December 31, 2022. See Note 2, Significant Accounting Policies, in Item 8, Financial Statements and Supplementary Data, for additional information on the interest rate swap.

Segments

We have three operating and reportable segments, Commercial Services, Government Solutions and Parking Solutions:

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Our Commercial Services segment offers toll and violation management solutions and title and registration services for RACs and FMCs in North America. In Europe, we provide tolling and violations processing services.

•
Our Government Solutions segment offers photo enforcement solutions and services to its customers. We provide complete, end-to-end speed, red-light, school bus stop arm and bus lane enforcement solutions within the United States and Canada. The international operations through Redflex primarily involve the sale of traffic enforcement products and related maintenance services.

•
Our Parking Solutions segment provides an integrated suite of parking software and hardware solutions to universities, municipalities, parking operators, healthcare facilities and transportation hubs in the United States and Canada.

Segment performance is based on revenues and income from operations before depreciation, amortization, and stock-based compensation. The measure also excludes interest expense, net, income taxes and certain other transactions and is inclusive of other income, net.

During the third quarter of 2022, we changed our measure of segment profit to include (gain) loss on disposal of assets, net, and to exclude transaction and transformation expenses that were previously included within the selling, general and administrative expenses and other income, net line items. The comparable periods have been recast to conform to the revised presentation, although the impact of this revision to previously reported segment profit was not material. See Note 18, Segment Reporting.

Primary Components of Our Operating Results

Revenues

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

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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.

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

Our Parking Solutions segment generates service revenue mainly from offering software as a service, subscription fees, professional services and citation processing services related to parking management solutions to its customers.

Product Sales. Product sales are generated by the sale of photo enforcement equipment in the Government Solutions segment and specialized hardware in the Parking Solutions segment. Customer buying patterns vary greatly from period to period related to product sales.

Costs and Expenses

Cost of Service Revenue. Cost of service revenue consists of recurring service costs, collection and other third-party costs in our segments.

Cost of Product Sales. Cost of product sales consists of the cost to acquire and install photo enforcement equipment purchased by Government Solutions customers and costs to develop and install hardware sold to Parking Solutions customers.

Operating Expenses. Operating expenses primarily include payroll and payroll-related costs (including stock-based compensation), subcontractor costs, payment processing and other operational costs, including 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, acquisition costs 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 liability adjustments related to the 6,666,666 Private Placement Warrants originally issued to Gores Sponsor II, LLC re-measured to fair value at the end of each reporting period.

Tax Receivable Agreement Liability Adjustment. This consists of adjustments made to our Tax Receivable Agreement liability due to changes in estimates.

Gain on Interest Rate Swap. Gain on interest rate swap relates to the gain associated with the derivative instrument re-measured to fair value at the end of each reporting period.

(Gain) Loss on Extinguishment of Debt. (Gain) loss on extinguishment of debt generally consists of early payment penalties and the write-off of original issue discounts and deferred financing costs associated with debt extinguishment, and any gains recognized as a result of loan forgiveness.

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Other Income, Net. Other income, net primarily consists of volume rebates earned from total spend on purchasing cards, gains or losses on foreign currency transactions and other non-operating expenses.

Results of Operations

Fiscal Year 2022 Compared to Fiscal Year 2021

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.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","","","Percentage of Revenue","","","Increase (Decrease) 2022 vs 2021"],["($ in thousands)","","2022","","","2021","","","2022","","","2021","","","$","","","%"],["Service revenue","","$","695,218","","","$","492,846","","","","93.7","%","","","89.5","%","","$","202,372","","","","41.1","%"],["Product sales","","","46,380","","","","57,744","","","","6.3","%","","","10.5","%","","","(11,364",")","","","(19.7",")%"],["Total revenue","","","741,598","","","","550,590","","","","100.0","%","","","100.0","%","","","191,008","","","","34.7","%"],["Cost of service revenue","","","16,330","","","","5,337","","","","2.2","%","","","1.0","%","","","10,993","","","","206.0","%"],["Cost of product sales","","","30,932","","","","29,809","","","","4.2","%","","","5.4","%","","","1,123","","","","3.8","%"],["Operating expenses","","","226,324","","","","163,370","","","","30.5","%","","","29.7","%","","","62,954","","","","38.5","%"],["Selling, general and administrative expenses","","","163,133","","","","123,407","","","","22.0","%","","","22.4","%","","","39,726","","","","32.2","%"],["Depreciation, amortization and (gain) loss on disposal of assets, net","","","140,174","","","","116,801","","","","18.9","%","","","21.2","%","","","23,373","","","","20.0","%"],["Total costs and expenses","","","576,893","","","","438,724","","","","77.8","%","","","79.7","%","","","138,169","","","","31.5","%"],["Income from operations","","","164,705","","","","111,866","","","","22.2","%","","","20.3","%","","","52,839","","","","47.2","%"],["Interest expense, net","","","69,372","","","","44,942","","","","9.4","%","","","8.1","%","","","24,430","","","","54.4","%"],["Change in fair value of private placement warrants","","","(14,400",")","","","7,600","","","","(2.0",")%","","","1.4","%","","","(22,000",")","","","(289.5",")%"],["Tax receivable agreement liability adjustment","","","(720",")","","","(1,016",")","","","(0.1",")%","","","(0.2",")%","","","296","","","","(29.1",")%"],["Gain on interest rate swap","","","(996",")","","","\u2014","","","","(0.1",")%","","","\u2014","","","","(996",")","","n/a"],["(Gain) loss on extinguishment of debt","","","(3,005",")","","","5,334","","","","(0.4",")%","","","1.0","%","","","(8,339",")","","","(156.3",")%"],["Other income, net","","","(12,654",")","","","(12,895",")","","","(1.7",")%","","","(2.3",")%","","","241","","","","(1.9",")%"],["Total other expenses","","","37,597","","","","43,965","","","","5.1","%","","","8.0","%","","","(6,368",")","","","(14.5",")%"],["Income before income taxes","","","127,108","","","","67,901","","","","17.1","%","","","12.3","%","","","59,207","","","","87.2","%"],["Income tax provision","","","34,633","","","","26,452","","","","4.6","%","","","4.8","%","","","8,181","","","","30.9","%"],["Net income","","$","92,475","","","$","41,449","","","","12.5","%","","","7.5","%","","$","51,026","","","","123.1","%"]]
[[/GREPCENT_TABLE]]

