Item 1. Financial Statements
XPEL, INC.
Condensed Consolidated Balance Sheets
(In thousands except share and per share data) | | | | | | | | | | | |
| (Unaudited) | | (Audited) |
| June 30, 2022 | | December 31, 2021 |
Assets | | | |
| Current | | | |
Cash and cash equivalents | $ | 9,321 | | | $ | 9,644 | |
| Accounts receivable, net | 19,119 | | | 13,159 | |
| Inventory, net | 74,142 | | | 51,936 | |
| Prepaid expenses and other current assets | 4,434 | | | 3,672 | |
| Income tax receivable | 550 | | | 617 | |
Total current assets | 107,566 | | | 79,028 | |
Property and equipment, net | 12,169 | | | 9,898 | |
| Right-of-use lease assets | 13,580 | | | 12,910 | |
| Intangible assets, net | 29,777 | | | 32,733 | |
| Other non-current assets | 893 | | | 791 | |
| Goodwill | 25,071 | | | 25,655 | |
| Total assets | $ | 189,056 | | | $ | 161,015 | |
| Liabilities | | | |
| Current | | | |
| Current portion of notes payable | 159 | | 375 |
| Current portion lease liabilities | 3,673 | | 2,978 |
| Accounts payable and accrued liabilities | 36,587 | | 32,915 |
| | | |
| Total current liabilities | 40,419 | | 36,268 |
| Deferred tax liability, net | 2,412 | | 2,748 |
| Other long-term liabilities | 1,140 | | 2,631 |
| Borrowings on line of credit | 32,000 | | 25,000 |
| Non-current portion of lease liabilities | 10,008 | | | 9,830 |
| Non-current portion of notes payable | — | | | 76 | |
| Total liabilities | 85,979 | | | 76,553 | |
| Commitments and Contingencies (Note 11) | | | |
| Stockholders’ equity | | | |
Preferred stock, $0.001 par value; authorized 10,000,000; none issued and outstanding | — | | | — | |
Common stock, $0.001 par value; 100,000,000 shares authorized; 27,612,597 issued and outstanding | 28 | | | 28 | |
| Additional paid-in-capital | 10,760 | | | 10,581 | |
| Accumulated other comprehensive loss | (1,860) | | | (590) | |
| Retained earnings | 94,149 | | | 74,443 | |
| Total stockholders’ equity | 103,077 | | | 84,462 | |
| Total liabilities and stockholders’ equity | $ | 189,056 | | | $ | 161,015 | |
See notes to condensed consolidated financial statements.
XPEL, INC.
Condensed Consolidated Statements of Income (Unaudited)
(In thousands except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue | | | | | | | |
Product revenue | $ | 67,040 | | | $ | 58,667 | | | $ | 125,137 | | | $ | 103,599 | |
| Service revenue | 16,850 | | | 10,069 | | | 30,617 | | | 17,003 | |
Total revenue | 83,890 | | | 68,736 | | | 155,754 | | | 120,602 | |
| | | | | | | |
| Cost of Sales | | | | | | | |
| Cost of product sales | 44,227 | | | 40,593 | | | 82,421 | | | 72,139 | |
| Cost of service | 6,680 | | | 2,896 | | | 12,633 | | | 4,929 | |
| Total cost of sales | 50,907 | | | 43,489 | | | 95,054 | | | 77,068 | |
| Gross Margin | 32,983 | | | 25,247 | | | 60,700 | | | 43,534 | |
| | | | | | | |
Operating Expenses | | | | | | | |
| Sales and marketing | 5,906 | | | 4,687 | | | 12,218 | | | 8,075 | |
| General and administrative | 11,328 | | | 7,888 | | | 22,696 | | | 14,240 | |
Total operating expenses | 17,234 | | | 12,575 | | | 34,914 | | | 22,315 | |
| | | | | | | |
| Operating Income | 15,749 | | | 12,672 | | | 25,786 | | | 21,219 | |
| | | | | | | |
| Interest expense | 322 | | | 44 | | | 542 | | | 97 | |
| Foreign currency exchange (gain) loss | 457 | | | (63) | | | 462 | | | (28) | |
| | | | | | | |
| Income before income taxes | 14,970 | | | 12,691 | | | 24,782 | | | 21,150 | |
| Income tax expense | 3,068 | | | 2,505 | | | 5,076 | | | 4,117 | |
| Net income | $ | 11,902 | | | $ | 10,186 | | | $ | 19,706 | | | $ | 17,033 | |
| | | | | | | |
| Earnings per share | | | | | | | |
| Basic | $ | 0.43 | | | $ | 0.37 | | | $ | 0.71 | | | $ | 0.62 | |
| Diluted | $ | 0.43 | | | $ | 0.37 | | | $ | 0.71 | | | $ | 0.62 | |
| Weighted Average Number of Common Shares | | | | | | | |
| Basic | 27,613 | | | 27,613 | | | 27,613 | | | 27,613 | |
| Diluted | 27,613 | | | 27,613 | | | 27,613 | | | 27,613 | |
See notes to condensed consolidated financial statements.
XPEL, INC.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Other comprehensive income | | | | | | | |
Net income | $ | 11,902 | | | $ | 10,186 | | | $ | 19,706 | | | $ | 17,033 | |
| Foreign currency translation | (1,175) | | | 226 | | | (1,270) | | | 16 | |
| Total comprehensive income | $ | 10,727 | | | $ | 10,412 | | | $ | 18,436 | | | $ | 17,049 | |
See notes to condensed consolidated financial statements.
XPEL, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stockholders' Equity - Three Months Ended June 30 |
| Common Stock | | Additional Paid-in-Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total Stockholders’ Equity |
| Shares | | Amount | | | | |
| Balance as of March 31, 2021 | 27,613 | | | $ | 28 | | | $ | 10,412 | | | $ | 49,724 | | | $ | (144) | | | $ | 60,020 | |
| Net income | — | | | — | | | — | | | 10,186 | | | — | | | 10,186 | |
| Foreign currency translation | — | | | — | | | — | | | — | | | 226 | | | 226 | |
| Balance as of June 30, 2021 | 27,613 | | | 28 | | | 10,412 | | | 59,910 | | | 82 | | | 70,432 | |
| | | | | | | | | | | |
| Balance as of March 31, 2022 | 27,613 | | | 28 | | | 10,652 | | | 82,247 | | | (685) | | | 92,242 | |
| Net income | — | | | — | | | — | | | 11,902 | | | — | | | 11,902 | |
| Foreign currency translation | — | | | — | | | — | | | — | | | (1,175) | | | (1,175) | |
| Stock-based compensation | — | | | — | | | 108 | | | — | | | — | | | 108 | |
| Balance as of June 30, 2022 | 27,613 | | | $ | 28 | | | $ | 10,760 | | | $ | 94,149 | | | $ | (1,860) | | | $ | 103,077 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stockholders' Equity - Six Months Ended June 30 |
| Common Stock | | Additional Paid-in-Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total Stockholders’ Equity |
| Shares | | Amount | | | | |
Balance as of December 31, 2020 | 27,613 | | | $ | 28 | | | $ | 10,412 | | | $ | 42,877 | | | $ | 66 | | | $ | 53,383 | |
| Net income | — | | | — | | | — | | | 17,033 | | | — | | | 17,033 | |
| Foreign currency translation | — | | | — | | | — | | | — | | | 16 | | | 16 | |
| Balance as of June 30, 2021 | 27,613 | | | 28 | | | 10,412 | | | 59,910 | | | 82 | | | 70,432 | |
| | | | | | | | | | | |
Balance as of December 31, 2021 | 27,613 | | | 28 | | | 10,581 | | | 74,443 | | | (590) | | | 84,462 | |
| Net income | — | | | — | | | — | | | 19,706 | | | — | | | 19,706 | |
| Foreign currency translation | — | | | — | | | — | | | — | | | (1,270) | | | (1,270) | |
| Stock-based compensation | — | | | — | | | 179 | | | — | | | — | | | 179 | |
| Balance as of June 30, 2022 | 27,613 | | | $ | 28 | | | $ | 10,760 | | | $ | 94,149 | | | $ | (1,860) | | | $ | 103,077 | |
See notes to condensed consolidated financial statements.
