UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20212022
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-38858
XPEL, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | |
Nevada | 20-1117381 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| |
618 W. Sunset Road3251 I-35 | San Antonio | Texas | 7821678219 | |
(Address of Principal Executive Offices) | | | (Zip Code) | |
Registrant's telephone number, including area code: (210) 678-3700
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | XPEL | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | | | | | | |
Large accelerated filer | ☐☒ | Accelerated filer | ☒☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☒☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The registrant had 27,612,59727,616,064 shares of common stock outstanding as of November 9, 2021.2022.
Part I. Financial Information
Item 1. Financial Statements
XPEL, INC.
Condensed Consolidated Balance Sheets | | | | | | | | | | | |
| (Unaudited) | | (Audited) |
| September 30, 2021 | | December 31, 2020 |
Assets | | | |
Current | | | |
Cash and cash equivalents | $ | 7,816,332 | | | $ | 29,027,124 | |
Accounts receivable, net | 14,324,671 | | | 9,944,213 | |
Inventory, net | 39,554,300 | | | 22,364,126 | |
Prepaid expenses and other current assets | 3,459,643 | | | 1,441,749 | |
Income tax receivable | 839,305 | | | — | |
Total current assets | 65,994,251 | | | 62,777,212 | |
Property and equipment, net | 8,662,924 | | | 4,706,248 | |
Right-of-Use lease assets | 11,785,675 | | | 5,973,702 | |
Intangible assets, net | 21,575,724 | | | 5,423,980 | |
Other non-current assets | 637,662 | | | 486,472 | |
Goodwill | 15,747,077 | | | 4,472,217 | |
Total assets | $ | 124,403,313 | | | $ | 83,839,831 | |
Liabilities | | | |
Current | | | |
Current portion of notes payable | $ | 424,610 | | | $ | 2,568,172 | |
Current portion lease liabilities | 2,908,492 | | | 1,650,749 | |
Accounts payable and accrued liabilities | 31,654,155 | | | 16,797,462 | |
Income tax payable | — | | | 183,961 | |
Total current liabilities | 34,987,257 | | | 21,200,344 | |
| | | |
Deferred tax liability, net | 1,049,433 | | | 627,806 | |
Other long-term liabilities | 720,777 | | | 729,408 | |
Non-current portion of lease liabilities | 9,084,258 | | | 4,331,214 | |
Non-current portion of notes payable | 154,763 | | | 3,568,191 | |
Total liabilities | 45,996,488 | | | 30,456,963 | |
Commitments and Contingencies (Note 11) | 0 | | 0 |
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 | 27,613 | | | 27,613 | |
Additional paid-in-capital | 10,489,295 | | | 10,412,471 | |
Accumulated other comprehensive (loss) income | (350,021) | | | 66,215 | |
Retained earnings | 68,239,938 | | | 42,876,569 | |
Total stockholders’ equity | 78,406,825 | | | 53,382,868 | |
Total liabilities and stockholders’ equity | $ | 124,403,313 | | | $ | 83,839,831 | |
(In thousands except share and per share data) | | | | | | | | | | | |
| (Unaudited) | | (Audited) |
| September 30, 2022 | | December 31, 2021 |
Assets | | | |
Current | | | |
Cash and cash equivalents | $ | 10,245 | | | $ | 9,644 | |
Accounts receivable, net | 17,944 | | | 13,159 | |
Inventory, net | 69,388 | | | 51,936 | |
Prepaid expenses and other current assets | 7,065 | | | 3,672 | |
Income tax receivable | — | | | 617 | |
Total current assets | 104,642 | | | 79,028 | |
Property and equipment, net | 12,658 | | | 9,898 | |
Right-of-use lease assets | 15,194 | | | 12,910 | |
Intangible assets, net | 29,426 | | | 32,733 | |
Other non-current assets | 921 | | | 791 | |
Goodwill | 25,417 | | | 25,655 | |
Total assets | $ | 188,258 | | | $ | 161,015 | |
Liabilities | | | |
Current | | | |
Current portion of notes payable | 140 | | 375 |
Current portion lease liabilities | 3,155 | | 2,978 |
Accounts payable and accrued liabilities | 28,048 | | 32,915 |
Income tax payable | 472 | | | — | |
Total current liabilities | 31,815 | | 36,268 |
Deferred tax liability, net | 2,502 | | 2,748 |
Other long-term liabilities | 899 | | 2,631 |
Borrowings on line of credit | 26,000 | | 25,000 |
Non-current portion of lease liabilities | 12,089 | | | 9,830 |
Non-current portion of notes payable | — | | | 76 | |
Total liabilities | 73,305 | | | 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; 27,616,064 issued and outstanding | 28 | | | 28 | |
Additional paid-in-capital | 10,869 | | | 10,581 | |
Accumulated other comprehensive loss | (3,411) | | | (590) | |
Retained earnings | 107,467 | | | 74,443 | |
Total stockholders’ equity | 114,953 | | | 84,462 | |
Total liabilities and stockholders’ equity | $ | 188,258 | | | $ | 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 September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Revenue | | | | | | | |
Product revenue | $ | 56,996,265 | | | $ | 39,528,383 | | | $ | 160,594,932 | | | $ | 94,240,296 | |
Service revenue | 11,532,658 | | | 6,594,413 | | | 28,536,076 | | | 16,076,821 | |
Total revenue | 68,528,923 | | | 46,122,796 | | | 189,131,008 | | | 110,317,117 | |
| | | | | | | |
Cost of Sales | | | | | | | |
Cost of product sales | 39,700,627 | | | 28,369,882 | | | 111,839,485 | | | 67,687,991 | |
Cost of service | 4,373,741 | | | 1,723,082 | | | 9,303,309 | | | 4,563,329 | |
Total cost of sales | 44,074,368 | | | 30,092,964 | | | 121,142,794 | | | 72,251,320 | |
Gross Margin | 24,454,555 | | | 16,029,832 | | | 67,988,214 | | | 38,065,797 | |
| | | | | | | |
Operating Expenses | | | | | | | |
Sales and marketing | 4,903,846 | | | 2,326,900 | | | 12,978,369 | | | 6,989,678 | |
General and administrative | 9,183,440 | | | 5,289,277 | | | 23,423,144 | | | 15,038,140 | |
Total operating expenses | 14,087,286 | | | 7,616,177 | | | 36,401,513 | | | 22,027,818 | |
| | | | | | | |
Operating Income | 10,367,269 | | | 8,413,655 | | | 31,586,701 | | | 16,037,979 | |
| | | | | | | |
Interest expense | 46,433 | | | 68,368 | | | 143,092 | | | 173,480 | |
Foreign currency exchange loss | 148,825 | | | 709 | | | 121,531 | | | 420,427 | |
| | | | | | | |
Income before income taxes | 10,172,011 | | | 8,344,578 | | | 31,322,078 | | | 15,444,072 | |
Income tax expense | 1,841,250 | | | 1,736,330 | | | 5,958,709 | | | 3,250,780 | |
Net income | $ | 8,330,761 | | | $ | 6,608,248 | | | $ | 25,363,369 | | | $ | 12,193,292 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Earnings per share | | | | | | | |
Basic | $ | 0.30 | | | $ | 0.24 | | | $ | 0.92 | | | $ | 0.44 | |
Diluted | $ | 0.30 | | | $ | 0.24 | | | $ | 0.92 | | | $ | 0.44 | |
Weighted Average Number of Common Shares | | | | | | | |
Basic | 27,612,597 | | | 27,612,597 | | | 27,612,597 | | | 27,612,597 | |
Diluted | 27,613,124 | | | 27,612,597 | | | 27,612,773 | | | 27,612,597 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue | | | | | | | |
Product revenue | $ | 72,616 | | | $ | 56,996 | | | $ | 197,753 | | | $ | 160,595 | |
Service revenue | 17,142 | | | 11,533 | | | 47,759 | | | 28,536 | |
Total revenue | 89,758 | | | 68,529 | | | 245,512 | | | 189,131 | |
| | | | | | | |
Cost of Sales | | | | | | | |
Cost of product sales | 47,225 | | | 39,701 | | | 129,646 | | | 111,839 | |
Cost of service | 6,767 | | | 4,374 | | | 19,400 | | | 9,303 | |
Total cost of sales | 53,992 | | | 44,075 | | | 149,046 | | | 121,142 | |
Gross Margin | 35,766 | | | 24,454 | | | 96,466 | | | 67,989 | |
| | | | | | | |
Operating Expenses | | | | | | | |
Sales and marketing | 6,297 | | | 4,904 | | | 18,515 | | | 12,978 | |
General and administrative | 12,162 | | | 9,183 | | | 34,859 | | | 23,423 | |
Total operating expenses | 18,459 | | | 14,087 | | | 53,374 | | | 36,401 | |
| | | | | | | |
Operating Income | 17,307 | | | 10,367 | | | 43,092 | | | 31,588 | |
| | | | | | | |
Interest expense | 391 | | | 46 | | | 933 | | | 143 | |
Foreign currency exchange loss | 372 | | | 149 | | | 833 | | | 122 | |
| | | | | | | |
Income before income taxes | 16,544 | | | 10,172 | | | 41,326 | | | 31,323 | |
Income tax expense | 3,226 | | | 1,841 | | | 8,302 | | | 5,959 | |
Net income | $ | 13,318 | | | $ | 8,331 | | | $ | 33,024 | | | $ | 25,364 | |
| | | | | | | |
Earnings per share | | | | | | | |
Basic | $ | 0.48 | | | $ | 0.30 | | | $ | 1.20 | | | $ | 0.92 | |
Diluted | $ | 0.48 | | | $ | 0.30 | | | $ | 1.20 | | | $ | 0.92 | |
Weighted Average Number of Common Shares | | | | | | | |
Basic | 27,616 | | | 27,613 | | | 27,614 | | | 27,613 | |
Diluted | 27,620 | | | 27,613 | | | 27,615 | | | 27,613 | |
See notes to condensed consolidated financial statements.