Service Revenue. Service revenue increased by $202.4 million, or 41.1%, to $695.2 million for fiscal year 2022 from $492.8 million in fiscal year 2021, representing 93.7% and 89.5% of total revenue, respectively. The following table depicts service revenue by segment:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","","","Percentage of Revenue","","","Increase (Decrease) 2022 vs 2021"],["($ in thousands)","","2022","","","2021","","","2022","","","2021","","","$","","","%"],["Service revenue"],["Commercial Services","","$","325,971","","","$","260,899","","","","44.0","%","","","47.4","%","","$","65,072","","","","24.9","%"],["Government Solutions","","","307,639","","","","227,992","","","","41.4","%","","","41.4","%","","","79,647","","","","34.9","%"],["Parking Solutions","","","61,608","","","","3,955","","","","8.3","%","","","0.7","%","","","57,653","","","","1457.7","%"],["Total service revenue","","$","695,218","","","$","492,846","","","","93.7","%","","","89.5","%","","$","202,372","","","","41.1","%"]]
[[/GREPCENT_TABLE]]

Commercial Services service revenue includes mainly toll and violation management revenues from RACs and FMCs. Commercial Services service revenue increased by $65.1 million, or 24.9%, from $260.9 million in fiscal year

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2021 to $326.0 million in fiscal year 2022. This increase was primarily due to the increase in travel volume in 2022 compared to 2021 which was negatively impacted by the COVID-19 pandemic, especially in the first three months of 2021. The volume of tolls incurred by RAC vehicles increased along with a shift towards an all-inclusive fee structure from an incidental or daily usage rate and higher pricing for certain products contributed to a $45.4 million increase, and the tolling related revenue generated by our FMC customers contributed to a $11.8 million increase during the year ended December 31, 2022 compared to the same period in 2021.

Government Solutions service revenue includes revenue from speed, red-light, school bus stop arm and bus lane photo enforcement systems. Service revenue was $307.6 million and $228.0 million for the years ended December 31, 2022, and 2021, respectively, and it increased by $79.6 million. Redflex operations contributed $37.4 million to our growth year-over-year. Organic growth excluding Redflex was $42.2 million, which was primarily driven by the expansion of school zone speed programs, and speed is the largest product in this segment. We added 752 speed cameras in 2021, excluding Redflex, which provided for service revenue growth in 2022, and added 632 speed cameras in 2022 which provided growth in the current period and will continue to provide growth for 2023 and beyond. The remaining growth is attributable to other expansions and improvement in variable rate programs that recovered from COVID-19 to more normalized volumes.

Parking Solutions service revenue increased to $61.6 million in fiscal year 2022 compared to $4.0 million in 2021 due to only 23 days of activity being included in fiscal year 2021 since the date of acquisition.

Product Sales. Product sales decreased $11.4 million year over year and were $46.4 million and $57.7 million for fiscal years 2022 and 2021, respectively. The product sales for the Government Solutions business decreased by $26.1 million largely from a single customer whose buying patterns varied from period to period. This decrease was offset by a $14.8 million growth generated from T2 Systems' product sales year over year.

Cost of Service Revenue. Cost of service revenue increased from $5.3 million for fiscal year 2021 to $16.3 million for fiscal year 2022. The $11.0 million increase was mainly attributable to the inclusion of costs in the Parking Solutions segment for the full year compared to only 23 days in the prior year. The costs in this line item will be higher in future periods due to higher recurring service costs for the Parking Solutions business.

Cost of Product Sales. Cost of product sales increased slightly year over year and was $30.9 million and $29.8 million for the fiscal years 2022 and 2021, respectively. This was mainly due to increased costs from the inclusion of T2 Systems for the full year compared to only 23 days in the prior year, offset by the reduced costs resulting from the decrease in product sales to Government Solutions customers.

Operating Expenses. Operating expenses increased by $63.0 million, or 38.5%, from $163.4 million for fiscal year 2021 to $226.3 million in fiscal year 2022. This was primarily due to an aggregate $56.0 million increase in costs in the Government Solutions and Parking Solutions segments resulting from increased wages expense, subcontractor expenses, recurring services and information technology costs from the inclusion of Redflex for the full fiscal year in 2022 compared to approximately two hundred days in 2021 and T2 Systems' operations for the full fiscal year in 2022 compared to only 23 days in the prior year. Operating expenses as a percentage of total revenue increased from 29.7% to 30.5% in fiscal years 2021 and 2022, respectively. The following table presents operating expenses by segment:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","","","Percentage of Revenue","","","Increase (Decrease) 2022 vs 2021"],["($ in thousands)","","2022","","","2021","","","2022","","","2021","","","$","","","%"],["Operating expenses"],["Commercial Services","","$","72,328","","","$","65,718","","","","9.8","%","","","12.0","%","","$","6,610","","","","10.1","%"],["Government Solutions","","","139,961","","","","96,284","","","","18.9","%","","","17.5","%","","","43,677","","","","45.4","%"],["Parking Solutions","","","12,905","","","","553","","","","1.7","%","","","0.1","%","","","12,352","","","","2233.6","%"],["Total operating expenses before stock-based compensation","","","225,194","","","","162,555","","","","30.4","%","","","29.6","%","","","62,639","","","","38.5","%"],["Stock-based compensation","","","1,130","","","","815","","","","0.1","%","","","0.1","%","","","315","","","","38.7","%"],["Total operating expenses","","$","226,324","","","$","163,370","","","","30.5","%","","","29.7","%","","$","62,954","","","","38.5","%"]]
[[/GREPCENT_TABLE]]

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $39.7 million to $163.1 million for fiscal year 2022 compared to $123.4 million for fiscal year 2021. The increase is primarily due to an aggregate $35.9 million increase due to the inclusion of Redflex for the full fiscal year in 2022 as compared to approximately two hundred days in the prior year and T2 Systems' operations included for the full fiscal