XPEL, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
Cash flows from operating activities | | | |
Net income | $ | 19,706 | | | $ | 17,033 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation of property, plant and equipment | 1,596 | | | 803 | |
| Amortization of intangible assets | 2,131 | | | 685 | |
| Gain on sale of property and equipment, net | (11) | | | (16) | |
| Stock-based compensation | 179 | | | — | |
| Bad debt expense | 251 | | | 123 | |
| Deferred income tax | 16 | | | 6 | |
| Accretion on notes payable | 5 | | | 18 | |
| | | |
| Changes in assets and liabilities: | | | |
| Accounts receivable | (6,604) | | | (849) | |
| Inventory, net | (22,725) | | | (2,394) | |
| Prepaid expenses and other assets | (1,039) | | | (1,624) | |
| Income tax receivable and payable | 96 | | | 1,206 | |
| Accounts payable and accrued liabilities | 3,874 | | | 4,082 | |
| Net cash (used in) provided by operating activities | (2,525) | | | 19,073 | |
| Cash flows used in investing activities | | | |
Purchase of property, plant and equipment | (4,025) | | | (3,461) | |
| Proceeds from sale of property and equipment | 53 | | | 16 | |
| Acquisition of a business, net of cash acquired | — | | | (29,992) | |
| Development of intangible assets | (623) | | | (201) | |
| Net cash used in investing activities | (4,595) | | | (33,638) | |
| Cash flows from financing activities | | | |
| Net borrowings on revolving credit agreement | 7,000 | | | — | |
| Repayments on term loan | — | | | (5,056) | |
| Repayments of notes payable | (294) | | | (367) | |
| Net cash used in provided by (used in) financing activities | 6,706 | | | (5,423) | |
| Net change in cash and cash equivalents | (414) | | | (19,988) | |
| Foreign exchange impact on cash and cash equivalents | 91 | | | (305) | |
| Decrease in cash and cash equivalents during the period | (323) | | | (20,293) | |
| Cash and cash equivalents at beginning of period | 9,644 | | | 29,027 | |
| Cash and cash equivalents at end of period | $ | 9,321 | | | $ | 8,734 | |
| | | |
| Supplemental schedule of non-cash activities | | | |
| Non-cash lease financing | $ | 2,534 | | | $ | 1,490 | |
| | | |
| | | |
| | | |
| Supplemental cash flow information | | | |
| Cash paid for income taxes | $ | 4,677 | | | $ | 2,939 | |
| Cash paid for interest | $ | 502 | | | $ | 92 | |
See notes to condensed consolidated financial statements.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. INTERIM FINANCIAL INFORMATION
The accompanying (a) condensed consolidated balance sheet as of December 31, 2021, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of and for the three and six months ended June 30, 2022 and 2021 have been prepared by XPEL, Inc. (“XPEL” or the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Pursuant to these rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. However, in the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations and cash flows of the interim periods presented. Operating results for the interim periods presented are not necessarily indicative of results to be expected for the full year or for any other interim period due to variability in customer purchasing patterns and seasonal, operating and other factors.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K as filed with the SEC on February 28, 2022 (the "Annual Report"). These condensed consolidated financial statements also should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section appearing in this Report.
2. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - The Company is based in San Antonio, Texas and sells, distributes, and installs protective films and coatings, including automotive paint protection film, surface protection film, automotive and architectural window films and ceramic coatings. The Company was incorporated in the state of Nevada, U.S.A. in October 2003.
Basis of Presentation - The condensed consolidated financial statements are prepared in conformity with United States Generally Accepted Accounting Principles ("U.S. GAAP") and include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated.
The functional currency for the Company is the United States dollar. The assets and liabilities of each of its foreign subsidiaries are translated into U.S dollars using the exchange rate at the end of the balance sheet date. Revenues and expenses are translated at the average exchange rates for the period. Gains and losses from translations are recognized in foreign currency translation included in accumulated other comprehensive income in the accompanying consolidated balance sheets. Foreign currency exchange gains and losses are presented as foreign currency exchange loss in the accompanying condensed consolidated statements of income. The ownership percentages and functional currencies of the entities included in these condensed consolidated financial statements are as follows:
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | |
| Subsidiaries | | Functional Currency | | % Owned by XPEL, Inc. |
| XPEL, Ltd. | | UK Pound Sterling | | 100 | % |
| XPEL Canada Corp. | | Canadian Dollar | | 100 | % |
| XPEL B.V. | | Euro | | 100 | % |
| XPEL Germany GmbH | | Euro | | 100 | % |
| XPEL de Mexico S. de R.L. de C.V. | | Peso | | 100 | % |
| XPEL Acquisition Corp. | | Canadian Dollar | | 100 | % |
| Protex Canada, Inc. | | Canadian Dollar | | 100 | % |
| Apogee Corp. | | New Taiwan Dollar | | 100 | % |
| XPEL Slovakia | | Euro | | 100 | % |
| XPEL France | | Euro | | 100 | % |
| XPEL Spain | | Euro | | 100 | % |
| PermaPlate Film, LLC | | US Dollar | | 100 | % |
| 1 One Armor, Inc. | | US Dollar | | 100 | % |
| TintNet, Inc. | | US Dollar | | 100 | % |
| North 1 Technologies, Inc. | | Canadian Dollar | | 100 | % |
| 1716808 Alberta, Ltd. o/a Shadow Tint | | Canadian Dollar | | 100 | % |
| 6873391 Canada, Ltd. o/a Shadow Shield | | Canadian Dollar | | 100 | % |
| invisiFRAME, Ltd. | | UK Pound Sterling | | 100 | % |
Segment Reporting - Management has concluded that XPEL's chief operating decision maker (“CODM”) is the Company's chief executive officer. The Company’s CODM reviews the entire organization’s consolidated results as a whole on a monthly basis to evaluate performance and make resource allocation decisions. Management views the Company’s operations and manages its business as one operating segment.
Use of Estimates - The preparation of these condensed consolidated financial statements in conformity to U.S. GAAP requires management to make judgments and estimates and form assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and underlying assumptions are reviewed on an ongoing basis. Actual outcomes may differ from these estimates under different assumptions and conditions.
Accounts Receivable - Accounts receivable are shown net of an allowance for doubtful accounts of $0.3 million and $0.3 million as of June 30, 2022 and December 31, 2021, respectively. The Company evaluates the adequacy of its allowances by analyzing the aging of receivables, customer financial condition, historical collection experience, the value of any collateral and other economic and industry factors. Actual collections may differ from historical experience, and if economic, business or customer conditions deteriorate significantly, adjustments to these reserves may be required. When the Company becomes aware of factors that indicate a change in a specific customer’s ability to meet its financial obligations, the Company records a specific reserve for credit losses. The Company had no significant accounts receivable concentration as of June 30, 2022 or December 31, 2021.
Provisions and Warranties - We provide a warranty on the Company's products. Liability under the warranty policy is based on a review of historical warranty claims. Adjustments are made to the accruals based on actual claims data. The Company's liability for warranties as of June 30, 2022 and December 31, 2021 was $0.2 million and $0.1 million, respectively. The following tables present a summary of the Company's accrued warranty liabilities for the six months ended June 30, 2022 and the twelve months ended December 31, 2021 (in thousands):
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | |
| 2022 |
| Warranty liability, January 1 | $ | 75 | |
| Warranties assumed in period | $ | 295 | |
| Payments | $ | (168) | |
| Warranty liability, June 30 | $ | 202 | |
| | | | | |
| 2021 |
| Warranty liability, January 1 | $ | 52 | |
| Warranties assumed in period | $ | 398 | |
| Payments | $ | (375) | |
| Warranty liability, December 31 | $ | 75 | |
Recent Accounting Pronouncements Issued and Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Measurement of Credit Losses on Financial Instruments”, which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for the Company beginning January 1, 2023 and is required to be applied prospectively. We are currently evaluating the impact that ASU 2016-13 will have on our consolidated financial statements.
3. REVENUE
Revenue recognition
The Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods and services to a customer, in an amount that reflects the consideration that it expects to receive in exchange for those goods or services. This is achieved through applying the following five-step model:
•Identification of the contract, or contracts, with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, the Company satisfies a performance obligation
The Company generates substantially all of its revenue from contracts with customers, whether formal or implied. Sales taxes collected from customers are remitted to the appropriate taxing jurisdictions and are excluded from sales revenue as the Company considers itself a pass-through conduit for collecting and remitting sales taxes, with the exception of taxes assessed during the procurement process of select inventories. Shipping and handling costs are included in cost of sales.
Revenues from product and services sales are recognized when control of the goods is transferred to the customer which occurs at a point in time, typically upon shipment to the customer or completion of the service. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Based upon the nature of the products the Company sells, its customers have limited rights of return, and these rights are immaterial. Discounts provided by the Company to customers at the time of sale are recognized as a reduction in sales at the time of the sale.
Warranty obligations associated with the sale of the Company's products are assurance-type warranties that are a guarantee of the product’s intended functionality and, therefore, do not represent a distinct performance obligation within the context of the contract. Warranty expense is included in cost of sales.
We apply a practical expedient to expense direct costs of obtaining a contract when incurred because the amortization period would have been one year or less.