XPEL, INC.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Other comprehensive income | | | | | | | |
Net income | $ | 8,330,761 | | | $ | 6,608,248 | | | $ | 25,363,369 | | | $ | 12,193,292 | |
Foreign currency translation | (433,107) | | | 419,298 | | | (416,236) | | | 102,965 | |
Total comprehensive income | 7,897,654 | | | 7,027,546 | | | 24,947,133 | | | 12,296,257 | |
Total comprehensive income attributable to: | | | | | | | |
Stockholders of the Company | 7,897,654 | | | 7,027,546 | | | 24,947,133 | | | 12,300,790 | |
Non-controlling interest | — | | | — | | | — | | | (4,533) | |
Total comprehensive income | $ | 7,897,654 | | | $ | 7,027,546 | | | $ | 24,947,133 | | | $ | 12,296,257 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Other comprehensive income | | | | | | | |
Net income | $ | 13,318 | | | $ | 8,331 | | | $ | 33,024 | | | $ | 25,364 | |
Foreign currency translation | (1,551) | | | (433) | | | (2,821) | | | (416) | |
Total comprehensive income | $ | 11,767 | | | $ | 7,898 | | | $ | 30,203 | | | $ | 24,948 | |
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 September 30 |
| Common Stock | | Additional Paid-in-Capital | | Retained Earnings | | Accumulated Other Comprehensive Gain (Loss) | | Equity Attributable to Stockholders of the Company | | Non-Controlling Interest | | Total Stockholders’ Equity |
| Shares | | Amount | | | | | | |
Balance as of June 30, 2020 | 27,612,597 | | | $ | 27,613 | | | $ | 10,412,471 | | | $ | 30,179,922 | | | $ | (1,220,564) | | | $ | 39,399,442 | | | $ | — | | | $ | 39,399,442 | |
Net income | — | | | — | | | — | | | 6,608,248 | | | — | | | 6,608,248 | | | — | | | 6,608,248 | |
Foreign currency translation | — | | | — | | | — | | | — | | | 419,298 | | | 419,298 | | | — | | | 419,298 | |
Balance as of September 30, 2020 | 27,612,597 | | | 27,613 | | | 10,412,471 | | | 36,788,170 | | | (801,266) | | | 46,426,988 | | | — | | | 46,426,988 | |
| | | | | | | | | | | | | | | |
Balance as of June 30, 2021 | 27,612,597 | | | 27,613 | | | 10,412,471 | | | 59,909,177 | | | 83,086 | | | 70,432,347 | | | — | | | 70,432,347 | |
Net income | — | | | — | | | — | | | 8,330,761 | | | — | | | 8,330,761 | | | — | | | 8,330,761 | |
Foreign currency translation | — | | | — | | | — | | | — | | | (433,107) | | | (433,107) | | | — | | | (433,107) | |
Stock-based compensation | — | | | — | | | 76,824 | | | — | | | — | | | 76,824 | | | — | | | 76,824 | |
Balance as of September 30, 2021 | 27,612,597 | | | $ | 27,613 | | | $ | 10,489,295 | | | $ | 68,239,938 | | | $ | (350,021) | | | $ | 78,406,825 | | | $ | — | | | $ | 78,406,825 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholders' Equity - Three Months Ended September 30 |
| Common Stock | | Additional Paid-in-Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
| Shares | | Amount | | | | |
Balance as of June 30, 2021 | 27,613 | | | $ | 28 | | | $ | 10,412 | | | $ | 59,909 | | | $ | 83 | | | $ | 70,432 | |
Net income | — | | | — | | | — | | | 8,331 | | | — | | | 8,331 | |
Foreign currency translation | — | | | — | | | — | | | — | | | (433) | | | (433) | |
Stock-based compensation | — | | | — | | | 77 | | | — | | | — | | | 77 | |
Balance as of September 30, 2021 | 27,613 | | | 28 | | | 10,489 | | | 68,240 | | | (350) | | | 78,407 | |
| | | | | | | | | | | |
Balance as of June 30, 2022 | 27,613 | | | 28 | | | 10,760 | | | 94,149 | | | (1,860) | | | 103,077 | |
Net income | — | | | — | | | — | | | 13,318 | | | — | | | 13,318 | |
Foreign currency translation | — | | | — | | | — | | | — | | | (1,551) | | | (1,551) | |
Stock-based compensation | 3 | | | — | | | 109 | | | — | | | — | | | 109 | |
Balance as of September 30, 2022 | 27,616 | | | $ | 28 | | | $ | 10,869 | | | $ | 107,467 | | | $ | (3,411) | | | $ | 114,953 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholders' Equity - Nine Months Ended September 30 |
| Common Stock | | Additional Paid-in-Capital | | Retained Earnings | | Accumulated Other Comprehensive Gain (Loss) | | Equity Attributable to Stockholders of the Company | | Non-Controlling Interest | | Total Stockholders’ Equity |
| Shares | | Amount | | | | | | |
Balance as of December 31, 2019 | 27,612,597 | | | $ | 27,613 | | | $ | 11,348,163 | | | $ | 24,594,878 | | | $ | (908,764) | | | $ | 35,061,890 | | | $ | (168,680) | | | $ | 34,893,210 | |
Net income | — | | | — | | | — | | | 12,193,292 | | | — | | | 12,193,292 | | | — | | | 12,193,292 | |
Foreign currency translation | | | | | | | — | | | 107,498 | | | 107,498 | | | (4,533) | | | 102,965 | |
Purchase of minority interest | — | | | — | | | (935,692) | | | — | | | — | | | (935,692) | | | 173,213 | | | (762,479) | |
Balance as of September 30, 2020 | 27,612,597 | | | 27,613 | | | 10,412,471 | | | 36,788,170 | | | (801,266) | | | 46,426,988 | | | — | | | 46,426,988 | |
| | | | | | | | | | | | | | | |
Balance as of December 31, 2020 | 27,612,597 | | | 27,613 | | | 10,412,471 | | | 42,876,569 | | | 66,215 | | | 53,382,868 | | | — | | | 53,382,868 | |
Net income | — | | | — | | | — | | | 25,363,369 | | | — | | | 25,363,369 | | | — | | | 25,363,369 | |
Foreign currency translation | — | | | — | | | — | | | — | | | (416,236) | | | (416,236) | | | — | | | (416,236) | |
Stock-based compensation | — | | | — | | | 76,824 | | | — | | | — | | | 76,824 | | | — | | | 76,824 | |
Balance as of September 30, 2021 | 27,612,597 | | | $ | 27,613 | | | $ | 10,489,295 | | | $ | 68,239,938 | | | $ | (350,021) | | | $ | 78,406,825 | | | $ | — | | | $ | 78,406,825 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholders' Equity - Nine Months Ended September 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 | | | $ | 42,876 | | | $ | 66 | | | $ | 53,382 | |
Net income | — | | | — | | | — | | | 25,364 | | | — | | | 25,364 | |
Other comprehensive (loss) income | — | | | — | | | — | | | — | | | (416) | | | (416) | |
Stock-based compensation | — | | | — | | | 77 | | | — | | | — | | | 77 | |
Balance as of September 30, 2021 | 27,613 | | | 28 | | | 10,489 | | | 68,240 | | | (350) | | | 78,407 | |
| | | | | | | | | | | |
Balance as of December 31, 2021 | 27,613 | | | 28 | | | 10,581 | | | 74,443 | | | (590) | | | 84,462 | |
Net income | — | | | — | | | — | | | 33,024 | | | — | | | 33,024 | |
Foreign currency translation | — | | | — | | | — | | | — | | | (2,821) | | | (2,821) | |
Stock-based compensation | 3 | | | — | | | 288 | | | — | | | — | | | 288 | |
Balance as of September 30, 2022 | 27,616 | | | $ | 28 | | | $ | 10,869 | | | $ | 107,467 | | | $ | (3,411) | | | $ | 114,953 | |
See notes to condensed consolidated financial statements.
XPEL, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
| | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
Cash flows from operating activities | Cash flows from operating activities | | | | Cash flows from operating activities | | | |
Net income | Net income | $ | 25,363,369 | | | $ | 12,193,292 | | Net income | $ | 33,024 | | | $ | 25,364 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation of property, plant and equipment | Depreciation of property, plant and equipment | 1,258,489 | | | 889,820 | | Depreciation of property, plant and equipment | 2,486 | | | 1,258 | |
Amortization of intangible assets | Amortization of intangible assets | 1,420,347 | | | 705,692 | | Amortization of intangible assets | 3,248 | | | 1,420 | |
Gain on sale of property and equipment, net | | Gain on sale of property and equipment, net | (10) | | | (14) | |
Stock-based compensation | Stock-based compensation | 76,824 | | | — | | Stock-based compensation | 317 | | | 77 | |
Gain on sale of property and equipment | (14,222) | | | (3,101) | | |
Bad debt expense | Bad debt expense | 236,601 | | | 85,535 | | Bad debt expense | 350 | | | 237 | |
Deferred income tax | Deferred income tax | 417,944 | | | (47,886) | | Deferred income tax | 7 | | | 418 | |
Accretion on notes payable | Accretion on notes payable | 24,205 | | | 36,760 | | Accretion on notes payable | 6 | | | 24 | |
| Changes in assets and liabilities: | Changes in assets and liabilities: | | Changes in assets and liabilities: | |
Accounts receivable | Accounts receivable | (2,801,246) | | | (1,692,396) | | Accounts receivable | (5,899) | | | (2,801) | |
Inventory, net | Inventory, net | (16,396,799) | | | (3,803,836) | | Inventory, net | (18,423) | | | (16,397) | |
Prepaid expenses and other current assets | (2,038,877) | | | (413,354) | | |
Income tax receivable or payable | (1,006,348) | | | 395,311 | | |
Other assets | (206,194) | | | (468,400) | | |
Prepaid expenses and other assets | | Prepaid expenses and other assets | (3,982) | | | (2,245) | |
Income tax receivable and payable | | Income tax receivable and payable | 1,077 | | | (1,006) | |
Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | 13,838,842 | | | 6,361,659 | | Accounts payable and accrued liabilities | (2,505) | | | 13,839 | |
| Net cash provided by operating activities | Net cash provided by operating activities | 20,172,935 | | | 14,239,096 | | Net cash provided by operating activities | 9,696 | | | 20,174 | |
Cash flows used in investing activities | Cash flows used in investing activities | | | | Cash flows used in investing activities | |
Purchase of property, plant and equipment | Purchase of property, plant and equipment | (5,081,424) | | | (1,358,108) | | Purchase of property, plant and equipment | (5,534) | | | (5,082) | |
Proceeds from sale of property and equipment | Proceeds from sale of property and equipment | 48,065 | | | 50,809 | | Proceeds from sale of property and equipment | 66 | | | 48 | |
Acquisition of a business, net of cash acquired | (29,992,449) | | | (1,247,843) | | |
Acquisition of a businesses, net of cash acquired | | Acquisition of a businesses, net of cash acquired | (2,993) | | | (29,992) | |
Development of intangible assets | Development of intangible assets | (665,871) | | | (306,635) | | Development of intangible assets | (1,368) | | | (666) | |
Net cash used in investing activities | Net cash used in investing activities | (35,691,679) | | | (2,861,777) | | Net cash used in investing activities | (9,829) | | | (35,692) | |
Cash flows from financing activities | Cash flows from financing activities | | | | Cash flows from financing activities | | | |
(Repayments) borrowings on term loan | (5,064,376) | | | 6,000,000 | | |
| Net borrowings on revolving credit agreement | | Net borrowings on revolving credit agreement | 1,000 | | | — | |
Repayments on term loan | | Repayments on term loan | — | | | (5,064) | |
Restricted stock withholding taxes paid in lieu of issued shares | | Restricted stock withholding taxes paid in lieu of issued shares | (30) | | | — | |
Repayments of notes payable | Repayments of notes payable | (529,247) | | | (1,043,818) | | Repayments of notes payable | (304) | | | (529) | |
Purchase of minority interest | — | | | (784,653) | | |
Net cash (used in) provided by financing activities | (5,593,623) | | | 4,171,529 | | |
Net cash used in provided by (used in) financing activities | | Net cash used in provided by (used in) financing activities | 666 | | | (5,593) | |
Net change in cash and cash equivalents | Net change in cash and cash equivalents | (21,112,367) | | | 15,548,848 | | Net change in cash and cash equivalents | 533 | | | (21,111) | |
Foreign exchange impact on cash and cash equivalents | Foreign exchange impact on cash and cash equivalents | (98,425) | | | 174,650 | | Foreign exchange impact on cash and cash equivalents | 68 | | | (100) | |
(Decrease) increase in cash and cash equivalents during the period | (21,210,792) | | | 15,723,498 | | |
Increase (decrease) in cash and cash equivalents during the period | | Increase (decrease) in cash and cash equivalents during the period | 601 | | | (21,211) | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 29,027,124 | | | 11,500,973 | | Cash and cash equivalents at beginning of period | 9,644 | | | 29,027 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 7,816,332 | | | $ | 27,224,471 | | Cash and cash equivalents at end of period | $ | 10,245 | | | $ | 7,816 | |
| Supplemental schedule of non-cash activities | Supplemental schedule of non-cash activities | | Supplemental schedule of non-cash activities | |
Notes payable issued for acquisitions | $ | — | | | $ | 893,317 | | |
Non-cash lease financing | | Non-cash lease financing | $ | 5,209 | | | $ | 7,322 | |
Issuance of vested restricted units | | Issuance of vested restricted units | $ | 222 | | | $ | — | |
| Non-cash lease financing | $ | 7,321,737 | | | $ | 782,909 | | |
| Supplemental cash flow information | Supplemental cash flow information | | Supplemental cash flow information | |
Cash paid for income taxes | Cash paid for income taxes | $ | 6,669,752 | | | $ | 2,949,838 | | Cash paid for income taxes | $ | 7,305 | | | $ | 6,670 | |
Cash paid for interest | Cash paid for interest | $ | 117,362 | | | $ | 129,117 | | Cash paid for interest | $ | 900 | | | $ | 117 | |
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, 2020,2021, which has been derived from consolidated audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of and for the three and nine months ended September 30, 20212022 and 20202021 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 audited consolidated financial statements and related notes contained in the Company’s annual reportAnnual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on March 11, 2021.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 and its registered office is 618 W. Sunset Road, San Antonio, Texas, 78216.2003.
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 or majority 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 | % |
Armourfend CAD, LLC | | US Dollar | | 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 | % |
XPEL Australia | | Australian 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 1one 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 $191,804$0.4 million and $90,844$0.3 million as of September 30, 20212022 and December 31, 2020,2021, 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 September 30, 2021. At2022 or December 31, 2020, receivable balances from two large customers accounted for 24.7% of the Company's total trade receivables.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 September 30, 20212022 and December 31, 20202021 was $49,927$0.2 million and $52,006,$0.1 million, respectively. The following tables present a summary of ourthe Company's accrued warranty liabilities for the nine months ended September 30, 20212022 and the twelve months ended December 31, 2020:2021 (in thousands):
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | |
| 20212022 |
Warranty liability, January 1 | $ | 52,00675 | |
Warranties assumed in period | 216,383$ | 412 | |
Payments | (218,462)$ | (257) | |
Warranty liability, September 30 | $ | 49,927230 | |
| | | | | |
| 20202021 |
Warranty liability, January 1 | $ | 65,59152 | |
Warranties assumed in period | 283,458$ | 398 | |
Payments | (297,043)$ | (375) | |
Warranty liability, December 31 | $ | 52,00675 | |
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU was effective for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year. The Company has adopted this ASU without a material change to its condensed consolidated financial statements.