43

year in 2022 compared to only 23 days in the prior year. In addition, we had an increase of $13.7 million in the Commercial Services segment from increased wages expense, professional services and credit loss expenses year over year, and a $2.6 million increase in total stock-based compensation expense compared to the prior year. These increases were partially offset by a $12.5 million decrease in certain transaction and transformation costs compared to 2021. Selling, general and administrative expenses as a percentage of total revenue decreased slightly from 22.4% to 22.0% in fiscal years 2021 and 2022, respectively. The following table presents selling, general and administrative expenses by segment:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","","","Percentage of Revenue","","","Increase (Decrease) 2022 vs 2021"],["($ in thousands)","","2022","","","2021","","","2022","","","2021","","","$","","","%"],["Selling, general and administrative expenses"],["Commercial Services","","$","56,105","","","$","42,386","","","","7.5","%","","","7.7","%","","$","13,719","","","","32.4","%"],["Government Solutions","","","61,235","","","","51,052","","","","8.3","%","","","9.3","%","","","10,183","","","","19.9","%"],["Parking Solutions","","","27,104","","","","1,361","","","","3.7","%","","","0.2","%","","","25,743","","","","1891.5","%"],["Corporate and other","","","3,156","","","","15,639","","","","0.4","%","","","2.8","%","","","(12,483",")","","","(79.8",")%"],["Total selling, general and administrative expenses before stock-based compensation","","","147,600","","","","110,438","","","","19.9","%","","","20.0","%","","","37,162","","","","33.6","%"],["Stock-based compensation","","","15,533","","","","12,969","","","","2.1","%","","","2.4","%","","","2,564","","","","19.8","%"],["Total selling, general and administrative expenses","","$","163,133","","","$","123,407","","","","22.0","%","","","22.4","%","","$","39,726","","","","32.2","%"]]
[[/GREPCENT_TABLE]]

Depreciation, Amortization and (Gain) Loss on Disposal of Assets, Net. Depreciation, amortization and (gain) loss on disposal of assets, net, increased by $23.4 million to $140.2 million for 2022 from $116.8 million for 2021. This was mainly due to increased amortization and depreciation expense from the inclusion of T2 Systems' operations for the full fiscal year in 2022 compared to only 23 days in the prior year and Redflex for the full fiscal year in 2022 as compared to approximately two hundred days in the prior year.

Interest Expense, Net. Interest expense, net increased by approximately $24.4 million from $44.9 million in fiscal year 2021 to $69.3 million in fiscal year 2022. This increase is due to higher outstanding debt in 2022 which included the $250 million of incremental term loan borrowing, and higher interest rates on our variable debt for six months of fiscal year 2022. See “Liquidity and Capital Resources” below.

Change in Fair Value of Private Placement Warrants. We recorded a $14.4 million gain and a $7.6 million loss in fiscal years 2022 and 2021, respectively, related to the changes in fair value of our Private Placement Warrants which are accounted for as liabilities on our consolidated balance sheets. The change in fair value is the result of re-measurement of the liability at the end of each reporting period.

Tax Receivable Agreement Liability Adjustment. We recorded $0.7 million and $1.0 of tax benefits in fiscal years 2022 and 2021, respectively, as a result of lower estimated state tax rates due to changes in apportionment.

Gain on Interest Rate Swap. We recorded a $1.0 million gain related to the interest rate swap associated with mark-to-market adjustments from re-measuring to fair value at the end of the reporting period.

(Gain) Loss on Extinguishment of Debt. We recorded a $3.0 million gain on extinguishment of debt during the year ended December 31, 2022 related to the forgiveness of the PPP loan, which is further discussed below. Loss on extinguishment of debt was $5.3 million for the year ended December 31, 2021 consisting of a $4.0 million write-off of pre-existing deferred financing costs and discounts and $1.3 million of lender and third-party costs associated with the issuance of the 2021 Term Loan, as discussed and defined below.

Other Income, Net. Other income, net was $12.7 million in fiscal year 2022 compared to $12.9 million in fiscal year 2021. The slight decrease was primarily due to income resulting from volume rebates earned from total spend on purchasing cards from increased tolling activity, especially in the RAC industry, offset by a $1.3 million impairment related to an equity investment and the remaining due to other non-operating expenses incurred in 2022.

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Income Tax Provision. Income tax provision was $34.6 million representing an effective tax rate of 27.2% for fiscal year 2022 compared to $26.5 million, representing an effective tax rate of 39.0% for fiscal year 2021. The Company’s effective tax rate for 2022 was lower compared to 2021 primarily due to an increase in pre-tax income in 2022 combined with the permanent differences related to the mark-to-market adjustment on the private placement warrants and the adjustments to the carrying value of the Company’s tax receivable agreement liability.

Net Income. We had net income of $92.5 million for fiscal year 2022 compared to a net income of $41.4 million for 2021. The $51.0 million increase in net income was primarily due to the increase in service revenue and the other statement of operations activity discussed above.

Fiscal Year 2021 Compared to Fiscal Year 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.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","","","Percentage of Revenue","","","Increase (Decrease) 2021 vs 2020"],["($ in thousands)","","2021","","","2020","","","2021","","","2020","","","$","","","%"],["Service revenue","","$","492,846","","","$","336,274","","","","89.5","%","","","85.4","%","","$","156,572","","","","46.6","%"],["Product sales","","","57,744","","","","57,319","","","","10.5","%","","","14.6","%","","","425","","","","0.7","%"],["Total revenue","","","550,590","","","","393,593","","","","100.0","%","","","100.0","%","","","156,997","","","","39.9","%"],["Cost of service revenue","","","5,337","","","","3,967","","","","1.0","%","","","1.0","%","","","1,370","","","","34.5","%"],["Cost of product sales","","","29,809","","","","29,573","","","","5.4","%","","","7.5","%","","","236","","","","0.8","%"],["Operating expenses","","","163,370","","","","115,729","","","","29.7","%","","","29.4","%","","","47,641","","","","41.2","%"],["Selling, general and administrative expenses","","","123,407","","","","89,664","","","","22.4","%","","","22.8","%","","","33,743","","","","37.6","%"],["Depreciation, amortization and (gain) loss on disposal of assets, net","","","116,801","","","","116,844","","","","21.2","%","","","29.7","%","","","(43",")","","","(0.0",")%"],["Total costs and expenses","","","438,724","","","","355,777","","","","79.7","%","","","90.4","%","","","82,947","","","","23.3","%"],["Income from operations","","","111,866","","","","37,816","","","","20.3","%","","","9.6","%","","","74,050","","","","195.8","%"],["Interest expense, net","","","44,942","","","","40,865","","","","8.1","%","","","10.4","%","","","4,077","","","","10.0","%"],["Change in fair value of private placement warrants","","","7,600","","","","1,133","","","","1.4","%","","","0.3","%","","","6,467","","","","570.8","%"],["Tax receivable agreement liability adjustment","","","(1,016",")","","","6,850","","","","(0.2",")%","","","1.7","%","","","(7,866",")","","","(114.8",")%"],["Loss on extinguishment of debt","","","5,334","","","","\u2014","","","","1.0","%","","","\u2014","","","","5,334","","","n/a"],["Other income, net","","","(12,895",")","","","(11,885",")","","","(2.3",")%","","","(3.0",")%","","","(1,010",")","","","8.5","%"],["Total other expenses","","","43,965","","","","36,963","","","","8.0","%","","","9.4","%","","","7,002","","","","18.9","%"],["Income before income taxes","","","67,901","","","","853","","","","12.3","%","","","0.2","%","","","67,048","","","","7860.3","%"],["Income tax provision","","","26,452","","","","5,431","","","","4.8","%","","","1.4","%","","","21,021","","","","387.1","%"],["Net income (loss)","","$","41,449","","","$","(4,578",")","","","7.5","%","","","(1.2",")%","","$","46,027","","","","1005.4","%"]]
[[/GREPCENT_TABLE]]