Under its contracts with customers, the Company stands ready to deliver product upon receipt of a customer's purchase order. Accordingly, the Company has no performance obligations under its contracts until its customers submit a purchase order. The Company does not enter into commitments to provide goods or services that have terms greater than one year. In limited cases, the Company requires payment in advance of shipping product. Typically, product is shipped within a few days after prepayment is received. These prepayments are recorded as contract liabilities on the condensed consolidated balance sheet and are included in accounts payable and accrued liabilities (Note 9). As the performance obligation is part of a contract that has an original expected duration of less than one year, the Company has applied the practical expedient under ASC 606 to omit disclosures regarding remaining performance obligations.
When the Company transfers goods or provides services to a customer, payment is due, subject to normal terms, and is not conditional on anything other than the passage of time. Typical payment terms range from due upon receipt to 30 days, depending on the type of customer and relationship. At contract inception, the Company expects that the period of time between the transfer of goods to the customer and when the customer pays for those goods will be less than one year, which is consistent with the Company’s standard payment terms. Accordingly, the Company has elected the practical expedient under ASC 606 to not adjust for the effects of a significant financing component. As such, these amounts are recorded as receivables and not contract assets.
The following table summarizes transactions within contract liabilities for the three and six months ended June 30, 2022 (in thousands):
| | | | | |
| Balance, December 31, 2021 | $ | 818 | |
| Revenue recognized related to payments included in the December 31, 2021 balance | $ | (556) | |
| Payments received for which performance obligations have not been satisfied | $ | 181 | |
| Effect of foreign currency translation | $ | (2) | |
| Balance, March 31, 2022 | $ | 441 | |
| Revenue recognized related to payments included in the March 31, 2022 balance | $ | (387) | |
| Payments received for which performance obligations have not been satisfied | $ | 1,012 | |
| Effect of foreign currency translation | $ | (8) | |
| Balance, June 30, 2022 | $ | 1,058 | |
The table below sets forth the disaggregation of revenue by product category for the periods indicated below (in thousands):
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, | | | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | | | |
| Product Revenue | | | | | | | | | | | | | |
| Paint protection film | $ | 48,275 | | | $ | 45,245 | | | $ | 92,236 | | | $ | 81,030 | | | | | | | |
| Window film | 15,786 | | | 11,084 | | | 27,320 | | | 18,243 | | | | | | | |
| Other | 2,979 | | | 2,338 | | | 5,581 | | | 4,326 | | | | | | | |
Total | 67,040 | | | 58,667 | | | 125,137 | | | 103,599 | | | | | | | |
| | | | | | | | | | | | | |
| Service Revenue | | | | | | | | | | | | | |
| Software | $ | 1,247 | | | $ | 1,055 | | | $ | 2,453 | | | $ | 2,033 | | | | | | | |
| Cutbank credits | 4,178 | | | 3,386 | | | 7,108 | | | 6,022 | | | | | | | |
| Installation labor | 11,048 | | | 5,358 | | | 20,303 | | | 8,473 | | | | | | | |
| Training | 306 | | | 270 | | | 655 | | | 475 | | | | | | | |
| Other | 71 | | | — | | | 98 | | | — | | | | | | | |
| Total | 16,850 | | | 10,069 | | | 30,617 | | | 17,003 | | | | | | | |
| | | | | | | | | | | | | |
| Total | $ | 83,890 | | | $ | 68,736 | | | $ | 155,754 | | | $ | 120,602 | | | | | | | |
Because many of the Company's international customers require us to ship their orders to freight forwarders located in the United States, we cannot be certain about the ultimate destination of the product. The following table represents the Company's estimate of sales by geographic regions based on the Company's understanding of ultimate product destination based on customer interactions, customer locations and other factors (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, | | | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | | | |
| United States | $ | 49,166 | | | $ | 34,296 | | | $ | 90,753 | | | $ | 59,901 | | | | | | | |
| China | 7,904 | | | 12,626 | | | 16,763 | | | 23,331 | | | | | | | |
| Canada | 10,877 | | | 8,877 | | | 18,727 | | | 13,823 | | | | | | | |
| Continental Europe | 6,944 | | | 5,215 | | | 12,607 | | | 9,539 | | | | | | | |
| United Kingdom | 2,595 | | | 2,133 | | | 5,022 | | | 3,919 | | | | | | | |
| Middle East/Africa | 2,654 | | | 2,414 | | | 4,703 | | | 4,376 | | | | | | | |
| Asia Pacific | 1,977 | | | 2,056 | | | 4,009 | | | 3,648 | | | | | | | |
| Latin America | 1,359 | | | 1,029 | | | 2,565 | | | 1,946 | | | | | | | |
| Other | 414 | | | 90 | | | 605 | | | 119 | | | | | | | |
| Total | $ | 83,890 | | | $ | 68,736 | | | $ | 155,754 | | | $ | 120,602 | | | | | | | |
XPEL's largest customer accounted for 9.4% and 18.4% of the Company's net sales during the three months ended June 30, 2022 and 2021, respectively and 10.8% and 19.3% of the Company's net sales during the six months ended June 30, 2022 and 2021, respectively.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following (in thousands):
| | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Furniture and fixtures | $ | 2,560 | | | | | $ | 2,147 | | | |
| Computer equipment | 2,687 | | | | | 2,201 | | | |
| Vehicles | 822 | | | | | 822 | | | |
| Equipment | 4,271 | | | | | 3,572 | | | |
| Leasehold improvements | 6,743 | | | | | 5,138 | | | |
| Plotters | 2,509 | | | | | 2,132 | | | |
| Construction in Progress | 78 | | | | | 117 | | | |
| Total property and equipment | 19,670 | | | | | 16,129 | | | |
| Less: accumulated depreciation | 7,501 | | | | | 6,231 | | | |
| Property and equipment, net | $ | 12,169 | | | | | $ | 9,898 | | | |
Depreciation expense for the three months ended June 30, 2022 and 2021 was $0.8 million and $0.4 million, respectively. For the six months ended June 30, 2022 and 2021, depreciation expense was $1.6 million and $0.8 million, respectively.
5. INTANGIBLE ASSETS, NET
Intangible assets consists of the following (in thousands):
| | | | | | | | | | | | | |
| | | June 30, 2022 | | December 31, 2021 |
Trademarks | | | $ | 539 | | | $ | 500 | |
Software | | | 3,982 | | | 3,431 | |
| Trade names | | | 1,463 | | | 2,579 | |
Contractual and customer relationships | | | 30,950 | | | 31,326 | |
Non-compete | | | 454 | | | 459 | |
Other | | | 676 | | | 693 | |
Total cost | | | 38,064 | | | 38,988 | |
| Less: Accumulated amortization | | | 8,287 | | | 6,255 | |
| Intangible assets, net | | | $ | 29,777 | | | $ | 32,733 | |
Amortization expense for the three months ended June 30, 2022 and 2021 was $1.1 million and $0.4 million, respectively. For the six months ended June 30, 2022 and 2021, amortization expense was $2.1 million and $0.7 million, respectively. Certain of these intangible assets have been adjusted for business acquisition open period adjustments. Refer to Footnote 13 for discussion of these updates.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. GOODWILL
The following table summarizes goodwill transactions for the six months ended June 30, 2022 and 2021 (in thousands):
| | | | | |
| Balance at December 31, 2021 | $ | 25,655 | |
| Open period adjustments for 2021 acquisitions not yet finalized | (153) | |
| Foreign Exchange | (431) | |
| Balance at June 30, 2022 | $ | 25,071 | |
| |
| Balance at December 31, 2020 | $ | 4,472 | |
| Additions | 11,272 | |
| Foreign Exchange | 83 | |
| Balance at June 30, 2021 | $ | 15,827 | |
The Company completed seven acquisitions during the twelve months ended December 31, 2021. Purchase price accounting for the five acquisitions completed on October 1, 2021 remain preliminary in nature. Accounting for these acquisitions will be finalized within one year of their completion. Refer to Footnote 13 for discussion related to open period adjustments.
7. INVENTORIES
The components of inventory are summarized as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Raw materials | $ | 12,537 | | | $ | 2,699 | |
| Work in process | 4,054 | | | 180 | |
| Finished goods | 57,551 | | | 49,057 | |
| $ | 74,142 | | | $ | 51,936 | |
8. DEBT
REVOLVING FACILITIES
The Company has a $75.0 million revolving line of credit with a financial institution. The facility is utilized to fund the Company's working capital needs and other strategic initiatives, and is secured by a security interest in substantially all of the Company's current and future assets. Borrowings under the credit agreement bear interest on at the Wall Street Journal U.S. Prime Rate less 0.75% per annum if the Company's EBITDA ratio (as defined in the Loan Agreement governing the facility) is equal to or less than 2.00 to 1.00 or the Wall Street Journal U.S. Prime rate less 0.25% if the Company's EBITDA ratio is greater than 2.00 to 1.00. The facility also includes a fee of 0.25% of the unused capacity on the facility. The interest rate for this credit facility as of June 30, 2022 and December 31, 2021 was 4.00% and 2.50%, respectively. The Company paid interest charges on borrowings under this facility of $0.3 million and $0.5 million during the three and six months ended June 30, 2022, respectively, and had a balance of $32.0 million and $25.0 million as of June 30, 2022 and December 31, 2021, respectively. This facility matures on July 5, 2024.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Loan Agreement governing the facility contains customary covenants relating to maintaining legal existence and good standing, complying with applicable laws, delivery of financial statements, payment of taxes and maintaining insurance. The Loan Agreement contains two financial covenants:
(1) Senior Funded Debt (as defined in the Loan Agreement) divided by EBITDA (as defined in the Loan Agreement) at or below 3.50 : 1.00 when tested at the end of each fiscal quarter on a rolling four-quarter basis, and
(2) A minimum Debt Service Coverage Ratio (as defined in the Loan Agreement) of 1.25 : 1.00 at the end of each fiscal quarter when measured on a rolling four-quarter basis.