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 the Company'sour 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
XPEL Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 nine months ended September 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 | |
Revenue recognized related to payments included in the June 30, 2022 balance | $ | (1,006) | |
Payments received for which performance obligations have not been satisfied | $ | 599 | |
Effect of foreign currency translation | $ | (9) | |
Balance, September 30, 2022 | $ | 642 | |
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes transactions within contract liabilities for the three and nine months ended September 30, 2021:
| | | | | |
Balance, December 31, 2020 | $ | 244,837 | |
Revenue recognized related to payments included in the December 31, 2020 balance | (167,868) | |
Payments received for which performance obligations have not been satisfied | 2,508,251 | |
Effect of foreign currency translation | (480) | |
Balance, March 31, 2021 | $ | 2,584,740 | |
Revenue recognized related to payments included in the March 31, 2021 balance | (2,519,452) | |
Payments received for which performance obligations have not been satisfied | 552,979 | |
Effect of foreign currency translation | 1,196 | |
Balance, June 30, 2021 | $ | 619,463 | |
Revenue recognized related to payments included in the June 30, 2021 balance | (540,391) | |
Payments received for which performance obligations have not been satisfied | 480,186 | |
Effect of foreign currency translation | 45 | |
Balance, September 30, 2021 | $ | 559,303 | |
The table below sets forth the disaggregation of revenue by product category for the periods indicated below:below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | | | |
| 2021 | | 2020 | | 2021 | | 2020 | | | | | | |
Product Revenue | | | | | | | | | | | | | |
Paint protection film | $ | 43,220,555 | | | $ | 31,977,210 | | | $ | 124,250,391 | | | $ | 75,996,444 | | | | | | | |
Window film | 11,401,322 | | | 6,302,364 | | | 29,644,669 | | | 15,347,270 | | | | | | | |
Other | 2,374,388 | | | 1,248,809 | | | 6,699,872 | | | 2,896,582 | | | | | | | |
Total | $ | 56,996,265 | | | $ | 39,528,383 | | | $ | 160,594,932 | | | $ | 94,240,296 | | | | | | | |
| | | | | | | | | | | | | |
Service Revenue | | | | | | | | | | | | | |
Software | $ | 1,125,365 | | | $ | 889,709 | | | $ | 3,158,337 | | | $ | 2,551,177 | | | | | | | |
Cutbank credits | 3,362,399 | | | 2,304,651 | | | 9,384,411 | | | 5,529,773 | | | | | | | |
Installation labor | 6,783,688 | | | 3,268,399 | | | 15,256,632 | | | 7,681,420 | | | | | | | |
Training | 261,206 | | | 131,654 | | | 736,696 | | | 314,451 | | | | | | | |
Total | $ | 11,532,658 | | | $ | 6,594,413 | | | $ | 28,536,076 | | | $ | 16,076,821 | | | | | | | |
| | | | | | | | | | | | | |
Total | $ | 68,528,923 | | | $ | 46,122,796 | | | $ | 189,131,008 | | | $ | 110,317,117 | | | | | | | |
XPEL Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | | | |
Product Revenue | | | | | | | | | | | | | |
Paint protection film | $ | 54,230 | | | $ | 43,221 | | | $ | 146,465 | | | $ | 124,250 | | | | | | | |
Window film | 15,391 | | | 11,401 | | | 42,711 | | | 29,645 | | | | | | | |
Other | 2,995 | | | 2,374 | | | 8,577 | | | 6,700 | | | | | | | |
Total | 72,616 | | | 56,996 | | | 197,753 | | | 160,595 | | | | | | | |
| | | | | | | | | | | | | |
Service Revenue | | | | | | | | | | | | | |
Software | $ | 1,351 | | | $ | 1,125 | | | $ | 3,804 | | | $ | 3,158 | | | | | | | |
Cutbank credits | 4,352 | | | 3,362 | | | 11,459 | | | 9,384 | | | | | | | |
Installation labor | 11,067 | | | 6,784 | | | 31,371 | | | 15,257 | | | | | | | |
Training and other | 372 | | | 262 | | | 1,125 | | | 737 | | | | | | | |
Total | 17,142 | | | 11,533 | | | 47,759 | | | 28,536 | | | | | | | |
| | | | | | | | | | | | | |
Total | $ | 89,758 | | | $ | 68,529 | | | $ | 245,512 | | | $ | 189,131 | | | | | | | |
Because many of ourthe 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 ourthe Company's estimate of sales by geographic regions based on ourthe Company's understanding of ultimate product destination based on customer interactions, customer locations and other factors:factors (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 | |
United States | United States | $ | 37,362,839 | | | $ | 22,041,941 | | | $ | 97,263,389 | | | $ | 53,713,708 | | | United States | $ | 51,522 | | | $ | 37,363 | | | $ | 142,275 | | | $ | 97,263 | | |
China | China | 10,571,126 | | | 9,397,486 | | | 33,902,146 | | | 21,409,365 | | | China | 11,009 | | | 10,571 | | | 27,772 | | | 33,902 | | |
Canada | Canada | 8,715,209 | | | 6,213,949 | | | 22,538,245 | | | 14,347,313 | | | Canada | 11,046 | | | 8,715 | | | 29,773 | | | 22,538 | | |
Continental Europe | Continental Europe | 4,747,140 | | | 3,656,477 | | | 14,286,185 | | | 9,347,780 | | | Continental Europe | 6,065 | | | 4,747 | | | 18,671 | | | 14,286 | | |
United Kingdom | | United Kingdom | 2,482 | | | 1,987 | | | 7,505 | | | 5,906 | | |
Middle East/Africa | Middle East/Africa | 2,090,125 | | | 1,326,589 | | | 6,466,319 | | | 3,177,155 | | | Middle East/Africa | 3,322 | | | 2,090 | | | 8,025 | | | 6,466 | | |
United Kingdom | 1,987,316 | | | 1,481,174 | | | 5,906,315 | | | 3,228,322 | | | |
Asia Pacific | Asia Pacific | 1,972,919 | | | 1,454,119 | | | 5,620,834 | | | 3,365,354 | | | Asia Pacific | 2,540 | | | 1,973 | | | 6,549 | | | 5,621 | | |
Latin America | Latin America | 944,668 | | | 537,892 | | | 2,890,526 | | | 1,499,944 | | | Latin America | 1,468 | | | 945 | | | 4,033 | | | 2,891 | | |
Other | Other | 137,581 | | | 13,169 | | | 257,049 | | | 228,176 | | | Other | 304 | | | 138 | | | 909 | | | 258 | | |
Total | Total | $ | 68,528,923 | | | $ | 46,122,796 | | | $ | 189,131,008 | | | $ | 110,317,117 | | | Total | $ | 89,758 | | | $ | 68,529 | | | $ | 245,512 | | | $ | 189,131 | | |
OurXPEL's largest customer accounted for 12.3% and 15.4% and 20.4% of ourthe Company's net sales during the three months ended September 30, 20212022 and 2020,2021, respectively and 11.3% and 17.9% and 19.4% of ourthe Company's net sales during the nine months ended September 30, 20212022 and 2020,2021, respectively.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:following (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
Furniture and fixtures | Furniture and fixtures | $ | 1,563,613 | | | | $ | 1,349,037 | | | Furniture and fixtures | $ | 2,573 | | | | $ | 2,147 | | |
Computer equipment | Computer equipment | 1,848,286 | | | | 1,482,911 | | | Computer equipment | 3,044 | | | | 2,201 | | |
Vehicles | Vehicles | 750,956 | | | | 760,335 | | | Vehicles | 811 | | | | 822 | | |
Equipment | Equipment | 3,061,293 | | | | 1,955,254 | | | Equipment | 4,371 | | | | 3,572 | | |
Leasehold improvements | Leasehold improvements | 2,191,250 | | | | 2,055,798 | | | Leasehold improvements | 6,787 | | | | 5,138 | | |
Plotters | Plotters | 1,822,036 | | | | 1,282,630 | | | Plotters | 2,809 | | | | 2,132 | | |
Construction in Progress | Construction in Progress | 3,044,896 | | | | 321,764 | | | Construction in Progress | 515 | | | | 117 | | |
Total property and equipment | Total property and equipment | 14,282,330 | | | | 9,207,729 | | | Total property and equipment | 20,910 | | | | 16,129 | | |
Less: accumulated depreciation | Less: accumulated depreciation | 5,619,406 | | | | 4,501,481 | | | Less: accumulated depreciation | 8,252 | | | | 6,231 | | |
Property and equipment, net | Property and equipment, net | $ | 8,662,924 | | | | $ | 4,706,248 | | | Property and equipment, net | $ | 12,658 | | | | $ | 9,898 | | |
Depreciation expense for the three months ended September 30, 2022 and 2021 was $0.9 million and 2020 was $455,792 and $325,643,$0.5 million, respectively. For the nine months ended September 30, 20212022 and 2020,2021, depreciation expense was $1,258,489$2.5 million and $889,820,$1.3 million, respectively.
5. INTANGIBLE ASSETS, NET
Intangible assets consists of the following (in thousands):
| | | | | | | | | | | | | |
| | | September 30, 2022 | | December 31, 2021 |
Trademarks | | | $ | 636 | | | $ | 500 | |
Software | | | 4,642 | | | 3,431 | |
Trade names | | | 1,372 | | | 2,579 | |
Contractual and customer relationships | | | 31,127 | | | 31,326 | |
Non-compete | | | 437 | | | 459 | |
Other | | | 487 | | | 693 | |
Total cost | | | 38,701 | | | 38,988 | |
Less: Accumulated amortization | | | 9,275 | | | 6,255 | |
Intangible assets, net | | | $ | 29,426 | | | $ | 32,733 | |
Amortization expense for the three months ended September 30, 2022 and 2021 was $1.1 million and $0.7 million, respectively. For the nine months ended September 30, 2022 and 2021, amortization expense was $3.2 million and $1.4 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)
5. INTANGIBLE ASSETS, NET
Intangible assets consists of the following:
| | | | | | | | | | | | | |
| | | September 30, 2021 | | December 31, 2020 |
Trademarks | | | $ | 451,300 | | | $ | 373,374 | |
Software | | | 3,187,028 | | | 2,598,985 | |
Trade name | | | 497,477 | | | 497,545 | |
Contractual and customer relationships | | | 21,947,176 | | | 5,043,915 | |
Non-compete | | | 458,741 | | | 458,536 | |
Other | | | 211,431 | | | 213,218 | |
Total cost | | | 26,753,153 | | | 9,185,573 | |
Less: Accumulated amortization | | | 5,177,429 | | | 3,761,593 | |
Intangible assets, net | | | $ | 21,575,724 | | | $ | 5,423,980 | |
Amortization expense for the three months ended September 30, 2021 and 2020 was $734,963 and $239,571, respectively. For the nine months ended September 30, 2021 and 2020, amortization expense was $1,420,347 and $705,692, respectively.
The Company completed the acquisition of a business during the nine months ended September 30, 2021. Refer to Note 12 for additional information related to intangible assets added from this acquisition.
6. GOODWILL
The following table summarizes goodwill transactions for the nine months ended September 30, 2022 and 2021 and 2020:(in thousands):
| | | | | |
Balance at December 31, 20192020 | $ | 2,406,5124,472 | |
Additions | 1,938,65621,284 | |
Foreign Exchange | 127,049 (101) | |
Balance at December 31, 20202021 | $ | 4,472,21725,655 | |
| |
Balance at December 31, 20202021 | $ | 4,472,21725,655 | |
AdditionsOpen period adjustments for 2021 acquisitions | 11,271,949772 | |
Foreign Exchange | 2,911 (1,010) | |
Balance at September 30, 20212022 | $ | 15,747,07725,417 | |
The Company completed the acquisition of a businessseven acquisitions during the ninetwelve months ended September 30,December 31, 2021. Purchase price accounting for all these acquisitions have been completed. Refer to Note 12Footnote 13 for additional informationdiscussion related to goodwill added from this acquisition.open period adjustments.
XPEL Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. INVENTORIES
The components of inventory are summarized as follows:follows (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
Raw materials | Raw materials | $ | 3,611,993 | | | $ | — | | Raw materials | $ | 11,986 | | | $ | 2,699 | |
Work in process | Work in process | 803,318 | | | — | | Work in process | 3,835 | | | 180 | |
Finished goods | Finished goods | 35,138,989 | | | 22,364,126 | | Finished goods | 53,567 | | | 49,057 | |
| | $ | 39,554,300 | | | $ | 22,364,126 | | | $ | 69,388 | | | $ | 51,936 | |
8. DEBT
REVOLVING FACILITIES
The Company has a $57.0$75.0 million revolving line of credit with Texas Partners Bank (which does business as the Bank of San Antonio) and a Canadian Dollar ("CAD") $4.5 million revolving credit facility maintained by the Company's Canadian subsidiary. The Texas Partners Bank facility was established on May 21, 2021 and replaced an $8.50 million revolving facility and a $6.0 million term loan facility. The outstanding balances on these prior loan agreements were fully repaid by the Company and these agreements were terminated when we entered into the new facility.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 borrowed amounts 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 (as defined in the facility) is greater than 2.00 to 1.00. The facility also containsincludes a fee of 0.25% of the unused capacity on the facility. The interest rate for this credit facility as of September 30, 2022 and December 31, 2021 was 5.50% and 2.50%., respectively. The Company paid interest charges on borrowings under this facility of $25,208$0.4 million and $0.9 million during the three and nine months ended September 30, 2021. As2022, respectively, and had a balance of $26.0 million and $25.0 million as of September 30, 2022 and December 31, 2021, no balance was outstanding on this line.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.