Service Revenue. Service revenue increased by $156.6 million, or 46.6%, to $492.8 million for fiscal year 2021 from $336.3 million in fiscal year 2020, representing 89.5% and 85.4% of total revenue, respectively. The following table depicts service revenue by segment:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","","","Percentage of Revenue","","","Increase (Decrease) 2021 vs 2020"],["($ in thousands)","","2021","","","2020","","","2021","","","2020","","","$","","","%"],["Service revenue"],["Commercial Services","","$","260,899","","","$","180,856","","","","47.4","%","","","46.0","%","","$","80,043","","","","44.3","%"],["Government Solutions","","","227,992","","","","155,418","","","","41.4","%","","","39.4","%","","","72,574","","","","46.7","%"],["Parking Solutions","","","3,955","","","","\u2014","","","","0.7","%","","","\u2014","","","","3,955","","","n/a"],["Total service revenue","","$","492,846","","","$","336,274","","","","89.5","%","","","85.4","%","","$","156,572","","","","46.6","%"]]
[[/GREPCENT_TABLE]]

45

Commercial Services service revenue includes toll and violation management revenues from RACs and FMCs. Commercial Services service revenue increased by $80.0 million, or 44.3%, from $180.9 million in fiscal year 2020 to $260.9 million in fiscal year 2021. This increase was primarily due to the wide distribution of COVID-19 vaccines and the lifting of travel restrictions that positively impacted the travel industry in 2021. Our RAC customers experienced a rebound in leisure travel that impacted our volume in 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 $228.0 million and $155.4 million for the years ended December 31, 2021, and 2020, respectively, and it increased by $72.6 million. The acquisition of Redflex on June 17, 2021 contributed $33.0 million to our year-over-year growth. Organic growth excluding Redflex was $39.6 million which was primarily driven by the expansion of school zone speed programs. Speed is our largest product in this segment and grew $33.5 million in 2021 excluding Redflex. We added 805 speed cameras in 2020 which provided year-over-year growth in 2021 and 752 speed cameras in 2021 which provided growth in the 2021 and will continue to provide growth into 2022. The remaining growth can be attributable to improvement in variable rate programs that returned to more normalized volume as COVID-19 restrictions lifted throughout 2021.

Parking Solutions service revenue of $4.0 million resulted from the December 7, 2021 acquisition of T2 systems with no revenue in the comparable period.

Product Sales. Product sales increased slightly year over year and were $57.7 million and $57.3 million for fiscal years 2021 and 2020, respectively, which relate to revenue generated from Government Solutions and Parking Solutions customers who purchase their equipment. We generated product revenue of $8.1 million from the Redflex and T2 Systems acquisitions for which there was no revenue in the comparable period. Prior to these acquisitions, product revenue was limited to a few large customers whose buying patterns vary greatly from period to period. Product sales for these customers decreased by $7.7 million due to a decline of 60 units sold and to a lesser extent from product mix.

Cost of Service Revenue. Cost of service revenue increased from $4.0 million for fiscal year 2020 to $5.3 million for fiscal year 2021. The $1.3 million increase resulted from increased costs from third-party professional services associated with the delivery of certain ancillary services, a portion of which related to the Parking Solutions segment with no comparable costs in the prior year.

Cost of Product Sales. Cost of product sales increased slightly year over year and was $29.8 million and $29.6 million for fiscal years 2021 and 2020, respectively. This was mainly due to a decrease from the timing of installations at a single customer that is expanding its school zone speed program, offset by an increase from the inclusion of Redflex and T2 Systems product sales in the 2021 period with no comparable amounts in the prior year.

Operating Expenses. Operating expenses increased by $47.6 million, or 41.2%, from $115.7 million for fiscal year 2020 to $163.4 million in fiscal year 2021. The increase was primarily attributable to increases of $20.4 million in wages expense, $13.4 million for subcontractor expenses and $9.4 million of recurring services resulting from increased operations in 2021, which were lower in the 2020 year due to the impact from the COVID-19 pandemic. Operating expenses as a percentage of total revenue increased from 29.4% to 29.7% in fiscal years 2020 and 2021, respectively. This slight increase represents improved operating leverage corresponding to the revenue improvement in the Commercial Services segment and decreased operating leverage for the Government Solutions business with the addition of Redflex which historically had lower margins than the Verra Mobility business. The following table presents operating expenses by segment:

46

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","","","Percentage of Revenue","","","Increase (Decrease) 2021 vs 2020"],["($ in thousands)","","2021","","","2020","","","2021","","","2020","","","$","","","%"],["Operating expenses"],["Commercial Services","","$","65,718","","","$","52,505","","","","12.0","%","","","13.3","%","","$","13,213","","","","25.2","%"],["Government Solutions","","","96,284","","","","62,387","","","","17.5","%","","","15.9","%","","","33,897","","","","54.3","%"],["Parking Solutions","","","553","","","","\u2014","","","","0.1","%","","","\u2014","","","","553","","","n/a"],["Total operating expenses before stock-based compensation","","","162,555","","","","114,892","","","","29.6","%","","","29.2","%","","","47,663","","","","41.5","%"],["Stock-based compensation","","","815","","","","837","","","","0.1","%","","","0.2","%","","","(22",")","","","(2.6",")%"],["Total operating expenses","","$","163,370","","","$","115,729","","","","29.7","%","","","29.4","%","","$","47,641","","","","41.2","%"]]
[[/GREPCENT_TABLE]]

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $33.7 million to $123.4 million for fiscal year 2021 compared to $89.7 million for fiscal year 2020. The increase was primarily due to $12.4 million in transaction costs incurred related to the Redflex and T2 systems acquisitions, increased wages expense due to the reinstatement of employee bonus accrual in 2021, and increased wages, rent, information technology and other professional expenses from the inclusion of Redflex operations for approximately 200 days in 2021 with no comparable amounts in prior year. These increases were partially offset by a $4.9 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 22.8% to 22.4% in fiscal years 2020 and 2021, respectively. The following table presents selling, general and administrative expenses by segment:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","","","Percentage of Revenue","","","Increase (Decrease) 2021 vs 2020"],["($ in thousands)","","2021","","","2020","","","2021","","","2020","","","$","","","%"],["Selling, general and administrative expenses"],["Commercial Services","","$","42,386","","","$","40,462","","","","7.7","%","","","10.3","%","","$","1,924","","","","4.8","%"],["Government Solutions","","","51,052","","","","34,465","","","","9.3","%","","","8.8","%","","","16,587","","","","48.1","%"],["Parking Solutions","","","1,361","","","","\u2014","","","","0.2","%","","","\u2014","","","","1,361","","","n/a"],["Corporate and other","","","15,639","","","","2,985","","","","2.8","%","","","0.7","%","","","12,654","","","","423.9","%"],["Total selling, general and administrative expenses before stock-based compensation","","","110,438","","","","77,912","","","","20.0","%","","","19.8","%","","","32,526","","","","41.7","%"],["Stock-based compensation","","","12,969","","","","11,752","","","","2.4","%","","","3.0","%","","","1,217","","","","10.4","%"],["Total selling, general and administrative expenses","","$","123,407","","","$","89,664","","","","22.4","%","","","22.8","%","","$","33,743","","","","37.6","%"]]
[[/GREPCENT_TABLE]]

Depreciation, Amortization and (Gain) Loss on Disposal of Assets, Net. Depreciation, amortization and (gain) loss on disposal of assets, net, remained consistent at $116.8 million for both fiscal years 2021 and 2020. This was mainly due to a decrease from certain trademark intangibles being fully amortized for ten months in fiscal year 2021, offset by increased depreciation and amortization expense resulting from the Redflex and T2 Systems acquisitions in 2021 with no comparable amounts in the prior year.

Interest Expense, Net. Interest expense, net increased by $4.0 million from $40.9 million in fiscal year 2020 to $44.9 million in fiscal year 2021. This increase was primarily a result of the additional borrowing of $350 million in unsecured notes at a higher fixed rate, offset by the reduction in the variable rate on our first lien term loan facility. See “Liquidity and Capital Resources” below.

Change in Fair Value of Private Placement Warrants. We recorded losses of $7.6 million and $1.1 million in fiscal years 2021 and 2020, respectively, related to the changes in fair value of our Private Placement Warrants which are accounted for as liabilities on our consolidated balance sheets. The change in fair value is the result of re-measurement of the liability at the end of each reporting period.

47

Tax Receivable Agreement Liability Adjustment. We recorded a $1.0 million tax benefit in fiscal year 2021 and a $6.8 million tax expense in fiscal year 2020. The liability adjustment in 2021 was a result of lower estimated state tax rates due to changes in apportionment, whereas in 2020 it was a result of higher state tax rates due to changes in apportionment.

Loss on Extinguishment of Debt. Loss on extinguishment of debt was $5.3 million for fiscal year 2021 consisting of a $4.0 million write-off of pre-existing deferred financing costs and discounts and $1.3 million of lender and third-party costs associated with the issuance of the new 2021 Term Loan.

Other Income, Net. Other income, net was $12.9 million in fiscal year 2021 compared to $11.9 million in fiscal year 2020. The increase of $1.0 million was primarily due to increased tolling activity as a result of COVID-19 recovery in the travel industry, offset by a total of $2.8 million in gains recorded in fiscal year 2020 from a settlement agreement and related insurance proceeds.

Income Tax Provision. Income tax provision was $26.5 million representing an effective tax rate of 39.0% for fiscal year 2021 compared to $5.4 million, representing an effective tax rate of 636.7% for fiscal year 2020. The Company’s effective tax rate for 2021 was lower compared to 2020 primarily due to an increase in pretax income in 2021, resulting in the Company’s permanent book and tax differences having a proportionately lesser impact on the effective tax rate for 2021.

Net Income (Loss). We had net income of $41.4 million for fiscal year 2021 compared to a net loss of $4.6 million for 2020. The $46.0 million increase in net income was primarily due to the significant recovery in the travel industry positively impacting our RAC customers and from the other statement of operations activity discussed above.

Liquidity and Capital Resources

Our principal sources of liquidity are cash flows from operations and the available borrowing under our Revolver (defined below).

We have incurred significant long-term debt as a result of acquisitions completed in prior years.

We believe that our existing cash and cash equivalents, cash flows provided by operating activities and our ability 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, borrowing 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 December 31, 2022, we had $74.8 million available for borrowing, net of letters of credit, under our Revolver.

Share Repurchases

In May 2022, our Board of Directors authorized a share repurchase program for up to an aggregate amount of $125.0 million of our outstanding shares of Class A Common Stock over a 12-month period in open market, ASR or privately negotiated transactions, each as permitted under applicable rules and regulations.