The Company also has a CAD $4.5 revolving credit facility through a financial institution in Canada, and is maintained by XPEL Canada Corp., a wholly-owned subsidiary of XPEL. This Canadian facility is utilized to fund the Company's working capital needs in Canada. This facility bears interest at HSBC Canada Bank’s prime rate plus 0.25% per annum and is guaranteed by the parent company. As of June 30, 2022 and December 31, 2021, no balance was outstanding on this line of credit.
As of June 30, 2022 and December 31, 2021, the Company was in compliance with all debt covenants.
NOTES PAYABLE
As part of its acquisition strategy, the Company may use a combination of cash and unsecured non-interest bearing promissory notes payable to fund its business acquisitions. The Company discounts the promissory note to fair value using market interest rates at the time of the acquisition.
Notes payable are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Weighted Average Interest Rate | | Matures | | June 30, 2022 | | December 31, 2021 |
| Face value of acquisition notes payable | 2.61% | | 2023 | | 161 | | | 458 | |
| Unamortized discount | | (2) | | | (7) | |
| Current portion | | (159) | | | (375) | |
| Total long-term debt | | $ | — | | | $ | 76 | |
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following table presents significant accounts payable and accrued liability balances as of the periods ending (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Trade payables | $ | 29,523 | | | $ | 25,175 | |
| Payroll liabilities | 2,394 | | | 3,385 | |
| Contract liabilities | 1,058 | | | 818 | |
| Acquisition holdback payments | 1,300 | | | 2,007 | |
| Other liabilities | 2,312 | | | 1,530 | |
| $ | 36,587 | | | $ | 32,915 | |
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10. FAIR VALUE MEASUREMENTS
ASC 820 prioritizes the inputs to valuation techniques used to measure fair value into the following hierarchy:
Level 1 – Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – Inputs other than the quoted prices in active markets that are observable either directly or indirectly, including: quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market data and require the reporting entity to develop its own assumptions.
Financial instruments include cash and cash equivalents, accounts receivable, accounts payable, our line of credit, and long-term debt. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, our line of credit, and short-term borrowings approximate fair value because of the near-term maturities of these financial instruments. The carrying value of the Company’s notes payable approximates fair value due to the relatively short-term nature and interest rates of the notes. The carrying value of the Company's long-term debt approximates fair value due to the interest rates being market rates.
The estimated fair value of debt is based on market quotes for instruments with similar terms and remaining maturities.
The Company incurred contingent liabilities in relation to the 2021 acquisition of invisiFRAME Ltd. and the 2020 acquisition of Veloce Innovation. The payments of these liabilities is contingent on attainment of certain revenue performance metrics in future years. The fair value of these liabilities was determined using a Monte Carlo Simulation method based on the probability and timing of certain future payments related to these metrics. These liabilities are accounted for as Level 3 liabilities within the fair value hierarchy.
Liabilities measured at fair value on a recurring basis as of the dates noted below are as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Level 3: | | | |
| Contingent Liabilities | $ | 1,119 | | | $ | 2,665 | |
We assessed the fair value of these contingent considerations liabilities as of June 30, 2022. This assessment resulted in a reduction in the fair value of the liability of $0.3 million and $0.3 million for the three and six months ended June 30, 2022, respectively. This reduction is reflected in general and administrative expenses in the Condensed Consolidated Statement of Income for the three and six months ended June 30, 2022. The remaining decrease in our contingent liabilities is attributable to foreign currency fluctuations and non-finalized acquisition related valuations. Refer to Footnote 13 for discussion of these valuation updates. These decreases are recorded in accumulated other comprehensive loss and goodwill, respectively.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business activities, the Company may be contingently liable for litigation and claims with customers, suppliers and former employees. Management believes that adequate provisions have been recorded in the accounts where required. Management also has determined that the likelihood of any litigation and claims having a material impact on our results of operations, cash flows or financial position is remote.
12. EARNINGS PER SHARE
We compute basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes effect of granted incremental restricted stock units.
The following table reconciles basic and diluted weighted average shares used in the computation of earnings per share (in thousands except per share values):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| Numerator | 2022 | | 2021 | | 2022 | | 2021 |
| Net income | $ | 11,902 | | | $ | 10,186 | | | $ | 19,706 | | | $ | 17,033 | |
| Denominator | | | | | | | |
| Weighted average basic shares | 27,613 | | | 27,613 | | | 27,613 | | | 27,613 | |
| Dilutive effect of restricted stock units | — | | | — | | | — | | | — | |
| Weighted average diluted shares | 27,613 | | | 27,613 | | | 27,613 | | | 27,613 | |
| Earnings per share | | | | | | | |
| Basic | $ | 0.43 | | | $ | 0.37 | | | $ | 0.71 | | | $ | 0.62 | |
| Diluted | $ | 0.43 | | | $ | 0.37 | | | $ | 0.71 | | | $ | 0.62 | |
13. ACQUISITIONS OF BUSINESSES
We acquired seven businesses during the twelve months ended December 31, 2021. The valuations of the identifiable intangible assets for TintNet, Inc., 1 One Armor, 6873391 Canada Ltd. (operating as Shadow Shield), 1716808 Alberta Ltd. (operating as Shadow Tint), and North 1 Technologies remain preliminary pending the finalization of the valuation models. These valuations will be finalized during the three months ending September 30, 2022. The accounting for all other assets and liabilities related to these acquisitions has been finalized.
During the three months ended June 30, 2022, we finalized the valuation of the purchase price and related purchase price allocation for our November 1, 2021 acquisition of invisiFRAME Ltd. resulting in a $0.9 million reduction in purchase price. The final allocation resulted in a $1.1 million reduction in net identifiable intangible assets, a $0.1 million reduction in goodwill, a $0.3 million reduction in deferred tax liabilities and a $0.9 million reduction in contingent liabilities. These changes were caused by updates made to certain valuation assumptions, including the discount rate applied to the valuation model. These changes resulted in a $0.1 million reduction in amortization expense for the three and six months ended
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2022. The impact of this final valuation on the twelve months ended December 31, 2021 results was not material.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess the financial condition and results of operations of XPEL, Inc. (“XPEL” or the “Company”). Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the heading “Forward-Looking Statements” in this report and under “Business," "Risk Factors,” "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements and Supplementary Data" in the Annual Report which is available on the SEC’s website at www.sec.gov.
Forward-Looking Statements
This quarterly report on Form 10-Q contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to the safe harbor created by those sections. In addition, the Company or others on the Company’s behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on the Company’s internet web site, or otherwise. All statements other than statements of historical facts included in this report or expressed by the Company orally from time to time that address activities, events, or developments that the Company expects, believes, or anticipates will or may occur in the future are forward-looking statements, including, in particular, the statements about the Company’s plans, objectives, strategies, and prospects regarding, among other things, the Company’s financial condition, results of operations and business, and the outcome of contingencies, such as legal proceedings. The Company has identified some of these forward-looking statements in this report with words like “believe,” “can,” “may,” “could,” “would,” “might,” “forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate,” “outlook,” or “continue” or the negative of these words or other words and terms of similar meaning. The use of future dates is also an indication of a forward-looking statement. Forward-looking statements may be contained in the notes to the Company’s condensed consolidated financial statements and elsewhere in this report, including under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Forward-looking statements are based on current expectations about future events affecting the Company and are subject to uncertainties and factors that affect all businesses operating in a global market as well as matters specific to the Company. These uncertainties and factors are difficult to predict, and many of them are beyond the Company’s control. Factors to consider when evaluating these forward-looking statements include, but are not limited to:
•We could be impacted by disruptions in supply.
•We currently rely on one distributor for sales of our products in China.
•A material portion of our business is in China, which may be an unpredictable market and is currently suffering trade tensions with the U.S.
•We must continue to attract, retain and develop key personnel.
•Our accounting estimates and risk management processes rely on assumptions or models that may prove inaccurate.
•We must maintain an effective system of internal control over financial reporting to keep stockholder confidence.
•Our industry is highly competitive.