As of September 30, 2021 and December 31, 2020, theThe Company was in compliance with all debt covenants.
XPEL Canada Corp., a wholly-owned subsidiary of XPEL, Inc., also has a CAD $4.5 million revolving credit facility through HSBC Bank Canada.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 September 30, 20212022 and December 31, 2020,2021, no balance was outstanding on this line of credit.
XPEL Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of September 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 notes, if used,note to fair value using market interest rates at the time of the acquisition.
Notes payable are summarized as follows:follows (in thousands):
| | | Weighted Average Interest Rate | | Matures | | September 30, 2021 | | December 31, 2020 | | Weighted Average Interest Rate | | Matures | | September 30, 2022 | | December 31, 2021 |
Term-loan | 3.50% | | 2023 | | — | | | 5,056,240 | | |
Face value of acquisition notes payable | Face value of acquisition notes payable | 2.27% | | 2023 | | 590,770 | | | 1,428,384 | | Face value of acquisition notes payable | 2.61% | | 2023 | | 152 | | | 458 | |
Total face value of notes payable | | 590,770 | | | 6,484,624 | | |
Unamortized discount | Unamortized discount | | (11,397) | | | (348,261) | | Unamortized discount | | (12) | | | (7) | |
Current portion | Current portion | | (424,610) | | | (2,568,172) | | Current portion | | (140) | | | (375) | |
Total long-term debt | Total long-term debt | | $ | 154,763 | | | $ | 3,568,191 | | 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:ending (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
Trade payables | Trade payables | $ | 27,007,788 | | | $ | 12,987,487 | | Trade payables | $ | 22,436 | | | $ | 25,175 | |
Payroll liabilities | Payroll liabilities | 2,750,331 | | | 2,266,643 | | Payroll liabilities | 2,864 | | | 3,385 | |
Contract liabilities | Contract liabilities | 559,303 | | | 244,837 | | Contract liabilities | 642 | | | 818 | |
Acquisition holdback payments | | Acquisition holdback payments | — | | | 2,007 | |
Other liabilities | Other liabilities | 1,336,733 | | | 1,298,495 | | Other liabilities | 2,106 | | | 1,530 | |
Total | $ | 31,654,155 | | | $ | 16,797,462 | | |
| | | $ | 28,048 | | | $ | 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
XPEL Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 (Level 2 inputs and valuation techniques).maturities.
The Company incurredhas certain contingent liabilities in relationrelated to one of its 2020completed acquisitions. The payment 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 Simulationsimulation 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:follows (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
Level 3: | Level 3: | | | | Level 3: | | | |
Contingent Liabilities | Contingent Liabilities | $ | 334,630 | | | $ | 571,833 | | Contingent Liabilities | $ | 858 | | | $ | 2,665 | |
We assessed the fair value of these contingent considerationsconsideration liabilities as of September 30, 2021.2022. This assessment resulted in a reduction in the fair value of the liability of $237,203.$0.2 million and $0.5 million for the three and nine months ended September 30, 2022, respectively. This reduction is reflected in general and administrative expenses in the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2021.2022. The remaining decrease in our contingent liabilities is attributable to foreign currency fluctuations and, for the nine-month period, the prior-quarter finalization of a different 2021 acquisition. Refer to Footnote 13 for discussion of valuation updates.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11. COMMITMENTS AND CONTINGENCIES
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 the Company'sour results of operations, cash flows or financial position is remote.
12. ACQUISITION OF A BUSINESS
The Company completed the following acquisition during the nine months ended September 30, 2021: | | | | | | | | | | | | | | | | | | | | | | | |
Acquisition Date | | Name/Location/Description | | Purchase Price | Acquisition Type | | Acquisition Purpose |
May 25, 2021 | | PermaPlate Film LLC, Salt Lake City, Utah, United States, Window film distribution and installation business | | $ | 30,000,000 | | Membership Interest Purchase | | Market Expansion |
The total preliminary purchase price for the acquisition completed during the nine months ended September 30, 2021 and a preliminary allocation of that purchase price are set forth in the table below. The purchase agreement provides for customary purchase price adjustments related to acquired working capital that have not yet been finalized. Purchase price accounting for this acquisition will be finalized within twelve months of the acquisition date.
XPEL Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | | | | |
| | (Unaudited) PermaPlate Film |
Purchase Price | | |
Cash | | $ | 30,000,000 | |
| | |
| | $ | 30,000,000 | |
| | |
Allocation | | |
Cash | | $ | 7,551 | |
Accounts receivable | | 1,951,225 | |
Inventory | | 968,603 | |
| | |
| | |
Property, plant, and equipment | | 184,366 | |
| | |
Customer relationships | | 16,910,704 | |
| | |
Goodwill | | 11,271,949 | |
Accounts payable and accrued liabilities | | (1,294,398) | |
| | |
| | |
| | |
| | $ | 30,000,000 | |
Intangible assets acquired in 2021 have a weighted average useful life of nine years.
Goodwill from this acquisition is deductible for tax purposes. The goodwill represents the acquired employee knowledge of the various markets, distribution knowledge by the employees of the acquired business, as well as the expected synergies resulting from the acquisition.
Acquisition costs incurred related to this acquisition were immaterial and were included in general and administrative expenses.
The acquired company was included in the Company's consolidated financial statements on its acquisition date. The amount of revenue and net income of this acquisition which have been included in the Company's financial statements for the three months ended September 30, 2021 was $5,335,387 and $441,358, respectively. The amount of revenue and net income which has been consolidated into the Company's financial statements for the nine months ended September 30, 2021 was $7,809,883 and $809,005, respectively.
The following unaudited consolidated pro forma combined financial information presents our results, including the estimated expenses relating to the amortization of intangibles purchased, as if this acquisition had occurred on January 1, 2021 and 2020:
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2021 (unaudited) | | 2020 (unaudited) |
Revenue | | $ | 199,010,439 | | | $ | 125,723,467 | |
Net income | | $ | 26,066,338 | | | $ | 14,093,013 | |
The unaudited consolidated pro forma combined financial information does not purport to be indicative of the results which would have been obtained had the acquisition been completed as of the beginning of the earliest period presented or of results that may be obtained in the future. In addition, they do not include any benefits that may result from the acquisition due to synergies that may be derived from the elimination of any duplicative costs.
XPEL Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
13. STOCK-BASED COMPENSATION
Pursuant to the Company's 2020 Equity Incentive Plan (the "Plan"), the Company granted unvested restricted stock units ("RSUs") for the first time on July 15, 2021, payable in shares of common stock upon vesting. The RSUs vest evenly over a four-year period at each anniversary of the grant date. The shares of common stock underlying the RSUs are not considered issued and outstanding until they are vested and common shares are issued. The RSUs do not have voting rights. A full description of the Plan can be found in the Company's Proxy Statement as filed with the SEC on April 16, 2021.
RSU activity for the nine months ended September 30, 2021 is summarized as follows:
| | | | | | | | | | | |
| Number of Restricted Stock Units | | Weighted Average Grant Value Per Share |
Outstanding at December 31, 2020 | — | | | N/A |
Granted | 17,520 | | | $ | 84.19 | |
Vested | — | | | N/A |
Forfeited or canceled | — | | | N/A |
Outstanding at September 30, 2021 | 17,520 | | | $ | 84.19 | |
During the three and nine months ended September 30, 2021, we recorded compensation expense of $76,824 related to RSUs.
14. 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:share (in thousands except per share values):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
Numerator | Numerator | 2021 | | 2020 | | 2021 | | 2020 | Numerator | 2022 | | 2021 | | 2022 | | 2021 |
Net income | Net income | $ | 8,330,761 | | | $ | 6,608,248 | | | $ | 25,363,369 | | | $ | 12,193,292 | | Net income | $ | 13,318 | | | $ | 8,331 | | | $ | 33,024 | | | $ | 25,364 | |
Denominator | Denominator | | | | | | | | Denominator | | | | | | | |
Weighted average basic shares | Weighted average basic shares | 27,612,597 | | | 27,612,597 | | | 27,612,597 | | | 27,612,597 | | Weighted average basic shares | 27,616 | | | 27,613 | | | 27,614 | | | 27,613 | |
Dilutive effect of restricted stock units | Dilutive effect of restricted stock units | 527 | | | — | | | 176 | | | — | | Dilutive effect of restricted stock units | 4 | | | — | | | 1 | | | — | |
Weighted average diluted shares | Weighted average diluted shares | 27,613,124 | | | 27,612,597 | | | 27,612,773 | | | 27,612,597 | | Weighted average diluted shares | 27,620 | | | 27,613 | | | 27,615 | | | 27,613 | |
Earnings per share | Earnings per share | | | | | | | | Earnings per share | | | | | | | |
Basic | Basic | $ | 0.30 | | | $ | 0.24 | | | $ | 0.92 | | | $ | 0.44 | | Basic | $ | 0.48 | | | $ | 0.30 | | | $ | 1.20 | | | $ | 0.92 | |
Diluted | Diluted | $ | 0.30 | | | $ | 0.24 | | | $ | 0.92 | | | $ | 0.44 | | Diluted | $ | 0.48 | | | $ | 0.30 | | | $ | 1.20 | | | $ | 0.92 | |
15. SUBSEQUENT EVENTS13. ACQUISITIONS OF BUSINESSES
XPEL Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company completedDuring the acquisitionthree months ended September 30, 2022, we finalized the valuations of 5 businesses in the United Statespurchase price and Canada from 2 unrelated sellers onrelated purchase price allocations for our October 1, 2021.
In Canada, the Company acquired 1) a company operating under the name2021 acquisitions of Shadow Shield, a distributor of paint protection film and window film to customers in Canada with locations in Calgary, Alberta and Mississauga, Ontario; 2) a company operating under the name of Shadow Tint, an installer of paint protection and window film operating in Calgary, Alberta; and, 3) a company operating under the name of North 1 Technologies, a software company providing software and patterns for cutting paint protection film to customers around the world under the FilmWraps brand from one seller.
In the United States, the Company acquired 4)TintNet, Inc., 1 One Armor, Inc.6873391 Canada Ltd. (operating as Shadow Shield), 1716808 Alberta Ltd. (operating as Shadow Tint), and North 1 Technologies. These final allocations resulted in an installerincrease to goodwill of paint protection$0.9 million, an increase to other intangible assets of $0.5 million, and window film in Phoenix, Arizona and 5) Tint Net Inc., a high-volume installeran increase to deferred tax liabilities of automotive window film providing on-site service primarily to mid-range new car dealerships in Arizona from one seller.
The combined preliminary$0.2 million. During the nine months ended September 30, 2022 finalization of purchase price and purchase price accounting for acquisitions completed during the twelve months ended December 31, 2021 resulted in purchase price reductions of these acquisitions was approximately $20.1$0.9 million, an increase to goodwill of $0.8 million, a reduction to other intangible assets of $0.6 million and is subjecta decrease to customary adjustments, including working capital adjustments.
deferred tax liabilities of $0.1 million and a reduction to contingent liabilities of $0.9 million. These acquisitionschanges were financed with a combination of cash on hand and borrowings from our lines of creditcaused by updates made to certain valuation assumptions. Results for the twelve months ended December 31, 2021 would not have been materially changed had these final allocations been made in the United States and Canada.
On November 1, 2021, the Company closed on the acquisition of United Kingdom-based invisiFRAME, Ltd., a leading provider of custom-tailored bicycle frame paint protection kits.
Initialthat period. The purchase price accounting for theseall 2021 acquisitions is not yet complete.has been finalized.
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 our annual report on Form 10-Kthe Annual Report which was filed with the Securities and Exchange Commission (“SEC”) on March 11, 2021 and 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, “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:
•One supplierOur business is the main source of our paint protection film.highly dependent on automotive sales and production volumes.
•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.
•We could be impacted by disruptions in supply.
•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.
•The growing popularity of electric vehicles and other technology could impact our revenue or render some of our products obsolete.
•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 are an “emerging growth company” which may impact investor perception of our Company.
•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.
•Fluctuationsconditions, including the risk of inflation in the cost and availability of raw materials, equipment, labor and transportation could cause manufacturing delays, increase our costs and/or impact our ability to meet customer demand.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 our annual report on Form 10-K as filed within the SEC on March 11, 2021.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.