We subsequently paid $50.0 million in May 2022 to repurchase outstanding shares of our Class A Common Stock through an ASR, and received an initial delivery of 2,739,726 shares. The final settlement occurred in August 2022, at which time we received 445,086 additional shares. In addition, during the second and third quarters, we paid $6.9 million and repurchased 445,791 shares of our Class A Common Stock through open market transactions. Our Board of Directors authorized a second ASR during the third quarter of 2022 for the remaining availability under the

48

share repurchase program and we paid $68.1 million in August 2022 and received an initial delivery of 3,300,000 shares of our Class A Common Stock. The final settlement occurred in November 2022, at which time we received 943,361 additional shares.

In November 2022, our Board of Directors authorized a new share repurchase program for up to an aggregate amount of $100.0 million of our outstanding shares of Class A Common Stock over an 18-month period in open market, ASR or privately negotiated transactions, each as permitted under applicable rules and regulations. The Company has not yet repurchased shares under this repurchase program.

Concentration of Credit Risk

The City of New York Department of Transportation (“NYCDOT”) represented 22% and 39% of total accounts receivable, net as of December 31, 2022 and 2021, respectively. There is no material reserve related to NYCDOT open receivables as amounts are deemed collectible based on current conditions and expectations.

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

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["($ in thousands)","","2022","","","2021","","","2020"],["Net cash provided by operating activities","","$","218,337","","","$","193,171","","","$","46,909"],["Net cash used in investing activities","","","(48,592",")","","","(475,970",")","","","(24,153",")"],["Net cash (used in) provided by financing activities","","","(164,932",")","","","268,722","","","","(34,004",")"]]
[[/GREPCENT_TABLE]]

Cash Flows from Operating Activities

Cash provided by operating activities increased by $25.2 million, from $193.2 million in 2021 to $218.3 million in 2022. Net income increased $51.0 million from $41.4 million in 2021 compared to $92.5 million in 2022. The adjustments to net income included decreases of $37.1 million for the changes in the fair value of private placement warrants, (gain) loss on extinguishment of debt and changes in deferred income taxes year over year, partially offset by increases of $29.7 million from depreciation and amortization, credit loss expense, and stock-based compensation expense year over year. The aggregate changes in operating assets and liabilities decreased by $20.8 million in 2022 primarily due to increased accounts receivable balances mainly in the Commercial Services business.

Cash provided by operating activities in 2021 increased by $146.3 million, from $46.9 million in 2020 to $193.2 million in 2021. Net income increased $46.0 million from a $4.6 million loss in 2020 compared to $41.4 million income in 2021. The adjustments to net income (loss) included increases of $6.5 million for the changes in the fair value of private placement warrants year over year and $5.3 million loss on extinguishment of debt, partially offset by decreases from lower credit loss expense, changes in deferred income taxes and the tax receivable agreement liability adjustments year over year. Changes in operating assets and liabilities were mainly driven by a significant reduction in the accounts receivable balance from $182 million in payments received from NYCDOT in 2021, and increases in accounts payable and accrued liabilities resulting from increases in accrued interest at the end of 2021, reinstatement of the bonus accrual in 2021 and increased liabilities related to Redflex which were not in the comparable prior period.

Cash Flows from Investing Activities

Cash used in investing activities in 2022 and in 2020 was primarily related to purchases of installation and service parts and property and equipment. Cash used in investing activities in 2021 was mainly related to acquisitions of Redflex, T2 Systems and NuPark. We acquired one hundred percent of the outstanding equity of Redflex on June 17, 2021 at A$0.96 per share for total consideration of A$152.5 million, or approximately US$117.9 million. On December 7, 2021, we acquired all of the outstanding shares of T2 Systems for $353.2 million, net of $14.1 million of cash acquired. On December 13, 2021, we acquired NuPark for $7.0 million, which included approximately $5.0 million of cash paid.

Cash Flows from Financing Activities

Cash used in financing activities was $164.9 million in 2022 mainly due to the repurchases of approximately 7.9 million shares of the Company's Class A Common Stock for $125.1 million in the second and third quarters of

49

2022 as discussed further in Note 13, Stockholders' Equity, the repayment of $25.0 million of borrowing on the Revolver (defined below) in January 2022 and the quarterly principal payments on the 2021 Term Loan.

Cash provided by financing activities was $268.7 million in 2021. We had aggregate borrowings of $1.3 billion during 2021 consisting of the 2021 Term Loan (which included $250 million incremental borrowing), Senior Notes and the Revolver and repayments of $884.5 million on outstanding debt related to the 2018 and 2021 Term Loans, and debt assumed as part of the Redflex and T2 acquisitions that was subsequently paid. The 2018 Term Loan had 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 and T2 systems acquisitions in June 2021 and December 2021, respectively, and the share repurchase and retirement for $100 million in August 2021.

The cash used in financing activities in 2020 of $34.0 million was primarily due to the $19.7 million mandatory prepayment of excess cash flows made pursuant to the terms of the 2018 Term Loan and the quarterly principal payments on the 2018 Term Loan.

Long-term Debt

2021 Term Loan and Senior Notes

In March 2021, VM Consolidated, Inc., the Company’s wholly owned subsidiary (“VM Consolidated”), 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 $650.0 million, maturing on March 26, 2028, and an accordion feature providing for an additional $250.0 million of term loans, subject to satisfaction of certain requirements. In connection with the 2021 Term Loan, the Company 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 issued an aggregate principal amount of $350.0 million in Senior Unsecured Notes (the “Senior Notes”), due on April 15, 2029. In connection with the issuance of the Senior Notes, the Company 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 in March 2021 to repay in full all outstanding debt which was represented by the First Lien Term Loan Credit Agreement (as amended, the “2018 Term Loan”) with a balance of $865.6 million.

On December 7, 2021, VM Consolidated entered into an agreement to exercise the accordion feature under the 2021 Term Loan, borrowing $250.0 million in incremental term loans (“Incremental Term Loan”). The proceeds from the Incremental Term Loan were used, along with cash on hand, to fund the acquisition of T2 Systems, including repayment in full all outstanding debt for T2 Systems. In connection with the Incremental Term Loan, the Company had an offering discount cost of $1.3 million and $3.8 million of deferred financing costs, both of which were capitalized and are amortized over the remaining life of the 2021 Term Loan. The Incremental Term Loan accrued interest from the date of borrowing until December 31, 2021, at which time, it was combined with the 2021 Term Loan to be a single tranche of term loan borrowings. The total principal outstanding under the 2021 Term Loan, which includes the Incremental Term Loan, was $886.1 million at December 31, 2022.