•Our business is highly dependent on automotive sales and production volumes.
•Our North American market is currently designed for the public’s use of car dealerships to purchase automobiles which may dramatically change.
•Our revenue could be impacted by growing use of ride-sharing or other alternate forms of car ownership.
•We must be effective in developing new lines of business and new products to maintain growth.
•Any disruptions in our relationships with independent installers and new car dealerships could harm our sales.
•Our strategy related to acquisitions and investments could be unsuccessful or consume significant resources.
•We must maintain and grow our network of sales, distribution channels and customer base to be successful.
•We are exposed to a wide range of risks due to the multinational nature of our business.
•We must continue to manage our rapid growth effectively.
•We are subject to claims and litigation in the ordinary course of our business, including product liability and warranty claims.
•We must comply with a broad and complicated regime of domestic and international trade compliance, anti-corruption, economic, intellectual property, cybersecurity, data protection and other regulatory regimes.
•We may seek to incur substantial indebtedness in the future.
•Our growth may be dependent on the availability of capital and funding.
•Our Common Stock could decline or be downgraded at any time.
•Our stock price has been, and may continue to be, volatile.
•We may issue additional equity securities that may affect the priority of our Common Stock.
•We do not currently pay dividends on our Common Stock.
•Shares eligible for future sale may depress our stock price.
•Anti-takeover provisions could make a third party acquisition of our Company difficult.
•Our directors and officers have substantial control over us.
•Our bylaws may limit investors’ ability to obtain a favorable judicial forum for disputes.
•The COVID-19 pandemic could materially affect our business.
•Our business faces unpredictable global, economic and business conditions, including the risk of inflation in various markets.
We believe the items we have outlined above are important factors that could cause estimates included in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed these factors in more detail in in the Annual Report. These factors are not necessarily all of the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this report could also have material adverse effects on actual results. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our shareholders that they should (1) be aware that factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution when considering our forward-looking statements.
Company Overview
Founded in 1997 and incorporated in Nevada in 2003, XPEL has grown from an automotive product design software company to a global provider of after-market automotive products, including automotive surface and paint protection, headlight protection, and automotive window films, as well as a provider of complementary proprietary software. In 2018, we expanded our product offerings to include architectural window film (both commercial and residential) and security film protection for commercial and residential uses, and in 2019 we further expanded our product line to include automotive ceramic coatings.
XPEL began as a software company designing vehicle patterns used to produce cut-to-fit protective film for the painted surfaces of automobiles. In 2007, we began selling automotive surface and paint protection film products to complement our software business. In 2011, we introduced our ULTIMATE protective film product line which, at the time, was the industry’s first protective film with self-healing properties. The ULTIMATE technology allows the protective film to better absorb the impacts from rocks or other road debris, thereby fully protecting the painted surface of a vehicle. The film is described as “self-healing” due to its ability to return to its original state after damage from surface scratches. The launch of the ULTIMATE product catapulted XPEL into several years of strong revenue growth.
Our over-arching strategic philosophy centers around our view that being closer to the end customer in terms of our channel strategy affords us a better opportunity to efficiently introduce new products and deliver tremendous value which, in turn, drives more revenue growth for the Company. Since 2014, we have executed on several strategic initiatives including:
•2014 - We began our international expansion by establishing an office in the United Kingdom.
•2015 - We acquired Parasol Canada, a distributor of our products in Canada.
•2016 - We opened our XPEL Netherlands office and established our European headquarters
•2017
◦We continued our international expansion with the acquisition of Protex Canada Corp., or Protex Canada, a leading franchisor of automotive protective film franchises serving Canada, and
◦We opened our XPEL Mexico office.
•2018
◦We launched our first product offering outside of the automotive industry, a window and security film protection for commercial and residential uses.
◦We introduced the next generation of our highly successful ULTIMATE line, ULTIMATE PLUS.
◦We acquired Apogee Corporation which led to formation of XPEL Asia based in Taiwan.
•2019
◦We were approved for the listing of our stock on Nasdaq trading under the symbol “XPEL”.
•2020
◦We acquired Protex Centre, a wholesale-focused paint protection installation business based in Montreal, Canada.
◦We expanded our presence in France with the acquisition of certain assets of France Auto Racing.
◦We expanded our architectural window film presence with the acquisition of Houston based Veloce Innovation, a leading provider of architectural films for use in residential, commercial, marine and industrial settings.
•2021
◦We expanded our presence into numerous automotive dealerships throughout the United States with the acquisition of PermaPlate Film, LLC, a wholesale-focused automotive window film installation and distribution business based in Salt Lake City, Utah.
◦We acquired five businesses in the United States and Canada from two sellers as a continuation of our acquisition strategy. These acquisitions allowed us to continue to increase our penetration into mid-range dealerships in the US and solidify our presence in Western Canada.
◦We acquired invisiFRAME, Ltd, a designer and manufacturer of paint protection film patterns for bicycles, thus further expanding our non-automotive offerings.
Strategic Overview
XPEL is currently pursuing several key strategic initiatives to drive continued growth. Our global expansion strategy includes establishing a local presence where possible, allowing us to better control the delivery of our products and services. We will continue to add locally based regional sales personnel, leveraging local knowledge and relationships to expand the markets in which we operate.
We seek to increase global brand awareness in strategically important areas, including pursuing high visibility at premium events such as major car shows and high value placement in advertising media consumed by car enthusiasts, to help further expand the Company’s premium brand.
XPEL also continues to expand its delivery channels by acquiring select installation facilities in key markets and acquiring international partners to enhance our global reach. As we expand globally, we strive to tailor our distribution model to adapt to target markets. We believe this flexibility allows us to penetrate and grow market share more efficiently. Our acquisition strategy centers on our belief that the closer the Company is to its end customers, the greater its ability to drive increased product sales. In our last fiscal year, we acquired several businesses serving multiple markets in the United States, Canada, and the United Kingdom, in furtherance of this objective.
We continue to drive expansion of our non-automotive product portfolio. Our architectural window film segment continues to gain traction. We believe there are multiple uses for protective films and we continue to explore those adjacent market opportunities.
Trends and Uncertainties
Despite sustained positive trends in our business, broad uncertainty about the long-term implications of COVID-19 and its attendant market disruptions remains. Revenue has continued to increase in most of our major markets. Despite these trends, market disruptions in future periods cannot reasonably be estimated, and they could be significant. See the risk factor “The COVID-19 pandemic could materially adversely affect our financial condition and results of operations” included in Part I, Item 1A “Risk Factors” in the Annual Report for further discussion of the potential impact of the COVID-19 pandemic on our business, results of operations and financial condition.
In particular, it is difficult to forecast the impact that the ongoing effect of the COVID-19 pandemic will have on our customers, suppliers, or our own operations and financial results. Despite the reduction of restrictions related to the COVID-19 pandemic and the ongoing recovery of our operations, significant uncertainty still exists concerning the magnitude of the residual impact of the pandemic. Additionally,
automotive sales and production are highly cyclical, and the cyclical nature of the industry has been, and could continue to be, compounded by the pandemic. As demand for automotive products fluctuates or decreases, the demand for our products may also fluctuate or decrease. Automotive manufacturers also continue to experience a global semiconductor shortage which has affected production of vehicles and, in turn, available inventory at dealerships. During the three and six months ended June 30, 2022, inventory at dealerships remained at low levels. As long as the semiconductor shortage persists and leads to low dealership inventories, there could be a material adverse effect on our business, financial condition and results of operations. Refer to the risk factor ‘We are highly dependent on the automotive industry. A prolonged or material contraction in automotive sales and production volumes could adversely affect our business, results of operations and financial condition” in the Annual Report for additional discussion of the cyclical nature of the automotive industry. We will continue to closely monitor updates regarding the continuing impact of COVID-19 and automotive sales and adjust our operations according to guidelines form local, state and federal officials. In light of the foregoing, we may take actions that alter our business operations or that we determine are in the best interest of our employees, customers, suppliers and stockholders.
Various geographies in which we operate, including the United States, are experiencing an increasing inflationary environment. We are actively monitoring the broader economic impact of inflation on the demand for our products and services. See risk factor "General global economic and business conditions affect demand for our products" included in Part I, Item 1A-Risk Factors, in the Annual Report on Form 10-K.
As more fully described in Part I, Item 1A-Risk Factors, in the Annual Report on Form 10-K, the entrotech agreement terminated on March 21, 2022. We continue to work towards entering a new supply agreement with entrotech; however, we cannot assure you that we will be successful in negotiating a new agreement. In the absence of a new agreement, we have continued purchasing from entrotech and expect to continue our supply relationship.
Key Business Metric - Non-GAAP Financial Measures
Our management regularly monitors certain financial measures to track the progress of our business against internal goals and targets. We believe that the most important measure to the Company is Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA").