Executive Summary
Set forth below is summary financial information for the three and nine months ended September 30, 2021 and 2020. This information is not necessarily indicative of results of future operations, and should be read in conjunction with Part I, Item 1A, “Risk Factors,” Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes thereto included in Part II, Item 8 of our annual report on Form 10-K, as filed with the SEC on March 11, 2021, to fully understand factors that may affect the comparability of the information presented below.
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. In
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. In
•2015 we- We acquired Parasol Canada, a distributor of our products in Canada. In 2017, we
•2016 - We opened our XPEL Netherlands office and established our European headquarters in The Netherlands, and expanded our product offerings to include an automotive protective window film branded as PRIME
•2017
◦We continued our international expansion in 2017 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. In
•2018 we
◦We launched our first product offering outside of the automotive industry, a window and security film protection for commercial and residential uses. Also in 2018, we
◦We introduced the next generation of our highly successful ULTIMATE line, ULTIMATE PLUS. As 2018 came to a close, we
◦We acquired Apogee Corporation which led to formation of XPEL Asia based in Taiwan. In 2020, as a continuation
•2019
◦We were approved for the listing of our get close tostock on Nasdaq trading under the customer strategy, wesymbol “XPEL”.
•2020
◦We acquired Protex Centre, a wholesale-focused paint protection installation business based in Montreal, Canada, andCanada.
◦We expanded our presence in France with the acquisition of certain assets of France Auto Racing.
◦We also 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. In May
•2021 we
◦We expanded our presence into numerous automotive dealerships throughout the United States throughwith 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 focuses on the need to establishincludes establishing a local presence where possible, allowing us to better control the delivery of our products and services. In furtherance of this approach, we established our European headquarters in early 2017 to capture market share in what we believed to be an under-penetrated region. We are continuingwill 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 seekingpursuing 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 itsour 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 is foundedcenters 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, and we have continued this trend with an October 2022 acquisition in Australia.
We also continue to drive expansion of our non-automotive product portfolio. The Company launched its new commercial/residentialOur architectural window film product line in 2018, giving us accesssegment continues to a large newgain traction. We believe there are multiple uses for protective films and we continue to explore those adjacent market and representing the first non-automotive product line in XPEL’s history. While there is some overlap with our existing customers, we believe that this product line exposes the Company to several new addressable markets.opportunities.
Trends and Uncertainties
DuringBroad uncertainty remains as to the three months ended September 30, 2021,lingering global business impact of the COVID-19 pandemic. While our operations have continued without major negative impacts from either COVID-19 or global supply chain issues. Throughout the first nine months of 2021, revenue has increased substantiallycontinued to increase in allmost of our major geographic areas over the prior year period. Despite continued positive trends, the long-term effects of COVID-19 and/or global supply chain issues on our financial resultsmarkets, market disruptions in future periods could still be significant and cannot be reasonably estimated due to the volatility, uncertainty and economic disruption caused by the pandemic or global supply chain issues.have a material impact on our business. See the risk factor “The COVID-19 pandemic could materially adversely affect our financial condition and results of operationsoperations”” included in Part I, Item 1A “Risk Factors” in our annual report on Form 10-Kthe Annual Report for
further discussion of the potential impact of the COVID-19 pandemic on our business, results of operations and financial condition.
As we look ahead, we are unable to determine or predict the continuing impact the COVID-19 pandemic or potential global supply chain interruptions will have on our customers, vendors and suppliers or our business; nor can we predict its impact on our results of operations or financial condition. Despite the gradual reduction of restrictions related to the COVID-19 pandemic and the apparent recovery of our operations, significant uncertainty still exists concerning the overall magnitude of the impact and the duration of the COVID-19 pandemic and the resulting economic implications, particularly given the recent increase in COVID-19 related illnesses. For example, automotiveAutomotive sales and production are highly cyclical, and the cyclical nature of the industry has been, and could continue to be, compounded by the fallouton-going low inventories of COVID-19. As supply and demand for automotive products fluctuates or decreases in this unusual business environment,new vehicles resulting primarily from the demand for our products may also fluctuate or decrease. Some automotive manufacturers have announced that they are experiencing a global semiconductor shortage. As long as the semiconductor shortage which has affected production of vehicles resulting inpersists and leads to low inventories. While we have yet to see a significant impact on the Company's core business, low car dealership inventories, have had an impact on the PermaPlate Films' business that we acquired in the second quarter this year. To the extent that this shortage persists and/or begins to impact our core business, itthere could havebe a material adverse effect on our business, financial conditionscondition and results of operations. Refer to "Part I, Item 1A Risk Factors"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 on Form 10-K for additional considerationdiscussion of
the cyclical nature of the automotive industry. We will continue to closely monitor updates regarding the continuing impact of COVID-19, global supply chain challengesthe foregoing matters and automotive sales, and we will adjust our operations accordingly.
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 changes our products and services. See risk factor "General global economic and business conditions affect demand for our products" included in those factors.
We and our suppliers depend on various components, compounds and raw materials supplied by others for the manufacturing of our products. While we have not experienced disruptions, supplier relationships could be interruptedPart I, Item 1A-Risk Factors, in the future due to material shortages, natural and other disasters and other disruptive events, or be terminated. Any sustained interruptionAnnual Report on Form 10-K.
As more fully described in Part I, Item 1A-Risk Factors, in the Company’s receipt of adequate supplies or operations due to natural and other disasters or events could haveAnnual Report on Form 10-K, the entrotech agreement terminated on March 21, 2022. Effective October 1, 2022, the Company entered into a material adverse effect on the Company. In addition, disruptions in the global economy in 2020 and the lingering impacts into 2021 have resulted in inflationary cost increases in certain raw materials, labor and transportation. We expect these inflationary trends to continue for some time, and while we believe that we will be able to somewhat offset the impact, there can be no assurances that unforeseen future events in the globalnew three-year supply chain, and inflationary pressures, will not have a material adverse effect on our business, financial condition and results of operations.agreement with entrotech under commercially reasonable terms.
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").
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 (loss) 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 nine months ended September 30, 2022 and 2021 and 2020:(dollars in thousands):
| | | (Unaudited) | | (Unaudited) | | | (Unaudited) | | (Unaudited) | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change | | 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change | |
Net Income | Net Income | $ | 8,330,761 | | | $ | 6,608,248 | | | 26.1 | % | | $ | 25,363,369 | | | $ | 12,193,292 | | | 108.0 | % | Net Income | $ | 13,318 | | | $ | 8,331 | | | 59.9 | % | | $ | 33,024 | | | $ | 25,364 | | | 30.2 | % | |
Interest | Interest | 46,433 | | | 68,368 | | | (32.1) | % | | 143,092 | | | 173,480 | | | (17.5) | % | Interest | 391 | | | 46 | | | 750.0 | % | | 933 | | | 143 | | | 552.4 | % | |
Taxes | Taxes | 1,841,250 | | | 1,736,330 | | | 6.0 | % | | 5,958,709 | | | 3,250,780 | | | 83.3 | % | Taxes | 3,226 | | | 1,841 | | | 75.2 | % | | 8,302 | | | 5,959 | | | 39.3 | % | |
Depreciation | Depreciation | 455,792 | | | 325,643 | | | 40.0 | % | | 1,258,489 | | | 889,820 | | | 41.4 | % | Depreciation | 890 | | | 456 | | | 95.2 | % | | 2,486 | | | 1,258 | | | 97.6 | % | |
Amortization | Amortization | 734,963 | | | 239,571 | | | 206.8 | % | | 1,420,347 | | | 705,692 | | | 101.3 | % | Amortization | 1,117 | | | 735 | | | 52.0 | % | | 3,248 | | | 1,420 | | | 128.7 | % | |
EBITDA | EBITDA | $ | 11,409,199 | | | $ | 8,978,160 | | | 27.1 | % | | $ | 34,144,006 | | | $ | 17,213,064 | | | 98.4 | % | EBITDA | $ | 18,942 | | | $ | 11,409 | | | 66.0 | % | | $ | 47,993 | | | $ | 34,144 | | | 40.6 | % | |
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 an alternativeas alternatives to revenue or net income, (loss), 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 nine months ended September 30, 2022 and 2021 and 2020:(dollars in thousands):
| | | Three Months Ended September 30, 2021 | | % of Total Revenue | | Three Months Ended September 30, 2020 | | % of Total Revenue | | $ Change | | % Change | | Three Months Ended September 30, 2022 | | % of Total Revenue | | Three Months Ended September 30, 2021 | | % of Total Revenue | | % Change |
Total revenue | Total revenue | $ | 68,528,923 | | | 100.0 | % | | $ | 46,122,796 | | | 100.0 | % | | $ | 22,406,127 | | | 48.6 | % | Total revenue | $ | 89,758 | | | 100.0 | % | | $ | 68,529 | | | 100.0 | % | | 31.0 | % |
Total cost of sales | Total cost of sales | 44,074,368 | | | 64.3 | % | | 30,092,964 | | | 65.2 | % | | 13,981,404 | | | 46.5 | % | Total cost of sales | 53,992 | | | 60.2 | % | | 44,075 | | | 64.3 | % | | 22.5 | % |
Gross margin | Gross margin | 24,454,555 | | | 35.7 | % | | 16,029,832 | | | 34.8 | % | | 8,424,723 | | | 52.6 | % | Gross margin | 35,766 | | | 39.8 | % | | 24,454 | | | 35.7 | % | | 46.3 | % |
Total operating expenses | Total operating expenses | 14,087,286 | | | 20.6 | % | | 7,616,177 | | | 16.5 | % | | 6,471,109 | | | 85.0 | % | Total operating expenses | 18,459 | | | 20.6 | % | | 14,087 | | | 20.6 | % | | 31.0 | % |
Operating income | Operating income | 10,367,269 | | | 15.1 | % | | 8,413,655 | | | 18.2 | % | | 1,953,614 | | | 23.2 | % | Operating income | 17,307 | | | 19.3 | % | | 10,367 | | | 15.1 | % | | 66.9 | % |
Other expenses | Other expenses | 195,258 | | | 0.3 | % | | 69,077 | | | 0.1 | % | | 126,181 | | | 182.7 | % | Other expenses | 763 | | | 0.9 | % | | 195 | | | 0.3 | % | | 291.3 | % |
Income tax | Income tax | 1,841,250 | | | 2.7 | % | | 1,736,330 | | | 3.8 | % | | 104,920 | | | 6.0 | % | Income tax | 3,226 | | | 3.6 | % | | 1,841 | | | 2.7 | % | | 75.2 | % |
Net income | Net income | $ | 8,330,761 | | | 12.2 | % | | $ | 6,608,248 | | | 14.3 | % | | $ | 1,722,513 | | | 26.1 | % | Net income | $ | 13,318 | | | 14.8 | % | | $ | 8,331 | | | 12.2 | % | | 59.9 | % |