The 2021 Term Loan is repayable at 1.0% per annum of the amount initially borrowed, paid in quarterly installments. It bears interest based, at the Company’s option, on either (1) LIBOR plus an applicable margin of 3.25% per annum, or (2) an alternate base rate plus an applicable margin of 2.25% per annum. As of December 31, 2022, the interest rate on the 2021 Term Loan was 7.6%.

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:

50

[[GREPCENT_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%"]]
[[/GREPCENT_TABLE]]

The Company will make a $12.9 million mandatory prepayment of excess cash flows during the first quarter of fiscal year 2023, which was classified as current portion of long-term debt in the consolidated balance sheet at December 31, 2022. We did not have a mandatory prepayment of excess cash flow for the fiscal year ended December 31, 2021.

Interest on the Senior Notes is fixed at 5.50% per annum and is payable on April 15 and October 15 of each year. On or after April 15, 2024, the Company may redeem all or a portion of the Senior Notes at the redemption prices set forth below in percentages by year, plus accrued and unpaid interest:

[[GREPCENT_TABLE]]
[["Year","","Percentage"],["2024","","102.750%"],["2025","","101.375%"],["2026 and thereafter","","100.000%"]]
[[/GREPCENT_TABLE]]

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

The Company evaluated the March 2021 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, the Company recognized a loss on extinguishment of debt of $5.3 million on the 2018 Term Loan during the year ended December 31, 2021, consisting of a $4.0 million write-off of pre-existing deferred financing costs and discounts and $1.3 million of lender and third-party costs associated with the issuance of the 2021 Term Loan.

PPP Loan

During fiscal year 2020, Redflex received a $2.9 million 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. In early 2021, Redflex applied for forgiveness of this loan, and on September 23, 2022, the Company was notified by the SBA that the loan, together with accrued interest, had been fully forgiven under the provisions of the PPP Loan program. Accordingly, the Company recognized a $3.0 million gain on extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2022.

The Revolver

The Company has a Revolving Credit Agreement (the “Revolver”) with a commitment of up to $75.0 million available for loans and letters of credit. The Revolver matures on December 20, 2026. 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 the Company’s average availability to borrow under the commitment. At December 31, 2021, the Company had $25.0 million in outstanding borrowings on the Revolver, which was repaid in full in January 2022. At December 31, 2022, the availability to borrow was $74.8 million, net of $0.2 million of outstanding letters of credit.

Interest on the unused portion of the Revolver is payable quarterly at 0.375% and the Company is also required to pay participation and fronting fees at 1.38% on $0.2 million of outstanding letters of credit as of December 31, 2022.

51

All borrowings and other extensions of credits under the 2021 Term Loan, Senior Notes and the Revolver are subject to the satisfaction of customary conditions and restrictive covenants including absence of defaults and accuracy in material respects of representations and warranties. Substantially all of the Company’s assets are pledged as collateral to secure the Company’s indebtedness under the 2021 Term Loan. At December 31, 2022, the Company was compliant with all debt covenants.

Interest Expense

The Company recorded interest expense, including amortization of deferred financing costs and discounts, of $69.4 million, $44.9 million and $40.9 million for the fiscal years ended December 31, 2022, 2021 and 2020 respectively.

See Note 2, Significant Accounting Policies, in Item 8, Financial Statements and Supplementary Data for additional information on the interest rate swap entered into in December 2022 to hedge our exposure against rising interest rates.

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that its estimates and assumptions are reasonable in the circumstances; however, actual results could differ materially from those estimates.

Our significant accounting policies are described in Note 2, Significant Accounting Policies, in Item 8, Financial Statements and Supplementary Data, of this Annual Report. We believe that the critical accounting policies listed below involve our more significant judgments, assumptions, and estimates and, therefore, could have the greatest potential impact on the financial statements.

Revenue Recognition

Judgment is required for the estimation of the standalone selling price ("SSP") and the allocation of the transaction price by relative SSPs. Within our Government Solutions and Parking Solutions operating segments, some customer arrangements include multiple performance obligations. Government Solutions’ customer arrangements containing multiple performance obligations typically include the sale and installation of photo-enforcement cameras and the performance of maintenance services on such cameras over a contractual term. Parking Solutions’ customer arrangements containing multiple performance obligations typically include the sale and installation of parking access hardware systems, the licensing of SaaS products and/or the performance of maintenance services over a contractual term. In most instances, we have determined these performance obligations qualify as distinct performance obligations, as the customer can benefit from the service on its own or together with other resources that are readily available to the customer, and our promise to transfer the service is separately identifiable from other promises in the contract. For arrangements that contain multiple performance obligations, we exercise judgement in allocating the transaction price based on the relative SSP method by comparing the SSP of each distinct performance obligation to the total value of the contract. We determine the SSP based on our historical pricing and discounting practices for the distinct performance obligation when sold separately. If the SSP is not directly observable, we estimate the SSP by considering information such as market conditions and information about the customer.

Allowance for Credit Losses

We review historical credit losses and customer payment trends on receivables and develop loss rate estimates as of the balance sheet date, which includes adjustments for current and future expectations using probability-weighted assumptions about potential outcomes. Receivables are written off against the allowance for credit losses when it is probable that amounts will not be collected based on the terms of the customer contracts, and subsequent recoveries reverse the previous write-off and apply to the receivable in the period recovered. The Company periodically evaluates the adequacy of its allowance for expected credit losses by comparing its actual historical write-offs to its previously

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recorded estimates and adjusts appropriately. This includes evaluation by portfolio segment the changes in expectations based on the newest information available on customer payment trends and risk characteristics, and adjusting the probability-weighting either upward or downward that is most representative of the expected credit losses.

Acquisitions

We apply the acquisition method to account for business combinations. We allocate the fair value of the purchase price consideration to assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the fair value of the identifiable assets and liabilities is recorded as goodwill.

The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment and includes the use of independent valuation specialists to assist us in estimating fair values of acquired tangible and intangible assets. Fair values of acquired assets and their respective useful lives are based on, among other factors, critical estimates of expected cash flows, customer turnover and anticipated growth from acquired customers, discount rates and royalty cost savings. Although we believe that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from estimates. Differences between estimates and actual results may result in adjustment to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to fair values of assets and liabilities made after the end of the measurement period are recognized within our consolidated statements of operations as a current period gain or loss.