EBITDA is a non-GAAP financial measure. We believe EBITDA provides helpful information with respect to our operating performance as viewed by management, including a view of our business that is not dependent on (i) the impact of our capitalization structure and (ii) items that are not part of our day-to-day operations. Management uses EBITDA (1) to compare our operating performance on a consistent basis, (2) to calculate incentive compensation for our employees, (3) for planning purposes including the preparation of our internal annual operating budget, (4) to evaluate the performance and effectiveness of our operational strategies, and (5) to assess compliance with various metrics associated with the agreements governing our indebtedness. Accordingly, we believe that EBITDA provides useful information in understanding and evaluating our operating performance in the same manner as management. We define EBITDA as net income plus (a) total depreciation and amortization, (b) interest expense, net, and (c) income tax expense.
The following table is a reconciliation of Net Income to EBITDA for the three and six months ended June 30, 2022 and 2021 (in thousands except percentage figures):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited) | | | | (Unaudited) | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | | |
| 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change | |
| Net Income | $ | 11,902 | | | $ | 10,186 | | | 16.8 | % | | $ | 19,706 | | | $ | 17,033 | | | 15.7 | % | |
| Interest | 322 | | | 44 | | | 631.8 | % | | 542 | | | 97 | | | 458.8 | % | |
| Taxes | 3,068 | | | 2,505 | | | 22.5 | % | | 5,076 | | | 4,117 | | | 23.3 | % | |
| Depreciation | 839 | | | 420 | | | 99.8 | % | | 1,596 | | | 803 | | | 98.8 | % | |
| Amortization | 1,054 | | | 423 | | | 149.2 | % | | 2,131 | | | 685 | | | 211.1 | % | |
| EBITDA | $ | 17,185 | | | $ | 13,578 | | | 26.6 | % | | $ | 29,051 | | | $ | 22,735 | | | 27.8 | % | |
Use of Non-GAAP Financial Measures
EBITDA should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. It is not a measurement of our financial performance under GAAP and should not be considered as alternatives to revenue or net income, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP.
EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of ongoing operations; and other companies in our industry may calculate EBITDA differently than we do, limiting their usefulness as comparative measures.
Results of Operations
The following tables summarize the Company’s consolidated results of operations for the three and six months ended June 30, 2022 and 2021 (in thousands except percentage figures):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 | | %
of Total Revenue | | Three Months Ended June 30, 2021 | | %
of Total Revenue | | $
Change | | %
Change |
| Total revenue | $ | 83,890 | | | 100.0 | % | | $ | 68,736 | | | 100.0 | % | | $ | 15,154 | | | 22.0 | % |
| Total cost of sales | 50,907 | | | 60.7 | % | | 43,489 | | | 63.3 | % | | 7,418 | | | 17.1 | % |
| Gross margin | 32,983 | | | 39.3 | % | | 25,247 | | | 36.7 | % | | 7,736 | | | 30.6 | % |
| Total operating expenses | 17,234 | | | 20.5 | % | | 12,575 | | | 18.3 | % | | 4,659 | | | 37.0 | % |
| Operating income | 15,749 | | | 18.8 | % | | 12,672 | | | 18.4 | % | | 3,077 | | | 24.3 | % |
| Other expenses | 779 | | | 0.9 | % | | (19) | | | — | % | | 798 | | | (4,200.0) | % |
| Income tax | 3,068 | | | 3.7 | % | | 2,505 | | | 3.6 | % | | 563 | | | 22.5 | % |
| Net income | $ | 11,902 | | | 14.2 | % | | $ | 10,186 | | | 14.8 | % | | $ | 1,716 | | | 16.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 | | %
of Total Revenue | | Six Months Ended June 30, 2021 | | %
of Total Revenue | | $
Change | | %
Change |
| Total revenue | $ | 155,754 | | | 100.0 | % | | $ | 120,602 | | | 100.0 | % | | $ | 35,152 | | | 29.1 | % |
| Total cost of sales | 95,054 | | | 61.0 | % | | 77,068 | | | 63.9 | % | | 17,986 | | | 23.3 | % |
| Gross margin | 60,700 | | | 39.0 | % | | 43,534 | | | 36.1 | % | | 17,166 | | | 39.4 | % |
| Total operating expenses | 34,914 | | | 22.4 | % | | 22,315 | | | 18.5 | % | | 12,599 | | | 56.5 | % |
| Operating income | 25,786 | | | 16.6 | % | | 21,219 | | | 17.6 | % | | 4,567 | | | 21.5 | % |
| Other expenses | 1,004 | | | 0.6 | % | | 69 | | | 0.1 | % | | 935 | | | 1,355.1 | % |
| Income tax | 5,076 | | | 3.3 | % | | 4,117 | | | 3.4 | % | | 959 | | | 23.3 | % |
| Net income | $ | 19,706 | | | 12.7 | % | | $ | 17,033 | | | 14.1 | % | | $ | 2,673 | | | 15.7 | % |
The following tables summarize revenue results for the three and six months ended June 30, 2022 and 2021 (in thousands except percentage figures):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | % | | % of Total Revenue |
| 2022 | | 2021 | | Inc (Dec) | | 2022 | | 2021 |
| Product Revenue | | | | | | | | | |
| Paint protection film | $ | 48,275 | | | $ | 45,245 | | | 6.7 | % | | 57.5 | % | | 65.8 | % |
| Window film | 15,786 | | | 11,084 | | | 42.4 | % | | 18.8 | % | | 16.1 | % |
| Other | 2,979 | | | 2,338 | | | 27.4 | % | | 3.6 | % | | 3.5 | % |
| Total | $ | 67,040 | | | $ | 58,667 | | | 14.3 | % | | 79.9 | % | | 85.4 | % |
| | | | | | | | | |
| Service Revenue | | | | | | | | | |
| Software | $ | 1,247 | | | $ | 1,055 | | | 18.2 | % | | 1.5 | % | | 1.5 | % |
| Cutbank credits | 4,178 | | | 3,386 | | | 23.4 | % | | 5.0 | % | | 4.9 | % |
| Installation labor | 11,048 | | | 5,358 | | | 106.2 | % | | 13.2 | % | | 7.8 | % |
| Training | 306 | | | 270 | | | 13.3 | % | | 0.3 | % | | 0.4 | % |
| Other | 71 | | | — | | | n/a | | 0.1 | % | | 0.0 | % |
| Total | $ | 16,850 | | | $ | 10,069 | | | 67.3 | % | | 20.1 | % | | 14.6 | % |
| | | | | | | | | |
| Total | $ | 83,890 | | | $ | 68,736 | | | 22.0 | % | | 100.0 | % | | 100.0 | % |
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| Six Months Ended June 30, | | % | | % of Total Revenue |
| 2022 | | 2021 | | Inc (Dec) | | 2022 | | 2021 |
| Product Revenue | | | | | | | | | |
| Paint protection film | $ | 92,236 | | | $ | 81,030 | | | 13.8 | % | | 59.2 | % | | 67.2 | % |
| Window film | $ | 27,320 | | | $ | 18,243 | | | 49.8 | % | | 17.5 | % | | 15.1 | % |
| Other | $ | 5,581 | | | $ | 4,326 | | | 29.0 | % | | 3.6 | % | | 3.6 | % |
| Total | $ | 125,137 | | | $ | 103,599 | | | 20.8 | % | | 80.3 | % | | 85.9 | % |
| | | | | | | | | |
| Service Revenue | | | | | | | | | |
| Software | $ | 2,453 | | | $ | 2,033 | | | 20.7 | % | | 1.6 | % | | 1.7 | % |
| Cutbank credits | $ | 7,108 | | | $ | 6,022 | | | 18.0 | % | | 4.6 | % | | 5.0 | % |
| Installation labor | $ | 20,303 | | | $ | 8,473 | | | 139.6 | % | | 13.0 | % | | 7.0 | % |
| Training | $ | 655 | | | $ | 475 | | | 37.9 | % | | 0.4 | % | | 0.4 | % |
| Other | $ | 98 | | | — | | | n/a | | 0.1 | % | | 0.0 | % |
| Total | $ | 30,617 | | | $ | 17,003 | | | 80.1 | % | | 19.7 | % | | 14.1 | % |
| | | | | | | | | |
| Total | $ | 155,754 | | | $ | 120,602 | | | 29.1 | % | | 100.0 | % | | 100.0 | % |
Because many of our international customers require us to ship their orders to freight forwarders located in the United States, we cannot be certain about the ultimate destination of the product. The following tables represent our estimate of sales by geographic regions based on our understanding of ultimate product destination based on customer interactions, customer locations and other factors for the three and six months ended June 30, 2022 and 2021 (in thousands except percentage figures):
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| Three Months Ended
June 30, | | % | | % of Total Revenue |
| 2022 | | 2021 | | Inc (Dec) | | 2022 | | 2021 |
| United States | $ | 49,166 | | | $ | 34,296 | | | 43.4 | % | | 58.6 | % | | 49.9 | % |
| China | 7,904 | | | 12,626 | | | (37.4) | % | | 9.4 | % | | 18.4 | % |
| Canada | 10,877 | | | 8,877 | | | 22.5 | % | | 13.0 | % | | 12.9 | % |
| Continental Europe | 6,944 | | | 5,215 | | | 33.2 | % | | 8.3 | % | | 7.6 | % |
| United Kingdom | 2,595 | | | 2,133 | | | 21.7 | % | | 3.1 | % | | 3.1 | % |
| Middle East/Africa | 2,654 | | | 2,414 | | | 9.9 | % | | 3.2 | % | | 3.5 | % |
| Asia Pacific | 1,977 | | | 2,056 | | | (3.8) | % | | 2.4 | % | | 3.0 | % |
| Latin America | 1,359 | | | 1,029 | | | 32.1 | % | | 1.6 | % | | 1.5 | % |
| Other | 414 | | | 90 | | | 360.0 | % | | 0.4 | % | | 0.1 | % |
| Total | $ | 83,890 | | | $ | 68,736 | | | 22.0 | % | | 100.0 | % | | 100.0 | % |
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| Six Months Ended June 30, | | % | | % of Total Revenue |
| 2022 | | 2021 | | Inc (Dec) | | 2022 | | 2021 |
| United States | $ | 90,753 | | | $ | 59,901 | | | 51.5 | % | | 58.3 | % | | 49.7 | % |
| China | 16,763 | | | 23,331 | | | (28.2) | % | | 10.8 | % | | 19.3 | % |