| | | Nine Months Ended September 30, 2021 | | % of Total Revenue | | Nine Months Ended September 30, 2020 | | % of Total Revenue | | $ Change | | % Change | | Nine Months Ended September 30, 2022 | | % of Total Revenue | | Nine Months Ended September 30, 2021 | | % of Total Revenue | | % Change |
Total revenue | Total revenue | $ | 189,131,008 | | | 100.0 | % | | $ | 110,317,117 | | | 100.0 | % | | $ | 78,813,891 | | | 71.4 | % | Total revenue | $ | 245,512 | | | 100.0 | % | | $ | 189,131 | | | 100.0 | % | | 29.8 | % |
Total cost of sales | Total cost of sales | 121,142,794 | | | 64.1 | % | | 72,251,320 | | | 65.5 | % | | 48,891,474 | | | 67.7 | % | Total cost of sales | 149,046 | | | 60.7 | % | | 121,142 | | | 64.1 | % | | 23.0 | % |
Gross margin | Gross margin | 67,988,214 | | | 35.9 | % | | 38,065,797 | | | 34.5 | % | | 29,922,417 | | | 78.6 | % | Gross margin | 96,466 | | | 39.3 | % | | 67,989 | | | 35.9 | % | | 41.9 | % |
Total operating expenses | Total operating expenses | 36,401,513 | | | 19.2 | % | | 22,027,818 | | | 20.0 | % | | 14,373,695 | | | 65.3 | % | Total operating expenses | 53,374 | | | 21.7 | % | | 36,401 | | | 19.2 | % | | 46.6 | % |
Operating income | Operating income | 31,586,701 | | | 16.7 | % | | 16,037,979 | | | 14.5 | % | | 15,548,722 | | | 96.9 | % | Operating income | 43,092 | | | 17.6 | % | | 31,588 | | | 16.7 | % | | 36.4 | % |
Other expenses | Other expenses | 264,623 | | | 0.1 | % | | 593,907 | | | 0.5 | % | | (329,284) | | | (55.4) | % | Other expenses | 1,766 | | | 0.7 | % | | 265 | | | 0.1 | % | | 566.4 | % |
Income tax | Income tax | 5,958,709 | | | 3.2 | % | | 3,250,780 | | | 2.9 | % | | 2,707,929 | | | 83.3 | % | Income tax | 8,302 | | | 3.4 | % | | 5,959 | | | 3.2 | % | | 39.3 | % |
Net income | Net income | $ | 25,363,369 | | | 13.4 | % | | $ | 12,193,292 | | | 11.1 | % | | $ | 13,170,077 | | | 108.0 | % | Net income | $ | 33,024 | | | 13.5 | % | | $ | 25,364 | | | 13.4 | % | | 30.2 | % |
The following tables summarize revenue results for the three and nine months ended September 30, 2022 and 2021 and 2020:
(dollars in thousands):
| | | Three Months Ended September 30, | | % | | % of Total Revenue | | Three Months Ended September 30, | | % | | % of Total Revenue |
| | 2021 | | 2020 | | Inc (Dec) | | 2021 | | 2020 | | 2022 | | 2021 | | Inc (Dec) | | 2022 | | 2021 |
Product Revenue | Product Revenue | | | | | | | | | | Product Revenue | | | | | | | | | |
Paint protection film | Paint protection film | $ | 43,220,555 | | | $ | 31,977,210 | | | 35.2 | % | | 63.1 | % | | 69.3 | % | Paint protection film | $ | 54,230 | | | $ | 43,221 | | | 25.5 | % | | 60.4 | % | | 63.1 | % |
Window film | Window film | 11,401,322 | | | 6,302,364 | | | 80.9 | % | | 16.6 | % | | 13.7 | % | Window film | 15,391 | | | 11,401 | | | 35.0 | % | | 17.1 | % | | 16.6 | % |
Other | Other | 2,374,388 | | | 1,248,809 | | | 90.1 | % | | 3.4 | % | | 2.7 | % | Other | 2,995 | | | 2,374 | | | 26.2 | % | | 3.4 | % | | 3.5 | % |
Total | Total | $ | 56,996,265 | | | $ | 39,528,383 | | | 44.2 | % | | 83.2 | % | | 85.7 | % | Total | $ | 72,616 | | | $ | 56,996 | | | 27.4 | % | | 80.9 | % | | 83.2 | % |
| Service Revenue | Service Revenue | | Service Revenue | |
Software | Software | $ | 1,125,365 | | | $ | 889,709 | | | 26.5 | % | | 1.6 | % | | 1.9 | % | Software | $ | 1,351 | | | $ | 1,125 | | | 20.1 | % | | 1.5 | % | | 1.6 | % |
Cutbank credits | Cutbank credits | 3,362,399 | | | 2,304,651 | | | 45.9 | % | | 4.9 | % | | 5.0 | % | Cutbank credits | 4,352 | | | 3,362 | | | 29.4 | % | | 4.8 | % | | 4.9 | % |
Installation labor | Installation labor | 6,783,688 | | | 3,268,399 | | | 107.6 | % | | 9.9 | % | | 7.1 | % | Installation labor | 11,067 | | | 6,784 | | | 63.1 | % | | 12.3 | % | | 9.9 | % |
Training | 261,206 | | | 131,654 | | | 98.4 | % | | 0.4 | % | | 0.3 | % | |
Training and other | | Training and other | 372 | | | 262 | | | 42.0 | % | | 0.5 | % | | 0.4 | % |
Total | Total | $ | 11,532,658 | | | $ | 6,594,413 | | | 74.9 | % | | 16.8 | % | | 14.3 | % | Total | $ | 17,142 | | | $ | 11,533 | | | 48.6 | % | | 19.1 | % | | 16.8 | % |
| Total | Total | $ | 68,528,923 | | | $ | 46,122,796 | | | 48.6 | % | | 100.0 | % | | 100.0 | % | Total | $ | 89,758 | | | $ | 68,529 | | | 31.0 | % | | 100.0 | % | | 100.0 | % |
| | | Nine Months Ended September 30, | | % | | % of Total Revenue | | Nine Months Ended September 30, | | % | | % of Total Revenue |
| | 2021 | | 2020 | | Inc (Dec) | | 2021 | | 2020 | | 2022 | | 2021 | | Inc (Dec) | | 2022 | | 2021 |
Product Revenue | Product Revenue | | | | | | | | | | Product Revenue | | | | | | | | | |
Paint protection film | Paint protection film | $ | 124,250,391 | | | $ | 75,996,444 | | | 63.5 | % | | 65.7 | % | | 68.9 | % | Paint protection film | $ | 146,465 | | | $ | 124,250 | | | 17.9 | % | | 59.7 | % | | 65.7 | % |
Window film | Window film | 29,644,669 | | | 15,347,270 | | | 93.2 | % | | 15.7 | % | | 13.9 | % | Window film | $ | 42,711 | | | $ | 29,645 | | | 44.1 | % | | 17.4 | % | | 15.7 | % |
Other | Other | 6,699,872 | | | 2,896,582 | | | 131.3 | % | | 3.5 | % | | 2.7 | % | Other | $ | 8,577 | | | $ | 6,700 | | | 28.0 | % | | 3.4 | % | | 3.5 | % |
Total | Total | $ | 160,594,932 | | | $ | 94,240,296 | | | 70.4 | % | | 84.9 | % | | 85.4 | % | Total | $ | 197,753 | | | $ | 160,595 | | | 23.1 | % | | 80.5 | % | | 84.9 | % |
| Service Revenue | Service Revenue | | Service Revenue | |
Software | Software | $ | 3,158,337 | | | $ | 2,551,177 | | | 23.8 | % | | 1.7 | % | | 2.3 | % | Software | $ | 3,804 | | | $ | 3,158 | | | 20.5 | % | | 1.5 | % | | 1.7 | % |
Cutbank credits | Cutbank credits | 9,384,411 | | | 5,529,773 | | | 69.7 | % | | 5.0 | % | | 5.0 | % | Cutbank credits | $ | 11,459 | | | $ | 9,384 | | | 22.1 | % | | 4.7 | % | | 5.0 | % |
Installation labor | Installation labor | 15,256,632 | | | 7,681,420 | | | 98.6 | % | | 8.1 | % | | 7.0 | % | Installation labor | $ | 31,371 | | | $ | 15,257 | | | 105.6 | % | | 12.8 | % | | 8.1 | % |
Training | 736,696 | | | 314,451 | | | 134.3 | % | | 0.4 | % | | 0.3 | % | |
Training and other | | Training and other | $ | 1,125 | | | 737 | | | 52.6 | % | | 0.5 | % | | 0.3 | % |
Total | Total | $ | 28,536,076 | | | $ | 16,076,821 | | | 77.5 | % | | 15.1 | % | | 14.6 | % | Total | $ | 47,759 | | | $ | 28,536 | | | 67.4 | % | | 19.5 | % | | 15.1 | % |
| Total | Total | $ | 189,131,008 | | | $ | 110,317,117 | | | 71.4 | % | | 100.0 | % | | 100.0 | % | Total | $ | 245,512 | | | $ | 189,131 | | | 29.8 | % | | 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 nine months ended September 30, 2022 and 2021 and 2020:(dollars in thousands):
| | | Three Months Ended September 30, | | % | | % of Total Revenue | | Three Months Ended September 30, | | % | | % of Total Revenue |
| | 2021 | | 2020 | | Inc (Dec) | | 2021 | | 2020 | | 2022 | | 2021 | | Inc (Dec) | | 2022 | | 2021 |
United States | United States | $ | 37,362,839 | | | $ | 22,041,941 | | | 69.5 | % | | 54.5 | % | | 47.8 | % | United States | $ | 51,522 | | | $ | 37,363 | | | 37.9 | % | | 57.4 | % | | 54.5 | % |
China | China | 10,571,126 | | | 9,397,486 | | | 12.5 | % | | 15.4 | % | | 20.4 | % | China | 11,009 | | | 10,571 | | | 4.1 | % | | 12.3 | % | | 15.4 | % |
Canada | Canada | 8,715,209 | | | 6,213,949 | | | 40.3 | % | | 12.7 | % | | 13.5 | % | Canada | 11,046 | | | 8,715 | | | 26.7 | % | | 12.3 | % | | 12.7 | % |
Continental Europe | Continental Europe | 4,747,140 | | | 3,656,477 | | | 29.8 | % | | 6.9 | % | | 7.9 | % | Continental Europe | 6,065 | | | 4,747 | | | 27.8 | % | | 6.8 | % | | 6.9 | % |
United Kingdom | | United Kingdom | 2,482 | | | 1,987 | | | 24.9 | % | | 2.8 | % | | 2.9 | % |
Middle East/Africa | Middle East/Africa | 2,090,125 | | | 1,326,589 | | | 57.6 | % | | 3.0 | % | | 2.8 | % | Middle East/Africa | 3,322 | | | 2,090 | | | 58.9 | % | | 3.7 | % | | 3.0 | % |
United Kingdom | 1,987,316 | | | 1,481,174 | | | 34.2 | % | | 2.9 | % | | 3.2 | % | |
Asia Pacific | Asia Pacific | 1,972,919 | | | 1,454,119 | | | 35.7 | % | | 2.9 | % | | 3.2 | % | Asia Pacific | 2,540 | | | 1,973 | | | 28.7 | % | | 2.8 | % | | 2.9 | % |
Latin America | Latin America | 944,668 | | | 537,892 | | | 75.6 | % | | 1.4 | % | | 1.2 | % | Latin America | 1,468 | | | 945 | | | 55.3 | % | | 1.6 | % | | 1.4 | % |
Other | Other | 137,581 | | | 13,169 | | | 944.7 | % | | 0.3 | % | | 0.0 | % | Other | 304 | | | 138 | | | 120.3 | % | | 0.2 | % | | 0.2 | % |
Total | Total | $ | 68,528,923 | | | $ | 46,122,796 | | | 48.6 | % | | 100.0 | % | | 100.0 | % | Total | $ | 89,758 | | | $ | 68,529 | | | 31.0 | % | | 100.0 | % | | 100.0 | % |
| | | Nine Months Ended September 30, | | % | | % of Total Revenue | | Nine Months Ended September 30, | | % | | % of Total Revenue |
| | 2021 | | 2020 | | Inc (Dec) | | 2021 | | 2020 | | 2022 | | 2021 | | Inc (Dec) | | 2022 | | 2021 |
United States | United States | $ | 97,263,389 | | | $ | 53,713,708 | | | 81.1 | % | | 51.4 | % | | 48.7 | % | United States | $ | 142,275 | | | $ | 97,263 | | | 46.3 | % | | 58.0 | % | | 51.4 | % |
China | China | 33,902,146 | | | 21,409,365 | | | 58.4 | % | | 17.9 | % | | 19.4 | % | China | 27,772 | | | 33,902 | | | (18.1) | % | | 11.3 | % | | 17.9 | % |
Canada | Canada | 22,538,245 | | | 14,347,313 | | | 57.1 | % | | 11.9 | % | | 13.0 | % | Canada | 29,773 | | | 22,538 | | | 32.1 | % | | 12.1 | % | | 11.9 | % |
Continental Europe | Continental Europe | 14,286,185 | | | 9,347,780 | | | 52.8 | % | | 7.6 | % | | 8.5 | % | Continental Europe | 18,671 | | | 14,286 | | | 30.7 | % | | 7.6 | % | | 7.6 | % |
United Kingdom | | United Kingdom | 7,505 | | | 5,906 | | | 27.1 | % | | 3.1 | % | | 3.1 | % |
Middle East/Africa | Middle East/Africa | 6,466,319 | | | 3,177,155 | | | 103.5 | % | | 3.4 | % | | 2.9 | % | Middle East/Africa | 8,025 | | | 6,466 | | | 24.1 | % | | 3.3 | % | | 3.4 | % |
United Kingdom | 5,906,315 | | | 3,228,322 | | | 83.0 | % | | 3.1 | % | | 2.9 | % | |
Asia Pacific | Asia Pacific | 5,620,834 | | | 3,365,354 | | | 67.0 | % | | 3.0 | % | | 3.1 | % | Asia Pacific | 6,549 | | | 5,621 | | | 16.5 | % | | 2.7 | % | | 3.0 | % |
Latin America | Latin America | 2,890,526 | | | 1,499,944 | | | 92.7 | % | | 1.5 | % | | 1.4 | % | Latin America | 4,033 | | | 2,891 | | | 39.5 | % | | 1.6 | % | | 1.5 | % |
Other | Other | 257,049 | | | 228,176 | | | 12.7 | % | | 0.2 | % | | 0.1 | % | Other | 909 | | | 258 | | | 252.3 | % | | 0.4 | % | | 0.2 | % |
Total | Total | $ | 189,131,008 | | | $ | 110,317,117 | | | 71.4 | % | | 100.0 | % | | 100.0 | % | Total | $ | 245,512 | | | $ | 189,131 | | | 29.8 | % | | 100.0 | % | | 100.0 | % |
Product Revenue. Product revenue for the three months ended September 30, 20212022 increased 44.2%27.4% over the three months ended September 30, 2020.2021. Product revenue represented 83.2%80.9% of our total revenue compared to 85.7%83.2% in the three months ended September 30, 2019. Within product revenue, revenue2021. Revenue from our paint protection film product line increased 35.2%25.5% over the three months ended September 30, 2020.2021. Paint protection film sales represented 63.1%60.4% and 69.3%63.1% of our total consolidated revenues for the three months ended September 30, 20212022 and 2020,2021, respectively. The increasegrowth in our paint protection film sales was primarily attributablerevenue is due mainly to continued strong demand for our various film productsproduct lines in all of our operating regions.most markets. Revenue from our window film product line grew 80.9%35.0% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Window film sales represented 16.6%17.1% and 13.7%16.6% of our total consolidated revenues for the three months ended September 30, 20212022 and 2020,2021, respectively. Growth in this product linewindow film sales was due primarilymainly to the continued broad-based increases in demand for our window film products throughout the world. Other product revenue for the three months ended September 30, 2022 increased 26.2% due mainly to continued demand in most operating regions stemming from strong channel executionfor non-film related products such as ceramic coating, plotters, chemicals, and increased product adoption.other film installation tools and accessories.