Impairment of Goodwill and Long-Lived Assets

We assess goodwill for impairment annually on October 1, or more frequently if events or circumstances indicate that the carrying amounts may not be fully recoverable. We first consider the option to assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value is less than the carrying amount, we then perform a one-step quantitative impairment test by comparing the reporting unit’s fair value with its carrying value. An impairment loss is recognized for the amount by which the reporting units’ carrying value exceeds its fair value, up to the total amount of goodwill allocated to the reporting unit. No impairment is recognized if the fair value of the reporting unit exceeds its carrying value.

The process of evaluating goodwill requires significant judgment including the identification of reporting units and the determination of the fair value of each reporting unit. If necessary, we determine fair values of our reporting units based on an income approach or more specifically, a discounted cash flow method (“DCF Method”). The DCF Method is based on projected future cash flows and terminal value estimates discounted to their present values. Terminal value represents the present value an investor would pay on the valuation date for the rights to the cash flows of the business for the years subsequent to the discrete cash flow projection period. We consider the DCF Method to be the most appropriate valuation technique since it is based on our long-term financial projections. In addition to determining the fair value of our reporting units based on the DCF method, we also compare the aggregate values of our net corporate assets and the reporting unit fair values to our overall market capitalization and use certain market-based valuation techniques to assess the reasonableness of the reporting unit fair values determined in accordance with the DCF Method. The key inputs used in the DCF Method include revenue growth rates, gross margin percentage, selling, general and administrative expense percentage, terminal growth rates and discount rates that are at or above our weighted-average cost of capital. We apply discount rates that are commensurate with the risks and uncertainties inherent in the respective reporting units and our internally developed projections of future cash flows.

In connection with our 2022 assessment of goodwill impairment, we qualitatively concluded that our Commercial Services and Government Solutions North America reporting units did not have indicators of impairment. We did however perform quantitative impairment reviews on our Parking Solutions and Government Solutions International reporting units, both of which were acquired in 2021. The fair values of these reporting units were determined in accordance with the DCF Method described above using currently available financial forecasts. Based on the results of our quantitative review, we concluded no adjustment to goodwill was necessary because the estimated fair values exceeded their reporting unit carrying values and the fair values were consistent with the operating values

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estimated in 2021 as part of the respective purchase price allocations. Moreover, we utilized earnings multiples to estimate the fair values of our Commercial Services and Government Solutions reporting units and corroborated the reasonableness of the reporting unit fair values by reconciling to the Company’s market capitalization as of October 1, 2022. Our qualitative analyses performed as of October 1 for fiscal years 2021 and 2020 did not have indicators of impairment.

We review our long-lived assets other than goodwill for impairment whenever events or circumstances indicate that the carrying amount of an asset or asset group may not be fully recoverable. We assess recoverability by comparing the estimated undiscounted future cash flows expected to be generated by the asset or asset group with its carrying value. If the carrying value of the asset or asset group exceeds the estimated undiscounted future cash flows, an impairment loss is recognized for the difference between the estimated fair value and the carrying value. Our estimates of cash flows are subjective judgments based on past experiences adjusted for trends and future expectations, and can be significantly impacted by changes in our business or economic conditions. The determination of asset group' fair value is also subject to significant judgment and utilizes valuation techniques including discounting estimated future cash flows and market-based analyses. If our estimates or underlying assumptions change in the future, our operating results may be materially impacted. We did not have any indicators of impairment related to long-lived assets for the years ended December 31, 2021 or 2020. We recorded $0.7 million of impairment related to certain photo enforcement programs that ended during the year ended December 31, 2022 within the depreciation, amortization and (gain) loss on disposal of assets, net line item on the consolidated statements of operations.

Income Taxes

We account for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between the tax basis of assets or liabilities and their carrying amounts in the financial statements. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years, while deferred tax liabilities generally represent items that generate a future tax liability for items where deductions have been accelerated for tax purposes. We provide a valuation allowance for deferred tax assets if it is more likely than not that some portion or all of the tax assets will not be realized. We calculate the valuation allowance in accordance with the authoritative guidance relating to income taxes, which requires an assessment of both positive and negative evidence regarding the realizability of these deferred tax assets when measuring the need for a valuation allowance. Significant judgment is required in determining any valuation allowance against deferred tax assets. The realization of deferred tax assets can be affected by, among other things, the nature, frequency, and severity of current and cumulative losses, forecasts of future profitability, the length of statutory carryforward periods, our experience with utilizing operating losses and tax credit carryforwards by jurisdiction, the reversal of existing taxable temporary differences and tax planning alternatives and strategies that may be available.

Our effective tax rate is based on income, statutory tax rates, differences in the deductibility of certain expenses and inclusion of certain income items between financial statement and tax return purposes, and tax planning opportunities available to us in the various jurisdictions in which we operate. Under GAAP, if we determine that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. Tax code and regulations require certain items to be included in the tax return at different times than when those items are required to be recorded in the consolidated financial statements. As a result, our effective tax rate reflected in our consolidated financial statements is different from that reported in our tax returns. Some of these differences are permanent, such as meals and entertainment expenses that are not fully deductible on our tax returns, and some are temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities.

Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax provision or benefit.

Private Placement Warrant Liabilities

We account for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance. For warrants that meet all of the criteria for equity

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classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. Our Public Warrants meet the criteria for equity classification and accordingly, are reported as a component of shareholders’ equity while our Private Placement Warrants do not meet the criteria for equity classification and are instead classified as a liability. The fair value of the Private Placement Warrants is estimated at period-end using a Black-Scholes option pricing model, which is a Level 3 fair value measurement exposed to valuation risk. The risk of exposure is estimated using a sensitivity analysis of potential changes in the significant unobservable inputs, primarily the volatility input that is the most susceptible to valuation risk. A 5% increase to the volatility input at December 31, 2022 would increase the estimated fair value of $3.61 by $0.19 per unit. A 5% decrease to the volatility input at December 31, 2022 would decrease the estimated fair value by $0.18 per unit.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, refer to Note 2, Significant Accounting Policies, in Item 8, Financial Statements and Supplementary Data.