| Canada | 18,727 | | | 13,823 | | | 35.5 | % | | 12.0 | % | | 11.5 | % |
| Continental Europe | 12,607 | | | 9,539 | | | 32.2 | % | | 8.1 | % | | 7.9 | % |
| United Kingdom | 5,022 | | | 3,919 | | | 28.1 | % | | 3.2 | % | | 3.2 | % |
| Middle East/Africa | 4,703 | | | 4,376 | | | 7.5 | % | | 3.0 | % | | 3.6 | % |
| Asia Pacific | 4,009 | | | 3,648 | | | 9.9 | % | | 2.6 | % | | 3.0 | % |
| Latin America | 2,565 | | | 1,946 | | | 31.8 | % | | 1.6 | % | | 1.6 | % |
| Other | 605 | | | 119 | | | 408.4 | % | | 0.4 | % | | 0.2 | % |
| Total | $ | 155,754 | | | $ | 120,602 | | | 29.1 | % | | 100.0 | % | | 100.0 | % |
Product Revenue. Product revenue for the three months ended June 30, 2022 increased 14.3% over the three months ended June 30, 2021 Product revenue represented 79.9% of our total revenue compared to 85.4% in the three months ended June 30, 2021. Revenue from our paint protection film product line increased 6.7% over the three months ended June 30, 2021. Paint protection film sales represented 57.5% and 65.8% of our total consolidated revenues for the three months ended June 30, 2022 and 2021, respectively. The increase in paint protection film sales was primarily attributable to continued demand for our various film product lines in most markets. Revenue from our window film product line grew 42.4% for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Window film sales represented 18.8% and 16.1% of our total consolidated revenues for the three months ended June 30, 2022 and 2021, respectively. This increase in window film sales was due mainly to the continued broad-based increases in demand for our window film products throughout the world. Other product revenue for the three months ended June 30, 2021 increased 27.4% due mainly to continued demand for non-film related products such as ceramic coating, plotters, chemicals, and other film installation tools and accessories.
Product revenue for the six months ended June 30, 2022 increased 20.8% over the six months ended June 30, 2021. Product revenue represented 80.3% of our total revenue compared to 85.9% in the six months ended June 30, 2021. Revenue from our paint protection film product line increased 13.8% compared to the six months ended June 30, 2021 due mainly to continued broad-based increases in demand for protective film. Revenue from our window film grew 49.8% compared to the six months ended June 20, 2021. This increase was due mainly to continued broad-based increases in demand for
our window film products throughout the world. Other product revenue for the six months ended June 30, 2022 increased 29.0% due mainly to continued demand for non-film related products such as ceramic coating, plotters, chemicals, and other film installation tools and accessories.
Service revenue. Service revenue consists of revenue from fees for DAP software access, cutbank credit revenue which represents per-cut fees sold for pattern access or the value of pattern access provided with eligible product revenue, revenue from the labor portion of installation sales in our installation centers and revenue from training services provided to our customers.
Service revenue grew 67.3% over the three months ended June 30, 2021. Within this category, software revenue increased 18.2% over the three months ended June 30, 2021. This increase was due to an increase in total subscribers to our DAP software. Cutbank credit revenue increased 23.4% from the three months ended June 30, 2021 due to substantial growth in our North American operations. Installation labor revenue increased 106.2% over the three months ended June 30, 2021 due to a substantially increased installation presence following our 2021 acquisitions of dealership services businesses.
Service revenue for the six months ended June 30, 2022 grew 80.1% over the six months ended June 30, 2021. Within this category, software revenue grew 20.7% over the six months ended June 30, 2021. This increase was due to an increase in total subscribers to our DAP software. Cutbank credit revenue increased 18.0% over the six months ended June 30, 2021 due to substantial growth in our North American operations. Installation labor increased 139.6% over the six months ended June 30, 2021 due to a substantially increased installation presence following our 2021 acquisitions of dealership services businesses.
Total installation revenue (labor and product combined) at our installation centers increased 106.2% over the three months ended June 30, 2021. This represented 15.7% and 9.3% of our total consolidated revenue for the three months ended June 30, 2022 and 2021, respectively. This increase was due primarily to acquired dealership services businesses in 2021. Total installation revenue increased 139.6% over the six months ended June 30, 2021. This represented 15.5% and 8.4% of our total consolidated revenue for the six months ended June 30, 2022 and 2021, respectively. This increase was due primarily to acquired dealership services businesses in 2021.
Adjusted product revenue, which combines the cutbank credit revenue service component with product revenue, increased 14.8% over the three months ended June 30, 2021. Adjusted product revenue increased 20.6% versus the six months ended June 30, 2021. For both the three and six month periods, this growth was due to sustained demand for our various product lines.
Cost of Sales
Cost of sales consists of product costs and the costs to provide our services. Product costs consist of material costs, personnel costs related to warehouse personnel, shipping costs, warranty costs and other related costs to provide products to our customers. Cost of service includes the labor costs associated with installation of product in our installation facilities, costs of labor associated with pattern design for our cutting software and the costs incurred to provide training for our customers.
Product costs for the three months ended June 30, 2022 increased 9.0% over the three months ended June 30, 2021. Cost of product sales represented 52.7% and 59.1% of total revenue in the three months ended June 30, 2022 and 2021, respectively. Cost of service revenue grew 130.6% during the three months ended June 30, 2022 due mainly to the increased installation labor costs associated with our acquired dealership services businesses in 2021.
Product costs for the six months ended June 30, 2022 increased 14.3% over the six months ended June 30, 2021. Cost of product sales represented 52.9% and 59.8% of total revenue in the six months
ended June 30, 2022 and 2021, respectively. Cost of service revenue grew 156.3% during the six months ended June 30, 2022 due mainly to the increased installation labor costs associated with our acquired dealership services businesses in 2021.
Gross Margin
Gross margin for the three months ended June 30, 2022 grew approximately $7.7 million, or 30.6%, from the three months ended June 30, 2021. For the three months ended June 30, 2022, gross margin represented 39.3% of revenue compared to 36.7% for the three months ended June 30, 2021
Gross margin for the six months ended June 30, 2022 grew approximately $17.2 million, or 39.4%, from the six months ended June 30, 2021. For the six months ended June 30, 2022, gross margin represented 39.0% of revenue compared to 36.1% for the six months ended June 30, 2021.
The following tables summarize gross margin for product and services for the three and six months ended June 30, 2022 and 2021 (in thousands except percentage figures):
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| Three Months Ended June 30, | | % | | % of Category Revenue |
| 2022 | | 2021 | | Inc (Dec) | | 2022 | | 2021 |
| Product | $ | 22,813 | | | $ | 18,074 | | | 26.2 | % | | 34.0 | % | | 30.8 | % |
| Service | 10,170 | | | 7,173 | | | 41.8 | % | | 60.4 | % | | 71.2 | % |
| Total | $ | 32,983 | | | $ | 25,247 | | | 30.6 | % | | 39.3 | % | | 36.7 | % |
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| Six Months Ended June 30, | | % | | % of Category Revenue |
| 2022 | | 2021 | | Inc (Dec) | | 2022 | | 2021 |
| Product | $ | 42,716 | | | $ | 31,460 | | | 35.8 | % | | 34.1 | % | | 30.4 | % |
| Service | $ | 17,984 | | | $ | 12,074 | | | 48.9 | % | | 58.7 | % | | 71.0 | % |
| Total | $ | 60,700 | | | $ | 43,534 | | | 39.4 | % | | 39.0 | % | | 36.1 | % |
Product gross margin for the three months ended June 30, 2022 increased approximately $4.7 million, or 26.2%, over the three months ended June 30, 2021 and represented 34.0% and 30.8% of total product revenue for the three months ended June 30, 2022 and 2021, respectively. This increase was due primarily to decreases in product costs and improved operating leverage.