Product revenue for the nine months ended September 30, 20212022 increased 70.4%23.1% over the nine months ended September 30, 2020. Within product2021. Product revenue salesrepresented 80.5% of paint protection film forour total revenue compared to 84.9% in the nine months ended September 30, 2021 increased by 63.5% over the same period in 2020. The increase in2021. Revenue from our paint protection film sales was primarily attributableproduct line increased 17.9% compared to the nine months ended September 30, 2021. The growth in our paint protection film revenue is due mainly to continued strong demand for our various film product lines in most markets. Revenue from our window film grew 44.1% compared to the nine months ended September 30,
2021. This increase was due mainly to continued broad-based increases in demand for our window film products throughout our operating regions. Also withinthe world. Other product revenue, window film revenue for the nine months ended September 30, 20212022 increased 93.2% over the same period in 202028.0% due primarilymainly to increasedcontinued demand in most geographical sales regions resulting from strong channel executionfor non-film related products such as ceramic coating, plotters, chemicals, and increased product adoption.
other film installation tools and accessories.Service revenue. Service revenue consists of revenue from fees for use of our 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 74.9%48.6% over the three months ended September 30, 2020. Software2021. Within this category, software revenue increased 26.5%20.1% over the three months ended September 30, 2020.2021. This increase was due primarily to increasesan increase in total subscribers to our DAP software. Cutbank credit revenue increased 45.9% compared to the prior year period due to wide-spread growth in our paint protection film sales in the United States and Canada. Installation labor revenue increased 107.6% over the three months ended September 30, 2020. Excluding acquisition related growth, installation labor revenue increased 17.1% during29.4% from the three months ended September 30, 2021 due primarily to increased demand for installation services primarilysubstantial growth in the United States, Canada, and Europe. Trainingour North American operations. Installation labor revenue increased 98.4%63.1% over the three months ended September 30, 2020. Training for the prior year period was heavily impacted by COVID-19 related restrictions and these impacts are less significant2021 due to a substantial increase in theour installation presence following our 2021 period.acquisitions of dealership services businesses.
Service revenue for the nine months ended September 30, 20212022 grew 77.5%67.4% over the nine months ended September 30, 2020. Software2021. Within this category, software revenue grew 23.8%20.5% over the nine months ended September 30, 2020.2021. This increase was due primarily to increasesan increase in total subscribers to our DAP software. Cutbank credit revenue increased 69.7%22.1% over the nine months ended September 30, 20202021 due mainly to the increased demandsubstantial growth in product revenue in the United States and Canada.our North American operations. Installation labor increased 98.6%105.6% over the nine months ended September 30, 2020. Excluding acquisition related growth, installation labor revenue increased 41.4% during the nine months ended September 30, 2021. This was2021 due to a significantsubstantial increase in demand forour installation presence following our 2021 acquisitions of dealership services in North America and Europe. Training revenue increased 134.3% over the nine months ended September 30, 2020. Training for the prior year period was heavily impacted by COVID-19 related restrictions and these impacts are less significant in the 2021 period.businesses.
Total installation revenue (labor and product combined) at our installation centers increased 107.6%63.1% over the three months ended September 30, 2020.2021. This represented 11.8%14.7% and 8.4%11.8% of our total consolidated revenue for the three months ended September 30, 2022 and 2021, respectively. This increase was due primarily to acquired dealership services businesses in 2021 and 2020, respectively. Excluding acquisition related growth, totalon-going increases in demand in our company-owned installation revenue grew 17.1%.facilities. Total installation revenue increased 98.6%105.6% over the nine months ended September 30, 2020 due primarily to increased demand for installation services in the United States, Canada and Europe.2021. This represented 9.6%15.2% and 8.3%9.6% of our total consolidated revenue for the nine months ended September 30, 2022 and 2021, respectively. This increase was due primarily to acquired dealership services businesses in 2021 and 2020, respectively. Excluding acquisition related growth, totalon-going increases in demand in our company-owned installation revenue grew 41.4% over the nine months ended September 30, 2021.facilities.
Adjusted product revenue, which combines the cutbank credit revenue service component with product revenue, increased 44.3%27.5% over the three months ended September 30, 2021 due mainly to wide-spread increased demand.2021. Adjusted product revenue increased 70.4%23.1% versus the nine months ended September 30, 2021. For both the three and nine 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.
Cost of salesProduct costs for the three months ended September 30, 2022 increased 46.5%19.0% over the three months ended September 30, 2020 as a result of increased sales volume. Product costs in the three months ended September 30, 2021 increased 39.9% over the three months ended September 30, 2020. This increase was the result of the increased sales of our products during the 2021 quarter.2021. Cost of product sales represented 57.9%52.6% and 61.5%57.9% of total revenue in the three months ended September 30, 20212022 and 2020,2021, respectively. Cost of service revenue
grew 153.8%54.7% during the three months ended September 30, 20212022 due mainly to the increased installation labor costs associated with a larger installation footprint following our May 2021 PermaPlate acquisition as well as increased installation sales.dealership services businesses acquired in 2021.
Cost of sales increased 67.7% in
Product costs for the nine months ended September 30, 20212022 increased 15.9% over the nine months ended September 30, 2020 as a result of increased sales volume. Product costs in the nine months ended September 30, 2021 increased 65.2% over the nine months ended September 30, 2020. This increase was due primarily to increased demand for our products during the 2021 period.2021. Cost of product sales represented 59.1%52.8% and 61.4%59.1% of total revenue in the nine months ended September 30, 2022 and 2021, and 2020, respectively. This relative decrease was the result of certain economies of scale attained during the 2021 period. Cost of service revenue grew 103.9%108.5% during the nine months ended September 30, 20212022 due mainly to the increased installation labor costs associated with a larger installation footprint following our May 2021 PermaPlate acquisition as well as increased installation sales.dealership services businesses acquired in 2021.
Gross Margin
Gross margin for the three months ended September 30, 20212022 grew approximately $8.4$11.3 million, or 52.6%46.3%, from the three months ended September 30, 2020.2021. For the three months ended September 30, 2021,2022, gross margin represented 39.8% of revenue compared to 35.7% of revenue.for the three months ended September 30, 2021
Gross margin for the nine months ended September 30, 20212022 grew approximately $29.9$28.5 million, or 78.6%41.9%, from the nine months ended September 30, 2020.2021. For the nine months ended September 30, 2021,2022, gross margin represented 39.3% of revenue compared to 35.9% of revenue. for the nine months ended September 30, 2021.
The following tables summarize gross margin for product and services for the three and nine months ended September 30, 2022 and 2021 and 2020:(dollars in thousands):
| | | Three Months Ended September 30, | | % | | % of Category Revenue | | Three Months Ended September 30, | | % | | % of Category Revenue |
| | 2021 | | 2020 | | Inc (Dec) | | 2021 | | 2020 | | 2022 | | 2021 | | Inc (Dec) | | 2022 | | 2021 |
Product | Product | $ | 17,295,638 | | | $ | 11,158,501 | | | 55.0 | % | | 30.3 | % | | 28.2 | % | Product | $ | 25,391 | | | $ | 17,295 | | | 46.8 | % | | 35.0 | % | | 30.3 | % |
Service | Service | 7,158,917 | | | 4,871,331 | | | 47.0 | % | | 62.1 | % | | 73.9 | % | Service | 10,375 | | | 7,159 | | | 44.9 | % | | 60.5 | % | | 62.1 | % |
Total | Total | $ | 24,454,555 | | | $ | 16,029,832 | | | 52.6 | % | | 35.7 | % | | 34.8 | % | Total | $ | 35,766 | | | $ | 24,454 | | | 46.3 | % | | 39.8 | % | | 35.7 | % |
| | | Nine Months Ended September 30, | | % | | % of Category Revenue | | Nine Months Ended September 30, | | % | | % of Category Revenue |
| | 2021 | | 2020 | | Inc (Dec) | | 2021 | | 2020 | | 2022 | | 2021 | | Inc (Dec) | | 2022 | | 2021 |
Product | Product | $ | 48,755,447 | | | $ | 26,552,305 | | | 83.6 | % | | 30.4 | % | | 28.2 | % | Product | $ | 68,107 | | | $ | 48,756 | | | 39.7 | % | | 34.4 | % | | 30.4 | % |
Service | Service | 19,232,767 | | | 11,513,492 | | | 67.0 | % | | 67.4 | % | | 71.6 | % | Service | $ | 28,359 | | | $ | 19,233 | | | 47.4 | % | | 59.4 | % | | 67.4 | % |
Total | Total | $ | 67,988,214 | | | $ | 38,065,797 | | | 78.6 | % | | 35.9 | % | | 34.5 | % | Total | $ | 96,466 | | | $ | 67,989 | | | 41.9 | % | | 39.3 | % | | 35.9 | % |
Product gross margin for the three months ended September 30, 20212022 increased approximately $6.1$8.1 million, or 55.0%46.8%, over the three months ended September 30, 20202021 and represented 30.3%35.0% and 28.2%30.3% of total product revenue for the three months ended September 30, 20212022 and 2020,2021, respectively. This increase was due primarily to increases in revenue, changes in revenue mix, improvementsdecreases in product costs and improved operating leverage.
Product gross margin for the nine months ended September 30, 20212022 increased approximately $22.2$19.4 million, or 83.6%39.7%, over the nine months ended September 30, 20202021 and represented 30.4%34.4% and 28.2%30.4% of total product revenue for the nine months ended September 30, 20212022 and 2020,2021, respectively. This increase was due primarily to increases in revenue, changes in revenue mix, improvementsdecreases in product costs and improved operating leverage.
Service gross margin increased approximately $3.2 million, or 44.9%, over the three months ended September 30, 2021. This represented 60.5% and 62.1% of total service revenue for the three months ended September 30, 2022 and 2021, respectively. The decrease in service gross margin percentage for the three months ended September 30, 2022 was primarily due to a higher percentage of lower margin installation labor work relative to other higher margin service revenue components.
Service gross margin increased approximately $2.3$9.1 million, or 47.0%, over the three months ended September 30, 2020. This represented 62.1% and 73.9% of total service revenue for the three months ended September 30, 2021 and 2020, respectively. The Company added additional installers in connection with its PermaPlate Film acquisition (Note 12). PermaPlate Film's business is more correlated to the arrival of new vehicles at car dealerships rather than new car sales. As a consequence of low new car inventories, our PermaPlate Film business is operating at approximately 70% capacity resulting in lower service margins.
Service gross margin increased approximately $7.7 million, or 67.0%47.5%, over the nine months ended September 30, 2020.2021. This represented 67.4%59.4% and 71.6%67.4% of total service revenue for the nine months ended September 30, 20212022 and 2020,2021, respectively. The relative decrease in service gross margin percentage for the nine months ended September 30, 20202022 was primarily due primarily to the impacta higher percentage of our PermaPlate Film business operating at reduced capacity as described above.lower margin installation labor work relative to other higher margin service revenue components.
Operating Expenses
Sales and marketing expenses for the three months ended September 30, 20212022 increased 110.7%28.4% compared to the same period in 2020.2021. This increase was due to increased personnel and travel related expenses related to support the ongoing growth of the business. These expenses represented 7.2%7.0% and 5.0%7.2% of total consolidated revenue for the three months ended September 30, 2022 and 2021, respectively.
For the nine months ended September 30, 2022, sales and 2020, respectively.marketing expenses increased 42.7% compared to the same period in 2021. This increase was due primarilymainly to acquisitionincreased personnel, increased expenses related expansion, hiring of sales personnel,to marketing events that were suspended in 2021 due to COVID-19, and increases in marketingtravel related expenses to support the ongoing growth of the business.
For the nine months ended September 30, 2021, sales and marketing expenses increased 85.7% compared to the same period in 2020. These expenses represented 6.9%7.5% and 6.3%6.9% of total consolidated revenue for the nine months ended September 30, 2022 and 2021, and 2020, respectively. This increase was due primarily to acquisition related expansion, hiring of sales personnel, and increases in marketing related expenses to support the ongoing growth of the business.
General and administrative expenses grew approximately $3.9$3.0 million, or 73.6%32.4% over the three months ended September 30, 2020.2021. 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 13.4%13.6% and 11.5%13.4% of total consolidated revenue for the three months ended September 30, 2022 and 2021, and 2020, respectively. Excluding acquisition related expenses, general
General and administrative costs forexpenses grew approximately $11.4 million, or 48.8% over the threenine months ended September 30, 2021 increased by approximately 61.3% and represented approximately 12.4% of total consolidated revenue. The2021. This increase in cost was due mainlyprimarily to increases in personnel, occupancy costs and information technology costsprofessional fees to support the on-goingongoing growth of the business.
General and administrativeacquisition related expenses grew approximately $8.4 million, or 55.8%, during the nine months ended September 30, 2021 over the same periodincluding amortization associated with intangible assets acquired in 2020.2021. These costs represented 12.4%14.2% and 13.6%12.4% of total consolidated revenue for the nine months ended September 30, 2022 and 2021, respectively.
Other Expenses
Other expenses consist of interest expense and 2020, respectively. The increase was due mainly to increases in personnel, occupancy costsforeign currency exchange gain/loss. Interest expense increased during the three and information technology costs to support the on-going growth of the business. Excluding acquisition related expenses, general and administrative costs for the nine months ended September 30, 20212022 due to borrowings on our line of credit and recent interest rate increases. Foreign currency losses during the three and nine months ended September 30, 2022 increased by approximately 48.8% and represented approximately 11.8% of total consolidated revenue.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 September 30, 20212022 increased $0.1$1.4 million from the three months ended September 30, 2020,2021. Our effective tax rate was 19.5% for the three months ended September 30, 2022 compared with 18.1% for the three months ended September 30, 2021 compared with 20.8% for the three months ended September 30, 2020.2021. The decreaseincrease in theour effective tax rate was primarily due primarily to increased deductions related to foreign-derived intangible income ("FDII") in connection with the 2017 Tax Reform and Jobs Act and increased research and development credits associated with our research and development activities.
impact of international operations.Income tax expense for the nine months ended September 30, 20212022 increased $2.7$2.3 million from the same period in 2020,2021. Our effective tax rate was 20.1% for the nine months ended September 30, 2022 compared with 19.0% for the nine months ended September 30, 2021 compared with 21.0% for the nine months ended September 30, 2020.2021. The decreaseincrease in theour effective tax rate was primarily due to an increase in our state effective rate was due primarily to increased deductions related to FDII in connection withand the 2017 Tax Reform and Jobs Act and increased research and development credits associated with our research and development activities.impact of international operations.
Net income for the three months ended September 30, 20212022 increased 26.1%59.9% to $8.3$13.3 million.
Net income for the nine months ended September 30, 20212022 increased 108.0%30.2% to $25.4$33.0 million.
Liquidity and Capital Resources
TheOur primary sourcesources of liquidity for our business isare available cash and cash equivalents and cash flows provided by operations. As of September 30, 2021,2022, we had cash and cash equivalents of $7.8$10.2 million. For the nine months ended September 30, 2021,2022, cash flows provided by operations were $20.2was $9.7 million. We expect available cash, internally generated funds, and borrowings from our committed credit facility to continue to havebe sufficient access to cash to support working capital needs, capital expenditures (including acquisitions), and to pay interest andour debt service debt, if applicable. We believe we have the ability and sufficient resources to meet these cash requirements by using available cash, internally generated funds and borrowing under committed credit facilities.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 flows provided by operations totaled approximately $20.2 million for the nine months ended September 30, 2021,2022 was $9.7 million compared to $14.2$20.2 million forduring the nine months ended September 30, 2020.2021. This increasedecrease was due mainly to increases in operating earnings, withinventory and other working capital items partially offset by an increase in net income more than doubling over the prior year period, and changes in working capital.income.
Investing activities. Cash flows used in investing activities totaled approximately $9.8 million during the nine months ended September 30, 2022 compared to $35.7 million during the nine months ended September 30, 2021 compared to $2.9 million during the nine months ended September 30, 2020.2021. This increasechange was due mainly to the acquisition of PermaPlate Films (Note 12) and purchases of fixed assets as the Company expands its operating locations.payments related to our 2021 acquisitions.
Financing activities.Cash flows used inprovided by financing activities during the nine months ended September 30, 20212022 totaled approximately $5.6$0.7 million compared to cash inflows of $4.2 millionuse in the prior year.year of $5.6 million. This cash usechange was due primarily paymentsto new borrowings on our revolving credit facility during the nine months ended September 30, 2022 and the prior year repayment of a term loans.loan.
Debt obligations as of September 30, 20212022 and December 31, 20202021 totaled approximately $0.6$26.1 million and $6.1$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
As of September 30, 2021, we hadThe Company has a $57$75.0 million revolving line of credit agreement with Texas Partners Bank (which does business as the Bank of San Antonio) and a CAD $4.5 million revolving credit facility maintained by our Canadian subsidiary. The Texas Partners Bank facility was established on May 21, 2021 and replaced an $8.5 million revolving facility and a $6 million term loan facility. The outstanding balances on the prior loan agreements were fully repaid by the Company and the agreements were terminated when we entered into the new facility.financial institution. The facility is utilized to fund ourthe Company's working capital needs and other strategic initiatives, and is secured by a security interest in substantially all of ourthe Company's current and future assets. Borrowings under the credit agreement bear interest on borrowed amounts 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 September 30, 2022 and December 31, 2021 was 5.50% and
2.50%., respectively. The Company paid interest charges on borrowings under this facility of $45,292$0.4 million and $0.9 million during the three and nine months ended September 30, 2021. As2022, respectively, and had a balance of $26.0 million and $25.0 million as of September 30, 2022 and December 31, 2021, no balance was outstanding on this line.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. The Company must maintain:covenants:
1.(1) Senior Funded Debt divided (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.(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.
XPEL Canada Corp., a wholly-owned subsidiary of XPEL, Inc.,The Company also has a CAD $4.5 million revolving credit facility through HSBC Bank Canada.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 ourthe 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 September 30, 20212022 and December 31, 2020,2021, no balance was outstanding on this facility.line of credit.
Contractual Obligations
There has been no material change toAs of September 30, 2022 and December 31, 2021, the Company’s contractual obligations as describedCompany was in the Company’s annual report on Form 10-K as filedcompliance with the SEC on March 11, 2021.all debt covenants.
Critical Accounting Policies
There have been no material changes to the Company’s critical accounting policies and estimates from the information provided in the Company’s annual report on Form 10-K as filed with the SEC on March 11, 2021.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.
Off-Balance Sheet Arrangements
As of September 30, 2021 and December 31, 2020, we did not have any relationships with unconsolidated organizations or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange contracts.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have operations that expose us to currency risk in the British Pound Sterling, the Canadian Dollar, the Euro, the Mexican Peso, and the New Taiwanese Dollar, and the Australian Dollar. Amounts invested in our foreign operations are translated into U.S. Dollars at the exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded as accumulated other comprehensive income,loss, a component of stockholders’ equity in our condensed consolidated balance sheets. We do not currently hedge our exposure to potential foreign currency translation adjustments.
If we borrowBorrowings under our revolving lines of credit we will beare subject to market risk resulting from changes in interest rates related to our floating rate bank credit facilities. If we were to makeFor such borrowings, a hypothetical 100
200 basis point increase in variable interest rates may result in a material impact to our financial statements. We do not currently have any derivative contracts to hedge our exposure to interest rate risk. During each of the periods presented, we have not experienced a significant effect on our business due to changes in interest rates.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established and maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended (Exchange Act)("Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures.
Management, with the participation of our CEO and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our CEO and CFO have each concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
From time to time, we are made parties to actions filed or have beenare given notice of potential claims relating to the ordinary conduct of our business, including those pertaining to commercial disputes, product liability, patent infringement and employment matters.
While we believe that a material impact on our financial position, results of operations or cash flows from any such future claims or potential claims is unlikely, given the inherent uncertainty of litigation, it is possible that an unforeseen future adverse ruling or unfavorable development could result in future charges that could have a material adverse impact. We do and will continue to periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our financial position, results of operations and cash flows for the proceedings and claims described in the notes to our consolidated financial statements could change in the future.
Item 1A. Risk Factors
In additionThere have been no material changes to the other information set forthrisk factors disclosed in this report, you should carefully considerPart I, Item IA of the factors discussed in “Item 1A Risk Factors” inAnnual Report, except as noted below:
The Annual Report included a risk factor entitled “A material disruption from our annual report on Form 10-K as filed with the SEC on March 11, 2021, whichsuppliers, or our inability to obtain a sufficient supply of product from alternate suppliers could materially affect our business, financial condition or future results. The risks described in our annual report on Form 10-K as filed with the SEC on March 11, 2021 are not the only risks facing us. Additional risks and uncertainties not currently known tocause us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
The COVID-19 pandemic could materially adversely affect our financial condition and results of operations.
The global pandemic resulting from the outbreak of COVID-19 has disrupted global health, economic and market conditions, consumer behavior and the Company's global operations beginning in early 2020. We cannot predict how the pandemic will continue to develop or to what extent the pandemic may have longer term unanticipated impacts on our global operations.
The spread of COVID-19 has caused us to modify our business practices (including employee travel, employee work locations, cancellation of physical participation in meetings, events and conferences, and social distancing measures), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, vendors, and suppliers. Work-from-home and other measures introduce additional operational risks, including cybersecurity risks, and have affected the way we conduct our product development, validation, and qualification, customer support, and other activities, which could have an adverse effect on our operations. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and illness and workforce disruptions could lead to unavailability of key personnel and harm our ability to perform critical functions.
Fluctuations in the cost and availability of raw materials, equipment, labor and transportation could cause manufacturing delays, increase our costs and/or impact our abilityunable to meet customer demand.demand or increase our costs.” In that risk factor, we disclosed that our supply agreement with our primary supplier, entrotech, Inc. would terminate on March 21, 2022 and that we intended to enter into a new supply agreement with entrotech. Effective October 1, 2022, we entered into a new supply agreement with entrotech on commercially reasonable terms.
The priceWe have operations or activities in numerous countries and availability of key components used to manufacturemarket-regions throughout the world. As a result, our products may fluctuate significantly. Any fluctuationsglobal financial results are affected by economic, political and other conditions in the cost and availability of anyglobal economy as well as in the United States. Economic conditions in several of our products and/or any interruptions inmarkets are increasingly experiencing increasing inflation which could impact the delivery ofdemand for our productsproducts. This could harmsignificantly impact our gross margins and our ability to meet customer demand. If we are unable to successfully mitigate these cost increases, supply interruptions and/or labor shortages, our results of operations could be affected.future financial results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the nine months ended September 30, 2021, the Company did not issue any shares of its common stock of the Company that were not registered under the Securities Act of 1933, as amended.
Pursuant to the Company's 2020 Equity Incentive Plan (the "Plan"), the Company granted unvested restricted stock units ("RSUs") for the first time on July 15, 2021, payable in shares of common stock upon vesting. The RSUs vest evenly over a four-year period at each anniversary of the grant date. The shares of common stock underlying the RSUs are not considered issued and outstanding until they are vested and common shares are issued. The RSUs do not have voting rights.None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Pursuant to the Company's 2020 Equity Incentive Plan (the "Plan"), the Company granted unvested restricted stock units ("RSUs") for the first time on July 15, 2021, payable in shares of common stock upon vesting. The RSUs vest evenly over a four-year period at each anniversary of the grant date. The shares of common stock underlying the RSUs are not considered issued and outstanding until they are vested and common shares are issued. The RSUs do not have voting rights.None.
Item 6. Exhibits
The following exhibits are being filed or furnished with this quarterly report on Form 10-Q:
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Exhibit No. | Description | Method of Filing |
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31.1 | | Filed herewith |
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31.2 | | Filed herewith |
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32.1 | | Furnished herewith |
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32.2 | | Furnished herewith |
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101 | The following materials from XPEL’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020,September 30, 2022, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Consolidated Balance Sheets, (ii) the unaudited Consolidated Statements of Operations, (iii) the unaudited Consolidated Statements of Comprehensive Income, (iv) the unaudited Consolidated Statements of Equity, (v) the unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements | Filed herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | XPEL, Inc. (Registrant) |
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| By: | /s/ Barry R. Wood | |
| | Barry R. Wood | |
| | Senior Vice President and Chief Financial Officer | |
November 9, 20212022 | | (Authorized Officer and Principal Financial and Accounting Officer) | |