Product gross margin for the six months ended June 30, 2022 increased approximately $11.3 million, or 35.8%, over the six months ended June 30, 2021 and represented 34.1% and 30.4% of total product revenue for the six months ended June 30, 2022 and 2021, respectively. This increase was due primarily to decreases in product costs and improved operating leverage.
Service gross margin increased approximately $3.0 million, or 41.8%, over the three months ended June 30, 2021. This represented 60.4% and 71.2% of total service revenue for the three months ended June 30, 2022 and 2021, respectively. The decrease in service gross margin percentage for the three months ended June 30, 2022 was primarily due to a higher percentage of lower margin installation labor costs relative to other higher margin service revenue components including a $0.3 million impact from low new car dealership inventories that impacted our dealership business.
Service gross margin increased approximately $5.9 million, or 48.9%, over the six months ended June 30, 2021. This represented 58.7% and 71.0% of total service revenue for the six months ended June 30, 2022 and 2021, respectively. The decrease in service gross margin percentage for the six months ended June 30, 2022 was primarily due to a higher percentage of lower margin installation labor
costs relative to other higher margin service revenue components including a $0.6 million impact from low new car dealership inventories that impacted our dealership business.
Operating Expenses
Sales and marketing expenses for the three months ended June 30, 2022 increased 26.0% compared to the same period in 2021. This increase was due to increased personnel and travel related expenses related to support the ongoing growth of the business. These expenses represented 7.0% and 6.8% of total consolidated revenue for the three months ended June 30, 2022 and 2021, respectively.
For the six months ended June 30, 2022, sales and marketing expenses increased 51.3% compared to the same period in 2021. This increase was due to increased personnel and travel related expenses to support the ongoing growth of the business. These expenses represented 7.8% and 6.7% of total consolidated revenue for the six months ended June 30, 2022 and 2021, respectively.
General and administrative expenses grew approximately $3.4 million, or 43.6% over the three months ended June 30, 2021. This increase in cost was due primarily to increases in personnel, occupancy costs and professional fees to support ongoing growth and acquisition related expenses including amortization associated with intangible assets acquired in 2021. These costs represented 13.5% and 11.5% of total consolidated revenue for the three months ended June 30, 2022 and 2021, respectively.
General and administrative expenses grew approximately $8.5 million, or 59.4% over the six months ended June 30, 2021. This increase in cost was due primarily to increases in personnel, occupancy costs and professional fees to support ongoing growth and acquisition related expenses including amortization associated with intangible assets acquired in 2021. These costs represented 14.6% and 11.8% of total consolidated revenue for the six months ended June 30, 2022 and 2021, respectively.
Other Expenses
Other expenses consist of interest expense and foreign currency exchange gain/loss. Interest expense increased during the three and six months ended June 30, 2022 due to borrowings on our line of credit. Foreign currency losses during the three and six months ended June 30, 2022 increased over the respective prior year periods due to fluctuations in the various currencies in which we conduct business.
Income Tax Expense
Income tax expense for the three months ended June 30, 2022 increased $0.6 million from the three months ended June 30, 2021. Our effective tax rate was 20.5% for the three months ended June 30, 2022 compared with 19.7% for the three months ended June 30, 2021. The increase in our effective tax rate was primarily due to an increase in our state tax effective rate and the impact of international operations.
Income tax expense for the six months ended June 30, 2022 increased $1.0 million from the same period in 2021, Our effective tax rate was 20.5% for the six months ended June 30, 2022 compared with 19.5% for the six months ended June 30, 2021. The increase in our effective tax rate was primarily due to an increase in our state effective rate and the impact of international operations.
Net income for the three months ended June 30, 2022 increased 16.9% to $11.9 million.
Net income for the six months ended June 30, 2022 increased 15.7% to $19.7 million.
Liquidity and Capital Resources
Our primary sources of liquidity are available cash and cash equivalents and cash flows provided by operations. As of June 30, 2022, we had cash and cash equivalents of $9.3 million. For the six months ended June 30, 2022, cash used in operations was $2.5 million. We expect available cash, internally generated funds, and borrowings from our committed credit facility to be sufficient to support working capital needs, capital expenditures (including acquisitions), and our debt service obligations. We are focused on continuing to generate positive operating cash to fund our operational and capital investment initiatives. We believe we have sufficient liquidity to operate for at least the next 12 months from the date of filing this report.
Operating activities. Cash used in operations for the six months ended June 30, 2022 was $2.5 million compared to positive cash flows of $19.1 million during the six months ended June 30, 2021. This decrease was due mainly to an intentional inventory build-up to assist in reducing our exposure to future supply chain risk.
Investing activities. Cash used in investing activities totaled approximately $4.6 million during the six months ended June 30, 2022 compared to $33.6 million during the six months ended June 30, 2021. This decrease was due mainly to the 2021 acquisition of PermaPlate Films LLC, which was completed in May 2021.
Financing activities. Cash flows provided by financing activities during the six months ended June 30, 2022 totaled approximately $6.7 million compared to cash use in the prior year of $5.4 million. This change was due primarily to new borrowings on our revolving credit facility during the six months ended June 30, 2022.
Debt obligations as of June 30, 2022 and December 31, 2021 totaled approximately $32.2 million and $25.5 million, respectively.
Future liquidity and capital resource requirements
We expect to fund ongoing operating expenses, capital expenditures, acquisitions, interest payments, tax payments, credit facility maturities, future lease obligations, and payments for other long-term liabilities with cash flow from operations. In the short-term, we are contractually obligated to make lease payments and make payments on unsecured non-interest bearing promissory notes payable and contingent liabilities related to certain completed acquisitions. In the long-term, we are contractually obligated to make lease payments, pay contingent liabilities as they are earned, and repay borrowings on our line of credit. We believe that we have sufficient cash and cash equivalents and borrowing capacity to cover our estimated short-term and long-term funding needs.
Credit Facilities
The Company has a $75.0 million revolving line of credit with a financial institution. The facility is utilized to fund the Company's working capital needs and other strategic initiatives, and is secured by a security interest in substantially all of the Company's current and future assets. Borrowings under the credit agreement bear interest on at the Wall Street Journal U.S. Prime Rate less 0.75% per annum if the Company's EBITDA ratio (as defined in the Loan Agreement governing the facility) is equal to or less than 2.00 to 1.00 or the Wall Street Journal U.S. Prime rate less 0.25% if the Company's EBITDA ratio is greater than 2.00 to 1.00. The facility also contains a fee of 0.25% of the unused capacity on the facility. The interest rate for this credit facility as of June 30, 2022 and December 31, 2021 was 4.00% and 2.50%, respectively. The Company paid interest charges on borrowings under this facility of $0.3 and $0.5 during the three and six months ended June 30, 2022, respectively, and owed a balance of $32.0 million
and $25.0 million as of June 30, 2022 and December 31, 2021, respectively. This facility matures on July 5, 2024.
The Loan Agreement governing the facility contains customary covenants relating to maintaining legal existence and good standing, complying with applicable laws, delivery of financial statements, payment of taxes and maintaining insurance. The Loan Agreement contains two financial covenants:
(1) Senior Funded Debt (as defined in the Loan Agreement) divided by EBITDA (as defined in the Loan Agreement) at or below 3.50 : 1.00 when tested at the end of each fiscal quarter on a rolling four-quarter basis, and
(2) A minimum Debt Service Coverage Ratio (as defined in the Loan Agreement) of 1.25 : 1.00 at the end of each fiscal quarter when measured on a rolling four-quarter basis.
The Company also has a CAD $4.5 million revolving credit facility through HSBC Bank Canada, and is maintained by XPEL Canada Corp., a wholly-owned subsidiary of XPEL. This Canadian facility is utilized to fund the Company's working capital needs in Canada. This facility bears interest at HSBC Canada Bank’s prime rate plus 0.25% per annum and is guaranteed by the parent company. As of June 30, 2022 and December 31, 2021, no balance was outstanding on this line of credit.
Critical Accounting Policies
There have been no material changes to the Company’s critical accounting estimates from the information provided in the Annual Report.
Related Party Relationships
There are no family relationships between or among any of our directors or executive officers. There are no arrangements or understandings between any two or more of our directors or executive officers, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current Board. There are also no arrangements, agreements or understandings between non-management stockholders that may directly or indirectly participate in or influence the management of our affairs.